Challenges Galore, but Aeropostale Has a Compelling Valuation

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Some good things happen not despite of, but because of, bad things. Take Aeropostale (NYSE: ARO) for example: This New York City-based specialty retailer of casual apparel and accessories disappointed investors with its outlook, even after beating estimates with its third-quarter results. Was that a bad thing, considering that it saw an immediate fall in its stock price? Definitely, but that was a pullback that could result in some buying opportunity, given that ARO is very attractively valued at the moment.

Q3 Results Beat Estimates

For the third quarter ended Oct. 27, 2012, Aeropostale reported a profit of $24.9 million, or $0.31 per share, compared to $24.1 million, or $0.30 per share reported for the same period in the previous year. Back in August, the company had forecast third-quarter earnings to be between $0.25 per share and $0.30 per share.

Aeropostale’s net sales for the quarter rose 1.6% to $605.9 million, beating the consensus forecast of $600.4 million.

Gross margin for the third quarter improved 80 basis points to 27.9%. Comparable store sales for the third quarter, including e-commerce operations, dropped 1%. Excluding e-commerce operations, comparable store sales for the third quarter fell 2%.

CEO Thomas P. Johnson said that for the third quarter the company achieved net earnings slightly ahead of its previously issued guidance. Johnson said: “Although we experienced pressure on our women's core basics business, she responded positively to our fashion offering.  In addition, our men's and accessories businesses performed well.”


While Aeropostale’s third-quarter results beat expectations, it was the company’s cautious outlook that really disappointed investors.

For the fourth quarter, which includes the crucial holiday season, Aeropostale expects profits to be between $0.36 per share and $0.41 per share. The earnings forecast for the fourth quarter is significantly below the consensus forecast of $0.54 per share.

However, Aeropostale has made a strong start to the holiday season and therefore the outlook may be a little too cautious.

Johnson said that while the company’s performance over the Black Friday weekend was encouraging, the environment during the first few weeks of November was challenging and, as a result, the company continues to be cautious for the remainder of the quarter given the inconsistency it is experiencing in its business against the backdrop of a highly promotional environment.

Indeed, promotions could hurt profit growth in the fourth quarter. A Stifel Nicolaus analyst noted the company is increasing its promotions in the fourth quarter in order to keep inventories in line and this could hurt profit growth. It will be interesting to see if the promotions boost sales significantly.


One of Aeropostale’s rivals, American Eagle Outfitters (NYSE: AEO) also reported its third-quarter financial results earlier this week. American Eagle’s sales for the third quarter rose 11% to a record $910 million. The company’s gross profit for the quarter rose 21% to $379 million. Operating income improved 39% to $129 million.

American Eagle reported earnings from continuing operations of $0.41 per share, compared to $0.30 per share reported for the same period in the previous year.

For the fourth quarter, American Eagle expects earnings to be between $0.54 per share and $0.56 per share.

Abercrombie & Fitch (NYSE: ANF), meanwhile, reported a profit of $71.5 million, or $0.87 per share for the quarter, up from $50.9 million, or $0.57 per share reported for the same period in the previous year. The company’s revenue for the quarter rose 8.7% to $1.17 billion. Abercrombie & Fitch’s results beat analysts’ forecast of earnings of $0.59 per share and revenue of $1.11 billion.

Abercrombie & Fitch’s same-store sales for the quarter fell 3%.

Challenges Ahead but Aeropostale is Moving in the Right Direction

Aeropostale’s third-quarter results did beat estimates; however, the company’s revenue growth compared to its rivals American Eagle and Abercrombie & Fitch was significantly lower. Aeropostale’s comparable store sales for the quarter also fell. The company’s outlook compared to American Eagle is also cautious.

According to analysts, the company is also finding it difficult to sell clothes that carry the Aeropostale logo, which is one of the company’s core merchandise categories.

Despite the challenges, Aeropostale is moving in the right direction. Speaking at a conference call, CEO Johnson noted that during the third quarter, the company navigated through an intense promotional and competitive retail environment and were able to post better-than-expected earnings. Johnson also noted that the company has undertaken strategic initiatives, which include refining its fashion offerings and brand projection, enhancing processes and technology and investing in future growth drivers.

Aeropostale also hired Emilia Fabricant as EVP for the Aeropostale brand back in August.

Johnson said in the conference call that the company’s P.S. stores had a strong third quarter. Last month P.S. reached 100 stores. The company is also developing licensing relationships with established partners to boost its international presence.

Certainly, Aeropostale is doing all the right things to enhance shareholder value.

Valuation Compelling

YTD, Aeropostale shares have fallen more than 9%. However, the stock’s performance in the last one month has been impressive, gaining more than 13%.

Aeropostale is currently trading at a P/E (ttm) ratio of 17.95, which is significantly lower than Abercrombie & Fitch’s 35.62 and American Eagle’s 22.06.

Aeropostale had a tough third quarter, yet the company still posted better-than-expected earnings. The company is cautious in its outlook for the fourth quarter. However, the company saw encouraging results during the Black Friday weekend, and the fourth quarter could turn out to be better than expected. The company is also taking steps in the right direction to improve its business.  Given all these factors, Aeropostale, despite all the challenges, looks attractively valued at the moment. has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Eagle Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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