- Struggling retailer had warned that supplies were in jeopardy
- Li & Fung would supplant MGF as chain's top source of clothing
Aeropostale Inc., which said last month that it was feuding with a clothing supplier and could face costly disruptions, has lined up alternative sourcing from Li & Fung Ltd., according to people with knowledge of the situation.
Li & Fung, a Hong Kong clothing vendor that was already working with Aeropostale, will now be providing the majority of the chain’s sourcing, said the people, who asked not to be identified because the matter isn’t public. It is displacing MGF Sourcing as the teen retailer’s main supplier, they said.
Aeropostale, a money-losing retailer focused on teens, said in March that MGF was holding up the delivery of merchandise and violating the terms of its agreement. The dispute threatened to cost the company millions of dollars if the delays continued, Aeropostale said at the time. MGF has said that it was merely seeking protection from Aeropostale, which has suffered years of red ink and declining sales.
Representatives from Li & Fung and Aeropostale declined to comment.
In an e-mailed statement this week, MGF reiterated that it wasn’t in violation of its sourcing agreement with Aeropostale. “MGF has taken action to protect itself by reducing payment terms in accordance with the agreement,” the company said.
MGF became one of Aeropostale’s key suppliers as part of an agreement with Sycamore Partners, a private equity firm that acquired a large stake in the retailer in 2013. In 2014, Sycamore loaned Aeropostale $150 million, brought on two board members and set up the deal with MGF.
At the time, Sycamore was seen as possible savior for the troubled chain. Some investors expected the investment firm to eventually acquire the rest of Aeropostale, helping redeem a stock that has been declining since 2010. But since then, ties with Sycamore have frayed. Sycamore’s directors, Stefan Kaluzny and Kent Kleeberger, have both left the apparel company’s board.
Aeropostale’s results, meanwhile, have continued to worsen. Last month, the company posted a wider fourth-quarter loss and embarked on a plan to explore its strategic alternatives. The news sent the stock down 46 percent in a single day.
Aeropostale’s agreement with MGF, which is part of Sycamore, required it to purchase between $240 million and $280 million in goods a year.
If Aeropostale falls short of the threshold, the company is required to make “certain agreed upon principal payments and shortfall payments” beginning in fiscal 2016, according to a regulatory filing. Following the first three years of the minimum purchase requirement, Aeropostale can terminate the agreement -- if it gives nine months’ notice. The company would owe a termination fee that depends on how much of the contract remains.
Aeropostale renewed a 10-year sourcing agreement with Li & Fung more than a year ago, Chief Executive Officer Julian Geiger said on an earnings conference call last March.