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
October 28, 2006
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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
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(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
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(Address of Principal Executive
Offices)
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(Zip
Code)
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(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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2
of the Act).
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer 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 52,572,819 shares of common stock issued
and outstanding as of December 1, 2006.
AÉROPOSTALE,
INC.
TABLE OF
CONTENTS
2
PART I
FINANCIAL INFORMATION
Item 1. Financial
Statements (unaudited)
AÉROPOSTALE,
INC.
(Unaudited)
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October 28,
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January 28,
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October 29,
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2006
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2006
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2005
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(In Thousands)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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148,141
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$
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205,235
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$
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114,317
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Short-term investments
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55,202
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20,037
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20,062
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Merchandise inventory
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167,527
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91,908
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159,873
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Tenant allowances receivable
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9,647
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6,510
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10,712
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Prepaid expenses
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14,635
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12,314
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11,997
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Other current assets
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2,894
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3,335
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5,721
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Total current assets
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398,046
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339,339
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322,682
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Fixtures, equipment and
improvements, net
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179,885
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160,229
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162,325
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Intangible assets
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2,455
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2,455
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2,529
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Other assets
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1,600
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1,928
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1,937
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TOTAL ASSETS
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$
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581,986
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$
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503,951
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$
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489,473
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LIABILITIES AND
STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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117,854
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$
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57,165
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$
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95,064
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Accrued compensation
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11,498
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10,714
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7,818
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Deferred income taxes
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5,195
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5,195
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1,519
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Income taxes payable
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17,715
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14,159
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8,085
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Accrued expenses
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37,235
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39,120
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32,355
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Total current liabilities
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189,497
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126,353
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144,841
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Deferred rent and tenant allowances
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89,526
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81,499
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81,409
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Retirement benefit plan liability
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10,321
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8,654
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7,347
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Deferred income taxes
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1,605
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2,655
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4,321
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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, $0.01 per share; 200,000 shares authorized,
59,260, 58,598 and 58,558 shares issued and outstanding
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593
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586
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586
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Additional paid-in capital
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98,512
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88,213
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87,567
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Accumulated other comprehensive
loss
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(1,557
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(1,557
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(817
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Deferred compensation
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(2,577
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(2,968
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Retained earnings
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357,625
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308,269
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266,463
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Treasury stock at cost (6,688,
4,548 and 4,203 shares)
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(164,136
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(108,144
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(99,276
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Total stockholders equity
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291,037
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284,790
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251,555
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TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
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$
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581,986
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$
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503,951
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$
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489,473
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See notes to unaudited condensed consolidated financial
statements.
3
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13 weeks ended
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39 weeks ended
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October 28,
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October 29,
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October 28,
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October 29,
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2006
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2005
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2006
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2005
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(In Thousands, Except per Share Data)
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Net sales
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$
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385,455
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$
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324,657
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$
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906,371
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$
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769,101
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Cost of sales (includes certain
buying, occupancy and warehousing expenses)
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261,856
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229,938
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639,718
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552,584
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Gross profit
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123,599
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94,719
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266,653
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216,517
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Selling, general and
administrative expenses
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71,840
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52,411
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192,327
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149,455
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Other income
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2,085
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Income from operations
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51,759
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42,308
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76,411
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67,062
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Interest income
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1,632
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781
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4,500
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2,362
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Income before income taxes
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53,391
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43,089
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80,911
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69,424
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Income taxes
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20,821
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17,004
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31,555
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27,276
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Net income and comprehensive income
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$
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32,570
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$
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26,085
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$
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49,356
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$
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42,148
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Basic earnings per share
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$
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0.62
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$
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0.48
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$
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0.92
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$
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0.76
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Diluted earnings per share
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$
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0.61
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$
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0.47
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$
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0.91
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$
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0.75
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Weighted average basic shares
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52,743
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54,913
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53,592
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55,243
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Weighted average diluted shares
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53,189
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55,711
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54,080
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56,217
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See notes to unaudited condensed consolidated financial
statements.
4
AÉROPOSTALE,
INC.
(Unaudited)
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39 weeks ended
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October 28,
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October 29,
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2006
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2005
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(In Thousands)
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CASH FLOWS FROM OPERATING
ACTIVITIES:
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Net income
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$
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49,356
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$
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42,148
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Adjustments to reconcile net
income to net cash provided by operating activities:
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Depreciation and amortization
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21,227
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15,046
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Stock-based compensation
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4,465
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1,282
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Excess tax benefits from stock
options
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(6,968
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)
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Other
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(3,932
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)
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2,164
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Changes in operating assets and
liabilities:
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Merchandise inventory
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(75,619
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(78,635
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Accounts payable
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60,689
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50,206
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Other assets and liabilities
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15,876
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3,070
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Net cash provided by operating
activities
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65,094
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35,281
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CASH FLOWS FROM INVESTING
ACTIVITIES:
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Purchases of fixtures, equipment
and improvements
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(39,452
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(48,783
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Purchase of short-term investments
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(294,510
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(166,376
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Proceeds from sale of short-term
investments
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259,345
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222,538
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Net cash (used in) provided by
investing activities
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(74,617
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)
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7,379
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CASH FLOWS FROM FINANCING
ACTIVITIES:
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Purchase of treasury stock
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(55,992
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(35,650
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Proceed from exercise of stock
options
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1,453
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1,179
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Excess tax benefits from stock
options
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6,968
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Net cash used in financing
activities
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(47,571
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)
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(34,471
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)
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Net (decrease) increase in cash
and cash equivalents
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(57,094
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)
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8,189
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Cash and cash equivalents,
beginning of year
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205,235
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106,128
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Cash and cash equivalents, end of
period
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$
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148,141
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$
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114,317
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Supplemental Disclosure of Cash
Flow Information:
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Non-cash operating and investing
activities
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$
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2,973
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$
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5,916
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See notes to unaudited condensed consolidated financial
statements.
5
AÉROPOSTALE,
INC.
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
for young women and men. We design, market and sell our own
brand of merchandise principally targeting 14 to
17 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 to 25. As of October 28, 2006, we
operated 738 stores in 47 states, consisting of 724
Aeropostale stores and 14 JimmyZ stores, in addition to
our Aeropostale
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 28, 2006.
References to 2006 mean the
53-week
period ending February 3, 2007, and references to
2005 mean the
52-week
period ended January 28, 2006. References to the
third quarter of 2006 mean the thirteen-week period ended
October 28, 2006, and references to the third quarter
of 2005 mean the thirteen-week period ended
October 29, 2005.
|
|
2.
|
Stock
Based Compensation
|
On January 29, 2006, the first day of our 2006 fiscal year,
we adopted the provisions of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123(R), as interpreted
by SEC Staff Accounting Bulletin No. 107. Under
SFAS No. 123(R), all forms of share-based payment to
employees and directors, including stock options, must be
treated as compensation and recognized in the income statement.
We recognized $1.0 million ($0.6 million after-tax, or
$0.01 per diluted share) in compensation expense related to
stock options during the third quarter of 2006, and
$2.7 million ($1.7 million after-tax, or
$0.03 per diluted share) during the first thirty-nine weeks
of 2006. Previous to the adoption of SFAS No. 123(R),
we accounted for stock options under the provisions of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and, accordingly, did not
recognize compensation expense in our consolidated financial
statements. We adopted the modified prospective transition
method provided under SFAS No. 123(R), and
consequently, have not retroactively adjusted results from prior
periods. Under this transition method, compensation cost
associated with stock options recognized in the third quarter of
2006 includes: 1) quarterly amortization related to the
remaining unvested portion of all stock option awards granted
prior to January 29, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of
SFAS No. 123; and 2) quarterly amortization
related to all stock option awards granted subsequent to
January 29, 2006, based on the grant-date fair value
estimated in accordance with the provisions of
SFAS No. 123(R).
Under SFAS No. 123(R), we are required to select a
valuation technique or option-pricing model that meets the
criteria as stated in the standard, which include a binomial
model and the Black-Scholes model. At the present time, we will
continue to use the Black-Scholes model, which requires the
input of subjective assumptions. These
6
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumptions include estimating the length of time employees will
retain their vested stock options before exercising them
(expected term), the estimated volatility of our
common stock price over the expected term and the number of
options that will ultimately not complete their vesting
requirements (forfeitures). Changes in the
subjective assumptions can materially affect the estimate of
fair value of stock based compensation and
consequently, the related amount recognized in the consolidated
statements of income.
In November 2005, the FASB issued FASB Staff Position
No. FAS 123R-3
Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards. We have elected
to adopt the alternative transition method provided in the FASB
Staff Position for calculating the tax effects of stock-based
compensation pursuant to SFAS No. 123(R). The
alternative transition method includes simplified methods to
establish the beginning balance of the additional paid-in
capital pool (APIC pool) related to the tax effects
of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of
SFAS No. 123(R).
Prior to the adoption of SFAS No. 123(R), we presented
all tax benefits resulting from the exercise of stock options as
operating cash flows in the Condensed Consolidated Statement of
Cash Flows. SFAS No. 123(R) requires that cash flows
resulting from tax deductions in excess of the cumulative
compensation cost recognized for options exercised be classified
as financing cash flows. Previously, all tax benefits from stock
options had been reported as an operating activity. For the
first thirty-nine weeks of 2006, net cash provided by operating
activities, and net cash used for financing activities, was
decreased by $7.0 million related to excess tax benefits
realized from the exercise of stock options.
We have stock option plans under which we may grant qualified
and non-qualified stock options to purchase shares of our common
stock to executives, consultants, directors, or other key
employees. As of October 28, 2006, 679,367 shares were
available for future grant under our plans. Stock options may
not be granted at less than the fair market value at the date of
grant. Stock options generally vest over four years on a pro
rata basis and expire after eight years. All outstanding stock
options immediately vest upon change in control.
As of October 28, 2006, there was $7.4 million of
total unrecognized compensation cost related to non-vested
options that we expect to be recognized over the remaining
weighted-average vesting period of 2.5 years. The
weighted-average grant-date fair value of options granted was
$15.10 during the third quarter of 2006 and $9.88 during the
third quarter of 2005. The weighted-average grant-date fair
value of options granted was $14.58 during the first thirty-nine
weeks of 2006 and $13.39 during the first thirty-nine weeks of
2005.
The following table summarizes stock options outstanding at
October 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
(In Thousands)
|
|
|
|
|
|
(In Years)
|
|
|
(In Millions)
|
|
|
Outstanding as of beginning of year
|
|
|
2,041
|
|
|
$
|
12.63
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
314
|
|
|
$
|
28.87
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(649
|
)
|
|
$
|
2.24
|
|
|
|
|
|
|
$
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(74
|
)
|
|
$
|
23.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of October 28,
2006
|
|
|
1,632
|
|
|
$
|
19.38
|
|
|
|
5.33
|
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of October 28,
2006
|
|
|
770
|
|
|
$
|
12.23
|
|
|
|
4.29
|
|
|
$
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Non-vested as of beginning of year
|
|
|
935
|
|
|
$
|
12.11
|
|
Granted
|
|
|
314
|
|
|
$
|
14.58
|
|
Vested
|
|
|
(319
|
)
|
|
$
|
11.43
|
|
Cancelled
|
|
|
(68
|
)
|
|
$
|
12.57
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of October 28,
2006
|
|
|
862
|
|
|
$
|
13.23
|
|
|
|
|
|
|
|
|
|
|
Certain of our employees and all of our directors have been
awarded restricted stock, pursuant to restricted stock
agreements. 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 $0.6 million for the third quarter of 2006 and
$0.5 million for the third quarter of 2005. Amortization
expense was $1.8 million for the first thirty-nine weeks of
2006 and $1.3 million for the first thirty-nine weeks of
2005. As of October 28, 2006, there was $4.7 million
of unrecognized compensation cost related to restricted stock
awards that is expected to be recognized over the weighted
average period of 1.7 years.
