Teen retailer's shares halved as turnaround falls flat

Shares of beleaguered teen retailer Aéropostale tumbled nearly 50 percent Friday, hours after the company reported a wider quarterly loss compared to the prior-year period.

What's more, analysts were quick to cast doubt on Aéropostale's plan to explore strategic alternatives — including a potential sale — saying they would be hard-pressed to come up with a list of possible buyers.

Aeropostale store
Roberto Machado Noa | LightRocket | Getty Images

"We are not quite sure what alternatives exist for a company that has lost money for the last three years, will likely lose money this year and operates in one of the most competitive subsectors of apparel retail," Guggenheim Securities analyst Howard Tubin told investors.

The company's shares were trading at about 25 cents Friday morning.

Like the two other formerly dominant teen retailers, Abercrombie & Fitch and American Eagle, Aéropostale has struggled to generate interest among a new generation of teenage shoppers. However, as trends at those two competitors have started to improve, Aéropostale's revenues have fallen further behind.

Hakon Helgesen, an analyst at retail research firm Conlumino, attributed much of the brand's shortfall to the fact that it's "steadfastly clung to a range [or merchandise] that looks more at home in the mid-2000s than 2016, and a store environment that all too often resembles a yard sale."

Even as the company somewhat veered its assortment away from low-price polos and logo merchandise — for example, by launching a collection with famous teen YouTube personality Bethany Mota — sales continued to deteriorate.

During the fourth quarter, net sales declined 16.1 percent to $498 million. The company reported a net loss of $21.7 million, compared with a shortfall of $13.5 million in the prior-year period.

Even Aéropostale's decision to shutter hundreds of stores failed to revive its comparable sales. During the company's fiscal 2015, net sales decreased 18 percent to $1.5 billion, and comparable sales dropped nearly 9 percent. For the year, it reported a net loss of $136.9 million, compared with a loss of $206.5 million the prior year.

Despite this relative improvement to its bottom line, Helgesen said cost-cutting will do "nothing to cure the underlying illness of a weak brand and a fragmented, uncoordinated offer."

Adding to the company's woes is a dispute with one of its sourcing partners. Though management did not provide much detail regarding the conflict with MGF Sourcing, it did say the dispute could cause delivery disruptions and a "liquidity constraint" if unresolved.

Aéropostale ended the quarter with cash and cash equivalents of $65.1 million. The current portion of its long-term debt was $5 million, and it had $138 million in noncurrent long-term debt. The company had no outstanding borrowings on its revolving credit facility, and was in compliance with all the financial covenants associated with its revolving credit facility and loan agreement.

In its earnings release, CEO Julian Geiger said initial reaction to its spring product has been "encouraging," as has its decision to convert select locations into a new "factory" concept, which focuses on selling low-cost basics and logo merchandise. Geiger noted that comparable sales at the chain have turned positive since it launched this initiative at the end of February.

It's worth noting, however, that this shift in strategy would bring back the merchandise mix that caused Aéropostale to fall out of favor with shoppers in the first place.

"While the early reaction to these conversions has been positive, we believe it is too soon to express an opinion on whether this strategy will work in the long term," Tubin said.

"However, we are not sure that returning 60 percent of the chain to its roots [or closer to its roots] is the right move."