Friday, May 21, 2010

Can Aeropostale sustain the momentum?

It is not an overstatement that Aeropostale (ARO) has weathered one of the biggest economic crisis in a century unscathed. While retailer peers fumbled to cut cost, slash inventory, raise cash, deleverage and avoid bankruptcy, ARO was not only surviving but also growing. Yes, you read it right, "growing" !

Its major competitors, Abercrombie and Fitch (ANF), American Eagles (AES), Hot Topics (HOTT) paled before ARO's same store sales, a common metric to measure how a store opened longer than a year fares compared to a year ago. Until recently, ARO stunned analysts with its streak of positive same store sales growth, something that one would be hard pressed to find in the last 12 months.

April 2009                 20%
May 2009                  19%
June 2009                  12%
July 2009                   6%
August 2009              9%
September 2009       19%
October 2009            3%
November 2009        7%
December 2009         10%
January 2010             6%
February 2010           7%
March 2010              19%
April 2010                 -5%

What makes Aerospotale so good?
Not only was ARO able to maintain traffic to its stores, it was also able to grow its operating margin, attributable as much to pricing power as cost control . The operating margin was 16% in the first quarter, 2010 compared to 13% in prior year.
The management pointed to nimble business models with the right mix of product at the right price. The company integrates designing, sourcing, distribution and marketing all in house, enabling very efficient response to change of fashion trend and demand. However, many analysts pointed to "trading down" among teenagers from higher profile brands like Abercrombie and Fitch as the unemployment rate teetered at almost 10% for the overall population and 25% among teens. Some doubt the sustainability of this success as competitors Abercrombie and Fitch and American Eagles lower prices. Some bet against ARO as teenagers return to brand pursuing as the economy recovers and unemployment pressure subsides, citing potential loss of market share and more need for marketing expenses.
My takes
1. I do not foresee a sharp and quick recovery in the global economy especially with the European debt crisis overshadowing an emerging recovery. Therefore, I believe teenagers will continue to "trade down" at least until 2011.
2. With its expansion of store front, additions of key items, cross selling efforts (e.g accessories) and enhanced marketing initiatives, it may be able to retain a majority of its "trading down" customers even if the economy returns to good times.
3. I was a little concerned by a sudden break of its streak of positive same store sales growth in April. That was the first negative figure in the last 12 months. The management attributed that to an earlier Easter this year that pushed sales forward to March. I generally do not like "calendar" excuse but I think this management deserves benefits of doubt after showing such consistency in delivering spectacular results in a very hard time.
In short, I believe ARO, given its unusually attractive valuation (P/E less than 10 with 2010 earnings estimates compared to its peer's average at 15) and a management that seems to do everything right, can continue to offer favorable risk/reward in the next 12 months.

That said, I am a big believer in the notion that first-hand experience gives best stock selection. I am neither a teenager nor do I have teenager friends. Therefore, I count on you, shoppers, to offer me feedbacks on the sustainability of its appeal to teenagers and kids.
Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does NOT own any position of ARO in her personal account as of May 20, 2010

No comments: