The company had revenue of $839.3 million in Q4, which beat expectations but it was a 13% drop for the quarter. Net earnings were also down to $83.8 million from $96.6 million in the prior year.
One big problem facing the Aeropostale is it’s ability to pass on rising costs to consumers.
Management’s guidance for 2011 implies 400 – 500 bps of gross margin erosion and an operating margin in the low double digits vs the 16% to end 2010. The apparent conservatism (plus an intra quarter update on inventory) limits more meaningful near term downside, in our view, though fashion risk and pricing power obscure 2H11 earnings visibility. We remain on the sidelines for now but could reconsider when we get more clarity on the back half.
Lower inventory should resulted in a more favourable setup for 2Q. That said, ARO has been missing on girl’s product and we haven’t seen enough to suggest a marked improvement in product for summer.
Pricing power, too, remains a concern. The company has been testing ticket increases yet we continue to believe ARO’s lower income demographic could result in higher price elasticity versus its peers. Inventory has been planned down for 2H11; management did not elaborate on the degree.
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