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$34.23 0.71 (2.12%)
2/9/2010 4:00 PM

Aeropostale, Inc. (ARO)

CAPS Rating:
***

The Company is a mall-based specialty retailer of casual apparel and accessories. The Company designs, markets and sells its own brand of merchandise principally targeting 11 to 18 year-old young women and young men.

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What the Community Thinks

Total Members

532 Outperforms
69 Underperforms
 

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15 Outperforms
3 Underperforms
 

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Ticker Tags

Growth (1902), Specialty Retail (131), Teen Clothing (9), Cyclical (3415), Clothing (26), Rule Breakers Universe (125), Consumer Discretionary (795), Small Cap (1645)
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Aeropostale, Inc. At A Glance

Current Price: $34.23
Last Trade Time: 2/9/2010 4:00 PM
Open: $33.90
Previous Close: $33.52
Daily Range: $33.58 - $34.38
52-Week Range: $20.97 - $44.85
Volume: 1,535,081
Market Cap: $2.26B
P/E Ratio: 11.14
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ARO VS S&P 500 (SPY)

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Top Bull Pitch

Recs

1

Aeropostale, Inc. (ARO)

Avatar pseud (97.38) Submitted: 12/09/09 4:06 PM

Aeropostale is standing out as a total value play right now in the beleagured apparel retail sector. It trades at an EV of 10x free cash flow, has no debt and a $285 mm cash cushion on top. What's more - they've consistently been growing their same store sales as well as total sales without compromi...More

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Top Bear Pitch

Recs

1

Aeropostale, Inc. (ARO)

Avatar Saloio (93.01) Submitted: 4/27/09 5:35 PM

Retail sales wiil go down with rising unemployment and ARO stocks will fallow

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CAPS Members

picks per page. CHANGE

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Recs

0

 (ARO)

Avatar ColeKellas (94.87) Submitted: 2/02/10 2:04 PM : Outperform Start Price: $34.66 ARO Score: 1.51

One of best clothing stocks along with: TRLG, COH, GES

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Recs

0

 (ARO)

Avatar ZBov82 (< 20) Submitted: 1/26/10 1:27 PM : Outperform Start Price: $33.85 ARO Score: 3.82

Recommendation Summary:

Aeropostale has a history of solid revenue and earnings growth, improving margins, and repurchasing shares. In addition, the company has a strong value proposition in a down economy and potential for future expansion with the PS from Aeropostale brand. Based on these factors, I rate Aeropostale a BUY with a 1-year price target of $56.00, a 62% upside over the stock’s current price.

Investment Thesis

Strong revenue and EPS growth. Over the past five years, Aeropostale’s earnings and revenue have grown at high rates. During that time, the compound annual growth rate (FY2010 estimated) for revenue was 18.2%, while EPS grew at a 28.6% CAGR for the same period. In addition, EPS growth accelerated during 2010 from 27.8% to an estimated 50.3% (based on $3.37 2010 EPS estimate). These high growth rates are a testament to Aeropostale’s management team, who have led the company to a 54.83% ROE, the brand’s popularity with consumers, and the company’s excellent value proposition.

Strong value proposition in down economy. While the US economy is expected to improve in 2010, the recovery is likely to be quite modest. The Conference Board projects that the unemployment rate will increase to 10.5% by the end of the third quarter. Moreover, the organization expects real GDP to increase only 2% and real consumer spending to grow just .6%. As a result, consumers are likely to continue to seek value when making purchases, a trend that is to Aeropostale’s advantage. The company’s strategy of providing clothing that is fashionable, high-quality, and value-priced has led to great success during a time when most other retailers have struggled. During 2008 and 2009, Aeropostale consistently outperformed its peers (listed in competitors section below) in same store sales. In addition, initial calendar year 2009 sales results show a 17.34% YoY increase for Aeropostale, compared to 9.20% for the next best competitor.

Expansion will help drive future growth. During 2010, management expects to open twenty-five new Aeropostale stores and retrofit forty stores in the United States and Canada. The retailer hopes to improve sales with the retrofitted stores since they have been outperforming stores that have not been retrofitted. In addition, the company expects to open between twenty-five and thirty P.S. from Aeropostale stores this year. The P.S. brand, which targets the 7 to 12-year old “tween” market, offers a significant opportunity for the company. Not only does it offer another revenue source, but it also has the potential to serve as a bridge from the tween to teen market. This benefits Aeropostale in two ways. First, parents of children who currently shop at Aeropostale for their teen will recognize the P.S. from Aeropostale brand name and be more willing to shop at P.S due to brand familiarity and loyalty. Furthermore, as tween children who shop at P.S. grow older, both them and their parents will be more likely to shop at Aeropostale for the same reasons.

