AROPOSTALE,

INC.

A Potential Acquisition to Offset BDIs Risk of Takeover



Presented to

Ms. Diane Banks
Chair of Board of Directors
Big Data Incorporated
Research Triangle Park, NC 27709

Prepared by

KRYAN LLC
Katrine Ryan
Elon, NC 27244
MAY 5, 2015

KRYAN LLC
100 Campus Drive
Elon, NC 27244

May 1, 2015

Ms. Diane Banks, Chair of Board of Directors
Big Data Incorporated
700 Data Park
Research Triangle Park, NC 27709

Dear Ms. Banks,

This document holds the findings to the report you requested of KRYAN in March regarding
BDIs potential acquisition of Aropostale to offset BDIs risk of becoming a takeover target.
Recently, BDI successfully expanded internationally, increasing its market share and attracting
new members to the Board of Directors.

As a newly elected chair on the Board, you raised an important concern about BDIs long-term
independence. Its recent successes have put BDI at risk of being acquired by another company.
You assigned KRYAN to discover if acquiring Aropostale would decrease BDIs critical
dependence on data mining for profit, reduce its cash position, and increase opportunities for
future profits.

Our analysis on Aropostales target demographic, competitors and financials support the
conclusion that BDI should not acquire Aropostale. Because of the companys inability to keep
up with the consumer, its intense competition, and weak financial performance, BDI should
acquire another company that is utilizes consumer trends.

KRYAN LLC used several resources to develop our analysis and recommendations. NASDAQ,
Forbes, MarketLine, and Hoover were a few of our resources that provided relevant
information to answer our research questions.

Thank you for choosing KRYAN to conduct the research into Aropostale. We would be happy
to talk to you further if you have any questions about the research or need our assistance.
Please contact us at 203-505-4786 or kryan19@elon.edu. Since we do not believe you should
acquire Aropostale, hopefully we can continue to work with you in the future to reach your
business needs and find the right acquisition for BDI.

Sincerely,

Katrine Ryan
KRYAN Team Member

i

Table of Contents

Letter of Transmittal i

Executive Summary .. iii

Introduction 1
Purpose of Report ....... 1
Scope 1
Background ... 1

Problem Statement .. 1
Organization .. 1
Preview of Conclusion ... 1

SWOT Analysis 2

Customer Retention . 2

The Fickle Consumer Base . 2

Consumer Trends ... 3

Relevance and Branding . 3

Competitive Market . 3

Aropostale, the Potential Acquistition 3

Forever 21, a Competitor .. 4

H&M, a Competitor .. 4

Abercrombie & Fitch, a Competitor 4
American Eagle, a Competitor 4
Competitor Expansion . 5

Financial Performance . 6

Cash Flow . 6
Significance of Cash Burn . 6
Shift in Channel Approach 6
Current Financial Situation .. 6

Conclusions and Recommendations 8

References 10

List of Illustrations

Table 1

Aropostales SWOT Analysis 2

Figure 1

Aropostales Revenue for FY2014 .. 5

Figure 2

Aropostales Net Income From 2011-2015 7

Potential Acquisition

Purchasing Aropostale to Offset BDIs Risk of Takeover

Executive Summary

Although acquiring Aropostale may reduce the risk of takeover for BDI, Aropostale is not the
best acquisition for the company. Aropostale is struggling financially in an unstable market
that has fierce, unyielding competition. The company offers BDI limited diversification and
potential profits.

The research conducted by KRYAN LLC indicates that this acquisition would not completely
fulfill BDIs goals and needs. BDIs capability of data mining could be seen as the boost it needs
to succeed in the industry. However, its business model limits its ability to succeed in the
apparel industry.

The following reveals the three main reasons why Aropostale is not fit for acquisition:

1) Aropostale is targeting a difficult demographic.

BDI can help Aropostale because the company is driven by consumer trends.
However, the company cannot keep up with the fast-paced changes of teen trends
because of its limited vendors and operation costs.
Aropostales consumer are hooked on the fast fashion companies such as H&M and
Forever 21, which offer trending styles at extremely low prices.