The following table summarizes restricted stock outstanding at
October 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Outstanding as of beginning of year
|
|
|
168
|
|
|
$
|
28.48
|
|
Granted
|
|
|
159
|
|
|
$
|
28.87
|
|
Vested
|
|
|
(13
|
)
|
|
$
|
31.12
|
|
Cancelled
|
|
|
(20
|
)
|
|
$
|
28.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of October 28,
2006
|
|
|
294
|
|
|
$
|
28.57
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2006, we expect to record a reduction
of previously recorded compensation expense of
$0.3 million, resulting from the termination with cause of
Christopher L. Finazzo, our then Executive Vice President and
Chief Merchandising Officer on November 8, 2006.
8
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to the first quarter of 2006, no compensation expense was
recognized for stock options. Had compensation cost for our
stock option plans been determined consistent with
SFAS No. 123(R), our net income and earnings per share
for the third quarter and first thirty-nine weeks of 2005 would
have been reduced to the following pro forma amounts (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
13 weeks
|
|
|
39 weeks
|
|
|
|
ended
|
|
|
ended
|
|
|
|
October 29, 2005
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
26,085
|
|
|
$
|
42,148
|
|
Add: Restricted stock
amortization, net of taxes
|
|
|
306
|
|
|
|
782
|
|
Less: Total stock based
compensation expense determined under the fair value method, net
of taxes
|
|
|
(746
|
)
|
|
|
(2,054
|
)
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
25,645
|
|
|
$
|
40,876
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.48
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
0.47
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
0.47
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
Pro-forma
|
|
$
|
0.46
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of stock options was calculated
with the following weighted average assumptions used for grants
in their respective periods. For 2006: no dividend yield;
expected volatility of 50%; risk free interest rate of 4.87%;
and expected life of 5.25 years. For 2005: no dividend
yield; expected volatility of 40%; risk free interest rate of
4.10%; and expected life of 5 years.
Under the provisions of SFAS No. 123(R), the
recognition of deferred compensation at the date that restricted
stock is granted, representing the amount of unrecognized
restricted stock expense that is reduced as expense is
recognized, is no longer required. Therefore, as of the date of
adoption, the amount that had been in Deferred
compensation in the Condensed Consolidated Balance Sheet
was reclassified to Additional paid in capital.
|
|
3.
|
Cost of
Sales and Selling, General and Administrative Expenses
|
Cost of sales includes costs related to: merchandise sold,
including inventory valuation adjustments, 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, 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.
|
|
4.
|
Recent
Accounting Developments
|
In September 2006, The Financial Accounting Standards Board, or
FASB, issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R). This statement
requires an employer to recognize the overfunded or underfunded
status
9
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity.
This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of
financial position, with limited exceptions.
SFAS No. 158 is effective for fiscal years ending
after December 15, 2006. We expect that the adoption of
SFAS No. 158 will not have a material impact on our
consolidated balance sheets or consolidated statement of cash
flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having concluded in
those other accounting pronouncements that fair value is the
relevant measurement attribute. This statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We expect that the adoption of SFAS No. 157
will not have a material impact on our consolidated balance
sheets or consolidated statement of cash flows.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, or
SAB 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements. SAB 108 provides guidance on
the consideration of effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB No. 108 is effective for
the first annual period ending after November 15, 2006. We
are currently evaluating the impact of adopting
SAB No. 108 on our consolidated financial statements.
In July 2006, The FASB issued Interpretation No. 48, or
FIN 48,Accounting for Uncertainty in Income
Taxes, which clarifies the accounting for uncertainty in
income taxes recognized in the financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 provides guidance on the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification interest and
penalties, accounting in interim periods, disclosures and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We are currently evaluating the
impact of this standard on our consolidated financial statements.
The following table sets forth the computations of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
39 weeks ended
|
|
|
|
October 28,
|
|
|
October 29,
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands, Except per Share Data)
|
|
|
Net income
|
|
$
|
32,570
|
|
|
$
|
26,085
|
|
|
$
|
49,356
|
|
|
$
|
42,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares
|
|
|
52,743
|
|
|
|
54,913
|
|
|
|
53,592
|
|
|
|
55,243
|
|
Impact of dilutive securities
|
|
|
446
|
|
|
|
798
|
|
|
|
488
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
|
|
|
53,189
|
|
|
|
55,711
|
|
|
|
54,080
|
|
|
|
56,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share
|
|
$
|
0.62
|
|
|
$
|
0.48
|
|
|
$
|
0.92
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
$
|
0.91
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 562,392 shares during the third quarter
of 2006 and 765,394 shares during the third quarter of 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. Options to
purchase 479,395 shares during the first thirty-nine weeks
of 2006 and 410,681 shares during the first thirty-nine
weeks of 2005 were not included in the
10
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
computation of diluted earnings per share because the exercise
price of the options was greater than the average market price
of the common shares.
|
|
6.
|
Revolving
Credit Facility
|
We have a revolving credit facility (the credit
facility) with Bank of America, N.A., which allows us to
borrow or obtain letters of credit up to an aggregate of
$50.0 million, with letters of credit having a
sub-limit of
$15.0 million. The amount of available credit can be
increased to an aggregate of $75.0 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 October 28, 2006, 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 thereunder 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 October 28, 2006, 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.
|
|
7.
|
Retirement
Benefit Plans
|
We maintain 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.
