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While I do not recommend staring randomly at 14-17 year olds, it is interesting to note the brands that they are wearing and the trends that dominate the generation's landscape. Gone are the days of simple jeans, shirt, and sneakers, and while this may be for better or worse, the market for fashionable brand names is alive and financially complex. One clothing company that has recently seen a downturn is Aeropostale (NYSE:ARO), a mall-based casual apparel retailer targeting adolescent boys and girls.

Billed as a debt-free company, the company will report third quarter earnings on November 29th, 2012, after a disappointing second quarter that saw a decreased guidance outlook. The stock price has reflected this outlook, closing on October 26, 2012 at $12.28, only $0.16 cents away from its 52-week low. In light of this, this provides an excellent buying opportunity for value investors as the company should make a nice turnaround and provide share price appreciation in the coming months and years.

Stagnant Sales

The company reported neutral second quarter earnings at $0.0 net diluted income per share, for the thirteen weeks ended July 28th, 2012. This disappointed as original estimates called for $0.03 - $0.05 cents per share. With a pre-tax benefit included, the company saw $0.06 diluted income per share for the same period in 2011, but with the benefit excluded, the company saw a loss of -$0.02 cents per share in this period of 2011.

While this may seem like neutral news, it is important to note three items of optimism:

  • The company reported no debt and cash equivalents of $169.9 million.
  • Net sales are up 4% from the same period in 2011, reaching a total of $485.3 million
  • E-commerce revenue is up 27% from 2011, with a total of $31.9 million

Additionally, the Street calls for third quarter earnings to fall between $0.25 - $0.30 for the upcoming earnings call on November 29th. Earnings for the same period in 2011 saw $0.30 earnings per share. Looking at the figures presented, we can conclude that there was no growth observed, and only a slight decrease, from company performance during 2011.

Between the three optimistic points stated above, and the stagnant sales figures, this may not be the best time for Aeropostale, but it is definitely still indicative of a healthy company with no items of particular concern for investors. This fact alone is grounds to begin considering the reasons to invest in Aeropostale.

The Continuing Cycle

It is important to note that unlike many other companies that have continuous growth and sales year-round, some clothing companies, particularly Aeropostale, have cycles, with winter sales being the peak and summer sales reaching lows. This corresponds to the traditional American school year, from September through June, which is generally the target audience for trendy casual apparel retailers, such as Aeropostale. Additionally, the holiday season during winter provides a catalyst for sales increases, as noted in past press releases.

Looking at the company's stock price chart since its IPO in 2002, the PPS tends to follow this trend with varying intensity. Such was the case between 2006-2007, for example, with the PPS reaching a bottom in September 2006 at just under $12, rising to a peak of $21 in May 2007, and then bottoming again in September 2007 between $13-$14. This trend continued again in 2008, 2010, and just last year in 2011.

While the future is never guaranteed, it is reasonable to expect this to possibly happen again, and official company estimates are calling for this trend to continue. Given there are no particularly negative aspects to the core business, and there is no trouble brewing for the company, there are no negative catalysts that could predictably prevent this trend from continuing. Investors should consider this pattern, along with their own due diligence, when considering the potential returns Aeropostale could provide this coming holiday season.

Looking to the Future

The company has several growth aspects that provide hope for the future.

First, the company has recently launched the "P.S. from Aeropostale" series of stores, targeted towards young children. In 2009, it opened 14 new P.S. stores and had plans in 2009 to open 40 new Aeropostale stores, and was ranked the 92nd Fastest Growing Company in the U.S. by CNN Money. Additionally, Aeropostale has licensed international retailers to sell their merchandise, and the company has plans to open 25 retail stores in Asia and currently has continuing growth in Canada. The upcoming conference call should provide updated outlook on its future growth, which is modest and at a healthy pace.

Additionally, its E-commerce sales are actively growing, as evidenced by 27% growth in the last quarter. For all of these reasons, Aeropostale has a bright long-term future, beyond just the upcoming holiday season. The company may ultimately begin to offer a dividend as well, given its lack of debt, large amount of cash on hand, and in the face of dividend-offering competitors, such as American Eagle (NYSE:AEO) and Abercrombie and Fitch (NYSE:ANF). While this is not guaranteed nor has it been suggested yet, it is entirely a reasonable possibility that would offer investors that stick around for the long-term a handsome bonus.

Conclusion

Despite the lack of a dividend, however, given the aspects mentioned above, as well as the upcoming potential increase in sales as the school year kicks into full swing and the holidays approach, Aeropostale presents an excellent buying opportunity for a 6-12 month outlook. This is a dip that is worth buying on, as it has more upside than potential downside, by far.

The company is fundamentally healthy and should increase in share price along with forecasted sales and earnings, as it recently traded at $12.28, near its 52-week low, and at only 16.35 P/E--very reasonable and within the average for its sector. In summary, Aeropostale is a great investment for the upcoming year, and if a dividend is put in place, would provide even more of a bonus to hang on to this fundamentally sound company.

Source: Aeropostale's Stock Is Healthy And Looking To Rise