Aeropostale Needs to Bring Back Shoppers or Go Private

Updated on
Chart of Aeropostale's Market Value

Aeropostale Inc. lost 95 percent of its value in five years. To keep it from falling further, it needs a successful back-to-school season or a buyout.

Mounting losses and 11 consecutive quarters of falling same-store sales have dragged down the teen retailer’s shares to $1.95 apiece, near a 13-year low. If the price drops to below $1, the stock could be in danger of being delisted. Revenue forecasts look grimmer this year than last and only one of more than 20 analysts is bullish.

Aeropostale Chief Executive Officer Julian Geiger says the back-to-school shopping season, which begins next month, is when the company’s turnaround efforts should come to fruition. Timed to coincide with the season, the clothing chain will be changing up its collection of merchandise.

If the $155 million retailer doesn’t win back customers, its last best hope may be to find a private-equity firm that sees a way to make money in stomaching Aeropostale’s challenges.

“What we need to see are certain changes begin to work and gain some traction with shoppers,” Howard Tubin, a New York-based analyst for Guggenheim Securities, said in a phone interview. “If it doesn’t, the board’s going to have to realistically say, ‘What are the other options out there for us?’”

A representative for New York-based Aeropostale declined to comment. CEO Geiger said on a May earnings call that he feels confident Aeropostale “will be in a position to win” because of the changes the company has made.

“Back-to-school is coming, and we’re so enthusiastic about seeing the results that it will bring,” he said.

Few LBOs

Aeropostale for years was considered one of the most likely leveraged-buyout candidates in the retail industry -- and that was back when private-equity firms were in buying mode. Today, though, LBOs of publicly traded companies are few and far between. Buyout firms are focused on exiting investments, and those that are buying are eschewing public targets for cheaper, private ones and carve-outs.

For investors still hoping for a buyout offer, there is one data point in their favor: Aeropostale is valued at a 90 percent discount to even the bleakest revenue forecast for this year, according to data compiled by Bloomberg. That means if it can stage a comeback -- at least on the top line -- the current stock price is a bargain.

Still, it can be argued that there are more appealing public candidates for buyout firms than Aeropostale. Earlier this year, Jefferies Group’s Randal Konik flagged other clothing stores such as Guess? Inc. and Michael Kors Holdings Ltd. as those that would offer a more than 20 percent return to a financial buyer. The analyst left Aeropostale out of his LBO analysis because the company is posting operating losses.

Sycamore Stake

Sycamore Partners, a private-equity firm known for targeting slumping retailers, took a stake in Aeropostale but stopped short of a buyout. Instead, it loaned Aeropostale $150 million in 2014, giving the chain more time for a turnaround. Aeropostale’s existing cash resources will allow it operate for the next 23 months without requiring additional financing, according to data compiled by Bloomberg.

Sycamore owned 7.9 percent of the company as of April. That month, Aeropostale said that Stefan Kaluzny, a managing director at Sycamore, would step down from the retailer’s board. A representative for the firm declined to comment on its plans for its Aeropostale stake.

Past acquisitions by Sycamore include Talbots Inc., Jones Group Inc. and Hot Topic Inc. The firm abandoned a bid for Chico’s FAS Inc. in February, the Wall Street Journal reported at the time.

Bearish Bets

For now, bets against Aeropostale’s stock are climbing. Short interest has returned to about 10 percent of shares outstanding after it briefly fell below 4 percent in February, according to data compiled by Markit and Bloomberg.

Aeropostale’s board and management team will probably wait to see how the new collection does before they would consider options such as a sale, said Betty Chen, a San Francisco-based analyst for Mizuho Securities USA Inc.

“They’re definitely hoping that the new collection will bring about a revival,” Chen said in a phone interview. “We’ll have to wait and see if the traffic materializes.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE