Betting the house on fashion is a dicey proposition, as anyone who has followed fashion stocks can tell you.
Aeropostale (ARO), which sells casual apparel and accessories to teens, is a case in point. For several years, the company thrived by undercutting competitors, such as
Abercrombie & Fitch (ANF), on price. Aeropostale’s stock more than doubled in 2009. But Abercrombie & Fitch slashed its own prices last year.
After underperforming the Standard & Poor’s 500 Index with a gain of 9 percent last year, Aeropostale’s shares plunged 29 percent in the first half of 2011. Given the fickle fates of fashion, this stock may remain high risk for some time.
In May, the company surprised analysts by forecasting fiscal second quarter earnings of 11 cents to 16 cents per share. That paled in comparison to the 27-cent consensus of analysts polled by Thomson Reuters.
"Our outlook for the second quarter reflects our plans to aggressively clear through spring inventories to position ourselves appropriately for the important back to school selling season," Aeropostale CEO Thomas Johnson said in a statement accompanying the earnings report.
“While we are disappointed with our current performance, we are confident that our entire organization is focused on the right initiatives to regain market share.”
Troubling numbers
Aeropostale recorded profit of $16.4 million in the quarter ended April 30, plummeting 64 percent from $45.4 million a year earlier. Revenue rose just 1 percent to $469.2 million.
Analysts see continuing challenges ahead for the company. “We believe ARO's competitive advantage lies in its highly promotional pricing strategy and value positioning,” writes Marie Driscoll of Standard & Poor’s.
“But with the dual headwinds of higher input costs — cotton, labor, and freight — and energy costs, we see margins contracting along with weak demand in the fiscal year ending in January. We think ARO's core value customer is most vulnerable to inflated prices eroding discretionary spending.”
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