Mea Culpa: Here’s One of My Worst Stock Calls, Aeropostale, Inc. (ARO)

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It’s really fun and satisfying to talk about investing successes. It’s much harder to talk about more unpleasant moments in making predictions and even putting real money behind the best stocks to buy. So in the spirit of discussing a real downer moment for me, I’m going to bring up beleaguered Aeropostale, Inc. (NYSE:ARO).

Mea culpa.

Aeropostale options active as shares gain on Abercrombie’s earnings beatAeropostale, Inc. (NYSE:ARO) falls flat
I recommended Aeropostale as a solid buy for investors many times in past years. In fact, it was my choice for our 11 O’Clock Stock series in 2010, during which many Foolish analysts purchased a huge array of stocks with real Fool money.

As of this writing, Aeropostale is one of the worst performers in the series, down 44%. Gulp. (See all the returns here.)

For years, Aeropostale did very well, and during the post-financial-crisis recession, it was one of the few retailers that admirably navigated the difficult retail environment. When I recommended it, I believed that its past performance was a good indicator of its ability to continue excelling. Even as the stock continued its downward trajectory, I didn’t fret; I suspected difficult comparisons to the previous good years could have been a major part of the problem.

Unfortunately, that’s where I was wrong. Aeropostale’s business really has gotten shabby over the course of the last two years. The retailer’s margins began to disintegrate as it indulged in higher levels of promotional activity, and as it faced its inability to adequately deal with a spike in the cost of cotton in 2011. Its profits began to plunge as its business execution faltered.

Despite the fact that cotton prices have improved, Aeropostale’s results have still suffered all throughout 2012, and the retailer looks no closer to a turnaround even now. Recently, Aeropostale lowered its outlook given disappointing sales and margins during the all-important holiday quarter.

Aeropostale’s holiday season ended up a disappointment, with teen customers choosing rivals like Abercrombie & Fitch Co. (NYSE:ANF) , which stooped low enough to get more promotional with its merchandise . Unfortunately, if a company like Abercrombie lowers its prices, hitting a lower-cost chain like Aeropostale makes less sense for discerning teen customers. Meanwhile, Aeropostale’s misses have allowed rivals to take away market share, possibly for good.

Given how difficult it is for retailers to executive turnarounds, I feel I have to issue a major mea culpa on Aeropostale.

Shopping for retail substitutes
At this point, I wouldn’t buy Aeropostale here, given the lack of any meaningful signs of a turnaround thus far. I wouldn’t necessarily sell it, either, but investors do need to weigh the fact that retail turnarounds are frankly difficult. They may have to wait a long time for business and share recovery, and there’s always the possibility that that may not happen, particularly given macroeconomic factors that remain shaky.

I won’t sugarcoat it. Aeropostale has morphed into a risky retail stock in recent years.

For investors who decide to sell and would like a substitute teen retail stock, consider The Buckle, Inc. (NYSE:BKE) . Although this mall-based teen retailer has recently suffered some negative sentiment on tough comparisons to its success during the recession, the truth is, its financial performance has been good for years. It’s held up far better than Aeropostale has.

In the 12 months ended January 2012, Buckle reported an 11.9% increase in sales to $1.1 billion and an 11.9% increase in net income, to $159 million, or $3.20 per share. Same-store sales also increased 8.4% for the year. Whatever negativity has surrounded Buckle in the last year, it doesn’t seem particularly founded given the difficult economic climate.

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