Aeropostale shares sink on downgrade

Shares fell 99 cents, or 5.8 percent, to $16.06 after earlier reaching a more than two-year low of $15.75. The stock has traded between $16.16 and $37.40 over the past year.

Aeropostale has been one of the few strong performers in the retail sector, as its focus on promotions and value has been a good match with the current economy. Consumers are cutting back on spending and hunting for bargains amid a shaky job market and tightening credit.

However, Brean Murray, Carret & Co. analyst Eric Beder said that as the economy deteriorates, Aeropostale will lose strength.

"While the company has been carving up significant market share over the last 15 months, we believe these gains are about to slow," he wrote. "Further, we believe more difficult margin and sales comparisons will make it even more difficult for the company to drive further upside."

To be more competitive in the current environment, retailers such as American Eagle Outfitters Inc. have lowered prices and emphasized promotions. Beder said this has caused Aeropostale to become more promotional as well, resulting in the company "winning the teen battle but losing the war" as it gains market share.

"The cost of this gain has been that Aeropostale has been aggressively matching and beating American Eagle, which has had to resort to an orgy of selling to clear out bloated inventory," Beder wrote. "We believe this response has reduced the upside potential for Aeropostale."

He lowered his rating to "Sell" from "Hold" and set a $14 price target on the stock. He also lowered his 2008 earnings estimate to $2.15 from $2.21, and his 2009 earnings estimate to $2.20 from $2.46.