Is This Company Worth a Look Despite a Dull Outlook?

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apparel retailers are having a good time since shoppers are opening up their wallets for the holiday season. Cotton prices have also given relief to the industry players who had been struggling hard to cope with problems of decreasing demand and higher input prices.

There has been a shift from the buying of basic apparels to the more fashionable ones, which come for a premium price. With these things falling in place, teen apparel retailers are looking forward to a great holiday season, which started well with Black Friday.

One of the apt examples here is Aeropostale (NYSE: ARO), which has been showing signs of recovery as customers flock to its stores and help the retailer post rocking third quarter results which overwhelmed investors. Let take a detailed look.

The Quarter and Its Merits…

Higher store traffic, increased number of transactions and increase in shoppers’ transaction size worked together to push revenue north to $605.9 million. Also, its earnings edged up slightly to $24.9 million. The retailer benefitted from lower cotton prices which helped expand its margins. Aeropostale has been customers’ favorite because of its collection of basic apparels. These basic clothes are low priced and hence attract a lot of customers.

However, the retailer has been trying to change its image. It has been taking initiatives to expand its fashion segment. Though the segment is smaller in size, it has generated a great response, especially from women. This segment looks lucrative and is expected to grow big given customers’ enthusiasm.

One of the strongest performers was the e-commerce segment which witnessed a growth of 12%. The teen apparel retailer has been particularly focusing on its online operations, and this is bearing fruit. In fact, it has recently acquired, an online women retailer, in order to strengthen the segment further. With the convenience of shopping at home, e-commerce has become increasingly important for customers. Hence, retailers have been trying to make the most of it and Aeropostale is no exception.

Hitting a Bump…

Both top line and bottom line were hampered by discounts. Due to highly promotional industry environment, the company suffered quite a lot. Promotional efforts such as discounts have been the need of the hour to stir demand. Fashion retailers such as American Eagle Outfitters (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF) have been following the trend and offering great discounts to customers. These retailers offered as much as a 40% discount on its apparels which lured young shoppers.

But Aeropostale went a step further and offered more than a 50% discount so that it can get back its lost customers. This affected the retailers’ top line which would have been even better if there were lesser promotions.

Also, Abercrombie & Fitch has a fan following because of its extremely trendy and fashionable clothing. Hence, even lesser discounts attract shoppers galore to its stores. Hence, Aeropostale is trying its best to enhance its fashion image in customers’ minds.

Even American Eagle has been a great performer. Its strategy of going by the trend and offering products as per changing tastes and preferences of customers have worked well. Moreover, it is not as premium priced as Abercrombie & Fitch. All these reasons have led to a stellar third quarter where American Eagle witnessed a jump of 11% in revenue and a whopping 44% rise in earnings. In fact, an upgraded outlook was like a cherry on the cake for its investors.

Conclusive Thoughts

Aeropostale faces stiff competition from its peers and has been struggling hard to come over it. Overall, the retailer has been making the right moves with a growing presence in the fashion apparel space. Its children segment has also been one of its strengths and has high growth potential. It has been eyeing international expansion from quite some time now. A growing international footprint can be something to look out for.

However, the company has not been very positive about its fourth quarter and has given a dull outlook which makes me think again about this company. I believe investors should be on the sidelines until some there are some positive signals.

justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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