In one of the worst-kept secrets since American Apparel Inc (APPCQ) filed for bankruptcy last October, teen retailer Aeropostale Inc (AROP) will do the same sometime this week, destroying $2 billion in market cap in a little over five years.
Aeropostale is dead money — a refrain that was ironically used by retail analyst Brian Sozzi to describe the teen retailer’s stock all the way back in December 2010.
What did he know that us mere mortals didn’t? Not much. In fact, at the time Sozzi rendered his analysis, he was speaking about AROP stock (then ARO) being stuck at — wait for it — $24.
In subsequent anniversaries, it closed at $16.24, $13.50, $8.15, $2.31 and 40 cents this past December.
Now, before you think this is a rant against Sozzi, let me assure you it’s not. I’m equally guilty of “catching a falling knife” syndrome. In an article I wrote for InvestorPlace in January 2014, I picked Aeropostale as my No. 1 small-cap stock to buy. In my defense, there’s a caveat to this pick: AROP and the other two small caps were selected from a list of the S&P 1500’s worst performing stocks in 2013. (Hence the reference to catching a falling knife. We’re all guilty of it.)
I thought that one of Aeropostale’s major shareholders at the time — Crescendo Partners, Sycamore Partners or Eminence Capital — would make a move to take it private because AROP still was generating more than $2 billion in revenue and just one fiscal year removed from an operating profit.
In hindsight, we know this was just wishful thinking.
Forget Aeropostale (AROP), And Forget Teen Retailers
Aeropostale and the rest of the teen retailers have been dead money for some time; investors just didn’t want to admit it. Five years ago, if you had invested $10,000 in each of the three A’s — Aeropostale, Abercrombie & Fitch Co. (ANF), and American Eagle Outfitters (AEO) — today, you would have $16,366, a 45% loss on your investment. If you had tucked that $30,000 total into an S&P 500 index fund as Warren Buffett suggests, you’d have $51,000 and change to show for your troubles, not a bunch of losses, or in the case of Aeropostale, your entire investment.
So, what’s Aeropostale going to do?
Sources say it will close more than 100 stores, or about 12% of its total locations. Crystal Financial LLC is said to be working with them to hammer out a loan that will get them through the bankruptcy and reorganization process.
That could be wishful thinking on management’s part.
Sports Authority filed for bankruptcy protection in March. Its reorganization plan included the closure of approximately 30% of its 463 stores. That didn’t happen. Instead, the retailer announced it is putting itself up for sale. With little interest from Dicks Sporting Goods Inc (DKS) and other regional players to own the company itself, most of the locations will be liquidated and closed, whereupon retailers such as Dick’s are free to negotiate with the owners of the properties on new leases.
America has too much retail — especially when you consider the move to an omnichannel distribution system that sees online says becoming an ever larger piece of the retail dollar. Teen retailers such as Aeropostale likely won’t be missed. And others like Forever 21 could be right behind them.
“Like many teen retailers, they [Forever 21] were drinking too much of their own Kool-Aid and overexpanded the store fleet both in terms of units and square feet — with new stores averaging over 35,000 square feet and some stores over 100,000 square feet,” Craig Johnson, president of Customer Growth Partners, recently told the New York Post.
Dead money, indeed.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.