Aeropostale Q3 Profit Plummets as Teen Retail Turns More Promotional

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New York—An increased level of markdowns, lower comparable store sales and pressured margins took a toll on Aeropostale, which reported Wednesday that its third quarter profit plummeted 59%.

For the quarter ended Oct. 29, the teen-oriented specialty retailer posted a profit of $24.1 million, or 30 cents a share, down from $58.5 million, or 63 cents a share, a year earlier. The company earlier this month raised its earnings forecast to between 27 cents and 28 cents.

Net sales declined 1% to $596.5 million. Comparable store sales dropped 9% compared to a 6.2% increase in third quarter last year. But its e-commerce division, which teamed up in September with Fifty One to expand internationally, posted a 19% increase to $45.7 million.

‘Retail Environment Incredibly Promotional’

Still the results were better than most analysts’ average estimate forecast. They expected Aeropostale to earn 27 cents a share on sales of $592.1 million

“The retail environment remains incredibly promotional, with many teen retailers increasing both the depth and breadth of their promotions,” Thomas Johnson, ceo, said. “Additionally, unemployment remains high and there is continued uncertainty about the overall economic environment.”

Not helping the outlook is the company’s pressured gross margin which fell to 27.1% 36.6%, as input costs climbed 14% to $435 million.

“Increased inventory level still remains a drag on its margins, as the company is offering heavy discounts to its customers to clear its inventory,” said Zacks Investment Research. “In spite of these huge discounts, Aeropostale is falling behind its competitor American Eagle Outfitters Inc. in terms of sales.”

Taking the promotional holiday season into account, Aeropostale gave a conservative fourth quarter forecast for earnings of 35 to 38 cents a share. Analysts’ average estimate expects 43 cents.

Jaime Katz, analyst at Morningstar, agreed that Aeropostale’s current quarter would be “another trying” one, but due mainly to cyclical trends, sourcing costs and the effects of high teenager unemployment.

“What we remain more concerned about is whether a new normal is emerging in teen apparel retail that focuses on promotions. While we still are hopeful that this is not the case, it would seem that the longer economic weakness persists, the more consumers will come to expect aggressive discounting,” Katz said. “We expect that fierce competition for wallet share through promotions will continue through at least the rest of the holiday season for the apparel companies.”