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Shares of Aeropostale (ARO) fell over 11% in Friday's trading session. The specialty apparel retailer focused at teenagers and kids, reported a disappointing set of second quarter results. It furthermore issued a weak outlook for the important back-to-school quarter.

Second Quarter Results

Aeropostale reported second quarter revenues of $485.3 million, up 4% compared to last year. Comparable sales, including the e-commerce channel, were flat for the year. The increase in store space was offset by a decline in average sales per square feet. On average, analysts anticipated the company to report revenues of $484 million. Two weeks ago Aeropostale already warned for a disappointing quarter.

Net income came in at $0.1 million, or $0.00 per diluted share. This compares to an adjusted loss of $1.7 million in the second quarter last year. Earnings came in line with analysts projections.

The company net opened 3 new Aeropostale stores, despite the closure of four stores, bringing the total to 989 stores. It opened 15 new P.S. Aeropostale stores, bringing the total to 97 stores. The expansion resulted in capital expenditures of $20.8 million for the second quarter.

Aeropostale announced that it has $145.2 million available under its authorized repurchase program, sufficient to retire another 15% of shares outstanding.

The company hopes to make up for the disappointing performance by injecting more fashion into its stores, invest in new technologies to increase the speed to market, and invest into the P.S. and e-commerce business.

CEO Thomas Johnson commented,

While we were encouraged by the customer response to our fashion offering, we were disappointed by our overall financial performance for the second quarter. Our core basics business experienced significant pricing pressure due to the highly promotional and competitive retail landscape.

Outlook

The company experienced a soft start to the important back-to-school season. For the third quarter, Aeropostale anticipates diluted earnings per share of $0.25-$0.30. This compares to earnings of $0.30 last year. CEO Johnson notes the sales trend for the important season have been inconsistent so far.

Valuation

Aeropostale ended its second quarter with $170 million in cash and equivalents. The company operates without the assumption of debt. For the first six months of 2012, Aeropostale reported revenues of $983 million. The company reported net income of $10.6 million, or $0.13 per diluted share.

At this rate, the company is on track to report annual revenues of $2.4 billion for its full year of 2012. Earnings could come in at around $50 million, or roughly $0.65 per share. After Friday's plunge, the market values the retailer just shy of $1.0 billion. This values the operating assets of the firm at around $800 million, or around 0.3 times annual revenues. The shares trade at roughly 16 times annual earnings.

Competitor The Children's Place (PLCE) trades at 0.8 times annual revenues, while Carter's (CRI) trades at 1.5 times annual revenues. These competitors trade at 22 and 26 times annual trailing earnings, respectively.

Currently, Aeropostale does not pay a dividend.

Investment Thesis

Year to date, shares of Aeropostale trade with losses of around 20%. Shares were off to a good start and rallied some 50% to a peak of $23 in April, as the company raised the guidance for its first quarter. Shares slid from their highs as the general market witnessed a correction. The real shock came on the 2nd of August, when shares fell from $19 to $13, after the company warned for a soft second quarter.

Shares of Aeropostale have lost roughly 20% of their value over the past five years. Shares have traded within a relatively wide trading range of $10-$30, trading near the lower level at the moment. Over the past years, the company did manage to expand revenues from $1.9 billion in 2008 to $2.3 billion in 2011. At the same time, net profits fell from $150 million to $70 million. The decline in earnings per share, to $1.08 for its full year of 2011, was limited as the company retired a fifth of its shares outstanding.

Investors are not happy as weakness in the second quarter seems to proliferate in the important back-to-school third quarter as well. Aeropostale's profits have been under pressure for years, as consumer spending has not re-bounded to pre-recession levels yet.

That being said, shares trade near their lows of the past decade. At the same time, the company continues to return money to its shareholders by its buyback programs.

Before initiating a long position, I would like to see a positive trigger. An upbeat guidance or third quarter report, might just give me enough confidence to ride the stock for a re-bound.

Source: Aeropostale: Wait For Trigger Before Picking Up This Beaten Retailer