Matching contributions vest 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.
We maintain a supplemental executive retirement plan, or SERP,
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.
11
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net periodic pension benefit cost are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
39 weeks ended
|
|
|
|
October 28,
|
|
|
October 29,
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Service cost
|
|
$
|
123
|
|
|
$
|
106
|
|
|
$
|
369
|
|
|
$
|
316
|
|
Interest cost
|
|
|
233
|
|
|
|
183
|
|
|
|
699
|
|
|
|
549
|
|
Amortization of prior service cost
|
|
|
19
|
|
|
|
19
|
|
|
|
57
|
|
|
|
56
|
|
Amortization of net loss
|
|
|
142
|
|
|
|
138
|
|
|
|
426
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost
|
|
$
|
517
|
|
|
$
|
446
|
|
|
$
|
1,551
|
|
|
$
|
1,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We maintain a long-term incentive deferred compensation plan 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.
We maintain a postretirement benefit plan for certain officers.
At October 28, 2006, we had a liability of
$0.1 million in connection with this plan.
|
|
8.
|
Stock
Repurchase Program
|
We repurchase our common stock from time to time under a stock
repurchase program. In June 2006, our Board of Directors
approved a $100 million increase in repurchase availability
under the program, bringing total repurchase authorization,
since inception of the program, to $250 million. 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, opening
and closing of our stock trading window, and liquidity and
capital resource requirements going forward. We repurchased
308,000 shares of our common stock for $8.3 million
during the third quarter of 2006 and 1,069,000 shares of
our common stock for $24.4 million during the third quarter
of 2005. We repurchased 2,139,400 shares of our common
stock for $56.0 million during the thirty-nine weeks of
2006 and 1,454,000 shares of our common stock for
$35.6 million during the first thirty-nine weeks of 2005.
We repurchased 6,687,650 shares for $164.1 million
since the inception of the repurchase program through
October 28, 2006, with $85.9 million of repurchase
availability remaining under the program as of October 28,
2006.
9. Other
Income:
During the second quarter of 2006, we resolved a dispute with a
vendor regarding the enforcement of our intellectual property
rights. In connection with the resolution of this dispute, we
received net proceeds of $2.1 million from this vendor,
which has been recorded in other income during the second
quarter of 2006. There are no future obligations or commitments
connected with this matter.
|
|
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. As of October 28,
2006 we have not issued any third party guarantees other than
the unauthorized, unenforceable and subsequently terminated
guaranty which Christopher Finazzo, our prior Chief
Merchandising Officer, executed in March 1999, as described in
note 11.
12
AÉROPOSTALE,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On November 8, 2006, we announced that Christopher L.
Finazzo, who had been our Executive Vice President and Chief
Merchandising Officer, had been terminated for cause, effective
immediately, based upon information uncovered by management and
after an independent investigation was conducted at the
direction, and under the supervision, of a special committee of
our Board of Directors. The investigation, being carried out by
our outside legal counsel and a third-party investigation firm,
revealed that Mr. Finazzo:
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concealed from management and the companys Board of
Directors, and failed to disclose in corporate disclosure
documents, his personal ownership interests in and officer
positions of, certain corporate entities affiliated with one of
our primary vendors at the time, South Bay Apparel, Inc.,
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without the knowledge or authorization of Aeropostale
management, executed a corporate Guaranty Agreement in March
1999, that, had it been enforceable, would have obligated us to
guarantee any payments due from South Bay Apparel, Inc. to
Tricot Richelieu, Inc., an apparel manufacturer and vendor to
South Bay Apparel, Inc., and
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|
failed to disclose unauthorized business relationships and
transactions between immediate and extended family members of
Mr. Finazzo and certain other of our vendors.
|
These activities, and their concealment, constituted numerous
instances of conflicts of interest that were in breach of, among
other things, the Companys Code of Business Conduct and
Ethics, as well as numerous violations of
Mr. Finazzos employment agreement.
South Bay Apparel, Inc. had been a vendor to Aeropostale since
1996, providing apparel products including womens and
mens graphic tee shirts, fleece and other tops. At least
one affiliate of South Bay Apparel, Inc. involved in this matter
has received orders from us aggregating approximately
$2.4 million in 2004, approximately $1.0 million in
2005 and approximately $0.6 million during the first
thirty-nine weeks of 2006.
Our management and our Board of Directors had no prior knowledge
of any of these unauthorized activities by Mr. Finazzo,
including the unauthorized Guaranty Agreement discussed above.
On December 5, 2006 we entered into a Confirmatory
Termination and Revocation Agreement with South Bay Apparel,
Inc. and Tricot Richelieu, Inc., whereby all parties agreed that
the Guaranty Agreement was thereby and has been permanently,
irrevocably and absolutely terminated, revoked and expired in
all respects. Therefore, the Guaranty Agreement was not recorded
in the accompanying unaudited condensed consolidated financial
statements.
Also on December 5, 2006, we entered into an agreement with
South Bay Apparel, Inc. and Douglas Dey, South Bay Apparel,
Inc.s President, whereby the parties agreed to resolve
certain outstanding matters between them. As such, South Bay
Apparel, Inc. agreed to pay us $8.0 million, representing
(i) a concession by South Bay Apparel, Inc. and
Mr. Dey concerning prior purchases of merchandise by us and
(ii) reimbursement by South Bay Apparel, Inc. of
professional fees that we incurred associated with the
negotiation of the Agreement and the investigation of the
underlying facts surrounding this Agreement. In addition, South
Bay Apparel, Inc. and Mr. Dey agreed to a reduction in the
price of merchandise sold to us. We have agreed to purchase this
merchandise for a total of $24.2 million between
December 5, 2006 and July 2, 2007. The agreement
terminates on July 2, 2007.
Due to the numerous undisclosed conflicts of interests discussed
above, we determined that transactions initiated or authorized
by Mr. Finazzo, during his employment with us, with the
above mentioned related parties cannot be presumed to have been
carried out on an arms-length basis, as the requisite
conditions of competitive, free-market dealings may not have
existed. However, we believe that our historical consolidated
financial statements were fairly stated in all material
respects. In addition, we believe that our historical trend of
earnings would not have been materially impacted by any of these
items.
13
|
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Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Note Regarding Forward-Looking Statements
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 risk factors included in
Item 1A 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 forward-looking
statements to reflect events or circumstances that occur after
such statements are made.
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 14
to 17, 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 to 25. We
opened our first JimmyZ stores in July 2005. In addition,
we launched our Aeropostale
e-commerce
business in May 2005. As of October 28, 2006, we operated
738 stores in 47 states, consisting of 724 Aeropostale
stores and 14 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 28, 2006.
The discussion in the following section is on a consolidated
basis, unless indicated otherwise.
Overview
We achieved net sales of $385.5 million for the third
quarter of 2006, or an 18.7% increase over the third quarter of
2005. The sales increase was driven by average square footage
growth of 12% and a 5.6% comparable store sales increase. On a
year-to-date
basis, we achieved net sales of $906.4 million for the
first thirty-nine weeks of 2006, or a 17.8% increase over the
same period in 2005. Comparable store sales increased 1.8%
during the first thirty-nine weeks of 2006. Gross profit, as a
percentage of net sales, increased 2.9 percentage points
for the third quarter of 2006 and increased 1.2 percentage
points for the first thirty-nine weeks of 2006. Merchandise
margin increased 3.0 percentage points for the third
quarter of 2006, primarily due to decreased promotional
activity. SG&A, as a percentage of net sales, increased
2.5 percentage points for the third quarter of 2006 and
1.8 percentage points for the first thirty-nine weeks of
2006. The increase in SG&A was primarily attributable to
increased store payroll and transaction costs; an increase in
incentive compensation, reflecting the reversal of previously
accrued incentive compensation during the third quarter of 2005;
and increased marketing expense. Interest income increased by
$0.9 million for the third quarter of 2006 and by
$2.1 million on a
year-to-date
basis versus the same periods in the prior year. Increases in
interest rates and cash and cash equivalents were the primary
drivers of the increase in net interest income. Net income for
the third quarter of 2006 was $32.6 million, or
$0.61 per diluted share, versus net income of
$26.1 million, or $0.47 per diluted share for the
third quarter of 2005. Net income for the first thirty-nine
weeks of 2006 was $49.4 million, or $0.91 per diluted
share, versus net income of $42.2 million, or
$0.75 per diluted share for the first thirty-nine weeks of
2005.
14
As of October 28, 2006, we had working capital of
$208.5 million, cash and cash equivalents of
$148.1 million, short-term investments of
$55.2 million, and no third party debt outstanding.
Merchandise inventories increased by 5%, and decreased by 5% on
a square foot basis, at October 28, 2006, compared to the
third quarter of 2005. We operated 738 stores at
October 28, 2006, an increase of 10% from the same period
last year.
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:
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|
|
|
|
|
|
|
|
|
|
|
13 weeks ended
|
|
|
39 weeks ended
|
|
|
|
October 28,
|
|
|
October 29,
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net sales (in millions)
|
|
$
|
385.5
|
|
|
$
|
324.7
|
|
|
$
|
906.4
|
|
|
$
|
769.1
|
|
Total store count at end of period
|
|
|
738
|
|
|
|
668
|
|
|
|
738
|
|
|
|
668
|
|
Comparable store count at end of
period
|
|
|
620
|
|
|
|
508
|
|
|
|
620
|
|
|
|
508
|
|
Net sales growth
|
|
|
18.7
|
%
|
|
|
18.2
|
%
|
|
|
17.8
|
%
|
|
|
20.7
|
%
|
Increase (decrease) in comparable
store sales
|
|
|
5.6
|
%
|
|
|
(1.5
|
)%
|
|
|
1.8
|
%
|
|
|
(0.1
|
)%
|
Increase (decrease) in comparable
average unit retail
|
|
|
5.0
|
%
|
|
|
(11.0
|
)%
|
|
|
4.3
|
%
|
|
|
(10.1
|
)%
|
(Decrease) increase in comparable
units per sales transaction
|
|
|
(0.1
|
)%
|
|
|
1.5
|
%
|
|
|
(1.9
|
)%
|
|
|
3.1
|
%
|
Increase (decrease) in comparable
sales transaction
|
|
|
0.6
|
%
|
|
|
9.2
|
%
|
|
|
(0.5
|
)%
|
|
|
7.8
|
%
|
Net sales per average square foot
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|
$
|
146
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|
$
|
140
|
|
|
$
|
353
|
|
|
$
|
351
|
|
Gross profit (in millions)
|
|
$
|
123.6
|
|
|
$
|
94.7
|
|
|
$
|
266.7
|
|
|
$
|
216.5
|
|
Income from operations (in
millions)
|
|
$
|
51.8
|
|
|
$
|
42.3
|
|
|
$
|
76.4
|
|
|
$
|
67.1
|
|
Diluted earnings per share
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
$
|
0.91
|
|
|
$
|
0.75
|
|
Average square footage growth
|
|
|
12
|
%
|
|
|
21
|
%
|
|
|
16
|
%
|
|
|
22
|
%
|
Increase in total inventory over
comparable period
|
|
|
5
|
%
|
|
|
40
|
%
|
|
|
5
|
%
|
|
|
40
|
%
|
(Decrease) increase in inventory
per square foot over comparable period
|
|
|
(5
|
)%
|
|
|
17
|
%
|
|
|
(5
|
)%
|
|
|
17
|
%
|
Percentages of net sales by
category:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Womens
|
|
|
65
|
%
|
|
|
66
|
%
|
|
|
60
|
%
|
|
|
62
|
%
|
Mens
|
|
|
24
|
%
|
|
|
23
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Accessories
|
|
|
11
|
%
|
|
|
11
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%
|
|
|
15
|
%
|
|
|
13
|
%
|
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:
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|
|
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|
13 weeks ended
|
|
|
39 weeks ended
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|
|
October 28,
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|
October 29,
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|
October 28,
|
|
|
October 29,
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|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Gross profit
|
|
|
32.1
|
%
|
|
|
29.2
|
%
|
|
|
29.4
|
%
|
|
|
28.2
|
%
|
Selling, general and
administrative expenses
|
|
|
18.6
|
%
|
|
|
16.1
|
%
|
|
|
21.2
|
%
|
|
|
19.4
|
%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
0.2
|
%
|
|
|
|
|
Income from operations
|
|
|
13.5
|
%
|
|
|
13.1
|
%
|
|
|
8.4
|
%
|
|
|
8.8
|
%
|
Interest income, net
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
Income before income taxes
|
|
|
13.9
|
%
|
|
|
13.2
|
%
|
|
|
8.9
|
%
|
|
|
9.0
|
%
|
Income taxes
|
|
|
5.4
|
%
|
|
|
5.2
|
%
|
|
|
3.5
|
%
|
|
|
3.5
|
%
|
Net income
|
|
|
8.5
|
%
|
|
|
8.0
|
%
|
|
|
5.4
|
%
|
|
|
5.5
|
%
|
15
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
e-commerce
business or sales from our temporary arrangements with colleges
and universities.
Net sales for the third quarter of 2006 increased by
$60.8 million, or by 18.7% versus the same period last
year. Average square footage growth of 12% drove the net sales
increase for the quarter, as well as an increase in comparable
store sales. Comparable store sales increased by
$17.1 million, or by 5.6% for the third quarter of 2006,
versus a comparable store sales decrease of 1.5% for the third
quarter of 2005. Comparable store sales increased in our young
mens, young womens and accessories categories. The
overall comparable store sales increase reflected a 5.0%
increase in average unit retail, a 0.6% increase in the number
of sales transactions, and a 0.1% decrease in units per sales
transaction. The increase in the average unit retail reflects
lower promotional activity this year.
Non-comparable
store sales increased by $43.7 million, or by 13.1%,
primarily due to 70 more stores open at the end of the third
quarter of 2006 versus the end of the third quarter of 2005.
Net sales for the first thirty-nine weeks of 2006 increased by
$137.3 million, or by 17.8%, driven by average square
footage growth of 16%, as well as an increase in comparable
store sales. Comparable store sales increased by
$13.3 million, or by 1.8% for the
year-to-date
period, versus a comparable store sales decrease of 0.1% for the
first thirty-nine weeks of 2005. Non-comparable store sales
increased by $124.0 million, or by 17.9%, primarily due to
the new store openings discussed above.
Gross profit Cost of sales includes
costs related to: merchandise sold, including inventory
valuation adjustments, 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, increased
2.9 percentage points for the third quarter of 2006 versus
the same period last year. Merchandise margin increased
3.0 percentage points, reflecting decreased promotional
activity.
Gross profit, as a percentage of net sales, increased
1.2 percentage points for the first thirty-nine weeks of
2006 versus the same period last year. Merchandise margin
increased 2.0 percentage points, reflecting lower
promotional activity, and was partially offset by a
0.6 percentage points increase in depreciation and
amortization and a 0.2 percentage point increase in
occupancy costs.
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, 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 $19.4 million, or 2.5 percentage
points, as a percentage of net sales, for the third quarter of
2006 versus the third quarter of 2005. The increase in SG&A
was attributable to a $10.2 million increase in store
payroll and benefits and store transaction costs resulting
primarily from new store growth; a $4.7 million increase in
incentive compensation, reflecting the reversal of previously
accrued incentive compensation during the third quarter of 2005;
and a $1.8 million increase in marketing costs. As a
percentage of net sales, the increase in incentive compensation
contributed to 1.3 percentage points of the increase in
SG&A, store transaction related expenses contributed to
0.6 percentage points of the increase, the adoption of
SFAS No. 123(R)contributed to 0.3 percentage
points of the increase, and marketing expense contributed to
0.3 percentage points of the increase.
SG&A, as a percentage of net sales, increased
1.8 percentage points for the first thirty-nine weeks of
2006 versus the same period last year. As a percentage of net
sales, store payroll and transaction costs contributed to
0.4 percentage points of the increase in SG&A, and
marketing expense contributed to 0.4 percentage points of
the increase. In addition, the adoption of
SFAS No. 123(R) contributed to 0.3 percentage
points of the increase in SG&A.
16
Other income We recognized
$2.1 million in other income during the second quarter of
2006 in connection with the resolution of a dispute with a
vendor regarding the enforcement of our intellectual property
rights.
Interest income and income taxes
Interest income increased by $0.9 million for the third
quarter of 2006, and by $2.1 million for the first
thirty-nine weeks of 2006, versus the same periods in 2005.
Increases in cash and cash equivalents and interest rates were
the primary drivers of the increase in net interest income.
The effective income tax rate was 39.0% for 2006, 39.5% for the
third quarter of 2005, and 39.3% for the first thirty-nine weeks
of 2005.
Net income Net income was
$32.6 million, or $0.61 per diluted share, for the
third quarter of 2006, versus net income of $26.1 million,
or $0.47 per diluted share, for the third quarter of 2005.
