netrashetty
Netra Shetty
B/E Aerospace, Inc. (NASDAQ: BEAV) is an S&P 400 and NASDAQ listed manufacturer of aircraft cabin parts, including passenger and crew seats, oxygen delivery systems, kitchens and lavatories for commercial airliners. Based in Wellington, Florida,[2] the company was capitalized as a $3.14 billion corporation as of 2010.[3]
[edit]Oxygen masks
The FAA announced on 11 August 2008 that it would investigate why "almost half the masks either did not deploy or failed to provide oxygen" during a pan-pan event on American Airlines Flight 31[4] The FAA had recently issued airworthiness directives regarding problems with defective inline flow indicators obstructing the BE Aerospace oxygen masks on several Boeing commercial aircraft models. B/E had identified a repair in February 2006. Boeing then issued a "Special Attention Service Bulletin" to inspect and if necessary repair the masks in April 2007. The directives only require action by April 2013 unless already done.[5]
BE Aerospace (NASDAQ: BEAV) is the largest manufacturer of cabin interior products for commercial aircraft and business jets as well as an aftermarket distributor of aerospace fasteners.[1] The company sells its manufactured products directly to nearly all of the world's airlines and airframe manufacturers as well as other aviation customers.[1]
Business Overview
BE manufactures seats, oxygen storage and delivery systems, other interior components and food preparation products for commercial and business jets.[1] The company sells all of its products directly to airplane manufacturers and airlines.[2] The company also distributes a range of aerospace grade fasteners.[1]
Business & Financial Metrics[3]
In 2009, BEAV generated a net income of $155.3 million on revenues of $1.94 billion. This represents a turnaround from 2008, when the company incurred a net loss of $99.4 million on revenues of $2.11 billion.
Business Segments[4]
Commercial Aircraft (47.0% of revenue): This segment manufactures first, business and coach class seats. The segment's first and business class seats are generally more expensive than their coach class seats because of added features such as laptop power sockets, adjustable lumbar supports and leg rests.[5] In addition to manufacturing and selling new airplane seats, it supplies spares and replacements to its customers.[5] Seating competes with companies like Zodiac S.A. and Premium Aircraft Interiors Group.
Consumables Management (41.2% of revenue):This segment manufactures aerospace fasteners.[6] Roughly 60% of the segment's orders are for the aftermarket.[6] Commercial Aircraft stocks over 200,000 different kinds of fasteners making BE an easy one stop shop for airline maintenance crews.[6]
Contents
1 Business Overview
1.1 Business & Financial Metrics[3]
1.2 Business Segments[4]
2 Key Trends and Forces
2.1 Increased orders of wide-body aircraft increased the demand for BE's products
3 Key Competitors
4 References
Business Jet (11.8% of revenue): This segment manufactures furnishings and interior systems for business jets.[7] The segment's furnishings include seats, beds, sofas, credenzas, closets and kitchen structures.[7] Its interior systems include walls, oxygen supply systems, lighting and air valves.[7] BE is the largest supplier of furnishings for business jets and supplies its products to almost all business jet manufacturers.[7] Business Jet competes with companies like Astronics (ATRO).
Key Trends and Forces
Increased orders of wide-body aircraft increased the demand for BE's products
The number of wide-body airplanes sold is excepted to grow at roughly 20% in 2011. [8] According to BE wide-body planes use five to eight times more of BE's products in dollar value than standard jets.[8] If this occurs, BE will have an opportunity to significantly increase its sales.
Key Competitors
Astronics (ATRO) manufactures cabin lighting, electronics and power systems for commercial, business and military aircraft. The company's cabin lighting for business jets competes with the cabin lighting produced by BE's Business Jet segment.[9]
Zodiac S.A. manufactures inflatable boats and pool equipment as well as aeronautical equipment. The company's aeronautical products include fuel circulation, hydraulics and electrical power systems as well as passenger seats and commercial aircraft interiors. Zodiac's passenger seats compete with BE's Seating Segment and their aircraft interiors compete with BE's Interior Systems segment.[10][11]
Premium Aircraft Interiors Group is a private company that manufactures seating, interiors, bathrooms and galley supplies for commercial passenger aircraft. The company's seating products compete with BE's Seating Segment and their aircraft interiors and galley supplies compete with BE's Interior Systems segment.[12]
Aeropostale (NYSE: ARO) sells its own brand of apparel and accessories to the highly targeted 14 to 17 year old demographic. ARO sells its relatively mid- and lower-priced merchandise via its namesake Aeropostale stores, which are mostly mall-based. Aeropostale is one of the smaller firms in the youth apparel retail sub-market, generating $2.23 billion in net sales during fiscal 2009[1]; its larger competitors Abercrombie & Fitch and American Eagle reported sales of $2.93 billion[2] and $3 billion[2] respectively.
