Aeropostale (NYSE:ARO) can be undoubtedly regarded as one of the biggest losers in the U.S. apparel industry post recession. The retailer started the year 2015 struggling for stability and it ended the year on a worse note. It’s stock has fallen over 90% over the last year and is currently trading at an all time low of $0.26. Aeropostale may not stay on public markets for long unless it employs a reverse stock split in order to restore compliance with NYSE regulations. However, this will not be enough because the pace at which the retailer is burning cash is alarming and it still seems a long way from generating profits.
In a desperate attempt to bolster its bottomline, Aeropostale signed a brand licensing deal for selling home textile in October and followed it up with an apparel licensing agreement for Ireland in November. Earlier in the year, the retailer had inked similar licensing deals in India and Indonesia as well, which makes it apparent that struggles in the U.S. have taken the company to uncharted territories. While exploring the licensing domain seems a valid move, given that expenses involved will be minimal, these deals are just not enough to counter Aeropostale’s core issues.
Our price estimate for Aeroposatle is at $2.22, implying a significant premium to the current market price. However, we are in the process of updating our estimate.
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Aeropostale Fell Out Of Compliance With NYSE Regulations
In September, Aeropostale unveiled that it had received a listing compliance notification from NYSE, which requires participant companies to maintain a share price of at least $1 to remain listed in the exchange. The company said that it was considering a reverse stock split to restore compliance. While a reverse stock split would not help increase shareholder returns, it could ensure that the retailer remain on the Big Board. With its persistent dismal performance and an apparent disagreement at the top leadership level, it is highly unlikely that the company will have any positive news to share on the operational front. There thus seem to be few triggers that can rally the demand for its shares in the near term. At this point, a reverse stock split, which essentially means cutting the number of shares outstanding, seems the only way out. Because if Aeropostale gets delisted, it will be yet another curve in its downward spiral. The company already has a significant amount of debt and contractual lease obligations. However, there have not been any updates on this front so far, which indicates indecision at the top levels of management.
Textile Licensing Agreement
In October, Aeropostale signed a brand licensing agreement with with Himatsingka America for selling home textiles under its brand name. Under the terms, Himatsingka will design and manufacture home textiles such as bedding and bath linens under Aeropostale’s brand name, and distribute them to various wholesale channels and big box retailers throughout North America. The first Aeropostale home collection is expected to hit stores by the back-to-school season next year. The retailer believes that it has enough brand visibility in the U.S. to attract a broader spectrum of customers with products other than casual apparel. However, Aeropostale’s name is no longer associated with quality, which can make customers skeptical about its branded home textile products. Even though the retailer expects this deal to be a new source of steady income, stiff competition from specialty player Bed Bath & Beyond (NASDAQ:BBBY), online behemoth Amazon (NASDAQ:AMZN) and numerous private label brands will not allow easy revenues.
International Licensing Agreements
In July, Aeropostale inked a couple of licensing deals in India and Indonesia to further its Asian expansion. It entered an agreement with Arvind Lifestyle Brands Limited in India and PT Mitra Adiperkasa TBK (MAP) in Indonesia to open licensee stores in both the regions. In India, Aeropostale plans to open 50 standalone stores, 150 shop-in-shop locations and e-commerce operations over the next five years. For Indonesia, the retailer intends to open 10-12 stores by 2020. Aeropostale signed another similar deal in November with Shuz 4 U International Ltd. to open stores in Ireland.
With its domestic business facing the risk of insolvency, it makes sense for Aeropostale to expand internationally in order to diversify its risk geographically and generate additional revenues through expansion. It also makes sense for the company to expand through brand licensing deals, where the licensing partner takes care of the majority of costs and the brand receives a steady income. However, apart from India, Aeropostale cannot expect notable income from other markets given its weak expansion plans and small market size. Ireland isn’t the biggest apparel market in Europe and Aeropostale’s partner has opened just 12 stores in the last five years. In Indonesia, 10-12 stores in five years will not make a difference for the company. Even in India, competition from local and global players would not allow Aeropostale easy revenues.
The year 2015 did not bring any respite for Aeropostale, as it reported comparable sales decline in double digits for all the three quarters. The company’s revival efforts have little substance and its management is reportedly in a pickle. Investors have virtually no confidence left in the company and that is why its market value has plummeted to just $22 million. This may seem an appropriate time for a strategic or a financial buyer to swoop in and buy the company for a small premium. But the question is – will there be any notable return on investment? Aeropostale has just $40 million in cash, its stores are leased and the major assets it has are merchandise inventory and equipment. It’s brand name isn’t popular anymore and growth arenas are gloomy, so it does not appear the best investment on the surface. However, a buyer could reshuffle the management structure, provide some steam to P.S. from Aeropostale expansion, and probably look to turn the company into a kids apparel brand. In that scenario, the buyer could get something out of Aeropostale, but not without significant investments.
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