4Q2008 EPS of $1.01 beat our/Consensus of $1.00. Comp sales grew +6%, gross margin
declined 170bps ex last year’s gift card breakage adjustment (better than we expected),
and SG&A was well-controlled with expense rate down 120bps. Inventory per ft declined
17% vs. -3% at the end of 3Q. Mgmt guided 1Q2009 to $0.25-0.27 ex items, vs.
consensus $0.25/our $0.28.
Implications
We have been highly encouraged by recent news from ARO and some incremental
highlights from the quarter: (1) ARO’s value message and product/process enhancements
drive share gains. Comp sales were +6% in a tough 4Q and +11% in February. (2) Much
leaner inventories are helping gross margin without hurting sales. Inventories/ft were
down about 8% at quarter end (apples to apples, ex a timing shift), remain tightly
controlled at -2% currently. This contributed to merchandise margins being up YoY in
Feb. and suggests potential upside to our gross margin expectations and guidance for
1Q2009. (3) Already announced savings from closing Jimmy’Z ($0.07) help to offset
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Investors should consider this report as only a single factor in making their investment
decision.
Aeropostale Textile
investment in “P.S. from Aeropostale” this year. Also, we see a higher probability of success with
kids as the styling/demographic are closer to ARO’s core competency than JimmyZ, a trendier
contemporary business.
Valuation
ARO offers a compelling opportunity: a value retailer that is performing well but trades at a
discount to peers on modest consensus estimates. We are raising our 2009/2010 EPS estimates to
$2.29/$2.36 from $2.28/$2.34 based on the 4Q beat. Our new 6-month PT of $27 is raised from $25
(based on a blend of 10X EPS and 6X EBITDA) as we are rolling the basis for our target to
3Q2009-2Q2010 following reporting of 4Q2008 results
Key risks
A significant slowing in sales momentum due to macro or fashion drivers
2 Goldman Sachs Global Investment Research
Aeropostale Textile
Goldman Sachs Global Investment Research 3