Aeropostale’s Licensing Deal Is A Smart Move, But It Comes With Challenges

In the wake of fumbling sales, a crashing stock price and a compliance violation notice from NYSE, Aeropostale (NYSE:ARO) has inked a licensing deal with Himatsingka America for selling home textiles under its brand name. The retailer believes that it has enough brand visibility in the U.S. to attract a broader spectrum of customers with products other than casual apparel. ^[1] But herein lies the problem. Aeropostale’s name is no longer associated with quality, which can make customers skeptical about its branded home textile products. Even though the retailer expects this deal to be a new source of steady income, stiff competition from specialty player Bed Bath & Beyond (NASDAQ:BBBY), online behemoth Amazon (NASDAQ:AMZN) and numerous private label brands will not allow easy revenues. However, under the current circumstances with—virtually no cash on hand and piling losses—a licensing deal appears a valid move for Aeropostale. Though the retailer will not receive much revenues from its licensing partner, it will not incur any losses either, given the nature of the licensing business.

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

Why The Deal Makes Sense

Aeropostale announced last week that it has signed a domestic licensing agreement with Himatsingka America, a producer of home textiles. Under the terms, Himatsingka will design and manufacture home textiles such as bedding and bath linens under Aeropostale’s brand name, and distribute them to various wholesale channels and big box retailers throughout North America. The first Aeropostale home collection is expected to hit stores by the back-to-school season next year.

While a casual apparel retailer entering the home textile business might look surprising on the outside, it makes some sense for Aeropostale. The teen apparel retailer has been struggling since 2010 to keep up with changing buyer preferences, and almost all of its strategies aimed at bringing customers back have failed. The company’s value has diminished almost 97% over the past five years, and it is on the brink of getting delisted, unless there’s a reverse stock split. Aeropostale can’t afford to get off the public market as it is virtually out of cash, does not have the best credit rating and desperately needs equity to finance its revival. A reverse stock split, while it would prevent delisting, would not help curb the decline in the retailer’s market value. In order to address the shareholders’ concern, Aeropostale needs some substance in its revival strategies, and a brand licensing deal is one way of adding more revenues without shelling out money.

Challenges

While the deal will add a new revenue stream to the company, growing licensing revenues year over year can become an arduous task. Aeropostale’s brand image is not the strongest in the market and it is often regarded as cheap and not very high on quality. Hence, attracting buyers with products that it has never sold before will not be easy. Secondly, the market segment is highly competitive with specialty retailer Bed Bath & Beyond leading the way, closely followed by Amazon and several other private label brands at Costco (NASDAQ:COST), Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Macy’s. A newcomer would have to beat these players on prices and quality to break its way into the market. Even though Himatsingka American has a strong portfolio of good quality bedding and bath products, Aeropostale’s long standing brand image can have a mitigating impact on customer response.

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1. Aeropostale Signs Licensee Agreement With Himatsingka America For Home Textiles, Aeropostale, Oct 8 2015 [↩]