Aeropostale Valuation

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Executive Summary

Since its’ inception in 1987, Aéropostale, named after the 1920s French airmail firm, has become one of the leaders in designing, making and retailing of teen casual apparel and accessories. Aéropostale stores are primarily located in malls, shopping plazas and large outlet centers where they can best reach their teen clientele. The company’s main competitors include other clothing brands that cater to teens. Some of these competitors that we considered for Part I of this analysis were Gap Inc. , Abercrombie, Forever 21, Express Inc., and American Eagle Outfitters. During our analysis of historical and current financial performance of Aeropostale, we found out that the main triggers of revenue growth for the company are the sales in the same store as well as opening of new stores. Another factor that contributes to Aeropostale’s performance, is the efficiency of its’ supply chain which ensures that products that are in high demand could be quickly delivered from the vendors, to distribution centers strategically located across the US, to the retail stores where the items are needed. With the DCF analysis providing us with the valuation of $2459.6, and the target share price of $29.8, we believe that Aeropostale is in a strong position which further demonstrated by the revenues that are growing at an average rate of 18% and the growth in sales which primarily is attributed to growth in same store sales by 10% year over year, average growth of 7% in store square footage (through new stores) and a 48% increase in Aeropostale’s online sales. Using the EV/ EBITDA multiple, we obtained Aeropostale’s Enterprise Value for 2011 and 2012. The value for 2011 was 3725.80; expected value per share was $36.38. From the price obtained we could see that the company is under-valued by the market. Aeropostale also has a 1.46 book to market ratio meaning that the market value is less than its assets value. These findings support our recommendation to buy the Aeropostale stock since we assume that its’ current price of $26.99 will go up in the near future based on the fact that it is currently undervalued by the market, improved sales across the sector of teenage casual apparel and the potential for high sales in the upcoming 2010 holiday season.


II. DCF Valuation For our DCF valuation, we used WACC as determined under standard procedures with no leverage. The revenue forecast was based on the store analyses. 1) Revenue growth in retail comes from 2 sources: (a) Same store sales growth Same store growth = % increase on prior yr's revenue (the sales increase from holding the same number of stores as last year) (b) Adding new stores Growing number of stores at 2010E growth rate for 5 years based on certain short term growth assumptions. Assuming afterwards Aeropostale would have saturated market and probably need to start closing some stores in 6 years from now. Finally, determining sales in the new stores using historical CAGR for sales/sq. ft. 2) Current year revenue = Last yr's revenue + sales from new stores (b) + increased sales from existing stores 3) Assume 3% long run same store growth, consistent with rate for more mature industry participants 4) FCFF calculations all as a % of sales; however, Capex rate suddenly falls after 6 years- due to slowed expansion and no need to invest in building new stores.


Short-run growth drivers (1) New store concept, PS Aeropostale, launched in 2009 to target elementary school age children. 14 stores opened 2009, 30 more in 2010. Anticipated to generate above average sales/sq.ft. (2) Many new stores expected to be built at street level in NY; above average sales/Sq.ft expected. (3) International licensing agreement signed 2008 with licensee for 5 stores. 8 new stores expected to be included in license agreement; additional revenue (4) Closure of 14 Jimmy Z concept brand stores in 2009; discontinuation of the brand (5) Recession/low consumer sentiments likely to...
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