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Thought it might be interesting to compare Aeropostale to a few other retailers to see if it’s the cotton prices and the recession that are hurting margins or if it is something else. The something else would be mainly the inability to sell their product at regular prices to the consumer because it was not what that consumer was looking for.

That would require promotional selling --ie markdowns-- to clear the shelves and clean up inventory for new product that is brought in for the next big season—Christmas. Gross margins would suffer.

I am not so much looking for margin comparison across companies as looking for how far down a particular retailer is from highs when business was good and sales high.

Not unexpectedly, ARO is one of the worst I looked at. Granted I have only a handful of companies for comparison. I chose each for a specific reason.

Abercrombie and American Eagle are close competitors

The Buckle is one of the best run and most consistently successful retailer I have looked at. Additionally, they pay out big dividends to shareholders and do not depend on share repurchases to try to create shareholder value. They are a model retailer

Last, I picked Ann Taylor. The clothes are not in any way comparable, but ANN was particularly brilliant in managing cotton costs and I included it to show how well the margins held up

Here are the margins and same store sales

Aeropostale

Quarterly


07/2011 04/2011 01/2011 10/2010 07/2010
===================================================================
gross 24.4% 29.1% 35.5% 36.6% 37.3%
operating 1.2% 5.9% 17.1% 16.0% 14.4%
net 0.6% 3.5% 10.0% 9.7% 8.8%
------------------------------------------------------------------
SSS -14% -7% =3% 0% 4%

Annual
    
2010 2009 2008 2007 2006
===========================================
gross 39% 40% 47% 45% 26%
operating 16% 17% 13% 13% 12%
net 10% 10% 8% 8% 8%
-------------------------------------------
SSS 10% 8% 3% 2% 4%

The quarterly numbers show a rapid downward spiral both in same store sales and a precipitous drop in gross margins. There is clearly more going on than just the recession and higher cotton prices. This becomes more apparent when compared to other retailers

The high 2008 gross margin gave way to 24% in the last quarter—a drop of 23%. At the same time same store sales are dropping every quarter over the last year. This neatly coincides with two changes in management at the CEO position. Even without knowing this, the numbers would warn investors that the company has taken a turn for the worse and the low gross margins tell a tale of hard to move merchandise on top of recession and cotton impacts.

American Eagle

American Eagle is not a lot better. Since it peaked on distressed denim in 2007 when margins were 48% and same store sales were 12%. Since then, the company struggles to find its market. Gross margins are down 14% as same store sales bump along in mostly negative territory. The recession and cotton may be causing some downdraft but it is also clear from SSS that the promotional activity is high.

Gross margins are down only 5% in the last 7 quarters and that is far better than ARO’s performance. While AEO struggles, it is not as disastrous as ARO. That is also evidenced by the same store sales that are flat to negative but not down as far as ARO.

Quarterly

07/2011 04/2011 01/2011 10/2010 07/2010 04/2010
===========================================================
gross 34.3% 38.0% 39.4% 41.6% 36.8% 39.7%
operating 4.3% 6.3% 14.6% 12.2% 5.9% 8.2%
net 2.9% 4.6% 9.5% 4.4% 1.5% 1.7%
----------------------------------------------------------
SSS 0% -8% -7% 1% -1% 5%

Annual
 
01/2011 01/2010 01/2009 01/2008 01/2007
======================================================
gross 39.6% 39.5% 40.6% 46.6% 48.0%
operating 10.7% 10.5% 13.0% 19.6% 21.0%
net 6.1% 7.2% 7.8% 13.1% 13.9%
--------------------------------------------------------
SSS -1% -4% -10% 1% 12%

Buckle

This retailer is particularly well run and shareholder friendly. They carry teen clothing but offer a far wider selection as they choose among many labels including their own.

Gross margins have contracted even as same store sales increase. I would consider this largely due to cost of goods –cotton prices. Margins have dropped around 8% in the last year.

Even with the ongoing recession and recession after shocks, BKE manages
Positive comps with the exception of 7/2010. This is a good indication they choose product consumers want to buy.

Quarterly

07/2011 04/2011 01/2011 10/2010 07/2010
======================================================
gross 41.0% 42.6% 47.6% 43.5% 49.6%
operating 17.3% 21.4% 25.6% 22.3% 17.2%
net 11.1% 13.9% 16.3% 14.1% 11.0%
------------------------------------------------------
SSS 8.9% 8.1% 17.3% 0.5% -7.3%

Annual

01/2011 01/2010 01/2009 01/2008 01/2007
======================================================
gross 44.1% 44.6% 43.4% 41.1% 39.1%
operating 22.2% 22.2% 20.5% 17.7% 14.9%
net 14.2% 14.2% 13.2% 12.1% 10.5%
------------------------------------------------------
SSS 1.2% 7.8% 20.6% 13.2% 0%


Abercrombie

ANF is a close competitor like AEO. They have been doing heavy promotional selling the last couple of quarters. In spite of this, margins are only down 1.5% in the last year. This would say that cotton prices are not hurting a great deal and the customer is buying full-price as well as promotional. Gross margins were 67% in 2007-2008 and the current 63.6% gross in July is only a drop of 3.4%. It is much better than the 23% decrease in gross that ARO saw from 5-year highs.

