Aeropostale Looks Like It Will Stay Grounded

When just about every other teen retailer was floundering during the recession, Aeropostale (NYSE: ARO  ) managed to rise above the others, reporting increasing sales and comps as it undercut rivals on price.

But teenage shoppers, who are disproportionately bearing the brunt of the lingering effects of the economic malaise with unemployment rates of 22%, have abandoned the retailer en masse as its fashion choices haven't kept up with tastes and the logo-heavy apparel that was central to Aeropostale's prior success is no longer in vogue.

It's true fashion is notoriously fickle, and teen fashion even more so, but trendy and less expensive fast-fashion clothiers such as Century 21 and H&M have managed to capture the essence of what teens are looking for, even as Abercrombie & Fitch has seen the heights, depths, and plateaus of changes in teen tastes. First they embraced the prep school look, then abandoned it, and finally settled on its surfer-lifestyle brand Hollister as their preferred outlet.

Aeropostale is switching away from its hoodies, jeans, and T-shirt template, but still struggles to find a style that resonates. In in the meantime, investors are watching sales sink and losses widen. With third-quarter earnings set to be announced tomorrow, management has already warned not to expect much in the way of improvement from its disastrous second-quarter effort, saying another loss is in the cards.

The retailer's investors are getting antsy. Late this summer, Hirzel Capital established a sizable position in the company (and boosted its stake again the other day), which was followed by the acquisition of a large tranche by a subsidiary of Sycamore Partners, a private equity firm known for its investments in troubled retailers. It acquired Hot Topic earlier this year and made a play for Billabong before that. And Aeropostale's largest shareholder, Crescendo Partners, just said the teen retailer ought to put itself on the market.

With all these investors pushing the retailer along, management decided it needed a breather to figure out what best to do, so it adopted a shareholder rights plan to protect it from any one investor acquiring too large of a stake. While it will ask shareholders to approve the poison-pill measure at its annual meeting, and will allow it to expire if it isn't approved, Aeropostale at least has space before then in which to work. The plan would be triggered if any one investor acquired 10% or more of the company's stock, but in the meantime it will attempt to introduce new clothing lines that will allow it to charge more.

Seems to me that's a risky strategy, even if it needs to bolster revenues. It's already been failing as a low-cost retailer, and in these still-difficult times, raising prices and reaching for an ephemeral "lifestyle brand" style hardly seems the prescription for what ails it. Handbag maker Coach is also in the midst of a similar identity crisis and is grasping for that elusive ideal.

It hasn't helped. Sales were flat last quarter, missing expectations even if per-share profits beat them. Its North American division is struggling, and the outlook for the coming quarter isn't exactly what you'd call bright. 

A going-private deal just might be what Aeropostale needs, though, and Sycamore Partners, with a track record in the space, would be at least one worthy partner for the process. Since the retailer says the poison-pill defense was not in response to any takeover bid it's received, perhaps it should take the time it's given itself to get its bearings to sound out any of these investors for what their interest level might be.

Having lost almost a quarter of its value so far this year, and with its stock about to get kicked off the S&P MidCap 400 index, Aeropostale could take flight if it were to announce its business was going to become a private matter.

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