FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
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(Mark One) |
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended July 30, 2005 |
OR |
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-31314
Aéropostale, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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31-1443880 |
(State of incorporation)
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(I.R.S. Employer Identification No.) |
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112 W. 34th Street, New York, NY
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10120 |
(Address of Principal Executive Offices)
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(Zip Code) |
(646) 485-5398
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The Registrant had 55,424,588 shares of common stock
outstanding as of August 19, 2005.
AÉROPOSTALE, INC.
TABLE OF CONTENTS
1
PART I
FINANCIAL INFORMATION
Item 1. Financial
Statements
AÉROPOSTALE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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July 30, | |
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January 29, | |
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July 31, | |
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|
2005 | |
|
2005 | |
|
2004 | |
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| |
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| |
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| |
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(In Thousands) | |
ASSETS
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Current Assets:
|
|
|
|
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|
|
|
|
|
|
|
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|
Cash and cash equivalents
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|
$ |
127,940 |
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|
$ |
106,128 |
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|
$ |
67,411 |
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|
Short-term investments
|
|
|
14,031 |
|
|
|
76,224 |
|
|
|
29,891 |
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|
Merchandise inventory
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|
|
162,726 |
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|
|
81,238 |
|
|
|
99,215 |
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|
Tenant allowances receivable
|
|
|
11,149 |
|
|
|
4,809 |
|
|
|
9,227 |
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|
Prepaid taxes
|
|
|
4,097 |
|
|
|
|
|
|
|
18,434 |
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|
Prepaid expenses and other current assets
|
|
|
12,082 |
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|
|
11,088 |
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|
|
9,243 |
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|
|
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|
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Total current assets
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|
332,025 |
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|
|
279,487 |
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|
|
233,421 |
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Fixtures, equipment and improvements, net
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|
|
144,509 |
|
|
|
122,651 |
|
|
|
111,482 |
|
Intangible assets
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|
|
2,529 |
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|
|
2,529 |
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|
|
1,400 |
|
Other assets
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|
|
1,930 |
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|
|
1,152 |
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|
|
2,040 |
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|
|
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TOTAL ASSETS
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$ |
480,993 |
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|
$ |
405,819 |
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|
$ |
348,343 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$ |
108,178 |
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$ |
44,858 |
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|
$ |
59,350 |
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|
Accrued compensation
|
|
|
11,693 |
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|
|
14,580 |
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|
|
10,944 |
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|
Income taxes payable
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|
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|
6,322 |
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|
|
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Accrued expenses
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|
27,956 |
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31,234 |
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24,931 |
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Total current liabilities
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147,827 |
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96,994 |
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95,225 |
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Deferred rent and tenant allowances
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75,554 |
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63,065 |
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54,422 |
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Retirement benefit plan liability
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|
6,840 |
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6,158 |
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|
6,518 |
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Deferred income taxes
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|
1,351 |
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|
1,351 |
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Commitments and contingent liabilities
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Stockholders Equity:
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Preferred stock par value, $0.01 per share;
5,000 shares authorized, no shares issued or outstanding
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Common stock par value, $0.01 per share;
200,000 shares authorized, 58,558, 58,115 and
58,086 shares issued
|
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|
586 |
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|
|
581 |
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|
|
581 |
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|
Additional paid-in capital
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|
87,455 |
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|
|
79,069 |
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|
77,609 |
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|
Accumulated other comprehensive loss
|
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|
(817 |
) |
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|
(817 |
) |
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|
(672 |
) |
|
Deferred compensation
|
|
|
(3,364 |
) |
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|
(1,271 |
) |
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|
(1,642 |
) |
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Retained earnings
|
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|
240,378 |
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|
224,315 |
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|
157,361 |
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Treasury stock at cost (3,134, 2,749 and 1,948 shares)
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(74,817 |
) |
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(63,626 |
) |
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(41,059 |
) |
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Total stockholders equity
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249,421 |
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238,251 |
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192,178 |
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TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
$ |
480,993 |
|
|
$ |
405,819 |
|
|
$ |
348,343 |
|
|
|
|
|
|
|
|
|
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|
See notes to unaudited condensed consolidated financial
statements.
2
AÉROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
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13 weeks ended | |
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26 weeks ended | |
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July 30, | |
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July 31, | |
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July 30, | |
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July 31, | |
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|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
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| |
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| |
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(In Thousands, Except Per Share Data) | |
Net sales
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$ |
232,770 |
|
|
$ |
194,852 |
|
|
$ |
444,444 |
|
|
$ |
362,506 |
|
Cost of sales (includes certain buying, occupancy and
warehousing expenses)
|
|
|
170,743 |
|
|
|
135,366 |
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|
|
322,646 |
|
|
|
253,913 |
|
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Gross profit
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|
62,027 |
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|
|
59,486 |
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|
121,798 |
|
|
|
108,593 |
|
Selling, general and administrative expenses
|
|
|
50,607 |
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|
|
41,925 |
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|
97,044 |
|
|
|
81,030 |
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|
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Income from operations
|
|
|
11,420 |
|
|
|
17,561 |
|
|
|
24,754 |
|
|
|
27,563 |
|
Interest income, net
|
|
|
796 |
|
|
|
201 |
|
|
|
1,581 |
|
|
|
460 |
|
|
|
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|
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|
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|
Income before income taxes
|
|
|
12,216 |
|
|
|
17,762 |
|
|
|
26,335 |
|
|
|
28,023 |
|
Income taxes
|
|
|
4,767 |
|
|
|
6,865 |
|
|
|
10,272 |
|
|
|
10,865 |
|
|
|
|
|
|
|
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|
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Net income and comprehensive income
|
|
$ |
7,449 |
|
|
$ |
10,897 |
|
|
$ |
16,063 |
|
|
$ |
17,158 |
|
|
|
|
|
|
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|
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|
Basic earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.20 |
|
|
$ |
0.29 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
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|
Diluted earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.19 |
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|
$ |
0.28 |
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|
$ |
0.30 |
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|
|
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|
Weighted average basic shares
|
|
|
55,408 |
|
|
|
55,663 |
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|
|
55,408 |
|
|
|
55,742 |
|
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|
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|
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|
Weighted average diluted shares
|
|
|
56,367 |
|
|
|
57,287 |
|
|
|
56,470 |
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|
|
57,494 |
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|
|
|
|
|
|
|
|
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|
|
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|
See notes to unaudited condensed consolidated financial
statements.
3
AÉROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
26 weeks ended | |
|
|
| |
|
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
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|
(In Thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,063 |
|
|
$ |
17,158 |
|
|
Adjustments to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,490 |
|
|
|
7,267 |
|
|
|
Other
|
|
|
(307 |
) |
|
|
987 |
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventory
|
|
|
(81,488 |
) |
|
|
(37,408 |
) |
|
|
|
Accounts payable
|
|
|
63,320 |
|
|
|
28,873 |
|
|
|
|
Other assets and liabilities
|
|
|
(6,113 |
) |
|
|
(7,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
965 |
|
|
|
9,123 |
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|
|
|
|
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|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases of fixtures, equipment and improvements
|
|
|
(31,327 |
) |
|
|
(26,155 |
) |
|
Purchase of short-term investments
|
|
|
(101,351 |
) |
|
|
(247,365 |
) |
|
Proceeds from sale of short-term investments
|
|
|
163,544 |
|
|
|
217,474 |
|
|
Purchase of intangible assets
|
|
|
|
|
|
|
(1,400 |
) |
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
30,866 |
|
|
|
(57,446 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(11,191 |
) |
|
|
(23,364 |
) |
|
Proceed from exercise of stock options
|
|
|
1,172 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(10,019 |
) |
|
|
(22,622 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
21,812 |
|
|
|
(70,945 |
) |
Cash and cash equivalents, beginning of year
|
|
|
106,128 |
|
|
|
138,356 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
127,940 |
|
|
$ |
67,411 |
|
|
|
|
|
|
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|
Supplemental Disclosure of Cash Flow Information:
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|
|
|
|
|
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|
|
Tax benefit related to exercise of stock options included in
change in other assets and liabilities
|
|
$ |
4,346 |
|
|
$ |
11,684 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
4
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
References to the Company, we,
us, or our means Aéropostale, Inc.