2) Aropostales competition reveals its limited success in the future.

BDI is looking to diversify its portfolio. Although Aropostale has a few brands under
its belt, the demographic is smaller, fickle and less diverse than its competition.
Unlike BDI, Aropostale will not find significant success by expanding internationally.
The competitors are expanding internationally, and succeeding more than
Aropostale financially.

3) Aropostales financial performance will hinder BDI success.

For more than 3 years, Aropostale has yet to capitalize on significant opportunities,
including expanding internationally, decrease debt with help from Sycamore
Partners and develop successful e-commerce.
The company has a significantly high cash burn rate that will prevent BDI from
increasing future profits. Although Aropostale will decrease BDIs cash reserves, the
company will drain BDIs profits quickly.
The companys decrease in stock prices and revenue reveal the companys
downward decline. The negative net income at this rate will continue to increase
before it will diminish. BDIs profits would be affected long-term.
iii

Aropostale Inc.

Introduction

To reduce risk of a takeover by another company, BDI has contacted KRYAN LLC to perform an
analysis regarding a potential acquisition of Aropostale. KRYAN has researched Aropostale to
determine if BDI would benefit from diversifying its company through Aropostale.

Purpose of Report

This report will determine if BDI should acquire Aropostale. It will examine Aropostales
financial performance, competition, and customer retention to make a recommendation to BDI.

BDI hopes to reduce the potential of being acquired by another company. This report is
significant because Although BDI would diversify its portfolio, Aropostale could potentially
hurt the company in the long run.

Scope

This report was limited to the information gathered from secondary research. KRYAN did not
speak with an Aropostale representative to verify the information. However, the information
was obtained from analysts and leaders in understanding company financials and markets.
KRYAN LLC chose respected databases and financial planning websites in order to make the
most responsible recommendation.

Background

Big Data Incorporated recently experienced significant international sales. BDI has immensely
increased its market share and has minimal short and long-term debt. There is concern that
BDIs long-term independence is at risk because of its success. BDIs high cash reserves and
reliance on only data mining makes it a tempting takeover target.

Problem Statement

Will acquisition of Aropostale fulfill BDIs goals of decreasing BDIs critical dependence on its
data mining for sale and profit, decrease BDIs attractiveness by reducing cash position, and
increasing opportunities for future profits?

Organization

This report will first examine the SWOT analysis for Aropostale. Then, the report will reveal the
limitations of the opportunities and strengths of the company. The report will first review the
Aropostale customer, then the competitive market, and lastly the companys financial
performance. Lastly, the report will draw key insights that lead us to our recommendation.

Preview of Conclusion

Based off our research and relevant findings, BDI should not acquire Aropostale Inc.
1

Aropostale Inc.

SWOT ANALYSIS FOR AROPOSTALE

The SWOT analysis establishes a baseline of ideas for KRYAN to question and evaluate. The
information following the SWOT analysis will reveal how some strengths and opportunities
from the SWOT analysis are not as strong as MarketLine suggests.

Table 1: The SWOT analysis is a culmination of SWOT analyses from respected research firms as
well as insights (bolded) from KRYANs relevant research.

Strengths:

Weaknesses:

Strong brand name

One of the largest retailers in the
market (MarketLine)
Multi-channel approach (MarketLine)

Small and unpredictable demographic

Decline in mall traffic, decreasing teen
retail sector (Forbes)
Reliance on a small number of vendors
(MarketLine)
Weak financial performance
(MarketLine)

Opportunities:

Threats:

Create new branded collections with

social media stars to reignite brand
popularity
Growth in E-commerce (MarketLine)
International expansion (MarketLine)
Rebranding stores to be more fashion-
forward

Competition for teen market share

(MarketLine)
Predicted losses through 2015 (Forbes)
Other markets are diverting teen
dollars away from fashion (MarketLine)
Loss of investor trust, cash burn

CUSTOMER RETENTION

The Fickle Consumer Base

Since its significantly profitable performance during the recession of 2008-2009, Aropostale
has struggled to grow its revenues and retain customers. Aropostale is a retailer of casual
apparels and accessories, targeting 14 to 17 year-old young women and men. P.S. from
Aropostale focuses on kids between the ages of four and 12. Therefore, Aropostale Inc. must
comply with a fickle customer base that continuously embraces new trends (MarketLine, 2015).

Aropostale Inc.
Aropostale Inc.

Consumer Trends
According to Retail and Technology Analyst Ika Erwina, kids and teens are digital natives that
divide their attentions across multiple platforms and channels, prompting impatient behaviors,
quick-fix mentality, and instant gratification. Their loyalty is likely to mirror this trend,
spreading thinly across brands, and easily switched, concluded Erwina (Mintel, 2015).

In recent years, food and electronics have diverted teen dollars away from fashion spending
(MarketLine, 2015). Fast-fashion competition has become more intense as fewer shoppers are
spending money on clothes.

Relevance and Branding

In addition, its consumers no longer desire the preppy, logo-driven styles offered by
Aropostale, Abercrombie & Fitch, and American Eagle (Huffington Post). Although Aropostale
has a strong brand name, the company is closely tied to its basic apparel options, including t-
shirts, tops, bottoms, dresses, jackets, footwear, intimates and accessories (MarketLine, 2015).

The company hopes to use two big collections inspired from TV show Pretty Little Liars and
powerful social media personality Bethany Mota who has more than 5 million subscribers on
her YouTube channel. Aropostale hopes to draw in a huge teenage fan base (Forbes, 2014).

COMPETITIVE MARKET

Aropostale lost its competitive edge as the cheapest alternative in preppy apparel to
Abercrombie and Fitch, and American Eagle when these brands were forced to offer deep
discounts to shoppers. More importantly, teens are flocking to cheap fast-fashion retailers like
H&M and Forever 21, which bring the newest fashions from the catwalk in only a few weeks
(Huffington Post, 2014). Aropostale is working to win back their audience by offering more
fashionable clothing. However, adoption continues to be its biggest challenge.

The information below offers information regarding Aropostale and its competition, including
Forever 21, H&M, Abercrombie & Fitch, and American Eagle. The competition will reveal the
weaknesses of Aeropostale by showing the differences in each portfolio, expansion efforts, and
companys strategy.

Aropostale, the Potential Acquisition

Aropostale offers casual apparel and accessories, primarily targeting 14 to 17 year-old young
women and men. It also targets four to 12 year-old kids through its P.S. from Aropostale
stores. Aropostale is mainly located in shopping malls, and outlet centers (MarketLine, 2015).

Its ability to produce apparel is limited because the company relies on a small number of
vendors; 83% of merchandise is from five merchandise vendors in FY2014 and does not own or

Aropostale Inc.
operate any manufacturing facilities (Forbes, 2015). If any of its primary vendors which
manufacture Aropostales merchandise delay shipping orders, supply products of less quality,
or delay deliveries, the company will be negatively impacted. For example, ship delays from
disruptions at ports on the West Coast contribute to Aropostales most recent quarterly loss
(Reuters, 2015).

Forever 21, a Competitor

Forever 21 makes fashion accessible to all members of a family. The company owns more than
six brands, offering clothes to kids, men, plus size and pregnant women (MarketLine, 2015).

H&M, a Competitor
H&M targets men, women, children, and teenagers through retail and online stores, offering
apparel, cosmetics, footwear, and accessories. The company primarily operates in Europe,
North America, and Asia. H&M has more than 3,100 stores in 53 markets and uses 800
independent suppliers (MarketLine, 2015).

H&Ms years of success and growth has allowed it to expand with a focus on quality,
sustainability and high profitability. H&M stores are typically ran by H&M, with a few markets
where it collaborates with franchising partners. However, franchising is not part of the general
expansion strategy (H&M, 2015).

Unlike competitors, H&M offers infant clothing and home textiles such as towels, bed linens,
and curtains (H&M). Its continuous expansion has diversified the company, and therefore, it has
reduced business risk. In 2013, the company opened one store each day (Fashionista, 2014).