ARO has ridden the internet wave very well compared to its competitors, posting 42% increase in e-commerce from $45 million to $63.9 million in 2009. Due to its value based pricing methods, ARO has benefited greatly from the recession, taking customers away from its competitors, but the true test will be how well ARO manages to maintain this base as the recession declines heading into the 2011 fiscal year. Though ARO's net sales increased for the past three quarters of 2010, it is yet to see if ARO can maintain such high growth when consumers begin having more disposable income. In addition, with the cotton shortage and rising commodity prices, ARO is expected to raise clothing prices which can lead to decreased net sales and lower net income as consumers are turned away by the higher clothing prices.
Business Overview
Contents
1 Business Overview
1.1 FY 2009 Performance
1.1.1 Q1 FY 2010 Results (ended May 1st, 2010)
1.1.2 Q2 fiscal 2010 (ended July 31, 2010)
1.1.3 Q3 fiscal 2010 (ended October 31, 2010)
2 Trends and Forces
2.1 Aeropostale Expanding E-commerce Sales
2.2 Recession working in Aeropostale's favor
2.3 Second Half Strength: Back-to-School and Holiday Shopping
2.4 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competition
4 References
Aeropostale runs a value-based business model which sells its own brand of lower-priced apparel and accessories to teenagers. While companies such as Abercrombie & Fitch Company (ANF) try to preserve a "luxury" image in order to charge a premium for their goods, Aeropostale produces similar apparel at a lower price, attracting consumers who either cannot afford higher-priced brands or who want a similar style but also want to save money. Using this model, Aeropostale increased its store count from 671 in FY04 to 952 in FY09[1] and grew net sales from $964 million to $2.23 billion during the same time span.[1] This kind of consistent growth is typically difficult to achieve in fashion retail because of constantly changing trends and customer preferences.
Like many similar apparel companies, Aeropostale has also moved towards expanding in Canada, where it currently operates 44 stores.[3][1] Several early entrants to this market such as American Eagle Outfitters (AEO) and Abercrombie & Fitch Company (ANF) have generated much higher per store revenue compared to their respective American outlets, suggesting a potentially unsaturated opportunity in the country.
Although its lower price points can be an advantage for Aeropostale, they also lead to lower gross margins. On Aeropostale's $2.23 billion of sales in 2009, ARO's gross margin rate was 38.8%, considerably lower than its competitors' gross margins. Since Aeropostale's prices are generally lower than those of competing chains, the amount of money it makes on each garment it sells is lower than a premium-priced brand would make. That leads to lower margins. However, ARO has been able to manage its operating expenses to increase its operating margin from 11.9% in 2006 to 13.2% in 2008[4], which puts them at about middle of the pack versus competitors.
