Breakout

What you need to know before you buy Aeropostale's enormous dip

Jeff Macke
Breakout

Shares of Aeropostale (ARO) are getting destroyed this morning after reporting a 13% decline in comp store sales and a net loss of of $76.8 million. To the surprise of no one, Aeropostale also lowered guidance for the current quarter and gave some new details on plans to close stores.

Aeropostale shares have lost 4/5 of their value over the last two years and missed analysts estimates by more than 20% in three of the last four quarters. This dismal record begs a question: how on earth can a company "disappoint" investors when everyone already expects them to fail? In the case of Aeropostale they did it by offering the weakest management comments of this bleak earnings period.

Before you buy the dip you need to know why a stock is down. To answer that question let's breakdown how Aeropostale CEO Tom Johnson destroyed investors, embarrassed analysts and most-likely ended his four year run at the top of Aeropostale in just 103 words.

Keep in mind the CEO comment portion of quarterly release follows the results section and sest the stage for guidance. It's a job interview, mission statement and state of the union speech all in one paragraph. Here's how Johnson got started:

As other retailers experienced, the macroeconomic environment was challenging during the first quarter with aggressive promotions, lower mall traffic, and unseasonable weather.

The reference to other retailers right at the top is our first red flag. You don’t grab the mic and start talking about the competition. This was Johnson’s moment and he opened by mentioning the competition then making excuses for Aeropostales problems.

It gets weirder from there. Johnson continues:

While our overall results were disappointing, we were able to exceed guidance and end the quarter with inventories well-controlled.

So after making a strong case for not investing in any specialty retailer anywhere Johnson manages to disappoint and declare victory in one sentence. If losing $76.8 million is a moral victory one shudders to consider defeat. This is a moment for steely determination; not an excuse laden victory lap. Not only is the logic flawed but the numbers don't add up. Aeropostale’s on-line sales actually declined 18%; much worse than the company overall. Every excuse Johnson made should have worked to the benefit of online shopping but e-commerce was actually the worst part of their results.

At this point the press release has already gone from informative to the financial equivalent of watching a NASCAR crash. There's no reason to belabor the point beyond what it means to investors.

The first point is not to ignore the comment section of quarterly press releases. If you're an investor inclined to buy on dips you need to have a catalyst for improvement. There isn't one here. The leader of Aeropostale himself has just told you the industry is horrible and his greatest ambition is keeping losses in check. That's not an investment thesis.

I'm not picking on Tom Johnson personally. He's probably a nice guy with good kids and a friendly dog. But he's been there for four years. These comments aren't out of a context or taken from some Tweet. They are a mission statement. Aeropostale is lost and the guy with the flashlight doesn't see any way out. There are simply better places to put your money.

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