Don't let it get away!
Help yourself with the Fool's FREE and easy new watchlist service today.
I don't buy poorly made clothes anymore. There was a time when I thought that saving a buck was worth it, but now I've moved into the "quality comes first" phase of my life. Even so, I know my limits when it comes to price, so I was taken aback when I noticed that Aeropostale's (NYSE: ARO ) stock is currently trading at a price-to-earnings ratio of 93. That means that for every dollar Aeropostale earned in income over the last four quarters, investors are being asked to pay $93.
As a point of reference, the apparel store sector's average P/E is 19.
The case isn't that strong
The stock isn't just riding up because of some completely fabricated hope; Aeropostale is doing some good things. Last quarter, the company increased its online sales by 13% over the same period a year ago, proving that it has the ability to manage that channel effectively. More important for long-term investors, Aeropostale is in a great position balance-sheet-wise. The company ended its last quarter with $148 million in cash and no debt.
Unfortunately, less expensive -- in terms of P/E -- competitors can boast a robust cash position, as well. Abercrombie & Fitch (NYSE: ANF ) , for example, has over $130 million in long-term debt, but it also had $555 million in cash at the end of its last quarter. Even better, Gap (NYSE: GPS ) held $1.7 billion in cash, and had no long-term debt, at the end of its last quarter.
So maybe the balance sheet isn't as strong as management would like to think. Luckily, Aeropostale is doing some things with its cash to help the business. The company recently announced an expansion into Mexico, which is a move that many other apparel retailers are starting to make. Aeropostale's push will take it into department stores run by Distribuidora Liverpool, which operates under the Liverpool brand.
The Mexican department store chain also helped launch the Banana Republic brand south of the border. Gap is now moving beyond the department store walls, and into free-standing locations, which is sure to be Aeropostale's long-term plan, as well.
The only reason I see to buy Aeropostale
Back to the clothing reference in the opener, the only reason I can see to splash out on Aeropostale is if you think there's a big chance that the company is going to have resale value -- by being bought out. With a market cap of just over $1 billion, it's not out of the buyable range for a bigger private equity firm. With other retailers going up on the block with good results recently, Aeropostale might be worth if, if you think it's a target.
In order for that to be a real investment opportunity, the stock would need to stay suppressed. Right now, it's 35% off its 12-month high, and 18% off its year-to-date high. That leaves lots of room for it to negotiate an offer, if one comes across the table. Apart from that scenario, I can't see a reason to pick Aeropostale over Gap. Even Abercrombie might be a better play, though the company has had sales slip recently.
For three other great companies in the retail sector, check out the 3 Companies Ready to Rule Retail in The Motley Fool's special report. 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 uncovering these top picks for free today; just click here to read more.