In December 2010, Aeropostale named a new CEO. Former co-CEO Mindy C. Meads departed the company and passed the role to other co-CEO, Thomas P. Johnson. Johnson had served as co-CEO since the beginning of 2010 and Meads will stay on for a short period for a smooth transition of power. This change in management will not result in any significant changes as ARO is still seeking to remain cautious in the current environment with aggressive pricing and reduction of inventories.[5]
FY 2009 Performance
The poor United States economy caused in large part by the 2007 Credit Crunch and the subprime lending crisis has led to an overall decrease in consumer spending. American consumers have begun to watch their purchases more carefully and spend money only on necessary items such as food and gas, leaving out more discretionary items such as apparel. This pullback in spending has resulted in a decrease in sales across all price points in the retail market. Aeropostale, however, is one of the few retailers to expand during the recession. Its lower price point makes it an attractive option for parents looking to cut down on how much they spend on clothes, and the products themselves prove popular to its core demographic of teenagers. [6]
Aeropostale has continued to buck the overall industry trend of decreasing sales in 2009. Aeropostale opened its first international store outside North America in Dubai[7] and started a new clothing line aimed at children ages 7-12, named "P.S. from Aeropostale." The first P.S. store opened in June.[8] In Q3 2009 (ending November 29th), ARO had record sales of $228.0 million, compared to $200.9 million in Q3 2008.[9] ARO also had an EPS of $0.92, compared to $0.68 in Q3 2008.[9] The firm has continued to profit from the recession, as consumers has turned to Aeropostale for young-adult clothing at cheaper prices than its competitors. ARO ended FY2009 with a record Q4 EPS of $0.99 -- a 48% increase from Q4 2008.[10]
Q1 FY 2010 Results (ended May 1st, 2010)
For the quarter, ARO posted net sales of $463.6 million -- a 14% increase from Q1 fiscal 2009.[11]
Same store sales increased 8% from Q1 fiscal 2009 to Q1 fiscal 2010.[11]
ARO posted E-commerce sales of $23.8 million -- a 43% increase from Q1 fiscal 2009.[11]
Aeropostale posted net income of $45.384 million -- a 43.3% increase from Q1 fiscal 2009.[11]
For Q2 fiscal 2010, Aeropostale expects earnings per diluted share in the range of $0.45 to $0.48. The firm hopes its early-year success, as well as capital expenditures of $90 million to open 25 new stores, will drive ARO earning through the entire fiscal year.[11]
Q2 fiscal 2010 (ended July 31, 2010)
ARO reported net sales of $494.7 million, a 9% increase compared to Q2 fiscal 2009.[12]
Same store sales increased 4% and comparable store sales increased 12% compared to Q2 fiscal 2009.[12]
The trend of increasing online sales continues, as net sales to ARO's e-commerce business increased 32% compared to Q2 fiscal 2009.[12]
The firm posted net income of $43.6 million, a 13% increase compared to Q2 fiscal 2009.[12]
Q3 fiscal 2010 (ended October 31, 2010)
Net sales for the third quarter increased 6% to $602.8 million while same store sales were flat.[13]
Net income for the quarter was $58.5 million, which was a 6.5% decrease from third quarter of 2009. Gross profit was $220.6 million, which was a 1% decrease from third quarter of 2009.[14]
Despite positive sales results of recent months, on September 28th, the President /CFO of Aeropostale Inc., Michael Cunningham, sold 4,535 shares. This executive-level transaction can reflect the top management's negative view on the future performance of the company.[15]
Aeropostale 5-Year Financial Figures[16]
Figure 2005 2006 2007 2008 2009
Revenue (millions) $1,204.3 $1,413.2 $1,590.8 $1,885.5 $2,230.0
Operating Margin 11.2% 11.9% 12.7% 13.2% 10.3%
Net Income $84.0 $106.6 $129.2 $149.4 $229.5
Same store sales growth 3.5% 2.0% 3.3% 8% 5%
Store Total 671 742 828 903 952
[17]
Proportion of total sales by gender. Men's clothing as a portion of total sales increased while women's clothing decreased
Trends and Forces
The overall opportunity for youth apparel in Canada has proven to be attractive as ARO's 44 stores in Canada generated $2.02 million per store, which is comparable to $2.4 million per store in America in FY09. With more growth globally, ARO can capture more sales than from America's saturated retail market.
Aeropostale Expanding E-commerce Sales
Retail e-commerce has become more and more important in the retail industry. Increasing over 4% each quarter, the retail e-commerce industry is $35 billion industry that is still projected to increase.[18] As a retailer, Aeropostale has increased the amount of e-commerce income by 42% in fiscal 2009, making $129 million in sales.[1] With more emphasis in e-commerce in the years to come, Aeropostale stands to make more money riding this wave.
Recession working in Aeropostale's favor
The American economy was struck with a recession in 2008, leaving consumers across all income levels less inclined to spend as much money on clothing and accessories as they did in previous years. Although 2008 and 2009 had been hard years for most American retailers, Aeropostale was actually one of the few companies to increase its sales in 2008. Its lower price point in comparison to competitors such as Abercrombie & Fitch Company (ANF) make it attractive to consumers who are looking to cut down on their spending. Aeropostale's sales increased by almost $400 million from 2008 to 2009.[1] Abercrombie & Fitch's sales, however, decreased by $200 million[19] and American Eagle's sales decreased by almost $100 million.[20] Aeropostale's value-based business model has proved a valuable asset during the recession.
