Aeropostale's Surge: Like Lambs to the Slaughter

In what has become an almost weekly ritual, a slow-moving retailer has seen its stock jump massively due to news of a big investor getting in. Now, in almost every Writing 101 workshop, you hear an instructor bang on about using passive tense, and how it makes writing weak. So I said Aeropostale (NYSE: ARO  ) had "seen its stock jump" only because the company hasn't done a single thing to make shares move. All it did was look like a target for Sycamore Investors' Hummingbird LLC division, which announced an 8% stake today.

Of course, the market loved it, and Aeropostale's stock jumped 19% by midday. That's bad news.

At an absolute standstill
The reason to drop $54 million into Aeropostale is the usual reason -- it seems cheap. Hummingbird called it "an attractive investment," and there's absolutely no way that could be a reference to the business itself. Last quarter, Aeropostale dropped revenue by 6%, with comparable-store sales falling 15% compared to the previous year. That's bad. That's the opposite of good.

To put it in perspective, Gap (NYSE: GPS  ) increased comparable sales by 5% over the previous year, resulting in a 31% jump in earnings per share. Aeropostale lost $0.43 per share last quarter -- a $0.43 drop from 2012.

Hummingbird's long-term plan for the retailer isn't clear yet, but already there's speculation about Aeropostale going private. That's basically the only option that makes sense right now, but it's far from a great reason to get into the stock.

The private problem
Apart from holding a small position, Hummingbird is currently on the outside. Even with a bigger slice of the pie, it's by no means certain that the investor would be able to drive meaningful change. Bill Ackman's foray into J.C. Penney (NYSE: JCP  ) made it pretty clear that hedge funds don't always "get" retailers. Ackman ended up losing about $470 million when he finally got out of J.C. Penney, even though the business took his advice for a year.

Even if it avoided making changes right off the bat and simply focused on taking the business private, Hummingbird might still run into an unhappy board and a poison pill. As Safeway's jump today has highlighted, boards are quickly learning how to keep themselves from losing control, and investors are reacting positively.

In short, Aeropostale has a weak core business, and Hummingbird's involvement is far from a guarantee that things are about to turn around. The stock's jump is an overreaction, and it's one more sign of investors following the blind herd. Luckily, we're not all that gullible.

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  • Report this Comment On September 17, 2013, at 6:11 PM, Retailermaven wrote:

    I wouldn't be so cynical off the bat. Not that I think ARO is a breakout star that's going to see double-digit(positive) gains in the next few months, but it looks like something's brewing.

    I've noticed a pretty considerable shift in the product mix for what's traditionally been a very conservative company, with a skew towards bigger-ticket fashion items and generally a lower(but still not low) mix of logo apparel. It's going to take a few seasons for a transition like this to be complete, lest they totally alienate their previous logo-happy customer before the fashionistas step foot in. Their facebook page referenced some in-demand fashion products being restocked a few days ago, translating to at least a few hot sellers, which is a good sign that things are at in the initial stages of catching on.

    I think people are forgetting that Rome wasn't built in a day. For a company that was in an obvious spiral, we're not going to wake up to profits any time before Q2, especially in teen retail, where it's critical to build your following. Gap had its dog-days, as did J.Crew, Urban, et al. I'm optimistic based on the fact that the company has identified they have a problem, and have actively went about changing it. At this point, an injection of capital may be all they need to take it to the next level and expedite turnaround. Even at fire sale prices, no investment company worth its salt would cut a check unless they've seen something worth it coming down the pipeline.

  • Report this Comment On September 18, 2013, at 9:50 AM, TMFRedRam wrote:

    Hey RetailerMaven,

    Those are all great reasons to like Aero. On the ground research, paying attention to trends, and looking at the long game. My point was that that's not why it jumped.

    It jumped because investors saw Hummingbird buy in. If that's your only driver, then that's a bad reason to buy a company.

    Your reasons are spot on, though. I don't know if Aero is doomed, there are just other retailers I like much more. Doesn't make me right.

    Cheers,

    Andrew

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