I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Aeropostale (NYSE: ARO). Is this casual apparel retailer the real thing? Let's get right to the numbers.

Foolish facts



Motley Fool CAPS stars (out of 5) ***
Total ratings 709
Percent bulls 90.6%
Percent bears 9.4%
Bullish pitches 102 out of 114
Highest rated peers Urban Outfitters, TJX Companies, Ross Stores

Data current as of Oct. 28.

If Fools can't make up their minds about Aeropostale, it's probably because of the fickle nature of teen fashion. Nothing in the financial statements is the least bit suspect.

Sales performance also seems to be on track. Same-store sales increased 3% in September, down from last year's 19% increase but still good considering that, industrywide, comps rose 2.6% last month, according to data from the International Council of Shopping Centers.

If anything, Aeropostale's long-term record of improving free cash flow is reassuring. Too many retailers fail to generate even $1 of cash flow, let alone hundreds of millions over the course of several years, as Aeropostale has.

"Aeropostale literally has the best supply chain management and inventory control I've seen among retailers of the same class. With their lean cost structure, competitive pricing, and solid products, Aero has been doing very well in the older teen's market. It is the hip thing to wear, trust me," Foolish investor KamisterJas wrote last month.

The elements of growth


Past 12 Months



Normalized net income growth 36.6% 54% 17.1%
Revenue growth 14.5% 18.3% 18.5%
Gross margin 44.5% 44% 40.9%
Inventory growth 7.2% 5.2% (7.4%)
Shares outstanding 93.5 million 94 million 100.4 million

Source: Capital IQ, a division of Standard & Poor's.

I can't speak to fashion trends, but this table speaks to our Fool's first point. Aeropostale is well positioned for long-term growth. Let's review:

  • First, Aeropostale is growing normalized net income faster than revenue, a good sign that's at least partly because of a shrinking base of shares outstanding.
  • More importantly, management is proving judicious with inventory. In each of the past three years, inventory has grown at less than half the rate of revenue.
  • Gross margin is also on the rise, another good sign. In this case, it means Aeropostale is keeping a lid on costs instead of discounting itself into oblivion.
  • Add it up and you've got a picture of an efficient organization that Capital IQ says has produced better-than 50% returns on its available capital since 2008.

Competitor and peer checkup


Normalized Net Income Growth (3 years)

Abercrombie & Fitch (NYSE: ANF) (35%)
Aeropostale 29.5%
American Eagle Outfitters (NYSE: AEO) (27%)
Gap (NYSE: GPS) 15.1%
The Children's Place (Nasdaq: PLCE) 3.1%

Source: Capital IQ. Data current as of Oct. 28.

This table helps confirm everything we just learned in the prior table. In short, it proves that Aeropostale is unusual:  A standout performer in an industry that hasn't produced many standout performances recently.

Grade: Sustainable
As growth stocks go, Aeropostale isn't sexy. So be it. There's no doubting this retailer's earnings and cash-generating power. And with the stock trading for a fraction of analysts' long-term projected earnings growth rate, today's price looks like an attractive entry point. I'm therefore compelled to rate Aeropostale to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Aeropostale at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Interested in more info on Aeropostale? Add it to your watchlist by clicking here.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 Fool owns shares of Aeropostale and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.