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Aeropostale Inc (NYSE:ARO) Rallies On Short Covering

Aeropostale Inc (NYSE:ARO) Rallies On Short Covering
Written by
Alex Carlson
Published on
April 5, 2016
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Source: yelp.com

Like many teen retailers, Aeropostale Inc (NYSE:ARO) has been the victim of a series of missteps in catering to this fickle demographic. If a company like Aeropostale cannot stay on top of the latest fashion trends, they become yesterday's news. Teens are not like moms who tend to remain loyal to their favorite stores and brands. Even still, many of Aeropostale's problems have been self-inflicted. A series of management missteps remain at the heart of the company's problems.

Aeropostale is a specialty retailer of casual apparel and accessories, principally targeting young women and men through its Aéropostale stores and website and 4 to 12 year-olds through its P.S. from Aéropostale stores and website. The company provides customers with a focused selection of high quality fashion and fashion basic merchandise at compelling values in an exciting and customer friendly store environment. Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise, other than in licensed stores.

The company currently operates 744 Aéropostale stores in 50 states and Puerto Rico, 41 Aéropostale stores in Canada and 25 P.S. from Aéropostale stores in 12 states. In addition, pursuant to various licensing agreements, the company's licensees currently operate 322 Aéropostale and P.S. from Aéropostale locations in the Middle East, Asia, Europe, and Latin America. Since November 2012, Aéropostale, Inc. has operated GoJane.com, an online women's fashion footwear and apparel retailer.

Things should have never gotten this bad for ARO. YouTube sensation Bethany Mota has been designing clothes with Aeropostale since the fall of 2013, and now she's just released her final collection. Unfortunately, ARO was never able to successfully market her or her collection. Now the company is switching gears and recently settled on an approach that splits the 810-door chain in two parts. Sixty percent of the stores have been converted over to a factory concept that offers a narrow and deep assortment of basics, while the balance of the fleet goes after the more fashion-forward mall shopper.

For those that have been following ARO know that this is a complete 180. Only now is the company realizing that it's old strategy wasn't working. For the longest time, management was touting a turnaround when in fact a turnaround was far from materializing. As a result, for the fourth quarter of fiscal 2015, net sales decreased 16.1% to $498.0 million, from $593.8 million in the year ago period. Comparable sales, including the e-commerce channel, for the fourth quarter decreased 6.7% compared to the fourth quarter of fiscal 2014. The Company reported a net loss for the fourth quarter of fiscal 2015 of $21.7 million, or $0.27 per diluted share compared to a net loss of $13.5 million, or $0.17 per diluted share last year.

The key for investors is what's next. Right now, ARO is exploring a sale of the company or a corporate restructuring (bankruptcy). What could drive this sooner rather than later is that ARO is in a dispute with Sycamore Partners, which has lent the company $150 million and is also ARO's chief supplier. This is really the last thing the company should be doing at this stage. Worth noting is that Sycamore Partners has been feasting on the carcasses of beleaguered retailers and has bought Talbot's, Hot Topic and Coldwater Creek.

Currently trading with a market cap of just $25 million, ARO is sitting on $65.1 million in cash. The current portion of long-term debt was $5.0 million and non-current long-term debt was $138.0 million. Additionally, there were no borrowings outstanding under the revolving credit facility and the company was in compliance with all financial covenants associated with the revolving credit facility and loan agreement.

Driving the recent bounce in shares was a combination of short covering and positive coverage from a few penny stock newsletters. ARO was touted as a momentum alert by the Daily Stock Reporter. These buyers combined with roughly 10% of ARO's float being sold short created the perfect bounce and short covering rally. ARO is a penny stock trader and not an investment. Don't be left holding the bag! We will be updating Insider Financial as soon as we know more. For continuing coverage on ARO, sign up for our free newsletter today and get our next hot stock pick!

Disclosure: We have no position in ARO and have not been compensated for this article.

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