I've got some Aeropostale (ARO) shares, here's my reasoning:
2 things:
1. Credit for bringing this idea to my attention goes to Roark, Rearden, and Hamot Capital Management, I simply dug into it for myself, but the research is really their own
2. SSS = Same Store Sales. If you sell $10 January 2009, but $12 January 2010, that's a 20% SSS increase
Long side:
- Positive SSS leading up to recession, through it, and then following it
- Look at YOY B/S data, they've grown revenue 40% over past 2 years, however inventory has stayed flat, they're managing that really well
- Cash Flow from ops lines up with very well with income statement - earnings are likely of good quality
- Cheap on metrics, 8x 2010 FCF, 10x P/E, etc., versus ANF@ 16x 2010 FCF, P/E on 2010 data is misleading because earnings got killed (Potentially long ARO, short ANF or a basket of the peer group)
- Very clean balance sheet, no long term debt or anything like that, plenty of cash on hand. Metrics improve to 7x FCF and 8-9x Earnings for ARO if you back out their significant cash position
Short case, why it's so cheap:
- Analysts believe people traded down to ARO from ANF and other brands, they will be going back to their brands as soon as consumer incomes rise
- Analysts frequently cite ARO's significant discounting as something that will erode margins
- Not an exciting situation, company is nearing maturity. 900 stores in existence, management believes the optimal amount will be 1000-1100
My counters:
1. If you buy it at a cheap price, it will be priced for both short cases and so if reality falls short of those issues even a little bit, we'll see an upside. If any of the consumers now likes ARO and enjoys wearing it, it's possible that they will stay with the brand or split their shopping between the two stores. I don't think they'll remove the store entirely.
2. They've had significant entire-store discounts for a while, it's what drives people there. It's a part of their strategy to have everything marked down. The numbers we see already have this effect for a long time, it's nothing new, but yes, compared to competitors, they are the ones still "discounting." I believe it's mostly marketing - raise the MSRP, say store is 50% off, etc.
2a (counter to 2) - Their profit margins have been steadily improving for quite a while, that's going to end at some point, so those gains will not continue on a YOY basis. I would assume they face same sourcing pressures that others deal with though, so their cost of manufacturing and sourcing the clothing should move with the market. (Again, go long ARO and short a basket to hedge out these risks)
3. Management actually understands capital allocation and that growing revenue for revenue's sake is not beneficial? This is great, I'd love if every company was this good at it.
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