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.
(ARO - Get Report) 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.
Check Out Our Best Services for Investors
Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.
- Model portfolio
- Stocks trading below $10
- Intraday trade alerts