Fast Fashion and the eventual demise of Aeropostale

Aéropostale Inc., announced early this month that they have filed Chapter 11 bankruptcy protection and closing 20 per cent of its stores in North America.  It is closing down 113 of its 739 U.S. stores and all 41 locations in Canada.

So being in the retail business industry, I am quite curious why such a world-recognized brands such as Aeropostale would even go out of business and heres what I learned and I am sharing it to all of you.

Fast-fashion retailers have taken the U.S. apparel industry by storm, driving customers away from specialty casual brands with fresh-fashion being launched almost every week. Designers at Zara, Forever 21 and H&M consistently strive for new designs, conceiving new trends frequently, which subsequently become a must-have for fashion-conscious buyers. Casual apparel retailers like Aeropostale, who earn a major portion of their revenues from basic-logo merchandise, have suffered terribly at the hands of fast-fashion companies.

A lack of comparable innovation and diversity in products has driven Aeropostale’s customers to other retailers in the industry, leaving the company in tatters. Even buyers seeking basic merchandise have shifted their interest from specialty brands to private labels at general merchandise retailers, further adding to Aeropostale’s problems. Due to a significant decline in the number of customers and an increase in traffic driving promotional activities, Aeropostale’s comparable sales have come down substantially over the past four years.

Simultaneously, the retailer’s value has diminished by over 95% over the last five years, and is currently worth just over $120 million in the market. On the outside, it seems a paltry investment for a strategic or a financial buyer, who can revamp the company’s business model and revive its growth away from the investors’ eyes. However, despite long standing speculation around a probable buyout, no one has come forward with an offer. It appears that Aeropostale’s lack of cash, high operating lease and uncertain future have driven investors and potential suitors away.

Customers Will Rather Buy Apparel From Fast-Fashion or Department Retailers

Physical store retailing is declining in the U.S., with the exception of fast-fashion retailers such as Zara, Forever 21 and H&M, who have redefined the fashion industry. In order to attract new customers and convince the existing ones to shop frequently, these players have been proactively launching new designs and trends almost every week. This strategy has drawn the attention of customers, who are now spending more on fashion-forward merchandise from Zara and Forever 21, moving away from specialty brands such as Aeropostale and Abercrombie & Fitch, who mainly sell basic merchandise such as jeans and t-shirts.

Also, rather than spending on branded basic clothes, U.S. shoppers are buying private label basic apparel at department stores and supermarket chains, where they get cheaper prices and comparable quality. For basic apparel, U.S. consumers are no longer sporting the brand they wear, and hence there is minimal brand loyalty. Brand is a concern for them mainly when they go for fashion-forward merchandise. In a way, Aeropostale is stuck between the two worlds, not having enough in its arsenal to attract buyers from either side.

As Aeropostale’s stock fell below $10 towards the end of 2013, speculations of a probable buyout surfaced. Sycamore Partners, which is known to acquire troubled retailers, acquired an 8% stake in the company, referring to it as an attractive investment. An active investor began pushing Aeropostale’s management to consider a sale, after which the company adopted a poison pill plan to shield itself from a hostile takeover. Last year, Aeropostale signed an extensive agreement with Sycamore, that provided it with $150 million from the private equity firm in exchange of 5% of its shares. Aeropostale desperately needed the money as it was burning cash at a rapid pace and was finding it hard to raise capital in the public market. Following the deal, Sycamore’s stake in Aeropostale increased to 14%. Many believed that a buyout offer was imminent, but it never arrived.

Meanwhile, Aeropostale’s stock has hit a record low of $1.57. Its resurrection strategies have failed to prevent customers from shifting to other brands, which has led to significant losses. The company is even closing its underperforming stores to dilute these losses and reduce its operating lease liabilities. Aeropostale reported a total loss of $206 million in 2014, but managed to protect its cash reserves as it received a net of $137 million from financing transaction with Sycamore and borrowed $75 million under revolving credit facility.

However, it is evident that the company cannot sustain such huge losses for long, because it now has just over $100 million in cash and cash equivalents. Also, Aeropostale’s strategies to bring customers back are not working out, which negates the chances of any near-term turnaround. Therefore, a potential suitor might not want to lay its hands on Aeropostale, unless they see a possibility of significant returns on their investments, which seems unlikely at the moment.

Moreover, if strategic or a financial buyer acquires the company, it will have to deal with the retailer’s huge operating leases. Aeropostale currently has total contractual obligations of over $500 million, which is enough to explain why no one has come forth with an offer for the company, even when its current market cap is just around $120 million. Even the supposed savior for Aeropostale – Sycamore Partners – seems to be abandoning ship, as a key Sycamore board member declined his re-election to the board earlier this year.