Aeropostale CEO Claims Largest Investor Wanted It to Fail

Updated to include statement from Sycamore Partners and news from bankruptcy hearing.

Aeropostale's (ARO)  private equity backer and largest individual shareholder may have finally gotten its wish Wednesday when the beleaguered teen apparel retailer officially filed for bankruptcy protection, following years of stunning losses.

That is, at least according to the retailer's bankruptcy filing with the courts. 

As Aeropostale's CEO Julian Geiger recounted in court documents filed on Wednesday, "In the fall of 2013, and prior to Sycamore, MGF Sourcing and Aero Investors entering into transactions with the company, Stefan Kaluzny [Sycamore Partners managing director and co-founder] initiated a discussion with me about the possibility of appointing me to Aeropostale's board -- I asked Kaluzny how active a director he would want me to be, and he clearly told me that as a Sycamore director, I should do nothing and just observe because his plan was to let Aeropostale deteriorate so that he could buy the company in bankruptcy, and if he appointed me as CEO I could hit the ground running."

According to Geiger, who is credited with building Aeropostale during his tenure as chairman and CEO of the company from 1998 until he retired in 2010, he told Kaluzny that is not how he operates.

In May 2014, Kaluzny and Geiger joined the Aeropostale board as Sycamore-designated directors. Geiger agreed to return as Aeropostale's CEO in August 2014, and placed a "courtesy call" to Kaluzny, who wished him luck in the new gig. Kaluzny is no longer on Aeropostale's board.

The frayed relationship between the two worsened in February of last year when Geiger met Kaluzny to discuss Sycamore-backed MGF Sourcing, which inked a sourcing deal with the company in 2014 and, claims Geiger, overcharged Aeropostale for goods. According to Geiger, Kaluzny said the over-payment didn't matter as long as Aeropostale "had enough money to pay the bills" and that he had to "make his numbers at MGF."

MGF Sourcing's tough stance with Aeropostale seemed to intensify after a dreadful holiday season.

"It has become increasingly clear to me over the course of the last several weeks since Sycamore and MGF first demanded cash in advance terms -- before manufacturing or supplying any merchandise -- that Sycamore was using its leverage over MGF to precipitate the filing of these chapter 11 cases -- MGF's demands systematically caused a cash drain on the debtors' enterprise through onerous and unreasonable terms and deprived the debtors of critical merchandise," said Aeropostale Chief Financial Officer David Dick in the filings, adding that "why Sycamore was determined to cause a precipitous chapter 11 filing immediately is not yet known with certainty."

Aeropostale said Wednesday it would be closing 113 of its over 720 locations in the U.S. as part of its bankruptcy, in addition to its 41 stories in Canada, as it seeks to "achieve long-term financial stability." The company listed assets of $354 million in the Chapter 11 filing, while its debts tallied $390 million. The company said it has secured $160 million in financing from Crystal Financial LLC.

The company cleared a major hurdle Wednesday afternoon in its first trip to the courts. U.S. bankruptcy Judge Sean Lane approved the company's request to draw a $100 million from its $160 million debtor-in-possession financing. 

Sycamore, which invests in distressed retailers, ultimately made a terrible bet on Aeropostale. The private equity firm took an 8% stake in Aeropostale back in September 2013 when shares were trading at about $9. Then in March 2014, the company loaned Aeropostale $150 million, and inked the sourcing contract with MGF Sourcing that helped to further choke Aeropostale's bottom line.

Sycamore Partners fired back at Aeropostale's claims Wednesday afternoon. 

"Sycamore Partners and its affiliates, which were Aéropostale's largest stockholder and are its largest secured creditor, deny the claims made by Aéropostale in its court filings -- Sycamore intends to defend itself vigorously, unfortunately Aéropostale management has been unable to reverse the company's disappointing financial performance, which led to its bankruptcy filing," said a Sycamore Partners spokesman via email to TheStreet.

They continued, "MGF Sourcing confirmed that it exercised its contractual rights to reduce or eliminate payment terms once Aeropostale's liquidity fell below $150 million - this action was permitted under the terms of its sourcing agreement with Aéropostale, which was and is free to source product from competing vendors if it chooses to do so."

During court proceedings, Sycamore Partners opposed the loan and called the retailer's reorganization plan "illusory." The private equity firm added that liquidation would be the most realistic course unless a buyer emerges in two to four weeks.

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