Teens may say they want to be trendsetters, but most are fashion followers. It's a simple insight, but understanding it has been the key to one of the hottest recent success stories in retailing: Aeropostale Inc. (ARO). The New York-based apparel chain of 494 mall stores is the top retailer on our Hot Growth list, at No. 5. Its earnings over the past three years have jumped an average annual 88%, to $54.3 million, on average yearly sales growth of 54%, to $734.9 million. The company has a market cap of $1.3 billion.
That's a big change from a few years ago. In 1996, as a division that retail giant Federated Department Stores Inc. (FD) had gotten as part of its Macy's acquisition, Aeropostale was a lackluster performer with just 100 shops. That's when Julian R. Geiger, a former Macy's executive, was brought in to try to turn things around. Two years later his management team, with an investment bank putting up most of the cash, acquired the chain from Federated for about $14 million.
Geiger, 58, has made plenty of changes in his eight-year run. He shifted a business largely aimed at young males toward females, because they buy more clothes and because those goods enjoy higher profit margins. Instead of continuing to go head-to-head with rivals Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters Inc. (AEOS) in trying to attract high-school and college-age shoppers, he aimed the brand at younger teens. Geiger pursued the popular active-casual look of Abercrombie and Eagle but made the clothes slightly less sexy and revealing to appeal to younger shoppers and their parents. He added more Aeropostale logo shirts, because kids like to identify with a brand that way. The reward: "It's less competitive down there," Geiger says.
He also chose not to compete with the likes of Abercrombie in setting fashion trends, choosing instead to follow significant trends quickly. "Most kids want to be fashionably safe and look like everybody else," Geiger explains. So while Abercrombie and American Eagle reduced the number of cargo pants on the sales floor last fall, they remained a steady third of Aeropostale's merchandise. "You can still make money when a product is on a downtrend," says chief merchant Christopher L. Finazzo. "We get a monopoly on it."
Aeropostale fits a girl's wallet. Recognizing that the average female teen comes to the mall with only $40 in her pocket, Aeropostale is the most promotional teen-specialty retailer, analysts say, and preplanned sale signs and two-for-one deals dominate the stores. Wachovia Securities (WB) LLC estimates that Aeropostale's prices, after scheduled discounts, are 50% lower than Abercrombie's and 30% lower than Eagle's. Lindsay O'Rourke, 16, whose father is a computer consultant, notices the price difference while shopping at Aeropostale in the Manhattan Mall in New York. She eyes a $34.50 pair of belted cargo shorts with a 40%-off sign above them and notes they would cost $50 at Abercrombie. "My dad likes me to watch my spending," she admits.
Geiger measures how well his non-stop promotions are performing, too. Every day, the chain compares its supply of goods to how fast they are selling. "If something is selling too fast, we will actually raise the price," he says. "Of course, it's still on sale."
NET SWEAT But not everything about Aeropostale is cheap. To jump on the right trends, Aeropostale is among the most diligent teen retailers when it comes to consumer research, says Lazard LLC analyst Todd Slater. In addition to high-school focus groups and in-store product tests, Aeropostale late last summer launched an Internet-based program that seeks online-shopper input in creating new styles. The company targets 10,000 of its best customers for each of those tests (it does 20 a year) and averages 3,500 participants. Such customers recently helped designers narrow down a range of hooded sweatshirts by silhouettes, color, and logo. The final product sold well: Aeropostale credits such insights for much of its 18.9% surge in first-quarter same-store sales.
Still, with teenagers, science can only get you so far. Aeropostale's biggest challenge is that its customers' tastes can change overnight. Teen retail is full of faded stars, from Buckle Inc. (BKE) to Wet Seal Inc. The chain also faces some tougher competition from Abercrombie and Eagle, which, after struggling for a period, show signs of picking up. But Geiger thinks his approach leaves plenty of room to run. He says Aeropostale can fill out to 900 stores, giving it four more years of strong growth -- time enough to develop or buy another store concept. Right now, though, Aeropostale is looking hotter than the latest fashion trend.
By Robert Berner in New York