Aeropostale Earnings Preview

Mar. 7.12 | About: Aeropostale, Inc. (ARO)

Aeropostale Inc. (NYSE:ARO), a retailer of active and casual clothing and accompaniments for youths, is slated to report its fourth-quarter 2011 financial results on March 8, 2012. The current Zacks Consensus Estimate for the quarter stands at 38 cents per share, representing an estimated year-over-year decrease of about 60%. Revenue, as per the Zacks Consensus Estimate, is $809 million.

Third-Quarter Synopsis

Aeropostale reported earnings per share of 30 cents, down 55.2% from the prior-year earnings of 67 cents, but surpassing the Zacks Consensus Estimate of 27 cents.

Moving on to its top-line result, Aeropostale registered a decline of 1% in its total sales to $596.5 million, owing to a 9% decline in comparable store sales. However, the reported revenue came ahead of the Zacks Consensus Estimate of $589 million.

Increased inventory level took a toll on its margins, as the company offered heavy discounts to clear its inventory. Despite these huge discounts, Aeropostale lagged behind its competitor American Eagle Outfitters Inc. (NYSE:AEO) in terms of sales.

Agreement of Estimate Revisions

Of the 24 analysts covering the stock, none revised estimates in either direction in the last 30 days. However, for fiscal 2011, one analyst revised an estimate downward.

Magnitude of Estimate Revisions

Estimates haven’t budged for Aeropostale over the last 30 days, as the risk-reward ratio remained well balanced for the company.

Analysts are of the opinion that the company has right product mix to lure its target customers, which in turn, will bring in incremental sales. However, the company’s increased markdowns and contracting merchandise margins offset the positives.

Mixed Earnings Surprise History

With respect to earnings surprises, Aeropostale has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 2.1% to a positive 33.3%. The average remained at positive 14.1%, indicating that the company has surpassed the Zacks Consensus Estimate by the same magnitude in the trailing four quarters.

Our Take

The company is trying to reposition itself to drive growth by focusing on inventory optimization and cost-containment efforts. Moreover, we believe the company’s e-commerce business provides an enormous scope for growth.

Aeropostale teamed up with FiftyOne, the leading provider of international e-commerce services to the U.S. retailers, to launch its global e-commerce site, Aeropostale.com. The move is highly accretive to the company’s online sales as it will enable Aeropostale to generate additional sales while broadening its existing customer base throughout the world.

However, we remain on the sidelines as we expect revenue growth to remain muted in the coming quarters in the absence of any near-term catalysts. Further, the company’s aggressive inventory offloading stance in order to right-size its inventory coupled with lower average selling price is likely to hurt profit margins.

Currently, Aeropostale retains a Zacks #3 Rank, which implies a short-term (1–3 months) Hold rating.

See also AEO free stock analysis report, ARO free stock analysis report