Abercrombie & Fitch, a Competitor

Like Aropostale, A & F has looked to become trendier, avoiding logo-oriented clothing.
Abercrombie & Fitch offers upscale mens, womens, and kids casual clothes. The company
owns four brands. Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks.
Abercrombie & Fitch and abercrombie kids target youth and kids respectively. On the other
hand, Hollister represents casual apparel. Gilly Hicks is designed specifically for young women.
With its diverse brand portfolio, the company positioned itself as a one-stop shopping place for
the whole family (MarketLine, 2015).

American Eagle, a Competitor

American Eagle targets men and women in the age group of 15 to 25 years old. Therefore, the
company has a more predictable demographic than Aropostales. Although the company is
suffering financially like Aeropostale, American Eagles aerie offers intimate apparel that is
expected to be a growth driver in the underserved teen lingerie market (MarketLine, 2015).

Aropostale Inc.

Competitor Expansion
Its competitors are increasing their accessibility to the target audience. While Aropostale
continues to shut down underperforming stores, H&M has opened 191 stores in the US from
November 2006 to November 2013. Similarly, Forever 21 has expanded into more than 450
stores across the country. The rapid expansion adds to Aropostales ability to reach out to its
customers (Bidness Etc, 2014).

In FY2009, Aropostale signed its first international licensing agreement. Aropostale hoped
that opening stores in various countries, including Singapore, Malaysia and Indonesia, would
position the company to witness incremental growth (MarketLine, 2015).

To rely less on the crowded U.S. market, Aropostale is expanding into Mexico through a
licensing agreement with Distribuidora Liverpool, and will open new stores in Chile and Turkey
by 2016 (Hoover, 2015). Mexico has become an attractive market for affordable brands.
However, its growth in Mexico will be a challenge. Despite its pushes internationally, of the
total revenues in FY2014, international licensing generated only 1% of the revenue (See Figure
2 below) (MarketLine, 2015). The company has not benefited from its opportunity to grow
internationally over the past 6 years.

Aropostale needs to plan its approach carefully as other competitors such as H&M,
Abercrombie & Fitch and American Eagle are also venture into the region, resulting in increased
competition (Trefis, 2013). Likewise, online expansion has been adopted by many of
Aeropostales competitors. Therefore, the online market face similar intensity as each
competitor attempts to create the most engaging digital store.


Figure 2:
Aropostale's Revenue in FY2014
Source:
MarketLine
1%

Retail Store and E-

Commerce
International
Licensing
99%

Aropostale Inc.

FINANCIAL PERFORMANCE

Aropostale has experienced terrible sales growth, high operating lease costs and low cash
(Forbes, 2014). In March of 2014, after six straight quarterly losses, Aropostale announced a
strategic partnership with Sycamore Partners, a New York buyout firm, which provided a $150
million loan (Bloomberg, 2014).

Cash Flow

The contribution from Sycamore Partners bought Aropostale another 6 to 12 months of

operating cash, according to NY Post. Because of high operating lease costs and diminishing
returns, the company has limited cash flow generation (Forbes, 2014). The company ended its
first quarter in 2014 with $24.5 million in cash, its lowest since 2000, according to Cowen & Co
analyst John Kernan (New York Post, 2014).

Significance of Cash Burn

If a companys cash burn continues over an extended period of time, then the company is using
stockholder equity funds and borrowed capital. Burn rates are important for mature companies
that are struggling and have excessive debt. In a report published in March of 2014, Morgan
Stanley analyst Kimberly C. Greenberger said the Street does not fully understand the
magnitude of Aropostales liquidity concerns, with its cash burn at $92M (Benzinga, 2014).

Shift in Channel Approach

Because teens are spending less time at the mall, Aropostale has focused on increasing its e-
commerce presence. Although MarketLine predicted that e-commerce would be an opportunity
for growth, it has yet to show success. In 2013, web sales declined by about 12% (Internet
Retailer, 2014).

Aropostale closed a little over 100 stores this past year to focus on other channels. The
company closed stores that did not generate substantial revenue, which although reduced
expenses, has deepened overall revenue decline (Forbes, 2015). It is considering closing 50 to
75 additional Aropostale stores and one P.S. from Aropostale location in fiscal 2015.

