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Aeropostale Rallies on Sycamore Deal Closure - Analyst Blog

Posted: 5/28/2014 3:20:00 PM
Referenced Stocks: AEO;ANF;ARO;CTRN

Shares of Aeropostale, Inc. ( ARO ) rallied 15% on the index following the completion of earlier announced $150 million financing deal with Sycamore Partners. The deal will bail out the beleaguered teen apparel retailer by mitigating any chances of near term liquidity crisis.

Aeropostale witnessed its cash reserves fall 83.5% year over year to $24.5 million as of May 3, 2014, that could have resulted in potential cash crunch.

In Mar 2014, Aeropostale inked the strategic deal with Sycamore Partners and its affiliates. As per the deal, Aeropostale will have access to $150 million worth of credit facility, which comprises five-year $100 million term loan facility and a ten-year $50 million term loan facility.

The deal also includes a sourcing arrangement with MGF Sourcing, one of the associates of Sycamore. The deal will allow Sycamore to acquire up to 5% of common stock at $7.25 per share (closing price on Mar 12, 2014).

Moreover, through sourcing agreement with MGF sourcing, Aeropostale has committed to buy the minimum merchandise each year for a decade. By fulfilling the minimum buying requirement, Aeropostale will have all its amortization payments, related to the credit financing, rebated in full.

Also, the company appointed two new members namely Stefan Kaluzny, managing director at Sycamore and Julian Geiger, former Chairman and CEO of Aeropostale, to its board of directors.

Aeropostale has been disappointing on the earnings front for sometime now. Aeropostale along with its peers American Eagle Outfitters, Inc. ( AEO ) and Abercrombie & Fitch Co. ( ANF ) has been under tremendous pressure as the teen retail environment remains challenging.

Aeropostale has posted losses for five consecutive quarters. In the most recent concluded quarter, this Zacks Rank #3 (Hold) stock posted loss of 52 cents, narrower than the Zacks Consensus Estimate of a loss of 72 cents, but wider year over year. Sales plunged 12% to $395.9 million and missed the Zacks Consensus Estimate as well. Comparable-store sales (comps) declined 13% year over year versus a 14% fall last year.

Going forward, the company plans to remain focused on undertaking initiatives to transform and grow its brand. With sustained implementation of operational, marketing and merchandising strategies, coupled with its cost-curtailment program, Aeropostale is likely to improve in the long term.

Other Stock to Consider

A better-ranked stock in the same industry is Citi Trends, Inc. ( CTRN ), with a Zacks Rank #1 (Strong Buy).

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