Aeropostale, Inc (ARO): Buy
|Recent Price||$ 21.89|
|Market Cap(million)||$ 2,050.00|
|Enterprise Value (millions)||$ 1,750.00|
|Shares outstanding (millions)||94.55|
|Average daily volume||3.7 million|
|52 week low||$ 19.10|
|52 week high||$ 32.24|
|Fiscal year end||Jan 30|
ARO Selected Financials 2002-2010
Year Sales Net Inc EPS FCF Shares 2002 $ 304.77 $ 11.32 $ 0.09 $ (4.35) 125.77 2003 $ 550.90 $ 31.29 $ 0.24 $ 22.80 130.38 2004 $ 734.87 $ 54.25 $ 0.41 $ 67.57 132.33 2005 $ 964.21 $ 84.11 $ 0.65 $ 90.30 129.40 2006 $1,204.35 $ 83.95 $ 0.67 $ 86.10 125.30 2007 $1,413.21 $ 106.65 $ 0.88 $ 132.50 121.19 2008 $1,590.88 $ 129.20 $ 1.15 $ 88.78 112.35 2009 $1,885.53 $ 149.42 $ 1.47 $ 119.10 101.65 2010 $2,230.11 $ 229.46 $ 2.27 $ 280.56 101.08
Note: All numbers in $millions except for EPS
“Aeropostale, Inc. operates as a mall-based specialty retailer of casual apparel and accessories. It designs, markets, and sells merchandise principally targeting 14 to 17 year-old young women and men. The company offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, and outerwear, as well as accessories, including sunglasses, belts, socks, and hats. It also offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. In addition, the company sells its products through its e-commerce Website, aeropostale.com. As of March 15, 2010, it operated 895 Aeropostale stores in 49 states and Puerto Rico; 44 Aeropostale stores in Canada; and 15 P.S. from Aeropostale stores in 6 states. The company was formerly known as MSS-Delaware, Inc. and changed its name to Aeropostale, Inc. in February 2000. Aeropostale, Inc. was founded in 1987 and is headquartered in New York, New York.” – Source: Yahoo Finance
Valuation (Is it cheap?)
|P/E (5 year avg)||17.00|
|EV / OCF||5.4|
|EV / EBITDA||3.7|
- ARO trades at 9x TTM P/E which is a discount to market multiple of 14x TTM earnings ( as well as its historical P/E)
- ARO sports a FCF multiple of 8x.
- ARO is only 15% above 52 week low of $19.1
Is it good business? (high returns for business and shareholder?)
While there is lot of competition in the fashion retail space, ARO’s line up of fashion sells cheaper than that of American Eagle (AEO) and Abercrombie (ANF). In the last few years, while SSS has declined at both stores, ARO has done extremely well. Some numbers below
- ARO average 5 year ROE: 38%, FCF growth: 11%, CROIC : 28%, shareholder equity : 11%, sales growth : 16%, earnings growth : 30%
Is Management share holder friendly?
+ Regular Share buy-back:
Shares outstanding reduced by 23% from 130 million in 2003 to 100 million in 2010.
“During the first twenty-six weeks of 2010, the Company repurchased 1.4 million shares of our common stock for $39.5 million, as compared to repurchases of 0.6 million shares for $13.5 million during the first twenty-six weeks of 2009. Program to date, we have returned $686.6 million to shareholders in the form of 44.1 million shares repurchased, at an average price of approximately $16 per share. We have approximately $163.4 million of repurchase authorization remaining as of July 31, 2010 under the $850.0 million share repurchase program.”
+ Strong balance sheet:
ARO has had net cash on balance sheet since 2003. ARO has no debt on its balance sheet and in fact has about $300 million in cash which is 15% of its market cap.
- No dividends : Unlike AEO and ANF, ARO currently does not pay a dividend.
- Low insider ownership
Can ARO grow?
- Increase Aeropostale stores overseas. Right now all locations in US and few in Canada and Puerto Rico. Total 900 stores.
- Only 35 P.S from Aeropostale stores.
- Increasing online sales (Total net sales from the Company’s e-commerce business for the second quarter of fiscal 2010 increased 32% to $20.9 million, from $15.8 million in the year ago period.)
What can go wrong?
- Fashion retail is a tough business with fickle customer tastes and preferences. A few years back AEO and ANF were the flavor of the season. ARO could suffer similar fate with mis-steps in execution.
- Heavy discounting by competitors could hurt margins
- Double dip recession could impact consumer discretionary spending
- New concepts P.S targeting school kids could fail. Has lot of competition in that space too.
Summary of 2Q 2010
- EPS grew by 21%($0.46 from $0.38)
- Net Income grew by 13% to $43.6 million from $38.6 million
- Sales increased by 9% to $494.7 million from $453 million.
- SSS increased by 4% compared to increase of 12% last year
- E-commerce sales up 32% to $20.9 million from $15.8 million.
- Opened 8 Aeropostale stores and 14 P.S from Aeropostale stores.
- (closed 1 Aeropostale store).
- Spent $24 million in capex.
3Q guidance: $0.61 – $0.63 per diluted share (last year $0.61)
What expectations are priced in?
I employ a DCF valuation approach to see what expectations are priced in the stock. Assuming a 3% FCF growth for the next 10 years, a 12% discount rate and 2% terminal growth rate, I arrive at a $30 intrinsic value. That presents about a 27% margin of safety. It is worth noting that median FCF growth over multiple year periods over the last 10 years was about 6% and 11% over the last 5 years.
|Sensitivity Matrix: Growth v/s Discount Rate|
|Growth Rates||0%||$ 29.99||$ 28.19||$ 26.58||$ 25.13||$ 23.84|
|2%||$ 33.03||$ 30.96||$ 29.11||$ 27.45||$ 25.97|
|4%||$ 36.44||$ 34.06||$ 31.94||$ 30.05||$ 28.35|
|6%||$ 40.26||$ 37.53||$ 35.11||$ 32.94||$ 31.00|
|8%||$ 44.55||$ 41.42||$ 38.64||$ 36.17||$ 33.95|
Everyone seems to ask for a catalyst for any stock nowadays. I like what Whitney Tilson said recently and I quote “Sometimes the cheapest situations are the ones that everyone agrees are cheap, but there’s no catalyst. We think cheapness is its own catalyst and if you can be patient, sometimes for a year or two, you’ll be rewarded.”
That said I like the fact that management is regularly buying back stock and this should help increase in EPS.
ARO is a good business that is profitable and growing. The management is focused on shareholder returns in the form of share buybacks. The balance sheet is excellent. Business has had good returns on equity and invested capital over the years. Best of all, the valuation of ARO is extremely attractive. I have a Buy recommendation on shares of ARO.
Disclaimer: I am long ARO at the time of publishing this report. My position may change at any time without any further updates. Please conduct your own research before considering an investment. This report is presented as a way to share my research and not as formal recommendation of investment or advice.