Last Thursday, shares of teen clothing retailer Aeropostale (ARO: Charts, News, Offers) plunged 12% on a green day in the markets due to declining margins, lowered guidance and departing management. Analysts were quick to trim price targets on this retailer, with concerns that an excess of discounts used to drive sales volume has finally taken its toll on its margins. Can Aeropostale survive the flurry of bad numbers and news, or will it be tossed out with the holiday leftovers?
Daily Chart
At the time of this writing, shares of Aeropostale are on their way to hit six-month lows in the $23 range. The stock has traded between $19.10 and $32.24 this year. The current forward P/E of 8.48 and the PEG ratio of 0.8 signify little further downside to this stock. The company has no debt, over $300 million in cash, and has posted sales growth of 11.3% over the past twelve months, slightly better than the industry average of 10.1%. Over the past seven years, the company’s EPS has grown 38.45% and its revenue per share has risen 25.4% annually. Technically speaking, the stock is strong and may appeal to value investors at this level.
However, the company is a mixed bag. Aeropostale stores can be found in many malls throughout the United States, selling its branded merchandise to a narrow age range of 14-17 year-old teenage boys and girls. In 2009, the company launched P.S. from Aeropostale, focused on an even younger target group of 7-12 year olds, and closed its Jimmy’Z Surf Company stores, which were focused on 18-25 year olds. Competitors such as American Eagle (AEO: Charts, News, Offers) and Abercrombie & Fitch (ANF: Charts, News, Offers) are currently better poised to take control of the holiday market, due to a much wider age range with stronger brand and pricing power. During the recession, Aeropostale performed well against these higher priced rivals, but as the economy recovers, the tables have turned and the company now struggles to increase margins while maintaining its current lower end price range, comparable to GAP Inc’s (GAP: Charts, News, Offers) Old Navy label.
Due to these variables, the company’s all-important same-store sales, the barometer of retail, fell 1% and its gross margins dropped from 36.6% from 39.3%. The company’s fourth-quarter guidance of 0.94-0.96 EPS was well below Wall Street’s expectations of $1.03.
To make matters worse, Mindy Meads, who was the company’s Chief Marketing Office since March 2007 and Co-CEO with CEO Thomas Johnson since February 2010, abruptly resigned to pursue other interests. Many analysts believe that under her guidance, Aeropostale was able to control its inventory levels well and rise up from the worst of the financial crisis, which cut its stock down to under $10 a share. Upon Meads’ departure, CEO Thomas Johnson assumes full CEO responsibilities, although stating optimistically, “Our ability to navigate effectively through the challenging and promotional environment truly underscores the power and flexibility of our promotional specialty store model.” Indeed, Aeropostale thrives on deep discounts, as a visit to their website, which saw an increase of 17% to $38.3 million, reveals apparel in the $10-$20 range.
Like many American companies, Aeropostale has expanded internationally in hopes that international sales will offset domestic stagnation and a declining dollar. In 2006, the company expanded into Canada, in 2008 into Puerto Rico and in 2009 into the Middle East, where it hopes use Dubai as a launch pad into other emerging markets such as Kuwait, Bahrain and Qatar. The company currently has over 900 stores and a market cap of 2.16 billion. At the stock’s currently depressed price, it trades at a mere 9 times earnings with a PEG ratio of 0.66. While there is little technical downside potential at this point, there is also little upside. Analysts forecast flat earnings through 2012, with a possible recovery of the price in 2013. However, to contrarian investors, the flood of downgrades and pessimism surrounding this stock may signify an opportunity to accumulate for the long run.
Other News About ARO
Aeropostale Slides on Weak Guidance and C-Level Shakeup
Aeropostale falls behind its industry peers.
Aeropostale disappoints in 3Q, co-CEO departs
One CEO steps down, one remains.
Other Stocks in the News
Dollar General 3rd-qtr Net Income Jumps 69 Percent
Following the rising trend of dollar stores such as Family Dollar, Dollar General impresses.
Ackman Says He Would Finance Barnes & Noble Bid
Will Borders swallow up Barnes&Noble?
Copyright 2010 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc.
No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions.
We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.
Other relevant articles you may like
Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
