I gave up on my bet on Aeropostale (NYSE:ARO) on Friday after thinking what was said on the earnings call through for four reasons:
- The strategy change to focus on factory stores
- The obvious bad sign that the company is exploring financial alternatives, including a restructuring
- A dispute with a company vendor that is affiliated with a company lender
- Management refusing to answer questions at the end of the earnings call.
At Aeropostale they have now discovered there are basically two types of stores. One type that attracts customers interested in fashion items and one that attracts customers interested in basic items. They have more of the latter. The new strategy is to focus on the latter type, called factory stores.
This could be a sound strategy but I don't like how it seems to conflict with the previous focus on the Bethany Mota and other fashion lines. From the earnings call (emphasis mine):
The customers at these stores have an appreciation for a more classic overall assortment, which includes a higher mix of our key basics and logo merchandise. The customers are not only teenagers, but are families looking for a strong value proposition on key items. These stores tend to be located primarily in outlets and in select B and C malls, and as such become our Factory Chain.
The factory stores are even going to stock more logo merchandise! Management is basically pulling a 180 here. You wouldn't know how outrageous this is, if you didn't follow the last year of earnings calls, but it is maddening! Call after call, logos were dismissed and we were convinced the teen of today demanded a fresh look. Now the story is, let's go back to logos.
I don't believe Aeropostale has the financial resilience to pull off another strategy change. Management had one shot and it wasn't a hit.
Then there is a real possibility that we see a Chapter 11 soon with the board exploring a full range of strategic and financial alternatives while the company has a vendor dispute with MGF sourcing which is an affiliate of Sycamore Partners. Sycamore Partners is the parent of a lender to the company. Sycamore Partners seems to be exercising influence here and its interests aren't well aligned with those of minority shareholders.
Finally, management did not take questions at the end of the earnings call and that screams pending trouble to me. It's such an incredibly weak showing to not answer questions after a bad quarter while you announce there may be a potential restructuring and a major strategy overhaul. There must be a lot of questions management does not want to answer to avoid legal problems and/or to avoid negatively influencing certain current negotiations and/or talks.
With another strategy change necessary I perceive that the odds of a turnaround have severely slimmed while the odds of a Chapter 11 announcement have increased strongly. As much as I like the global licensing effort, and the stock is already down a lot after all the bad news, I'm still out.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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