Will Aeropostale's Turnaround Succeed?

| About: Aeropostale, Inc. (ARO)


Aeropostale is under pressure due to broader weakness in the apparel retail industry and stiff competition from rivals.

Aeropostale is undertaking several strategies to improve its situation, but the company's weak outlook indicates that it is not executing properly.

Aeropostale's balance sheet is not in good shape, and this is another reason to stay away from the stock.

A look at apparel retailer Aeropostale's (NYSE:ARO) year-to-date stock price performance reveals that the company is in a soup. It has lost 60% of its capitalization this year due to stiff competition in the apparel retail industry, and its losses nearly doubled in the second quarter on a year-over-year basis. As a result, the stock tanked once again after the quarterly report, and is currently trading near its 52-week low.

Aeropostale is suffering from broader weakness in the industry. Even peers such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) are facing similar challenges, as mall traffic has declined due to a change in shoppers' taste and preferences. However, its peers are making positive moves that are delivering results, while Aeropostale's guidance for the current quarter reveals that the company still has a long way to go before it can turnaround.

Aeropostale is facing headwinds on a number of fronts, which have weighed on its results. It has been losing money for seven consecutive quarters. The back-to-school season is not going as expected for Aeropostale, and to add to this problem, its graphic T-shirts and fleece offerings were not received well by the teen shoppers.

Strategic moves aimed at a turnaround

But, management is working hard to rescue the situation, and with the appointment of a new CEO, Julian R. Geiger, it seems more confident of better days ahead. Aeropostale is trying to incorporate more fashionable items to its product mix. It has taken various initiatives to reduce its cost structure, such as exiting mall-based locations of for children's brand, P.S.

Aeropostale has also launched an additional proprietary sub-label, which is expected to strengthen its business. It has expanded the product offerings of its existing sub labels, which include Bethany Mota Home, and Bethany Mota Fragrance. In addition, the retailer is also re-branding its image in consumers' mind with a new brand platform known as Aero Now. With this new introduction, the company aims to convey its brand's authenticity, emotion, and relevance to today's teens. To popularize this brand, Aeropostale is undertaking substantial media coverage on YouTube and social networking websites.

The company is counting on Aero Now to fuel its growth. According to management, "The Aero Now highlights the changes we have made to our business in response to the changes that we have seen with our customer. Very few teens are who they were a year ago and neither are we. The Aeropostale brand is committed to become the first American brand that caters to the now generation."

Along with new launches, it is important for any company to focus on operational aspects as well. As a result, Aeropostale has launched its Pathway strategy, under which a sub-set of stores are tested with various strategies to drive same-store sale performance by way of allocation and shopability. The company has seen better results, and based on its findings, it plans to roll out several initiatives to the broader supply chain by the holiday season to improve its execution.

Aeropostale is also restructuring its P.S. brand by adding more distribution channels. The company has signed its second licensing agreement to launch P.S. in Chile, which was followed by a launch in Mexico. Going forward, management is also focusing on improving its financial standing, which was evident during the second quarter as it strengthened its liquidity.

Also, to save cost on infrastructure, the company is in negotiations with a real estate consulting firm regarding potential early lease buyouts to gain rent relief and accelerate store closures. This will allow Aeropostale to improve its balance sheet and realign its stores to meet the change in customer preferences.

More concerns

Currently, the company's balance sheet is in a sticky situation. It has total cash of $152 million, which is followed closely by a debt of $133 million. In addition, Aeropostale's current ratio of 1.73 indicates that the company's liquidity position is weak.

At the same time, Aeropostale faces competition from other resurgent apparel industry players such as American Eagle. As I pointed out in a recent article:

To execute its turnaround, American Eagle is focused on three aspects. These include strengthening customer engagement, customer service, and operational efficiencies. Management has made investments in these areas as we will see shortly, and these moves are expected to power its growth in the long run.

The retailer has started its new manufacturing facility in Pennsylvania, which is equipped with improved features to increase operational efficiency. This facility will now enable the company to meet demand from its online business and speed up delivery. Management also plans to add served distributions in the facility that will bring down its cost by around 10% in the coming months.

Hence, Aeropostale's turnaround won't come easy, as the company is under pressure in a highly-competitive industry. Although the company is indeed making moves to execute a comeback, it will be wise for investors to stay on the sidelines. Its weak guidance suggests that Aeropostale is currently not moving in the right direction, and so, it is a stock best avoided till it shows concrete signs of a turnaround.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.