Investing in Aeropostale
Dear teenagers, please just choose one
Aeropostale caters to a fickle group, which is reflected in the stock's performance over the past few years. Just looking at the highlights, the stock price hit $23 and $9 in 2008, ran up to $29 in 2009, then back below $10 in 2011, up to $23 again this year, and now sits at $12 and some change. I can't imagine anyone is having fun on that rollercoaster. But teen fashion comes and goes, and Aeropostale just hasn't been able to lead the pack for any period of time.
Keeping up with the Joneses
Aeropostale has suffered from its inability to move merchandise while the trend is still hot. That's due to the fact that it's been a trendchaser, instead of a trendsetter. The market for t-shirts and "core basics" has become so saturated that the company had to run more aggressive pricing promotions for the items, to get inventory in line with expectations. The remedy for this plight is to increase the speed at which the company can bring core items to market, allowing it to "chase best sellers," according to CEO Thomas Johnson.
That's not the way I like my apparel companies to operate. I'd rather they made best sellers, giving them market dominance right out of the gate. Remember when people only wore athletic apparel to work out? Lululemon athletica
As a result, Lululemon is able to name any price it wants for its clothes, only rarely having to discount them. Last quarter, gross margins came in at 55%, and the company stores increased comparable sales by 25%. That's the power of naming your own price. For investors, it means being at the head of the curve, if you get in early. Once the trend catches on, we play catch-up, just like competitors. Lululemon's forward P/E is now 30, which is rather rich.
The great divide
Looking at ratios across the board, it's clear that Aeropostale is playing in a different league. Like Lululemon, many of the high-end trendsetting companies trade at high P/Es, while the trend followers like Aeropostale sit at the lower end. The difficulty for investors is finding the right balance of growth potential and stability. Growth comes from setting trends, while stability often comes from being able to follow trends without chasing ever new style, every season.
For stability, I can't get enough of Buckle
The bottom line
Looking at the range laid out here, we've got three different ways to get in on apparel retail. You can buy into the rock-solid-but-boring Buckle to play it safe. You can get rocket-boosted growth from Lululemon, though you're going to pay the price for that potential. Or you can try to strike a balance with Gap. But there is no reason I can see to buy Aeropostale. The company is a long way off from having its act together, and the trends aren't looking good.
I'm sold on Gap these days. While Buckle will continue to have a place in my heart, Gap is on a nice rebound, and I continue to be impressed with the work that it's doing. While it didn't make the list this year, Gap could easily be in next year's "Middle-Class Millionaire-Makers" report. The Fool has focused on three stocks that the big boys are overlooking, because the companies are too small or boring. But you can get all the details in this free report.