Second Half Strength: Back-to-School and Holiday Shopping
Back-to-School: Because the overwhelming majority of the customers of Aeropostale's brands age from 14 to 17 years old are high school students, Aeropostale traditionally experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for Aeropostale's competitors. Most of the back-to-school sales are included the third fiscal quarter, for which in 2009 Aeropostale experienced flat same store sales growth [13] while its competitors (Abercrombie & Fitch and American Eagle (AEO) and Gap (GPS)) saw same store sales increase 7% [21], 1% [22], and 0% [23] respectively. This indicates that ARO performed on par with its competitors, with the exception of ANF, due to rough back to school shopping season.
Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Aeropostale is no different, as ARO's fourth quarter 2008 sales increased by 17%.[24] Abercrombie & Fitch, on the other hand, saw a 25% decrease in comparable store sales and a 2.80% decrease in profit.[25] The sales boom usually brought about by the holiday season was dampened by the recession, and Abercrombie & Fitch's premium price level made consumers less inclined to purchase its goods.
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[26] [27] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [28][29] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[26] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[26]
Competition
Aeropostale fights for apparel and accessory spending with many other retailers in the highly competitive 14-25 year old fashion market. Aeropostale is one of the smaller members of its sector in terms of sales and it ranks fairly low in gross margin profitability (38.0% in FY 2009) due to its positioning as a mid- to lower-priced merchandiser. A "near luxury" company such as Abercrombie & Fitch generated a 64.3% gross margin rate in comparison.[19][30]
Most of Aeropostale's major competitors operate multiple in-house sub-branded concept stores (such as the Hollister and abercrombie concepts by Abercrombie & Fitch and American Eagle Outfitter's aerie concept), while virtually all of Aeropostale's sales come from its one chain of Aeropostale stores. Aeropostale is attempting to catch up with its larger competitors by expanding its operations throughout the U.S. and Canada and by growing the P.S. from Aeropostale retail concept.
Aeropostale's major competitors include:
Abercrombie & Fitch Company (ANF): Abercrombie & Fitch is the leader of the youth apparel retail market by nearly all measures. ANF is a larger company than ARO, with a greater store base and much higher net sales than ARO. Abercrombie & Fitch also operates three brands: Abercrombie & Fitch, Hollister, abercrombie; all of which target different subsets of the 8-30 age range. While ARO's namesake stores compete with A&F and Hollister stores and ARO's new P.S. from Aeropostale concept competes directly with ANF's A&F, ARO has no match for post-college merchandise concept abercrombie. Although ANF is one of ARO's most direct competitors, the two company's operate with different strategies: Abercrombie maintains a premium brand with high price points while Aeropostale focuses on providing its customers, primarily high school students, with trend-smart fashion at value prices.
American Eagle Outfitters (AEO): American Eagle competes directly for the same customers (young men and women between the ages of 15 and 25)[31] with Aeropostale's namesake stores; however, Aeropostale does not have a direct match for AE's new aerie sub brand. AEO is larger than Aeropostale in terms of total sales and profits, however, it is hard to directly compare the two retailers because of AEO's higher price points and larger store base.
Gap (GPS): Similarly to AEO and ANF, GPS competes with ARO for the same target customers (15-25 year-old males and females). Although, Gap has clothing lines for the 25-40 year-old age group, in which it competes with J. Crew Group (JCG) and AnnTaylor Stores (ANN), amongst others. In addition, Gap has a strong Baby Gap clothing line for toddlers.