and its subsidiaries, except as expressly indicated to the
contrary or unless the context otherwise requires. We are a
mall-based, specialty retailer of casual apparel and
accessories. We design, market and sell our own brand of
merchandise principally targeting 11 to 18 year-old young
women and men. JimmyZ Surf Co., Inc., a wholly owned
subsidiary of Aéropostale, Inc., is a California
lifestyle-oriented brand targeting trend-aware young women and
men aged 18-25. As of July 30, 2005, we operated 634 stores
in 47 states, consisting of 628 Aeropostale stores and 6
JimmyZ stores and in May 2005 launched our e-commerce
website, www.aeropostale.com (this and any other
references in this Quarterly Report on Form 10-Q to
aeropostale.com is solely a reference to a uniform resource
locator, or URL, and is an inactive textual reference only, not
intended to incorporate the website into this Quarterly Report
on Form 10-Q).
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with Rule 10-01
of Regulation S-X and do not include all of the information
and footnotes required by accounting principles generally
accepted in the United States. However, in the opinion of our
management, all known adjustments necessary for a fair
presentation of the results of the interim periods have been
made. These adjustments consist primarily of normal recurring
accruals and estimates that impact the carrying value of assets
and liabilities. Actual results may materially differ from these
estimates.
Our business is highly seasonal, and historically we have
realized a significant portion of our sales, net income, and
cash flow in the second half of the year, driven by the impact
of the back-to-school selling season in the third quarter and
the holiday selling season in the fourth quarter. Therefore, our
interim period consolidated financial statements will not be
indicative of our full-year results of operations, financial
condition or cash flows. These financial statements should be
read in conjunction with our Annual Report on Form 10-K for
our fiscal year ended January 29, 2005.
References to 2005 mean the 52-week period ending
January 28, 2006, and references to 2004 mean
the 52-week period ended January 29, 2005. References to
the second quarter of 2005 mean the thirteen-week
period ended July 30, 2005, and references to the
second quarter of 2004 mean the thirteen-week period ended
July 31, 2004.
|
|
2. |
Stock Based Compensation |
We periodically grant stock options to our employees, and we
account for these stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB
No. 25. We have also adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, or
SFAS No. 148. In accordance with the
provisions of SFAS No. 148 and APB No. 25, since
all options were issued at market value, we have not recognized
compensation expense related to stock options in our
consolidated financial statements. If we would have elected to
recognize compensation
5
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense based on the fair value of options at grant date, as
prescribed by SFAS No. 148, our net income and
earnings per share would have been reduced to the pro forma
amounts indicated in the following table:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended | |
|
26 weeks ended | |
|
|
| |
|
| |
|
|
July 30, | |
|
July 31, | |
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In Thousands, Except Per Share Data) | |
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
7,449 |
|
|
$ |
10,897 |
|
|
$ |
16,063 |
|
|
$ |
17,158 |
|
|
Add: Restricted stock amortization net of taxes
|
|
|
272 |
|
|
|
107 |
|
|
|
476 |
|
|
|
160 |
|
|
Deduct: Total stock based compensation expense determined under
the fair value method, net of taxes
|
|
|
(708 |
) |
|
|
(379 |
) |
|
|
(1,308 |
) |
|
|
(644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$ |
7,013 |
|
|
$ |
10,625 |
|
|
$ |
15,231 |
|
|
$ |
16,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.13 |
|
|
$ |
0.20 |
|
|
$ |
0.29 |
|
|
$ |
0.31 |
|
|
Pro-forma
|
|
$ |
0.13 |
|
|
$ |
0.19 |
|
|
$ |
0.27 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.13 |
|
|
$ |
0.19 |
|
|
$ |
0.28 |
|
|
$ |
0.30 |
|
|
Pro-forma
|
|
$ |
0.12 |
|
|
$ |
0.19 |
|
|
$ |
0.27 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of the Companys stock
options was calculated using the Black-Scholes Option Pricing
Model with the following weighted average assumptions used for
grants in their respective periods. For periods ended in 2005:
no dividend yield; expected volatility of 40%; risk free
interest rate of 4.10%; and expected life of 5 years. For
periods ended in 2004: no dividend yield; expected volatility of
70%; risk free interest rate of 2.76%; and expected life of
5 years. There were 288,000 options granted during the
twenty-six weeks ended July 30, 2005 with a weighted
average fair value of $3.9 million. There were 502,000
options granted during the twenty-six weeks ended July 31,
2004 with a weighted average fair value of $7.0 million.
Certain of our executives and directors have been awarded
restricted stock, pursuant to restricted stock agreements. There
were 161,000 outstanding shares of restricted stock as of
July 30, 2005. The restricted stock awarded to employees
vests at the end of three years of continuous service with us.
Initial grants of restricted stock awarded to directors vest,
pro-rata, over a three-year period, based upon continuous
service. Subsequent grants of restricted stock awarded to
directors vest, in full, one year after the grant date. Total
compensation expense is being amortized over the vesting period.
Amortization expense was $0.8 million for the twenty-six
weeks ended July 30, 2005 and $0.3 million for the
twenty-six weeks July 31, 2004.
|
|
3. |
Reclassification of Auction Rate Securities |
Auction rate securities, which were previously recorded in cash
and cash equivalents in our interim 2004 condensed consolidated
financial statements, have been included in short-term
investments in the accompanying consolidated financial
statements due to their liquidity and pricing reset feature.
There was no impact on net income, stockholders equity,
debt covenants or cash flow from operations as a result of
6
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
this reclassification. The condensed consolidated financial
statements for the first twenty-six weeks of 2004 have been
reclassified as follows:
|
|
|
|
|
|
|
|
|
|
|
As previously | |
|
|
|
|
reported | |
|
As reclassified | |
|
|
| |
|
| |
|
|
(In Thousands) | |
Cash and cash equivalents
|
|
$ |
97,302 |
|
|
$ |
67,411 |
|
|
|
|
|
|
|
|
Short-term investments
|
|
$ |
|
|
|
$ |
29,891 |
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
$ |
(27,555 |
) |
|
$ |
(57,446 |
) |
|
|
|
|
|
|
|
|
|
4. |
Cost of Sales and Selling, General and Administrative
Expenses |
Cost of sales includes costs related to: merchandise sold,
distribution and warehousing, freight from the distribution
center and warehouse to the stores, payroll for our design,
buying and merchandising departments, and occupancy costs.
Occupancy costs include: rent, contingent rents, common area
maintenance, real estate taxes, utilities, repairs, maintenance
and all depreciation.
Selling, general and administrative expenses, or
SG&A, include costs related to: selling
expenses, store management and corporate expenses such as
payroll and employee benefits, marketing expenses, employment
taxes, information technology maintenance costs and expenses,
insurance and legal expenses, and store pre-opening and other
corporate level expenses. Store pre-opening expenses include
store level payroll, grand opening event marketing, travel,
supplies and other store pre-opening expenses.
|
|
5. |
Recent accounting developments |
In May 2005, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 154, Accounting
Changes and Error Corrections. This statement replaces APB
No. 20 and SFAS No. 3, and changes the
requirements for the accounting for and reporting of a change in
accounting principle. SFAS No. 154 requires
retrospective application to prior periods financial
statements of changes in accounting principle. The statement
defines retrospective application as the application of a
different accounting principle to prior accounting periods as if
that principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. This statement shall be effective for
accounting changes and correction of errors made in years
beginning after December 15, 2005.
