Is Now the Time to Buy Into an Aeropostale Comeback?

It has been a challenging climate for retailers in recent quarters with too many stores chasing too few customers. Aeropostale (NYSE: ARO  ) , Express (NYSE: EXPR  ) , and even The Gap (NYSE: GPS  ) have all seen the current retail environment impact their bottom lines in the past year.

Among the three companies, though, Aeropostale appears to be feeling the heat the most. Various trends within the industry have helped push Aeropostale's stock price down over 50% in 2014 alone. By comparison, Express and The Gap are down over 21% and up over 2%, respectively.

In recent weeks, Aeropostale has announced several changes intended to help turn the once-thriving teen clothing retailer around. However, is now the time to buy into an Aeropostale comeback?

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Previous quarter's earnings
Aeropostale's fourth-quarter and full-year 2013 earnings release earlier this year was a big reason why the company's stock price has been cut in half. The fourth quarter saw the company's revenue tumble 16% to $670 million, which resulted in a quarterly net loss of $70.3 million. Even worse was the fact that comp sales accelerated downward with a 15% drop versus the 8% fall in the year-ago quarter. For 2013 overall, Aeropostale's revenue fell 12% and the company posted a net loss of $141.8 million.

Express fared slightly better with its fourth-quarter and full-year 2013 earnings. Even with the fourth quarter negative in terms of revenue and net income, net sales for Express for all of 2013 rose 3% to $2.2 billion. However, problems in the fourth quarter as well as the competitive promotional environment throughout the year resulted in net income falling over 16% for the year to $116.5 million.

The Gap's wide brand portfolio, which includes the Banana Republic, Old Navy, Piperlime, Athleta, and Intermix brands, has helped brace the company overall while many peers have struggled. Unlike both Aeropostale and Express, The Gap had a solid 2013 with net sales growing 5% to $16.2 billion, and this resulted in net income being up 11% to $1.3 billion.

At the end of April , Aeropostale laid out the framework for a turnaround strategy which includes closing 125 mall-based P.S. from Aeropostale stores by the end of the current fiscal year, a new focus on off-mall locations and outlets, and an overall workforce reduction strategy.

Credit: Aeropostale

Is now the time to buy into an Aeropostale comeback though?
A first-place ranking in a recent Piper Jaffray study of "top-cited brands that teen girls say they no longer wear" is not where Aeropostale wants to be. Aeropostale was cited 32% of the time, while The Gap was cited just 5%. Express wasn't even listed.

The Piper Jaffray study is another sign of the shift in popularity among teen retailers. Even worse is that teens are no longer loyal to single brands, but instead are now putting together outfits across several different brands.

Aeropostale's recent announcement that it will focus on outlets and newer store concepts may backfire over the long term. Other luxury retailers have seen their outlet stores post faster sales growth than their regular stores in recent quarters. Therefore, even if the new outlet stores succeed, these newer formats may continue to take sales away from the main Aeropostale stores and further hurt the bottom line.

Turning toward Aeropostale's online business, the company hasn't been as successful online as its peers. In 2013, Aeropostale's online business was essentially flat at $218 million, and it fell 12% in the fourth quarter.

What is interesting is that there is an upcoming national 2014 Online Merchandising Workshop taking place in July. The event provides tips, tricks, and tactics for increasing online conversion rates and boosting customer engagement to retailers' online businesses. However, Aeropostale is still not one of the attending companies as of today.

Technology has hurt all clothing retailers. However, given that Aeropostale's target customer base is teens, while Express is aimed at young professionals and The Gap's portfolio covers a much wider age range, Aeropostale is feeling the burden of technology hardest.

The back-to-school purchasing period was once a time when younger kids and teens would revamp their wardrobes so their friends would see what new styles they were wearing after not seeing them during the summer. This was a big plus for clothing retailers.

Now that technology connects everyone 24/7 and you can often meet people more easily through texting or other forms of communication, the back-to-school shopping spree is becoming an obsolete event.

Sales like this are one of the reasons Aeropostale has struggled.  Credit: Aeropostale.com

Upcoming earnings and what to look for
Aeropostale, Express, and The Gap are expected to release earnings later this month. Even though these three companies address slightly different age groups and have different target customers, there is a good chance that the promotional environment will affect their first-quarter bottom lines.

During their recent strategy announcement, Aeropostale reaffirmed that it expects to see significant losses in the first quarter. However, there is a chance that going forward, the company will show a turnaround in progress.

Express recently announced plans to open the first 30 outlets in the company's history this year. At the end of April they opened the first at Tanger Outlets National Harbor in Washington, D.C. In the upcoming earnings call, Express may provide updates on the early performance of this outlet location and news on future locations for the other outlets.  .

Express also opened the largest regular store in the chain's history at the end of March in Times Square, New York. At 28,000 square feet, it is over three times as big as the planned outlet location sizes.  It will be important to see whether the outlets or the bigger footprint stores perform better, not in just the upcoming quarter, but for the rest of the fiscal year. Express may 2014 to test out which direction the company should focus on in upcoming years in the increasingly competitive retail apparel industry.

Lastly, The Gap just released April sales results that may foreshadow positive first-quarter earnings. The Gap, Banana Republic, and Old Navy concept stores showed global comp sales up 3%, 7%, and 18%, respectively. This compares to April 2013 results of 8%, 1%, and 9%, respectively.

Bottom line
Is now the time to buy into an Aeropostale comeback? It is hard to say. Unlike last year, the company is definitely making decisions to address its problems in 2014. However, expectations may need to be readjusted on the exact definition of a 'comeback', given today's retail environment.

Instead of asking if the company will return to its stock price highs of just a few years ago, the real question might be whether it can become a profitable company again and avoid adding to its consecutive quarterly losses, which stand at five right now.

As always, be sure to do your own due diligence before making any investment decisions.

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