Aeropostale (ARO): Teen titan or turnaround trap?

*Disclosure:  No position in ARO.  I’m not interested in buying at current levels.  This post may be a waste of your time.

After Julian Geiger left Aeropostale, his successor (Thomas Johnson) has managed to run the retailer into the ground.  On August 18, Aeropostale announced that Geiger is returning.  During Geiger’s previous reign, Aeropostale’s revenues went from $123.8M in 1997 to $1,886M in 2009.

Suppose that Geiger returns Aeropostale to its former glory several years from now.  Geiger’s last full fiscal year at the company was 2009 (Geiger officially left in Jan 2010).  In that fiscal year, Aeropostale posted GAAP net income for $149M.  Suppose that Aeropostale makes $149M, achieves a P/E multiple of 15, and has 82M shares outstanding.  The share price would be $27, roughly seven times the current share price of $3.87.  Of course, there are risks and other possible outcomes.  It is likely that Aeropostale will face the same secular headwinds affecting its peers ANF and AEO.  The profitability of all three ‘teen titans’ may be significantly lower several years from now.

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RH: This one might take a while…

Restoration Hardware recently announced the pricing of the convertible debentures that they are selling (here is the press release filed on EDGAR).  Unfortunately, this is a blow to my short thesis.

Restoration Hardware versus West Elm

Restoration Hardware competes against a company called West Elm, which is owned by the publicly-traded Williams Sonoma (WSM).  SEC 10-K filings disclose metrics for both companies.  Restoration Hardware’s metrics are far superior:

• Higher “comparable brand revenue growth” overall
• Roughly three times higher sales per leased square footage (by my calculation)

Yet there are some curious things about Restoration Hardware:

• According to Google Trends data, West Elm has been trending stronger than the supposedly faster-growing Restoration Hardware.
• I’ve never seen a hot retailer shrink its store count.  Hot retailers look like West Elm.  They open stores because the rate of return on new stores is likely very high.

Coach: Victor Luis could be the next Ron Johnson

I have a few speculative out-of-the-money puts on COH.  The thesis is simple.  Coach’s same store sales dropped 21% in North America (press release).  This is an outlier.  It is highly unusual for same store sales to drop so fast.  It is a sign that the CEO will eventually destroy the company if left unchecked.

Restoration Hardware: Their numbers don’t make a lot of sense

Restoration Hardware is a retailer with a shrinking store count, going from 95 stores in YE2010 to 70 stores in YE2014.  Despite this drop in store count, capital expenditures have grown from $2.024M to $93.868M in that timeframe.  One explanation is that Restoration Hardware is improperly capitalizing expenses to inflate its earnings.  Of course, it is also possible that there is no accounting fraud here.  Perhaps Restoration Hardware is legitimately making a huge investment in software and store renovations.  As always, you should do your own due diligence and come to your own conclusions.

Market cap:  $2.6B
Borrow:  <1%
Shares short / shares outstanding: 10.3% (Shares short as a % of float would be higher)

Dollarama: It’s a wonderful business but…

(This is not an actionable idea.)

Dollarama’s stock has performed phenomenally well since its IPO.  The underlying business has grown its profits as fast as Salesforce has grown its revenues.  Their returns on invested capital are phenomenal (see my post on dollar stores).

Yet I cannot get past the company’s self-dealing with members of the Rossy family and how the financial statements don’t add up.

Crocs: I guess I’m shorting this company now

I was wrong about John McCarvel.  The way I judge a CEO’s operating ability is by looking at his or her prior track record.  McCarvel had a run of a few very good years immediately after he became CEO in Feb 2010.  In this situation, extrapolating from the past did not work.  Currently, it seems like McCarvel was riding off of the momentum from the prior CEO (John Duerden) and is on track to slowly destroy Crocs.  His decision to mislead investors with the share repurchase fakeout is bizarre and stupid.  He is quickly destroying his credibility.  And why exactly does he feel the need to mislead investors?