Shareholders in teen retailer Aeropostale (AROPQ) have likely been feeling a bit queasy given the company's stock price volatility in 2014, most of which has been in a downward direction.  Aeropostale has been hurt by fading customer traffic, a trend that has also hit the businesses of competitors like American Eagle Outfitters (AEO -1.82%) and Tilly's (TLYS -3.94%). 

Exhibit A was the company's latest fiscal quarter, where a double-digit sales decline led to a larger operating loss compared to the prior-year period, which culminated in a sharp subsequent drop for its stock price. On the upside, though, retail-focused investment firm Sycamore Partners saw enough value in Aeropostale to recently lend it $150 million, which bought management time to try to turn around its fortunes. So at a heavily discounted price, is Aeropostale a good bet? 

What's the value?
Aeropostale is one of the major players in the teen retailing space, operating a network of more than 1,000 stores under its Aeropostale and P.S. by Aeropostale brands. The company's historical ability to attract a growing and loyal customer base to its trendy apparel offerings gave it a highly profitable business model that fueled a rapid expansion around the country. Unfortunately, an anecdotal shift in its target demographic's buying habits toward more value-priced apparel lines, like those offered by competitors Forever 21 and H&M, has turned Aeropostale's business model on its head, which led to flatter pricing and sharply diminished profitability. 

A case in point was Aeropostale's performance in its latest fiscal year when it reported a 12.4% top-line decline, which included a dismal 15% drop in comparable-store sales versus the prior-year period. Even worse, a highly promotional selling environment drove the company's gross margin down into the high-teens range. This made earning a profit all but impossible and the company reported a large operating loss for the period. The net result for Aeropostale was poor cash flow, which has led to a quickly disintegrating balance sheet. 

All boats are sinking
Of course, Aeropostale is hardly alone in its current quagmire, and most of the major players in the sector have faced similar operating difficulties. Like Aeropostale, American Eagle Outfitters' business has come under increasing pressure recently because it has not been able to charge premium prices for its branded products, which has led to reduced profitability for the company. 

For its latest fiscal year, American Eagle Outfitters posted decidedly uninspiring results highlighted by a 4.9% top-line decline that was a function of negative comparable-store sales growth, its first negative annual performance since fiscal 2010. While the company remained in the black, unlike Aeropostale, its adjusted operating profitability declined 37.1%. More notably, American Eagle Outfitters' cash flow could not support its required capital expenditures, which has led management to reduce the company's overall store footprint, and this includes the closure of free-standing stores in its Aerie intimates unit. 

Also trending down lately have been the fortunes of Tilly's, an action sports-oriented retailer that has ridden loyal customers to a fast expansion of its store base over the past few years. While the company posted a top-line increase in its latest fiscal year, unlike Aeropostale and American Eagle Outfitters, those incremental sales came at a cost as it posted its lowest gross margin of the past five years. Tilly's financial performance also brings into question its ability to continue expanding its store base at such a fast clip, which has undoubtedly weighed on its flailing stock price. 

The bottom line
Aeropostale is certainly cheaper than it was at the start of the year, after a more than 60% share price decline. That being said, the company is in poor financial health, which only looks set to worsen based on management's forecast for continued operating losses. In addition, the reduced profitability of major competitors in the sector doesn't provide much hope for a quick turnaround at Aeropostale. As such, prudent investors should probably leave this one to the turnaround experts and find greener pastures elsewhere in the retail industry.