In what has become an almost weekly ritual, a slow-moving retailer has seen its stock jump massively due to news of a big investor getting in. Now, in almost every Writing 101 workshop, you hear an instructor bang on about using passive tense, and how it makes writing weak. So I said Aeropostale, Inc. (NYSE:ARO) had “seen its stock jump” only because the company hasn’t done a single thing to make shares move. All it did was look like a target for Sycamore Investors’ Hummingbird LLC division, which announced an 8% stake today.
Of course, the market loved it, and Aeropostale, Inc. (NYSE:ARO)’s stock jumped 19% by midday. That’s bad news.
At an absolute standstill
The reason to drop $54 million into Aeropostale, Inc. (NYSE:ARO) is the usual reason — it seems cheap. Hummingbird called it “an attractive investment,” and there’s absolutely no way that could be a reference to the business itself. Last quarter, Aeropostale, Inc. (NYSE:ARO) dropped revenue by 6%, with comparable-store sales falling 15% compared to the previous year. That’s bad. That’s the opposite of good.
To put it in perspective, The Gap Inc. (NYSE:GPS) increased comparable sales by 5% over the previous year, resulting in a 31% jump in earnings per share. Aeropostale lost $0.43 per share last quarter — a $0.43 drop from 2012.
Hummingbird’s long-term plan for the retailer isn’t clear yet, but already there’s speculation about Aeropostale, Inc. (NYSE:ARO) going private. That’s basically the only option that makes sense right now, but it’s far from a great reason to get into the stock.
The private problem
Apart from holding a small position, Hummingbird is currently on the outside. Even with a bigger slice of the pie, it’s by no means certain that the investor would be able to drive meaningful change. Bill Ackman’s foray into J.C. Penney Company, Inc. (NYSE:JCP) made it pretty clear that hedge funds don’t always “get” retailers. Ackman ended up losing about $470 million when he finally got out of J.C. Penney Company, Inc. (NYSE:JCP), even though the business took his advice for a year.
Even if it avoided making changes right off the bat and simply focused on taking the business private, Hummingbird might still run into an unhappy board and a poison pill. As Safeway‘s jump today has highlighted, boards are quickly learning how to keep themselves from losing control, and investors are reacting positively.
In short, Aeropostale, Inc. (NYSE:ARO) has a weak core business, and Hummingbird’s involvement is far from a guarantee that things are about to turn around. The stock’s jump is an overreaction, and it’s one more sign of investors following the blind herd. Luckily, we’re not all that gullible.
The article Aeropostale’s Surge: Like Lambs to the Slaughter originally appeared on Fool.com and is written by Andrew Marder.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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