Aeropostale: After A 40% Discount It Might Be Time To Go Bargain Shopping

Aug.23.13 | About: Aeropostale, Inc. (ARO)

Shares of Aeropostale (NYSE:ARO) are getting hammered after the troubled clothing retailer announced poor second quarter results, accompanied by a weaker outlook for the third quarter.

After witnessing a 40% correction over the past three weeks alone, shares offer a possible interesting investment for investors with a long-term horizon and a greater tolerance for risk.

Second Quarter Results

Aeropostale generated second quarter revenues of $454.0 million, down 6.4% on the year before. Comparable sales, including the e-commerce channel, fell by 15%.

Aeropostale reported a net loss of $33.7 million, or $0.43 per share. Losses included a $0.07 per share asset impairment charge, and another $0.02 charge on accounting effects from the stock-based compensation plan.

Adjusted losses came in at $0.34 per share and were greater than expected losses of $0.24 per share.

Looking Into The Results..

The only bright spot were e-commerce activities which saw revenues rise by 22% to $39.0 million. Note that the activities include the revenues from, acquired in November of last year.

As e-commerce revenues don't even make up 10% of total sales, they could by far not offset the 15% drop in comparable sales.

Worse, gross profits collapsed to very unhealthy levels. Gross margins compressed by 740 basis points to just 17.9% of total revenues.

Selling, general and administrative expenses actually rose slightly in dollar terms despite the drop in revenues. As such, negative operating leverage pushed up those expenses by 230 basis points to 27.5% of total revenues.

Consequently, net losses of $33.7 million represented 7.4% of total revenues, indicating the severity of Aeropostale's problems as the company broke even last year.

..And The Future Outlook

For the current third quarter, net losses are seen between $0.21 and $0.26 per share. In comparison, last year Aeropostale reported a profit of $0.31 per share, while analysts were looking for profits of $0.25 per share.

Note that the guidance excludes potential store impairment charges, which will most certainly occur as the company guides for 30 to 40 store closures, up from a previously guided 15 to 20 closings.

Like other retailers, including Abercrombie & Fitch (NYSE:ANF), Aeropostale blames the highly promotional and competitive teen retail environment for the disappointing performance and guidance.


Aeropostale ended the quarter with $100.3 million in cash and equivalents. The company operates without the assumption of debt, for a decent net cash position.

Revenues for the first six months of the year came in at $906.3 million, down 7.8% on the year before. Last year's profits of $10.6 million were reversed into large losses of $45.9 million.

Based on the poor trends I would expect full year revenues to come in between $2.0 and $2.1 billion. Net losses depend heavily on the impairment charges related to store closings, but will most likely increase from year to date losses of $45.9 million.

Trading around $8.75, the market values Aeropostale at merely $680 million, or its operating assets around $580 million. As such, the operating assets are valued at merely 0.3 times annual revenues.

Given the financial difficulties, Aeropostale does not pay a dividend at the moment.

Some Historical Perspective

Long term investors had little pleasure from their investment in the firm. Shares steadily rose from $8 in 2003 to a peak of around $30 in 2010. Unlike many traditional large retailers, the stock peaked after the 2009 crisis. The continued slump in earnings, and now in revenues as well has pushed shares downwards to $8-$9 per share.

Between the calendar year of 2009 and 2012, Aeropostale has increased its annual revenues by a cumulative 7% to $2.39 billion. Given the very poor performance, revenues will fall heavily this year. Net earnings have already fallen from $239 million in 2009 to just $35 million last year, while the company will report a large loss in 2013.

Investment Thesis

After struggling for awhile, Aeropostale seems to have finally woken up, although the poor economic conditions push the business into further turmoil before a recovery can materialize.

The company already warned for this weakness two weeks ago and shares have lost an incredible 40% of their value over the past three weeks, warranting a closer look whether an investment opportunity exists.

The good news is that the company recognizes that it has a problem. It is good to see that inventory levels rose by merely a percent over the past year to $250 million. Furthermore, the company holds $100 million in cash, with no outstanding debt and it is looking to boost cash flows.

Yet the size of the losses, especially when taking restructuring and impairment charges from store closures into account, start to add up. Fortunately many of these charges are not resulting in cash outflows. Key for Aeropostale is to stabilize revenues, boost traffic and rebuild the balance sheet, while making the most of the important holiday fourth quarter.

For now a 10% decrease in traffic, a 5% drop in pricing and a 1% drop in products per transaction are all negative signs. Yet it is these times which offer an opportunity for investors with a higher tolerance for risk.

The journey won't be pleasant and shareholders should expect quite a few bumps on the road ahead. Yet the acknowledgement of the problems, plans to boost traffic and reasonably solid balance sheet give the company time to react.

If you believe in management's capability to stabilize the business and return to profitability, a doubling of your investment in one or two year's time is not unthinkable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.