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Teen Angst: Stay Away From These Retail Stocks

Stocks in this article: AEO ARO ANF HOTT WTSLA

NEW YORK ( TheStreet) -- Teen retailers are among the most volatile stocks in the sector following same-store sales results.

While there was some bright spots in the space, overall teen retailers remain a risky investment heading into the holiday season.


Aeropostale (ARO) significantly boosted its third-quarter guidance, sending shares surging more than 18%, but this could just be a case of under-promise and over-deliver.

Sales and margins came in better than management's very conservative guidance, leading the company to raise its profit outlook to 27 cents to 28 cents per share for the October-ended quarter from a prior projection of 9 to 15 cents.

But while gross margins for the quarter were better than management originally anticipated. Stifel Nicolaus analyst Richard Jaffe expects margins will likely decrease 1,000 basis points from last year due to additional markdowns, which were necessary to clear merchandise.

"We believe that the teens' interest in their 'uniform' -- the hoodies, graphic tee and jeans -- has waned," Jaffe wrote in a note. "Fast fashion for girls and authentic lifestyle and extreme sport brands for guys have taken a more important role in the teen's wardrobe."

Aeropostale, which was one of the biggest winners amid the recession as the low-cost leader, is now being challenged.

"Aeropostale and its competitors are fighting for market share, with price as the primary weapon. However, the more expensively prices competitors have an advantage; greater room to discount. Aeropostale, as the low-cost provider, must cut prices to a margin-eroding level, just to keep up," Jaffe wrote.

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