Should Shareholders Steer Clear of These 3 Retailers?

After retail stocks fell dramatically over the past week, should shareholders consider buying shares of Aeropostale, American Eagle Outfitters, and/or Dollar General? Or would they be wise to stay away?

Mar 18, 2014 at 8:45AM

During the week of March 9, shares of many retailers fell precipitously as investors realized that brick-and-mortar companies might be on the ropes:

Aro Aeo Dg

Source: Yahoo! Finance.

After seeing stocks like Aeropostale (NYSE:ARO), American Eagle Outfitters (NYSE:AEO), and Dollar General (NYSE:DG) fall so much, should the Foolish investor consider jumping into the fray? Or is there just too much risk to owning these businesses?


Source: Wikimedia Commons.

Aeropostale appears to be in a state of crisis
By Friday, Aeropostale's shares had plummeted 21%. The sharp decline followed an earnings release that illustrated that the core of the company's operations was questionable at best. Aeropostale reported quarterly revenue of $670 million.

This represents a significant shortfall compared to the $797.7 million the business reported in the year-ago quarter, and fell short of the $685 million forecast by analysts. The main drag on the company's lackluster revenue was a 15% drop in comparable-store sales.

In terms of profits, the retailer did even worse. For the quarter, management reported adjusted earnings per share of -$0.35. This was $0.04 lower than analysts anticipated and a world apart from the $0.24 gain the business reported a year earlier. This decline occurred as sales fell but also as the company was unable to reduce its costs at the rate that sales dropped.


Source: Wikimedia Commons.

American Eagle's in free fall
Just like Aeropostale, American Eagle shares experienced a significant decline after the retailer reported a less-than-ideal quarter. During the week, shares fell 11% after the business reported revenue that beat expectations but earnings that were -- at best -- disappointing. For the quarter, American Eagle's revenue came in at $1.04 billion. This represented a slight rise compared to the $1.03 billion forecast by analysts but was 7% shy of the $1.1 billion the business reported a year earlier.

Making matters worse, American Eagle saw its earnings per share come in at $0.05, a whopping 89% below the $0.47 the company reported in the year-ago quarter amid soaring costs. The main hindrance to the business was its cost of goods sold, which rose from 58.8% of sales to 70.6%; management increased its promotional activities and booked losses associated with deleveraging expenses that stemmed from lower comparable-store sales.


Source: Wikimedia Commons

Dollar General goes on sale
Rounding out the retailers was Dollar General (NYSE:DG). For the week, shares of the discount retailer declined 4% after the company reported earnings that fell short of analyst expectations but were nevertheless strong. Compared to the year-ago quarter, the business reported a 7% jump in revenue, from $4.2 billion to nearly $4.5 billion.

This represented a slight miss when placed next to the $4.6 billion Mr. Market anticipated; results were driven, for the most part, by a 6% rise in the number of locations in operation. Another catalyst for Dollar General's growth was the 1.3% rise in comparable-store sales the business enjoyed in spite of poor winter weather.

Where Dollar General fell short, it made up for it in profits. For the quarter, the business reported earnings per share of $1.01. This represents a 4% rise compared to the $0.97 per share reported in the year-ago period, and was in line with estimates. In its earnings release, the company attributed its profit increase to a 3% reduction in shares outstanding after management repurchased $620 million worth of stock throughout its 2013 fiscal year.

Foolish takeaway
Moving forward, it's difficult to tell which of these companies, if any, offer investors strong prospects. However, at first glance, it looks as though Dollar General might deserve a deeper look, as unlike its peers, it's still growing. Meanwhile, Aeropostale and American Eagle may grant the Foolish investor some nice returns if business turns around. But any investment ought to be monitored closely because of the dour earnings reports and the possibility that the picture could worsen.

Are any of these retailers the best of the best?
After watching retailers' shares fall so much over the past week, shareholders might think that now is a good time to buy more of these companies. At such steep discounts to their prices a week earlier, could any of these businesses be the best investment to hold for 2014? Is there a better opportunity for the Foolish investor?

There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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