In April 2005, the Securities and Exchange Commission delayed
the date of compliance with SFAS No. 123(R),
Share-Based Payment, a revision of SFAS No. 123,
Accounting for Stock Based Compensation, for publicly held
companies until the companys first fiscal year beginning
on or after June 15, 2005. Accordingly, we will adopt the
provisions of SFAS No. 123(R) at the beginning of our
2006 fiscal year. SFAS No. 123(R) was issued in
December 2004, and supersedes APB No. 25, and its related
implementation guidance. Under SFAS No. 123(R), all
forms of share-based payment to employees, including employee
stock options, must be treated as compensation and recognized in
the income statement. As discussed in Note 2, we currently
account for stock options under APB No. 25 and,
accordingly, do not recognize compensation expense in our
consolidated financial statements. Also as prescribed by
SFAS No. 148, we have disclosed the pro-forma impact
of expensing options in Note 2. We expect that the adoption
of SFAS No. 123(R) will not have a material impact on
our consolidated financial statements or cash flows.
7
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computations of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended | |
|
26 weeks ended | |
|
|
| |
|
| |
|
|
July 30, | |
|
July 31, | |
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In Thousands, Except Per Share Data) | |
Net income
|
|
$ |
7,449 |
|
|
$ |
10,897 |
|
|
$ |
16,063 |
|
|
$ |
17,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares
|
|
|
55,408 |
|
|
|
55,663 |
|
|
|
55,408 |
|
|
|
55,742 |
|
Impact of dilutive securities
|
|
|
959 |
|
|
|
1,624 |
|
|
|
1,062 |
|
|
|
1,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
56,367 |
|
|
|
57,287 |
|
|
|
56,470 |
|
|
|
57,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share
|
|
$ |
0.13 |
|
|
$ |
0.20 |
|
|
$ |
0.29 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share
|
|
$ |
0.13 |
|
|
$ |
0.19 |
|
|
$ |
0.28 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 295,000 shares during the second
quarter of 2005, and 234,000 shares during the twenty-six
weeks ended July 30, 2005 were not included in the
computation of diluted earnings per share because the exercise
price of the options was greater than the average market price
of the common shares.
|
|
7. |
Revolving Credit Facility |
In April 2005, we amended our revolving credit facility (the
credit facility) with Fleet Retail Finance, Inc. As
amended, the credit facility allows us to borrow or obtain
letters of credit up to an aggregate of $50 million, with
letters of credit having a sub-limit of $15 million. The
amount of available credit can be increased to an aggregate of
$75 million if we so request. The credit facility matures
in April 2010, and our assets collateralize indebtedness under
the credit facility. Borrowings under the credit facility bear
interest at our option, either at (a) the lenders
prime rate or (b) the Euro Dollar Rate plus 0.75% to 1.25%,
dependent upon our financial performance. There are no covenants
in the credit facility requiring us to achieve certain earnings
levels and there are no capital spending limitations. There are
certain negative covenants under the credit facility, including
but not limited to, limitations on our ability to incur other
indebtedness, encumber our assets, or undergo a change of
control. Additionally, we are required to maintain a ratio of
2:1 for the value of our inventory to the amount of the loans
under the credit facility. As of July 30, 2005, we were in
compliance with all covenants under the credit facility. Events
of default under the credit facility include, subject to grace
periods and notice provisions in certain circumstances, failure
to pay principal amounts when due, breaches of covenants,
misrepresentation, default of leases or other indebtedness,
excess uninsured casualty loss, excess uninsured judgment or
restraint of business, business failure or application for
bankruptcy, indictment of or institution of any legal process or
proceeding under federal, state, municipal or civil statutes,
legal challenges to loan documents, and a change in control. If
an event of default occurs, the lenders under the credit
facility will be entitled to take various actions, including the
acceleration of amounts due there under and requiring that all
such amounts be immediately paid in full as well as possession
and sale of all assets that have been used as collateral. At
July 30, 2005, we had no amount outstanding under the
credit facility, and no stand-by or commercial letters of credit
issued under the credit facility. In addition, we have not had
outstanding borrowings under the credit facility since November
2002.
8
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8. |
Retirement Benefit Plans |
We have a qualified, defined contribution retirement plan with a
401(k) salary deferral feature that covers substantially all of
our employees who meet certain requirements. Under the terms of
the plan, employees may contribute up to 14% of gross earnings
and we will provide a matching contribution of 50% of the first
5% of gross earnings contributed by the participants. We also
have the option to make additional contributions. The terms of
the plan provide for vesting in our matching contributions to
the plan over a five-year service period with 20% vesting after
two years and 50% vesting after year three. Vesting increases
thereafter at a rate of 25% per year so that participants
will be fully vested after year five. Contribution expense was
$0.3 million for the first twenty-six weeks of 2005, and
$0.3 million for the first twenty-six weeks of 2004.
We maintain a supplemental executive retirement plan, which is a
nonqualified defined benefit plan for certain officers. The plan
is non-contributory and not funded and provides benefits based
on years of service and compensation during employment.
Participants are vested upon entrance in the plan. Pension
expense is determined using various actuarial cost methods to
estimate the total benefits ultimately payable to officers and
this cost is allocated to service periods. The actuarial
assumptions used to calculate pension costs are reviewed
annually.
The components of net periodic pension benefit cost are as
follows:
|
|
|
|
|
|
|
|
|
|
|
26 weeks ended | |
|
|
| |
|
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In Thousands) | |
Service cost
|
|
$ |
210 |
|
|
$ |
139 |
|
Interest cost
|
|
|
366 |
|
|
|
346 |
|
Amortization of prior service cost
|
|
|
37 |
|
|
|
37 |
|
Amortization of net loss
|
|
|
275 |
|
|
|
188 |
|
Loss recognized due to settlement
|
|
|
|
|
|
|
1,396 |
|
|
|
|
|
|
|
|
Net periodic pension benefit cost
|
|
$ |
888 |
|
|
$ |
2,106 |
|
|
|
|
|
|
|
|
The loss recognized due to settlement in 2004 resulted from the
early retirement of our former President and Chief Operating
Officer, and we made a contribution of $2.4 million in
August 2004 in connection with this early retirement.
During 2004, we adopted a long-term incentive deferred
compensation plan established for the purpose of providing
long-term incentive to a select group of management. The plan is
a non-qualified, defined contribution plan and is not funded.
Participants in this plan include all employees designated by us
as Vice President, or other higher-ranking position that are not
participants in the SERP. Annual monetary credits are recorded
to each participants account based on compensation levels
and years as a participant in the plan. Annual interest credits
are applied to the balance of each participants account
based upon established benchmarks. Each annual credit is subject
to a three-year cliff-vesting schedule, and participants
accounts will be fully vested upon retirement after completing
five years of service and attaining age 55.
In 2004, we adopted a postretirement benefit plan for certain
officers. At July 30, 2005, we had a liability of $54,000
in connection with this plan.
9
AÉROPOSTALE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9. |
Stock Repurchase Program |
We repurchase our common stock from time to time under a
$100.0 million stock repurchase program. The repurchase
program may be modified or terminated by the Board of Directors
at any time, and there is no expiration date for the program.
The extent and timing of repurchases will depend upon general
business and market conditions, stock prices, and requirements
going forward. We repurchased 385,000 shares for
$11.2 million during the first twenty-six weeks of 2005.
Since the inception of the repurchase program, we have
repurchased a total of 3.1 million shares of our common
stock for total consideration of $74.8 million. At
July 30, 2005 we had $25.2 million of repurchase
availability remaining.
|
|
10. |
Commitments and Contingent Liabilities |
We are party to various litigation matters and proceedings in
the ordinary course of business. In the opinion of our
management, dispositions of these matters are not expected to
have a material adverse affect on our financial position,
results from operations or cash flows. We have not provided any
financial guarantees as of July 30, 2005.
