Investors seem to think that Aeropostale's (NYSE: ARO) third-quarter earnings just aren't good enough, judging by the stock's drop today. Then again, given the stock's steep climb in recent weeks, maybe that's just a case of the jitters.
The retailer increased net income by 10% to $36 million, or $0.48 per share. Sales climbed 7% to $412.6 million. Lukewarm comps rose 1.9%, versus a 5.6% increase this time last year. In a more heartening aside, Aeropostale expanded gross margin to 34.9%, from 32.9% of sales this time last year. That's particularly good news amid fears of a consumer-spending slowdown.
On the other hand, Aero's inventory did increase more quickly than sales, up 15%. The discrepancy might not be outrageous, but it's nonetheless worth watching.
Even so, it makes little sense for investors to so drastically spurn Aeropostale today. The retailer projected full-year earnings of $1.60 to $1.62 per share, exceeding its targeted annual earnings growth rate of 20%.
That doesn't seem too worrisome, especially since other teen retailers have taken similar hits. American Eagle Outfitters (NYSE: AEO) also recently reported earnings, and while it met Wall Street's expectations, it had similarly tepid comps for the quarter. Investors didn't really care for that news, either. (On the other hand, Abercrombie & Fitch's (NYSE: ANF) recent 15% increase in quarterly net income showed that it was able to beat the negative consumer trends squeezing many retailers.)
After taking a hit earlier this year, Aeropostale's began gaining altitude recently. If you bought it Nov. 1, you would have made an outlandish 30% as of yesterday's crazy rally. It's understandable that some people might want to take their profits now, especially with so much uncertainty about next year's economic outlook. Still, I'm not convinced that Aeropostale's overvalued. It's trading at just 13 times forward earnings -- cheaper than its expected growth rate for next year year -- with a PEG ratio of 0.95.
Wall Street's decision to shoot down Aeropostale on less-than-dire earnings news seems just as silly as the big jump in price the company (and many others) posted yesterday. Long-haul investors are best advised to ignore this stock's recent rollercoaster stunts, selling only if something truly fundamental changes. It's as good a plan as any, and it should come with a lot less airsickness.
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