There are few worse feelings in the social world than being the last person to the party. The chips are gone, all the soda left is diet, and everyone except Stan the IRS auditor has someone to talk to. Over the past few days, investors have been worried that they might be showing up late to the Aeropostale (ARO +0.00%) party.
On Wednesday, BMO Capital upgraded Aeropostale from "market perform" to "outperform." The stock rose 4% over the day, and was up again by midday Thursday. Year to date, Aeropostale is now up 27%, making it one of the stronger performers in its sector. The upgrade was based on BMO's belief that the turnaround at Aeropostale is getting under way sooner rather than later -- let's see if that's true.
Why Aeropostale needs a turnaround
Before we get to the solution, let's look at the problem. While the company is up in 2013, over the last 12 months, it's down 12%. Last year, the company's net sales increased slightly, up 2%, but comparable sales dropped 2%. Hinting at a recovery, that 2% decline was a step in the right direction from the 8% drop that the company managed in 2011.
One of Aeropostale's problems has been its time to market. The company is chasing trends, but by the time its version hits the sales floor, the trend is old. In the last earnings call, EVP Emilia Fabricant said that Aeropostale was working to "create greater flexibility and scale in our sourcing model."
The solution to the problem
In a focus group run by BMO, it seemed that teen customers had already seen a difference in the company's offerings. One was quoted as saying, "There's a lot of fashion, instead of just logo tees." If that's a universal belief, then it would indicate that Aeropostale had already started to make the move from market follower to market leader. That move is meant to shift the company's product mix from all basics to a mix of basics and fashion pieces.
It's very similar to the move that Gap (GPS 2.75%) made starting in 2011. Gap had been discounting heavily, and had been unable to sustain any of the sales momentum that it would occasionally gain. One of the big problems was that the company was seen as a basics provider -- not a place to get fashionable clothing. Flash-forward to this year, and Gap's comparable sales were up 5% over 2012, with customers flocking back to stores.
Another teen retailer, American Eagle (AEO 2.91%), seems to be in the early stages of a rebound. The company reported a 9% increase in comparable sales over 2012, with earnings per share up 43%. While American Eagle still hasn't been able to sustain a rebound in the stock price, it seems to have made the fundamental changes that could sustain growth in the future.
I think that the Aeropostale turnaround is still too early to call. The company has an earnings call at the end of the month, and before I get overly excited, I'll be looking for some growth in the company's comparable sales. Right now, the stock is trading at a P/E of 38, which seems incredibly expensive for a company that hasn't proven itself yet. While good things may be around the corner, the corner is still a long way off.
