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Aeropostale Now Looks Like a Takeover Target

The Exchange

The beaten-down shares of teen-clothier Aeropostale (ARO) were soaring after another investor -- one with an acquisitive past in the retail sector -- revealed a sizable buy in a stock that, before the Tuesday surge, had lost a third of its value year-to-date.

Aeropostale store

In recent trading, Aeropostale was up 18.9% at $10.24 on volume that was much heavier than average. At the moment, that's its fourth-best day ever in terms of a percentage gain, according to FactSet. Two firms like the opportunity in the shares that, ahead of the session's gains, had plunged nearly 34% since their close Dec. 31. The key differences are that one stake is new and more aggressive, while the other is expanded and ostensibly less overbearing.

Hummingbird LLC, indirectly owned by Sycamore Funds, said in a regulatory filing that it had purchased 6.25 million Aeropostale shares for just under $54 million, equal to a stake of 7.96%. The filing, a 13D, indicates Sycamore expects to take an activist role at New York-based Aeropostale, whose biggest holder as of June 30 was Fidelity Management & Research. Hummingbird, which didn't have any Aeropostale stock prior to announcing the stake, immediately becomes the third-largest investor.

What's particularly interesting is that with Sycamore, an ongoing or even outright purchase is conceivable. It's been behind the acquisition this year of Hot Topic, the chain that sells apparel and accessories for young people, and the 2012 takeover of Talbots, the seller of women's clothing. The year before that, it took a controlling interest in a Limited Brands (now L Brands (LTD)) division, Mast Global.

Tiger boosted stake

Though the Hummingbird announcement is notable in isolation, it's the second such event in a matter of days. Earlier this month, Tiger Consumer Management said it now owns 6.43 million Aeropostale shares, good for an 8.2% ownership position, and up from 3.55 million shares as of June 30. That makes it the No. 2 holder of the chain. Tiger, though, filed a 13G, indicating it will be a passive investor in the company, as opposed to the activist measure taken by Hummingbird. In total, Tiger has lifted its stake more than four-fold from its 1.91% ownership position in September 2012.

With positions that substantial, if either chose they could press for change at Aeropostale, whether by leaning on management about personnel or operations, though Hummingbird clearly appears to be the more likely to do so. That's pushing the stock higher here, since one of the possibilities could be to lay out the case for a sale of the company. Also likely a factor is that some degree of short-covering was occurring. Yahoo Finance data show that about 25% of Aeropostale's float was sold short Aug. 30.

The filing is, of course, formal and legal and doesn't broach that topic, noting that Hummingbird's share buy centers on its belief that Aeropostale "is an attractive investment." The firm says it might, however, talk to management, board members and other stockholders "concerning the business, assets, capitalization, financial condition, operations, management, governance, strategy and future plans" of the company.

Aeropostale has had terrible financial results as it faces an always fickle core shopper and serious competition -- from similarly suffering Abercrombie & Fitch (ANF) and American Eagle (AEO), along with retail comeback story Gap (GPS), trendy favorite Urban Outfitters (URBN) and the likes of Forever 21. That's even before it has to worry about its audience potentially preferring to spend their dollars on new iPhone gear instead of apparel in the months ahead.

So far this year -- before the Sycamore-led bump -- Aeropostale has been a laggard even among laggards. As of Monday's close, its 2013 loss trailed the 21% drop in Abercrombie and the 27% decrease in American Eagle. Urban Outfitters had posted a 2% decline. Gap, meanwhile, is up 36% from where it ended last year, and the retail sector, measured by the SPDR S&P Retail ETF (XRT) has advanced 30%. That said, consumer names in general have been under stress in recent weeks amid renewed worries about spending in the U.S.