The Teen Retailer Facing the Steepest Challenges
The three big teen retailers, Aeropostale , Abercrombie & Fitch , and American Eagle Outfitters , have for the most part traded together over the years. While all three of these companies are facing steep challenges at the moment, there are factors that separate them.
For instance, Abercrombie & Fitch has faced public relations nightmares, and the CEO might soon be replaced. And for American Eagle, while it's lacking top-line growth over the past year, it's the only one of the three that has completely stayed out of the red. American Eagle also yields 3.1%, whereas Abercrombie & Fitch yields 2.3%, and Aeropostale doesn't offer any yield. Speaking of Aeropostale, it's different from its peers in some other ways.
The game plan
Aeropostale stores are often found in malls. This, right away, is a negative. Mall traffic has been inconsistent recently, which Aeropostale has stated itself. Many retailers are cutting down on their physical store locations in order to reduce costs and take a more omni-channel approach to their businesses. I haven't read much about an omni-channel strategy for Aeropostale, but I do know that the company is reducing its physical store count, which is likely a good idea.
In FY 2014, Aeropostale plans on opening 11 Aeropostale stores as well as five P.S. from Aeropostale locations. The former targets 14-to-17 year-olds, and the latter targets 4-to-12 year-olds. Both brands aim to offer high-quality fashion at compelling values. Aeropostale will also remodel 26 Aeropostale stores. Overall, Aeropostale will invest $35 million on store openings, remodels, and infrastructure. This is a significant difference from the $82 million spent in FY 2013.
Aeropostale will also close 40-50 Aeropostale locations. Currently, the company has 902 Aeropostale locations across all 50 states and in Puerto Rico. Considering the new trend is for retailers to aim for 200 physical locations and focus more on online and mobile growth, Aeropostale could be closing a lot more physical retail locations in the future.
Reducing physical store locations should greatly help the bottom line, and Aeropostale needs a lot of help in this regard. This is one area where Aeropostale has separated itself from its competitors over the past few years, and this isn't meant in a good way:
American Eagle net income (trailing-12 months) data by YCharts
As you might already know, the retail environment has become highly promotional, and this is especially the case for teen retailers. The only way to drive traffic is to offer promotions, which then cut into margins and hurt profits. This then leads to investor disappointment and stock sell-offs.
Aeropostale has undergone a brand transformation, which has the potential to lead to reduced promotions in order to drive natural demand, but the early results have been disappointing. However, this isn't likely due to poor quality, but consumers not knowing about the change.
I visited the company's website, and the apparel looks trendy. I also noticed something else during my visit to the website -- up to 70% off everything. Once again, this might help the top line, but it's not going to help the bottom line. Speaking of the top line....
In Aeropostale's third quarter, net sales plummeted 15% to $514.6 million year- over-year, with comps also falling 15%. Another negative here is that e-commerce net revenue came in flat. This is rare. Despite many retailers struggling, most of them are enjoying online growth. Therefore, this is worrisome. Last year, Aeropostale made a move to increase its online exposure. It acquired GoJane.com, an Internet retailer of fashion-forward apparel for progressive young women.
Unfortunately, GoJane.com doesn't have much of an online presence. According to Alexa.com (global leader in website analytics), it sports a global traffic ranking of 32,942 and a domestic traffic ranking of 8,689. And page views per user and time on site have seen declines of 11.3% and 33% over the past three months, respectively. If Aeropostale wants to increase the brand's exposure, it will require capital.
Aeropostale finds itself in a difficult consumer environment, and it's unable to grow the top line without consistent promotions. Difficulties are likely to persist in the near future. That said, the brand has too much value to disappear. Aeropostale should eventually present value to investors, but that time doesn't appear to be now.
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The article The Teen Retailer Facing the Steepest Challenges originally appeared on Fool.com.
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