Aeropostale's Cash Bleed Is Continuing: Morgan Stanley
Aeropostale Inc (NYSE: ARO) has seen a more than 64 percent decline in its share price over the past year.
Morgan Stanley’s Kimberly C Greenberger has maintained an Underweight rating on Aeropostale.
Quarter-to-date, net income and cash flow continue to deteriorate in Q3. Greenberger believes that even if sales stabilized, Aeropostale might be able to return to profitability.
Although the LSD comps have seen a sequential improvement quarter-to date in Q3, as well as improvement on a one- and two-year basis, the company’s net income and cash flow have continued to worsen.
The management has guided to Q3 loss per share at the high end of the consensus range but worse than the estimate, “despite a less bad sales outlook.”
“We think the primary driver of this is aggressive 2H inventory buys, which hinder the magnitude of potential merchandise margin recovery,” Greenberger said, while adding, “We see significant risk in assuming deeply negative sales trends will suddenly accelerate... especially given continued volatility and price competition in the broader retail environment.”
In addition, the company’s sales per square foot has fallen 19 percent during 2011-2014, although inventory per square foot declined only 11 percent, suggesting that the company was “chronically over inventoried.”
In the absence of positive same store sales, the incremental investment in inventory could lead to additional cash burn and considerable markdowns.
According to the Morgan Stanley report, “Management is hoping for a 2H15 turnaround, but we think it is unlikely ARO can earn a profit again.” However, Greenberger believes that even in the optimistic scenario that sales stabilizes, Aeropostale was unlikely to return to profitability, given its meaningful SG&A deleverage. With its lean cost structure, there does not appear to be room for the company to make any significant expense cuts.
Latest Ratings for ARO
Aug 2015 | Wolfe Research | Initiates Coverage on | Peer Perform | |
Jul 2015 | UBS | Downgrades | Neutral | Sell |
May 2015 | Stephens & Co. | Maintains | Equal-weight |
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