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Aeropostale Meets the Force of Gravity

By Alyce Lomax – Updated Apr 6, 2017 at 8:02PM

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Is this retail stock a bargain?

Almost a year ago, I recommended buying Aeropostale (NYSE: ARO) for our 11 O'Clock Stocks series, through which the Fool put real money into 50 stocks for 50 days. Unfortunately, my Aeropostale pick hasn't worked out well. The company defied the recessionary climate to report consistently strong sales for several years. But in the last 12 months, it's lost a lot of momentum -- and nearly 48% of its stock value.

Last week, the picture worsened. Aeropostale announced that its second-quarter revenue dropped 5%, and its same-store sales plunged 14%. The company also took a machete to its guidance: It now expects second-quarter earnings of $0.02 to $0.03 per share. Aeropostale had previously anticipated earnings of $0.11 to $0.16 per share.

Some of the current pessimism relates to Aeropostale's tough comparisons. In the years ended January 2009 and January 2010, it grew total sales by 18.5% and 18.3%, and generated impressive EPS growth of 27.8% and 54.4%, respectively. That kind of performance in such a tough climate was the exception to the rule in retail.

I wasn't surprised that Aeropostale held up so well in difficult times. It sells trendy clothing to teens at lower prices than many competitors such as Abercrombie & Fitch (NYSE: ANF), a key advantage when money's tight. But once retailers start losing fashion sense and credibility with their core customers, it can be difficult, if not impossible, for them to regain what they've lost.

The company faces plenty of competition for teen clothing dollars. Long-beleaguered American Eagle Outfitters (Nasdaq: AEO) has struggled to turn its fortunes around for about three years now. On the lower-priced end of the spectrum, Rue21 (NYSE: RUE) offers trendy apparel at bargain prices, and tends to deliberately situate its stores next to other value retailers Target (NYSE: TGT), Kohl's (NYSE: KSS), and Wal-Mart (NYSE: WMT). It's seen sales soar nearly 21% over the last four quarters, too.

At this point, Aeropostale's shares look insanely cheap. The stock's trading at less than 7 times forward earnings, and its PEG ratio is just 0.69. However, investors must carefully weigh the risks here. If Aeropostale's losing advantage with teen shoppers, and needs a serious turnaround, its stock could stay grounded for quite some time.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Aeropostale and Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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Stocks Mentioned

Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
Walmart Stock Quote
Walmart
WMT
$130.06 (-2.50%) $-3.33
Target Corporation Stock Quote
Target Corporation
TGT
$152.61 (-0.23%) $0.35
Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$26.30 (-2.34%) $0.63
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27

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

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