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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.  

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