Aeropostale; the Power of Good Systems and the Right Market Position

For the quarter ended October 31, Aeropostale reported sales up almost 18% to $568 million.  For nine
months, they rose almost 20% to $1.43 billion. Gross profit margin in the quarter rose from 36% in the
same quarter last year to 39.3%.  For nine months, it was up from 34.4% to 37.5%.  Selling, general and
administrative expenses were down as a percentage of sales for both the quarter and nine months
compared to the same period the prior year.  New income was up almost 47% for the quarter to $62.6
million.  It rose nearly 64% to $133 million for nine months.

While they did this, their merchandise inventory rose only 6.8% from Nov. 1, 2008 to October 31, 2009
even though their store count was up from 905 on November 1, 2008 to 945 on October 31, 2009.
Inventory per retail square foot didn’t grow at all.  Comparable store sales were up 10% for the quarter
and 11% for nine months.

How have they accomplished this in the current economic environment?  The conference call was
instructive.

They offer, they said, “Great fashion at compelling value.”  Their “balanced and exciting merchandise
assortment… targets the cross channel shopper” and “strikes a balance between core fashion while
optimizing trending classifications.”  That’s good stuff- whatever it means and I’m sure every retailer
would like to do it.  But HOW did they do it?  What it requires is incredible efficiency, flexibility, and the
ability to react quickly.  That means good systems and good data.  Go look again at the numbers they
put up with no increase in per square foot inventory.  That is just amazing.

They claim to turn inventory faster than any of their competitors, and I believe them.  They “pursue
technology to drive efficiency.”  Their systems and technologies have let them “allocate on a more
scientific basis.”

In their last conference call, PacSun CEO Gary Schoenfeld indicated that their “one size fits all” approach
to merchandising needed to change and that they expected to start making those changes without a
major capital investment.  PacSun, is roughly the size of Aeropostale in terms of stores.  Just for fun, I
called a good friend of mine who retired as the Chief Information Officer of a huge retailer and asked
him about that.

He spent a few minutes waxing eloquent (usually he does that after a couple of drinks) on the
complexities of the processes and systems required to select and deliver the right merchandise to the
right stores in the right quantities at the right time.  First, you have to have the systems to gather the
data.  Do you do it by store, by city, by region, by state?  By some combination of those?  At what level
of detail do you start to look for patterns that will help you with merchandising?  Just for t-shirts overall?
For a single style?  Divided up by color?  What about size?  What’s enough data and what’s too much?
How much do you need, in what format, to improve your sales and gross margin dollars without burying
yourself under numbers and analysis?

Based on this data, when you start to make changes in your merchandising, you of course will have to
change how, when, and maybe where you buy.  This impacts shipping and warehousing.  Who decides
what assortments go to what stores/regions/states/cities?  The jobs of a bunch of people can change.
As you make changes in assortments and merchandising, this may impact your customer base and in
turn their buying patterns.  The changes you make will probably cause other changes to occur.  It’s a
never ending feedback loop.

My friends tells me it use to be done pretty intuitively, but that these days computer programs that use
advanced algorithms to detect patterns and opportunities are coming into their own.

My guess is that Aeropostale has spent, and is continuing to spend, money, time, and effort on this
every hour, day, week, month and year.  It has to be a major source of their success or we would not see
their impressive inventory results.

I have been pushing the importance of systems and maximizing your gross margin dollars for some time
now.  I think it’s the only way to manage in this economy.  I think Aeropostale knew that a long time
ago.