Company 2009 Revenue (mm) Gross Margin Operating Margin Revenue (Decline) from 2008 Same Store Sales Growth (Decline) Total Stores Same Store Sales (mm)
Aeropostale $2,230 38.0% 17.2% 18.3% 10.0% 952 $2,206
American Eagle Outfitters (AEO) $2,990 38.7% 8.0% 0.5% (4.0%) 1,076 $2,404
Abercrombie & Fitch Company (ANF) $2,928 64.3% 4.0% (17.2%) (23.0%) 1,127 $2,412
Gap (GPS) $14,197 40.3% 12.8% (2.2%)
[edit]Oxygen masks
The FAA announced on 11 August 2008 that it would investigate why "almost half the masks either did not deploy or failed to provide oxygen" during a pan-pan event on American Airlines Flight 31[4] The FAA had recently issued airworthiness directives regarding problems with defective inline flow indicators obstructing the BE Aerospace oxygen masks on several Boeing commercial aircraft models. B/E had identified a repair in February 2006. Boeing then issued a "Special Attention Service Bulletin" to inspect and if necessary repair the masks in April 2007. The directives only require action by April 2013 unless already done.[5]
BE Aerospace (NASDAQ: BEAV) is the largest manufacturer of cabin interior products for commercial aircraft and business jets as well as an aftermarket distributor of aerospace fasteners.[1] The company sells its manufactured products directly to nearly all of the world's airlines and airframe manufacturers as well as other aviation customers.[1]
Business Overview
BE manufactures seats, oxygen storage and delivery systems, other interior components and food preparation products for commercial and business jets.[1] The company sells all of its products directly to airplane manufacturers and airlines.[2] The company also distributes a range of aerospace grade fasteners.[1]
Business & Financial Metrics[3]
In 2009, BEAV generated a net income of $155.3 million on revenues of $1.94 billion. This represents a turnaround from 2008, when the company incurred a net loss of $99.4 million on revenues of $2.11 billion.
Business Segments[4]
Commercial Aircraft (47.0% of revenue): This segment manufactures first, business and coach class seats. The segment's first and business class seats are generally more expensive than their coach class seats because of added features such as laptop power sockets, adjustable lumbar supports and leg rests.[5] In addition to manufacturing and selling new airplane seats, it supplies spares and replacements to its customers.[5] Seating competes with companies like Zodiac S.A. and Premium Aircraft Interiors Group.
Consumables Management (41.2% of revenue):This segment manufactures aerospace fasteners.[6] Roughly 60% of the segment's orders are for the aftermarket.[6] Commercial Aircraft stocks over 200,000 different kinds of fasteners making BE an easy one stop shop for airline maintenance crews.[6]
Contents
1 Business Overview
1.1 Business & Financial Metrics[3]
1.2 Business Segments[4]
2 Key Trends and Forces
2.1 Increased orders of wide-body aircraft increased the demand for BE's products
3 Key Competitors
4 References
Business Jet (11.8% of revenue): This segment manufactures furnishings and interior systems for business jets.[7] The segment's furnishings include seats, beds, sofas, credenzas, closets and kitchen structures.[7] Its interior systems include walls, oxygen supply systems, lighting and air valves.[7] BE is the largest supplier of furnishings for business jets and supplies its products to almost all business jet manufacturers.[7] Business Jet competes with companies like Astronics (ATRO).
Key Trends and Forces
Increased orders of wide-body aircraft increased the demand for BE's products
The number of wide-body airplanes sold is excepted to grow at roughly 20% in 2011. [8] According to BE wide-body planes use five to eight times more of BE's products in dollar value than standard jets.[8] If this occurs, BE will have an opportunity to significantly increase its sales.
Key Competitors
Astronics (ATRO) manufactures cabin lighting, electronics and power systems for commercial, business and military aircraft. The company's cabin lighting for business jets competes with the cabin lighting produced by BE's Business Jet segment.[9]
Zodiac S.A. manufactures inflatable boats and pool equipment as well as aeronautical equipment. The company's aeronautical products include fuel circulation, hydraulics and electrical power systems as well as passenger seats and commercial aircraft interiors. Zodiac's passenger seats compete with BE's Seating Segment and their aircraft interiors compete with BE's Interior Systems segment.[10][11]
Premium Aircraft Interiors Group is a private company that manufactures seating, interiors, bathrooms and galley supplies for commercial passenger aircraft. The company's seating products compete with BE's Seating Segment and their aircraft interiors and galley supplies compete with BE's Interior Systems segment.[12]
Aeropostale (NYSE: ARO) sells its own brand of apparel and accessories to the highly targeted 14 to 17 year old demographic. ARO sells its relatively mid- and lower-priced merchandise via its namesake Aeropostale stores, which are mostly mall-based. Aeropostale is one of the smaller firms in the youth apparel retail sub-market, generating $2.23 billion in net sales during fiscal 2009[1]; its larger competitors Abercrombie & Fitch and American Eagle reported sales of $2.93 billion[2] and $3 billion[2] respectively.
