Monday, Credit Suisse initiated coverage of Aeropostale Inc. (ARO) stock with a Neutral rating and a price target of $41.
Analyst Lejuez said that ARO has stood out in the teen apparel universe, benefiting from its value pricing and promotional strategies at a time when consumers have been looking for bargains. This consumer behavior is unlikely to change, but the competitive landscape is intensifying and the stock's current valuation is appropriate.
The analyst noted that while ARO's competition has struggled with negative comps and margin pressure over the past two years, ARO's sales productivity has risen to all-time highs and operating margins are at peak levels. It will be a challenge for the company to continue on the same path, as ARO is increasing prices while key competitors are reducing prices.
As the 922 store Aeropostale chain approaches saturation, the launch of P.S. provides a next leg of growth. While it is not a bad decision to grow this concept, the analyst believes it is important for the market to recognize that tween/kids businesses carry lower operating margins and returns on capital when thinking about ARO's long-term return profile.
Currently, ARO is up $0.01 or 0.02% and trading at $42.44.
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