The teen market is fickle, just like its core customers. Throw in parents cutting back on discretionary apparel purchases -- not to mention cutting back on allowances -- and the sector today seems all but impenetrable.
But business maxims don't change in trying times -- they are, in fact, made all the more true. The key to success for teen retailers in the economic crisis is therefore the same as it has been throughout time: Give shoppers what they want at prices they can afford. And this deceptively simple formula that has helped
to not only survive, but thrive, during the recession.
Aeropostale has prided itself on its ability to offer "trend-right" merchandise at value prices, perfecting its promotional business model long before consumers began seeking out lower prices. Call it a miniature
. Indeed, much as that big-box discounter has done, Aeropostale has transcened its core middle-income demographic through an appeal to frugality.
But unlike Wal-Mart, which is still delivering its usual steady results amid the recession, Aeropostale's numbers are breathtaking -- making the New York City-based Aeropostale our pick for the best in class of the retail.
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Luckily for Aeropostale, the "new normal" is expected to continue long after the economy rebounds. "The idea that shoppers will immediately revert back to purchasing a $20 shirt with a $60 logo just won't happen," says Craig Johnson, president at Customer Growth Partners.
Indeed, through sourcing, Aeropostale has been able to be a price player without disregarding its margins. In the company's first quarter, which ended May 2, the mall-based retailer
, with gross margins experiencing a 220 basis point improvement.
Its total profit reached $31.7 million, or 47 cents a share, from $17.5 million, or 26 cents in the year prior. Its revenue rose 21% to $408 million from $336.3 million a year ago, while its total same-store sales grew 11%.
Management expects second-quarter earnings in the range of 46 cents to 48 cents per share, far surpassing Wall Street's forecast of 37 cents.
Its rivals haven't been so lucky. Abercrombie & Fitch swung to a first-quarter loss of $26.8 million, or 31 cents, while American Eagle Outfitters
, or 11 cents a share.
Investors are rewarding Aeropostale's tenacity. During the year-to-date period shares have spiked 98%. In comparison, shares of American Eagle and Abercrombie & Fitch are up substantially less, 48% and 12%, respectively, during the same period.
This enormous hike in share price is a collective bet on Aeropostale's solid fundamentals. But there's more to the story than just numbers.
Walk into Aeropostale's corporate office in mid-town Manhattan and the ambience is not unlike walking into one of its stores -- fun, bright and lively. At the helm is CEO Julian Geiger, a leader with a well-known ability to crack jokes while rallying his employees -- a skill often ignored by analysts and investors.
And with the appointment of Mindy Meads as president and chief merchandising officer in March 2007, Aeropostale has improved it fashion assortment -- an area in which it traditionally lagged.
Said management team has been strategic in its growth. The company currently operates 881 stores in the United States, Puerto Rico and Canada. In comparison, Abercrombie & Fitch has 1,112 stores across its five concepts, while American Eagle owns 1,118 stores across three chains.
And save for a few international franchises, overseas expansion, a move that has been successful with Abercombie & Fitch, remains untouched.
There is, in other words, plenty of room for growth.
Aeropostale is also looking for new vehicles, and will roll out its new P.S. concept at the end of the month. The children's apparel chain will target the 7- to 12-year-old brother and sister of the Aeropostale teen, with 10 stores opening in the New York/Metro area by the end of the year.
"We are taking all of the success of Aeropostale -- both operational and merchandising -- and making modifications to fit the younger demographic," Geiger said
"There is a void in the market for this demographic of fashionable clothes at value prices. We have the advantage of already having built-in recognition with moms and kids."
Indeed, management not only knows when to expand, but also the right time to pull out.
In February, Aeropostale decided to shutter its flailing contemporary concept Jimmy'Z. Other retailers, namely Abercrombie & Fitch, should take note. Abercrombie is holding on to its Ruehl chain, which has been dragging down earnings. It wasn't until earlier this month that the company finally said it is
considering "strategic alternatives" for the business.
American Eagle -- clearly unwilling to let a bad concept die -- is also maintaining a firm grip on Martin + Osa.
"This closing of Jimmy'Z is really a tribute to Aeropostale's management," Johnson said, "They tried the concept, it never really caught on. Not everything is going to work. They didn't over extend and pulled the plug in a timely fashion."
While management is cutting its losses with Jimmy'Z, its walking away with some valuable lessons for the next concept. "We made the mistake with Jimmy'Z of targeting a completely different customer than Aeropostale," Geiger said. "This time around, the only difference between the Aeropostale and P.S. customer is age. It's the same customer and parent that we know well."
Granted, moving forward, Aeropostale may find itself losing some of its market share, as competitors like
Abercrombie & Fitch
American Eagle Outfitters
, lower their prices.
But by now the fact is well-established: These companies will be playing on Aeropostale's turf.
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