Aeropostale (NYSE:ARO) designs and markets casual apparel and accessories for young adults and teens. The retailer primarily competes with American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS) and Urban Outfitters (NYSE:URBN).
Although Aeropostale’s internet & catalog business is more profitable than Aeropostale stores (profit as a percentage of revenues), the high revenue per square foot and high number of Aeropostale stores means that the bulk of Aeropostale’s value comes from the stores business.
We currently maintain a $51.90 price estimate for Aeropostale’s stock, well ahead of the stock’s market price.
Aeropostale’s Strong Historical Performance
Aeropostale’s store revenue per square foot increased from about $550 in 2007 to about $620 in 2009, an annual growth rate of 7%. During this period, the revenue per square foot for competitor Abercrombie & Fitch fell from $480 to $370, while that of American Eagle fell from $520 to $420. Aeropostale’s strong revenue performance despite economic recession can be attributed to its innovative marketing strategies and competitive pricing.
With the economic recovery in gaining steam, Aeropostale is pursuing strategic initiatives like enhancing its supply chain and introducing new technology, especially for its better performing stores. Around 20% of its stores report revenue per square foot that is at least 30% higher than the overall Aeropostale average.
As the economy recovers and consumer spending picks up, we expect revenue per square foot for Aeropostale stores to increase towards the $700 mark by the end of our forecast period.
However, a potential pitfall for Aeropostale is its lack of international presence. The company’s lack of exposure in the growing Asian market makes it susceptible to U.S. economic cycles. As a result, a slowdown in consumer spending in the future may not be offset by sales from other regions. At the same time, Aeropostale may miss out on the chance to capitalize early on the growing Asian market or be a late comer when it decides to expand. (See: Aeropostale’s Recession Strategy Pays Off)
Given the positive outlook for Aeropostale’s revenue per square foot, we pose the following question:
What Percent of Aeropostale’s Stock Value Comes from Aeropostale Stores?
Disclosure: No positions