Time is running out for Aeropostale (AROPQ) to turn itself around before it burns through its remaining cash. Sycamore Partners gave the teen retailer a bit of rope to hang on to, but unless it's able to reverse sliding sales and mounting losses, the lifeline may only serve as a noose used to hang itself.
Just four months into the new year and Aeropostale stock is already down 45%, while over the past year, it's lost two-thirds of its value. Sales tumbled 12% in 2013 to $2.1 billion and stand only slightly above where they were in 2009, while operating margins have collapsed and it's recorded five straight quarters of ever-worsening losses.
The cash crunch is causing Aeropostale to fall behind on its bills. Accounts payable mushroomed at the end of the year because the retailer had to delay paying its rent, pushing the payments due in the fourth quarter out into the first. While it said it hasn't violated any of the terms the retailer has with its vendors, you just know there's a cascading effect similiar to when a homeowner starts delaying his mortgage payment so he can make his car note and then hope he's got enough cash coming in to get the bill paid before he gets whacked with a late fee. Needing to float your bills like that screams of money troubles.
To help bring the situation under control, Aeropostale hired a real estate consulting firm to investigate ways in which it can get rent relief to negotiate early lease buyouts. As part of its real estate rationalization program, it's also going to be closing 125 of its 151 P.S. from Aeropostale stores that target 4-to-12-year-olds, restructuring the brand instead to one focused on off-mall locations, e-commerce, and international licensing opportunities.
Analysts estimate the teen retailer will be digging around in the couch cushions for spare change to continue making its bills this coming quarter. With $106 million in cash at the end of the year, and because of having to now make its rent payments along with the rest of its bills, Morgan Stanley forecasts it will burn through $61 million in the first quarter, leaving it with just $7 million in the bank.
Management hopes the new cost-saving initiatives generate annualized pretax savings of $30 million to $35 million, some $5 million to $10 million worth to be realized this year. But it's also going to be recording pretax restructuring, asset impairment, and other charges of approximately $40 million to $65 million, of which $25 million to $40 million will be cash expenses.
The financing deal with Sycamore may take bankruptcy talks off the table for the moment, but it remains an ever-looming threat in the background. In exchange for the cash infusion, Aeropostale gave the private equity firm a seat on its board of directors, the right to name an additional director, and the ability to nominate a third one that's also agreeable to Aeropostale. Additionally, Sycamore gets the right to buy as much as 5% more of its stock, giving it nearly a 13% stake in the retailer.
Aeropostale might not be the only teen retailer hurt by changing fashion tastes as fast-fashion leaders like Forever 21 and Zara become ascendant, but it may be the worst off. It's still facing pressure from Crescendo Partners to sell itself and the retailer reiterated that the first quarter will be just as dismal as the last, with operating losses between $64 million to $68 million for net losses totaling $0.70 to $0.75 per share.
Ultimately, financial engineering only goes so far, and the real test will be whether it can still sell clothes. As it looks now, Aeropostale still seems to be on a crash course with oblivion.
