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Bear of the Day: Aeropostale (ARO)

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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...

Company Description
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 campuses.

Not a Household Name
Peter Lynch’s investment mantra is to “Invest in what you know,” I like to add a qualifier to that slogan to “Invest 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 catalyst for 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 competition.

Even more recognizable brands like Abercrombie & Fitch (ANF - Free 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 - Free 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 14th.

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.

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

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