Air Ball (NASDAQ: ARO)

NEW YORK - Shares of Aeropostale slid another 15% on Friday; the stock is down 56% year to date. One can focus on the extreme negatives of the stock such as their 14% drop in same store sales in the last 3 months or their 10% drop in same store sales this year. Total revenue in the quarter dropped a tad over 5%. Comparable store sales are looked at very closely in retail stores as companies cannot continue to open new stores unless their comps are growing or are steady. If revenue is dropping at stores already open it would be more important to focus on that before looking at growth. A retail store can grow without opening up any new stores and can also grow by opening up many stores while having low same store sales growth. However the latter option will likely cause losses. Therefore the first option is the only practical one.

This means ARO will likely close stores going forward and focus on their more profitable ones. Stores which are losing money will be an anchor in their side. Once this problem is settled and comparables store sales go up the store can begin focusing on growth once again. ARO recently began a new brand called PS, a store for young children. Since they don't break out the results its hard to know if these stores are the reasons for the decline in earnings.

The company's extremely poor results in the last year should be extremely concerning for shareholders. To have same store sales drop by 14% in a quarter is shocking especially when other clothing retailers are either hitting par, moderately declining or beginning to grow. Very few stores are hitting the skids as unemployment drops. People were afraid that ARO known for its cheaper clothing would have trouble as the recession subsided but unemployment is still quite high which should have boded well for the company. Second is the fact that the company grew in years before the recession so the company is not a kind of stock that needs people to lose their money to grow. A counterargument could be that the company had such strong growth during the recession that this years comparable store sales are hard to compare with the year before. The problem with that argument is 2011 is going so bad that it is way worse than 2010, 2009 and 2008.

Aeropostale always had a supreme financial condition and perhaps this is the most concerning development for the company. While the company still has no long term debt it should be concerning that the company has moved into a more leveraged position. The company has around $152 million of assets not including inventory and $234 million of current liabilities. This compares to last year when they had $369 million of current assets not including to $254 million of current liabilities. The company's financial position has deteriorated because of its large stock buyback program. The company has repurchased $900 million in stock since 2005.

Stock buyback programs are good when a company has no money for their investments but management can overextend themselves when buybacks are too big.

This means next year ARO will need to buy inventory from its accounts payable sell the inventory with its markup then buy again from its suppliers. But ARO now will buy first pay later. This is obviously more attractive for ARO but it is more risky to continuously fund your working capital requirements by extending your accounts payable. It is certainly not the way to run a business. ARO also has a $150 million line of credit which may soon be used if the results don't begin to turn around.