Falling for Cupid's Aero

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Follow the comps. That may sound like a simple strategy to picking winners in specialty retail -- we certainly have a more elaborate growth stock selection strategy in our Rule Breakers newsletter service -- but it does seem to be working. Consider Aeropostale (NYSE: ARO), which posted a 7% spike in same-store sales for the month of March. That's awfully impressive when you consider that those results are stacked on top of a meteoric 14% gain in comps back in March 2004.

I had written about Aeropostale over the holidays in my "Early Adopter Roundup" column that runs monthly in Rule Breakers. Singling out some growing retailers that appeared poised to produce over the seasonally potent January quarter, Aeropostale was an easy consideration. Comps had been strong all year long, and the company was coming off an October quarter that found earnings soaring by 49% on a 25% uptick in sales.

At the time, Aeropostale was guiding investors to expect $1.48 a share in earnings for the year. Backing out lease accounting charges, it ultimately earned $1.52 a share. Is Aeropostale still a bargain now that it is trading at a little more than 20 times trailing earnings?

You bet. Because it is expanding its chain while existing stores are ringing in even higher sales, the company has grown its top line by 33% so far this young fiscal year.

Analysts expect the trendy apparel specialist to earn $1.88 this year -- and $2.28 next year. That prices Aeropostale at 17 times this year's bottom-line target and less than 14 times next year's projected profitability.

Comps matter. You see that spark in other specialty retailers like Urban Outfitters (Nasdaq: URBN) and American Eagle Outfitters (Nasdaq: AEOS). You can also see what declining comps will do by taking a peek at sluggish retailers like Hot Topic (Nasdaq: HOTT).

While there are many ways to ruin strong comps -- poor operating efficiency, for example, or a spike in sales from selling dated inventory at closeout prices -- it's always a great place to start in picking apart the next retailer in your portfolio.

Some more related scenes from the mall:

• Aeropostale's balance sheet has some analysts worried.
• American Eagle has been flying high alongside Aeropostale.
• Hot Topic? Not so hot.
• Check out all of the "Early Adopter Roundup" columns by taking a 30-day free trial of Rule Breakers.

Longtime Fool contributor Rick Munarriz enjoys the mall -- even the food court. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.