Sycamore Takes 8% Stake In Aeropostale; Are We Looking At A Probable Buyout?

Private equity firm Sycamore Partners recently disclosed in its filings that it has acquired an 8% stake in teen apparel retailer Aeropostale (NYSE:ARO). ^[1] The firm stated that it bought about 6.25 million Aeropostale shares between August 23 – September 11, for $8.27 – $8.75 apiece.

The apparel retailer has been struggling since the recession set in and its stock price was at a five year low before the disclosure. With stock price at its lowest point, Aeropostale appeared as an attractive investment for Sycamore. ^[2] The private equity firm also stated that it will communicate with the company’s management about its business, core issues, future plans and assets strategy. Following this news, Aeropostale’s stock price increased by about 18%.

Although Sycamore Partners did not comment on taking Aeropostale private, possibilities of a future buyout is a possible consideration. ^[3] The company’s lack of debt and solid cash flow generation makes it an attractive buyout candidate. ^[4] Moreover, Sycamore Partners is not new at buying struggling retail companies since it has bought two retailers Talbots and Hot Topic in the last couple of years. We believe that selling its business might not be such a bad idea for Aeropostale which could then revive its business with more flexibility and less scrutiny.

See our complete analysis for Aeropostale

Why Has Aeropostale Been 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%. ^[5] It has often been said that if Aeropostale wants to bring back its customers, it needs to be more fashionable. Although the company tried that, the results were not as expected.

Aeropostale tried 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. ^[6] It started offering trendy products like lacy ruffled tunics, studded combat boots, floral anorak jackets etc and launched some marketing campaigns to reposition the brand as fashionable. ^[7] However, these products failed to attract customers due to their higher prices and sudden change of styles. ^[7] As a result, Aeropostale reported dismal results in Q2 fiscal 2013 (-15% comparable store sales growth) and slashed its outlook for the third quarter. It appears that nothing is going right for the retailer at the moment.

Will There Be A Buyout?

Aeropostale is not the first struggling retailer Sycamore Partners has set its eyes on. In August 2011, the private equity firm unveiled a 9.9% stake in Talbots, a women’s apparel and accessories retailer. In its filings, Sycamore had stated that the stock was an attractive investment, same as what it has claimed in the case of Aeropostale. ^[3] The firm made an offer to buy the remaining company four months later and eventually, bought Talbots for $369 million in May 2012. ^[8] Talbots had been struggling for a while before it decided to go private for a lower bid than the earlier offer. In March this year, Sycamore reached another deal to acquire teen apparel retailer Hot Topic for $600 million. ^[9]

According to Bloomberg, during the period of October 2011-October 2012, Aeropostale’s valuation was 9.6 times its free cash flow. The figure was the lowest among its competitors, thus making it a potentially attractive acquisition target. ^[4] Moreover, Aeropostale has healthy room for growth in international markets, where its pricing could resonate well with the value conscious consumers. In the U.S., success of its relatively new business – P.S. from Aeropostale and growth of online channel provide some hope. Apart from addressing its core issues, Sycamore can focus on these aspects to revive Aeropostale’s business if it decides to buy the company.

Going private will liberate Aeropostale’s resources, which can be then directed towards development of its e-commerce channel and international expansion. Moreover, the company can now better focus on its long-term strategies as private equity firms have longer holding periods. However, Sycamore may try to make big changes to the top level management, feeling that new leadership can better guide the business. This can result in Aeropostale’s original management losing control, and is one of the factors that can restrain the company from going private.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Sycamore takes 8% stake in Aeropostale, Reuters, Sept 17 2013 [↩]
2. Aeropostale’s shares jump after private-equity firm takes a stake, Market Watch, Sept 17 2013 [↩]
3. Sycamore Now Targeting Aeropostale, The Wall Street Journal, Sept 17 2013 [↩] [↩]
4. Aeropostale Seen as Next Hot Topic on discount, Bloomberg, Mar 19 2013 [↩] [↩]
5. Aeropostale’s SEC filings [↩]
6. Aeropostale’s Q2 fiscal 2013 earnings transcript, Aug 22 2013 [↩]
7. Aeropostale Tries Makeover In Time For Back-To-School, Crain’s New York Business, Aug 11 2013 [↩] [↩]
8. Talbots Accepts Lower Sycamore Bid in $369 Million Takeover, Bloomberg, Jun 1 2012 [↩]
9. Sycamore Partners To Buy Hot Topic For About $ 600 Million, RTT News, March 7 2013 [↩]