Aeropostale Hopes to Be Too Cool for School

As much as some people are beginning to worry about the state of the economy and consumer spending, there's an argument to be made that mall-based teen retailers will weather the storm. After all, even the IRS could learn a thing or two from teenagers' ability to whine and wheedle money from their parents. Assuming that holds true, and that Aeropostale's (NYSE: ARO  ) new merchandising efforts hit the sweet spot, this could be a good back-to-school season for this teen retailer.

Judging by the response to this quarter's round of retailer earnings, folks really seem to want to be positive about the retailers -- at least those showing positive sales comps. Otherwise, I'm not really sure how to justify the big reaction to what otherwise struck me as OK, but not great, second-quarter earnings.

Aeropostale's revenue was up 18%, atop a 1% increase in comps. Gross margins, though, were a bit lower, and operating margins were lower as well, despite the contribution of $2 million from the resolution of a vendor dispute. On a stronger note, inventory management seemed a fair bit better this time around, and though management seemed cautious about the third quarter, a chorus of analysts appears to believe that this will be a strong back-to-school season for the company.

If folks want to try to play that strong back-to-school theme through Aeropostale, I think I can get behind that. The company does appear to be moving from a lower-priced fashion-laggard model to a more fashion-forward merchandise assortment, and that should be good for growth. Moreover, the company has a solid return on capital -- not quite up there with Abercrombie & Fitch (NYSE: ANF  ) , CitiTrends (Nasdaq: CTRN  ) , or Zumiez (Nasdaq: ZUMZ  ) , depending on your math, but still in those upper echelons.

All that said, retailing is a tough market where it's not a question of "if" you screw up at some point, but rather "when" you screw up (and maybe "how bad"). Some companies hit the bump, learn, and go back to profitable growth. Other companies, like HotTopic (Nasdaq: HOTT  ) and Gap (NYSE: GPS  ) , seem to hit the bump and then spend some time in the ditch. What all that means to me is that I insist on a nice fat pitch before investing in retails -- one that Aeropostale just doesn't seem to have in its share price today.

For more Foolish thoughts on retail:

Zumiezis a Motley FoolHidden Gemsselection, and Gap has been recommended by bothStock AdvisorandInside Value. Click on any of the names to check out what else those newsletters are recommending.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 515524, ~/Articles/ArticleHandler.aspx, 10/31/2014 6:12:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement