Aeropostale Posts Wider Q4 Loss - Analyst Blog

Shares of Aeropostale Inc. ARO fell 12.0% in the after-hour trading session following the company's dismal fourth-quarter fiscal 2013 results. The company reported adjusted loss per share of 35 cents in the quarter, much wider than the Zacks Consensus Estimate of a loss of 30 cents and year-ago quarter earnings of 24 cents.

Declining traffic and higher promotional expenses had a deeper-than-expected impact as the loss came wider than the guided range of 24–32 cents per share.

Including one-time items, the quarterly loss came in at 90 cents per share, as against loss of 1 cent per share in the prior-year quarter.

For the full year, adjusted loss per share came in at $1.13, wider than the Zacks Consensus Estimate of a loss of $1.09 per share and adjusted earnings of 68 cents per share in fiscal 2012.

This teen apparel retailer witnessed a tough 2013 as it reported continuous losses throughout the year. To counter this, the company has undertaken a number of initiatives, such as retail store downsizing, effective merchandising and expense management.

Recently, the company inked a strategic deal with Sycamore Partners and its affiliates. As per the deal, Aeropostale will have access to $150 million worth of credit facility, which comprises five-year $100 million term loan facility and a ten-year $50 million term loan facility.

The deal also includes a sourcing arrangement with MGF Sourcing, one of the associates of Sycamore. Moreover, Aeropostale has to offer Sycamore up to 5% of convertible stock equivalent at $7.25 per share. Therefore, on as-converted basis, this will boost Sycamore's stake in Aeropostale to 12.3% of outstanding shares.

Coming back to Aeropostale's quarterly results, the top line fell 16.0% to $670.0 million, lagging the Zacks Consensus Estimate of $699.0 million. Weakness in certain core categories affected the quarterly sales. Full-year earnings came in at $2,091 million, down 12% year over year and fell short of the Zacks Consensus Estimate of $2,116 million.

Comparable-store sales (comps) – which include Aeropostale's e-Commerce business – declined 15% in the quarter due to a 12% fall in transactions and 3% fall in average unit retail, partly offset by 1% increase in units per transaction. Revenues from e-Commerce that include the GoJane business decreased 12% to $85.6 million.

The company's gross profit declined 45.2% to $86.9 million while gross margin fell to 13.0% from 19.8% in the prior-year quarter. However, excluding one-time items, gross margin contracted 620 basis points to 17.8%, reflecting lower merchandise margins and deleveraging of non-merchandise costs.

Store Update

During the quarter, the company opened 5 Aeropostale and 3 P.S. from Aeropostale stores. Alongside, it closed 32 Aeropostale outlets.

For 2014, the company plans to open 7 Aeropostale stores, 1 P.S. from Aeropostale stores, remodel nearly 10 Aeropostale stores and close 50 Aeropostale stores and 2 P.S. from Aeropostale stores.  The capital expenditure for 2014 is expected to be around $22 million, lower than $35 million expected earlier, mainly diverted to store refurbishment and other infrastructural development.

Currently, the company operates 864 Aeropostale outlets across 50 states and Puerto Rico, 78 Aeropostale stores in Canada and 151 P.S. from Aeropostale stores across 31 states and Puerto Rico.

Balance Sheet & Guidance

Aeropostale, which competes with Abercrombie & Fitch Co. ANF, ended the quarter with cash and cash equivalents of $106.5 million, with no debt and shareholders' equity of $280.7 million.

Going forward, Aeropostale anticipates macroeconomic headwinds, weak traffic and inventory clearance to weigh on its margins and in turn, earnings. It anticipates operating loss in the band of $64–$68 million for the first quarter of fiscal 2014. Consequently, it expects to report loss per share in the range of 70 cents to 75 cents in the first quarter of fiscal 2014.

The Zacks Consensus Estimate for the first quarter stands at a loss of 17 cents at present.

Peer Performance

Cautious spending among teenagers has shown no signs of improvement, thereby leading to lackluster results for Aeropostale and its peers. American Eagle Outfitters, Inc.'s AEO posted fourth-quarter fiscal 2013 adjusted earnings of 27 cents per share, plunging 50.9% from 55 cents in the prior-year quarter. American Eagle's net sales declined 6.7% year over year to $1,041.7 million in the fourth quarter and came below the Zacks Consensus Estimate of $1,065.0 million.

Zacks Rank

Currently, Aeropostale carries a Zacks Rank #4 (Sell). A better-placed stock in the retail apparel/shoes sector is Foot Locker, Inc. FL, which has a Zacks Rank #2 (Buy).