Mar 11, 2011
Higher cotton cost weighs on Aeropostale forecast
Mar 11, 2011
NEW YORK | Thu Mar 10, 2011 - Clothing retailer Aeropostale Inc (ARO.N) gave a weaker-than-expected forecast on Thursday, hurt by higher cotton costs, sending its shares down more than 6 percent.
Soaring costs for commodities from cotton to grains to oil are squeezing many consumer product makers, forcing them to gamble with raising prices, even as consumers remain fickle with their spending.
Aeropostale, whose profit margins have been hurt by deep discounting to lure shoppers, said it plans to raise prices this year on some products.
It aims to offset costs expected to rise 3 to 5 percent in the first half of the year and 10 to 15 percent in the second half, but does not expect to recoup the entire increase.
As a result, Aeropostale forecast earnings of 35 cents to 38 cents per share in the current first quarter, below the average analyst expectation of 43 cents per share, according to Thomson Reuters I/B/E/S. It expects full-year earnings of $2.20 to $2.40 per share, where analysts were expecting $2.54.
"It looks like they're trying to come out with guidance they feel is very realistic at this point. Hopefully with a bit of luck and better merchandise they might be able to do a bit better," said Sterne Agee analyst Margaret Whitfield, adding a management shake-up could be making the company a bit conservative.
"We have a newly appointed CFO and he wants to, obviously, not have egg on his face," she said. Whitfield has had a "neutral" rating on Aeropostale shares since last summer, when she said she saw teenagers flocking to rival store Hollister, operated by Abercrombie & Fitch (ANF.N).
Aeropostale had enjoyed double-digit same-store sales growth during the economic downturn in 2009, as teens and their mothers gravitated to its stores for casual fashions at low prices, eschewing rivals.
But recently lowered price tags at competitors such as American Eagle Outfitters Inc (AEO.N) and Abercrombie cut into the company's market share, forcing Aeropostale to discount even further.
The weak forecast could also revive takeover rumors that have been sparked by Aeropostale's relatively cheap valuation, Whitfield said. The New York Post reported in December that Aeropostale hired Barclays Capital to advise it on defending against takeover.
COST INFLATION OUTPACES SALES
Aeropostale Chief Executive Tom Johnson said performance in the key year-end holiday quarter did not meet company expectations, since it did not "fully deliver a cohesive women's assortment in terms of fashion or color." He said performance was also hurt by deep discounting across the teen clothing industry.
But the company is taking "necessary" steps to improve its merchandise, with brighter colors and more menswear and accessories, he said.
Fourth-quarter net income fell to $83.8 million, or 95 cents per share, from $96.6 million, or 99 cents per share, a year earlier.
Excluding items, earnings were 98 cents per share, a penny ahead of analysts' average expectation, according to Thomson Reuters I/B/E/S.
Last month Aeropostale raised its fourth-quarter forecast to a range of 96 to 97 cents per share, from a prior view of 94 to 96 cents per share.
Net sales rose 5 percent to $839.3 million. Same-store sales, a key gauge of retail health, fell 3 percent.
Aeropostale's cost of sales, including certain buying, occupancy and warehouse expenses, rose 10 percent and amounted to 64.5 percent of sales, up from 61.2 percent a year earlier.
The company did not elaborate on its costs, but Whitfield said cotton supplies accounts for a third of its cost of goods sold.
In fiscal 2011, which began on January 30, the company expects to invest $70 million to open 30 Aeropostale stores, about 20 P.S. from Aeropostale stores and remodel about 50 stores.
Aeropostale shares fell to $23.10 in after-hours trade, from their close at $24.63 on the New York Stock Exchange.
(Additional reporting by Alexandria Sage in San Francisco; editing by Gunna Dickson, Carol Bishopric, Gary Hill, Sofina Mirza-Reid)
© Thomson Reuters 2023 All rights reserved.