Crescendo Partners Sends Letter to Aeropostale Board, Sees Significant Opportunity for Co. to Cut Costs, Urging Special Committee, Possible Sale, Sees Implied Price $14-16/Share Range
Crescendo Partners today announced that it has delivered a letter to the Board of Directors of Aéropostale, Inc. (“Aéropostale” or the “Company”) (NYSE: ARO).
In the letter, Crescendo Partners urges the Board to immediately commence a broad sale process for the entire Company. Crescendo believes that numerous potential buyers will be interested in acquiring Aéropostale because of its strong brand name and its compelling valuation. Crescendo intends to nominate directors for election at the 2014 Annual Meeting to ensure that the Company is taking the appropriate steps to maximize stockholder value.
The full text of the letter follows:
Crescendo Partners 777 Third Avenue, Floor 37 New York, NY 10022 (212)-319-7676
November 21, 2013
Members of the Board of Directors c/o Ms. Karin Hirtler-Garvey Aéropostale, Inc. 112 West 34^th Street, 22^nd Floor New York, NY 10120
Dear Board Members,
Crescendo Partners, together with its affiliates (“Crescendo”), is a significant stockholder of Aéropostale, Inc. (“Aéropostale” or the “Company”). We initially invested in Aéropostale because of the strength of its brand name, the opportunity for the Company to execute a plan to restore margins and its compelling valuation. Based on what we perceived to be extremely undervalued shares, we were not surprised when Sycamore Partners, a private equity firm specializing in consumer and retail investments, filed a 13D in September disclosing ownership of approximately 8% of the Company's outstanding shares.
Although Aéropostale has embarked on a turnaround to improve same-store sales (SSS) trends and close underperforming stores, we think that there is a fair amount of execution risk associated with performing this turnaround in the public market. Therefore, we believe that the Company should immediately commence a strategic process to sell itself. In addition, Crescendo Partners intends to nominate directors for the upcoming 2014 Annual Meeting of Stockholders (the “2014 Annual Meeting”).
We were initially attracted to Aéropostale for several reasons, including the following:
* Extremely attractive valuation: Aéropostale is trading at a significant discount to its intrinsic value assuming the stabilization of SSS trends and a return to a more typical level of operating margins. * Opportunity to rationalize operating expenses: The Company has stated that it plans to close down at least 100 of its unprofitable Aéropostale stores which are primarily located in “C” malls. Although there will be some costs associated with shutting down stores, the overall positive impact on margins is likely to be significant and lasting. Based on our extensive and successful experience investing and creating value in the retail sector, we believe that there is a significant opportunity to cut costs from the business. * Incremental growth opportunity in P.S. from Aéropostale concept: Since 2009, Aéropostale has focused on developing its children's concept, “P.S. from Aéropostale”. The Company currently has 145 stores and has stated that this concept can ultimately grow to 500 stores, which would result in approximately $700 million in incremental revenue. The Company has noted that “P.S. from Aéropostale” has lost money in previous years, but it expects the concept to become profitable in the future.
Given the substantial work required for Aéropostale to stabilize its SSS trends and rationalize its operating expenses, as well as to close a number of stores, we feel that these tasks are best accomplished as a private company. Based on our knowledge of the industry, we are confident that the Company could be sold for between 0.5x and 0.6x sales. Using consensus revenue of $2,160 million and the Company's current cash balance, these multiples would imply a sale price between $14 and $16 per share, which is consistent with our view of a 5.5x to 6.5x normalized EBITDA multiple. Given the strength of the Company's brand, a price in excess of this range may be achievable. We believe that many of the features that initially attracted us to Aéropostale will also attract numerous potential buyers, both strategic and financial, if the Company decides to start a sales process. We strongly believe that many of the Company's stockholders would agree that a sale of the Company is the most effective way to maximize stockholder value.
We are concerned that the Company will attempt to argue that now is not the time to sell itself because the Company is in the middle of a turnaround and more value could be created by trying to successfully complete the turnaround process. We preemptively refute any attempt by the Company to make such an argument for the following reasons:
* Turnarounds in the retail sector are difficult to perform and the ability to make tough decisions, including the closure of stores, is best done as a private company. Difficulties associated with turnarounds, such as non-recurring charges, layoffs, management turnover and negative press, result in a general lack of market confidence and a depressed stock price. * The Company has done an extremely poor job of forecasting its future performance. During the past five years, the Company has spent approximately $580 million (approximately 75% of its current market capitalization) to buy back stock at an average price of more than $22.75 per share. We believe these purchases were made because the Board incorrectly forecast that the stock price would increase based on improved performance. * While the Company was aggressively buying stock at inflated levels using stockholders' money, the Board and management have been far more cautious with their personal wealth. Over this same five year period, management and the Board have purchased no stock on the open market. * Aéropostale's stock price has substantially underperformed its two closest peers (Abercrombie & Fitch Co. and American Eagle Outfitters, Inc.) as well as the S&P 500 specialty retail index in each of the past 1-, 3-, and 5-year periods. The following table details the share price underperformance:
Share Price S&P 500 Abercrombie American Performance Specialty & Fitch Eagle Aéropostale Retail 1 Year 35.0% -16.7% -17.0% -29.7% Performance 3 Year 97.8% -26.3% -3.4% -63.6% Performance 5 Year 285.1% 148.6% 123.6% 8.7% Performance
* With the stock down 63% in the past three years, we believe that stockholders have suffered enough under the current Board and are entitled to a process that will maximize stockholder value.
We believe that numerous potential buyers will be interested in acquiring Aéropostale due to its strong brand name, discount to intrinsic value and opportunity to return to historical profitability. As mentioned, we believe that retail turnarounds are difficult to perform as a public company. With an average holding period in excess of three years, Crescendo Partners is a long-term value-oriented investor. However, we have firsthand experience turning around specialty retailers in the public market, and we know how much more easily it can be done as a private company.
We urge the Company to set up a special committee of independent directors and hire investment bankers to run a broad sale process. As noted above, Crescendo plans to nominate directors for the 2014 Annual Meeting to ensure that the Company is taking the appropriate steps to maximize stockholder value.
Eric Rosenfeld, Chairman and CEO
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