Aeropostale Earnings: Scrutinizing Consolidation Strategy Following Another Dismal Quarter

Aeropostale (NYSE:ARO) can be undoubtedly regarded as one of the biggest losers in the U.S. apparel industry post recession. The company began struggling after fashion-conscious buyers raised their budget for apparel and started shifting to relatively expensive and better fashion brands. For the past two years, the retailer has reported significant losses and its Q3 fiscal 2015 was no different. Aeropostale’s net sales fell 20% in Q3 and its losses totaled at $26.4 million or 33 cents a share. While there were a few positives in the form of an improvement in gross margins, a decline in net profits and a marginal improvement in average unit retail, the overall situation remains bad and it is no surprise that the company’s Q4 loss per share guidance at $0.04-$0.17, was worse than analysts’ expectations of $0.02 per share. ^[1] Aeropostale’s balance sheet is weakening, its share value is at an all time low and it has  fallen out of compliance with NYSE’s listing regulations. On top of that, Aeropostale’s top level management remains in a split on whether it should focus on brick-and-mortar or online retailing. We believe that its store expansion and consolidation is one area that needs some serious review and fresh perspective.

Our price estimate for Aeroposatle is at $2.22, implying a significant premium to the current market price. However, we are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Aeropostale

With continuing losses, Aeropostale is burning cash at a rapid pace, which is hindering its plans for P.S. from Aeropostale’s expansion. The retailer ended the quarter with just $41.8 million in cash and $142.8 million in long term debt, while it had over $86 million in cash with similar debt in the year ago period. ^[2] Since generating profits in the near term seems unlikely as Aeropostale has been unable to address its core problems, it is not investing in P.S. from Aeropostale’s expansion, the only format that shows some promise. It is instead aggressively closing down mainline stores in-order to lower operating expenses relative to revenues, as a means to narrow losses. The retailer expects to lower its namesake brand store count by 50 by the end of the year, and has plans to close another 20-40 stores next year. ^[3]

Aeropostale outlined a store rightsizing strategy a while back, which included the reduction of Aeropostale store count to around 700 and the increase in P.S. from Aeropostale’s store count to 500. As a part of this strategy, the company planned to shift all its P.S. outlets from malls to more lucrative off-mall locations and hence, it rapidly shut over 120 stores of the format. While it was expected that Aeropostale would simultaneously expand the P.S. format in line with its ambitious plans, money constraints got in the way. As a result, the retailer still has just 25 P.S. outlets, while ideally there should have been many more. We believe that apart from a lack of cash, weak confidence in growth strategies may be discouraging the management from making significant investments. This explains why the company has inked a couple of licensing deals over the past couple of months. Although these licensing deals make ample sense, it seems that Aeropostale has gone defensive and isn’t prepared to take big risks. However, we believe that P.S.’s expansion is one risk that the retailer should take, otherwise there may not be an end to its woes.

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1. Aeropostale Sales Decline in the Latest Quarter, The Wall Street Journal, Dec 2 2015 [↩]
2. Aeropostale Reports Results For Third Quarter of Fiscal 2015, Aeropostale, Dec 2 2015 [↩]
3. Aeropostale’s Q3 Fiscal 2015 Earnings Transcript, Dec 2015 [↩]