Talk about disappointment after disappointment. Aeropostale (ARO) has it. Quarter after quarter it just can't get it together, yet quarter after quarter CEO Thomas Johnson touts "progress against our strategic initiatives." If you define progress as taking net income from $231 million to practically nothing, then yes Mr. Johnson, you are making wonderful progress.
Our bewilderment is actually directed towards the board. As we previously communicated to the board, we are very curious why Aeropostale is not thriving in this promotional environment and showed why we believe current management is to blame. What is striking is that by our estimate, problems started occurring during the second quarter of 2010, very shortly after the new CEO arrived. That is now ten quarters of poor and declining performance the board has just sat on.
Retailing is tough. You must always be current with your fashion and always on your toes looking for the next hit style. The business of Aeropostale has many advantages that should lead it to be successful. Its operation is lean, it rapidly turns over inventory (or used to), it has a good balance sheet and it sells quality clothes at very cheap prices. Execution here is lacking. We would recommend two courses of action. The first would be to bring back the previous CEO Julian Geiger. JC Penney seems to think that is a better idea then following the path to ruin with its current CEO. The second option, as expressed here, would be to go private.
We think Aeropostale has some very attractive qualities a private equity firm might find interesting. First is the lack of debt and over $200 million in cash. The company's strong balance sheet makes it easier to extract a higher return with financial engineering alone as the cash from the company can be used as part of the purchase price. Second, with a new owner comes new management. As we stated earlier, we believe management is the key reason the company is struggling. As a private company, Aeropostale could be able to attract better talent and improve margins without the constant scrutiny from Wall Street. Should a new owner improve margins and fix the company's inventory problem there is the possibility free cash flow could return to the range of $200 million in just a few short years. That would be pretty impressive considering the market capitalization currently resides around $1 billion. Finally, we see some growth avenues a private buyer could improve upon. Online revenues could continue to grow and the P.S. from Aeropostale brand could continue to expand. We also see more overseas licensing deals as a positive contributor to growth. Again, better execution could really take this company to the next level.
The overriding question we have to the board is what are you waiting for? Isn't 10 quarters enough?