Aeropostale's P.S. Kids Brand Creates Investing Opportunity

| About: Aeropostale, Inc. (ARO)
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Earlier this week, teen retailer Aeropostale (NYSE:ARO) reported weakened fourth quarter and full year earnings. There was a bit of bright news during the company's earnings in new growth plans. After being able to compete with other teen retailers American Eagle (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF), the company now appears ready to take on the kids' clothing market.

In the fourth quarter, net sales dropped 1% to $797.7 million. Comparable sales dropped 8% for the quarter, including e-commerce sales. Aeropostale reported a net loss of $0.7 million and a loss of $0.01 per share. Adjusted net income was $19.1 million, good for $0.24 in earnings per share. The company's previous guidance was earnings of $0.20 to $0.24 per share.

In the full fiscal year, Aeropostale did see an increase of 2% in net sales to $2.39 billion. The fourth quarter really hurt sales and earnings. Aeropostale reported adjusted net income of $54.7 million for the full year.

Aerepostale is making strides in its e-commerce sales. For the full year, e-commerce sales grew 19% to $217.0 million. Fourth quarter e-commerce sales were helped by the acquisition of In the fourth quarter, e-commerce sales grew 16% to $96.8 million. GoJane is a trendy women's clothing and shoe website.

Aeropostale ended the year with a cash balance of $231.5 million. Aeropostale has been using the money to buy back shares and open new stores. In the fiscal year, Aeropostale repurchased 30 million shares at a price of $40.8 million. There is still $104.4 million remaining on the company's buyback program, which could eliminate close to 10% of outstanding shares.

The thing that has me most excited about Aeropostale going forward is its P.S. From Abercrombie brand. This children's brand aimed at kids 4-14 is a huge growth opportunity for Aeropostale. Currently there are 103 P.S. locations in 22 states. Aeropostale owns stores in all 50 states and Puerto Rico, so it has relationships with several malls and could expand this brand into other locations. Aeropostale, who sets their target age at 14-17, also has the opportunity to test P.S. clothing in some of its stores to track customer demand and create a buzz for P.S. products and its e-commerce platform.

For fiscal 2014, Aeropostale plans on opening 60 P.S. locations. In fact, the majority of the company's expansion will come from the P.S. brand. Other plans call for 14 new Aeropostale, 30 remodels on existing Aeropostales, and the closing of 15-20 existing locations.

With only 103 locations, Aeropostale has plenty of room to growth this brand. In fiscal 2014, the brand will almost double to 163. Aeropostale has 906 locations and P.S. could someday have the same number of locations.

Justice, owned by Ascena Brands (NASDAQ:ASNA), has over 900 stores in the United States. Justice targets girls aged 7-14 and is dominant in its demographic. Aeropostale has the benefit of strong mall relationships and cross promotional capabilities. Parents familiar with Aeropostale and their low priced tee clothing shouldn't have a problem testing out P.S. for their younger children.

In the first quarter, Aeropostale expects a net loss of $0.15 to $0.20 per share. Analysts expect the company to post a loss of $0.16 in the first quarter. Analysts see Aeropostale posting earnings per share of $0.51 for the current fiscal year. Revenue is expected to come in relatively flat to $2.38 billion. Analysts are more bullish on fiscal 2015, where they expect revenue to increase 5.2% to $2.50 billion and earnings to grow to $0.75 per share.

With over $230 million in cash and no long term debt, Aeropostale will continue to be a rumored buyout target. The company has a clear growth target and a chance to increase sales significantly with the addition of P.S. stores across the country. Shares trade at $13.52, which is near the bottom of their 52 week range ($11.76 to $23.05). Consider putting this teen retailer in your portfolio.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ARO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.