Drama at the mall, Aeropostale explores options

A review of strategic alternatives is underway at mall-based specialty retailer Aeropostale following the deterioration of fourth quarter results and a supply chain disruption caused by a supplier dispute.



Sale declined 16.1% to $498 million and same-store sales, including e-commerce, declined 6.7%. Profits declined to $21.7 million, or 27 cents a share, compared to a prior year fourth quarter loss of $13.5 million, 17 cents a share.



In commenting on the company’s performance, Aeropostale CEO Julian Geiger cited a $7.6 million adjusted operating loss which he said was within guidance and a positive initial reaction to spring product. However, he also disclosed that management plans to explore a full range of strategic and financial alternatives, including a potential sale or restructuring of the company, while it pursues a new merchandising strategy across two formats.



"The business trend has improved significantly since we introduced our spring merchandise assortments and launched our factory store initiative,” Geiger said. “Under normal conditions, we would be very optimistic about our potential for financial growth throughout the first half of 2016. Regrettably, our short-term visibility is limited by our current vendor dispute."



The company is currently engaged in a dispute with a vendor, MGF Sourcing US, LLC, an affiliate of Sycamore Partners, over what it believes is a violation of a sourcing agreement. Sycamore Partner also happens to be the parent company of the lender under Aeropostale’s term loan agreement.



“This violation is causing a disruption in the supply of some merchandise, which, if unresolved, could cause a liquidity constraint,” Aeropsostale said in a statement. “The company is considering all options with respect to this dispute and to address the disruption in supply.”



If the supply issue is resolved, Geiger believes the company’s new strategy of differentiating merchandise in fashion oriented stores in higher end malls from product available in outlet and lower end malls will yield improved performance.



“On a relative basis the malls in which the customers are seeking fashion represent about 40% of our stores, while the remaining malls and outlets that attract a customer interested in a more basic assortment account for about 60%,” Geiger said. “We believe that a more immediate focus on the larger store group that we will now be calling factory stores will accelerate the pace of our financial improvement.”



Geiger assumed the chief merchant role last July after joining the company in 2014 as CEO, having previously served as CEO from 2010 to 2014.



In recent months the company added the word “factory” to the exterior signage at some stores while adjusting assortments to include heavily promoted basics and logo merchandise designed to appeal to customers seeking value.



“The product assortment within these (factory) stores will be more narrow and deep, with some merchandise exclusive to factory stores arriving for back-to-school. The assortment on average will also have less fashion, which is less desired by our factory customers,” Geiger said.



At the non-factory Aeropostale stores that account for 40% of the locations, the company said it will de-emphasize logo merchandise and offer updated classics with a twist.



The company will continue to have one design team and one merchandising team for both store types as much of the merchandise will be the same, however there will also be products developed exclusively for each concept.



“We believe that there is a real opportunity to improve both sales and margin across our organization through both our revamped merchandise assortment as well as our bifurcated store strategy,” Geiger said. “We expect to see improvements more quickly in the factory channel, given our ability to foster change in sales promotion and in presentation.”