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Shopping for Value at Aeropostale

The stock is near a 52-week low, and some analysts say the time to buy might be now.
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Investors looking to buy after a selloff are finding the teen-apparel retailers a compelling group of stocks these days.




has attracted two recent upgrades by Wall Street analysts as the stock hovers just above a 52-week low.

Down 16% in the month of August, the stock got hit after the company revealed that merchandising mistakes have lowered expectations for its back-to-school season. Now, some analysts see a buying opportunity, because in their view, merchandising mistakes can be corrected, and Aeropostale's long-term prospects still look good. But the retailer's competitors have sold off as well, even without merchandising problems, so why buy Aeropostale?

"We believe back-to-school traffic is accelerating in this fourth and final week of August," Piper Jaffray analyst Jeffrey Klinefelter said in a research note Thursday. "It is a great signal coming out of the month that back-to-school will be at least on plan and maybe better than expected."

Klinefelter raised his rating on the shares to outperform from market perform, citing his belief that any recent bad news from the company is fully priced into the stock, making the current valuation attractive. He doesn't own shares of Aeropostale, and Piper Jaffray hasn't had an investment banking relationship with the company in the past 12 months.

Also last week, Prudential Equity Group analyst Stacy Pak upgraded Aeropostale's shares to neutral-weight from underweight, citing similar reasons. She said its denim wares appear to be selling at a good clip, which would bode well on the inventory front. The company startled investors already concerned about a denim glut when it said inventories climbed 64% during the quarter, or 34% on a square-footage basis.

Shares of Aeropostale jumped 5.6% Thursday on the upgrades, but they have since lost ground, and now trade at around 13 times earnings estimates through 2006. That sounds cheap for the highflying teen-apparel sector, where longtime gems like

Urban Outfitters

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trade close to 28 times earnings estimates.

Still, other competitors that have shown far better results lately are priced at similar discounts.

American Eagle

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, also down 16% so far in August, is valued at 12.7 times estimates. For its second quarter, the company said both total revenue and same-store sales rose more than 20%, and it offered guidance that met Wall Street's estimates.

Abercrombie & Fitch

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is trading at 14.7 times its estimates, after dropping more than 20% this month. The company reported a 34% jump in second-quarter earnings and cranked up its outlook for the year on strong sales, but its results did fall short of Wall Street's expectations.

Both companies appear to have avoided the merchandising snafu that befell Aeropostale, which reported a 34% decline in second-quarter earnings on a 2.2% drop in same-store sales vs. the same quarter last year. The results were in line with expectations, but those expectations had been lowered several times in the lead-up to the report.

Also, Aeropostale lowered its guidance for the back half of the year, predicting third-quarter earnings of 50 cents to 53 cents a share and fourth-quarter earnings of 67 cents to 70 cents, both well below analysts' estimates.

Elizabeth Pierce, an analyst with Sanders Morris Harris, said Aeropostale's troubles are probably priced in to its stock at this point, but she still doesn't find the stock attractive relative to its peers.

"There's not much risk for material earnings revisions from this point on, since they pretty much threw the baby out with the bath water with this lowered guidance," Pierce said. She doesn't own shares of Aeropostale, and her firm has no banking relationship with the company.

"They're doing the right thing, and I still think this company has a good brand, but it seems like there might need to be some changes on how they think about their product and the level of fashion in their product," she continued. "There are other teen retailers that have been very consistent throughout this year, and they look cheap here too, so why not go with one of them?"

While Aeropostale trades at a similar valuation with peers like Abercrombie and American Eagle, Morningstar's discounted cash flow analysis of the stock makes it look much cheaper.

Morningstar analyst Brady Lemos puts the company's fair value at $30. The stock, meanwhile, trades below $25. Both Abercrombie and American Eagle trade above their fair value by this measure -- even with their recent selloffs. Much of Aeropostale's valuation is based on the company's growth prospects. Currently, it operates about 500 stores, and Abercrombie and American Eagle have around 800. Lemos believes it can reach 1,000 stores in the next half-decade.

"Aeropostale has much more room to grow than the others, particularly with its Jimmy Z chain," Lemos said. "It's showing a lot of potential, and it targets an older customer, so it won't cannibalize the Aeropostale chain."

Lemos acknowledged that Aeropostale's competitors have executed better lately, and investing in other companies might mean more immediate rewards. But he believes that for a buy-and-hold investor, Aeropostale offers the best value.

"You have to assume there's going to be times like this for a teen retailer," he said. "That's just the nature of the business."