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Zacks Investment Research downgraded Aeropostale, Inc. (ARO - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on Aug 23.

Why the Downgrade?

Aeropostale has witnessed sharp downward estimate revisions after reporting dismal second-quarter fiscal 2013 results. Shares of this teen apparel retailer have been on a downtrend since the beginning of August and given its sluggish third quarter outlook, it has more downside left. 

On Aug 22, Aeropostale posted adjusted loss per share of 34 cents for second-quarter fiscal 2013. This compared to the break-even results posted in the year-ago quarter. The Zacks Consensus Estimate for the quarter was a loss of 24 cents. Including one-time items, the quarterly loss came in at 43 cents a share.

Aeropostale’s gross profit tumbled 33.9% to $81.2 million, whereas gross margin contracted 740 basis points to 17.9%. However, excluding one-time items, gross margin contracted 570 basis points, reflecting decreased merchandise margins and deleveraging of non-merchandise costs.

Going forward, Aeropostale stated that weak traffic, higher costs and competition will adversely affect its margins and in turn earnings. Consequently, it expects to report loss per share in the range of 21 cents to 26 cents in the third quarter of fiscal 2013.

The Zacks Consensus Estimate for fiscal 2013 plunged significantly in the last 7 days. It now stands at a loss of 55 cents per share, down from earnings of 20 cents. For fiscal 2014, most of the estimates were revised downward over the last 7 days, bringing down the Zacks Consensus Estimate to a loss of 10 cents per share from the earnings of 48 cents.

Other Stocks to Consider

Not all apparel retailers are performing as dismally as Aeropostale. DSW Inc. (DSW - Snapshot Report), L Brands, Inc. and ANN INC (ANN - Snapshot Report), all of which hold a favorable Zacks Rank #2 (Buy) are worth considering.

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