The Deal: Sycamore to Pursue Aeropostale Just Like Talbots

NEW YORK ( TheStreet) - Private equity firm Sycamore Partners LLC will use the same strategy in targeting teen apparel retailer Aeropostale ( ARO) as it did in acquiring women's apparel retailer Talbots ( TLB).

The private equity firm revealed in a regulatory filing Sept. 17, that it had taken a nearly 8% activist stake in New York-based Aeropostale, picking up 6.25 million shares for $54 million.

But unlike activist investors, who would push for changes at the company, Sycamore is ultimately looking to buy, someone close to the situation said. Over the past several years, Aeropostale has been pegged as a private equity takeover target by analysts and in news reports. And its latest financials make a Talbots-like scenario even more likely.

For its fiscal second quarter, the teen retailer reported sales dropped 6% to $454 million, compared to a similar period a year ago, while comparable sales including e-commerce were down a whopping 15%, year-over-year. The company reported a net loss of nearly $34 million. Its stock dropped 20.2% from a close of $10.98 on Aug. 22 -- the day of the earnings announcement -- to a close of $8.76 the following day.

After Sycamore disclosed its stake, the stock went back up to close at $10.17 on Sept. 17. This all brings back a memory of Sycamore's campaign to buy Talbots. Initially, the private equity firm, led by Golden Gate Capital veteran Stefan Kaluzny piled up a 9.9% stake in Talbots in August 2011.

Then in December of that year, Sycamore came forward with an unsolicited $3 per share bid, later sweetened to $3.05. But then, Sycamore withdrew its bid altogether, without giving a reason.

Turns out, that was the right strategy, as Talbots' first quarter earnings released on May 25, 2012, were dismal. The retailer reported net sales dropped to $275.9 million for the first quarter ended April 28, from $301.3 million for a similar period the year prior.

That gave Sycamore the bargaining power it needed to bag Hingham, Mass.-based Talbots for a reduced $2.75 per share, valuing the chain at about $369 million, including the assumption of debt. Sycamore, it turned out, was the only bidder for the company.

Meanwhile, back at Aeropostale, the company ended the second quarter with cash and cash equivalents of $100.3 million and no debt. This lack of debt, coupled with disappointing earnings and a share price drop makes it an even likelier target for a firm like Sycamore that specializes in distressed retailers.

For example, there was the firm's March acquisition of Hot Topic Inc. for $600 million. And, when Kaluzny was at Golden Gate, he did a whole slew if distressed retail deals including Eddie Bauer.

And Aeropostale isn't likely to turn around on its own any time soon. In its third quarter guidance the company said it expected a loss in a range between $0.21 and $0.26 per diluted share, compared to earnings of $0.31 per diluted share for the third quarter of 2012. Aeropostale also made plans to double its projected store closings in 2013 to between 30 and40.

For fiscal 2014 ending Jan. 31, Aeropostale is projected to have revenue of nearly $2.2 billion and negative Ebitda of nearly $18 million, according to Bloomberg estimates. That compares to nearly $2.4 billion in revenue for fiscal 2013 and Ebitda of about $125 million.

The company did not immediately return calls seeking comment.

-- Written by Richard Collings in New York

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