Aeropostale : Teens and Tweens

06/25/2004 12:00 am EST


Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

"Some $39 billion in annual spending can be attributed to tweenschildren aged 8 to 14 a booming segment of the retail market" says Nancy Zambell, editor of UnDiscovered Stocks. "Another $170 billion is spent by teenagers." Here's a top play on this market.

"Aeropostale (ARO NYSE) is targeted toward 11- to 20-year-olds, and it sells its products exclusively in its own stores. The stores feature a fun environment, with high-energy popular music, visual merchandising, colorful in-store signage, bright lighting, and a well-trained, age-appropriate sales force. Unlike brands such as Abercrombie & Fitch that can put a large hole in your pocketbook, Aeropostale's graphic T-shirts, five-pocket denim jeans, and woven polo shirts sell at prices ranging from $10 to $40, averaging $13 per item. The company changes its promotions and buying strategies on a daily basis to take advantage of emerging trends as well as the fickle tastes of tweens and teens. It updates its floor sets 11 times per year. The company also recently announced a marketing alliance with Mischa Barton, star of the Fox television hit ‘The OC.’

"Aeropostale was developed in the early 1980s by R.H. Macy & Co. The stores quickly grew to number 100, and Federated (Macy's parent company) sold the specialty store division to an executive team and Bear Stearns Merchant Banking in 1998. The company went public in 2002 and has not looked back. Aeropostale has absolutely mushroomed and now has 489 stores in 42 states, with plans to almost double that to around 900 over the next few years, pushing growth especially in the western part of the United States.

"For 2003, the company's results were explosive and record-breaking. Sales for 2003 rose 33.4% to $734.9 million. Net income was up a stunning 73%, to $54.3 million, or $1.40 per share. Same store sales improved 6.6% and cash on hand almost tripled—rising from $50.9 million to $138.4 million. On almost every comparable financial ratio, the company's results are tremendous. For the past five years, its sales growth rate has been more than double its rivals, while its earnings expansion has been more than triple that of its peers. Every profitability measure is far above its competition. The growth opportunities continue to look fabulous for this market. For the next five years, analysts estimate that Aeropostale will grow its revenues by 24% a year.

"The stock is still undiscovered, as only a handful of prominent analysts are covering the company. However, institutional ownership is growing like wildfire, and we have seen 29 top-performing funds adding $48.3 million in shares in the last few months. The shares are currently in a good buying range that is definitely trending upward. Last month, the company split its shares 3-for-2, and doubled its share repurchase program—from $35 million to $70 million. Both earnings estimates and targets are being raised by Wall Street. We believe the shares are going to take off soon. Buy on pullbacks below $26. Our price target is $42 per share."

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