10
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Introduction
Aéropostale, Inc. is a mall-based specialty retailer of
casual apparel and accessories in the United States. Our
target customers are both young women and young men from
age 11 to 18, and we provide our customers with a
selection of high-quality, active-oriented, fashion basic
merchandise at compelling values in a high-energy store
environment. JimmyZ Surf Co., Inc., a wholly owned
subsidiary of Aéropostale, Inc., is a California
lifestyle-oriented brand targeting trend-aware young women and
men aged 18-25. We opened our first JimmyZ stores in July
2005. In addition, we launched our Aeropostale e-commerce
business in May 2005. As of July 30, 2005, we operated 634
stores in 47 states, consisting of 628 Aeropostale stores
and 6 JimmyZ stores, in addition to our e-commerce
website, www.aeropostale.com.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, or MD&A, is intended
to provide information to help you better understand our
financial condition and results of operations. Our business is
highly seasonal, and historically we realize a significant
portion of our sales, net income, and cash flow in the second
half of the year, driven by the impact of the back-to-school
selling season in our third quarter and the holiday selling
season in our fourth quarter. Therefore, our interim period
consolidated financial statements will not be indicative of our
full-year results of operations, financial condition or cash
flows. We recommend that you read this section along with our
condensed consolidated financial statements included in this
report and along with our Annual Report on Form 10-K for
the year ended January 29, 2005.
Overview
We achieved net sales of $232.8 million for the second
quarter of 2005, a 19.5% increase over the second quarter of
2004. This increase was driven by total square footage growth of
22.4%, and was partially offset by a 2.2% decline in comparable
store sales. On a year-to-date basis, we achieved net sales of
$444.4 million for the first twenty-six weeks of 2005, or a
22.6% increase over the same period in 2004. This increase was
driven by the total square footage growth, in addition to a 0.9%
increase in comparable store sales. Gross profit, as a
percentage of net sales, decreased by 3.9 percentage points
for the second quarter of 2005 and by 2.6 percentage points
for the year-to-date period. The decline in gross profit, as a
percentage of net sales, was primarily due to decreased
merchandise margins driven by significantly higher promotional
activity, which was intended to stimulate demand. SG&A, as a
percentage of net sales, increased by 0.2 percentage points
for the second quarter of 2005, and decreased by
0.6 percentage points for the year-to-date period. A
retirement charge of $1.4 million recorded in the first
quarter of 2004 represented 0.8 percentage points of the
year-to-date decrease. Net income for the second quarter of 2005
declined to $7.5 million, or $0.13 per diluted share,
from $10.9 million, or $0.19 per diluted share for the
second quarter of last year. Net income for the first twenty-six
weeks of 2005 declined to $16.1 million, or $0.28 per
diluted share, from $17.2 million, or $0.30 per
diluted share, for the first twenty-six weeks of last year.
As of July 30, 2005, we had working capital of
$184.2 million, cash and cash equivalents of
$127.9 million, short-term investments of
$14.0 million, and no third party debt outstanding. Our
merchandise inventories increased by 64% at July 30, 2005,
compared to the same period last year, and by 34% on a square
foot basis. Cash flows from operating activities were
$1.0 million for the first twenty-six weeks of 2005. We
operated 634 stores at July 30, 2005, an increase of 22%
from the same period last year.
11
We use a number of key indicators of financial condition and
operating performance to evaluate the performance of our
business, some of which are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended | |
|
26 weeks ended | |
|
|
| |
|
| |
|
|
|
|
July 31, | |
|
July 30, | |
|
July 31, | |
|
|
July 30, 2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net sales (in millions)
|
|
$ |
232.8 |
|
|
$ |
194.9 |
|
|
$ |
444.4 |
|
|
$ |
362.5 |
|
Total store count at end of period
|
|
|
634 |
|
|
|
521 |
|
|
|
634 |
|
|
|
521 |
|
Comparable store sales count at end of period
|
|
|
477 |
|
|
|
376 |
|
|
|
477 |
|
|
|
376 |
|
Net sales growth
|
|
|
19.5 |
% |
|
|
50.0 |
% |
|
|
22.6 |
% |
|
|
49.7 |
% |
Comparable store sales increase (decrease)
|
|
|
(2.2) |
% |
|
|
20.0 |
% |
|
|
0.9 |
% |
|
|
19.5 |
% |
Net sales per average square foot
|
|
$ |
105 |
|
|
$ |
109 |
|
|
$ |
210 |
|
|
$ |
210 |
|
Gross profit (in millions)
|
|
$ |
62.0 |
|
|
$ |
59.5 |
|
|
$ |
121.8 |
|
|
$ |
108.6 |
|
Income from operations (in millions)
|
|
$ |
11.4 |
|
|
$ |
17.6 |
|
|
$ |
24.8 |
|
|
$ |
27.6 |
|
Diluted earnings per share
|
|
$ |
0.1 |
3 |
|
$ |
0.1 |
9 |
|
$ |
0.2 |
8 |
|
$ |
0.3 |
0 |
Square footage growth
|
|
|
22 |
% |
|
|
22 |
% |
|
|
22 |
% |
|
|
22 |
% |
Increase in total inventory over comparable period
|
|
|
64 |
% |
|
|
8 |
% |
|
|
64 |
% |
|
|
8 |
% |
Increase (decrease) in inventory per square foot over comparable
period
|
|
|
34 |
% |
|
|
(12) |
% |
|
|
34 |
% |
|
|
(12) |
% |
Percentages of net sales by category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Womens
|
|
|
61 |
% |
|
|
60 |
% |
|
|
59 |
% |
|
|
59 |
% |
|
Mens
|
|
|
26 |
% |
|
|
25 |
% |
|
|
26 |
% |
|
|
26 |
% |
|
Accessories
|
|
|
13 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
The following table sets forth our results of operations as a
percentage of net sales. We also use this information to
evaluate the performance of our business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended | |
|
26 weeks ended | |
|
|
| |
|
| |
|
|
July 30, | |
|
July 31, | |
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross profit
|
|
|
26.6 |
% |
|
|
30.5 |
% |
|
|
27.4 |
% |
|
|
30.0 |
% |
Selling, general and administrative expenses
|
|
|
21.7 |
% |
|
|
21.5 |
% |
|
|
21.8 |
% |
|
|
22.4 |
% |
Income from operations
|
|
|
4.9 |
% |
|
|
9.0 |
% |
|
|
5.6 |
% |
|
|
7.6 |
% |
Interest income, net
|
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
0.1 |
% |
Income before income taxes
|
|
|
5.2 |
% |
|
|
9.1 |
% |
|
|
5.9 |
% |
|
|
7.7 |
% |
Income taxes
|
|
|
2.0 |
% |
|
|
3.5 |
% |
|
|
2.3 |
% |
|
|
3.0 |
% |
Net income
|
|
|
3.2 |
% |
|
|
5.6 |
% |
|
|
3.6 |
% |
|
|
4.7 |
% |
Results of Operations
Sales Net sales consist of sales from
comparable stores and non-comparable stores. A store is included
in comparable store sales after fourteen months of operation. We
consider a remodeled or relocated store with more than a 25%
change in square feet to be a new store. Prior period sales from
stores that have closed are not included in comparable store
sales, nor are sales from our arrangements with colleges and
universities.
Net sales for the second quarter of 2005 increased by
$37.9 million, or by 19.5%. New store sales drove the net
sales increase for the quarter, and were partially offset by a
decrease in comparable store sales. Comparable store sales
decreased by $3.2 million, or by 2.2% for the second
quarter of 2005, versus
12
a comparable store sales increase of 20.0% for the second
quarter of 2004. Comparable sales increased in our young
mens category, but decreased in our womens and
accessories categories. The comparable store sales decline
reflected a 9.2% decrease in average dollar per unit sold, a
2.5% increase in units per transaction, and a 5.1% increase in
the number of sales transactions. Due to lower than expected
sales performance during the second quarter of 2005, we
increased our promotional cadence in an effort to stimulate
customer demand for our merchandise. Non-comparable store sales
increased by $34.7 million, or by 21.7%, primarily due to
113 more stores open at the end of the second quarter of 2005
versus the end of the second quarter of 2004.
