Featured Stock: Aeropostale (NYSE: ARO)

By: SumZero Staff | Published: September 11, 2012 | Be the First to Comment

ARO
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SumZero Analysts Following Aeropostale: 28
SumZero Investment Reports on Aeropostale: 15

SumZero Community Sentiment:
82% Long, 12% Hold, 6% Short

SumZero Consensus Price Target:
Mean: $22.63 per share
Median: $25.00 per share

Quick Thesis:
“At a current price of $17 per share, the stock remains at an attractive entry point from a valuation perspective. The herd mentality of sell-side analysts continue to weigh on this stock, and the analysts are missing the opportunity inherent in this turnaround story. Given better inventory management in the future, same store sales should reverse its negative trajectory and move towards a long-term average growth of 2% (combined with continued square footage growth).”

SumZero's Differentiated Market Insight:
“I believe that Aeropostale is fundamentally a turnaround and stabilization story, and after negative free cash flow in the current fiscal year, the company should begin to grow its FCF until reaching a steady growth rate of 1.5% in 2015. Thus I also felt that a DCF analysis would be appropriate in this instance. The company is completely equity financed with a WACC of 11.3% based on a Beta of 1.14, which produces a price target of $24.74. .” Hedge Fund. Palo Alto, CA.

“Clearly, the most important issue is the long-term viability of the Aeropostale brand – it must stay relevant and have a good pulse on teen consumer tastes. The teen environment has grown more promotional and the company is not as well positioned as prior years as Abercrombie & Fitch (NYSE: ANF) and American Eagle (NYSE AEO) have become more aggressive in their pricing, eroding Aeropostale’s value positioning. This year has been a clear fashion miss, and there is no guarantee that any given year will get the merchandising correct. While teen retailing has been a challenging place to operate with several hero to zero stories over the years (Chess King, County Seat), channel checks and customer surveys indicate that Aeropostale still has very positive brand recognition. ” Hedge Fund. San Francisco, CA.

“Improved inventory management should produce better same store sales going forward, improving from a 8.5% drop this year to a 3% drop in 2012 and a reversal into positive territory with a 1% rise in 2013.” Hedge Fund. Palo Alto, CA.

“Given expectations for an upward reversion to the mean for Aeropostale, we see significant EBITDA margin upside from current levels. Consensus estimates see margins troughing at 7.8% in FY2012, and then increasing from there. Assuming the company can achieve ‘best-in-class’ peer average margins of 15.6% on the same revenues levels as consensus FY2013 estimate of $2.42bn, and applying a peer average EBITDA multiple of 5.5x, we arrive at a price target of $27.” Hedge Fund. Raleigh, NC.

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