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Aeropostale (ARO) is a mall-based specialty retailer of casual apparel and accessories. The company competes with other specialty retailers such as American Eagle (AEO), Abercrombie & Fitch (ANF), Gap (GPS) and Urban Outfitters (URBN).

We estimate that Aeropostale Stores account for 78% of the $55 Trefis price estimate for Aeropostale’s stock and about 16% of our estimate comes from the company’s Internet & Catalog sales business.

Our price estimate for Aeropostale presents an 80% upside to the current market price of about $30. This is attributable to the outstanding performance that Aeropostale demonstrated during the recent economic downturn when many of its peers suffered and our expectation that the company will continue to outperform other specialty retailers.

Specifically, we believe that Aeropostale’s revenue per square foot, store count and profit margins will continue to improve.

Aeropostale’s Revenue per Square Foot Improves During Economic Downturn

From 2007 to 2009, sales by Aeropostale competitor Abercrombie & Fitch fell by 22% while American Eagle’s sales remained relatively flat. In comparison, Aeropostale’s sales increased by about 35% during this period and revenue per square foot increased from about $550 in 2007 to about $620 in 2009, an annual growth rate of 7%. Revenue per square foot for Abercrombie & Fitch fell from $480 to $370 while American Eagle’s revenue per square foot fell from $520 to $420.

We estimate that Aeropostale’s market share of the specialty clothing industry increased from 2% to 3% during this two year period, which is a significant increase within the highly fragmented $70 billion apparel industry.

We forecast that revenue per square foot for Aeropostale stores will increase to about $700 by the end of Trefis forecast period.

Aeropostale’s Sales Driven by Smart Pricing and Promotions

Low prices combined with promotions have played an important role in Aeropostale’s success. The company’s price point is about 50% lower than Abercrombie & Fitch and 30% lower than American Eagle.

The company also improved its promotional merchandising strategy in advance of the recession. With pre-planned sales signs and two-for-one deals throughout their stores, Aeropostale has successfully established a unique identity for itself as a value priced chain and benefited during a time when consumer spending consistently fell.

Aeropostale Store Count and Profit Margins Expected to Increase

The number of Aeropostale stores increased from 670 in 2005 to 970 in 2009, at an average growth rate of around 9%. In comparison, during the same period, the number of Abercrombie & Fitch stores decreased from around 360 to 350 while the number of American Eagle stores increased from 870 to 940.

We expect the number of Aeropostale stores to further increase from 2010 till the end of the Trefis forecast period, as the company’s strong performance during the recent economic helps it to invest further in expansion.

Like revenue per square foot and Aeropostale’s store count, the company’s profit margins also increased in recent years. We expect this trend to continue, albeit at a slower rate, over our forecast period. We believe that the company’s margins will benefit from the expected improvements in revenue per square foot and improvements in the company’s ability to control average unit cost for its merchandise.

Disclosure: No positions

Source: Aeropostale Expected to Outperform Peers