Net sales for the first twenty-six weeks of 2005 increased by
$81.9 million, or by 22.6%, driven by new store sales.
Comparable store sales increased by $3.2 million, or by
0.9% for the year-to-date period, versus a comparable store
sales increase of 19.5% for the first twenty-six weeks of 2004.
Non-comparable store sales increased by $78.7 million, or
by 21.7%, primarily due to the new store openings discussed
above.
Gross profit Cost of sales includes
costs related to: merchandise sold, distribution and
warehousing, freight from the distribution center and warehouse
to the stores, payroll for our design, buying and merchandising
departments, and occupancy costs. Occupancy costs include: rent,
contingent rents, common area maintenance, real estate taxes,
utilities, repairs, maintenance and all depreciation.
Gross profit, as a percentage of net sales, decreased by
3.9 percentage points for the second quarter of 2005. This
decrease was primarily due to a 3.7 percentage point
decrease in merchandise margin, as well as start-up costs
associated with our JimmyZ stores. The decrease in
merchandise margin was driven by significantly higher
promotional activity. Gross profit, as a percentage of net
sales, decreased by 2.6 percentage points for the first
twenty-six weeks of 2005.
SG&A SG&A includes costs
related to: selling expenses, store management and corporate
expenses such as payroll and employee benefits, marketing
expenses, employment taxes, information technology maintenance
costs and expenses, insurance and legal expenses, and store
pre-opening and other corporate level expenses. Store
pre-opening expenses include store level payroll, grand opening
event marketing, travel, supplies and other store pre-opening
expenses.
SG&A increased by $8.7 million for the second quarter
of 2005, or by 0.2 percentage points, as a percentage of
net sales. These increases were primarily attributable to a
$5.7 million increase in store payroll and
$1.1 million in higher transaction costs, driven by new
store growth, as well as $1.2 million in higher payroll
benefit costs.
SG&A increased by $16.0 million for the first
twenty-six weeks of 2005, and decreased by 0.6 percentage
points, as a percentage of sales. SG&A for the first quarter
of 2004 included a retirement charge of $1.4 million, which
represented 0.8 percentage points of the year-to-date
decrease. This increase in absolute dollars was primarily due to
a $10.6 million increase in store payroll and
$1.9 million in higher transaction costs, driven by the new
store growth, as well as $1.9 million in higher payroll
benefit costs.
Interest income and income taxes
Interest income, net of interest expense, increased by
$0.6 million for the second quarter of 2005 and by
$1.1 million for the first twenty-six weeks of 2005. These
increases were driven by an increase of $44.7 million in
cash and cash equivalents, together with short-term investments,
at the end of the second quarter of 2005. The effective tax rate
was estimated at 39.0% for 2005.
Net income Net income decreased by
$3.4 million, or $0.06 per diluted share, for the
second quarter of 2005, and decreased by $1.1 million, or
$0.2 per diluted share for the first twenty-six weeks of
2005.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital,
construction of new stores, remodeling of existing stores, and
the improvement and enhancement of our information technology
systems. Due to the
13
seasonality of our business, we have historically realized a
significant portion of our cash flows from operations during the
second half of the year. Most recently, our cash requirements
have been met primarily through cash and cash equivalents on
hand during the first half of the year, and through cash flows
from operations during the second half of the year. We expect to
continue to meet our cash requirements for the next twelve
months primarily through cash flows from operations and existing
cash and cash equivalents. In addition, we have recently amended
our revolving credit facility (the credit facility),
and have expanded our borrowing availability to provide for a
$50 million base borrowing availability with
$25 million of additional borrowing availability (see
note 7 to the Notes to Unaudited Condensed Consolidated
Financial Statements for a further description). We have not had
outstanding borrowings under the credit facility since November
2002. At July 30, 2005, we had working capital of
$184.2 million, cash and cash equivalents of
$127.9 million, short-term investments of $14.0, and no
third party debt outstanding.
The following table sets forth our cash flows for the period
indicated:
|
|
|
|
|
|
|
|
|
|
|
26 weeks ended | |
|
|
| |
|
|
July 30, | |
|
July 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In Thousands) | |
Net cash from operating activities
|
|
$ |
965 |
|
|
$ |
9,123 |
|
Net cash from investing activities
|
|
|
30,866 |
|
|
|
(57,446 |
) |
Net cash from financing activities
|
|
|
(10,019 |
) |
|
|
(22,622 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$ |
21,812 |
|
|
$ |
(70,945 |
) |
|
|
|
|
|
|
|
Operating activities Cash flows from
operating activities, our primary form of liquidity on a
full-year basis, decreased by $8.1 million for the
twenty-six weeks of 2005, as compared to the same period in
2004. On a period-over-period basis, cash used for merchandise
inventories, net of accounts payable, increased by
$9.6 million. Merchandise inventories increased by 64% as
of July 30, 2005, as compared to the same period last year.
On a square foot basis, merchandise inventories increased by 34%
as of July 30, 2005, as compared to the same period in
2004. Merchandise inventories decreased, however, by
12% per square foot as of July 31, 2004, as compared
to the same period in 2003.
We increased our inventory levels at July 30, 2005 in an
effort to better capitalize upon sales opportunities identified
during the prior back to school season. However, sales did not
meet expectations and we anticipate utilizing increased
promotional activities throughout 2005 in an effort to increase
customer demand for our products, and thereby reduce our
inventory levels. We expect that this strategy will have an
unfavorable impact on our gross margin through the remainder of
2005.
The timing of certain tax payments offset the $7.3 million
decrease in cash provided from the tax benefit related to
exercise of stock options. Due to the seasonality of our
business, we have historically generated a significant portion
of our cash flows from operating activities in the second half
of the year, and we expect this trend to continue for the
balance of this year.
Capital requirements Investments in
capital expenditures are principally for the construction of new
stores, remodeling of existing stores, and investments in
information technology. Our future capital requirements will
depend primarily on the number of new stores we open, the number
of existing stores we remodel and the timing of these
expenditures. Capital expenditures for the full year of 2005 are
expected to approximate $50 million. We opened 72 new
Aeropostale stores during the first twenty-six weeks of 2005,
and we plan to open approximately 28 more during the balance of
2005. We also opened our first 6 JimmyZ stores in
July 2005, and we plan to open 8 more during the balance of
2005. In addition, we plan to remodel certain existing stores
and continue to improve and enhance our information technology
systems.
We had $14.0 million in short-term investments at
July 30, 2005, consisting of auction rate debt and
preferred stock securities. Auction rate securities are term
securities that earn income at a rate that is periodically
reset, typically within 35 days, to reflect current market
conditions through an auction process.
14
These securities have long-term contractual maturities and are
classified as available-for-sale securities in the
current asset section of our condensed consolidated balance
sheet as of July 30, 2005.
Financing activities and capital
resources We repurchase our common stock
from time to time under a $100.0 million stock repurchase
program. The repurchase program may be modified or terminated by
the Board of Directors at any time, and there is no expiration
date for the program. The extent and timing of repurchases will
depend upon general business and market conditions, stock
prices, and requirements going forward. We repurchased
385,000 shares for $11.2 million during the first
twenty-six weeks of 2005, versus 1,003,000 shares
repurchased for $23.4 million during the same period in
2004. Since the inception of the repurchase program, we have
repurchased a total of 3.1 million shares of our common
stock for total consideration of $74.8 million. At
July 30, 2005, we had $25.2 million of repurchase
availability remaining.
In April 2005, we amended our revolving credit facility to allow
us to borrow or obtain letters of credit up to at least an
aggregate of $50 million (see note 7 to the Notes to
Unaudited Condensed Consolidated Financial Statements for a
further discussion). At July 30, 2005, we had no amount
outstanding under the credit facility, and no stand-by or
commercial letters of credit issued under the credit facility.
