Aeropostale Falls Even Further Behind

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When a CEO says, "As we move through the remainder of the year, we continue to focus on improving our financial performance and our profitability," I hear, "No one is buying this junk, so we're focusing on not losing too much money." Aeropostale (NYS: ARO) announced its first-quarter earnings the other day, and things aren't looking great for the clothing retailer.

Barn fires and other write-offs
On the plus side, revenue increased versus 2011, rising 6% to $497 million. The direct-to-customer channel also grew, increasing revenue 32% to $37 million. That's especially good news for the company's margins. E-commerce has the benefit of low overhead, generating higher margins on sales.

Even with the increase in online sales, Aeropostale still had a tight quarter. 2011's 3.5% net income margin is somehow looking enviable in light of this quarter's anemic 2.1% margin. Same-store sales were flat, which is an improvement on last year, when they fell 5%. Luckily, the company has been sinking all its spare cash into stock buybacks, and earnings per share kept up with overall income -- both fell 35%.


Of course, it's a great idea for companies to repurchase its own stock when the price is depressed and the company has extra cash. Aeropostale's shares fell below $10 in September last year, which presented an excellent opportunity for share repurchasing. Unfortunately, the company decided to spend its cash in the first quarter, when shares were over twice as expensive.

A hole too deep to climb out of
So is the brand sunk, or is there some gas left in the tank? I think Aeropostale has lived through its day in the sun and is now receding into the twilight. The company's fashion sense has never been cutting-edge, and in the face of Abercrombie & Fitch (NYS: ANF) and Urban Outfitters, it's fallen even further behind. These companies have had their own fair share of difficulties as well, but if nothing else they are indicative of how competitive this landscape has become.

Gap (NYS: GPS) has had some success in fixing its margins and actually redefining its brand over the past year. Revenue was up in the first quarter and gross margins were running at a healthy 39%, compared to Aeropostale's painful 24%.

Even Abercrombie, which had its net margins gutted in the first quarter, has been able to put some chips down on the international market. The company opened new stores in Europe and Asia this quarter, including a new flagship in Germany. While the bets haven't paid off yet, an economic recovery in Europe or a revised focus in China could turn into meaningful profits. Aeropostale has all of 17 non-North American stores, and none of those are run by the company.

The future of air mail
Aeropostale is a sinking ship. I hope CEO Thomas Johnson is right, and that the company can improve profitability. If it doesn't, then I might actually advocate shopping at Aeropostale -- in order to make less money, it'll have to start throwing wads of cash at customers. I'd be happy to catch a bundle alongside all the other folks wearing Gap khakis.

While Aeropostale's ship slowly sinks, two other retailers are plowing across the choppy waves. The Fool has issued a special report to give readers the inside scoop on these two great American companies. You can get your free copy right here and start investing in the next retail revolution.

At the time this article was published Fool contributorAndrew Marderdoesn't own any of the stocks mentioned in this article. The Motley Fool owns shares of Aeropostale. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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