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Aeropostale Loss Widens in Q3

Zacks Equity Research

Shares of Aeropostale Inc. (ARO) fell nearly 6.0% in the after-hours trading session following the company’s dismal third-quarter fiscal 2013 results. Battered by weak traffic and higher promotional expenses, Aeropostale reported adjusted loss per share of 29 cents for the quarter. The figure also compared unfavorably with the Zacks Consensus Estimate of a loss of 25 cents.

Including one-time items, the quarterly loss came in at 33 cents per share.

Aeropostale’s top line fell 15.1% to $514.6 million and missed the Zacks Consensus Estimate of $516.0 million. Weakness in certain core categories affected the quarterly sales.

Comparable-store sales (comps) – which include the e-Commerce business – declined 15% in the quarter, reflecting a decline of 10% in transactions and 7% in average unit retail, partly offset by 2% increase in units per transaction. Revenues from e-Commerce that include the GoJane business remained flat year over year.

Cautious spending among teens led to lackluster third-quarter results for Aeropostale and its peers. American Eagle Outfitters, Inc.’s (AEO) reported disappointing preliminary sales and comps results for third-quarter fiscal 2013 on Nov 6, 2013. Net sales for the quarter fell 6% year over year to $857 million but beat the Zacks Consensus Estimate of $834 million. The company is scheduled to report full-fledged earnings on Dec 6, 2013.

Coming back to Aeropostale, gross profit declined 48.0% to $87.9 million while gross margin fell drastically to 17.1%, compared with 27.9% reported in the prior-year quarter. However, excluding one-time items, gross margin contracted 980 basis points to 18.1%, reflecting lower merchandise margins and deleveraging of non-merchandise costs.

Store Update

During the quarter, the company opened 3 Aeropostale and 6 P.S. from Aeropostale stores. Alongside, it closed 4 Aeropostale outlets. In the fourth quarter, the company plans to shut 29 Aeropostale stores, thereby bringing total store closures for 2013 to 46 against its earlier projection of 15–20 store closures for 2013.

For 2014, the company plans to open 11 Aeropostale stores, 5 P.S. from Aeropostale stores, remodel nearly 26 Aeropostale stores and shutter 40–50 Aeropostale stores.  The capital expenditure for 2014 is expected to be around $35 million, mainly owing to store refurbishment and other infrastructural development.  

Currently, the company operates 902 Aeropostale outlets across 50 states and Puerto Rico, 79 Aeropostale stores in Canada and 151 P.S. from Aeropostale stores across 31 states and Puerto Rico.

Balance Sheet & Guidance

Aeropostale, which competes with Abercrombie & Fitch Co. (ANF), ended the quarter with cash and cash equivalents of $68.0 million, with no debt and shareholders' equity of $346.9 million.

Going forward, Aeropostale stated that macroeconomic headwinds, weak traffic and rise in costs as well as competition would weigh on its margins and in turn earnings. Consequently, it expects to report loss per share in the range of 24 cents to 32 cents in the fourth quarter of fiscal 2013. The Zacks Consensus Estimate for the fourth quarter stands at a loss of 12 cents at present and we expect further downward revisions.

Currently, Aeropostale carries a Zacks Rank #4 (Sell). A better placed stock in the retail apparel/shoes sector is Finish Line Inc. (FINL) with a Zacks Rank #2 (Buy).

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