ARO has ridden the internet wave very well compared to its competitors, posting 42% increase in e-commerce from $45 million to $63.9 million in 2009. Due to its value based pricing methods, ARO has benefited greatly from the recession, taking customers away from its competitors, but the true test will be how well ARO manages to maintain this base as the recession declines heading into the 2011 fiscal year. Though ARO's net sales increased for the past three quarters of 2010, it is yet to see if ARO can maintain such high growth when consumers begin having more disposable income. In addition, with the cotton shortage and rising commodity prices, ARO is expected to raise clothing prices which can lead to decreased net sales and lower net income as consumers are turned away by the higher clothing prices.
Business Overview
Contents
1 Business Overview
1.1 FY 2009 Performance
1.1.1 Q1 FY 2010 Results (ended May 1st, 2010)
1.1.2 Q2 fiscal 2010 (ended July 31, 2010)
1.1.3 Q3 fiscal 2010 (ended October 31, 2010)
2 Trends and Forces
2.1 Aeropostale Expanding E-commerce Sales
2.2 Recession working in Aeropostale's favor
2.3 Second Half Strength: Back-to-School and Holiday Shopping
2.4 Increases in Commodity Prices Will Raise Clothing Retailer Prices
3 Competition
4 References
Aeropostale runs a value-based business model which sells its own brand of lower-priced apparel and accessories to teenagers. While companies such as Abercrombie & Fitch Company (ANF) try to preserve a "luxury" image in order to charge a premium for their goods, Aeropostale produces similar apparel at a lower price, attracting consumers who either cannot afford higher-priced brands or who want a similar style but also want to save money. Using this model, Aeropostale increased its store count from 671 in FY04 to 952 in FY09[1] and grew net sales from $964 million to $2.23 billion during the same time span.[1] This kind of consistent growth is typically difficult to achieve in fashion retail because of constantly changing trends and customer preferences.
Like many similar apparel companies, Aeropostale has also moved towards expanding in Canada, where it currently operates 44 stores.[3][1] Several early entrants to this market such as American Eagle Outfitters (AEO) and Abercrombie & Fitch Company (ANF) have generated much higher per store revenue compared to their respective American outlets, suggesting a potentially unsaturated opportunity in the country.
Although its lower price points can be an advantage for Aeropostale, they also lead to lower gross margins. On Aeropostale's $2.23 billion of sales in 2009, ARO's gross margin rate was 38.8%, considerably lower than its competitors' gross margins. Since Aeropostale's prices are generally lower than those of competing chains, the amount of money it makes on each garment it sells is lower than a premium-priced brand would make. That leads to lower margins. However, ARO has been able to manage its operating expenses to increase its operating margin from 11.9% in 2006 to 13.2% in 2008[4], which puts them at about middle of the pack versus competitors.
In December 2010, Aeropostale named a new CEO. Former co-CEO Mindy C. Meads departed the company and passed the role to other co-CEO, Thomas P. Johnson. Johnson had served as co-CEO since the beginning of 2010 and Meads will stay on for a short period for a smooth transition of power. This change in management will not result in any significant changes as ARO is still seeking to remain cautious in the current environment with aggressive pricing and reduction of inventories.[5]
FY 2009 Performance
The poor United States economy caused in large part by the 2007 Credit Crunch and the subprime lending crisis has led to an overall decrease in consumer spending. American consumers have begun to watch their purchases more carefully and spend money only on necessary items such as food and gas, leaving out more discretionary items such as apparel. This pullback in spending has resulted in a decrease in sales across all price points in the retail market. Aeropostale, however, is one of the few retailers to expand during the recession. Its lower price point makes it an attractive option for parents looking to cut down on how much they spend on clothes, and the products themselves prove popular to its core demographic of teenagers. [6]
Aeropostale has continued to buck the overall industry trend of decreasing sales in 2009. Aeropostale opened its first international store outside North America in Dubai[7] and started a new clothing line aimed at children ages 7-12, named "P.S. from Aeropostale." The first P.S. store opened in June.[8] In Q3 2009 (ending November 29th), ARO had record sales of $228.0 million, compared to $200.9 million in Q3 2008.[9] ARO also had an EPS of $0.92, compared to $0.68 in Q3 2008.[9] The firm has continued to profit from the recession, as consumers has turned to Aeropostale for young-adult clothing at cheaper prices than its competitors. ARO ended FY2009 with a record Q4 EPS of $0.99 -- a 48% increase from Q4 2008.[10]
Q1 FY 2010 Results (ended May 1st, 2010)
For the quarter, ARO posted net sales of $463.6 million -- a 14% increase from Q1 fiscal 2009.[11]
Same store sales increased 8% from Q1 fiscal 2009 to Q1 fiscal 2010.[11]
ARO posted E-commerce sales of $23.8 million -- a 43% increase from Q1 fiscal 2009.[11]
Aeropostale posted net income of $45.384 million -- a 43.3% increase from Q1 fiscal 2009.[11]
For Q2 fiscal 2010, Aeropostale expects earnings per diluted share in the range of $0.45 to $0.48. The firm hopes its early-year success, as well as capital expenditures of $90 million to open 25 new stores, will drive ARO earning through the entire fiscal year.[11]
Q2 fiscal 2010 (ended July 31, 2010)
ARO reported net sales of $494.7 million, a 9% increase compared to Q2 fiscal 2009.[12]
Same store sales increased 4% and comparable store sales increased 12% compared to Q2 fiscal 2009.[12]
The trend of increasing online sales continues, as net sales to ARO's e-commerce business increased 32% compared to Q2 fiscal 2009.[12]
The firm posted net income of $43.6 million, a 13% increase compared to Q2 fiscal 2009.[12]
Q3 fiscal 2010 (ended October 31, 2010)
Net sales for the third quarter increased 6% to $602.8 million while same store sales were flat.[13]
Net income for the quarter was $58.5 million, which was a 6.5% decrease from third quarter of 2009. Gross profit was $220.6 million, which was a 1% decrease from third quarter of 2009.[14]
Despite positive sales results of recent months, on September 28th, the President /CFO of Aeropostale Inc., Michael Cunningham, sold 4,535 shares. This executive-level transaction can reflect the top management's negative view on the future performance of the company.[15]
Aeropostale 5-Year Financial Figures[16]
Figure 2005 2006 2007 2008 2009
Revenue (millions) $1,204.3 $1,413.2 $1,590.8 $1,885.5 $2,230.0
Operating Margin 11.2% 11.9% 12.7% 13.2% 10.3%
Net Income $84.0 $106.6 $129.2 $149.4 $229.5
Same store sales growth 3.5% 2.0% 3.3% 8% 5%
Store Total 671 742 828 903 952
[17]
Proportion of total sales by gender. Men's clothing as a portion of total sales increased while women's clothing decreased
Trends and Forces
The overall opportunity for youth apparel in Canada has proven to be attractive as ARO's 44 stores in Canada generated $2.02 million per store, which is comparable to $2.4 million per store in America in FY09. With more growth globally, ARO can capture more sales than from America's saturated retail market.
Aeropostale Expanding E-commerce Sales
Retail e-commerce has become more and more important in the retail industry. Increasing over 4% each quarter, the retail e-commerce industry is $35 billion industry that is still projected to increase.[18] As a retailer, Aeropostale has increased the amount of e-commerce income by 42% in fiscal 2009, making $129 million in sales.[1] With more emphasis in e-commerce in the years to come, Aeropostale stands to make more money riding this wave.
Recession working in Aeropostale's favor
The American economy was struck with a recession in 2008, leaving consumers across all income levels less inclined to spend as much money on clothing and accessories as they did in previous years. Although 2008 and 2009 had been hard years for most American retailers, Aeropostale was actually one of the few companies to increase its sales in 2008. Its lower price point in comparison to competitors such as Abercrombie & Fitch Company (ANF) make it attractive to consumers who are looking to cut down on their spending. Aeropostale's sales increased by almost $400 million from 2008 to 2009.[1] Abercrombie & Fitch's sales, however, decreased by $200 million[19] and American Eagle's sales decreased by almost $100 million.[20] Aeropostale's value-based business model has proved a valuable asset during the recession.
