Aeropostale Bouncing Back After Huge Earnings Sell-Off

Shares of struggling retailer Aeropostale ARO surged Tuesday after getting crushed on Friday in the wake of the company's Q1 earnings results.

Around mid-day, the stock was trading up 15 percent to $3.92. The catalyst for the move in the name was an announcement that the company had entered into "definitive agreements" with affiliates of Sycamore Partners for $150 million in senior secured credit facilities.

Despite having a market cap that has dwindled to just over $300 million, Aeropostale has attracted very heavy trading volume in the last two sessions. The company was once a hot retailer with teens and young adults, but the wheels have come off completely over the last couple of years. The Aeropostale story is a fairly simple one to understand in terms of the company's financials -- and stock price.

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Sales fell from $2.386 billion in fiscal 2012 to $2.090 billion in fiscal 2013. The retailer also recorded a steep $142 million loss in its most recent fiscal year after seeing net income fall by more than 50 percent in fiscal 2012. Sales, margins and net income have all deteriorated to a significant extent and analysts are anticipating this trend to continue in 2014.

Wall Street is currently modeling a loss of $1.78 per share on just $1.88 billion in revenue for fiscal 2014. In the first quarter, Aeropostale reported an adjusted loss of $0.52 per share compared to a loss of $0.16 in the year ago period. Sales fell 12 percent to $395.86 million, which missed analysts' consensus revenue estimates of $410.04 million by a wide margin.

Looking ahead, Aeropostale guided for a loss of $0.55 to $0.61 in the second-quarter compared to current estimates calling for a loss of $0.50.

At this point, the company looks like a very speculative bet. Nevertheless, that does not appear to be the likely scenario as a string of disappointments have triggered a nearly 83 percent decline in the share price over the last five years. Year-to-date, the stock is down almost 57 percent.

Last week, RBC Capital analyst Howard Tubin, who has been bullish on the stock during its decline, finally threw in the towel and downgraded the shares to Sector Perform from Outperform and cut his price target to $6 from $14.

Tubin wrote, “to say our call on Aeropostale shares has been bad would be a colossal understatement." Based on Tuesday's trading action, it would appear that the analyst may have capitulated at the bottom. Nevertheless, despite the Sycamore financing, this remains a very risky play as the company will not be able to withstand too many more huge quarterly losses.

Shares of Aeropostale closed Tuesday at $3.91, up 14.95 percent.