Zacks_Analysts' Blog : Aeropostale Beats, Profit Dips - Analyst Blog

Increased markdowns, lower comparable-store sales and contracting merchandise margins dragged down the third-quarter 2011 results of Aeropostale Inc. (ARO), a retailer of active and casual clothing and accompaniments for youths.

The company reported earnings per share of 30 cents, down 55.2% from the prior-year earnings of 67 cents a share. However, the reported earnings fared better than the Zacks Consensus Estimate of 27 cents a share.

Quarter in Detail

Moving on to its top-line result, Aeropostale registered a decline of 1% in its total sales to $596.5 million, owing to a 9% decline in comparable store sales. However, the reported revenue came ahead of the Zacks Consensus Estimate of $589 million.

Increased inventory level still remains a drag on its margins, as the company is offering heavy discounts to its customers to clear its inventory. In spite of these huge discounts, Aeropostale is falling behind its competitor American Eagle Outfitters Inc. (AEO) in terms of sales.

Amid this gloom, e-commerce business emerged as a ray of hope for the company. Net sales at the e-commerce business marked a jump of 19% year over year to $45.7 million during the quarter under review.

In September 2011, the company teamed up with FiftyOne, the leading provider of international e-commerce services to the U.S.retailers, to launch its global e-commerce site, Aeropostale.com.

The announced strategy will better position the company to offer its international customers a wide range of collections in apparel, including its celebrated hoodies, denims, graphic tees and fashion accessories.

Further, the move is highly accretive to the company’s online sales as it will enable Aeropostale to generate additional sales while broadening its existing customer base throughout the world. Moreover, it will also enhance the visibility and reputation of Aeropostale as a global firm offering great fashion and value.

An increase of 13.8% in cost of sales weighed heavily upon the company’s gross profit results. Gross profit plunged 26.8% year over year to $161.5 million. Gross margin contracted 950 basis points year over year to 27.1%, reflecting increased product costs and higher discounts coupled with the deleveraging of occupancy and depreciation expenses.

Stores Update

During the quarter, the company opened 7 Aeropostale and 6 P.S. from Aeropostale stores.  Aeropostale currently operates 918 Aeropostale stores in 50 states and Puerto Rico and 67 Aeropostale stores in Canada, while it operates 72 P.S. from Aeropostale stores in 21 states. 

Other Financial Details

Aeropostale ended the quarter with cash and cash equivalents of $109.4 million with no debt and shareholders equity of $382.2 million. Moreover, the company incurred $17.6 million in capital expenditures during the quarter under review.

Guidance Update

Following the sluggish results, the company forecasts a conservative earnings result for the fourth of 2011. Aeropostale expects earnings in the range of 35 cents to 38 cents a share for the fourth quarter of 2011, which is well below the earnings of 95 cents registered in the fourth quarter of 2010.

Currently, Aeropostale holds a Zacks #2 Rank, which implies a short-term ‘Buy’ rating (1–3 months).