Aeropostale Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of teen clothing retailer Aeropostale (NYSE: ARO  ) are spiraling downward by 12% today after a flurry of news came out last night after the bell, including the company's November sales figures, third-quarter report, and fourth-quarter guidance.

So what: Margins and management tell the story here of why Aeropostale is down. Same-store sales figures fell by 1% in November, and the company came up short of Wall Street's expectations by reporting a $0.63-per-share quarter profit when the Street had been looking for $0.66. On top of this, fourth-quarter guidance was on the low end of estimates and co-CEO Mindy Meads, who is the main reason inventory levels have been so well-controlled, announced she is leaving the company to pursue other interests.

Now what: Although it's not prudent to let one month determine the long-term outlook for Aeropostale, I have to say its penchant for discounting to drive sales is definitely beginning to eat into its margins. Competitors Abercrombie & Fitch (NYSE: ANF  ) and J.C. Penney (NYSE: JCP  ) appear to have the stronger pricing power at the moment and could use that momentum to trade higher as we get closer to Christmas. Still, I think patience is the key with Aeropostale. It has shown strong growth over recent years and understands how to control its inventory, but this situation bears watching.

Interested in more info on Aeropostale? Add it to your watchlist by clicking here.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Fool owns shares of Aeropostale.

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  • Report this Comment On December 02, 2010, at 2:52 PM, exdividendday wrote:

    AEO is a mid cap with a market capitalization of roughly USD 3 billion and sales in nearly the same amount as of last fiscal. Net income was USD 169 million. The company is wonderful. Sales tripled and EPS doubled over the past decade. The company pays no dividends, has no long term debt and serves cash in an amount of more than USD 600 million.

    Despite all, AEO is still on my watch list. Here is an interesting comparison of AEO and some more clothing retailer:

    http://long-term-investments.blogspot.com/2010/08/five-appar...

    The average dividend-yield amounts to 2.68 percent and the average P/E ratio is 15.48.

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