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Why This Popular Clothing Store Isn't Built to Last

By Joe Tenebruso - Mar 26, 2015 at 8:00AM

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This popular brand could soon disappear.

The teen retail industry is fiercely competitive. It's an arena in which companies must constantly adapt to changing consumer preferences and difficult-to-predict fashion trends. Even the strongest companies can find it difficult to consistently navigate these treacherous waters, and the weaker retailers often disappear completely. Let's dive into the details of one teen retailer investors should probably avoid. 

Struggling to stay competitive
Aeropostale (AROPQ) has been struggling for several years. Last year was particularly brutal for the company, with net sales for fiscal 2014 falling 12% to $1.8 billion as comparable-store sales plummeted 11%. And that's after a 15% decrease in comps in 2013. Aeropostale also suffered a full-year net loss of $206.5 million, or $2.62 per diluted share, as store asset impairment charges, restructuring charges, store closing costs, and employee severance costs all took a toll. 

Unfortunately, it does not appear the situation will improve anytime soon. Management expects an operating loss in the range of $39 million to $45 million in the first quarter of fiscal 2015 and a net loss in the range of $0.53 to $0.61 per diluted share. That outlook does not include the impact of any store impairments, accelerated store closure costs, or real estate consulting fees. That's significant, because the company closed 77 Aeropostale and 115 P.S. from Aeropostale stores during the fourth quarter, and management is considering closing 50 to 75 more Aeropostale stores in 2015. 

Source: Aeropostale. 

Commenting on the difficulties facing the company in the months ahead, CEO Julian Geiger stated in Aeropostale's fourth-quarter press release that the company's "first quarter outlook for 2015 reflects challenging trends as we continue to see softness in consumer demand as a result of weak traffic." Translation: consumer preferences are moving away from Aeropostale, and fewer people are shopping at its stores. A recent survey by respected research firm Piper Jaffray adds more evidence of this trend, with teen girls citing Aeropostale as the No. 1 brand they no longer wear:

Source: Piper Jaffray. 

Aeropostale does not appear to be in immediate danger of a liquidity crisis, as the company ended the year with cash and cash equivalents of $151.8 million and long-term debt of $138.5 million. As of Jan. 31, 2015, Aeropostale also had $116.8 million available under its revolving credit facility. Still, if the company cannot right the ship and shoppers continue to flock to competitors, plunging sales and continued operating losses will eventually take a toll on Aeropostale's balance sheet.

Aeropostale's stock price reflects this worrisome trend: shares have plunged by more than 85% in the past five years.

ARO Chart

ARO data by YCharts.

Yet even at today's depressed price, without many signs that a turnaround is under way in its core retail business, investors might wish to steer clear of Aeropostale's shares.

Joe Tenebruso is portfolio manager of Tier 1 Investments, a Motley Fool Real-Money Portfolio. You can connect with him on Twitter @Tier1Investor. Joe has no position in any stocks mentioned.

The Motley Fool has no position in any of the stocks mentioned. 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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