Aeropostale, Inc. (ARO), Under Armour Inc (UA): Going Out of Style?

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Danger! Danger! Many companies rely on consumers wanting to wear the brand, but as soon as consumer sentiment leaves so do profits. Being caught in a stock who’s product is no longer popular is a bad scenario for investors. Let’s take a look at three businesses that depend on brand name, and I will asses a danger score from 1 to 5 for each — 5 being the worst.

87 is not heading to heaven

Aeropostale, Inc. (NYSE:ARO)

Aeropostale, Inc. (NYSE:ARO) used to be the thing to wear, but not so much any more. The standard t-shirt with “Aeropostale 87” on it has disappeared. I guess it isn’t cool to wear Aeropostale, Inc. (NYSE:ARO) anymore, and my hunch is backed by the numbers. Aeropostale’s comparable store sales declined by 14% in the first quarter of fiscal 2013 due to heavy promotional activities and low demand for spring clothing. The retailer seems to be banking on the growth of a different brand, P.S. from Aeropostale, Inc. (NYSE:ARO) to save the flailing business. Unfortunately, a new brand cannot be grown overnight and Aeropostale, Inc. (NYSE:ARO) is in some serious trouble.  I am surprised Aeropostale’s price has not sunk more; a current P/E of 104 seems out of sorts.  Also, with a paltry ROE of 8.5, management is clearly making mistakes.

Danger Score: 5

This house is protected

The Under Armour Inc (NYSE:UA) brand has remained strong. Even during 2009, Under Armour Inc (NYSE:UA) was able to grow its customer base and earnings; that is saying something with the premium prices it charges for its brand. Under Armour Inc (NYSE:UA) apparel is now on the same level as NIKE, Inc. (NYSE:NKE), perhaps even higher. Another advantage, unlike with Aeropostale, Inc. (NYSE:ARO), is that Under Armour is worn by a variety of consumers; everyone from kids to adults sport the gear. The current P/E of 55 looks very high at first, but Under Armour has increased year-over-year revenue by at least 20% each quarter for the past three years. Under Armour Inc (NYSE:UA)‘s fantastic profit margin is not in danger as consumers will continue to pay a premium for the brand they desire. Under Armour Inc (NYSE:UA) practically doubles Aeropostale’s ROE, coming in at 16.2. CEO Kevin Plank recently stated sales are expected to double by 2016 — $1.8 billion to $4 billion — and there isn’t much reason to be a doubter.

Danger Score: 1

Growth flying away?

American Eagle Outfitters (NYSE:AEO) has had a tough time growing its business lately, with a lackluster projection of 4% EPS growth in 2013. The big question is, will this pick up? American Eagle Outfitters (NYSE:AEO) definitely believes so, predicting a 16% growth rate in 2014. The stock also looks attractive with a 2.5% yield, 16 P/E, and not debt — what’s not to like? When taking a closer look, investors can find an ugly payout ratio of 178. Unfortunately American Eagle Outfitters (NYSE:AEO) is currently paying out more to shareholders than it makes. Personally I wear American Eagle Outfitters (NYSE:AEO) products, along with my peers; it is seen as an acceptable brand for teenagers, but rarely do you find someone else wearing its products. With sales at stores open at least a year falling 5% in the first quarter of 2013, time will tell if projected growth will come through.

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