Did Aeropostale Stock Find Its Bottom?

Teen-oriented retailer Aeropostale (NYSE: ARO  ) briefly touched its 52-week low at the end of last month when it delivered less-than-stellar results for the previous quarter. The company was facing one of the most difficult retail environments in recent memory, along with unfavorable weather conditions, poor store traffic, high promotional expenses, and an all-around forgettable few months. Top-line sales fell from the year-ago level, and the company posted a much wider loss- -- $0.34 per share -- than last year's $0.16 per-share loss. The question now is one that's facing many retailers and their investors: Is the stock at an inflection point and ready for bargain hunters, or is Aeropostale about to fall off the hanger?

Dismal 
Not entirely due to internal issues, Aeropostale's earnings simply stunk this past quarter. Top-line sales dropped 6%, to $454 million, which was actually only marginally lower than analyst estimates. But high promotional fees squeezed margins, and the bottom-line profit came in, as mentioned, at an adjusted loss of $0.34 per share.

Other financial figures looked equally poor. Same-store sales crumbled 15% over the prior year's quarter, even when including the e-commerce sales -- a relative bright spot for the company. Net revenue for that segment grew by 22%, to $39 million, or roughly 9% of the company's total sales.

Looking ahead, management is expecting a third quarter net income loss in the range of $0.21 to $0.26 per share. Aeropostale has also decided to increase its store closures to 30-40 over the fiscal year, up from 15-20.

So, the past quarter, and the coming quarter, both leave little to love about the company, and the full year probably won't end up much better. But what about beyond fiscal 2013 -- will cost cutting and better merchandising make today's stock price a bargain?

Compelling factors 
One thing investors should note about Aeropostale, regardless of its poor performance, is its balance sheet strength. With a little more than $100 million in cash, and zero debt on the books, and a (hopefully) more efficient, streamlined business on the horizon, Aeropostale stock is certainly priced to sell. The company has an enterprise value of roughly $540 million, and last year generated $72.5 million in free cash flow.

Abercrombie and Fitch is cheaper on a trailing EV/EBITDA basis, and while the company holds a little more than $200 million in debt, it, too, appears to be nearing a bottom for its business, and management is cutting costs and store count to compensate for poor sales.

For deep turnaround plays, both Aeropostale and Abercrombie are worthy of a closer look. Most of Wall Street has labeled both stocks relatively untouchable, which is a good sign of better things to come. Still, these are riskier plays that only more experienced deep-value investors with retail experience should consider.

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