Aeropostale to Slow Down Rate of Store Openings

Case Type: improve profitability.
Consulting Firm: Capgemini Consulting first round full time job interview.
Industry Coverage: apparel, clothing, textiles; retail.

Case Interview Question #00872: Your client Aeropostale, Inc. (occasionally known as Aero) is an American shopping mall-based specialty retailer of casual apparel and accessories, principally targeting ages 14-to-40 year old men and women through its Aeropostale stores. Headquartered in New York City, New York, the company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise.

Over the last ten years, the client Aeropostale has expanded their number of store locations and achieved significant sales growth. As a result, they are considering an IPO (initial public offerings) in 6 to 12 months. However, recently the company has moved from profits to losses. The CEO of Aeropostale needs to understand why this has occurred, and what needs to be done to become profitable again.

Additional Information: to be provided to candidate after relevant questions

1. Revenue

When asked about revenue growth, the Interviewer produced this graph:

2. Number of Store Locations

When asked about the number of store locations, the Interviewer produced this graph:

3. Costs

* Assume fixed costs of $1 million per store location. This includes lease costs, utilities, store manager, etc.
* Assume variable costs equal to 20% of sales. This includes cost of clothing, sales people, etc.
* Corporate overhead is minimal.

Possible Solution:

The key to this profitability case is to notice that sales increased for the first location over time. In year 2009, the company would have made a profit of $600,000 on sales of $2MM ($2MM*80% profit margin – $1MM fixed cost = $600,000). Subsequent store openings should experience similar sales ramp up. Once the candidate realizes this, then it becomes apparent that the client is realizing losses because of the large number of stores opened recently.

Recommendations for the client include:

1. If the client wants to go IPO and show significant profits, then they must slow the rate of store openings so that a larger percentage of stores have entered the profitable portion of their life cycle.

2. Develop performance reporting systems which will allow the company management to assess the profitability of individual store locations, rather than reviewing financial performance in aggregate.

3. Review performance of successful store locations to understand what reasonable performance levels are for new store locations at various points in their life cycle. Use these hurdles to assess the performance of newer locations, and determine whether some locations should be closed.