Even though Aeropostale (ARO) shares are down
over 50% from where they were just 10 months ago, they still may be too
expensive, especially trading at 17 times forward earnings with just a 1.60%
increase in quarterly revenue compared to the same quarter a year ago (the
industry average p/e is closer to 13 times forward).
ARO is also a Zacks Rank #5 (strong sell),
which puts it in the “stocks you don’t want to be long in an unsure market” category.
Let me explain why...
Aeropostale, Inc. is a mall-based,
specialty retailer of casual apparel and accessories, principally targeting
fourteen to seventeen year-old young women and men (talk about a small target).
The Company provides customers with
a focused selection of high-quality, active-oriented, fashion and fashion basic
merchandise at compelling values. Aeropostale maintains control over its
proprietary brands by designing, sourcing, marketing and selling all of its own
merchandise. Aeropostale products are currently purchased only in its stores,
on-line through its e-commerce website or at organized sales events at college
Not a Household Name
Lynch’s investment mantra is
to “Invest in what you know,” I like to add a qualifier to that slogan
in what you know and in a business you believe will succeed for years
to come.” Investors who want longevity don’t just go a
buy any company that they feel comfortable with, there has to be a
it to expand!
Aeropostale seems to be the opposite
at this moment in time. The company finds
themselves in a space that has tremendous challenges; lackluster retail growth
overall, a consumer facing stress and a very narrow niche with increasing
Even more recognizable brands like Abercrombie
& Fitch (ANF - Analyst Report) are seeing their shares under pressure after reporting disappointing
results and issuing a cautious outlook. Just
a couple days ago, the teen retailer (ANF - Analyst Report) forecast a loss for the first
quarter, citing concern about the weak economy’s impact on sales.
Chances are that this is not an
isolated trend and that ANF’s warnings are manifesting themselves throughout
the space; those warnings should be (and are partially being) heeded by
shareholders of ARO.
Analysts Jumping Ship
ARO has seen a slew of downgrades;
the latest was just yesterday by KeyBanc downgrading shares to Hold from Buy. They are not alone, 18 analysts have
downgraded shares of ARO in the past 90 days.
Current quarter estimates for the stock have dropped by over 50% in that
same time frame.
Estimates for the current year
(FY2013) and FY2014 have also come in substantially.
If the sequester passes on top of
the higher tax rates amidst an already sluggish economy, it could further cause
the discretionary consumer to reign in their spending even more. This is already proving true as savings rates
have been on the rise and retails sales have been mediocre at best.
Zacks earnings’ ESPs are negative
for the current and next quarter as well as FY2013 and FY2014. This combined with a Zacks Rank of 5 gives
ARO a high probably of missing analyst expectations when they report on March
I don’t think that ARO is going
away, but perhaps their shares have a little more room to move lower before
investors find value in this niche company.
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