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Teen apparel retailer Aeropostale (ARO) will release its Q4 fiscal 2012 earnings on March 14. Due to the shift in sales mix toward cheaper products and lower in-store traffic, we expect the comparable-store sales growth to remain under pressure. We note that the retailer's comparable-store sales growth has remained flat in all the three quarters of fiscal 2012, despite the comparison against weak fiscal 2011. In addition to this, the weak holiday season in the U.S. may add up to Aeropostale's existing troubles. We'll keep an eye on the retailer's margins to see the impact of lower cotton prices and continued promotional discounts. Although we believe that the rapid growth in the direct-to-consumer business will help Aeropostale, it may still not be enough to drive its overall growth.

Comparable Store Sales in Focus

Aeropostale's comparable store sales remained more or less unchanged during the first nine months of fiscal 2012. Given that the comparable period of fiscal 2011 delivered 8% decline in same-store sales, it's clearly visible that Aeropostale's recovery has been painfully slow. The retailer's troubles began when customers started shifting to other brands that offered more fashion-based apparel products while Aeropostale remained focused on basic clothing. However, Aeropostale saw some improvement in its store traffic (+2%) in Q3 fiscal 2012, as it received a good response to its limited fashion-based apparel.

Nevertheless, the weak holiday season in the U.S. dragged sales down and the retailer stated that its store traffic declined sharply after Black Friday. Aeropostale continued to face challenges in its main product offerings -- graphics and fleece. We don't expect any notable increase in Aeropostale's average prices either since the holiday season tends to be highly promotional. Therefore, we expect the comparable=store sales to remain under pressure in Q4 fiscal 2012.

Aeropostale's EBITDA margins declined sharply by about 900 basis points in 2011 due to cotton price inflation. Cotton prices came down in 2012, and Aeropostale has continued with its heavy promotional discounts. It will be interesting to see the mixed impact of these trends on the retailer's margins.

Furthermore, we note that major players in the U.S. apparel industry such as Urban Outfitters (URBN), American Eagle Outfitters (AEO), Abercrombie & Fitch (ANF) and Gap (GPS) have seen substantial growth in their direct-to-consumer business. Although, we expect Aeropostale to benefit from this broader trend, it may not be enough to drive its overall results. We estimate that direct-to-consumer business accounts for only about 15% of the retailer's value.

Our price estimate for Aeropostale stands at $13, implying a premium of about 5% to the market price.

Disclosure: No positions.

Source: Aeropostale Earnings Preview: Expecting Weakness To Continue