Company: Aeropostale (ARO, Financial)
CMP: $10.56
Market Cap: $852 million
Company Info
Aeropostale Inc. is primarily a mall-based retailer of apparel, mainly targeting 14 to 17 year old customers through its namesake brand Aeropostale. The P.S. brand of Aeropostale is an apparel store for 7 to 12 year old kids. They sell their merchandise through their stores and website, www.aeropostale.com and www.ps4u.com. As of Jan. 29, 2011, the company operated 965 Aeropostale stores, 906 stores in 49 states in the U.S. and Puerto Rico, 59 stores in Canada and 47 P.S. stores. The company has entered into a licensing agreement with a third party to operate 10 Aeropostale stores in United Arab Emirates.
Store productivity
New stores
E-commerce
The company’s sales via their website have increased to $25.1 million in the second quarter of 2011 as opposed to $20.9 million last year.
International expansion
The company earns a royalty fee status from licensing their stores to a third party. Ten stores have been opened since 2009 and three more are expected to be opened in 2011 in United Arab Emirates. The company has also signed a licensing agreement to open to 25 stores in Singapore, Malaysia and Indonesia over the next five years
Share Repurchase Program
During fiscal 2010, the company repurchased 10.3 million shares for $257.5 million.
Program to date: The company repurchased 53 million shares for $904.0 million, at an average price of $17.06 per share as of Jan. 29, 2011. The company at the end of the second quarter has $145.2 million available under its share repurchase program. At the current market price of around $11, the company can reduce another 13 million in share count. Even if the company buys back at an average price of $14 it would equate to little over 10 million shares. The company has a share count of 82 million which can go down to around 69-72 million.
Valuation
I have not considered the first and second-quarter results for 2011 in the valuation.
With Growth
The company does not have any debt. The average free cash flow to equity over the last three years has been $187 million. Assuming they will be able to grow it at 3% and assuming a cost of equity of 12% (arbitrary, not using any model) and risk free rate of 2.15% (10-year treasury yield). We get a valuation of $1975million. We add cash of $73.1million (as of second quarter 2011). The share count at the end of the second quarter is around 82 million. If the company buys another 10 million shares using the $145.2 in the share repurchase program the share count can go down to 72 million. Based on this estimate we get a target price of $28.17 (150% upside from CMP).
No Growth
Assuming that the company does not experience any growth we can assume a slightly higher FCFE than the $187 million that we used, as the capex for growth would not be included. Nevertheless if we use $187 million with a multiple of 6, add back cash of $73.1 million and assume that share count goes to 72 million, we get a target price of $16.59 (50% upside from CMP).
First and second quarter 2011
Above image from Aeropostale Inc 8-K filled on 08/18/2011.
The company has experienced a downturn in 2011. The company’s margins have been squeezed due to higher cost of sales and lower revenues. The company has given a low guidance for the third quarter of $0.09 to $0.15 per share as opposed to $0.63 last year. I don’t know if the fourth quarter will be better but I think the current market valuation provides a good chance of reasonable returns with a margin of safety.
I am guessing that one of the important factors in the increase in cost was the increase in cotton prices since late 2010. Cotton prices increased from 85 cents per pound in August 2010 to a peak of 230 cents a pound in March 2011. Since then the cotton price has come down and currently is at 103 cents a pound. Margins could get better as cotton sourced right now for making apparels gets sold in the future. Generally half a pound of cotton goes into a regular t-shirt so at a price of 100 cents per pound as opposed to 200 cents per pound for cotton the cost goes down by 50 cents per t-shirt.
Conclusion
The company is selling for a depressed price due to the company performance in 2011. The company is buying back it stock at low prices. Cotton price cooling off will help with margins in the future. I think there is a good margin of safety at the current market price.
Disclaimer: I do not own the stock discussed nor do I plan to initiate a position in the next three business days. The information used in the report is publicly available and correct to the best of my knowledge. My view about the stock may change without any notice. I might edit the report without any notice. Do your own due diligence.
CMP: $10.56
Market Cap: $852 million
Company Info
Aeropostale Inc. is primarily a mall-based retailer of apparel, mainly targeting 14 to 17 year old customers through its namesake brand Aeropostale. The P.S. brand of Aeropostale is an apparel store for 7 to 12 year old kids. They sell their merchandise through their stores and website, www.aeropostale.com and www.ps4u.com. As of Jan. 29, 2011, the company operated 965 Aeropostale stores, 906 stores in 49 states in the U.S. and Puerto Rico, 59 stores in Canada and 47 P.S. stores. The company has entered into a licensing agreement with a third party to operate 10 Aeropostale stores in United Arab Emirates.
Store productivity
As of January | 2011 | 2010 | 2009 | 2008 | 2007 |
comparable store sale increase | 1% | 10% | 8% | 3% | 2% |
comparable average unit retail change | -4% | 3% | 2% | -3% | 3% |
Average net sales per store (in thousand) | $2,267 | $2,243 | $2,042 | $1,932 | $1,924 |
Average square footage per store | 3659 | 3601 | 3594 | 3546 | 3540 |
Net store sales per average square foot | $626 | $624 | 572 | $545 | $543 |
New stores
2011 | 2010 | 2009 | 2008 | 2007 | |
Number of stores open at end of period | 1012 | 952 | 914 | 828 | 742 |
Net Sales (in thousand dollars) | 2400434 | 2230105 | 1885531 | 1590883 | 1413208 |
E-commerce
The company’s sales via their website have increased to $25.1 million in the second quarter of 2011 as opposed to $20.9 million last year.
International expansion
The company earns a royalty fee status from licensing their stores to a third party. Ten stores have been opened since 2009 and three more are expected to be opened in 2011 in United Arab Emirates. The company has also signed a licensing agreement to open to 25 stores in Singapore, Malaysia and Indonesia over the next five years
Share Repurchase Program
During fiscal 2010, the company repurchased 10.3 million shares for $257.5 million.
Program to date: The company repurchased 53 million shares for $904.0 million, at an average price of $17.06 per share as of Jan. 29, 2011. The company at the end of the second quarter has $145.2 million available under its share repurchase program. At the current market price of around $11, the company can reduce another 13 million in share count. Even if the company buys back at an average price of $14 it would equate to little over 10 million shares. The company has a share count of 82 million which can go down to around 69-72 million.
Valuation
In million dollars | 2010 | 2009 | 2008 |
Cash flow from operations | 263.7 | 333.4 | 202.13 |
cap ex | 100.8 | 53.8 | 83 |
FCFE | 162.9 | 279.6 | 119.13 |
I have not considered the first and second-quarter results for 2011 in the valuation.
With Growth
The company does not have any debt. The average free cash flow to equity over the last three years has been $187 million. Assuming they will be able to grow it at 3% and assuming a cost of equity of 12% (arbitrary, not using any model) and risk free rate of 2.15% (10-year treasury yield). We get a valuation of $1975million. We add cash of $73.1million (as of second quarter 2011). The share count at the end of the second quarter is around 82 million. If the company buys another 10 million shares using the $145.2 in the share repurchase program the share count can go down to 72 million. Based on this estimate we get a target price of $28.17 (150% upside from CMP).
No Growth
Assuming that the company does not experience any growth we can assume a slightly higher FCFE than the $187 million that we used, as the capex for growth would not be included. Nevertheless if we use $187 million with a multiple of 6, add back cash of $73.1 million and assume that share count goes to 72 million, we get a target price of $16.59 (50% upside from CMP).
First and second quarter 2011
Above image from Aeropostale Inc 8-K filled on 08/18/2011.
The company has experienced a downturn in 2011. The company’s margins have been squeezed due to higher cost of sales and lower revenues. The company has given a low guidance for the third quarter of $0.09 to $0.15 per share as opposed to $0.63 last year. I don’t know if the fourth quarter will be better but I think the current market valuation provides a good chance of reasonable returns with a margin of safety.
I am guessing that one of the important factors in the increase in cost was the increase in cotton prices since late 2010. Cotton prices increased from 85 cents per pound in August 2010 to a peak of 230 cents a pound in March 2011. Since then the cotton price has come down and currently is at 103 cents a pound. Margins could get better as cotton sourced right now for making apparels gets sold in the future. Generally half a pound of cotton goes into a regular t-shirt so at a price of 100 cents per pound as opposed to 200 cents per pound for cotton the cost goes down by 50 cents per t-shirt.
Conclusion
The company is selling for a depressed price due to the company performance in 2011. The company is buying back it stock at low prices. Cotton price cooling off will help with margins in the future. I think there is a good margin of safety at the current market price.
Disclaimer: I do not own the stock discussed nor do I plan to initiate a position in the next three business days. The information used in the report is publicly available and correct to the best of my knowledge. My view about the stock may change without any notice. I might edit the report without any notice. Do your own due diligence.
