Can Aeropostale Climb Past American Eagle Outfitters and Abercrombie & Fitch?

Can Aeropostale Climb Past American Eagle Outfitters and Abercrombie & Fitch?

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Aeropostale (NYSE: ARO  ) will release its quarterly report on Wednesday, and investors have suffered greatly since mid-summer as the teen retailer's dismal results pushed the stock down sharply. Yet even as rivals American Eagle Outfitters (NYSE: AEO  ) and Abercrombie & Fitch(NYSE: ANF  ) have seen much the same challenges, Aeropostale is working hard to try to bounce back and avoid getting mired in losses for years to come.

Aeropostale has had to deal with fickle customers in the teen-retail space for years, and overall, it has done a good job historically of reading changing trends and responding accordingly. Lately, though, Aeropostale hasn't come up with an answer to its sagging share price. What's in store for the teen retailer, and can it regain the upper hand against Abercrombie and American Eagle? Let's take an early look at what's been happening with Aeropostale over the past quarter and what we're likely to see in its report.

Will Aeropostale avoid a big loss this quarter?Analysts haven't been too excited about Aeropostale's earnings prospects in recent months, as they've widened their October-quarter loss estimates by $0.07 per share and made even larger negative adjustments to full-year fiscal 2014 and 2015 projections. The stock has suffered as a consequence, falling 22% since mid-August.

All of those losses came after the company reported its fiscal second-quarter results in late August, with a terrible report sending shares down 20% in a single day. Like Abercrombie and American Eagle, Aeropostale experienced major problems in the quarter, with comparable-store sales down 15%, pulling total revenue down 6% and posting a worse-than-expected loss. Guidance for a loss when analysts had expected a profit of roughly equal magnitude also weighed on investor confidence, especially as competition from newer chains became fiercer.

But Aeropostale stock fell so far that the company got attention from private equity investors. In mid-September, Sycamore Partners bought an 8% stake in the teen retailer, and with a reputation for trying to take companies private, shareholders lauded the move by sending the stock higher. The stock got another boost last month, when Hirzel Capital Management joined the private-equity party by increasing its holdings in Aeropostale to 6%. Yet without an improvement in fundamental business results, it's hard to get too excited about Aeropostale's future, especially with costs on the rise even as net sales decline.

The real challenge Aeropostale faces isn't from Abercrombie or American Eagle, both of which have also struggled. Rather, companies like Urban Outfitters (NASDAQ: URBN  ) and H&M have hammered on the retail segment, with Urban Outfitters in particularly having finally come back into style after a long period of relative stagnation. One secret to Urban Outfitters' success has been coming up with different store concepts that target several different lucrative demographic groups, helping it diversify and avoid the challenges that focusing on a single group can bring.

In the Aeropostale earnings report, watch for management to explain its recent decision to create a poison-pill defense against further takeover activity. The retailer needs to boost its results in the holiday season if it wants to avoid a big fight among activist investors to push Aeropostale in the right direction.

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