Aeropostale (NYSE:ARO) Plunges on Missed Earnings and Guidance

Shares of Aeropostale (NYSE:ARO) fell 19% on Friday after the retailer reported Q4 earnings and forward guidance that came in well below analyst estimates. Management also introduced a new capital allocation plan that will result in significant dilution for equity shareholders. Analysts have lowered their estimates and target prices post the announcement; Barclays, which has equal weight on the stock, lowered its price target by 40% to $6 from $10, prior. Results show that the retailer’s comps continue to worsen in a tough retail environment that is only partially to blame. Peers such as Abercrombie & Fitch (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO) have also attributed heavy promotions to colder-than-expected weather.

There is little visibility on when Aeropostale(NYSE:ARO)’s margins will recover. Investors have become even more discouraged as comps were easier in 2013 and yet, adjusted gross margin still declined by more than 600 basis points. Inventory ended the quarter up 12% per square foot, and as a result, margin pressure will likely continue into next quarter, as ARO works to clear backlog from Q4. The new capital structure makes sense as management attempts to bolsters its operational and liquidity position. However, the issuance of convertible preferred shares (as well as incremental interest expense) will inevitably result in additional equity dilution. As a recap, Aeropostale (NYSE:ARO) reported adjusted Q4 2013 EPS loss of ($0.35) on Thursday after the close. This missed consensus estimates for a loss of ($0.31) and prior guidance for a loss of ($0.24)-($0.32).

Note that the adjusted number excludes $0.25 in asset impairment charges, $0.03 in litigation expense, and $0.25 in the establishment of reserves against net deferred tax assets. Total comp store sales, including e-commerce, declined by 15% largely due to lower transactions while average unit retail prices decreased modestly. Comps quarter-to-date are running in the negative high-single-digits.

Aeropostale (NYSE:ARO) introduced Q1 2014 EPS guidance for a loss of ($0.70)-($0.75), well short of the street’s forecast for a loss of ($0.17); this reflects high-single to low-double digit decline in comps and continued margin degradation. Separately, ARO also announced a strategic partnership with Sycamore, which includes $150 million in debt, preferred stock convertible into 5% of common shares outstanding, and a $240 million sourcing commitment with MGF, an affiliate of Sycamore); this is in addition to a real estate and cost cutting investigation lead by consultants.


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