You know the retail world is challenging when a 75% surge in profits makes your stock price fall.
That's what happened to Aeropostale (NYSE: ARO), which reported record profits for the second quarter. You would expect the stock price to rise sharply after the company performed so well, especially in an environment where other retailers are struggling. But the market has a few key reasons for its lack of enthusiasm.
Let's quickly break down the numbers. Net income jumped 74.5% to $14.7 million on a gross-margin gain of 470 basis points. There's no denying that's tremendous. Next, we see that total sales increased 13.3% to $311.2 million. Again, very impressive. Then the trouble begins.
Despite the gain in total sales, same-store sales declined 4.1% year over year. Naturally, comps provide a better indication of a company's performance, because they include only locations that are open in the comparative periods.
The company's third-quarter forecast also prompted a cautious response from investors. Aeropostale expects to earn $0.43 to $0.45 per share in the third quarter. That would represent an increase of 5% to 10% over last year's third quarter. That's decent, but the Street was expecting more rapid growth of 20%.
Investors may be reacting somewhat harshly to what is overall very good news. However, that's what happens when a company and its stock price grow as quickly as Aeropostale has. I warned about this possibility after Aeropostale's extraordinary first-quarter results. Despite the impressive earnings gains, underlying problems, including negative comps, have been lurking just beneath the surface.
Like other teenager-friendly retailers, including American Eagle (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF), Aeropostale has seen its stock price knocked lower (by 28%) in the past few months. The other two have already started to recover, while Aeropostale began its descent a little later. It may be worthwhile to keep an eye on this one and see whether it looks like it's ready to start climbing again. After all, it's well-managed, and its products are still in demand. Just be prepared for continuous swings up and down.
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Fool contributor Mike Cianciolo owns shares of American Eagle, but no other company in this article. The Fool's disclosure policy is always snappily dressed.
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