TSC Ratings' Updates: Aeropostale

The following ratings changes were generated on Friday, Nov. 21.

We've downgraded Aeropostale(ARO Quote) from buy to hold. Strengths include its robust revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the stock has had a generally disappointing performance in the past year.

Revenue rose 21.2% since the same quarter a year ago, outperforming the industry average of 4.3% growth and boosting earnings per share. Aeropostale reported significant EPS improvement in the most recent quarter compared with the same quarter a year ago. The company has demonstrated a pattern of positive EPS growth over the past two years that we feel should continue, suggesting improving business performance. During the past fiscal year, it increased its bottom line by earning $1.80 vs. $1.33 in the prior year. This year, the market expects an improvement in earnings to $2.18. The company has a debt-to-equity ratio of zero, but its quick ratio of 0.4 is very weak and demonstrates a lack of ability to pay short-term obligations. The company's current return on equity greatly increased when compared with its ROE from the same quarter one year prior, a signal of significant strength within the corporation. On the basis of ROE, Aeropostale underpfromed the specialty retail industry but outperformed the S&P 500.

Shares are down 49.1% on the year, apparently dragged down in part by the decline we have seen in the S&P 500. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, Aeropostale is still more expensive than most of the other companies in its industry.