Aeropostale (ARO) isn't the first teen apparel retailer to experience financial difficulties and it surely won't be the last.
Unfavorable trends including decreased traffic to malls and the rise of low-cost fast-fashion chains such as Inditex's Zara and Swedish retailer H&M are squeezing the sector's profit margins. Moreover, teens and millennials are increasingly shopping for apparel online. A teen unemployment rate of 15.6 percent doesn't help either.
"The junior apparel group is simply doing terribly including Gap (GPS), which is the leader and has the most stores," Howard Davidowitz, the head of Davidowitz & Associates, which provides investment bank and consulting services to retailers, said. "They have been closing massive amounts of stores for five years."
Aeropostale, which operates 744 stores in all 50 states and Puerto Rico, rattled investors Thursday after announcing a dispute with a supplier MGF Sourcing, which has disrupted the stocking of some merchandise. The chain also said it may not be able to continue operating because of a "liquidity constraint." According to Davidowitz, Aeropostale will get less favorable terms from suppliers who may demand more cash up front for their products.
MGF is an affiliate of Sycamore Partners, a private equity firm that provided a $150 million credit facility to the troubled chain in 2014. It and also took a position in Aeropostale's stock that it has since sold at a loss.
Shares of Aeropostale, which had already plummeted more than 90 percent over the past year, fell nearly 46 percent on Friday. Analysts are skeptical that another company will ride to Aeropostale's rescue.
"A few years ago, J. Crew and Gymboree were taken private," Simeon Siegel, an analyst with Nomura Securities, said. "Ever since then it has been difficult to make a similar deal happen. All indications are that those deals have not been as profitable as (investors) would have liked them to be."
Pacific Sunware of California (PSUN), which sells beach-inspired attire, is in a similar predicament to Aeropostale. The chain recently hired financial advisers to help it get a handle on its $160 million in debt slated to mature later this year.
American Apparel recently emerged from bankruptcy as a private company as it faced the same economic conditions as its rivals coupled with sexual harassment lawsuits against its former CEO Dov Charney. Another teen apparel chain, Abercrombie & Fitch (ANF), recently reported its first gain in comparable sales in more than three years, although analysts expect it to lose money in the current quarter.
"Abercrombie has had a long trajectory of pain," Siegel said. "The companies that are there have to figure out how to operate in their new normal."
"American Eagle and Express have been selling products that consumers want," Siegel said. "People are willing to shop in the mall if you give them a reason to."