ARO ==> The $$$MR. MARKET$$$ End of Springsteen tour pick

[mrmarket]

Your teenage daughter opens up the doors to her cavernous closet and peers inside With a look of fear she slams the doors shut and screams. No…this isn’t another teen horror movie. She absolutely has nothing to wear. She’ll be so mortified at school today. You tell her, “What are you kidding, look at all these clothes.” She turns up her nose and says, “Geeeeeeeez THOSE clothes….those are so 5 minutes ago!! I need new stuff.” Now it’s your turn to see your college tuition savings fritter away. However there is a solution. You schlep out to the mall with your happy teen queen.

Lower-priced apparel retailer Aeropostale (ARO) has come to the rescue. Today I bought ARO at 28.90. I will sell it in 4 to 6 weeks at 33.39 . Here’s why I like ARO:

ARO’s stock is up 430% over its 52 week low. That’s price momentum for you and we’re not even talking about some bio-tech gene that’s going to make us more virile. We’re talking about just another retail store. Yea….a retail store with pheeeenomenal growth prospects.

When times were tough , ARO’s numbers held up better than those at higher-end teen clothier Abercrombie & Fitch (ANF ), where the figures fell significantly below consensus expectations. The first Aeropostale store was opened in 1987. The company currently operates 427 stores in 40 states

Since ARO has its own brand of clothes, it can follow what the trendy Abercrombie stores are doing and let them waste all the money with marketing and research. ARO then simply mimics their styles at lower prices. At the end of the day, what they are selling is T-shirts, flip flops, shorts and polos…pretty basic stuff.

The stores play popular music so that the teenage girls enjoy hanging out there. Then the moms hang out there because they want to be cool like their kids.

ARO is well positioned to sustain strong back-to-school sales momentum from a favorable response to its fall products, and its ability to chase sales. ARO is cheaper but the kids still like their stuff. Its lower price points and promotional brands mitigate any downside risk in a difficult retail environment. But now things are getting better. Did you see the unemployment numbers today??

Earnings year on year grew about 40% for the 1st and 2nd quarter and the big guns, back to school 3Q and Xmas 4 Q are coming up. I look for some big big BIG numbers from ARO this year.

ANALysts say ARO will make $0.50 this quarter (reporting November 21, 2003). They are smoking crack. With revenues in excess of 200 million, they will easily make $0.70 and Christmas will be out of this world. Remember, last winter was really bad weather in the Northeast, where ARO mostly operates. Their year over year numbers will be HUGE!

My bet is they’ll hit $1.62 in 2003 and, at today’s PE of 28, would translate into a stock price of 45.36. All of the stars are aligned for the cylinders to be pumping. Overall economy is better, same store sales are growing enormously and they are adding new stores.

ARO is a mall-based specialty retailer of casual apparel and accessories that targets both young women and young men aged 11 to 20. The Company provides its customers with a focused selection of active-oriented, fashion basic merchandise. The great thing about this market segment is that the kids make the choices but the parents whip out their credit card. There is lots of purchasing power here.

With a return on equity of 26%, it’s no secret that the kids are shopping at ARO and ruining their parents vacation fund. Since ARO is only in the early stages of their growth, new growth will come more efficiently and a great deal of their fixed costs will be amortized over bigger sales volumes. Furthermore, as ARO grows, they will have more leverage over suppliers that will lower their variable cost structure as well. What’s really exciting is that the growth is accelerating….and they don’t carry any debt…zero…zip…nada.

Return on assets is 14% (vs. Industry average of 7%) indicating that they do a good job picking their sites and managing inventory. Their asset turnover is 3.2 vs. the industry average of 1.8. Pre-tax profit margins are 9.5% vs, Industry average 6.7% which means that their brands carry some extra marketing pizzazz.

So much for what $$$MR. MARKET$$$ thinks…here is what ARO’s big kahuna, Julian R. Geiger, said, "We are very pleased with the vitality of our business in the second quarter. Our sales were driven by above-plan results for both new stores and same stores sales. We executed well, utilized inventory effectively, transitioned into fall assortments smoothly, and
positioned our company for a successful back-to-school."

