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Value Fail: Aeropostale

December 09, 2013 | About:

Barel Karsan

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.

About the author:

Barel Karsan
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