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Aeropostale Hits Turbulence

NEW YORK — Aeropostale stockholders were advised to buckle their seat belts Tuesday as the teen retailer’s shares lost more than half their value one day after warning that its second-half profits would fall well below...

NEW YORK — Aeropostale stockholders were advised to buckle their seat belts Tuesday as the teen retailer’s shares lost more than half their value one day after warning that its second-half profits would fall well below expectations.

Blaming a slowdown in mall traffic, Aeropostale, which sells trendy teen clothing in 278 stores, cautioned investors that its third- and fourth-quarter earnings would fall well short of expectations, in ranges of 31 to 33 cents and 30 to 34 cents, respectively. The new guidance is significantly below what analysts had anticipated — 50 and 52 cents, respectively.

Investors reacted firmly and severely, slashing shares down $8.90, or 57.8 percent, to close Tuesday at $6.50 in New York Stock Exchange trading. Shares traded as low as $6.17 —a new low for the year — during the day and are off 78 percent from their high of $29.50, reached June 12. Shares traded as low as $12.80, reached Aug. 7. Aeropostale went public at $18 on May 16 and closed at $27.70 that day.

“We believe that the retail environment has deteriorated very quickly over the course of the last few weeks,” Julian?Geiger, chairman and chief executive, told a group of Wall Street analysts on a morning conference call Tuesday. “This has forced us to take a more conservative view of the third quarter and the remainder of the year.”

For the stock market overall, the fourth quarter started off vigorously for the Dow Jones Industrial Average, which skyrocketed 346.86, or 4.6 percent, to end the day at 7,938.79, and even the Standard & Poor’s Retail Index managed a 3 percent increase, to close at 272.53. However, Aeropostale dragged the price of many teen retailers and other specialty stores down with it, as caution about the sector’s holiday prospects spread.

Citing slower mall traffic, a crowded teen retail scene and heightened margin risk, Brian Tunick, specialty retail analyst with J.P. Morgan, lowered his 2002 estimates for Abercrombie & Fitch, American Eagle Outfitters and Wet Seal, in addition to Aeropostale. Shares of those teen retailers also fell Tuesday: A&F was off $1.47, or 7.5 percent, to $18.20; American Eagle dropped 76 cents, or 6.3 percent, to $11.30, and Wet Seal belly-flopped $1.02, or 10.2 percent, to $8.98.

This story first appeared in the October 2, 2002 issue of WWD.  Subscribe Today.

Other teen specialty stores joining in the nosedive included Delia’s, down 25 cents, or 23.8 percent, to 80 cents; Bebe Stores, 89 cents, or 7.5 percent, to $10.92; Gap, 74 cents, or 6.8 percent, to $10.11; Hot Topic, 96 cents, or 5.3 percent to $17.07; Too Inc., $1.73, or 7.4 percent, to $21.55, and Charlotte Russe, 79 cents, or 8.3 percent, to $8.71.

Charlotte Russe Holding, a San Diego-based retailer of 244 stores under the Charlotte Russe and Rampage nameplates, last week lowered its guidance for the quarter ending Sept. 28 to earnings of 23 to 25 cents a share from a July outlook of 28 cents to 31 cents. In last year’s fourth quarter, CR had earnings of 23 cents. Wall Street had anticipated earnings of 28 cents. CR is expected to announce results on October 24.

As reported, Aeropostale enjoyed a strong August, with same-store sales rising 6.6 percent, even as many of its peers struggled, against a 28.6 percent upswing in August 2001. The momentum continued into September as the business was strong through the end of the first week, in fact exceeding its comp-store sale targets and generating strong profitability.

“We believe we had the opportunity to perform quite well for the month, given the relatively easier comps, given the events of last September,” Geiger said on the call. “When we planned our inventories for this period, we decided that we should position ourselves for an upturn in sales comparisons during September.” He noted that the company planned for a mid-single-digit increase in comps and felt that it might even be stronger.

These optimistic projections proved well off target though. Aeropostale said they have seen a “pronounced downward trend in mall traffic levels over the past few weeks.” The company reported that its transaction counts are down and described customers as increasingly driven by price. And as a result, the firm accelerated its promotional activity in the second week of September and found it necessary to do so again later in the month.

Specifically, Geiger said from the second week of August through the second week of September, its transactions on a comp basis were up in the mid-teens. However, they were only marginally positive by the third week of the month and down in double digits in the fourth week.

Michael?Cunningham, chief financial officer, said he expects third-quarter sales to range between $153 million and $156 million and gross margin to decrease 800 to 900 basis points from last year because of a decrease in merchandise margins. Selling, general and administrative (SG&A) expenses should be down 300 to 330 basis points from last year.

He said he expects fourth-quarter sales of between $199 million to $202 million and gross margin and SG&A to be down, 710 to 830 and 80 to 90 basis points, respectively.

In addition, he said, the company expects comps for September to be down in the mid-single digits and likely to be down in the mid-to-high teens during October. In total, he said third-quarter comps are expected to be down in the low- to mid-single digits. In the fourth quarter, comps are expected to be flat to up slightly.

While caution about September comps has been the rule for teen retailers, Aeropostale went further and earlier in the season than most of its competitors to detail its comp-store performance for the past six weeks as well as its stance on October and full-year expectations, which were based on what management has seen most recently.

“Even though we saw good rates of sales in all our fall classifications in August, there seems to be no clear positive trend in the men’s business, which right now is our weakest, and women’s, while somewhat better, is also underperforming,” Geiger said, adding that sweaters and active pants are the weakest classifications in men’s and women’s.