Aeropostale Reaches Out To Private Equity Firms Amid Growing Pressure From Investors


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Amid growing pressure from its investors, struggling apparel retailer Aeropostale ( ARO ), has contacted at least two private equity firms to look for strategic options, sources close to the matter said. The retailer is also seeking assistance from investment banks to deal with the pressure from activist investor Crescendo Partners.

Aeropostale's stock has stumbled by more than 35% over the past one year as it reported substantial revenue decline during four consecutive quarters. In November 2013, Crescendo Partners, which holds an undisclosed stake in the company along with its affiliates, had urged the company to sell itself in a letter to the board.

Though the sources said that the company has not yet initiated a sales process, we believe that a buyout might be imminent. Aeropostale's strategies aren't working, its stock price is at a five-year low and Crescendo sees it going for $14 - $16 per share (which is more than 80% premium to its current stock price). Therefore, this might be the apt moment for the retailer to sell its business, to either a strategic or financial buyer.

Our price estimate for Aeroposatle is at $10 , implying a premium of about 30% to the market price

See our complete analysis for Aeropostale

Aeropostale's Business Is Struggling

Aeropostale has been struggling to achieve positive comparable store sales growth for the past three years due to low store traffic and high markdowns. The company mainly offers basic products such as hoodies, jeans and t-shirts, which no longer resonate with fashion conscious teenagers. Although these products were quite popular during the recessionary environment due to their low prices, their demand gradually subsided as customers moved towards other fast-fashion brands. As a result, Aeropostale's comparable store sales fell by 9% and 4% in 2011 and 2012 respectively. This continued in the first quarter of 2013, as the retailer's comparable store sales further declined by 14%. Although the company felt that offering more fashionable clothes will help its sales, it did not work out as expected.

Aeropostale attempted a complete product overhaul for the second quarter, with a head-to-toe approach as it extended its fashion offerings and added new product categories such as footwear. It started offering trendy products like lacy ruffled tunics, studded combat boots, floral anorak jackets, and other similar merchandise.  Management also launched some marketing campaigns to reposition the brand as fashionable. However, these products have so far failed to attract customers as hoped due to high pricing and abrupt change of styles. As a result, Aeropostale reported dismal results in Q2 and Q3 fiscal 2013 (-15% comparable store sales growth in both the quarters), and slashed its outlook for the fourth quarter.  As things stand, the consensus revenue estimate for the January quarter is $690 million and represents a steep 13% decline from the prior year level. Consensus EPS estimate is a sizable loss of 30 cents. Clearly, the turn around has faltered.

Buyout May Be Around The Corner

Even though Aeroposatle adopted a poison pill last November, we believe that a near term buyout is very much possible. Indeed, the stated intention of the Shareholder Rights Plan is not to prevent a sale, but to insure any transaction process is orderly.  Recently, the company cancelled an appearance at the ICR XChange Conference and has no upcoming events listed on its website. Additionally, as we noted above, Aeropostale is said to be reaching out to private equity firms and investment banks to explore probable strategies.

Despite its troubles and the stumbling stock price, many investors have taken a keen interest in the company. A few months back, Sycamore Partners acquired an 8% stake in the company, followed by Hirzel Capital Management LLC's 6% stake. Sycamore Partners is know to acquire struggling retailers as it has bought Talbots, Hot Topic, and most recently, Jones Group ( JNY ). We believe that it can extend an offer to Aeropostale as well given its low market price. Going private might be the only option left for the company since survival for long looks difficult with its dismal sales.

See More at Trefis | View Interactive S&P Capital IQ Analyses

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
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