As of July 30, 2005, we were in compliance with all
covenants under the credit facility. In addition, we have not
had outstanding borrowings under the credit facility since
November 2002.
The following table summarizes our contractual obligations as of
July 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due | |
|
|
|
|
| |
|
|
|
|
Balance of | |
|
In 2006 | |
|
In 2008 | |
|
|
|
|
Total | |
|
2005 | |
|
and 2007 | |
|
and 2009 | |
|
After 2009 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
$ |
4,409 |
|
|
$ |
1,205 |
|
|
$ |
3,204 |
|
|
$ |
|
|
|
$ |
|
|
|
Event sponsorship agreement
|
|
|
1,810 |
|
|
|
|
|
|
|
1,810 |
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
469,422 |
|
|
|
30,293 |
|
|
|
118,892 |
|
|
|
117,273 |
|
|
|
202,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
475,641 |
|
|
$ |
31,498 |
|
|
$ |
123,906 |
|
|
$ |
117,273 |
|
|
$ |
202,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual computed bonuses in excess of capped amounts for certain
members of our senior management are carried forward to the
following year. As of July 30, 2005, $3.3 million was
available for carry forward and is not included in the above
table. The operating leases included in the above table do not
include contingent rent based upon sales volume, which
represented approximately 17% of minimum lease obligations in
2004, or variable costs such as maintenance, insurance and
taxes, which represented approximately 53% of minimum lease
obligations in 2004. Our open purchase orders are cancelable
without penalty and are therefore not included in the above
table. We have not provided any financial guarantees as of
July 30, 2005.
|
|
|
Off-Balance Sheet Arrangements |
We have not created, and are not party to, any special-purpose
or off-balance sheet entities for the purpose of raising
capital, incurring debt or operating our business. We do not
have any arrangements or relationships with entities that are
not consolidated into the financial statements that are
reasonably likely to materially affect our liquidity or the
availability of capital resources. As of July 30, 2005, we
have not issued any letters of credit for the purchase of
merchandise inventory or any capital expenditures.
Critical Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires the appropriate application of certain accounting
policies, many of which require
15
us to make estimates and assumptions about future events and
their impact on amounts reported in our financial statements and
related notes. We believe the application of our accounting
policies, and the estimates inherently required therein, are
reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and
circumstances dictate a change. However, since future events and
their impact cannot be determined with certainty, actual results
may differ from our estimates, and such differences could be
material to the consolidated financial statements. Historically,
we have found our application of accounting policies to be
appropriate, and actual results have not differed materially
from those determined using necessary estimates. A summary of
our significant accounting policies and a description of
accounting policies that we believe are most critical may be
found in the MD&A included in our Annual Report on
Form 10-K for the year ended January 29, 2005.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
At July 30, 2005, we had no borrowings outstanding under
our credit facility and we have not had any borrowings
outstanding under our credit facility since November 2002. To
the extent that we may borrow pursuant to our credit facility in
the future, we may be exposed to market risk related to interest
rate fluctuations. Additionally, we have not entered into
financial instruments for hedging purposes.
|
|
Item 4. |
Controls and Procedures |
(a) Evaluation of Disclosure Controls and
Procedures: Pursuant to Exchange Act Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act), our management carried out an
evaluation, under the supervision and with the participation of
our Chairman and Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls (as defined in
Rule 13a-15(e) of the Exchange Act) and procedures. Based
upon that evaluation, our Chief Executive Officer along with our
Chief Financial Officer concluded that as of the end of our 2005
second quarter, ended July 30, 2005, our disclosure
controls and procedures (1) are effective in timely
alerting them to material information relating to our company
(including its consolidated subsidiaries) required to be
included in our periodic SEC filings and (2) are adequate
to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is
recorded, processed and summarized and reported within the time
periods specified in the SECs rules and forms. It should
be noted, however, that the design of any system of controls is
limited in its ability to detect errors and therefore there can
be no assurance that any design of system controls will succeed
in achieving its stated goals under all potential future
conditions, regardless of how remote.
(b) Changes in internal controls: During the period
covered by this quarterly report, there have been no significant
changes in our internal controls over our financial reporting
that have materially affected, or are reasonably likely to
materially affect, our internal controls over our financial
reporting.
Cautionary Note Regarding Forward-Looking Statements and
Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve
certain risks and uncertainties, including statements regarding
the companys strategic direction, prospects and future
results. Certain factors, including factors outside of our
control, may cause actual results to differ materially from
those contained in the forward-looking statements. The following
risk factors should be read in connection with evaluating the
Companys business and future prospects. All forward
looking statements included in this report are based on
information available to us as of the date hereof, and we assume
no obligation to update or revise such
16
forward-looking statements to reflect events or circumstances
that occur after such statements are made. Such uncertainties
include, among others, the following factors:
|
|
|
Fluctuations in comparable store sales and quarterly results
of operations may cause the price of our common stock to decline
substantially. |
Our comparable store sales and quarterly results of operations
have fluctuated in the past and are likely to continue to
fluctuate in the future. In addition, there can be no assurance
that we will be able to maintain our recent levels of comparable
store sales as our business continues to expand. Our comparable
store sales and quarterly results of operations are affected by
a variety of factors, including:
|
|
|
|
|
fashion trends; |
|
|
|
changes in our merchandise mix; |
|
|
|
the effectiveness of our inventory management; |
|
|
|
actions of competitors or mall anchor tenants; |
|
|
|
calendar shifts of holiday or seasonal periods; |
|
|
|
the timing of promotional events; |
|
|
|
weather conditions; and |
|
|
|
changes in general economic conditions and consumer spending
patterns. |
If our future comparable store sales fail to meet the
expectations of investors, then the market price of our common
stock could decline substantially. You should refer to the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations for more
information.
|
|
|
Our business could suffer as a result of a
manufacturers inability to produce merchandise on time and
to specifications. |
We do not own or operate any manufacturing facilities and
therefore we depend upon independent third parties for the
manufacture of all of our merchandise. We utilize both domestic
and international manufacturers to produce our merchandise. The
inability of a manufacturer to ship orders in a timely manner or
meet our quality standards could cause delivery date
requirements to be missed, which could result in lost sales.
|
|
|
Our business could suffer if a manufacturer fails to use
acceptable labor practices. |
Our sourcing agents and independent manufacturers are required
to operate in compliance with all applicable foreign and
domestic laws and regulations. While our vendor operating
guidelines promote ethical business practices for our vendors
and suppliers, we do not control these manufacturers or their
labor practices. The violation of labor or other laws by an
independent manufacturer, or by one of the sourcing agents, or
the divergence of an independent manufacturers or sourcing
agents labor practices from those generally accepted as
ethical in the United States, could interrupt, or otherwise
disrupt the shipment of finished products or damage the
Companys reputation. Any of these, in turn, could have a
material adverse effect on the Companys financial
condition and results of operations. To help mitigate this risk,
we engage a third party independent contractor to visit the
production facilities we receive our products from. This
independent contractor assesses the compliance of the facility
with, among other things, local and United States labor laws and
regulations as well as foreign and domestic fair trade and
business practices.
|
|
|
We rely on a small number of vendors to supply a significant
amount of our merchandise. |
In 2004, we sourced 35% of our merchandise from our top three
vendors; one company supplied 15% of our merchandise, and two
others each supplied 10% of our merchandise. In addition,
approximately 68%
17
of our merchandise was directly sourced from our top ten
vendors, and one company acted as our agent with respect to the
sourcing of 21% of our merchandise. Our relationships with our
vendors generally are not on a contractual basis and do not
provide assurances on a long-term basis as to adequate supply,
quality or acceptable pricing. Most of our vendors could
discontinue selling to us at any time. If one or more of our
significant vendors were to sever their relationship with us, we
could be unable to obtain replacement products in a timely
manner, which could cause our sales to decrease.
