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Fueled by IPO, Aropostale sets course for the West

With $225 million from its May IPO, Aèropostale is revving up for a major expansion in the Western U.S., where the New York-based teen-apparel chain expects to add 80 stores annually within four years.

The company has 278 stores in 34 states, mainly in the East, except for outposts in California and Arizona. This year, the company is already moving into Texas and will use the IPO money to fill in areas in between. “We'll continue to move West from our current store base,” says Chariman Julian Geiger. “This business is not near saturation. It can grow significantly.”

Despite the risks of the fad-driven teen market, investors seem to buy Geiger's story. During its IPO last May, Aèropostale [NYSE: ARO] was one of only 29 IPOs in the second quarter — down from 333 two years ago — and delivered the second-best return in the period, behind JetBlue Airways Corp., according to Hoover's Inc. Aèropostale sold 12.5 million shares at $18, and its shares rose to $29.18 and were trading at $19.85 during late July's market-wide downturn.

Aèropostale started as a private-label brand of R.H. Macy & Co. in the early-1980s. But by the mid-1990s, the label transitioned from being a young men's brand to its current format, and separated from the Federated Department Stores Inc. fold.

Aèropostale's current expansion comes at a time when competitors are slowing store growth. The increase in square footage by national chains in the teen/young adult retailing space is up again this year by about 6.8%, according to Wachovia Securities. But that is quite a deceleration from the peak of 19.6% expansion in 2000.

Aèropostale prefers to locate its stores near busy food courts, music stores or other popular teen hangouts. Its average store size, at 3,500 sq. ft., is much smaller than its rivals American Eagle and Abercrombie & Fitch, which average around 5,000 sq. ft. and 6,800 sq. ft., respectively.

“The smaller format creates more energy in Aèropostale's stores,” USBancorp Piper Jaffray (USPBJ) analyst Jeffrey Klinefelter stated in a recent report. Another difference is price — as in cheap. With an average unit sale of about $15, Aèropostale's prices are the second-least expensive in the category, behind Old Navy, according to Klinefelter. Disclosure: USBancorp Piper Jaffray served as managing underwriter on Aèropostale's IPO and has other beneficial interests in the company.

Still, many analysts are concerned that the teen market is too risky and saturated (Aèropostale's core customers are ages 11 to 20). Gap has struggled lately to find the right formula. Klinefelter figures Aèropostale is less at risk, because it is more of a fashion follower than a trendsetter. Also, Aèropostale has an activewear focus and apparel with logos, which are working well for the retailer. Same-store sales were up 22% during the first quarter ended May 4.

“We have the best track record in this space for the past three years,” Aèropostale's Geiger says. “We understand what teens want.”

Renée DeGross covers retail business and development for The Atlanta Journal-Constitution.

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