My issue with ARO comes down to the fashion risk that they are exposed to. Yes, they say that they cater to deliver low priced good and so we might think that fashion doesn't matter, but if it was just low cost, they wouldn't be in a mall. Of the mall retailers though, are they the lowest cost? I use Wal*Mart as my low cost benchmark and even when removing their location as an equation, they aren't selling the same clothes. This means that ARO must believe they have better fashion, which means that there is fashion risk at the end of the day.
What I do like about ARO is that they are very focused on a specific segment of the market. They have a defined age group and know that they want to be lower cost than their peers in the mall. Even if they miss fashion in a given year, it's okay, because they are so focused on a certain customer that they will be able to get it back. In addition, their margins are so large that even if they only get fashion right for 7 of 10 years and operate at a loss during the other 3 years, it will be a net positive gain, and our statistical expected result on any given year is a decently large profit. It does mean that we can't simply assign a multiple to their best year though, because we expect them to miss fashion on certain years.
I don't understand just how large of a factor their fashion is and just how bad things could get during a "bad" year. Estimating a good year isn't so hard, because they've demonstrated plenty of those for us to use as a general benchmark. The challenge is identifying what a bad year would look like, and what we think the odds are of any given year "getting" fashion or missing fashion.
Something good to analyze might be Ross clothing stores, ticker ROST, because they sell many brands with the focus of being at a discount to the price others sell at. Their history might give us some guidance on what happens in clothing environments.
ARO has been bugging me a lot because I want to understand what drives the value of the stock and what I should be focusing on. I love the moves that their management team has been making and so I just wish I understood this last piece concerning fashion so that I could find an intrinsic value and be prepared to buy it if it falls below that price.
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