Aeropostale Seen Winning 57% LBO Premium: Real M&A

Aeropostale Inc., the worst performing teen-clothing stock in the last three years, still has enough value to reward shareholders with a takeover premium of as much as 57 percent.

After Sycamore Partners disclosed an 8 percent stake in the retailer last month, investors began to wager that the private-equity firm will eventually make a buyout offer for the rest of the $750 million company. The stock is still down 58 percent since 2010, the biggest decline among its North American competitors, amid fashion misfires that reduced profits.

While the New York-based chain revamped its clothing to better appeal to 14- to 17-year-old shoppers, plunging margins leave a buyer plenty of room to make further improvements, Morningstar Inc. said. Avondale Partners LLC estimates Aeropostale may be able to sell itself for as much as $15 a share, 57 percent more than last week’s price. The median sales multiple paid for apparel-retail deals in the region implies a $16 bid, according to data compiled by Bloomberg.

If Aeropostale can “turn things around, then there’s probably a lot of value as a public company or as an LBO candidate,” Howard Tubin, a New York-based analyst at Royal Bank of Canada, said in a phone interview. “The valuation depends on whether it can get back to historical levels of profitability.”

Michael Freitag, a spokesman for New York-based Sycamore who works for Joele Frank Wilkinson Brimmer Katcher, declined to comment on the firm’s plans for the investment. Jessy Adams, a spokeswoman for Aeropostale who works for FTI Consulting Inc., also declined to comment.

Big Plunge

Aeropostale shares plunged 20 percent on Aug. 23 to $8.76, the lowest since 2008, after the company said that same-store sales slid 15 percent in the second quarter because of weak customer traffic and increased promotions. In the past three years, it’s been the worst performer in the Bloomberg Industries Teen/Young Adult Clothing Stores Index, which gained 24 percent.

Sycamore, through its Hummingbird LLC unit, bought 6.25 million shares of Aeropostale from Aug. 23 through Sept. 12 for prices ranging from $8.27 to $8.76 apiece, according to a filing with the U.S. Securities and Exchange Commission. It’s the fourth-biggest shareholder, data compiled by Bloomberg show.

Today, Aeropostale shares fell 2.2 percent to $9.34.

In June, Sycamore completed a $534 million buyout of Hot Topic Inc., another retailer that caters to young adults. In 2012, it bought struggling women’s clothing chain Talbots Inc.

Sycamore Record

The New York Post wrote in a Twitter post last month that Sycamore has no immediate plans to bid for Aeropostale. This week, The Street’s reported that the private-equity firm is “ultimately looking to buy” Aeropostale, citing an unnamed source close to the situation.

Given Sycamore’s track record, Richard Jaffe, a New York-based analyst at Stifel Financial Corp., says Sycamore probably will attempt to take Aeropostale private.

“Investors should be very excited about Sycamore being on board,” Rebecca Duval, a Boston-based analyst at BlueFin Research Partners Inc., wrote in a Sept. 19 report. “In about two years Sycamore has made great progress in turning around Talbots, a company many had written off as dead.”

Duval was director of production at Talbots when Sycamore first took a stake in it. As far as Aeropostale, “the surgery that needs to be done doesn’t even compare to what had to be done at Talbots,” she wrote.

Store Glut

Aeropostale has too many stores, and a private-equity buyer could shut down the underperforming ones, said Jaime Katz, a Chicago-based analyst at Morningstar. There were more than 1,100 stores as of Aug. 3, including its P.S. From Aeropostale chain, which targets kids ages 4 to 12, according to a filing.

Aeropostale’s operating margin, on an annual basis, peaked at about 17 percent for the year that ended in January 2010 and has been slipping ever since. The chain had almost 10 cents of operating losses for each dollar of sales in the past 12 months, data compiled by Bloomberg show. Its gross margin, or ability to mark up prices, is the lowest in the peer group, the data show.

“To go from 17 percent margins to negative margins in three years says something about the business,” Katz said in a phone interview. “Either the merchandise isn’t resonating properly or the business isn’t being run efficiently. Something’s not working.”

Sycamore’s investment may have strategic benefits because of its 51 percent stake in Mast Global Fashions, one of the world’s largest independent apparel sourcing companies, according to Maxim Group LLC’s Rick Snyder.

‘Merchandise Problem’

Mast, a unit of L Brands Inc., could help Aeropostale transform into a “fast fashion” brand if it decided to make that shift, and Mast’s scale may even reduce Aeropostale’s average unit costs, the New York-based analyst said.

“Aeropostale has great distribution, but they have a merchandise problem, and Mast has merchandise, but would love this type of distribution,” Snyder said in a phone interview. “Sycamore can potentially tie those two together. That makes a tremendous amount of sense.”

Based on Sycamore’s previous buyouts, a deal with Aeropostale could surface in the next six to nine months, Jeff Black, a Nashville, Tennessee-based analyst at Avondale Partners LLC, wrote in a Sept. 18 report. He estimates that the retailer would fetch $12 to $15 a share in a takeover. Morningstar’s Katz, whose fair value estimate for Aeropostale is $12, said she also could see a deal in the $14 to $15 range.

Acquisitions of North American apparel and shoe retailers had a median revenue multiple of 0.5, according to data compiled by Bloomberg. That implies $16 a share for Aeropostale, valuing the company at about $1.2 billion net of cash, the data show. The company has no debt.

A potential takeout price likely will be determined by Aeropostale’s performance in the current quarter and during the holiday shopping season, Duval of BlueFin Research said.

“It really will depend on when Sycamore will consider the right time to make the offer and if current business conditions persist or get better or worse,” she said.

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