Analysts are also concerned about the cost to remodel the existing stores, such as switching its
banner from Aropostale to Aero, modernizing the look of its stores. There is no guarantee that
the improvements will lead to financial success (The Deal, 2015).

Current Financial Situation

Market analysts predict continued losses through 2015 because of the companys weak
financial performance. In fiscal 2014, sales fell by 12% to $2.4 billion in 2013 (Hoover, 2015).
And by the end of the fourth quarter in January, Aropostale reported a 9% fall in comparable
sales.

Aropostale Inc.

Although Chief Executive Julian Geiger expected improvement in Aropostales performance
because of last years changes, the company currently faces its tenth consecutive quarter of
decline (Reuters, 2015). Rebranding continued the stumbling financial performance of
Aropostale. The company lost 90% of its stock value, from $31.1 a share in 2011, to $3.2 per
share currently (Bidness Etc, 2014).

Since 2014 Aropostale has had a negative net income, revealing its lack of revenue and
suffering in the market. Net income shows how much money is left for the company after all its
expenses are paid. In 2011, Aeropostale made $231 million in net income. Today, the net
income reveals that the company is in debt by $206 million (Morning Star, 2015).


Figure 3:
Source: Morning Star

Aropostale's Net Income From 2011-2015

Net Income (Million of Dollars)

300
250

231

200
150

70

100

35

50
0
-50

2014 2015
2011

2012 2013

-100
-150
-200
-250

-142
-206

Years



Its limited cash flow and significant cash burn rate reveals the companys inability to profit and
hold on to revenue. Its net income over the past five years reemphasizes this point, showing a
significant drop in net income.

Investors and analysts are losing faith that the company can make a comeback in the industry
because of its weak financial performance over ten quarters (Forbes, 2015). For more than
three years, analysts have suggested a chance of financial recovery; however, this has yet to
occur.
7

Aropostale Inc.

Conclusions

Can Aropostale help BDI reach its goals of

Decreasing BDIs critical dependence on its data mining for sales and profit?
Decreasing BDIs attractiveness as a takeover target by reducing its cash position?
Increasing opportunities for future profits?

Aropostales Customer Retention & Competition:

What it means for BDI

With high operating costs, Aropostale has the challenge of not only creating fashion-forward
clothing quickly, but also it must create affordable clothing without losing profitability. The
current affordability of Aropostale has resulted in significant company debt. It cannot rely on
affordable prices to succeed in the industry. Although BDI can offer information about potential
new trends for Aropostale, the cost and limited ability to keep up with the rapidly changing
tastes of the demographic poses serious threats.

In addition, Aropostale is less diverse than the leading companies in the industry. Successful
companies, such as H&M and Forever 21, offer clothing for many demographics. Similarly,
Abercrombie & Fitch and American Eagle are suffering less than Aropostale because of its
wider demographics, which dont solely rely on following the continuously changing teenage
trends. Its competition offers more diversification for BDI than Aropostale and therefore more
opportunities to be successful than Aropostale.

Its reliance on a small number of vendors, which is a weakness in the SWOT analysis, is
intensified by the fact that the companys competition has found success in the large number of
suppliers it utilizes. Aropostale is at risk if one of its main third party vendors backs out. BDIs
profits would be limited and at risk because of Aropostales small selection of vendors.

Aropostales Financials:
What it means for BDI

It is beneficial that Aropostale is in significant debt by reducing BDIs cash position. However,
high cash burn rates could turn investments into ashes. Even with a buyout from Sycamore
Partners, Aropostale has yet to gain its footing. The company continues to face losses into
2015. Thus, BDI cannot increase its opportunity for future profits by acquiring Aropostale.




8

Aropostale Inc.

Recommendations

The research gathered and insights produced support the decision to not acquire Aropostale.
Its customer retention, competition, and financial performance reveal the instability of the
company and its vulnerable future.


The following reveals the three main reasons why Aropostale is not fit for acquisition:

1 Aropostale is targeting a difficult demographic.

BDI can help Aropostale because the company is driven by consumer trends.
However, the company cannot keep up with the fast-paced changes of teen trends
because of its limited vendors and operation costs.
Aropostales consumer are hooked on the fast fashion companies such as H&M and
Forever 21, which offer trending styles at extremely low prices.