|
|
|
Failure of a new business concept could have a material
adverse effect on our results of operations and our business |
We expect that the introduction of new brand concepts and other
business opportunities will play an important role in our growth
strategy. In particular, we have and will continue to open our
JimmyZ brand stores during 2005 and beyond. The operation
of the JimmyZ stores and the sale of Aéropostale, and
potentially JimmyZ, merchandise over the Internet through
our e-commerce business, are subject to numerous risks,
including unanticipated operating problems; lack of prior
experience; lack of customer acceptance; new vendor
relationships; competition from existing and new retailers; and
diversion of managements attention from the Companys
core Aéropostale business. The JimmyZ concept
involves, among other things, implementation of a retail apparel
concept which is subject to many of the same risks as
Aéropostale, as well as additional risks inherent with a
more fashion driven concept, including risks of difficulty in
merchandising, uncertainty of customer acceptance, fluctuations
in fashion trends and customer tastes, as well as the attendant
mark-down risks. Risks inherent in any new concept are
particularly acute with respect to JimmyZ because this is
the first significant new venture by us, and the nature of the
JimmyZ business differs in certain respects from that of
our core Aéropostale business. There can be no assurance
that the JimmyZ stores or our e-commerce business will
achieve sales and profitability levels justifying our
investments in these businesses. If those sales levels are not
achieved we may be forced to impair the carrying value of our
investments, which may have a material adverse effect on our
results of operations.
|
|
|
Foreign suppliers manufacture most of our merchandise and the
availability and costs of these products may be negatively
affected by risks associated with international trade. |
Trade restrictions such as increased tariffs or quotas, or both,
could affect the importation of apparel generally and increase
the cost and reduce the supply of merchandise available to us.
Much of our merchandise is sourced directly from foreign vendors
in Europe, Asia and Central America. In addition, many of our
domestic vendors maintain production facilities overseas. Some
of these facilities are also located in regions that may be
affected by political instability that could cause a disruption
in trade. Any reduction in merchandise available to us or any
increase in its cost due to tariffs, quotas or local political
issues could have a material adverse effect on our results of
operations.
|
|
|
Our storeline growth strategy relies on the continued
addition of a significant number of new stores each year, which
could strain our resources and cause the performance of our
existing stores to suffer. |
Our growth will largely depend on our ability to open and
operate new stores successfully. We opened 103 stores in 2004,
95 stores in 2003 and 93 stores in 2002. Additionally, we plan
to open approximately 100 new Aéropostale stores and
approximately 14 JimmyZ stores during 2005. We expect to
continue to open a significant number of new stores in future
years while also remodeling a portion of our existing store
base. Our planned expansion will place increased demands on our
operational, managerial and administrative resources. These
increased demands could cause us to operate our business less
effectively, which in turn could cause deterioration in the
financial performance of our individual stores. In addition, to
the extent that our new store openings are in existing markets,
we may experience reduced net sales volumes in previously
existing stores in those same markets.
18
|
|
|
Our continued expansion plan is dependent on a number of
factors which, if not implemented, could delay or prevent the
successful opening of new stores and penetration into new
markets. |
Unless we continue to do the following, we may be unable to open
new stores successfully and, if so, our continued growth would
be impaired:
|
|
|
|
|
identify suitable markets and sites for new store locations; |
|
|
|
negotiate acceptable lease terms; |
|
|
|
hire, train and retain competent store personnel; |
|
|
|
foster current relationships and develop new relationships with
vendors that are capable of supplying a greater volume of
merchandise; |
|
|
|
manage inventory effectively to meet the needs of new and
existing stores on a timely basis; |
|
|
|
expand our infrastructure to accommodate growth; and |
|
|
|
generate sufficient operating cash flows or secure adequate
capital on commercially reasonable terms to fund our expansion
plans. |
In addition, we will open new stores in markets in the United
States in which we currently have few or no stores. Our
experience in these markets is limited and there can be no
assurance that we will be able to develop our brand in these
markets or adapt to competitive, merchandising and distribution
challenges that may be different from those in our existing
markets. Our inability to open new stores successfully and/or
penetrate new markets would have a material adverse effect on
our revenue and earnings growth.
|
|
|
The loss of the services of key personnel could have a
material adverse effect on our business. |
The Companys key executive officers have substantial
experience and expertise in the retail business and have made
significant contributions to the growth and success of the
Companys brands. The unexpected loss of the services of
one or more of these individuals could adversely affect the
Company. Specifically, if we were to lose the services of Julian
R. Geiger, our Chairman and Chief Executive Officer, and/or
Christopher L. Finazzo, our Executive Vice President-Chief
Merchandising Officer, our business could be adversely affected.
In addition, Mr. Geiger and Mr. Finazzo maintain many
of our vendor relationships, and the loss of either of them
could negatively impact present vendor relationships.
|
|
|
Our net sales and inventory levels fluctuate on a
seasonal basis. |
Our net sales and net income are disproportionately higher from
August through January each year due to increased sales from
back-to-school and holiday shopping. Sales during this period
cannot be used as an accurate indicator for our annual results.
Our net sales and net income from February through July are
typically lower due to, in part, the traditional retail slowdown
immediately following the winter holiday season. Any significant
decrease in sales during the back-to-school and winter holiday
seasons would have a material adverse effect on our financial
condition and results of operations. In addition, in order to
prepare for the back-to-school and holiday shopping seasons, we
must order and keep in stock significantly more merchandise than
we would carry during other parts of the year. Any unanticipated
decrease in demand for our products during these peak shopping
seasons could require us to sell excess inventory at a
substantial markdown, which could reduce our net sales and gross
margins and negatively impact our profitability.
|
|
|
If we are unable to identify and respond to consumers
fashion preferences in a timely manner, our profitability would
decline. |
We may not be able to keep pace with the rapidly changing
fashion trends and consumer tastes inherent in the apparel
industry. Our current design philosophy is based on the belief
that our target customers prefer clothing that suits the demands
of their active lifestyles and that they like to identify with a
logo. Accordingly, we produce casual, comfortable apparel, a
majority of which displays either the
19
Aéropostale or Aéro logo.
There can be no assurance that fashion trends will not move away
from casual clothing or that we will not have to alter our
design strategy to reflect a consumer change in logo preference.
Failing to anticipate, identify or react appropriately to
changes in styles, trends, desired images or brand preferences,
could have a material adverse effect on the Companys
sales, financial condition and results of operations.
|
|
|
A downturn in the united states economy may affect consumer
spending habits. |
Consumer purchases of discretionary items and retail products,
including the Companys products, may decline during
recessionary periods and also may decline at other times when
disposable income is lower. A downturn in the economy may
adversely affect our sales.
|
|
|
Our ability to attract customers to our stores depends
heavily on the success of the shopping malls in which we are
located. |
In order to generate customer traffic, we must locate our stores
in prominent locations within successful shopping malls. We
cannot control the development of new shopping malls, the
availability or cost of appropriate locations within existing or
new shopping malls, or the success of individual shopping malls.
A significant decrease in shopping mall traffic would have a
material adverse effect on our results of operations.
|
|
|
We rely on a single distribution center. |
We maintain one distribution center to receive, store and
distribute merchandise to all of our stores. Any significant
interruption in the operation of the distribution center due to
natural disasters, accidents, system failures or other
unforeseen causes could have a material adverse effect on the
Companys financial condition and results.
|
|
|
We rely on a third party to manage our distribution
center. |
The efficient operation of our stores is dependent on our
ability to distribute, in a timely manner, merchandise to our
store locations throughout the United States. An independent
third party operates our distribution and warehouse facility. We
depend on this third party to receive, sort, pack and distribute
substantially all of our merchandise. This third party employs
personnel represented by a labor union. Although there have been
no work stoppages or disruptions since the inception of our
relationship with this third party provider beginning in 1991,
there can be no assurance that work stoppages or disruptions
will not occur in the future. We also use a separate third party
transportation company to deliver our merchandise from our
warehouse to our stores. Any failure by either of these third
parties to respond adequately to our warehousing and
distribution needs would disrupt our operations and negatively
impact our profitability.
|
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|
We rely on a third party to administer to certain aspects of
our E-Commerce business |
Under an e-commerce agreements with GSI Commerce, Inc.
