Back in August, Aeropostale (NYSE:ARO) was carrying around some excess baggage, with its inventories far outpacing revenue growth. Did the company get rid of its weight with its latest third-quarter results? Let's take a look.
The casual-apparel retailer for the teen market saw comparable same-store sales decline 1.5%. However, total revenues were $324.7 million, up 18.2% compared with the same period a year ago. If you're wondering how comps can be down with its top line (net sales) up, I'll explain.
Comps are from the units that have been open for more than year. So even though Aeropostale is seeing less customer traffic for its older and more established stores, it has been able to counter that by opening a bunch of new sites. This time last year, it had 560 stores, and in the latest period it had 668 -- a 19.3% increase. So you can see that the 18.2% increase in net revenues is not all that impressive when the company had to open 19.3% more stores just to get that growth.
And while sales trail behind expectations, inventories are ballooning to worrisome levels. Its merchandise inventory grew by 39.7% versus the year-ago period. Aeropostale's leadership recognizes the problem. CEO Julian Geiger commented, "We remain focused on working through excess inventory and on positioning ourselves appropriately for the holiday season." What this typically means for a retailer is that the company would have to resort to slashing prices to get through excess inventory.
Price reductions, in turn, affect profit margins. In the third quarter, Aeropostale's operating profit margins dropped dramatically to 13% from the 18.7% it achieved in the same period last year.
In a nutshell, what this tells us that Aeropostale may be losing the battle of cool. Does that mean it is time to change out of Aeropostale and sport some Guess? (NYSE:GES) or some other similar investment threads? A stock that has doubled in the past 12 months certainly suggests that Guess? is back in style.
But Aeropostale's stock has this going for it: a reasonable valuation at roughly 13 times forward earnings, compared with expected long-term growth of 20%. Fools should be on the lookout for improvement in the comp sales growth and inventories to prove that this enterprise is back on track with its fickle teen market.
More related Foolishness:
- Is it time to take flight with American Eagle (NASDAQ:AEOS)?
- Abercrombie & Fitch (NYSE:ANF) is in the zone.
- And PacSun (NASDAQ:PSUN) is like, chillin', dude.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
