Aeropostale May Stay a High Flyer

06/25/2009 10:41 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer's Investment Research says a popular teen retailer is spreading its wings, and its stock price remains aloft.

[Teen apparel retailer] Aeropostale (NYSE: ARO) is moving into the children's market and recently opened its first P.S. store, which will target the 7- to 12-year-old brothers and sisters of the core Aeropostale demographic.

The company plans to open about nine additional stores, mostly in the New York metropolitan area, during the year. It will also roll out an e-commerce site, www.ps4u.com.

According to [a recent article], [chief executive officer] Julian Geiger stated, "We are taking all of the success of Aeropostale—both operational and merchandising—and making modifications to fit the younger demographic." He believes [that] "there is a void in the market for this demographic of fashionable clothes at value prices. We have the advantage of already having built-in recognition with moms and kids."

The article also contends there is more room for ARO to grow, as it is nowhere near saturation, with only 881 stores in the United States, Canada and Puerto Rico. In comparison, Abercrombie & Fitch has 1,112 stores, and American Eagle Outfitters operates 1,118 stores.

Yes Wall Street remains optimistic. "With very few players expanding, the level of vacancies has continued to creep up at the mall," Eric Beder, analyst at Brean Murray, Carret wrote in a note. "We believe this has offered aggressive players the ability to acquire premium space in strong malls at fair pricing, which should result in stronger returns longer term."

Technically speaking, the shares of ARO have put in a stellar performance since the beginning of the year, gaining more than 112%. In fact, the security has been guided higher by its ten-week moving average since the beginning of January, providing a solid layer of support.

However, there are still signs of pessimism in the stock's sentiment backdrop. The Schaeffer's put/call open interest ratio [was recently] at 1.42, as put open interest outnumbers call open interest among near-term options. This reading is also higher than two-thirds of the readings taken during the past year, pointing to high levels of skepticism.

Short sellers have also flocked to the security in an attempt to call a top to the stock's ascent. Nearly ten million ARO shares have been sold short, accounting for more than 15% of the company's total float. An unwinding of these bearish bets could fuel a significant rally in the shares.

Considering the stock's stellar outperformance of the broad market and fundamental strength, the optimism on Wall Street is to be expected. (The stock closed below $33 Wednesday, slightly under its 52-week high and above its 50-day moving average—Editor.)

Subscribe to the Option Advisor here.

Related Articles on STOCKS