Will Pretty Little Liars Change the Story for Aeropostale?

Teen retailer Aeropostale's stock hasn't been too pretty since the summer but a collaboration with a hot TV teen property may change its story.

Jan 17, 2014 at 6:30PM

Four Pretty Little Liars may just change the sad story of Aeropostale (NYSE:ARO) the specialty mall-based teen retailer whose stock price has been halved since last summer. The company announced that it will collaborate with ABC Family TV show Pretty Little Liars' costume designer Mandi Line for a character-driven clothing collection.

Aeropostale Pretty Little Liars

source: Aeropostale

The Pretty Little Liars collaboration may also make the company more attractive to possible acquirers. Aeropostale has been under pressure from activist shareholder Crescendo Partners to sell itself. On January 14, Bloomberg News, quoting unnamed sources, reported the company has reached out to two private-equity firms to explore a possible sale. Note: the company is not currently negotiating a sale.

Drama queens
The show has been a teen sensation and its season finale propelled it to become the most-tweeted show in TV history with almost 2 million tweets. You're probably unfamiliar with the ongoing teen traumas of Aria, Spencer, Hanna, and Emily.  Over 4 million viewers, mainly female viewers between the ages of 12-34, watched the show's Halloween special and over 2 million watch weekly episodes.

This is exactly the demographic that Aeropostale needs. Designer Mandi Line told Fashionista.com she was inundated with requests for a retail outlet to stock the show's designs. Originally hoping for a larger retailer, Line is satisfied with Aeropostale and she expects to work up four collections. She added, "I'm going to bring you a customer you've never had — a Pretty Little Liars customer who's like, 'Wow, Aero? Really?'"

Aeropostale strategically scheduled the collection launch for the same day as the season premiere, January 7, at its 976 stores and online in the US, Puerto Rico, and Canada.

Teen Trauma
Like beleaguered teen-retail rival Abercrombie & Fitch (NYSE:ANF), Aeropostale received a downgrade from Jefferies analyst Randal Konik on January 2 from Buy to Hold. He gave a $7 price target for Aeropostale (which closed at $8.63 on January 8). The median target is $10 out of 23 analysts. The stock also has a huge short interest at 38.6%. This isn't surprising given its fundamentals: profit margin of -3.25%, quarterly revenue growth of -15.10%, and a price of twice its book value of $4.42.

On the third quarter earnings call, which included Black Friday results, CEO Thomas Johnson gave a downbeat recap using the dreaded phrase, "clearly disappointing," noting a turnaround has taken, "longer than expected." Unlike many retailers, even Aeropostale's e-commerce sales were down, for a total comp sales decline of 15%.

The litany of bad news continued for Aeropostale with cash and cash equivalents declining to $68 million from $184 million. Store closings will triple to 46 from its 2013 expectations of only 15. Finally, Aeropostale guided for a loss of $0.24-$0.32 per share for the fourth quarter, making this the fourth quarter in a row with disappointing results.

Johnson partially blamed a challenging and promotional environment in retail. Other teen retailers like American Eagle Outfitters (NYSE:AEO) and Urban Outfitters (NASDAQ:URBN) have also underperformed. However, Jefferies' Konik thinks these latter two are top 2014 picks if a promotional ceasefire takes hold and their strong managements prevail.

Aeropostale's management said it was cutting expenditures but how to bring in sales? The company highlighted another promising brand launch. Teen YouTube sensation Bethany Mota with over 4 million subscribers, debuted a much-anticipated Aeropostale collection in December. EVP Emilia Fabricant said "The collection truly underscores how we are evolving our business in terms of relevancy and speed to market as the line progressed from concept to launch in just 3 months."

Bethany Mota At Aeropostale


Better late than never
On the eroding relevance of the Aero logo brand, CEO Johnson admitted," Teen preference has changed so significantly it has been a seismic shift over the past 5 years...We know these truths because of the declining business over a multi-year scenario." He also said the change from almost 100% logo merchandise to a more fashion-oriented inventory has been a pleasant surprise for teens questioned in exit interviews.

In Aeropostale's defense the speed of the Mota and Liars launches has shown improving responsiveness, a must-have trait for teen retailers. Rival Abercrombie & Fitch has been working to overcome last year's  public relations snafus and teens' perception that its pricey, preppy cool is wearing thin.

Urban is generally lumped in with teen retailers but it better represents an 18-34 Millennial demographic. At a 20 trailing earnings multiple and a $54 price target it offers significant upside if Jefferies is right. Its Free People division is outperforming and the company is expanding in Europe and Japan.

American Eagle at a 17.72 trailing multiple and a 3.30% yield looks interesting. More so after the Konik upgrade as he argued, " We believe the company can drive a significant margin and earnings rebound against easy compares, and restore brand momentum through more focused merchandising, faster speed to market, and strict inventory and expense control."

The Foolish takeaway
To be fair, Aeropostale is definitely improving speed to market, and expense and inventory control was the main thrust of the Aeropostale earnings call. The something drastic the company needed are these two launches; bold moves that may just change the Aeropostale story into one with a happy ending even if it doesn't sell itself.

1 stock for a truly happy ending in 2014
There’s a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information