Am I a fool for not buying into the hype over at Aeropostale (NYSE: ARO)? The teen apparel retailer posted another remarkable quarter. Earnings and sales soared, improvements in planning and inventory management paid off, and margins improved. As a result, management is feeling thrilled about the upcoming back-to-school season, increasing its guidance for the second quarter.
In the first quarter, Aeropostale increased earnings by 64.4% to $13.8 million. Its sales were up 12% to $275.8 million, with comps inching up 2.5%. Flying high, management increased its guidance for the second quarter. It now expects to earn $0.26 to $0.28 per share, well above current Street estimates of $0.20 per share. So, why am I not ready to take flight with Aeropostale?
First, the retailer suffered a 14% drop in April comps. I realize that's just one month, and the company overcame it and reported positive comps for the quarter, but it also had an easy comparison as last year's second-quarter comps were down 2.9%. Second, if you look closely at the second-quarter projections, you'll see that management expects the numbers to be inflated by $0.04 to $0.06 per share. This is the result of a shift in the calendar year, which moves up the school shopping season into the second quarter. Naturally, that means they are moved out of the third quarter, which sets the table for lackluster results in that period. Finally, the fact that management was so pleased with its "trend-right merchandise" was cause for concern. Of course, teen retailers hope to be up with the latest trends; otherwise, fickle shoppers will quickly take their business elsewhere. However, these trendy companies also have trendy stock prices, which typically fluctuate drastically.
I believe that Aeropostale will either have a misstep or a perceived misstep, prompting the market to take a hefty chunk out of its stock price. Expectations have gotten so high for this company that if it comes in even a penny shy of estimates, it will be treated as if it's nearing bankruptcy. Just look at what happened to Zumiez (Nasdaq: ZUMZ) yesterday. Similarly, Gap (NYSE: GPS) lost its appeal, bebe (Nasdaq: BEBE) lost its trendsetter, and Wet Seal (Nasdaq: WTSLA) is still fighting to resurface after the clubbing it suffered way back in 2004.
Trendsetting retailers offer tremendous upside potential for investors -- and equally tremendous downside. There will always be investors out there willing to take their chances that they'll time it right and be rewarded. Aeropostale looks priced for perfection, and anything short of that will push the stock much lower. Buying under such conditions doesn't sound very Foolish to me.
For the latest on the trendsetters of retail, check out:
Gap and bebe are
Stock Advisor
selections. Gap is also an
Inside Value
recommendation. Zumiez is a
Hidden Gems
pick.
Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article. The Fool has a disclosure policy.
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