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ARO Falls Out of Fashion in More Ways Than One

In Monday’s trading on the Bigboard, shares of NYSE component stocks (^NYA) declined nearly half a percent on continued worries about declining oil prices, which have fallen to fresh five-year lows.

Bucking the downtrend, however, shares of Aéropostale (ARO) rose 7.55%, with more than 2.5 million shares changing hands. This compares to the stock’s three-month average volume of just over 2.6 million shares.

The stock closed the day at $2.85, or $0.20 higher than Friday’s close.

The move up came on news that the teen apparel retailer said it achieved higher margins than originally expected for the holiday shopping quarter, which will reduce the company’s expected Q4 2014 losses.

The company iterated that while it still expects to report a loss, the loss is now estimated to be in the range of $0.25 to $0.31 compared with the original estimate of $0.37 to $0.44.

Aéropostale has had a disastrous 36-month run, declining more than 83.6% in that time.

Now, the New York-based retailer has been attempting to stage a comeback by cutting expenses, while also selling higher-margin products in an effort to check its red ink.

Even so, net sales for the company continue to slide, decreasing 11% for the nine-week period ended January 3, 2015 compared to the same period a year ago. Sales fell to $507.8 million from $572 million in that time.

So while investors have responded to the better-than-expected performance by pushing the stock more than 27.8% higher since January 7, 2015, the real question is whether the news is proof of a long-awaited turnaround at ARO.

Given that ARO has announced the closure of as many as 240 stores in addition to its entire P.S. children’s chain – not to mention the recent news that large retailers Macy’s (M) and J.C. Penney (JCP) will also close stores – it doesn’t look good for retailers in general or ARO specifically.

No Chance for Profits Anytime Soon…

This retailer is well into its 18th-consecutive quarter of declining or flat same-store sales, and the company’s financials are showing significant stress.

ARO’s debt-to-equity ratio of 1.31 is relatively high when compared with the industry average.

But a more telling indicator is the company’s quick ratio of 0.49, which clearly demonstrates its inability to cover short-term cash needs.

This is likely to worsen due to the company’s declining revenue, too.

In its Q4 2014 report, Aéropostale announced total revenue of $452.9 million, a decline of 12% over the $514.6 million reported in the same quarter a year ago.

Gross profits for the retailer also contracted, falling from $87.9 million in Q4 2013 to $68.9 million in Q4 2014 – a 21.6% decline.

The decline in revenue and gross profits have precipitated a significant decline in ARO’s net operating cash flow, which decreased to -$36.03 million, or 321.94% when compared to Q4 2013.

In short, Aéropostale is bleeding money with no credible plan to stanch the flow.

And with stability in the teen clothing sector nowhere to be found, Aéropostale’s losses should continue to accelerate.

In fact, analysts expect another contraction in earnings of 1.1% for 2015.

Bottom line: If teens won’t buy Aeropostale for the fashion, adults shouldn’t buy the stock at any price!

Good investing,

Richard Robinson

Richard Robinson

, Ph.D., Equities Analyst

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