ARO: Bling is Not an Investment Process

Several analysts are out this morning pumping Aeropostale after seeing the fall assortment. If you want to hinge your investment thesis on the company having the right 'skinny jeans, plaid blazers, and bling' then be my guest. If that's your style then you're probably not reading our stuff anyway.

But what I'll ask is this... Have you ever heard a CEO or a head of merchandise stand before ANY external constituent and say "boy, our brand new product line really stinks..." In all the years I've covered retail I have not.

In the meantime, this is a company operating at both peak margins and sales/inventory spread. It's inventory turns defy gravity relative to industry standards (i.e. 3x ANF) and its cash conversion cycle has come down to about 20 days - which is a level that makes it appear as close to a bank as a retailer can conceivably appear to be. I don't want to penalize success, but I scratch my head in wondering how it can get more efficient.

If you believe in more earnings beats, then you could argue that the current 7.5x consensus EBITDA multiple is actually closer to 5-6x. Still not enough to get me excited, but I won't argue that this is an 'expensive' multiple. But while short interest is not exactly low at 16% of the float, it is down from 37% earlier this year.

A point I think is most telling is in the sell-side sentiment chart below. Even as the stock lost 65% of its value and then bounced 170% off its bottom, price targets remained within a $5 band of the price at that point in time. There are 30 analysts covering the stock, and not a single 'Sell' rating.

The bottom line here is that I won't be so close-minded as to say that fashion does not matter. But we need sheer growth in comp and square footage in order to feed this horse. Let's hope that the bling works for Fall.  But neither hope nor bling are part of our investment process. What is part of our process is finding a company where it has something in its DNA that gives it a competitive edge in leading consumer demand as opposed to following it. ARO's inventory turns and speed to market are a plus, but its edge in controlling its destiny is dull.

ARO: Bling is Not an Investment Process - pt

ARO: Bling is Not an Investment Process - si


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