Is There No Hope for Aeropostale?

After being slammed by Mr. Market on terrible revenue and earnings results, is Aeropostale nearing the end? If so, should the Foolish investor consider taking a stake in American Eagle Outfitters instead, or is that company worse off?

May 27, 2014 at 5:01PM


Source: Wikimedia Commons

One of the worst-performing stocks on May 23 was Aeropostale (NYSE:ARO). After the retailer reported revenue and earnings that fell far short of what analysts anticipated, shares plummeted 25% to close at $3.41. Even after hours, shares continued to be hit by investor pessimism, shedding an additional 1.5%.

However, now that Aeropostale shares are trading at such a steep discount from their 52-week high of $16.82, does the business present the Foolish investor with an attractive prospect? Or would a stake in American Eagle Outfitters (NYSE:AEO) make more sense?

Aeropostale let investors down big time!
For the quarter, Aeropostale reported revenue of $395.9 million. Results handily missed the $410 million analysts anticipated and came in more than 12% below the $452.3 million management reported for the year-ago quarter. According to the company's earnings release, the main drag on its disappointing results was a 13% fall in comparable-store sales coupled with a 2% reduction in store count.


Source: Aeropostale

From an earnings perspective, Aeropostale's results were even worse. For the quarter, management reported a loss per share of $0.98. This was significantly worse than the $0.72 loss Mr. Market wanted to see and the $0.16 loss the company was hit with during the first quarter of 2013. This decline was due, in part, to its drop in sales but was also attributable to the business' cost of goods sold falling from 77.6% of sales to 82.2%, while restructuring costs rose from zero to 8.7% of sales.

Aeropostale's not looking pretty, but is American Eagle any better?
Over the past few years, Aeropostale has been something of a disappointment to its shareholders. Between 2009 and 2013, the retailer saw its revenue fall 6% from $2.2 billion to $2.1 billion. This decrease stemmed from an aggregate comparable-store sales decline of 12% during this period that was partially offset by an almost 16% increase in store count from 952 locations to 1,100.

From a profitability perspective, the company's metrics have been even worse. Over the past five years, Aeropostale's net income of $229.5 million turned into a loss of $141.8 million as booming costs and lower sales negatively affected the business' bottom line. The largest contributor to the company's net loss in 2013 was its cost of goods sold, which jumped from 62% of sales in 2009 to 82.9% by the end of last year.

ARO Revenue (Annual) Chart

Aeropostale revenue (annual) data by YCharts

Fortunately for investors, American Eagle looks like it may be a better prospect. During this same time frame, American Eagle managed to grow its revenue by 12% from $2.9 billion to $3.3 billion; an aggregate comparable-store sales increase of 2% outweighed the 1% reduction in store count management reported from 1,075 locations in 2009 to 1,066 by year-end 2013.

Despite seeing its sales inch higher, American Eagle's bottom line has suffered considerably. Over the past five years, the retailer's net income dropped by 51% from $169 million to $83 million; the business' cost of goods sold shot up from 60.1% of sales to 66.3%, and management was forced to book impairment and restructuring charges totaling $44.5 million.

A new hope emerges for shareholders!
In an effort to turn business around, Aeropostale's management team announced on May 27 that it had closed a round of financing with Sycamore Partners.  The deal, which will provide a 5-year $100 million term loan facility and a 10-year $50 million loan facility, will increase the company's liquidity and give it the resources necessary to start turning the retailer around. 

As a sign of approval for the company's strategic decision, Mr. Market pushed the company's shares 15% higher by the end of trading on May 27.  Whether this move by the company will prove successful in turning its operations around can only be seen as time progresses, but the fact that a multi-billion dollar firm is putting so much at stake is a positive sign.

Foolish takeaway
Right now, it's not terribly hard to see why Mr. Market is unhappy with Aeropostale. In addition to missing both revenue and earnings expectations for the quarter, the company has been hit with disappointing results for years now. While this may point to turnaround potential, it also means that there's risk for investors who don't know what they're getting themselves into.

Although its performance hasn't been great by any means, American Eagle might make for a more appealing prospect for Foolish investors. Yes, the company's profitability has suffered lately. But the fact that management has successfully grown revenue over the past five years while continuing to generate a profit suggests that the retailer might make for a safer opportunity than Aeropostale.

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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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