Aeropostale Fundamental Analysis

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

Aeropostale Inc. (ARO) Company Business Aeropostale is a retail mall based casual clothing store which targets teenagers (14 - 17 years old) through its Aeropostale stores and targets 7 to 12 year olds through its P.S. from Aeropostale stores. Clothes can be purchased from inside the respective stores or online through their website. They currently have 918 Aeropostale stores in 50 states and Puerto Rico, 68 Aeropostale stores in Canada, and 72 P.S. from Aeropostale stores in 21 states. Also, after they signed their first Licensing Agreement, one of its international licensees operated 11 Aeropostale stores in the United Arab Emirates as of October 29,2011. They have announced that they have signed a second licensing agreement in March 2011 and is expected to open approximately 25 stores in Singapore, Malaysia, and Indonesia over the next 5 years. The third license agreement was signed on November 15, 2011, which is expected to open approximately 30 stores in Turkey over the next 5 years. Aeropostale does not assumes inventory risk on the merchandise sold in their licensee's stores and do not own/lease the real estate where the stores operate. Their competitive advantage comes from having lower prices and offering longer promotions than their competitors.

Additional Notes: Aeropostale P.S. was launched in June 2009 and may provide future growth. Their 2012 Strategic Initiatives include investing in future growth with e-commerce, international, and P.S. from Aeropostale International: o Middle East - 3 new stores in 2011 / total of 12 stores including P.S. o Singapore - 2 new stores in 2011 o Total International - 14 stores in 2011 o Next Countries - Turkey in Summer 2012 P.S. partnered with Marvel in Q3 and showed strong holiday results Did not repurchase shares of their common stock during Q3, 2011 but have been repurchasing shares over the years Highly seasonal business with high demand in back to school and Christmas shopping (second part of the year) Has not paid a dividend for the last 3 fiscal years and does not plan on paying a dividend Strategies in place to mitigate the rising cost of raw materials

Potential Risks Aeropostale has been experiencing declining demand for its women's fashion design The company has been having an increasing inventory amount (may be due to an increase in the amount of stores they are creating) and higher clothing discounts that is putting pressure on its profit margins Massive amount of operating leases are expected from 2012 to 2016 (off-balance sheet financing)

Have currency foreign risks and they do not hedge currency risks o Gains/Losses from currency have not been significant to date, also hedging currency risks does not always work (almost all international companies are exposed to currency risk) Increased competition in the pre-teen and teenager focused clothing store where more companies are following Aeropostale's promotional based business model Business is highly sensitive to consumer spending patterns and how the economy is performing

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

43.1% 9.3% 33.2% -7.3%

2002

24.5% 14.0% 31.6% 13.8%

2003

29.2% 17.7% 37.5% 28.7%

2004

35.3% 20.7% 44.0% 29.2%

2005

29.5% 16.7% 35.9% 22.8%

2006

34.2% 18.4% 39.8% 31.8%

2007

65.5% 25.1% 65.5% 28.0%

2008

42.1% 22.7% 51.5% 24.7%

2009

52.8% 29.0% 69.5% 51.0%

2010

53.5% 29.9% 69.4% 29.2%

2011

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

0.23 1.17 3.61 0.00 1.34

1.69 2.50 0.74 0.00 0.00

2.10 2.97 0.65 0.00 0.00

2.04 2.88 0.70 0.00 0.00

1.96 2.69 0.77 0.00 0.00

1.80 2.42 0.86 0.00 0.00

0.75 1.44 1.61 0.00 0.00

1.52 2.25 0.85 0.00 0.00

1.64 2.19 0.82 0.00 0.00

1.45 2.17 0.79 0.00 0.00

The big difference between the current and quick ratio shows that Aeropostale's inventories take up a large portion of its current assets. With no long term and short debt, the companies ratios thus far look to be very good.

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2.52 2.1% 0.0% 21.9% 0.0%

2.47 15.9% 0.0% 20.1% 0.0%

2.39 18.8% 0.0% 19.3% 0.0%

2.38 11.0% 0.0% 19.1% 0.0%

2.39 17.0% 0.0% 18.9% 0.0%

2.43 14.2% 0.0% 20.5% 0.0%

3.09 7.0% 0.0% 21.7% 0.0%

2.87 12.1% 0.0% 21.5% 0.0%

2.81 15.6% 0.0% 20.8% 0.0%

3.10 11.1% 0.0% 20.8% 0.0%

Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0.00 0.0 22.4 3.69 98.88 0.0% 19.3%

0.00 0.0 17.1 7.27 50.23 0.0% 8.5%

0.00 0.0 22.4 9.17 39.80 0.0% 8.4%

0.00 0.0 25.8 8.87 41.15 1.1% 8.4%

0.00 0.0 25.3 9.51 38.37 0.9% 7.6%

0.00 0.0 25.0 9.67 37.76 0.4% 7.2%

0.00 0.0 36.0 8.48 43.05 0.0% 8.6%

0.00 0.0 23.8 9.00 40.54 0.0% 6.7%

0.00 0.0 24.7 10.34 35.28 0.0% 6.0%

0.00 0.0 25.7 10.10 36.16 0.0% 6.5%

Although they have been experiencing an inventory increase over the past years, I am less worried about this problem as the average days of inventory is on the low side compared to historical information. Also, the inventory as a percentage of revenue is also on the low side compared to the past.
2008 2009 2010 2011

P/E P/S P/BV P/CF P/FCF

11.00 0.89 7.20 7.77 16.01

14.56 1.15 6.13 8.32 18.27

12.80 1.32 6.76 7.12 10.47

9.24 0.89 4.94 5.45 13.12

All five ratios consider the company to be cheap relative to the past.

