When big businesses want to raise new capital, they seek out investments from the general investing public. Unfortunately, sometimes, your business is doing so poorly that you're unlikely to get what you're looking for from the public. In that case, companies can try to raise capital from private investors, who are rewarded with below-market rate ownership for taking on the extra risk. According to recent reports, Aeropostale (NYSE:ARO) has decided to go the private investment in public equity -- PIPE -- route to try and stabilize its flagging business.
Aeropostales' ongoing woes
Over 2013, Aeropostale watched its balance sheet erode, as sales and margins crashed. There's no way to paint the picture without displaying Aeropostale as a brand out of favor with its core demographic. As consumers cut back on apparel spending in general, teen retailers are being hammered. Parents are no longer willing to indulge their teens every fashion whim, opting to spend their hard earned cash on major improvements and investments instead.
As a result, weaker teen brands are being pushed even further into the red. Teens are focusing on the hottest brands, giving fistfuls of cash to the likes of Urban Outfitters' (NASDAQ:URBN) Anthropologie brand and VF's (NYSE:VFC) North Face line.
While Aeropostale's comparable sales had dropped 15% through its first three quarters, Anthropologie increased comparable sales by 10% last quarter. North Face outdid them both, increasing its direct-to-customer sales revenue by 30% over the last year.
What the cash is useful for; what it means for investors
Aeropostale's bid to increase its cash position would give it a few more options for the long run. The company has been sinking cash into new lines to try to refresh the brand, with little success. That has to make investors of all stripes hesitant about giving the company even more cash to potentially fritter away.
On the other hand, if the business can manage to stabilize itself, it would certainly help its chances of finding a buyer later down the road. Some reports of interest in the business have surfaced recently, but no one has made a public offer. For current investors, a buyout is looking like the best way for Aeropostale's sales debacle to end. A nice cash injection could be the first step on the road to that buyout.
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Andrew Marder 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 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.