Mea Culpa: Here's One of My Worst Stock Calls

It's really fun and satisfying to talk about investing successes. It's much harder to talk about more unpleasant moments in making predictions and even putting real money behind the best stocks to buy. So in the spirit of discussing a real downer moment for me, I'm going to bring up beleaguered Aeropostale (NYSE: ARO  ) .

Mea culpa.

Aeropostale falls flat
I recommended Aeropostale as a solid buy for investors many times in past years. In fact, it was my choice for our 11 O'Clock Stock series in 2010, during which many Foolish analysts purchased a huge array of stocks with real Fool money.

As of this writing, Aeropostale is one of the worst performers in the series, down 44%. Gulp. (See all the returns here.)

For years, Aeropostale did very well, and during the post-financial-crisis recession, it was one of the few retailers that admirably navigated the difficult retail environment. When I recommended it, I believed that its past performance was a good indicator of its ability to continue excelling. Even as the stock continued its downward trajectory, I didn't fret; I suspected difficult comparisons to the previous good years could have been a major part of the problem.

Unfortunately, that's where I was wrong. Aeropostale's business really has gotten shabby over the course of the last two years. The retailer's margins began to disintegrate as it indulged in higher levels of promotional activity, and as it faced its inability to adequately deal with a spike in the cost of cotton in 2011. Its profits began to plunge as its business execution faltered.

Despite the fact that cotton prices have improved, Aeropostale's results have still suffered all throughout 2012, and the retailer looks no closer to a turnaround even now. Recently, Aeropostale lowered its outlook given disappointing sales and margins during the all-important holiday quarter.

Aeropostale's holiday season ended up a disappointment, with teen customers choosing rivals like Abercrombie & Fitch (NYSE: ANF  ) , which stooped low enough to get more promotional with its merchandise . Unfortunately, if a company like Abercrombie lowers its prices, hitting a lower-cost chain like Aeropostale makes less sense for discerning teen customers. Meanwhile, Aeropostale's misses have allowed rivals to take away market share, possibly for good.

Given how difficult it is for retailers to executive turnarounds, I feel I have to issue a major mea culpa on Aeropostale.

Shopping for retail substitutes
At this point, I wouldn't buy Aeropostale here, given the lack of any meaningful signs of a turnaround thus far. I wouldn't necessarily sell it, either, but investors do need to weigh the fact that retail turnarounds are frankly difficult. They may have to wait a long time for business and share recovery, and there's always the possibility that that may not happen, particularly given macroeconomic factors that remain shaky.

I won't sugarcoat it. Aeropostale has morphed into a risky retail stock in recent years.

For investors who decide to sell and would like a substitute teen retail stock, consider Buckle (NYSE: BKE  ) . Although this mall-based teen retailer has recently suffered some negative sentiment on tough comparisons to its success during the recession, the truth is, its financial performance has been good for years. It's held up far better than Aeropostale has.

In the 12 months ended January 2012, Buckle reported an 11.9% increase in sales to $1.1 billion and an 11.9% increase in net income, to $159 million, or $3.20 per share. Same-store sales also increased 8.4% for the year. Whatever negativity has surrounded Buckle in the last year, it doesn't seem particularly founded given the difficult economic climate.

On the other hand, let's stay away from retail companies that are in even more perpetual states of failed turnaround than Aeropostale. Take Coldwater Creek (NASDAQ: CWTR  ) , which hasn't been able to get itself together for years running. It recently reported worse-than-expected holiday numbers, and the retailer hasn't been profitable on an annual basis since the year ended February 2007.

Putting failure into perspective
As much as I always feel bad and even embarrassed when I've made a rotten call or recommendation for investors, I try to nibble at crow while remembering that no investor is correct 100% of the time.

The hedge fund Thunderdome that's surrounded Herbalife recently provides a fine example. William Ackman, who has taken a short position, and Carl Icahn and Daniel Loeb, who either have long positions or are defending the company, are all highly respected investors, and they have opposing views regarding the stability of that company. One side will be right, and one side will be wrong.

Even the smartest guys (and gals) in the room won't be perfect. None of us will be. We can just try to learn from our mistakes and keep on honing our investing skills with every stumble.

One of my lessons is simply refreshing my memory on how difficult retail turnarounds can be; this is something I already knew but failed to apply in this case. I admit I may have to ask for seconds of crow for saying investors shouldn't sell right now and instead wait patiently for a turnaround. I'm going to keep a close eye and challenge myself to admit if it seems like Aeropostale's beyond a reasonable chance at turnaround.

What do you think? Share your thoughts on Aeropostale's future or your own less-stellar investing calls in the comments box below, and please be kind. Like I said, mea culpa.

