Aeropostale ( ARO) is a specialty retailer that sells casual apparel and accessories targeted primarily at youth aged 14 to 17. Its primary competitors include American Eagle ( AEO), Abercrombie & Fitch ( ANF), Gap ( GPS) and Urban Outfitters ( URBN).

Aeropostale designs, markets and sells its own brand of merchandise through its retail stores and the Internet. The Aeropostale stores constitute around 78% of the $55 Trefis price estimate for Aeropostale's stock.

Heavy reliance on marketing and advertising to generate sales could impact Aeropostale's margins in the future. Another risk: As the economy recovers, many customers could trade up to premium brands, hurting Aeropostale's sales and eroding its margins. In this scenario, there could be as much as a 20% downside to our $55 Trefis price estimate for Aeropostale's stock. Our analysis follows below.

Recession Benefits

Aeropostale's EBITDA margin from the stores division increased from around 10% in 2005 to 19% in 2009. The margin boost was mainly attributable to strong sales growth, which kept revenue per square foot high. Revenue per square foot of Aeropostale stores increased from around $530 in 2005 to $630 in 2009.

A significant portion of this growth came between 2007 and 2009, as weak consumer spending trends suited Aeropostale's promotional marketing strategy and lower price points compared to more upscale brands like American Eagle and Abercrombie & Fitch. Revenue per square foot of Aeropostale store space grew at an annual growth rate of 7% from 2007 to 2009.

However, expenses grew from 2005 to 2009 due to heavy marketing and promotional activities to generate sales. The company's cost of goods sold also grew at an annual growth rate of around 13% during this period. Meanwhile Aeropostale's SG&A expenses, which include promotional and marketing activity costs, rose by 20% a year. The higher cost base can present a risk to Aeropostale if it is unable to maintain the higher revenue per square foot levels that it achieved in recent years.

Economic Recovery Risk

As the U.S. economy recovers, many customers may trade up to more premium teen brands like Abercrombie & Fitch and American Eagle, both of which performed very well prior to the economic slowdown.

On average, Aeropostale's price points are around 30% lower than American Eagle and 50% lower than Abercrombie & Fitch. We believe that Aeropostale will be able to hold on to a significant portion of its customer base, due to the popularity and brand recognition that it acquired during the downturn.

But if Aeropostale loses significant market share, its revenue per square foot could stay below $650 during our forecast period. This could drive EBITDA margins down to around 16% by 2016, implying a downside of around 20% to the current Trefis price estimate for Aeropostale's stock .

You can see our complete $55 Trefis price estimate for Aeropostale here .
Trefis is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the U.S.

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