You have heard it before: “Margin is Everything”. In these strange economic times, these words have never rung truer.
Take, for instance, the recent solid performance of Aeropostale. When most of the specialty retail world was crying “Uncle” from the recessionary stranglehold on consumer spending, Aeropostale posted positive comps every month this past fall including a 12 comp in December and an 8 comp in January.
How did they do this? Margins.
Their margins have allowed them to become the promotional specialty retailer in a very crowded teen/tween/preppy category. If you look at the recent results among those who occupy this exact space (we are talking the same look, let alone the same demographic), it was an unmitigated disaster. Abercrombie and Fitch (which refused to mark down – which I applaud by the way) posted comps in the negative 20’s for most of their fall and holiday seasons. American Eagle Outfitters (the cheaper knock-off of A & F) also posted negative comps in the teens for most of their fall and holiday seasons including a -22 comp for January.
In these uncertain economic times, where household income is tightening and spending is scrutinized daily, Aeropostale’s promotional stance with the exact same styling, esprit de corp and target market seems to be gaining market share from the other fuller priced preppy twins. Walking through the malls, I used to shake my head at how hard it was to tell the three brands apart. I often asked myself how could all three survive? If the names and store designs were taken away and you were left with an assortment overview without logos, it would be very hard to tell the three apart. That is, until recently. Aeropostale has become highly promotional 365 days a year. They seemed to have found a recipe for success even prior to the new economic realities.
How are they able to be so promotional all the time? It comes down to sourcing. As an example, if you are able to offer a sweatshirt at $50 dollars and it cost you $10 to manufacture, that is an initial gross margin of 80 points. Even if you sell the sweatshirt on promotion at 50% off, you are netting out at 60% gross margins, which is extremely healthy in any retail environment.
And, when you announce that you are turning your inventory 7 times a year, that is a license to print money. Especially in times of lower productivity, margins become the buffer to ensure you can still operate profitably as it provides a cushion when sales decline (which actually isn’t happening for them yet anyway).
They have successfully redesigned their stores, they have increased their media presence, but at the end of the day, they have embraced a full-on promotional model that seems to be a winner.