Again, it would indicate minimal impact from the recession and cotton prices and support a case for management missteps at ARO.

Quarterly

07/2011 04/2011 01/2011 10/2010 07/2010
===================================================
gross 63.6% 65.0% 63.6% 63.7% 65.1%
operating 5.1% 4.6% 12.6% 8.9% 3.7%
net 3.5% 3.0% 8.1% 5.6% 2.6%
---------------------------------------------------
SSS 9% 10% 13% 7% 5%

Annual

01/2011 01/2010 01/2009 01/2008 01/2007
==================================================
gross 63.77% 64.32% 66.91% 67.25% 67.01%
operating 6.69% 4.03% 14.30% 21.05% 21.25%
net 4.33% 0.01% 7.81% 12.86% 12.86%
-------------------------------------------------
SSS 7% -23% -13% -1% 1%

Ann Taylor

Quarterly

7/11 4/11 1/11 10/10 7/10
===============================================
gross 55% 57% 52% 57% 55%
operating 7% 9% 2% 8% 6%
net 4% 5% 2% 5% 4%
----------------------------------------------
SSS 8.6% 13.7% 19.1% 23.4% 6.10%

Annual

1/2011 1/2010 1/2009 1/2008 1/2007
================================================
gross 56% 54% 48% 52% 54%
operating 6% -1% -17% 6% 10%
net 4% -1% -15% 4% 6%
===============================================
SSS 10.7% -17.4% -13.4% -2.2% 4.5%

Ann Taylor

I included Ann Taylor because of a recent WSJ article pointing out the company’s foresight in locking in low cotton prices before the big run up in the last year.

The clothes and the customers are not the same demographic as the other
4 companies

Quarterly

7/11 4/11 1/11 10/10 7/10
===============================================
gross 55% 57% 52% 57% 55%
operating 7% 9% 2% 8% 6%
net 4% 5% 2% 5% 4%
----------------------------------------------
SSS 8.6% 13.7% 19.1% 23.4% 6.10%

Annual

1/2011 1/2010 1/2009 1/2008 1/2007
================================================
gross 56% 54% 48% 52% 54%
operating 6% -1% -17% 6% 10%
net 4% -1% -15% 4% 6%
===============================================
SSS 10.7% -17.4% -13.4% -2.2% 4.5%

Recent gross margins are close to the 5-year high of 56% in 2010. In the past year the decrease is only 2% from the highs. The recession and cotton prices appear to be having very little effect.

Same store sales are excellent over the past year. Management is obviously is step with their core customer and are successful in their demographic. They don’t compete with ARO, but stand in contrast to management doing a good job with product and inventory to management that has lost it way.

From the WSJ

<SNIPS>

With many fashion retailers looking exposed this fall, Ann Inc. investors should be happy they have some extra layers.

Thanks to surging costs of fuel, cotton, and labor, retailers throughout the apparel industry need to raise prices to maintain margins. Unfortunately, that's happening just as cash-strapped consumers are spending cautiously. That sets the stage for painful discounting if retailers wind up with too much inventory.

But Ann, operator of the Ann Taylor and LOFT women's apparel chains, is a rare company that purchased fabrics in advance, avoiding the cost problem altogether. While Gap Inc. expects unit costs to rise 20% in the second half, Ann's will be flat.

And even in this tough environment, there are signs the company has significant pricing power. BofA Merrill Lynch's Lorraine Hutchinson says Ann's LOFT division has used fewer promotions than a year ago during the current quarter. Part of the reason may simply be effective merchandising; the company has emphasized more modern, fashion-forward styles to adjust to shifting preferences.


FWIW

These are just numbers but they are useful numbers IMO. COGS for ARO, AEO and BKE include occupancy and as such changes in gross are not purely cotton pricing and promotional activity. The retailers do add stores and rent expense, but generally, that may be offset by the revenue those stores collect. ANN and ANF do not include occupancy in COGs and the margins are quite a bit higher.

The argument that ARO is a great bargain because it is $10 and off from its highs of $30 in 2010 is not convincing. Some investors feel that when cotton prices return to norms and the recession eases, ARO will recover. It may not be that simple.

The numbers for ARO when compared to the competition over the same time period suggest deeper problems and that the solutions are not going to be corrections in macro issues but rather some changes internally. That kind of change is far more difficult to measure and predicting a time course for recovery is impossible. Retail is littered with companies that lost their way and have yet to come back years later—AEO, CBK, WSLA, PSUN New York and I am sure there are more. A drop from all time highs does not guarantee recovery to those highs. The numbers provide evidence of just how far ARO has fallen compared to some other retailers.

The difficulty is deciding if and when to buy. Because the indications of recovery are going to be hard to spot between Qs, an investor is forced to buy on faith at current lows and hope for the best from management and their decisions Alternately an investor can wait for the numbers to show that the recovery is under way. Unfortunately, every other investor has that same information and the price will react rapidly and you will miss the bottom.

Hard choice. What would you do and why?
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