Today's Buy Opportunity: Aeropostale

Welcome to "11 O'Clock Stock." Here at Fool.com, we'll be finding a new great stock at 11 a.m. ET every weekday for 50 days. Better yet, we're so confident in the picks that we're investing $50,000 of the Fool's own money in them! To hear more about the series, click here to see a video from Motley Fool co-founder Tom Gardner. Can't make it at 11 a.m. ET? Come back to Fool.com, and we'll have the article in our Top Stories section 24 hours a day.

The back-to-school shopping season, a huge sales driver for teen retailers, is upon us. What better time to consider a back-to-school stock pick that's a bargain to boot?

Step right up, Aeropostale (NYSE: ARO  ) .

Aeropostale fast facts

Market Cap

$2.11 billion

Revenue (TTM)

$2.29 billion

Earnings (TTM)

$243.2 million

Price-to-Earnings Ratio

9

Cash/Debt

$312.7 million/$0

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

The teen scene
The back-to-school season is a huge deal for teen retailers, representing roughly $11 billion in sales, according to market research firm NPD. Despite the great pressure on retailers to grab a piece of the back-to-school sales pie, Aeropostale's a great contender for this pivotal sales season and beyond.

The current consumer situation is tough for many retailers. Catering to fickle teen shoppers isn't easy even when times are good, and the current back-to-school shopping season already looks heavily driven by sales and promotions. However, Aeropostale's stellar history of successfully navigating the rotten consumer climate over the last several years, even as other retailers stumbled, is a major part of its investment thesis.

Let's look at the last three completed years of same-store sales for Aeropostale and two teen retail rivals:

Company

FY 2010 Comps

FY 2009 Comps

FY 2008 Comps

Aeropostale

10%

8%

3%

Abercrombie & Fitch (NYSE: ANF  )

(23%)

(13%)

(1%)

American Eagle Outfitters (NYSE: AEO  )

(4%)

(10%)

1%

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Aeropostale has reported extremely impressive same-store sales over the last several difficult years, and arguably stolen market share from its teen retail rivals in the process.

The secrets of Aeropostale
Despite its great performance, this clothier's share price has been smacked down by nearly 20% over the last couple of months. Investors may be missing -- or misunderstanding -- a few important elements about its business:

  1. Mastering the "new normal." Aeropostale has an advantage in these difficult economic times, when even spendthrift teens are watching their wallets. (Unemployment currently stands at 26.1% for 16-to-19-year-olds.) According to Aeropostale's 10-K, "We believe that a key component of our success is our ability to understand what our customers want and what they can afford." This runs counter to mall-based retailers that command higher prices, like Abercrombie and J. Crew (NYSE: JCG  ) , and gives Aeropostale a particular competitive edge in the current economic environment.
  2. Conservative grower. Aeropostale has a healthy cash cushion and no debt. Blockbuster is a perfect poster child for the alarming dangers of highly indebted retailers in difficult economic climates. For another cautionary tale, recall Talbots' (NYSE: TLB  ) debt-laden and ill-fated acquisition of J. Jill.

    That doesn't mean Aeropostale's adverse to trying new concepts to drive growth. It has opened 31 P.S. from Aeropostale stores, aiming for kids in the 7-to-12-year-old age bracket. Retailers like Aeropostale, bolstered by sturdy stockpiles of cash, have a lot more freedom to weather economic storms while still experimenting with new ideas.
  3. Misunderstandings lead to bargains. When the majority of investors misinterpret certain data, they can create a bargain opportunity. Fools shouldn't confuse difficult sales comparisons with difficulties in running a business. Aeropostale has delivered several years of healthy increases in revenue and comps while running circles around competitors and swiping market share. The retailer is a cheap stock for value-oriented investors, currently trading at nine times trailing earnings. That's much less expensive than rivals such as Abercrombie and American Eagle, both of which have suffered from lackluster sales for quite some time, and now trade at 65 and 17 times earnings, respectively.

There are plenty of reasons to avoid retail stocks these days, including cash-strapped consumers and dog-eat-dog competition. Investors should be cautious, even downright picky, about which retail stocks they purchase. However, Fools should consider making an exception for well-run retailers with plenty of cash, great brands, and historical success in bringing customers in the door. With all these strengths under its belt, Aeropostale belongs on investors' stock-picking shopping list.  

Previous recommendations:

Come back to Fool.com Thursday for another great stock pick. There's plenty more great stock advice, and you can find video of each day's recommendation as well! You can also check out previous recommendations' performance.

"11 O'Clock Stock" is sponsored by Motley Fool Stock Advisor. The Motley Fool will wait at least 24 hours after this publication before purchasing shares of Aeropostale. For FAQs on our "11 O'Clock Stock" series, click here.

Alyce Lomax does not own shares of any of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (30)

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.

  • Report this Comment On August 18, 2010, at 11:23 AM, Melaschasm wrote:

    Amazing ROI & ROE, no debt, reasonable P/E and a 4 star CAPS rating. That sounds like enough reason to give a green thumb.

    The only negative I can find is that they are in a fadish industry, and could lose popularity quickly with a few mistakes.

  • Report this Comment On August 18, 2010, at 11:59 AM, mikecart1 wrote:

    AERO is a solid company and I even buy from them regularly. I'm not your typical rich snob. I keep my wardrobe inexpensive and full of new items from places like Target, Wal-Mart, and Aeropostale. You are never too old to buy at AERO. Visit your nearest shop today or shop online at aeropostale dot com!

    Cheers!

  • Report this Comment On August 18, 2010, at 5:53 PM, TMFLomax wrote:

    Thanks for the comments, folks!

    Melaschasm, agreed that all retailers do face the risk that they could make serious fashion missteps. That is one of the risks in teen retail overall. I've been impressed with ARO's comps for the last several years though, it seems like it's been on top of the trends.

    hiddenlevers, you're right that the economic situation is something to take into consideration and I do think investors should be extremely cautious about which retail stocks they choose at the moment. I've gone into more detail about the topic in some of my other articles in the retail sector. However, ARO is one that I do think is a solid one, especially given the current economic situation, since it provides on-trend clothing at cheaper prices than many of its rivals. I think it's a good stock for the so-called "new normal."

    Best,

    Alyce

Add your comment.

DocumentId: 1273591, ~/Articles/ArticleHandler.aspx, 4/16/2014 6:43:11 PM

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