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Does Aeropostale Have Any Appeal for Investors?

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It's been a rough time for teen apparel retailer Aeropostale (NYSE: ARO  ) , which is trading around its lowest levels since 2003 and cannot seem to generate demand for its products. Sales on all levels, from the top line to store level, plummeted in the recently reported quarter, and management had little positivity to add in the way of forward-looking guidance. In recent years, the company has tried to increase its e-commerce business via organic growth and acquisitions, though even this has not slowed the pace of losses. One of its few strong points going forward is a great-looking balance sheet that creates an even more enticing valuation if the business were to turn around or be bought out. Is there any way investors could consider a buy in Aeropostale?

No love
Aeropostale management expected a loss for its fiscal fourth quarter, but the adjusted $0.35-per-share drain came in even steeper than the low end of guidance, not to mention well underneath analyst estimates. Nothing is working out well for the dated retailer. Same-store sales fell a disheartening 15%, while the top line shrank 16% overall.

For many brick-and-mortar retailers, e-commerce has been the lone source of growth. When Aeropostale acquired, mainly a footwear seller, back in 2012 for more than $33 million, the market applauded its effort to dig deeper into the fast-growing Web-based retail business. Today, the story looks much different. E-commerce, including results from GoJane, declined 12%.

In the current quarter, management expects another loss, this time in the range of $0.70 to $0.75 per share, excluding one-time expenses.

Any good news?
There are a few things going on here that could possibly interest investors. For one, the company took on $150 million in financing from Sycamore Partners. Sycamore is a private equity firm with deep experience in the retail industry. The $150 million comes in the form of convertible debt that allows the firm to own up to 12.3% of Aeropostale common stock. This could be the beginning of an eventual go-private transaction, which is one of the best options available to current common stockholders.

The company is also accelerating its store closures, slimming down rent and operating costs as fast as possible. For the full year 2014, management expects to shut down 50 locations and open just one.

Aeropostale trades at a valuation that suggests continued declines in its business, and that's largely going to be the case. However, there is an opportunity that, once the expensive store closure and consulting fees pass, the company could generate some meaningful cash flow that would flow back to investors. Aeropostale currently trades at just 0.22 times sales.

All in all, the stock holds some appeal to deep-value turnaround lovers, but its downside risk remains prominent. With no hope of sales improvements in the near future, this is yet another apparel retailer to steer clear of.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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Related Tickers

8/27/2015 4:00 PM
ARO $1.26 Up +0.12 +10.53%
Aeropostale CAPS Rating: **