The previously discussed adoption of SFAS No. 123(R)
unfavorably impacted net income for the third quarter of 2006 by
$1.0 million, or $0.01 per diluted share.
Net income was $49.4 million, or $0.91 per diluted
share, for the first thirty-nine weeks of 2006, versus net
income of $42.1 million, or $0.75 per diluted share,
for the first thirty-nine weeks of 2005. The previously
discussed adoption of SFAS No. 123(R) unfavorably
impacted net income for the first thirty-nine weeks of 2006 by
$2.7 million, or $0.03 per diluted share.
Consolidated net income included net losses from the
Companys JimmyZ subsidiary of $1.6 million, or
$0.03 per diluted share, for the third quarter of 2006 and
$4.6 million, or $0.9 per diluted share, for the first
thirty-nine weeks of 2006. Consolidated net income included net
losses from the Companys JimmyZ subsidiary of
$1.5 million, or $0.03 per diluted share, for the
third quarter of 2005 and $3.3 million, or $0.6 per
diluted share, for the first thirty-nine 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 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 a revolving credit facility (the credit
facility) that provides for a $50.0 million base
borrowing availability, and can be increased to an aggregate of
$75.0 million if we so request (see note 6 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
October 28, 2006, we had working capital of
$208.5 million, cash and cash equivalents of
$148.1 million, short-term investments of
$55.2 million, and no third party debt outstanding.
The following table sets forth our cash flows for the period
indicated:
|
|
|
|
|
|
|
|
|
|
|
39 weeks ended
|
|
|
|
October 28,
|
|
|
October 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In Thousands)
|
|
|
Net cash provided by operating
activities
|
|
$
|
65,094
|
|
|
$
|
35,281
|
|
Net cash (used in) provided by
investing activities
|
|
|
(74,617
|
)
|
|
|
7,379
|
|
Net cash used in financing
activities
|
|
|
(47,571
|
)
|
|
|
(34,471
|
)
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
$
|
(57,094
|
)
|
|
$
|
8,189
|
|
|
|
|
|
|
|
|
|
|
Operating activities Cash flows from
operating activities, our primary form of liquidity on a
full-year basis, increased by $29.8 million for the first
thirty-nine weeks of 2006, versus the first thirty-nine weeks of
2005. Cash provided by net income, as adjusted for non-cash
items, increased by $16.6 million for the first thirty-nine
weeks of 2006, versus the third quarter of 2005. Cash used for
merchandise inventories, net of accounts payable, decreased by
$13.5 million. Merchandise inventories decreased by 5% on a
square foot basis, as of October 28, 2006, as
17
compared to October 29, 2005. Merchandise inventories
increased by 17% on a square foot basis, as of October 29,
2005, as compared to October 30, 2004. In accordance with
the provisions of SFAS No. 123(R), excess tax benefits
from stock options of $7.0 million were reported as a
financing activity for the first thirty-nine weeks of 2006. For
the first thirty-nine weeks of 2005, tax benefits from stock
options of $4.3 million were reported as an operating
activity.
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 through 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. We opened 70 new Aeropostale stores through
October 28, 2006, and we plan to open five additional
Aeropostale stores during the fourth quarter of 2006. In
addition, we have remodeled 15 existing Aeropostale stores
during 2006. Capital expenditures for the full year of 2006 are
expected to approximate $49 million for these new and
remodeled stores, to update our existing
point-of-sale
systems, and for certain other information technology
investments.
We had $55.2 million in short-term investments at
October 28, 2006, 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. 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 sheets.
Financing activities and capital
resources We repurchase our common stock
from time to time under a stock repurchase program. In June
2006, our Board of Directors approved a $100 million
increase in repurchase authorization under the program, bringing
total repurchase availability, since inception of the program,
to $250 million. 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, opening and closing of our stock
trading window, and liquidity and capital resource requirements
going forward. We repurchased 308,000 shares of our common
stock for $8.3 million during the third quarter of 2006 and
1,069,000 shares of our common stock for $24.4 million
during the third quarter of 2005. We repurchased
2,139,400 shares of our common stock for $56.0 million
during the thirty-nine weeks of 2006 and 1,454,000 shares
of our common stock for $35.6 million during the first
thirty-nine weeks of 2005. We repurchased 6,687,650 shares
for $164.1 million since the inception of the repurchase
program through October 28, 2006, with $85.9 million
of repurchase availability remaining under the program as of
October 28, 2006.
We have a credit facility that provides for a $50.0 million
base borrowing availability, and can be increased to an
aggregate of $75.0 million if we so request (see
note 6 to the notes to unaudited condensed consolidated
financial statements for a further description). At
October 28, 2006, we had no amounts outstanding under the
credit facility, and no stand-by or commercial letters of credit
issued under the credit facility. As of October 28, 2006,
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.
In accordance with the provisions of SFAS No. 123(R),
excess tax benefits from stock options of $6.9 million were
reported as a financing activity for the third quarter of 2006.
Previously, all tax benefits from stock options were reported as
an operating activity.
18
Contractual
Obligations
The following table summarizes our contractual obligations as of
October 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
|
|
|
|
Balance of
|
|
|
In 2007
|
|
|
In 2009
|
|
|
After
|
|
|
|
Total
|
|
|
2006
|
|
|
and 2008
|
|
|
and 2010
|
|
|
2010
|
|
|
|
(In Thousands)
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment agreements
|
|
$
|
1,496
|
|
|
$
|
569
|
|
|
$
|
927
|
|
|
$
|
|
|
|
$
|
|
|
Sponsorship and advertising
contracts
|
|
|
2,910
|
|
|
|
300
|
|
|
|
1,886
|
|
|
|
724
|
|
|
|
|
|
Operating leases
|
|
|
542,842
|
|
|
|
18,824
|
|
|
|
149,385
|
|
|
|
139,907
|
|
|
|
234,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
547,248
|
|
|
$
|
19,693
|
|
|
$
|
152,198
|
|
|
$
|
140,631
|
|
|
$
|
234,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 fiscal 2005,
or variable costs such as maintenance, insurance and taxes,
which represented approximately 56% of minimum lease obligations
in fiscal 2005. Our open purchase orders are cancelable without
penalty and are therefore not included in the above table.
