US: Aeropostale fails to end shareholder lawsuit
Aeropostale has failed in a bid to dismiss a lawsuit accusing the US retailer of defrauding shareholders in 2011 by hiding problems with excess inventory and weak sales, which hit its share price.
U.S. District Judge Colleen McMahon had raised a strong inference that the retailer's management issued guidance that was "overly rosy and highly unlikely".
The difficulties came as the brand attempted to focus on a more mature consumer, which led to severe inventory issues and high levels of discounting.
According to the City of Providence, which brought the lawsuit, as the truth became known, Aeropostale's stock price slid more than 50% between 5 May 2011 and 4 August 2011.
McMahon, of the Southern District Court of New York, found that the plaintiffs showed that Aeropostale's management knew they had made a "huge merchandising mistake" and set about correcting it. And given that the company orders clothing six to nine months in advance, it would have been impossible to rectify an excess inventory problem in one or two quarters.
The complaint alleges that while the retailer admitted to being more promotional to offload excess winter stock after the holiday period in 2010, it should have been able to "surmise relatively early in the spring selling season that the spring line was going to be no more successful than the winter line had been".
However, the group's forward looking statements implied that the lower earnings were the result of a temporary inventory problem that would be resolved imminently, without saying that it anticipated the problem might extend into following quarters as the unpopular designs had been pre-ordered and would continue to be stocked until autumn 2011.
The plaintiff now has 30 days to move for class certification.
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