How Aeropostale (ARO) Could Buck The Abercrombie & Fitch (ANF) Demographic Problem To Become The Next H&M Or Forever 21

  @AlexCKaufman on September 19 2013 5:21 AM
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A woman walks past an Aeropostale store in Times Square in New York, July 27, 2012. REUTERS/Andrew Burton

Could Aeropostale Inc. (NYSE:ARO) be the next H&M or Forever 21?

A day after the private equity firm Hummingbird LLC filed for a nearly 8 percent stake in the apparel chain, a top retail analyst said Aeropostale could become a new distribution arm for Mast Global Fashion, the former supplier to Limited Brands.

Hummingbird is an investment vehicle for Sycamore Partners LLC, the private equity fund that took a 51 percent stake in Mast Global two years ago. And with Aeropostale’s continually high sales, it could be due for a facelift, with a re-upped line of cheaper, “fast fashion” courtesy of its new financial stablemate.

“MGF has product, Aeropostale has distribution through its 1,119 stores,” Rick Snyder, a senior retail analyst at Maxim Group, wrote in a note on Wednesday. “Further, as Aeropostale attempts to remerchandise, the stores are getting something of a makeover. Therefore, it is not unreasonable to think that Aeropostale stores could eventually shift their focus and become a fast fashion brand.”

With a larger manufacturer to source from, such a transition would be easier for an apparel chain suffering the same woes as Abercombie & Fitch (NYSE:ANF) and American Eagle (NYSE:AEO).

The trio – referred to by industry insiders as the “3As” – have long appealed to teens, a demographic that is shrinking as people in the U.S. have fewer children.

What's more, the retailers have long offered pricier clothing that fails to compete alongside cheaper, hipper offerings from H&M, Zara (MCE:ITX) or Forever 21.

“In theory, MFG’s scale could reduce Aeropostale’s average unit costs, allowing the chain to price more competitively while maintaining or recapturing some gross margin losses,” Snyder wrote. “Thus, we believe that Aeropostale could currently be more valuable as a strategic asset to Sycamore than to individual investors.”

Shares in Aeropostale closed down nearly 0.9 percent to $10.08 on Wednesday.

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