Is Aeropostale One of the Best Companies in America?

Motley Fool analysts recently culled through an array of data to yield The 25 Best Companies in America, providing a gathering of best-in-class corporations according to stakeholder-friendly factors. Some companies didn't make the cut, but revealed surprisingly positive elements that many investors may not be aware of. Aeropostale (NYSE: ARO  ) is one of those companies, so let's take a look at why it almost made the list.

New York-based Aeropostale is an apparel retailer that peddles fashionable, low-priced clothing to teens aged 14 to 17. Its P.S. for Aeropostale brand addresses the four- to 12-year-old age group. In the 1980s, Aeropostale originated as a men's brand at Macy's, and the department store company opened the first stand-alone, mall-based Aeropostale store in 1987. Aeropostale went public as its own entity in 2002.

The company's core values include four categories: integrity (do the right thing, be open, honest, and ethical); respect (respect customers, employees and partners; honor our heritage and embrace the future); teamwork (communicate and collaborate; be accountable; empower and encourage each other); compassion (recognize needs; show heart; give, acknowledge, and reward contributions). 

The case for Aeropostale
Employees:
Aeropostale has an interesting not-for-profit program called Aero Cares, which is a fund set up to help employees who experience financial hardship. Aeropostale employees contribute to the fund for their fellow workers. In addition, Aeropostale crept onto Fortune's 100 Best Companies to Work For list at number 97 this year; one reason is a "teen advisory board" through which its workers can make recommendations to management.

Customers: Unlike many teen retailers, which would prefer their young customers to blow their babysitting money (or their parents' bank accounts), Aeropostale is out to provide stylish but affordable, options.

Shareholders: In five years, Aeropostale's growth rate has fallen by 7.62%, although its total revenue growth has increased 10% in that time frame. Its median return on capital has been 49.4%. Although Aeropostale was one of the few retailers that did well during the recessionary period immediately after the financial crisis, its margins began eroding due to higher promotional activity and higher product costs, among other things. In fiscal 2011, business continued going awry,  complete with a decrease in revenue, and a precipitous drop in annual profit.

World: Aeropostale has a Vendor Code of Conduct through which it tries to make sure the people who make its clothes are treated decently, and given healthy and safe working environments. It requires its suppliers to adhere to its rules, and has a factory inspection program. Overseas clothing manufacturing can be an inhumane and unsafe business, so Aeropostale's ahead of many of its retail peers on this factor. Aeropostale also has several initiatives that are part of the Aero Gives program, through which it practices charitable giving to those in need.

The case against
Whatever Aeropostale was doing right in its business sense for many years running has soured in more recent history. The retailer's recent tidings about the fourth-quarter -- the all-important holiday quarter -- sadly showed that a turnaround isn't a foregone conclusion anytime soon. Teen retail is a cutthroat industry, complete with a very fickle customer base that will defect to competitors in the blink of an eye. Macroeconomic difficulties can make it even worse, since parents have fewer discretionary dollars for kids, and teen unemployment has been a major problem for years, as retail jobs have gone to older, more experienced people desperate for work. Despite continued disheartening trends in its business over the last year, Aeropostale inexplicably acquired an online women's fashion retailer called GoJane.com. Maybe it can acquire its way to growth, but that's a risky strategy for any company (and for its shareholders, too). Although the company's apparent respect for teens is an interesting twist, some of its efforts feel like they fall short. The Aero Cares fund for employees beset by hardship is interesting -- but it appears that it relies solely on employee contributions for their fellow workers. Is the company's top brass adding to the kitty, as well? It would be nice to know.

Foolish bottom line
Aeropostale's business strategy has gone off the rails; retail turnarounds aren't easy and, so far, shareholders have seen few signs that this retailer will regain its fashion sense anytime soon. Although Aeropostale has some surprising positive factors, it simply didn't make it into our Top 25 Best-Run Businesses list; the retailer has plenty of areas where it needs to work a whole lot harder.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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