Aeropostale an Attractive Takeover Target, Says Bloomberg

   on March 18 2013 4:27 PM
Customers wait in line at an Aeropostale store in New York
Customers wait in line at an Aeropostale store in New York Reuters

Shares of struggling retailer Aeropostale (NYSE: ARO [FREE Stock Trend Analysis]) are moving higher on Monday after Bloomberg reported that the company is a takeover target for private equity firms.

At last check the stock was trading up nearly four percent to $14.27. Over the last year, the stock has fallen more than 30 percent after Aeropostale posted a sharp drop in income, margins and revenue for fiscal 2012.

The most recent catalyst for the fall in the stock was the company's fiscal fourth-quarter earnings results. The retailer posted a loss of $672,000 or $0.01 per share, compared to net income of $26.1 million or $0.32 per share, in last year's corresponding quarter.

Adjusted net income was $19.1 million or $0.24 per share, compared to $35.6 million or $0.44 per share, in last year's corresponding quarter. This beat Wall Street analysts' consensus EPS estimates of $0.22 by two cents.

Sales for the period were down one percent to $797.71 million from $808.38 million last year. This easily topped Wall Street consensus revenue projections of $775.70 million.

Comparable store sales at Aeropostale decreased nine percent compared to a nine percent decrease last year.

Looking ahead to the first-quarter, the company guided for a loss of $0.15 to $0.20 per share, which compares to analysts' consensus calling for a profit of $0.08 per share for the first-quarter.

Investors were particularly disappointed with the company's poor guidance, which came largely as a surprise to analysts. The stock traded down sharply on Friday, but Aeropostale has bounced back on Monday in the wake of the Bloomberg article.

According to Bloomberg data, the stock trades at roughly 0.46 times last year's revenue, making it the cheapest among similar-sized domestic specialty apparel-retailers. Analysts at Jefferies said that the company could become a buyout target like Hot Topic (NASDAQ: HOTT), which was recently acquired by Sycamore Partners for $600 million.

“There's clearly value in this company but management is finding some trouble with unlocking it,” Jaime Katz, a Chicago- based analyst at Morningstar, said in a telephone interview. He added, “you could get gross margins up pretty quickly and operating margins up pretty quickly and clean your hands of it in five or six years and put it back out on the market. That's kind of a nice quick turnaround for someone looking to make a buck in private equity.”

The company has no debt and an attractive free cash flow yield. Both of these factors are fueling the takeover speculation surrounding Aeropostale. Katz estimated that a private equity bid for the company could come between $19 and $23 per share or as much as a 67 percent premium.

There are plenty of drawbacks to a potential transaction, however, as the business is not on a growth track. In order for private equity to unlock value in a takeover they would have to be able to better manage Aeropostale's inventory and product assortment and boost growth at its P.S. brand, which targets kids between 4 and 12.

Richard Jaffe, a New York-based analyst for Stifel Financial, said "private equity wants more bang for their buck. He added, "you don't have a growth story here." Nevertheless, many analysts believe that there is an opportunity to make money in a leveraged transaction. The buyer, however, will have to accept some risk as Aeropostale's operating headwinds make it far from a sure thing.

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