American teen apparel retailer Aeropostale’s (NYSE:ARO) stock gained roughly 20% yesterday after the company announced that it is looking forward to better than expected gross margins for the third quarter.  Additionally the company also increased its earning guidance for the quarter and the effect echoed through its stock yesterday with ARO touching $17.5 mark for the first time since August. Its competitor Abercrombie & Fitch’s (NYSE:ANF) stock crashed yesterday by nearly 20% on disappointing international sales, which is a welcomed change as the past couple of quarters Aeropostale has underperformed Abercrombie and other peers like American Eagle Outfitters (NYSE:AEO) and Gap Inc. (NYSE:GPS) in the teen apparel space.
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Growth in Gross Margins Increase Investor’s Confidence in Aeropostale:
Shrinking gross margins have been the biggest source of concern amongst apparel retailers since last three quarters. The situation was more grave for value-based retailers such as Aeropostale as it was facing a double-whammy on its margins, first from the increase in production costs due to rising cotton prices and second from the increase in promotions due to stiff competition in challenging retail environment. Aeropostale’s stock had plummeted by nearly 40% after the declaration of its Q2 results, with a 13% drop in margins being the prime headline.
While the decline in cotton prices has certainly helped Aeropostale to improve its margins this quarter, we believe some key initiatives by the company such as rolling out global shipments before the holiday season have also positively impacted the margins.
See our article: Aeropostale Rolls Out Global Shipping to Improve Sales & Margins
Our price estimate for Aeropostale stands at $18.74, implying an upside of nearly 10% to the current market price.Notes: