Aeropostale Aiming Low--Backstory
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It’s been a volatile couple of years for Aeropostale (NYSE: ARO). Two years ago, ARO was at historic highs around $30 per share. And why not? ARO was coming off some of the best comps and growth in its history with 19% increases in same store salese in 2009, 18% for 2010 and revenue growth at 18% in 2009-2010.
2011 was not as kind. The price dropped from over $30 to a little over $9 in September 2011. The decline coincided with the first few quarters under the leadership of the new CEO Tom Johnson. ARO lost what might have been the heart and soul of the company as Julian Geiger stepped down as CEO [and went to the board] in 2009 and in December 2010, Mindy Meads promoted to co-CEO, quit. This was much like the loss of Mickey Drexler at the Gap (NYSE: GPS). The chief with the fashion vision and sense leaves and the company founders.
ARO’s decline started in 2010 -- just as the six months of product under Geiger’s tenure was running down. Comps slowed in the back half of 2010 and turned negative in 2011, reaching –14% by July 2011.
Management was slow to recognize what needed to happen to fix the problems in merchandising. In the early spring of 2011, they were talking about the great spring season they were expecting and looking forward to strong back to school in the summer and fall of 2011. Spring and summer sales were some of the worst in the company’s recent history and ARO was forced to mark down heavily all the way through Christmas 2011.
It was clear Areropostale had lost its way for most of 2010 and through 2011. Even though they are merely followers of fashion and live by knocking off what fashion leaders are doing, they couldn’t spot the trends that were in front of them at competitors and get them on their own shelves fast enough to keep customers happy. ARO stuck with the uniform of the logoed hoodie/graphic tee and denim long after the party was over. Consequently they got stuck with huge piles of Aeropostale logo-splashed hoodies and graphic tees in muted, dull colors and loads of tired looking denim. They carried few to no dresses and skirts and were slow on the uptake in yoga wear.
In the recent conference call, Tom Johnson finally gives us some clues on what’s hot and what’s not. In the past, he spoke in generalities about:
- the color palette
- being true to the core customer
- more fashion
- better silhouettes
He briefly mentioned a few months ago that stores were a bit heavy into denim and merchandising would be rethinking the uniform. The uniform is their term for what customers buy over and over. For a few years it was denim, graphic tees and hoodies. Stores including Aeropostale and American Eagle Outfitters (NYSE: AEO) made a good living off the core customer and the three must-have uniform units.
Unfortunately, Johnson at ARO [and competitor AEO] missed the turn and was stuck for a year with uniforms the core customer was tired of wearing and could only be persuaded to buy at huge discounts. That has been cleared off the shelves and a stroll through their website now reveals lots of skirts in interesting colors and prints, dresses, less "denim" denim and some colored denim. Colored denim has been a developing trend at competitors for several quarters. ARO also has better graphics on the tees, brighter colors overall, fewer hoodies and prettier camis and tanks. It is a far better presentation of clothes than the drab clearance Aeropostale tees, distressed denim and lifeless hoodies we were seeing in the first quarter of 2011.
With aggressive promotional sales as ARO’s only alternative for moving inventory, gross margins went subterranean. There were also record high cotton prices to contend with raising costs. It was ARO’s misfortune that high raw material prices coincided with some of the worst clothing and fashion missteps in the company’s history. It produced the lowest gross margins and worst comps of the past 8 years.
If I had been convinced of Tom Johnson’s rapid response, on-target fashion sense and ability to make the right choices for 2012, I would have bought at $9. But his failure to be specific during conference calls and his tendency to speak in grand generalities made remediation of ARO’s troubles look like a long slow crawl back to better business. I am still not convinced he has the turnaround well in hand, but the clothes do look better this quarter. He finally discussed some specific errors in the most recent conference call.
They stayed too long and overloaded denim. The selection at the website has now been decimated. The ubiquitous company logo as a dominant style statement has given way to better more colorful graphics. Hoodies are down to just a few styles from dozens. Unfortunately most of them still say Aeorpostale on the front and more interesting graphics are still missing. Graphic tees have better and more colorful designs. The colors are brighter. Gone are muted greys, dark maroons, washed out pastels, and browns.
At some point clothing stores may figure out the coolness factor of wearing and advertising a brand is not what it used to be. Abercrombie & Fitch (NYSE: ANF)is another company that splashes its logo everywhere --- getting customers to pay to be walking billboards. ANF sales have also been disappointing. Same store sales for Q4 were flat and gross margins were 7.5% lower, driven primarily by lower than expected sales and higher markdowns in the same promotional environment that has plagued ARO.
From Tom Johnson:
The dominant logo business throughout the entire store was something that we needed to broaden our assortment and that's what we did and we are certainly not walking away from our core business.
ARO has added a nice assortment of skirts and dresses in prints and bright colors with no Aeropostale ‘87 anywhere to be found. Six months ago they had one ugly plaid uniform-style miniskirt online.
Last year they were top-heavy in distressed denim and plain denim in dozens of styles—now severely pared back. In the meantime, colored denim began showing up at other chains six months ago in some remarkable shades and hues. While ARO says they beat the competition to colored denim and were ahead of the trend, that’s not quite true and the selection is still poor -— 3 colors blue white and tan [at least online-- no stores here to check]. ARO has some way to go even as a dedicated follower of fashion and not an innovator
Forever 21 is a leader in fast fashion and can be relied on to front run emerging tastes and trends. Their colored denim selection is broad and available over a good cross section of styles. ARO is not there yet. By the time they do get inventory, it may be on its way out -- such are the hazards of following trends with long lag times. Aeropostale needs a lead time of 3 to 6 months from conception and ordering to shelf; Forever 21 can respond to fashion trends in several weeks.
As far as the product Stacy, we're pleased as, but as Marc said, we can't comment obviously into February, but we're pleased with the reaction to the fashion as I mentioned earlier, particularly thanks for noticing the colored denim. We were happy we had it out the second week of January before most of our friends
Overall, the clothes are vastly improved this quarter.