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Aéropostale, Inc. (NYSE:ARO) is a primarily mall-based specialty retailer of casual apparel and accessories, targeting 14- to 17-Year-old young women and men through its Aéropostale stores and 7- to 12-year-old kids through its P.S. From Aéropostale stores.

The Aéropostale brand was established by R.H. Macy and Company, Inc. (NYSE:M) as a department store private label initiative, in the early 1980s. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to Aéropostale management and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took the company public through an initial public offering and listed its common stock on the New York Stock Exchange.

The company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise; its products can only be purchased in Aéropostale stores and online.The company operates 965 Aéropostale stores and 47 P.S. From Aéropostale stores. In addition, pursuant to a licensing agreement, one of the company's international licensees operates 10 Aéropostale stores in the United Arab Emirates. The company also recently announced a second licensing agreement which will allow the licensee to operated 25 stores in Singapore, Malaysia and Indonesia over the next five years.

Basis
Financial information presented in this report for ARO is based on the company's most recent SEC Form 10-K filing for year ending January 31, as filed with the Securities and Exchange Commission on March 28.

Short-Term Investment Considerations
The stock closed recently at $21.57, with first Resistance at $24.43, a 13% increase from the recent close, second Resistance at $24.59, 14% increase from the recent close, and final Resistance at $31.31, a 45% increase from a recent close. First Support for the stock settled at $20.50, a 5% decline from the recent close.

Long-Term (5-Year Hold) Investment Considerations
In reviewing the company's latest annual financial information, we note that the Current Ratio at 2.17 and the Cash Ratio at 1.23 were both what we consider investment quality. While close to where we like to see it, the Quick Ratio at 1.23 was not at what we consider investment quality levels. One very bright spot for the company was Return On Invested Capital at 94%. While down from FY10, given the very tough economic conditions retailers have faced over the past several years, we were pleased with this metric. We were also very pleased to see year over year growth in Free Cash Flow of 7%, and year over year earnings growth of 20%.

Earnings Growth Valuation
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates. However, we have come to realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.

In the case of ARO, the company had year over year earnings growth of 22%, ending FY11 with earnings of $3.06 per share. With a current PE of 7, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $31.00, if the stock were purchased at its recent close.

Finanical Statement Valuation
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-35 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $20-21 range, a First Sell Target in the $40-41 range, and a Close Target in the $42-43 range. Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $16-17 range.

Considering a recent close of $21.57, an estimated Merger and Acquisition payback of four years (assuming EBITDA remains the same), and Free Cash Flow of $2.61, we think the stock is currently undervalued, and a candidate for additional research for the Wax Ink Portfolio.

Source: Aéropostale, Inc. Stock Analysis