Monday, December 9, 2013

Value Fail: Aeropostale

A few years ago, I brought up Aeropostale as a potential value investment. There was a time this company could do no wrong. Times have changed.

I'm pretty embarrassed about this one. This is an industry with extremely tough economics. You've got a lot of fixed costs because it's in retail, and you've also got a very fickle and fast-changing customer. When there are no barriers to entry in such an environment, you better have good management. Alas, based on Aeropostale's deteriorating results, I believe the company was severely lacking in this regard. Aeropostale's results appear to have turned negative ever since its current CEO was promoted to the top position in 2010.

I quite like the saying: “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” And in this case, my behaviour is quite foolish (and not the cool, Motley kind). I knew this was a tough business going in; I've read about a number of disasters in this area. But for some reason, I tried to outsmart the market anyway, and failed.

Somehow, I didn't lose money on this one in absolute terms (though of course the tied-up capital has an opportunity cost). I believe that's only because I got very lucky in that the market has expectations for a buyout offer from someone who has been accumulating shares. I don't think I add any value to that speculation, so I sold my shares. That's not to say a buyout offer couldn't come that is favourable to current shareholders, but I don't want to be left holding this bag if that doesn't happen. (I wouldn't be surprised if the company needs to raise capital at some point; something needs to change quickly to avoid that scenario.)

That's not to say I'd never again invest in an industry like this. But if I do, it's going to be behind what I perceive to be a strong management team with a track record, not someone who has risen through the ranks to the top job. I suspect the latter to be someone who's talks a good game but who can't necessarily deliver; give me someone who delivers but lacks charisma anytime.

Disclosure: No position


Anonymous said...

Excellent introspection Saj.


Anonymous said...

You remind of the gambler who gets tired of not winning on a slot machine despite playing for two hours. And so he gets up and waddles over to a different slot machine.

This isn't investig. It's throwing out a bunch of metrics you found in some books and affixing a minimal narrative to perpetuate this pretense.

Good luck.

Anonymous said...

interesting time to bail given that management is saying the right things and 2 activists have gotten involved. yes, its a tough business, and yes, the macro environment is brutal right now... but that is in the price already.

Cameron said...

I think you are attributing to bad management what could just be bad luck and Aeropostale going out of fashion. All the specialty retailers, Urban Outfitters, Abercombie and Fitch, American Eagle, are all getting hammered because people don't want to buy their stuff. Are the management teams in all those businesses bad after delivering stellar results for so many years. No, I think this is an example of the halo effect. At least the lesson I take away from this although I may be biased as someone who already does this, is to not invest in retailers that depend on fads or fashion to sell products because you never know when the fad is going to turn against them. Perhaps the second lesson you could have learned in my opinion is to ask the people on the ground. If you asked any teenager or 20 something girl about their shopping habits, people would have told you that lots of people are migrating to cheaper and plainer stores like H&M. That's at least what I would take away from this lesson. Not that the management team was bad.

Saj Karsan said...

Thanks, BF.

Hi Anon3, I would suggest the activists are also in the price, as I suspect the company would be trading a lot lower if not for them.

Hi Cameron, you make a good point, but I would also suggest ARO has done much worse than its peers.