Relative Ratio Comparison Aeropostale's competitors consist of Abercrombie & Fitch Co. (ANF), American Eagle Outfitters (AEO), and Gap Inc (GPS).
ANF AEO 20.0 1.0 8.7 53.6 5.6 1.6% 1.3% 3.1% 21.5% 1.0% 4.6% 2.1% 67.5% -15.6% 1.1 2.1 1.4 1.4 62.9% 65.8% 7.8% 13.5% 5.0% 8.6% 6.7% 11.4% 10.6% 17.9% 46.3 2.5 1.3 14.4 0.9 8.2 0.0 5.1 3.2% 2.0% 19.0% 10.7% 0.9% 5.0% 59.0% 13.7% -6.5% 1.6 3.0 0.0 0.0 37.4% 42.9% 9.4% 14.8% 6.2% 9.6% 9.8% 14.6% 13.5% 20.2% 74.5 3.9 1.6 ARO 11.3 0.6 6.9 11.4 4.4 0.0% 0.0% 0.0% -1.0% 0.6% 14.8% -52.8% -42.2% 30.2% 0.7 1.8 0.0 0.0 29.9% 35.7% 9.1% 14.6% 5.4% 8.9% 15.8% 26.6% 29.0% 51.0% 0.0 6.6 3.0 GPS 10.9 0.6 5.8 14.1 4.1 2.4% 2.0% 17.3% -1.9% 0.6% -1.7% -21.0% -4.3% 8.3% 0.9 1.8 60.4 62.4 37.9% 37.8% 11.3% 10.5% 6.7% 6.6% 12.7% 12.4% 28.0% 21.1% 0.0 4.1 1.9

Multiples
P/E(TTM) P/S(TTM) P/CF (TTM) P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative basis, Aeropostale remains cheap in relation to the multiples. However, it offers no dividends which its competitors do offer and does not plan on paying a dividend. Over 5 years

Aeropostale has been outperforming its competitors when looking at EPS growth, however this past year has been a hard one for Aeropostale and it is clearly underperforming its competitors. It's balance sheet ratios are a bit weaker compared to its competitors, however its return on assets and return on equity is better than its competitors in both the short run and long run. Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% as this stock is not a large cap stock and a terminal growth rate of 1.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced Aeropostale based on fundamentals. Based on my assumptions the market has currently based Aeropostale to have a owners earnings FCF growth rate of around 9% year after year for the next 10 years, where then it will grow at its terminal growth rate. This is a rough estimate number, however this is way below its historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. I believe that a more reasonable estimate of 15% growth for the next 10 years with it slowing down in the later years is more accurate. Under my assumptions, I believe the intrinsic value to be around $22.56 on the safe side and on the more optimistic side with increasing growth it can be up to $29.00. For Aeropostale, I believe at this point of time the conservative DCF is the way to go.

Note, it says buy under $11.28 this is not a strict rule it is just the number which generated a margin of safety of 50%.

35 30

5 Yr Price vs Intrinsic Value

25 20
15 10 5 0 16/05/2005 16/05/2007
Historical Price

16/05/2009
Intrinsic Value

16/05/2011
Buy Price

Graham Valuation Under the graham valuation model, I also believe Aeropostale to be undervalued but I am wary of it due to the fact that Aeropostale just released that they expect their fourth quarter EPS to be around 0.35 0.38 diluted per share which is below analysts' expectations. FCFE Valuation Under the FCFE valuation I consider Aeropostale to be also undervalued. The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate. Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. According to this model, the intrinsic value is roughly around $22.00, which is in line with our actual owner's earnings DCF. Technical Analysis My reports are strongly on the fundamental side but I have studied technical analysis in the past and I think especially for this stock it is good to bring it up. Looking at the chart below it is obvious that Aeropostale has been struggling to beat the resistance line of around $17 a share. Therefore, even though the intrinsic value is around $22 if I were to invest at this company and get in at a good price, I may exit the stock at $17, depending on the circumstances.

Overview I believe that Aeropostale is a solid company with good fundamentals and good growth opportunities especially in the international markets and with P.S. from Aeropostale opening more stores. I do not like to time the market, but would not get in at these levels around $16 due to three reasons: 1. They are expected to have a lower 4th quarter EPS than analyst expectations, which should bring the price down. 2. There is clearly resistance at the $17 level 3. I would prefer a higher amount of margin of safety I will re-evaluate the company and its position once the 4th quarter and annual report is released. Another caution would be if you look at the chart below you could see for the first time in over 10 years owner's earnings FCF has decreased in 2011 and is expected to decrease this year even further.

2002
Owner Earnings FCF $ (10.8) $

2003
7.2 $

2004
26.2 $

2005
47.4 $

2006
44.0 $

2007
84.9 $

2008

2009

2010
217.4 $

2011
183.5 $

TTM
102.9

75.8 $ 114.5 $

Although, Aeropostale may be a good investment this decreasing FCF problem has me standing by and watching at the moment for a turnaround in FCF. Best Regards, Matthew

Matt's Fundamental Stock Analysis

Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.