Beyond Aeropostale’s Q1 Results: A fresh look at ARO and the teenage popularity contest
I’m not into fashion and can’t tell you exactly why Aeropostale’s tops performed so poorly during Q1. I’ll leave that analysis to the middle school girls. However, I hope to settle some fears about the outlook for this teen retailer by using some interesting data from Google Trends. First, I want to start with some quick history about my relationship with Aeropostale.
Andrew and I have been long ARO for a while now and suffered through a disappointing Q1. Following the numbers and the outlook cut for Q2, ARO sold off over 18%. Now, normally I wouldn’t recommend “adding to losers.” Doubling down on a position when you’re in the red by 20% or more presents additional risks; your original analysis is often flawed and you might be stuffing more cash into a black hole. With that in mind, we increased our position size by 50% following Q1 results. We believed that this stock was a steal below $18. Hopefully you’ve read Andrew’s valuation work on Aeropostale. If not, be sure to check it out here: (link). His analysis is the rationale for our investment. My work is anecdotal but I think it deserves some attention.
We received some interesting responses to Andrew’s original post following Aeropostale’s Q1 results. Granted, we were holding a stock that just dropped nearly 20%. We deserve criticism for not anticipating these poor results. Additionally, some of Andrew’s readers suggested that growth in ARO is done because the brand is losing its popularity. I’ve been lurking on other financial forums and have heard similar sentiments. I don’t think it’s a stretch to assume that fears about Aeropostale’s “death” contributed to its enormous decline. If one thing is certain with teen retailers, it’s that the brand’s popularity is difficult to gage from financial statements alone. Because of this, I’ve been working to find some alternative ways to assess the popularity of this company.
I started by asking my 12 and 13-year-old cousins about Aeropostale. After giving me some weird looks, they assured me that kids today still wear the clothing. They mentioned that ARO sweatshirts are probably the most popular item. OK, so at least some teenage girls in the Midwest still like ARO. How else can we assess Aeropostale’s popularity? Google Trends.
You probably haven’t seen Google Trends before. Check it out here: http://www.google.com/trends. Basically, you can enter a search term and Google will return data about its search volume. My basic premise is that if a brand is becoming more popular, there will be more search activity for it on Google. Similarly, if consumers aren’t interested in a company’s products, they won’t search for it. For example, let’s compare search activity for Myspace and facebook.
I think it’s pretty easy to identity a trend in popularity with these two companies.
So what about Aeropostale? I’ll go ahead and give you charts of ARO and two of its largest competitors. The y-axis scaling on these charts is relative. Use these charts as a way to compare search trends, not actual search volume.
Do you see that? Since 2004 there has been steady growth in search activity for Aeropostale. ARO’s trend is clearly superior to Abercrombie. Search activity for ARO is five times what it was in 2004 while Abercrombie is below 2004 levels. Hollister appears to be holding its popularity better than Abercrombie, but neither Abercrombie nor Hollister maintained search interest during the 2008 recession. Interestingly, search activity for Aeropostale hit three consecutive all-time highs during Christmas of 2008, 2009 and again in 2010. This is likely because Aeropostale offers cheaper clothing and perhaps has a small counter-cyclical tendency.
The data here is far from perfect and certainly doesn’t paint the whole picture. After all, even if this shows consistent popularity growth for Aeropostale, management hasn’t been able to capitalize on the brand’s popularity. ARO’s spring lineup was unattractive to consumers and the next quarter will be rough as well. However, this data eases my fears about the Aeropostale brand. Significant discounting costs and lower than expected sales hurt the bottom line, but that doesn’t mean teens aren’t interested in the brand. Hopefully it will help others see this past quarter for what it was: a merchandising problem—nothing more, nothing less. Once (if) management gets their heads out of the ground, they will turn this around. The kids still like ARO and so do I.