Strengthening margins with room for improvement. From FY2006 to fiscal year FY2009, Aeropostale’s operating margin increased by an average of 64 bps each year to 13.17%. In addition, the company’s FY2010 operating margin is expected to further improve by 343 bps to 16.6%. Aeropostale is currently implementing a new inventory management system that was a factor in FY2010’s dramatic margin improvement. Management believes this new tool will serve as a catalyst for future margin improvement as the system is further implemented across the company.

Share buybacks. Aeropostale has shown a commitment to adding shareholder value by repurchasing outstanding shares when there are opportunities available. Since the end of FY2005, the number of diluted shares has decreased 27% from 85.8 million to 66.9 million as a result of the firm’s buyback program. The company has board authorization to purchase an additional $290 million in shares under the plan, which management expects to continue well into the future.

Catalysts

Strong fourth quarter and FY 2010 earnings. Aeropostale will report fiscal year 2010 (February 1, 2009 to January 31, 2010) and fourth quarter earnings in mid-March 2010. On January 7, 2010, the company reported that revenue and same store sales results for December 2010 were above expectations, which prompted the company to raise FY 2010 EPS guidance from $1.20-$1.24 to $1.33-$1.34. A positive earnings surprise and upbeat FY 2011 outlook could send the stock higher when the company reports.

P.S. from Aeropostale success. Management has yet to divulge performance guidance for the P.S. from Aeropostale brand. If those stores are successful, it will give Aeropostale a solid vehicle for future revenue and EPS growth.

International expansion. Aeropostale’s success in the United States and Canada may have raised international interest in the brand. However, management has only licensed the Apparel Group LLC to open a handful of stores in the Middle East so far. Announcements of further international expansion could be a driver for stock price appreciation.

Risks

Discounting at other retailers. With consumer spending remaining tight, Aeropostale’s competitors may engage in increased discounting to move product. This could result in decreased sales and margins for the company.

Failure to meet fashion trends. Success in the apparel industry depends on keeping up with current fashion trends. If Aeropostale fails to recognize and design products that are in style, it will likely experience a deterioration of sales.

Disappointing P.S. from Aeropostale results. Aeropostale’s expansion strategy is highly focused on the P.S. from Aeropostale brand. If the concept is unsuccessful, it could hinder Aeropostale’s future growth.

Management changes. Julian Geiger, Aeropostale’s Chairman and CEO since 1996, will be retiring at the end of January 2010. He will remain Chairman. Effective Geiger’s retirement, Aeropostale will promote President and Chief Merchandising Officer Mindy Meads and EVP and COO Thomas Johnson to Co-CEO.    

Valuation

Aeropostale is currently trading well-below most of its 5-year average multiples. Based on LTM P/E, the company is trading at a 51% discount to its 5-year historical average. In addition, Aeropostale is trading at a discount to its peers. Compared to the peer group average NTM P/E, Aeropostale is discounted 81%.

Using relative valuation and DCF analysis, I valued Aeropostale and determined 1-year price targets based on the following assumptions:

1-Year Price Target: $56 (62% Upside).

Aeropostale’s YoY SSS results slow to a 3.50% annual rate as difficult comparisons prove hard to substantially beat. The company opens a combined 50 Aeropostale and PS stores per year, with PS having moderate success. Gross margin peaks at 38% in fiscal 2011 and remains around that level in the future. SG&A as a percentage of revenue increases 50 bps beginning in FY2011 due to increased advertising costs. This valuation implies a 16.6x multiple of FY2010 EPS of $3.37, which is a 4% discount to the 5-year historical average LTM P/E of 17.4x. DCF analysis is based on a WACC of 10% and a 3% terminal growth rate.

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Recs

0

 (ARO)

Avatar Spectre0011 (< 20) Submitted: 1/18/10 2:45 PM : Outperform Start Price: $34.59 ARO Score: 4.59

ARO is the type of equity that kind of blossoms during times of malaise. If you have any doubt as to "consumer spending", visit an ARO store. Kids will spend....and so do their parents!





Spectre0011


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Recs

0

 (ARO)

Avatar JDKeene (88.86) Submitted: 1/14/10 7:20 AM : Outperform Start Price: $35.05 ARO Score: 4.01

Strong Buy from Ford Equity Research, Q/Q revenue increase, starting to recover from recent pull back forming a cup with handle pattern.

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Recs

0

 (ARO)

Avatar udflyerz (91.58) Submitted: 1/06/10 10:48 AM : Outperform Start Price: $34.23 ARO Score: 5.65

priced for slower growth but should still be a cash cow

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Wall Street

Results 1 - 18 of 18  

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