Morgan Stanley Reiterates Underweight on Aeropostale

Morgan Stanley reiterated its Underweight rating on Aeropostale ARO after the company missed its Q1 targets. In a research report published today, Morgan Stanley states, "ARO's 1Q11 EPS was inline with lowered expectations, but the company's 2Q11 outlook was a considerable miss vs. Street and MS estimates ($0.11 - $0.16 guidance vs. MS at $0.25 and consensus at $0.27), with “challenging sales trends” and higher promotions driving the weakness in 2Q11. At 1Q11-end, total inventory grew 16% y/y, outpacing the 1Q sales growth by 15 percentage points. This represents the third consecutive quarter for inventory concerns at ARO. 1Q11 gross margin declined 1,030 bp to 29.1% while SG&A was flattish as a % of sales. Consequently, operating margin declined to 5.9% from 16.2% LY. On Thursday, Aeropostale lost 0.51% of its value to close the day at $21.34. Its shares had a disastrous pre-market trading session, however, tumbling 12.32% to $18.71.