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Amid its struggling business and growing investor pressure, Aeropostale (NYSE:ARO) is considering a PIPE (private investment in public equity) transaction, sources close to the matter said. [1] Due to its weakening balance sheet and stumbling stock price, it may be getting difficult for the retailer to find investors in the public market. Therefore, Aeropostale is turning to private equity firms to raise some capital in order to shore up its balance sheet. The sources also claimed that the retailer is working with investment bank Barclays PLc to look for probable future options, which may include the sale of the entire business.

Towards the end of last year, a number of investors such as Sycamore Partners and Hirzel had raised their stake in the company stating that it was an attractive investment. However, it may not look as attractive considering the fact that Aeropostale’s working capital and cash have declined substantially from Q2 fiscal 2013 to Q3 fiscal 2013 with no improvement in financial performance. It has often been said that the company can ensure its revival by boosting its P.S. from Aeropostale brand and international business. However, it needs some capital to invest in these areas. If Aeropostale is unable to raise the desired capital, its results will continue to disappoint and potential buyers may not be interested in acquiring the company.

Our price estimate for Aeroposatle is at $10, implying a premium of about 50% to the market price.

Aeropostale’s Results Have Been Poor And Cash Has Been Declining

It has been more than two years since Aeropostale saw positive comparable store sales growth. Last year, the retailer registered a sales decline of 14%-15% in three consecutive quarters as U.S. buyers continued to elude Aeropostale’s basic products. Although the retailer tried a product overhaul with more trendy and fashionable items, the move was unsuccessful. Given the apparel retail market trends in the recently concluded holiday season, it is quite possible that the retailer’s results worsened in the fourth quarter (ended January 31st). The company’s sales are dismal and its store consolidation strategy will make revenue growth even more difficult. Moreover, Aeropostale’s high operating lease costs somewhat limit its ability ot generate cash flow. As a result, the retailer has been burning its cash faster than it can generate it. At the start of fiscal 2013, Aeropostale had close to $231 million in cash and cash equivalents, which decreased to $100 million at the end of Q2 and $68 million at the end of Q3. The company’s working capital also fell from $193.9 million in Q2 to $166.7 million in Q3.

Most of the cash Aeropostale has used recently is in its Bethany Mota and Pretty Little Liars collections. Although the company expects these product lines to facilitate a turnaround in its brand image, we’ll get a clearer picture when Aeropostale comes out with its Q4 results next month. Good response or not, the retailer needs to continue investing in the promising facets of its business and strengthen its balance sheet. This will not only assist Aeropostale in its recovery process, but will also help it in finding potential buyers if it decides to go private in the future.

A PIPE Transaction May Be Imminent

A company (small-mid cap) usually enters a PIPE transaction when it is unable to find investors in public markets. The private equity investors involved in this transaction get the company’s stock at a discount to the market price. In case of Aeropostale, sources said that the retailer is considering the option of raising capital through a private equity firm to buttress its balance sheet. They said that this transaction could be in the amount of a few hundred million dollars. (Aeropostale mulls raising capital from private equity:sources, Reuters, Feb 10 2014)

The future of Aeropostale still remains uncertain. The retailer’s results aren’t improving and its intentions regarding an acquisition are unclear. According to some sources, Sycamore Partners (which raised its stake in the company to 8% a while back) may ultimately extend an offer to the company, or may continue to advice the board on its future strategies. [1] We believe that it’s only a matter of time before Aeropostale takes a big step towards the sale of its entire business.

Notes:
  1. Aeropostale mulls raising capital from private equity:sources, Reuters, Feb 10 2014

Disclosure: No positions

Source: Aeropostale May Seek Private Equity Firms To Raise Capital