Will Aeropostale's Turn Things Around?

Down more than 60% in 2014, Aeropostale is trying hard to turnaround. But will it succeed?

Jun 11, 2014 at 1:33PM

The new fiscal year didn't start on a happy note for Aeropostale (NYSE:ARO). The apparel retailer crashed 25% in a single day after posting a wider-than-expected loss, and a terrible outlook for the ongoing quarter made matters worse. Aeropostale has been the worst performer so far this year when compared to peers such as American Eagle (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF). It looks like the trend is set to continue until and unless its turnaround strategies start working.

What gives?
The teen apparel space has seen a shift in buying preference, with new fast fashion retailers such as H&M and Forever 21 gaining prominence over the established players. Aeropostale has been a victim of this change. In the first quarter, its revenue dropped 12% year-over-year to $396 million, while the net loss widened from $12.2 million last year to $77 million in the previous quarter. Although management has expressed confidence regarding a turnaround, investors aren't impressed. The company's stock is trading at the lower end of its 52-week range.

A challenging economic environment, lower mall traffic, and unseasonable weather during the first quarter hurt Aeropostale. However, there are broader trends affecting the retailer. There has been a significant change in the shopping pattern of some customers, especially those belonging to Generation Z (aged between 18-23.)

A study has revealed that they no longer need malls to socialize, and their apparel preference is now focused on individuality and uniqueness. As a result, Aeropostale's sales have taken a hit and the company is busy adapting to the change. The company is taking on various initiatives which include aligning its financial structure, accelerating customer adoption, changing brand sentiment, and adapting operationally to the current retail environment. These factors are expected to play a decisive role in its turnaround, but investors haven't seen any results so far.

Turnaround strategies
Aeropostale says that it is experiencing strength in its sub-labels such as Bethany Mota, as well as new labels such as Tokyo Darling, Free State, and Live Love Dream. As result, Aeropostale reported a positive average unit revenue (AUR) for the first time in seven quarters. The company plans to expand into additional sub-labels throughout the year in order to provide differentiation and uniqueness to customers. 

Aeropostale has also decided to close around 125 mall-based P.S. locations by the end of fiscal 2014 to better align with consumers' changing shopping preference. Instead, it will now focus on the P.S. brand through other sales channels such as off-mall locations, e-commerce, and international licensing. Management believes that this will result in a more profitable business than the current model.

Aeropostale also launched a new brand campaign. This will distinguish Aeropostale as an iconic American brand that caters to Gen-Z customers and evokes a sense of energy and positive spirit. Its go-to-market strategy for back-to-school customers will reposition the brand across all stores and digital channels. Management is of the opinion that this new campaign will highlight the changes that Aeropostale has made to its brand, and ultimately attract new customers... especially the teens. 

Aeropostale is taking steps to manage its expenses efficiently. It expects to save around $5 million to $10 million in 2014. By 2015, it anticipates saving around $30 million to $35 million. These savings will help the company improve its bottom line performance going forward.

Peers are in better shape now
While Aeropostale's moves sound impressive, they haven't resulted in a solid turnaround yet. In comparison, American Eagle and Abercrombie are doing better. For example, American Eagle is running a buy online and ship-from-store pilot program, which has received positive feedback. The company is also bringing down inventories and improving its pricing strategy by running selected promotions, bolstering product assortment, and focusing on relevant marketing events. 

In addition, American Eagle is streamlining its operations by restructuring the business to eliminate redundancies in the sales channel. It has also enhanced its online site to include improved product displays and better navigation. 

Meanwhile, Abercrombie is doing even better by reducing the use of its logo in its merchandize to a great extent. Abercrombie is presently testing all of its product categories without using its logo in order to understand the demand patterns. Moreover, as Abercrombie plans to sell its merchandize through online retailers going forward, it might continue improving.

Aeropostale's shares are down more than 60% so far in 2014, but further downside cannot be ruled out. Its peers are in better shape and may continue pressuring the company with their strategies. Investors should consider staying away from Aeropostale until and unless the company's turnaround efforts bear fruit.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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