New Collections Can Make Aeropostale A More Attractive Takeover Option

Teen apparel retailer Aeropostale (NYSE:ARO) may be closer to selling its business. With its falling stock price, a number of investors such as Sycamore Partners and Hirzel have raised their stake in the company. Activist investor Crescendo Partners even sent a letter to the company’s board urging it to go private. Moreover, Aeropostale is said to have recently reached out to private equity firms and investment banks to look for possible future strategies and suitors. ^[1]

While the company might consider going private in the near future, it could struggle to find attractive buyout offers. Aeropostale’s terrible sales growth and low cash are likely to prevent a smooth public-to-private transaction. However, the company is now coming out with some new collections that can change its potential buyers’ perception. Aeropostale is launching new products inspired from TV series Pretty Little Liars and Internet personalty Bethany Mota. Both of them have tremendous teen following, which is an ideal demographic for the retailer. Although we don’t see Aeropostale having a turnaround on account of these collections, good customer response will mean that its recovery can start sooner than expected. Therefore, potential buyers may consider paying slightly more for the company.

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

See our complete analysis for Aeropostale

Poor Sales & Low Cash Can Prevent High Premium During A Buyout

It has been more than two years since Aeropostale saw positive comparable store sales growth. Last year, the retailer registered a sales decline of 14%-15% in three consecutive quarters. Given the apparel retail market trends in the recently concluded holiday season, it might not be surprising if Aeropostale’s results worsen in the fourth quarter. The company’s sales are dismal and its store consolidation strategy will make revenue growth even more difficult. We believe that Aeropostale’s probable buyers will analyze this factor carefully before extending an offer to the retailer.

Moreover, the company has high operating lease costs, which somewhat limits its cash flow generation abilities. Also, its cash and cash equivalents are low and have declined significantly during the first nine months of fiscal 2013. At the start of the fiscal year, Aeropostale had close to $231 million in cash and cash equivalents, which decreased to $68 million at the end of Q3 fiscal 2013. Therefore, even as Crescendo sees the retailer going for $14-$16 per share, we believe that buyers might not want to pay such high premium.

However, New Collections Can Add Some Value

Historically, Aeropostale has only focused on basic products such as t-shirts, jeans, hoodies, etc., which is one of the main reasons responsible for its troubles. This built a “cheap basic product” brand image of the company, which undermined its recent efforts of being more fashionable. However, we believe that Aeropostale’s new collections can do well since they are likely to influence a vast group of customers.

Back in December, the retailer introduced an exclusive collection in partnership with Bethany Mota, an 18-year old established power player in the social media world. ^[2] The collection featured a range of apparel, accessories and jewelry designed by Bethany to reflect her own lifestyle. The company kept the starting price of this collection at $5 so that buyers do not find its products expensive, which was the case with Aeropostale’s previous fashion launches. Bethany Mota has a huge teenage fan base (close to 5 million subscribers of her YouTube Channel) and we believe that they will show some affinity towards these products. ^[3] According to some interviews conducted with customers exiting from Aeropostale stores, a change from basic logo products to a more fashion-relevant range was a pleasant surprise.

A more important launch for the company is its first ever Pretty Little Liars collection in partnership with Warner Bros. ^[4] TV show Pretty Little Liars has been a sensation among teenage viewers, becoming the most tweeted show in television history. ^[5] Over 2 million viewers watch its weekly episodes and more than 4 million viewers watched its Halloween special. The collection featuring outfits based of the personalities of the show’s stars is designed by Pretty Little Liars‘ costume designer Mandi Line herself. The collection’s prices are kept in $18-$72 range, which should resonate well with cost conscious teenage buyers. The company strategically kept the collection’s launch date same as the season’s premier to leverage the viewers’ excitement to enhance sales. This collection has hit all of Aeropostale’s stores as well as its online channel. Therefore, we believe this can have a positive impact on the retailer’s results in the near future.

Though we’re not looking at a complete overhaul for the company, it can get a start with these two product lines. If this happens, Aeropostale will be well-positioned to gradually turn around its brand image. This might encourage a strategic or a financial buyer to pay a little extra for the company in the event of a buyout.

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1. Aeropostale Reaches Out To Private Equity Firms Amid Growing Pressure From Investors [↩]
2. Aeropostale Launches Exclusive Collection With Bethany Mota, Aeropostale, Dec 6 2013 [↩]
3. Bethany Mota Fashion Beauty Fun, YouTube [↩]
4. Aeropostale Partners With Warner Bros To Launch First Ever Pretty Little Liars Series-Inspired Collection, In Collaboration With Costume Designer Mandi Line, Aeropostale, Jan 7 2014 [↩]
5. Twitter’s Biggest Show: Pretty Little Liars Breaks Another Social Media Record, People.com, Jan 14 2014 [↩]