Running a business is all about innovation. Whether you're a biotechnology upstart, a cutting-edge technology company, or a large-scale retailer, innovation is paramount to a business' success. Without innovation, companies run the risk of complacency and getting passed by competitors, or, even worse, folding up shop altogether like Circuit City did a couple of years ago.
No company gets a free pass when it comes to adapting its business plan, so when push comes to shove, we need to ask ourselves: Will this company innovate or die?
Today, let's take a closer look at Aeropostale (NYSE: ARO) to determine if the company can adapt to rapidly changing consumer demands or if it will be pushed into the background.
What's wrong with Aeropostale?
The perfect storm is brewing in the retail clothing sector. Cotton prices, though well off their March highs, are wreaking havoc on retailers' margins. On top of this, changing consumer trends in a sector already marked by very low brand loyalty has caused inventory gluts with practically every teen clothing retailer. Recently, Gap (NYSE: GPS), Pacific Sunwear (Nasdaq: PSUN), and American Eagle Outfitters (NYSE: AEO) have come under the scalpel of declining margins and rising inventories. Without question though, no company has seen a greater fall-off than Aeropostale.
It wasn't long ago that Aeropostale was successfully taking it to Abercrombie & Fitch (NYSE: ANF) on their own turf and winning the battle. Consumers were abandoning higher-priced clothing for Aeropostale's cheaper alternatives. However, following an extensive two-year rally in equities, consumers' wallets are opening up once again and teenagers' fickle trends are once again swaying in the direction of Abercrombie and away from Aeropostale.
Getting Aeropostale back on track
I'm not the CEO of Aeropostale, but for a moment, let's pretend I am. As I see it, the company needs to focus on three things to itself back on track.
- Focus on e-commerce: The lone bright spot in every Aeropostale earnings report is the growth in the company's online business. Still, online revenue only accounted for 6% of total revenue in the first quarter, and that's simply not going to cut it. I'm not saying the company's recently announced share buyback isn't in shareholders' best interests, but I'd rather see them using excess cash to build out their online business.
- Focus on brand loyalty: Aside from carrying what many of us older folks would consider "overpriced" clothing, Abercrombie is a marketing genius. Its consumers are literally walking billboards for the company with the Hollister or Abercrombie brand names emblazoned on many of its shirts. Aeropostale has begun a branding campaign with its Aero line, but it could be doing much more. More branding should translate into free advertising and greater customer loyalty.
- Get consumer input: The past few quarters it seems like Aeropostale has been on its own renegade campaign to purchase whatever styles it seems to think consumers want. I actually think it might be prudent to get consumer feedback on a consistent basis through either their website or in-store. It might seem like a fruitless idea, but it costs practically nothing and could pay big dividends in relation to eating into Abercrombie's monstrous teen market share.
What's the verdict?
Aeropostale has been moving swiftly in the wrong direction since last July, but thankfully it doesn't seem like all hope is lost. While profits and margins haven't been up to par, the company has remained profitable, and its balance sheet sports no debt and $1.72 per-share in cash. Although things could very easily deteriorate and its share price may not have seen the lows yet, Aeropostale does look to have the tools available to turn its business around. Aeropostale is a worthy candidate for your Motley Fool watchlist.
How do you feel about Aeropostale's prospects? Share your opinion in the comments section below, and consider adding Aeropostale to your watchlist to keep up on the latest in the teen retailing sector.
