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Aeropostale Hopes to Be Too Cool for School

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 5:54PM

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A new merchandising strategy holds promise so long as teens keep spending.

As much as some people are beginning to worry about the state of the economy and consumer spending, there's an argument to be made that mall-based teen retailers will weather the storm. After all, even the IRS could learn a thing or two from teenagers' ability to whine and wheedle money from their parents. Assuming that holds true, and that Aeropostale's (NYSE:ARO) new merchandising efforts hit the sweet spot, this could be a good back-to-school season for this teen retailer.

Judging by the response to this quarter's round of retailer earnings, folks really seem to want to be positive about the retailers -- at least those showing positive sales comps. Otherwise, I'm not really sure how to justify the big reaction to what otherwise struck me as OK, but not great, second-quarter earnings.

Aeropostale's revenue was up 18%, atop a 1% increase in comps. Gross margins, though, were a bit lower, and operating margins were lower as well, despite the contribution of $2 million from the resolution of a vendor dispute. On a stronger note, inventory management seemed a fair bit better this time around, and though management seemed cautious about the third quarter, a chorus of analysts appears to believe that this will be a strong back-to-school season for the company.

If folks want to try to play that strong back-to-school theme through Aeropostale, I think I can get behind that. The company does appear to be moving from a lower-priced fashion-laggard model to a more fashion-forward merchandise assortment, and that should be good for growth. Moreover, the company has a solid return on capital -- not quite up there with Abercrombie & Fitch (NYSE:ANF), CitiTrends (NASDAQ:CTRN), or Zumiez (NASDAQ:ZUMZ), depending on your math, but still in those upper echelons.

All that said, retailing is a tough market where it's not a question of "if" you screw up at some point, but rather "when" you screw up (and maybe "how bad"). Some companies hit the bump, learn, and go back to profitable growth. Other companies, like HotTopic (NASDAQ:HOTT) and Gap (NYSE:GPS), seem to hit the bump and then spend some time in the ditch. What all that means to me is that I insist on a nice fat pitch before investing in retails -- one that Aeropostale just doesn't seem to have in its share price today.

For more Foolish thoughts on retail:

Zumiez is a Motley Fool Hidden Gems selection, and Gap has been recommended by both Stock Advisor and Inside Value . Click on any of the names to check out what else those newsletters are recommending.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stocks Mentioned

Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.47 (-4.40%) $0.39
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27
Zumiez Inc. Stock Quote
Zumiez Inc.
ZUMZ
$21.88 (1.02%) $0.22
Citi Trends, Inc. Stock Quote
Citi Trends, Inc.
CTRN
$17.71 (-1.17%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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