Aeropostale One Year Later and No Delivery

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Aeropostale (NYSE: ARO) can still be filed in the dead letter office two years after the turnaround was supposed to take place. Back in the first quarter of 2011, CEO Tom Johnson was doing a post-mortem after a disappointing back half of 2010 and an ugly Q1 2011, and concluded that the fashion was wrong. At the time he remarked it was “crystal clear” what the fashion missteps were and was looking forward to a brilliant and rejuvenated 2011. 

It was clear that the uniform of graphic T’s and hoodies emblazoned with a variety of Aeropostale logos was not what the core customer was going to pay for, even with heavy discounts.   Fleeces were also on the outs, along with distressed denim. Aeropostale ended 2011 with massive promotional selling to clear the dead inventory, and some of the worst gross, operating, and net margins in its history.

Fashion is easy — maybe not

Johnson’s generalities concerning improving fashion:

  • Freshness
  • Newness
  • Optimism
  • The color palette
  • Being true to the core customer
  • More fashion
  • Better silhouettes
  • More fashion again

It’s a list that doesn’t describe any specific changes and gives no sense of the focus or energy needed to bail out this sinking ship. Unsurprisingly, Aeropostale still does not seem to understand, much less develop, fashion for its core customer. They continue to struggle, looking for the right fashion statement to follow, and don’t fully appreciate that the uniform has died a quiet but noticeable death. Time to bury the graphic Ts, hoodies, and fleece. The uniform was on its deathbed a year ago, but Aero kept defibrillating, trying for resuscitation.

Move forward one year into the Aeropostale fashion turnaround, and we see a company mired in clearing the shelves of stale product during key sales seasons—back to school, Black Friday, and Christmas.  While competitors American Eagle (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF) have improved margins year-over-year, Aero is plowing through piles of margin-destroying promotional products with discouraging traffic numbers and declining same store sales numbers.  The big tailwind expected to push retailers to higher margins—lower cotton prices—has worked for American Eagle and Abercrombi. It has not done as much for Aero, as the company is still finding the need to clear inventory with discount pricing. 

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Aeropostale managed an impressive run in price per share from rock bottom at $9 in October 2011 to $22 by April 2012 -- beating guidance every quarter. Management would give gloomy guidance numbers at the conference calls and then manage to beat them by a substantial margin quarter after quarter. The market was impressed. That carried into Q1 2012 with estimated earnings at $0.08 to $0.10 and actual EPS of $0.13. The lowball/conservative guidance strategy was used for most of 2011 and early 2012 with gratifying results – share prices recovered to $22. 

All good things to come to an end, as they must.  The company missed guidance in Q2 2012 and revised down rather than up in a reversal of fortune that sent the share price down 40%, back to $12.  Aero missed again in Q4 2012 and instead of earnings of $0.36-$0.41 per share, had to pre-announce a big swing and a miss -- Q4 2012 EPS will be $0.20-$0.24.

The company has produced a string of unending disappointments  -- margins not recovering, same store sales negative even with easy comps last year to gain on, and management, after acknowledging fashion missteps 18 months ago, has yet to get it right. CEO Tom Johnson still has to talk about the pricing pressure on graphics and fleece that should have been banned from the shelves twelve months ago.

Recently, Aeropostale lured Bebe’s president, Emilia Fabricant, with a job as executive vice president. Ms. Fabricant managed to see Bebe’s through a small recovery from August 2010 through August 2012 before resigning. Unfortunately, she is obligated to report to Tom Johnson, and it’s unclear how much latitude she will have to make deep changes to the fashion and the company culture.

Aeropostale is not the store it was under the leadership of former CEO Julian Geiger. Then, the company excelled at imitating fashion and finding the teen pulse. Aeropostale flourished during the recession when all around were dropping. How did they do it, and where has Tom Johnson gone so wrong?

Geiger and the Aeropostale marketing team found they should:

  • Follow established trends—not set them
  • Watch customers and take careful note of what they wore in teen natural habitats like Disneyland, Six Flags, concerts, and any place teenagers hang out in clothes they like to wear
  • Allow teens to see and feel new styles and stock stores with the carefully observed hits
  • Use a few locations as test stores to introduce and evaluate product before stocking stores nationwide 

These are a few simple strategies that put Aeropostale on top that are not being effectively followed since Julian Geiger left. If Ms. Fabricant brings back the spirit of past success or even finds new rules to win the customer, Aeropostale may yet be investment-worthy.  What we do know is Aeropostale needs to exorcise the ghost of retail-past, including hoodies, graphic Ts, and fleece.

LeKitKat has no position in any stocks mentioned. The Motley Fool owns shares of Aeropostale. 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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