2 Aropostales competition reveals limited success in the future.

BDI is looking to diversify its portfolio. Although Aropostale has a few brands under
its belt, the demographic is smaller, fickle and less diverse than its competition.
Unlike BDI, Aropostale will not find significant success by expanding internationally.
The competitors are expanding internationally, and succeeding more than
Aropostale financially.

3 Aropostales financial performance will hinder BDI success.

Aropostales opportunities to gain momentum, such as expanding internationally,

help from Sycamore Partners and the development of e-commerce, continue to let
analysts down who hope for the companys revival over the past three years.
BDI cannot increase its opportunity for future profits because its cash burn rate is so
high. Although Aropostale will decrease BDIs cash reserves, the company will drain
BDIs profits quickly.
The companys decrease in stock prices and revenue reveal the companys
downward decline. The negative net income at this rate will continue to increase
before it will diminish. BDIs profits would be affected long-term.

In conclusion, the KRYAN LLC does not recommend acquiring Aropostale Inc. Although there
are some benefits to acquiring BDI, other companies have more potential to help BDI reach
its business goals.

If BDI has any questions regarding the recommendation, please contact Katrine Ryan at 203-
505-4786 or kryan19@elon.edu. KRYAN LLC would be happy to speak with you. We hope to
work with you again to continue your search for the right acquisition.

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Aropostale Inc.

REFERENCES

3 Key Long Term Growth Strategies For Aeropostale. (2013, February 14). Retrieved April 11,
2015.

Abercrombie & Fitch. (2015). MarketLine. Retrieved May 1, 2015.

Activity of Kids and Teens- US- November 2013. (2013). Mintel. Retrieved April 28, 2015, from

ProQuest.

Aeropostale. (2015, March 11). Reuters. Retrieved March 29, 2015, from http://reuters.com

Aeropostale. (2015, May 3). NASDAQ.

Aropostale 2013 Web Sales are Flat. Internet Retailer. (2014, March 19). Internet Retailer

Retrieved May 4, 2015.

Aeropostale Inc. (3 May 2015). MarketWatch, Retrieved April 28, 2015.

Aeropostale Inc. (2015). Morning Star.

Aeropostale Drops After Forecasting Wider Quarterly Loss. (2014, March 14). Bloomberg.

Retrieved April 25, 2015, from http://www.bloomberg.com.

Aeropostale Inc. (2015). MarketLine. Retrieved May 1, 2015.

Aeropostale Inc. (2015). Hoover. Retrieved May 1, 2015.


Aeropostale Earnings Preview: Likely Another Dismal Quarter. Forbes. (2015, March 11).

Aeropostale's International Business is Small But Holds Promise. (2013, August 7). Retrieved

May 2, 2015.

Aeropostale Revamps Its Look To Attract The Millennials. Bidness Etc. (2014, August 6).

Retrieved April 12, 2015.

Aeropostale Stock Pops On Financing Deal (2014, May 27). New York Post. Retrieved May 1,

2015, from http://nypost.com.

American Eagle. (2015). MarketLine. Retrieved May 1, 2015.

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Aropostale Inc.

Desperate Aeropostale Turns To Former Cupcake CEO For Help. Huffington Post. (2014, August

19). Retrieved March 31, 2015.

H&M (2015). MarketLine. Retrieved May 1, 2015.

H&M Opened a New Store Nearly Every Day Last Year, Shows no Signs of Letting up. (2014,

January 30). Fashionista. Retrieved May 1, 2015, from http://fashionista.com.

New Collections Can Make Aeropostale A More Attractive Takeover Option. Forbes. (2014,

January 23). Retrieved May 3, 2015.

Update: Morgan Stanley Reiterates on Aeropostale as Cash Burn Accelerates. (2014, March 14).

Benzinga. Retrieved May 1, 2015.

Why Aeropostale's Nearly Good News Isn't Good Enough. The Deal. (2014, March 15) Retrieved

May 4, 2015.

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