(GSI), GSI operates the retail potion of our
website, www.aeropostale.com. Under this agreement, GSI owns
certain content and technology related to the website, hosts and
maintains the website, and fulfills orders through the website
as well as furnishing all other back-end operations
required to operate the website. Any significant interruption of
operations at GSI due to natural disasters, accidents, system
failures or other unforeseen causes would have a material
adverse effect on the Companys e-commerce business.
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Failure to protect our trademarks adequately could negatively
impact our brand image and limit our ability to penetrate new
markets. |
We believe that our key trademarks AÉROPOSTALE®,
JIMMYZ and, to a lesser extent, AERO® and the Woody
Car Design are integral to our logo-driven design strategy. We
have obtained a federal registration of the
AÉROPOSTALE® and JIMMYZ trademarks and the Woody
Car Design in the
20
United States and, with regard to the AÉROPOSTALE®
trademark, have applied for or obtained registrations in most
foreign countries in which our vendors are located. We use the
AERO mark in many constantly changing designs and logos even
though we have not applied to register every variation or
combination thereof for adult clothing. We have also expanded
the scope of our filings in the United States Patent and
Trademark Office for a greater number of apparel and accessory
categories. There can be no assurance that the registrations we
own and have obtained will prevent the imitation of our products
or infringement of our intellectual property rights by others.
If any third party imitates our products in a manner that
projects lesser quality or carries a negative connotation, our
brand image could be materially adversely affected. Because we
have not registered the AERO mark in all forms and categories
and have not registered the AÉROPOSTALE,
JIMMYZ and Woody Car Design marks in all
categories or in all foreign countries in which we now or may in
the future source or offer our merchandise, international
expansion and our merchandising of non-apparel products using
these marks could be limited.
In addition, there can be no assurance that others will not try
to block the manufacture, export or sale of our products as
violation of their trademarks or other proprietary rights. Other
entities may have rights to trademarks that contain the word
AERO or may have registered similar or competing
marks for apparel and accessories in foreign countries in which
our vendors are located. Our applications for international
registration of the AÉROPOSTALE® mark have been
rejected in several countries in which our products are
manufactured because third parties have already registered the
mark for clothing in those countries. There may also be other
prior registrations in other foreign countries of which we are
not aware. In addition, we do not own the JimmyZ brand
outside of the United States and Canada. Accordingly, it may be
possible, in those few foreign countries where we were not been
able to register the AÉROPOSTALE® mark, or in the
countries where the JimmyZ brand is owned by a third
party, for a third party owner of the national trademark
registration for AÉROPOSTALE,
JIMMYZ or the Woody Car Design to enjoin the
manufacture, sale or exportation of Aéropostale or
JimmyZ branded goods to the United States. If we were
unable to reach a licensing arrangement with these parties, our
vendors may be unable to manufacture our products in those
countries. Our inability to register our trademarks or purchase
or license the right to use our trademarks or logos in these
jurisdictions could limit our ability to obtain supplies from or
manufacture in less costly markets or penetrate new markets
should our business plan change to include selling our
merchandise in those jurisdictions outside the
United States.
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The effects of war or acts of terrorism could have a material
adverse effect on our operating results and financial
condition. |
The continued threat of terrorism, heightened security measures
and military action in response to an act of terrorism has
disrupted commerce and has intensified the uncertainty of the
U.S. economy. Any further acts of terrorism or a future war
may disrupt commerce and undermine consumer confidence, which
could negatively impact our sales revenue by causing consumer
spending and/or mall traffic to decline. Furthermore, an act of
terrorism or war, or the threat thereof, could negatively impact
our business by interfering with our ability to obtain
merchandise from foreign vendors. Inability to obtain
merchandise from our foreign vendors or substitute other
vendors, at similar costs and in a timely manner, could
adversely affect our operating results and financial condition.
PART II
OTHER INFORMATION
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Item 1. |
Legal Proceedings |
We are party to various litigation matters and proceedings in
the ordinary course of business. In the opinion of our
management, dispositions of these matters are not expected to
have a material adverse affect on our financial position,
results from operations or cash flows.
21
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
Our Board of Directors has authorized a share repurchase program
of our outstanding common stock in the amount of
$100.0 million. Our purchases of treasury stock for the
second quarter ended July 30, 2005 pursuant to the share
repurchase program, and remaining repurchase availability at
that date, were as follows:
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Total Number of | |
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Approximate Dollar | |
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Total | |
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Shares Purchased | |
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Value of Shares | |
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Number of | |
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as Part of | |
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that May Yet Be | |
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Shares (or | |
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Average | |
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Publicly | |
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Purchased Under | |
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Units) | |
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Price Paid | |
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Announced Plans | |
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the Plans or | |
Period |
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Purchased | |
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per Share | |
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or Programs | |
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Programs | |
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| |
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| |
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(In Thousands) | |
May 2005
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125,000 |
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$ |
26.96 |
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125,000 |
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$ |
26,198 |
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June 2005
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35,000 |
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$ |
28.89 |
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35,000 |
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$ |
25,187 |
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July 2005
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Total
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160,000 |
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$ |
27.38 |
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160,000 |
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$ |
25,187 |
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Item 3. |
Defaults Upon Senior Securities |
Not applicable.
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Item 4. |
Submission of Matters to a Vote of Security Holders |
(a) In accordance with the Companys notice and proxy
statement dated May 6, 2005, the Company held its Annual
Meeting of Stockholders on June 15, 2005. Holders of
50,309,798 shares of the Companys common stock were
present in person or by proxy representing approximately 91% of
the Companys 55,422,460 shares outstanding on the
record date. The matters set forth in the paragraphs below were
submitted to a vote of the Companys stockholders.
(b) The following persons were elected as members of the
Board of Directors to serve a term of one year and until their
successors shall have been duly elected and qualified:
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Name of Nominee |
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Votes For | |
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Votes Withheld | |
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Julian R. Geiger
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49,026,379 |
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1,358,435 |
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Bodil Arlander
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50,219,816 |
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164,998 |
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Ronald R. Beegle
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50,217,307 |
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167,507 |
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Mary Elizabeth Burton
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47,645,195 |
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2,739,619 |
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Robert B. Chavez
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27,847,461 |
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22,537,353 |
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David H. Edwab
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50,205,364 |
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179,450 |
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John D. Howard
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50,220,114 |
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164,700 |
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David B. Vermylen
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48,357,136 |
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2,027,678 |
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22
(c) The proposal to ratify Deloitte & Touche LLP
as the companys independent registered public accounting
firm for 2005, which was approved and recommended by the
Companys Audit Committee of the Board of Directors, was
approved by a majority of the shares voted as follows:
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Votes For |
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Votes Against | |
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Abstentions | |
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49,531,220
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785,661 |
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67,933 |
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Item 5. |
Other Information |
Not applicable.
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31 |
.1 |
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Certification by Julian R. Geiger, Chairman and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
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31 |
.2 |
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Certification by Michael J. Cunningham, Executive Vice President
and Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32 |
.1 |
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Certification by Julian R. Geiger pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32 |
.2 |
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Certification by Michael J. Cunningham pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
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Aeropostale, Inc.
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/s/ Julian R. Geiger
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Julian R. Geiger |
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Chairman of the Board and Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ Michael J. Cunningham
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Michael J. Cunningham |
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Executive Vice President-Chief Financial Officer |
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(Principal Financial Officer) |
Dated: September 6, 2005
24