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Aeropostale (NYSE:ARO)
Gross Margin Trends:

YearGross Margin
200230.5%
200332.3%
200434.2%
200531.6%
200633.9%
200736.6%
200837.2%
200939.9%

The annual gross margin trends (table above) are not only consistent but have gotten better over the years.

QuarterGross Margin
2007 Q135.1%
2007 Q233.7%
2007 Q337.1%
2007 Q438.4%
2008 Q136.0%
2008 Q236.1%
2008 Q338.2%
2008 Q437.8%
2009 Q139.1%
2009 Q239.4%
2009 Q341.5%
2009 Q439.3%
2010 Q142.3%
2010 Q237.3%

I do not see any cause for concern in the quarterly gross margins either.

Sales-per-square-foot data

Here is the information from the company website.

YearSales per sq feetStore CountSame store sales increase
2005$5346714%
2006$5437422%
2007$5458283%
2008$5729148%
2009$62495210%

As can be seen in the table above, sales per square foot have increased each year, along with increase in store count. SSS have done pretty well year over year. The strength in 2008-2009 in SSS (up 8% and 10%), when the rest of the retailers were struggling, is simply superb.

Examine Inventory/Receivable trends

These are changes to sales and inventory over prior quarter.
QuarterSales Inventory
2007 Q1-45.6%6%
2007 Q212.8%40%
2007 Q332.6%27.7%
2007 Q443.3%-29%
2008 Q1-43.1%-1.1%
2008 Q212.1%36.1%
2008 Q327.8%12.6%
2008 Q443.2%-38.9%
2009 Q1-40.9%2%
2009 Q211%55.9%
2009 Q325.3%10.2%
2009 Q441.1%-40%
2010 Q1-42.1%-7.7%
2010 Q26.7%75.6%

ARO does not have receivables to speak of. So, that is excluded.

Sequential change to Sales v/s Inventory on a quarterly basis is quite interesting for a retailer. Q4 is the big sales season for retailers. Typically, there is a buildup in inventory in the first 3 quarters of the year, especially in Q2. The huge sales period in Q4 drives down inventory. So, if you look at 2009 Q4, you will see that sales shot up 41% over Q3 and inventory dropped by 40%. Q1 is always going to see a drop in sales when compared to Q4 of the prior year.

The only negative is that there was a larger than normal increase in inventory in 2010 Q2 (up 75.6%). I went back to past years and saw an increase of 81.6% in 2005 and 89.7% in 2003. So, it has happened in the past. I would expect Q3 to have a much smaller increase in inventory.

Let’s also look at year over year comparisons of sales and inventory

YearSalesInventory
200280.7%-20.6%
200333.4%32.6%
200431.2%31.4%
200524.9%13.2%
200617.3%10.4%
200712.6%34.5%
200818.5%-7.4%
200918.3%5.1%


With the exception of 2007, Sales have grown much more than inventory on a year over year basis. Once again, 2008 and 2009 stand out for the sales growth of 18%.

6. Examine same-store-sales (SSS) data closely

Apparently this is the most important metric in retail sales analysis. Same-store-sales data reveals how a store, or a number of stores, fares on a period-to-period basis. Ideally, an investor would like to see both sequential and year-over-year same-store-sales growth. Such an increase would indicate that the company's concept is working and its merchandise is fresh.

QuarterSSS
2007 Q13%
2007 Q2-4.1%
2007 Q31.9%
2007 Q4+9.2%
2008 Q1+10%
2008 Q2+11%
2008 Q3+7%
2008 Q4+6%
2009 Q1+11%
2009 Q2+12%
2009 Q3+10%
2009 Q4+9%
2010 Q1+8%
2010 Q2+4%

Amazingly, ARO has had only one quarter of decline in SSS on a quarter over quarter basis back in 2007 Q2. While the recent quarter shows a slowdown in the SSS growth, you have to keep in mind that this comes on the back of two monstrous years of SSS growth.

Comparing P/E ratio to expected earnings growth rate.

Yahoo Finance shows a PEG ratio of 0.63. Anything less than 1 for the PEG ratio is considered attractive. This means ARO earnings are poised to grow much faster than the multiple Mr Market has currently put on its earnings.

YearEPS growthSales growthNet Income Diluted Shares
2002166.7%80.7%177%+6.8%
200370.8%33.4%73.5%+2.6%
200458.5%31.2%54.9%-1.8%
20053.1%24.9%-0.1%-2.3%
200631.3%17.6%26.9%-5.7%
200730.7%12.6%21.2%-5.4%
200827.8%18.5%15.6%-9.7%
200954.4%18.3%53.6%-0.4%

The above table shows a highly consistent growth in sales, net income and EPS. You will notice the EPS grows even faster than net income due to the consistent share buyback program as shown in the last column. While I do not expect growth in Sales and EPS to continue at the rates seen from 2002-2009, I would expect a 5-10% increase in sales and a 10-15% increase in EPS. The sales growth should be driven by increase in store count, SSS and sales per square feet as well as the increase in online sales. EPS growth should be higher than sales growth due to the continued share buy-back program and the operating leverage of the business.

Tangible book value

ARO has total equity of $497.5 million. At its current market cap of $2050 million, I arrive at a book value multiple of 4.12. There are no intangibles on the balance sheet. The only negative here is that competitors such as American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF) have a 1.5x multiple of book value compared to 4x of ARO.

Conclusion: I have seen nothing in the above analysis to cause me any concern. On the contrary, all the data shows me a company and management that is functioning well, growing consistently and profitably over several years. I reiterate my buy rating on ARO.

Disclaimer: I have a long position in shares of Aeropostale at the time of publishing this report. My position may change at any time without any further updates. Please conduct your own research before considering an investment. This report is presented as a way to share my research and not as formal recommendation of investment or advice.

Disclosure: Long ARO

Source: Aeropostale: Profitable and Growing, Part 2