- Last year, I profiled Aeropostale and posited that shares were highly overvalued.
- That thesis has played out, and shares are now under $4.
- The return of the former CEO is not enough to save this dying company, and longs should get out now.
Last July, I published a piece on Aeropostale (NYSE:ARO), the beaten-down teen retailer that has been the source of many discussions among investors for a few years. With shares trading at around $14 at the time, I posited that the company's buyout premium, along with delusional earnings estimates meant that shares were a short down to the $8 area, based on my analysis. Well, as it turns out, I wasn't bearish enough, as we have shares trading at ~$3.65 in the premarket as I write this. So what happened to ARO, and what are shareholders to do going forward?
What happened is easy; the company is a terrible retailer, and the buyout premium evaporated. I highlighted the buyout premium in my previous article and the fact that I found earnings estimates to be downright insane given the company's prior operating results. This led me to believe that ARO shares would see a big reset lower, and while I was right on that, I underestimated the magnitude of the move, despite my steadfast bearishness on the company.
For instance, when I wrote my article last year, analysts were calling for 64 cents in EPS this year; the estimate now is for a loss of $1.70! Ouch. This is exactly what I was warning people of in my prior article; earnings expectations like that of ARO last year are built on nothing but hopes and dreams, and when that occurs, investors should run like the wind to get away from the stock.
One thing I did in my previous article was estimate a fair value for shares based upon earnings estimates, and at the time, I came up with an $8 fair value, assuming the company could actually hit the stratospheric earnings estimates that were placed in front of it. Of course, this didn't happen, or even close for that matter, so we see shares trading with a $3 handle now. So now that we have fully cemented that ARO is going to continue to lose money for a long time forward from now, what are shares worth?
That gets a bit tricky because of two things; the company's book value has been cut in half just since last July when I profiled the company and, as I mentioned, earnings estimates have turned into loss estimates. Thus, the discounted earnings value of this company is negative; it has no intrinsic value, because the value of its projected losses exceeds the current book value of the company. In other words, in my opinion, this company isn't worth anything. Of course, that is a bit brash, as it owns trademarks and brands that are worth something in a liquidation, but in the sense of this company remaining a going concern, there is literally nothing here. The company currently isn't expected to turn a profit for several years going forward, so how do you value it?
Just yesterday, ARO reported yet another horrible quarter, and shares are getting pounded in the premarket this morning yet again. This company is totally clueless, and while bulls are touting the return of the former CEO, not even Jack Welch could save this burning ship. In the most recent quarter, as we've seen over and over and over again, margins compressed and the company lowered guidance below analyst consensus numbers. This is a scenario that has played out for a very long time now, and I don't see anything that makes me want to change my view on this.
ARO is a company that is under extreme duress. Operating results are horrendous and doing nothing but getting worse. The company is so desperate, it has hired back its former CEO in an attempt to right the ship. Half of the company's book value has evaporated in just one year, and while ARO's balance sheet is still clean, it gets smaller every day due to awful operating results. My thesis from last year has played out even more strongly than I thought it would, and with shares down more than 70% since my call, I'll go ahead and take a victory lap and move on. I'm not one to short a $3 stock, and in particular, one that has so much coverage and interest around it. For traders, ARO is probably a good vehicle to move in and out on a very short-term basis, but for long-term investors, I just don't see anything to like here.
I think we'll either see ARO eventually file for bankruptcy or sell itself, because it has proven time and again that it cannot function as a going concern on its own. I'm not sure which will happen, but if I had to guess, I would say a sale is more likely. But at what price? And who would want to buy this train wreck? There are some strategic buyers that come to mind, but they are largely struggling as well. An LBO seems more likely but again, what LBO shop would want to own this thing that loses enormous amounts of money every quarter? How would they get their money back and resell it? It's hard to see a buyout happening for any price, other than some liquidation-type sale after the company continues its impressive string of destroying shareholder value until there is literally nothing left. I'll be on the sidelines watching with great interest, because my short call has already played out; I just hope that longs take a good look at what they own, to avoid losing the last three dollars of their investment.