Aeropostale May Employ Reverse Stock Split To Prevent Delisting, But What Next?

Aeropostale (NYSE:ARO) unveiled in a recent regulatory filing that it may be considering a reverse stock split in order the shore up the value of its stumbling shares, and restore compliance with NYSE regulations. The company’s shares, down 80% over the past year, are currently trading at $0.57, and it recently received a listing compliance notification from NYSE, which requires participant companies to maintain a share price of at least $1 to remain listed in the exchange. ^[1] While a reverse stock split would not help increase shareholder returns, it can ensure that the retailer can remain in the public market, and receive capital through equity. Subsequently, Aeropostale can resume the search for a potential buyer in order to improve the chances for its revival.

With its persistent dismal performance and an apparent disagreement at the top leadership level, it is highly unlikely that the company will have any positive news to share on the operational front, that can rally the demand for its shares in the near term. At this point, a reverse stock split, which essentially means cutting the number of shares outstanding, seems the only way out. Because if Aeropostale gets delisted, it will no longer be able to finance its growth through equity, and it already has a significant amount of debt and contractual lease obligations. After the reverse stock split, the company can once again explore the buyout option, which although difficult, is getting necessary.

Our revised price estimate for Aeroposatle is at $2.22, implying a significant premium to the current market price.

See our complete analysis for Aeropostale

Reverse Stock Split As An Immediate Step

Aeropostale has been clocking huge losses for the past two years and 2015 is going to be its third. At the moment, the company is terribly short on cash and it needs equity now more than ever to finance its operations. The only concepts that hold some promise for the company’s long term growth are online and P.S. from Aeropostale. For expanding these concepts and revamping the back-end supply chain to improve speed to market, the retailer needs a significant amount of capital. Hence, it is imperative for the company to stay in the public market and rejuvenate its value therefrom.

While Aeropostale’s regulatory filing indicates that there is a possibility of a reverse stock split, we believe that the company should take this step without much delay. Though reverse stock split will need majority shareholder approval and it will only be a temporary solution to its problems, there isn’t much Aeropostale can do ensure significant stock movement in the near term. With the looming threat of getting delisted, the retailer is desperately searching for a way out and it plans to address NYSE’s violation notice latest by October 13.

Search For A Buyer Thereafter

As Aeropostale’s stock fell below $10 towards the end of 2013, speculation of a probable buyout surfaced. Sycamore Partners, which is known to acquire troubled retailers, acquired an 8% stake in the company, and an active investor began pushing Aeropostale’s management to consider a sale. Last year, Aeropostale signed an extensive agreement with Sycamore, that provided it with $150 million from the private equity firm in exchange of 5% of its shares. Following the deal, Sycamore’s stake in Aeropostale increased to 14%. Many believed that a buyout offer was imminent, but it never arrived.

Aeropostale’s huge losses, its low cash position and high lease obligations have discouraged financial and strategic buyers from coming forth with an offer. However, the company’s market cap is just $50 million now and it will be a very small investment for a private equity firm or another apparel retailer. Question is, will they see it as a lucrative investment? We believe they should. Firstly, Aeropostale’s current leadership is in a disagreement on whether to focus on the company’s physical operations or online operations, as per people close to the matter. ^[2] A new leadership structure may be able to provide a better direction to the company. Secondly, apart from factors that have troubled the entire apparel industry, the retailer’s lack of cash has been a big drag on its turnaround efforts. It has not been able to invest as much in its P.S. format, better design and supply systems, international growth, online and omni-channel efforts. A buyer can provide that cash and trigger a gradual turnaround in the company’s growth.

Aeropostale may have searched for a buyer before, but it needs one desperately now. However, given its present situation, shareholders may not get much premium, even if the company succeeds in getting a buyout offer. If such a scenario unfolds, it will be interesting to see how shareholders respond. Some of them may not approve of the buyout given the paltry premium involved. Others may look at Aeropostale’s past year’s stock performance and accept whatever is available.

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1. Aeropostale Receives Notice From NYSE Regarding Continued Listing Requirements, Company Intends To Restore Compliance, Aeropostale, Sept 29 2015 [↩]
2. Aeropostale Considers Reverse Stock Split to Bolster Beleaguered Shares, The Wall Street Journal, Sept 29 2015 [↩]