Wednesday, August 17, 2011

Aeropostale Losing Promotional Edge. Abercrombie, American Eagle, and Others Tearing Down Margins. But Aeropostale Flush With Cash.

Aeropostale is seriously losing its edge in the promotional business. Competition in the teen apparel industry is increasingly fierce and margins are under intense pressure as Abercrombie & Fitch and American Eagle Outfitters, among others, are embracing discounts and offering more clearance and promotional sales. In addition, cotton prices have rocketed upwards during recent years, and have only now started to show some signs of subsiding.

The stock has fallen below $12 per share recently and investors are anxiously awaiting its next earnings and sales numbers, as last quarter's were atrocious, with both margins and sales tumbling by double digits. So why would any investor still consider owning the company? They have piles of cash still left on their balance sheet, and have no long-term debt whatsoever. Why is no-debt significant? Because when the company makes a dollar in earnings, all of that earnings can be designated towards something that actually improves shareholder value, such as: share-buybacks, capital expenditures, expansion, or dividends to shareholders. In other words, the shareholders actually own the whole company, unlike many businesses, which are owned by shareholders and a conglomeration of banks and creditors.

Financially, the company is healthy, and they are still making a decent profit, so if next quarter's numbers reveal a bump up or stabilization of sales and revenues, this stock will be cheap, very cheap. But until then, fashion is a horribly fickle business and notoriously difficult for the Intelligent Investor to predict. The proof for this company will be in the sales data.

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