Second Half Strength: Back-to-School and Holiday Shopping
Back-to-School: Because the overwhelming majority of the customers of Aeropostale's brands age from 14 to 17 years old are high school students, Aeropostale traditionally experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for Aeropostale's competitors. Most of the back-to-school sales are included the third fiscal quarter, for which in 2009 Aeropostale experienced flat same store sales growth [13] while its competitors (Abercrombie & Fitch and American Eagle (AEO) and Gap (GPS)) saw same store sales increase 7% [21], 1% [22], and 0% [23] respectively. This indicates that ARO performed on par with its competitors, with the exception of ANF, due to rough back to school shopping season.
Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Aeropostale is no different, as ARO's fourth quarter 2008 sales increased by 17%.[24] Abercrombie & Fitch, on the other hand, saw a 25% decrease in comparable store sales and a 2.80% decrease in profit.[25] The sales boom usually brought about by the holiday season was dampened by the recession, and Abercrombie & Fitch's premium price level made consumers less inclined to purchase its goods.
Increases in Commodity Prices Will Raise Clothing Retailer Prices
In 2010, cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.[26] [27] In 2009, natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. [28][29] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs.
In addition, raising commodity prices in other areas will also raise costs for retailers. The price of shipping a 40-foot dry container from China to the US has increased by 90% since 2009. Lumber and coal prices increased 36.3% and 23.7% from last year, respectively, while oil prices increased by 40% in early 2010 but has now decreased back to a steady single digit increase for the year.[26] While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.[26]
Competition
Aeropostale fights for apparel and accessory spending with many other retailers in the highly competitive 14-25 year old fashion market. Aeropostale is one of the smaller members of its sector in terms of sales and it ranks fairly low in gross margin profitability (38.0% in FY 2009) due to its positioning as a mid- to lower-priced merchandiser. A "near luxury" company such as Abercrombie & Fitch generated a 64.3% gross margin rate in comparison.[19][30]
Most of Aeropostale's major competitors operate multiple in-house sub-branded concept stores (such as the Hollister and abercrombie concepts by Abercrombie & Fitch and American Eagle Outfitter's aerie concept), while virtually all of Aeropostale's sales come from its one chain of Aeropostale stores. Aeropostale is attempting to catch up with its larger competitors by expanding its operations throughout the U.S. and Canada and by growing the P.S. from Aeropostale retail concept.
Aeropostale's major competitors include:
Abercrombie & Fitch Company (ANF): Abercrombie & Fitch is the leader of the youth apparel retail market by nearly all measures. ANF is a larger company than ARO, with a greater store base and much higher net sales than ARO. Abercrombie & Fitch also operates three brands: Abercrombie & Fitch, Hollister, abercrombie; all of which target different subsets of the 8-30 age range. While ARO's namesake stores compete with A&F and Hollister stores and ARO's new P.S. from Aeropostale concept competes directly with ANF's A&F, ARO has no match for post-college merchandise concept abercrombie. Although ANF is one of ARO's most direct competitors, the two company's operate with different strategies: Abercrombie maintains a premium brand with high price points while Aeropostale focuses on providing its customers, primarily high school students, with trend-smart fashion at value prices.
American Eagle Outfitters (AEO): American Eagle competes directly for the same customers (young men and women between the ages of 15 and 25)[31] with Aeropostale's namesake stores; however, Aeropostale does not have a direct match for AE's new aerie sub brand. AEO is larger than Aeropostale in terms of total sales and profits, however, it is hard to directly compare the two retailers because of AEO's higher price points and larger store base.
Gap (GPS): Similarly to AEO and ANF, GPS competes with ARO for the same target customers (15-25 year-old males and females). Although, Gap has clothing lines for the 25-40 year-old age group, in which it competes with J. Crew Group (JCG) and AnnTaylor Stores (ANN), amongst others. In addition, Gap has a strong Baby Gap clothing line for toddlers.
Company 2009 Revenue (mm) Gross Margin Operating Margin Revenue (Decline) from 2008 Same Store Sales Growth (Decline) Total Stores Same Store Sales (mm)
Aeropostale $2,230 38.0% 17.2% 18.3% 10.0% 952 $2,206
American Eagle Outfitters (AEO) $2,990 38.7% 8.0% 0.5% (4.0%) 1,076 $2,404
Abercrombie & Fitch Company (ANF) $2,928 64.3% 4.0% (17.2%) (23.0%) 1,127 $2,412
Gap (GPS) $14,197 40.3% 12.8% (2.2%)