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Read/Post Comments (12) | Recommend This Article (25)

Comments from our Foolish Readers

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  • Report this Comment On February 04, 2013, at 2:49 PM, paul1942 wrote:

    Analyst: ARO

    all players 938 out perform,69 under perform

    all star players 261 out perform,11 under perform

    wall street 16 out perform,1 underperform

    Compare BKE

    all players 569 out perform, 59 underperform

    all star players 180 outperform,15 underperform

    wall street 4 outperform, 5 underperform.

    In comparing the two companies ARO and BKE, they show very little reality to either company. BKE continues to out perform and ARO continues to underperform. The stats have little to do with what is really happening. I believe that wall street is simply guessing about ARO and BKE. Like throwing darts.

  • Report this Comment On February 05, 2013, at 7:07 PM, MattC69 wrote:

    ARO announced the resignation of their President today.

    Its going to get worse Alyce, its going to get a whole lot worse... SELL and RUN!!!

  • Report this Comment On February 06, 2013, at 4:17 PM, TMFTomGardner wrote:

    My problem with Aeropostale is that their brand has just never really stood out for me. Abercrombie, American Eagle, Aeropostale. . . there's just too much competition in that general area. I'm sure there are clear distinctions for those who follow these companies closely. . but as a consumer, I can't tell the difference. And as an investor, that worries me.

  • Report this Comment On February 06, 2013, at 4:34 PM, Rake80 wrote:

    I don't understand one thing: Why buy a fickle fashion retailer, when healthcare is so full of wide-moat companies with secular tailwinds? And that is just one sector, there are other compelling sectors too. Retail is tough, fashion even worse...

    Divorsification maybe?

  • Report this Comment On February 06, 2013, at 4:40 PM, TMFLomax wrote:

    Thanks for the update, MattC69. Yet another thing to look into here! Yikes.

    Yeah, Tom, I think ARO had a great advantage in the recessionary time period (it really was amazing how it was doing so well when other retailers were caving -- it and BKE were major anomalies) because of its lower prices for similar clothes, but yeah, now the lack of fashion differentiation is hitting it. *Especially* if a retailer like ANF is at all willing to start being more promotional or sell at lower price points. The fashion is really similar at a lot of the teen retailers. (Not that I'm positive on ANF, quite frankly... a different article for a different day. ;))

    I think companies like URBN and BKE actually have much better differentiation when it comes to their merchandise, but it is a really tough space generally.

    Live and learn! And I'll keep thinking on ARO, particularly given the breaking news on the CEO resignation.

    Alyce

  • Report this Comment On February 06, 2013, at 4:47 PM, TMFLomax wrote:

    Rake80, I have a soft spot for retail because there's a lot you can ascertain and analyze by your own eyes and word of mouth as well as the numbers. (I don't track health care companies, but I'm sure there are readers that would have plenty of thoughts on your assessment of that as a better place for investment dollars!)

    Then again, in the wide scope of apparel retailers, there are few I'm all that crazy about. It's definitely an area where I believe there's opportunity, but also a place to be very selective. In ARO's case, I wasn't picky enough. Also, as I recall its stock had fallen when 11 O'Clock Stock series happened, so I got caught up in thinking it was a bargain. Value trap.

    Best,

    Alyce

  • Report this Comment On February 06, 2013, at 4:56 PM, conifer wrote:

    I'm seeing the CEO news described as retiring, not using the word resigning. Market had no reaction today.

  • Report this Comment On February 06, 2013, at 5:28 PM, TMFLomax wrote:

    Oops, it wasn't the CEO, it was the President. Mea culpa again. ;)

    Alyce

  • Report this Comment On February 07, 2013, at 10:56 AM, margot5664 wrote:

    Aeropostale is part of LIMITED, isn't it?

  • Report this Comment On February 07, 2013, at 11:53 AM, stan8331 wrote:

    I think it's often more instructive to examine failures, vs. successes. As you say, none of us are perfect, and overconfidence is one of the deadliest investing mistakes. Frequent questioning of premises, reexamination of strategies and admission of mistakes is the wise course.

  • Report this Comment On February 07, 2013, at 12:02 PM, MarkEvans24 wrote:

    As much as I like to buy and hold, if tuning around retail is tough, and there is no sign of it, and 10 Best Buys Now come out every month, all of which show promise, I'd sell.

  • Report this Comment On February 10, 2013, at 6:45 PM, rsinj wrote:

    "Aeropostale is part of LIMITED, isn't it?"

    No, they are two different companies. No connection with each other.

    ARO is a public company

    LTD is a public company

    You may be thinking of ANF which was spun off from LTD.

    http://en.wikipedia.org/wiki/Les_Wexner

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