Aeropostale Inc. (NYSE: ARO)

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Consumers Love This Trendy Teen Retailer… And Your Portfolio Will, Too

by Jeannette Di Louie, Investment U Research
Friday, January 22, 2010

Investing in retail can be risky these days, unless you invest in clothing retailers, where it’s completely insane.

High jobless rates and continuing economic fears have Western consumers edgy. And since they’re tightening their belts, last year’s pair of slacks will work just fine, thank you very much.

Worse still for the retail sector…

The International Monetary Fund recently warned of a possible double-dip recession.
Two months ago, the U.S. Federal Reserve admitted that unemployment should stay high through 2012.

Even if the U.S. economy did grow during the final quarter of 2009, consumers and investors alike are still apt to be cautious as 2010 unfolds. With finding winning stocks a much more tricky task these days, many investors are getting back to basics, picking according to real value and merit.

Fortunately, retailer Aeropostale Inc. (NYSE: ARO) has both. It proved that last year – and should continue to do so as 2010 progresses.

Aeropostale: Teenager-Tested, Parent-Approved

With over 900 stores across the United States, Canada and Puerto Rico, and a significant, loyal fan base in the 14-17 age group, North American parents would be hard-pressed not to know about Aeropostale. And not just because kids like the store so much. Mom and Dad have a few good reasons to like the clothing company, too.

While too many of its competitors – including Wet Seal Inc. (Nasdaq: WTSLA) and Abercrombie & Fitch Co. (NYSE: ANF) – manufacture expensive and/or provocative apparel for teens, Aeropostale fills its stores with age-appropriate, affordable clothing and accessories, season after season.

Cash-strapped parents and appearance-obsessed middle and high-school students can pick up fashionable Aeropostale jeans for $19.75-$49.50. Polo tops range between $14.99 and $29.50, while you can grab a hoodie for less than $20.

And the self-proclaimed “mall-based, specialty retailer of causal apparel and accessories” keeps most of its revenue too, since it designs and markets everything it sells in its physical stores and online.

In addition, it reduces marketing costs by slapping its label conspicuously on just about every top it sells, usually in very eye-catching colors and bold fonts.

Defying the Recession: Customers, Sales and Market Share All Heading Higher

Over the past 52 weeks, Aeropostale’s stock has ranged from a low of $19.17 to a high of $44.05 – a wide range by most standards, although not uncommon for stocks in 2009. As of Wednesday’s close, it sat at $34.54.

Even throughout the recession, the company has steadily gained customers and market share. But when it reported a mere 3% rise in October same-store sales (stores open at least a year), instead of the 13.8% that analysts predicted, shares nosedived, tumbling $5.39 in a single day.

BMO Capital Markets analyst John Morris wasted little time in downgrading the stock, saying that consumers had begun shifting from Aeropostale to its competitors. And as evidenced by the stock’s further decline, the market seemed to buy into his opinion for a while.

But Aeropostale smashed that negative opinion the very next month when it posted excellent third quarter earnings. For the period…

Net income rose 47% to $62.6 million, compared to a mere $42.6 million during Q3 2008.
Net sales climbed by 18% to $587.8 million.
Same-store sales increased by 10%.
Diluted earnings per share benefited, too, surging by 46% to $0.92.

Aeropostale’s Not Only Trendy… It’s Trend-Busting Too

Aeropostale sustained that strong showing during the holidays, too. From Black Friday 2009 through January 2, 2010, net sales jumped by 17% to $460.8 million, versus the $392.7 million it pulled in during the same period in 2008. And it expects total fourth quarter earnings to perform equally well, hitting $1.33 or $1.34 per diluted share.

Considering the Commerce Department’s recent report that showed a 0.3% drop in overall retail sales in December, Aeropostale is clearly bucking the trend and is among the leaders in the sector.

If Aeropostale can keep increasing its sales – and indications show that it can – there’s a good chance that the stock could climb back up to its 52-week high – and beyond.

Good investing,

Jeannette Di Louie