By  on October 16, 2006

NEW YORK — Extensive discounts may have driven back-to-school sales at Aéropostale, but analysts are skeptical continued promotions will equal success for the holidays.

As a result, two equity firms downgraded the stock of the specialty retailer. On Oct. 6 Citigroup downgraded the retailer from a "buy" to a "hold" rating, and on Oct. 4, Prudential Securities downgraded the company from "overweight" to "neutral."

Eric Beder, senior vice president at Brean Murray, Carret & Co., said the markdown strategy previously worked for Aéropostale because the company was up against easier year-over-year sales comparisons. "Now they are up against [more difficult same-store sales] numbers, and the question is, can they continue on a path to success?" Beder said. "Deep discounting really only works once for driving strong results."

Aéropostale remains one of the most aggressive discounters in the mall compared with competitors such as American Eagle and Hollister, both of whom have continued to reduce their level of discounting to drive higher productivity, said Kimberly Greenberger, retail analyst at Citigroup.

As of Sept. 29, Aéropostale was still running deep discounts, with up to 50 percent off everything in the store.

"The only times Aéropostale has driven really strong results in terms of comps is when they are heavily discounted," Beder said. "The consumer expects Aéro­postale to discount and will wait for those discounts before they shop at the store."

While the retailer will continue promotional activity to increase foot traffic, the company assured Wall Street that it will not anniversary last year's blowout holiday sale, said Christine Chen, equity research at Pacific Growth Equities. And compared with last year, more merchandise is being sold at full price this year.

Chen said that, while comps could moderate during the fourth quarter, she expects the momentum from the b-t-s season to carry over into the holidays.

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