Since CEO Julian Geiger led a management-led buyout from Federated Department Stores in 1998, Aeropostale has become the nation's best-performing teen clothing chain. In fact, at No. 6 on this year's BusinessWeek Hot Growth list, it's the highest-ranked retailer.
It's easy to see why: Aeropostale's earnings over the last three years have increased an average of 88%, to $54.3 million, on average sales growth of 54%, to $734.9 million. Not bad for a business that Geiger, with an investment bank putting up most of the cash, bought from Federated (FD) in 1998 for about $14 million. It went public in 2002 and now has a market capitalization of nearly $1.3 billion.
Macy's created Aeropostale (ARO) as a young men's label for its department stores in the early 1980s, and it started separate Aeropostale stores after the label's success. But the division slipped as Macy's ran into financial trouble in the early 1990s. Federated picked it up through its acquisition of Macy's in 1994 and hired Geiger, a former Macy's executive, two years later to stabilize the chain.
Geiger refocused Aeropostale. He sought a slightly younger age group than the high school and collage students that rivals Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEOS) target. While Aeropostale sells similar active, casual clothing, Geiger further differentiated the brand by offering much lower prices than the competition. And he steered the company away from being a fashion-setting teen retailer to one that follows established trends. To that end, Aeropostale is among the most diligent teen chains in doing consumer research.
In an interview with BusinessWeek Chicago Correspondent Robert Berner, Geiger and Chief Merchant Chris Finazzo discuss what sets the 494-store chain apart. Edited excerpts from their conversation follow:
Q: How do you fit in the marketplace? Your clothes look to a degree like Abercrombie's and American Eagle with cargo shorts, logo-emblazoned T-shirts, etc.
Geiger: We're by design younger in our orientation. Abercrombie and American Eagle basically target the college customer. We're middle school and high school. We're more active, athletic and comfort driven. And because we're a promotional specialty store, our values are extraordinary.
Q: How do you define promotional?
Geiger: We have a promotion going on all the time. We match supply and demand and demand and supply every day by seeing how many weeks of supply we have of an item. Under this umbrella we can fine-tune the elasticity of demand to know what the price should be. If something is selling too fast, we'll actually raise the price. Of course, it's still on sale.
Everyone else tries to dictate what they feel the customer should wear. We generally want to listen to our customer and give them what they want at the right price.
Q: How do you determine what type clothes they want?
Geiger: We don't look at what's on the selling floor of our competitors. We look at what's on the back our customers. Our design group goes all over. Sure, everybody goes to London and Paris and Barcelona. But we go to Great Adventure and concerts, spring break, train stations, and airports to see what the real kids are wearing. We feel we're targeting the real, universal American kid, who comes to the mall with $40 in their pocket.
Q: Most kids come to the mall with just $40?
Geiger: We do a significant amount of our business, more than our competitors, in cash. We see them come in with $20 to $40. Cash is more than half our business. That's because of the age group and economic strata of our customers. And that's one of the reasons we think we can go to 900 stores from 494.
Q: Why don't you want to be a leader in setting trends?
Geiger: Every kid lies about what they want. "I want to be an individual." What they really want is: "I want to look just like my friends. I want to be safe. I want to wear something that looks good, but I have to understand what the uniform is cause I desperately want to fit in." That's why we're fashion followers, not fashion leaders. The vast majority of kids are fashion followers.
Finazzo: What you see with Abercrombie a lot is that they really find a trend that is working. They really start the trend. But we wait until we actually see it on our kid before we react to it. What they haven't done as well as they could have is replenish the product that's selling in the store, either by design or they just can't.
We look at what the trend is and make sure it's on our kid. Then when we see that trend, we maximize that trend, and make as much profit as we can. It's O.K. to be on the downtrend of a trend. You can still make money when a product is slightly on the downtrend, post-peak.
Geiger: By definition, the demand curve is a parabola. So just post-peak has the same potential as just pre-peak. But because we're fashion followers -- and we think the masses want styles longer -- when other people bail our of a style or classification we get a monopoly on it.
Q: Give me an example of types of clothing you are selling now that is post peak?
Finazzo: Cargo shorts, carpenter jeans, graphic T-shirts, hooded sweatshirts.
Geiger: We react to trends, not fads. Two years ago, there was this whole peasant look for women. That was a bomb. That was a fad not a trend.
Q: Tell me about the consumer research you do to know you're targeting the right trends? You do Internet research that allows your shoppers to react to future clothing you may sell, giving you more information on what goods to ultimately put on store shelves.
Geiger: We tap the 500,000 users on our Web site who we use to screen designs. We target groups of 10,000, and they have the ability to look at future merchandise designs and say which ones they like. We get like 3,000 responses back in 3 days. That's a huge statistical sample.
We do 20 of these tests a year, or about two a month. We find out a lot about what kids want. These kids may be young, but they're very sophisticated and know exactly what they want and what they're willing to pay for it.
Finazzo: We also do product tests in stores. We have 50 test stores. We also do focus groups in high schools. We do a lot of research with the design group going to spring break and living with the kids. And we have a college division where we do a lot of research on the college market.
Q: Do you flow merchandise into your store more quickly than rivals like Abercrombie?
Geiger: I think everybody pretty much does it on the same kind of cycle. We have the ability to replenish more of our merchandise more quickly because such a large percent of our business is printed graphic T-shirts with our logo on it. Our goal is to be able to fill in by size, by color, by screen, by store, in 72 hours, which nobody else can do.
Q: How do you do that?
Geiger: There are 16 venders we have used since I started here. One of these guys, who shall remain nameless, has a printing plant in Long Island. At his risk, he stocks 2.5 million blank T-shirts at a time and is totally integrated into our systems. He has invested millions of dollars in infrastructure to be able to receive orders, print them, and get them out the door and to stores in 72 hours, except for California. That takes five days because of trucking time.
Last year, we sold about 14 million graphic T-shirts. We sold 800 in 1996.
Q: At $491 dollars in sales per square foot a year, Aeropostale has the second-highest sales per square foot in teen retail, second only to the chain Hot Topic. How do you do that?
Geiger: We like to create relatively small stores -- 3,500 square feet is our average store. We sell more units per square foot than any of our competitors. While it's a simple concept, it's functionally difficult to pump that many units through a store. That's about a 140,000 units per store, per year.
Hot Topic is somewhat more productive but they have smaller space, about 1,500 to 1,600 square feet per store. But we're over $100 higher than American Eagle or Abercrombie in sales per square foot. And it's not like we feel we're at our potential either. We have always said to investors we feel we can get to $600 a square foot.
So the math becomes very easy if you can do $600 a square foot, and if you have an average box of 3,500 square feet. Your average store does at some point $2.1 million in sales a year. If you have 900 stores, that's over $1.8 billion in annual sales. We would like to stay at the top of [the BusinessWeek Hot Growth] list for many years.