What Could Support a $36 Value for Aeropostale?

Jun. 9.11 | About: Aeropostale, Inc. (ARO)

Aeropostale (NYSE:ARO) competes with a variety of other retailers like American Eagle (NYSE:AEO), Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS). We have price estimate close to $36 for Aeropostale’s stock, implying a hefty premium to the stock’s market price. In this article we visit some of our forecasts for revenue per square foot and then identify some factors that would drive our forecasts going forward.

(Chart created by using Trefis' app)

Aeropostale revenue per square foot:

The revenue per square foot for Aeropostale increased considerably during the economic downturn, while those of some of its competitors Abercrombie & Fitch and American Eagle, declined. This was largely due to the fact that Aeropostale markets itself as a value priced retailer of trendy outfits for teens and young adults. Going forward, we expect Aeropostale revenue per square foot to further increase as the company has added significant customer following and brand value during the recent economic crisis

Following our some key trends that we expect to play out over the coming years and which would drive our above forecast.

1. Double dip recession / A slowdown in consumer spending sometime over our forecast period

As seen during the last few years, Aeroposatle is best positioned to benefit from downturns as compared to peers. Its price points are much lower that competitors but its styles are still resonate and sell well with young teenagers. This makes AEO relatively defensive compared to other names in this sector.

2. Changes in fashion trends

The profitability of apparel retailers depend largely on their ability to correctly gauge fashion trends in each season. Aeropostale is more focused on selling customers what they want based on prevailing fashion trends among its target demographic, rather than forecast what young buyers might want in the future.

When targeting teens, trying to be fashion forward can be hit or miss – providing high returns in some seasons but impacting them negatively at other times. On the other hand, Aeroposatle’s strategy provides more stable results over the long-term and this has been proved to be true during the recent downturn.

3. International expansion

The specialty apparel retailers in US are now moving towards emerging markets in Asia. Here again Aeropostale stands to benefit from its pricing + trendy fashion, especially in emerging markets where the demographics and income levels are highly weighted towards the urban middle class who are still conservative on their apparel and consumer goods spend, showing a preference for value prices brands.

Disclosure: No positions