Peter Mycroft Psaras'  Instablog

 Aeropostale (ARO) is an extremely well managed company that is the premier discount retailer for the teen market.  The company has put up some amazing results in their most recent quarterly and yearly earnings and has beat estimates handily.  This monthly same store sales report  came in at +3% for the month, which when compared to the sales of the same period last year (+1%) comes out to a big beat in my book.

Here is the press release;

http://phx.corporate-ir.net/phoenix.zhtml?c=131103&p=irol-newsArticle&ID=1351663&highlight=

Here are the key points from the release;

“The Company's same store sales increased 3% for the month, compared to a same store sales increase of 1% in the year ago period.”

 

“For the third quarter of fiscal 2009, total net sales increased 18% to $567.8 million, from $482.0 million in the year ago period.” 

 

“Based on the better than expected results for the month, the Company now believes it will achieve net earnings in the range $0.90 to $0.91 per diluted share, compared to its previously issued earnings guidance in the range of $0.84 to $0.85 per share.”

 

“The revised guidance compares to earnings of $0.63 per share in the third quarter last year, representing an increase of 43% to 44%.”

 

 I read the press release this morning and was very impressed as it all sounded great to me. Record October sales, increasing guidance per diluted share and then they are doing so well, that they had to revise guidance +44% from their previous estimates.  To me this sounds like they hit a homerun and I was expecting the stock to be way up today.  I then logged into my computer and saw that they were trading down $5 a share?  What’s this about?

 

Well I went and checked the news and Wall Street analysts had projected them to come in with a sales increase of 13.8%? Now if your sales for the same month last year were up 1%, I think it is irrational to think that the company should beat by such a wild figure. 

 

The markets then took no prisoners and  dropped the stock price 11.99% as a result of this so called miss.  I would assume those who sold their stock today, didn't do their homework on the company and were probably just short term traders.  If they had done their homework they would have seen that the company is trading right now at a 2010 Price to Free Cash Flow number of 10.86 and has a Free Cash Flow Return on Invested Capital (FROIC) of 24.58%.  So for every $1 of invested capital the company is expected to make 23.58 cents of free cash flow in 2010.  For 2011 the company is trading at 10 times its expected Price to Free Cash Flow and its FROIC for that year is estimated to come in at 27%.  So with such numbers how can anyone possibly think of selling this stock?  The answer is that there was an analyst out there today who downgraded the stock.

 

Here is the downgrade;

 

http://finance.yahoo.com/news/Aeropostale-falls-on-apf-3762135647.html?x=0&.v=1

 

“BMO Capital Markets analyst John Morris downgraded the company and said it is likely starting to lose market share to competitors.

"The company reported significantly disappointing October (sales of stores open at least one year) of 3 percent, which leads us to conclude that Aeropostale is at the beginning of a market share-losing cycle," he wrote. "This factor combined with our view that Aeropostale is coming off historically high sales productivity and margin levels leaves us with the outlook that earnings per share growth is likely to decelerate significantly next year."

He downgraded the stock to "Market Perform" from "Outperform" and slashed his yearly earnings estimate to $3.20 from $3.65. Analysts, on average, predict a full-year profit of $3.16 per share.

 

So in trying to understand the logic here;

Where on Earth is their evidence that the company is losing market share to competitors, if the company has raised their guidance estimates for this coming quarter by 44% and net sales for the third quarter increased 18%?

 Along with that where is their evidence of deceleration?  Aeropostale increased sales 3% vs. 1% last year for the month and bumped up their guidance for the quarter an extra 7% from their previous guidance.  Where is the slowdown? 

Mr. Morris dropped his earnings per share to $3.20 for 2009, so that means the stock is now trading at an 11 PE with a FROIC of 25%, a PFCF of 11 and a 2009 Return on Equity of 37%.  Add that the company has zero debt on its balance sheet, has a 10 year annualized sales growth of 27.52% and a 10 year annualized EPS growth of 41.11%. Of course your numbers are going to decelerate, but their sales are still going to go up an estimated 14.83% this year and EPS is expected to go up 44.79% from $2.21 in 2008 to $3.20 in 2009. 

If the company can put up those kinds of numbers in a deep recession, imagine what they will do in a recovery.  The growth rates will decelerate in the future but the stock is only selling at an 11 PE. I would have been worried if it was trading at a 30 PE but 11? Why worry!  

Losing market share to competitors? That's like saying that Wal-Mart (WMT) is losing market share.  I think today’s action was just a complete panic sell off for no reason, because why on earth would you sell a company that is putting up those kinds of numbers?  It is also irrational to raise the bar so high that no company can pass the test. It is unfair to do so, but this is why Wall Street Analysts make the big bucks as they are able to move markets anyway they want as no one does their own research anymore.

Disclosure Long ARO , No position in WMT

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