If you are looking to invest in niche apparel producers, Aeropostale Inc (NYSE:ARO) and NIKE, Inc. (NYSE:NKE) are two popular stocks with almost cult followings. This kind of demand would be attractive for defensive investors uncertain about fickleness of consumers. However, Aeropostale Inc (NYSE:ARO) and Nike have their own problems. Below, I review some of these problems and whether they detract from the overall positive investment thesis.
Aeropostale Inc (NYSE:ARO) largely struggled in the second fiscal quarter. Around a third of its value has since been shaved off. Thus, while it may be one of the best companies to work for, it hasn’t exactly been one of the best to invest in of late. It has been criticized for weak execution in the holiday season, and Retail Greeks recently rated Aeropostale Inc (NYSE:ARO)’s CEO as the worst CEO in specialty apparel. Holiday sales declined by 6% as top-line same-store sales fell by 8%.
On the positive side, margins are looking like they will trend upwards from strong pricing stability and growing consumer demand following the fiscal cliff resolution. And the company is underrecognized for its incredible 11.5% free-cash-flow yield. Analysts forecast a 9.8% growth rate over the next five years. Assuming expectations are met, 2017 EPS will come out to $1.08. At a multiple of 15.5 times earnings, this translates to a future stock value of $16.74.
Discounting backwards by 10% yields a present value of $10.39. This is at a discount to the current value, but I believe the premium is warranted to the debt-clean balance sheet, strong generation of free cash flow, and positive macro trends.
Facing strong competition
NIKE, Inc. (NYSE:NKE)’s revenues recently went up to $25 billion, but the PE multiple could start to compress from softening growth. It ended 2012 with a disappointingly low 7.4% growth, which was far below expectations. The main reason for this low growth was the competition in general and Under Armour Inc (NYSE:UA) in particular.
As a result, NIKE, Inc. (NYSE:NKE) has been working on revising brands by selling some, like Cole Haan for $570 million and Umbro for $225 million, and investing in others. The Lance Armstrong fiasco has put some downward momentum on the stock, which, in my view, was unfounded. In my view, the company’s growth opportunities come from more sports sponsorship deals – Michael Jordan products and Lance Armstrong products, for example, have been notable catalysts for further investments.