The company also today updated guidance for the third quarter. For
the third quarter, the company is comfortable with current consensus
of $0.51 per diluted share. Comfortable my eye…can you say $0.70 Julian you sandbagger, you? They are going to open 85 stores this year. That’s 20% growth from new stores alone. Many of the new stores will open west of the Mississippi, where the East Coast-oriented chain has little presence. It's also moving into Texas, Florida and California, states with the greatest number of teens.

The Big Dr. J. used to be CEO of Federated Specialty Stores. That means as ARO grows, he will be more suited to manage the operation and more efficiencies should be expected.

Ask your babysitter if Aeropostale makes cool stuff and see what she says. They make stuff for skinny kids, so I can’t try it on myself.

I am HUGE!!!

$$$MR. MARKET$$$

[tx_damnyankee0]

Ernie,
Thanks! I really look forward to your picks and the great stories you write explaining the company and your reasons for picking it. Keep it up....it brightens up the day.

Ernie,

It looks a bit scary to me when in the last 6 months you see only 21,000 shares purchased by insiders and 28,741,000 shares sold..

84.2% of ALL insider held shares were sold in the last 6 months..

Does insider activity affect your picking? Or are these folks just all buying yachts and summer houses all at once?

I bet you got a winner here, Mr. Market. Your explanation reminds me of my not buying Fila when every kid I saw on the NY subway was wearing and the stock went up. Your explanation also reminds me of a father of a 17 year old girl Guest Market Monitor on a Friday night PBS Nightly Business Report who said that some tech stock would soon be bought by more mutual fund managers because "fund managers are like teenage girls: if one gets the hot new purse, they all have to have it!" Instead of the analogy with a tech stock, you go right to the teenage "gear" company itself. Way to go, Mr. Market.

The previous post in this thread about major insider dumping of shares is hard to disagree with, although I haven't verified the figures myself. For a 6 month trade, it would be a deal killer, but in a few week (or possibly days) trade, there is still some opportunity to milk some upside momentum out of this stock. Watch those trailing stops or at least watch those intraday charts.

Today's run up of over a dollar a share didn't hurt the bullish argument, either.

Mr. Market the ARO write up is so on the money! Do you guys remember the movie SWINGERS (Vince Vaughn and Jon Favreau)? Just like the famous line from the movie: "you are money baby!" This is true for Mr. Market!! Please continue the terrific and enlightening analyses of your picks, they add a genuine view of the company at hand...

All the best cheese and meats!!!

[stenzrob]

Another superb and enlightening write-up, Ernie. Somebody left an extra large Aeropostale sweatshirt at the soccer field this weekend, and I thought about you. Looks like it could be a quick 15% or more for you on this one, with a correspondingly HUGE annualized gain!

[mrmarket]

Originally Posted by stenzrob

Another superb and enlightening write-up, Ernie. Somebody left an extra large Aeropostale sweatshirt at the soccer field this weekend, and I thought about you. Looks like it could be a quick 15% or more for you on this one, with a correspondingly HUGE annualized gain!

Funny you mention this...at the Springsteen concert Saturday night, I saw a whole bunch of kids wearing these plain grey Aeropostale hooded sweatshirts. The things must cost nothing to make but with the "Aero" logo, they sell for $$$. It's nice sometime to be on the right side of a hot fad.

[stenzrob]

Originally Posted by mrmarket

Funny you mention this...at the Springsteen concert Saturday night, I saw a whole bunch of kids wearing these plain grey Aeropostale hooded sweatshirts. The things must cost nothing to make but with the "Aero" logo, they sell for $$$. It's nice sometime to be on the right side of a hot fad.

It strikes me as somehow ironic that kids wearing the latest fashion would be going to a Springsteen concert. :P

[mrmarket]

Originally Posted by stenzrob

It strikes me as somehow ironic that kids wearing the latest fashion would be going to a Springsteen concert. :P

They were with their parents...only this time it was the parents making the kids go!! LOL!!