On December 5, 2006, we entered into a $24.2 million
purchase commitment with South Bay Apparel, Inc. through
July 2, 2007, as discussed in note 11 to the notes to
the unaudited condensed consolidated financial statements. We
have not provided any financial guarantees, other than the
unauthorized guaranty that was revoked and terminated on
December 5, 2006, as discussed in note 11 to the notes
to the unaudited condensed consolidated financial statements.
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 October 28, 2006,
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 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 28, 2006.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
At October 28, 2006, 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.
19
|
|
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 2006 third quarter,
ended October 28, 2006, 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.
(b) Changes in internal controls: During
the period covered by this quarterly report, there have been no
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.
PART II
OTHER INFORMATION
|
|
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.
Cautionary
Note Regarding Forward-Looking Statements
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 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;
|
|
|
|
changes in general economic conditions and consumer spending
patterns;
|
20
|
|
|
|
|
the timing of promotional events; and
|
|
|
|
weather conditions.
|
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.
If we
were 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. Accordingly, we produce casual, comfortable apparel, a
majority of which displays either the
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. 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.
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 to
manufacture 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 from which we receive our products. 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 fiscal 2005, we sourced approximately 33% of our merchandise
from our top three suppliers; one company supplied approximately
15% of our merchandise, and two others each supplied
approximately 9% of our merchandise. In addition, approximately
67% of our merchandise was directly sourced from our top ten
suppliers, and one company acted as our agent with respect to
the sourcing of approximately 21% of our merchandise. Our
relationships with our suppliers generally are not on a
long-term contractual basis and do not provide assurances on a
long-term basis as to adequate supply, quality or acceptable
pricing. Most of our suppliers could discontinue selling to us
at any time. If one or more of our significant suppliers were to
sever their relationship with us, we could be unable to obtain
replacement products in a timely manner, which could have a
material adverse effect on our sales, financial condition and
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
21
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
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 105 Aéropostale
and 14 JimmyZ stores in fiscal 2005, 103 Aéropostale
stores in fiscal 2004, and 95 Aéropostale stores in fiscal
2003. Additionally, we have opened 70 new Aeropostale stores
during the first thirty-nine weeks of fiscal 2006, and plan to
open five additional Aeropostale stores during the fourth
quarter of fiscal 2006. 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.
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 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, our
business could be adversely affected. In addition,
Mr. Geiger maintains many of our vendor relationships, and
the loss of Mr. Geiger could negatively impact present
vendor relationships.
Failure
of new business concepts would have an effect on our results of
operations.
We expect that the introduction of new brand concepts and other
business opportunities will play an important role in our
overall growth strategy. In particular, we have and will
continue to open our JimmyZ brand stores. The operation of
the JimmyZ store is subject to numerous risks, including
unanticipated operating problems; lack of prior experience; lack
of customer acceptance; new vendor relationships; competition
from existing and new
22
retailers; and could be a 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
will achieve sales and profitability levels justifying our
investments in this business. If those sales levels are not
achieved we may be forced to recognize impairments in the
carrying value of our investments, which would have a negative
impact on our results of operations.
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.
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.
23
We rely
on a third party to manage the warehousing and order fulfillment
for our
E-Commerce
business.
We rely on one third party, GSI Commerce, pursuant to an
E-Commerce
Agreement, to warehouse all of the inventory sold through our
e-commerce
website, as well as to fulfill all of our
e-commerce
sales to our customers. Any significant interruption in the
operations of GSI Commerce, of which we have no control, would
have a material adverse effect on our
e-commerce
business.
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®
and, to a lesser extent,
AERO®
are integral to our logo-driven design strategy. We have
obtained a federal registration of the
AÉROPOSTALE®
trademark in the United States and 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
also believe that the JIMMYZ and Woody Car Design marks
are an important part of our growth strategy and expansion of
our business. We have acquired federal registrations in the
United States and in Canada and have 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.
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.
24
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
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Our Board of Directors has authorized a share repurchase program
of our outstanding common stock aggregating in the amount of
$250.0 million since inception. Our purchases of treasury
stock for the third quarter ended October 28, 2006 pursuant
to the share repurchase program, and remaining repurchase
availability at that date, were as follows:
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Total Number of
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Approximate Dollar
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Total
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Shares Purchased
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Value of Shares
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Number of
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as Part of
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that May Yet Be
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Shares (or
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Average
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Publicly
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Purchased Under
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Units)
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Price Paid
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Announced Plans
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the Plans or
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Period
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Purchased
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per Share
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or Programs
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Programs
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(In Thousands)
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August 2006
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50,000
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$
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25.55
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50,000
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$
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92,937
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September 2006
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140,000
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$
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25.72
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140,000
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$
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89,337
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October 2006
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118,000
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$
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29.43
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118,000
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$
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85,864
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Total
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308,000
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$
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26.95
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308,000
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Item 3.
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Defaults
Upon Senior Securities
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Not applicable.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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Not applicable.
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Item 5.
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Other
Information
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Not applicable.
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Exhibit
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No.
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Description
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3
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.1
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Form of Amended and Restated
Certificate of Incorporation.
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3
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.2
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Form of Amended and Restated
By-Laws.
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4
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.1
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Specimen Common Stock
Certificate.
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4
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.2
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Stockholders Agreement,
dated as of August 3, 1998, by and among MSS-Delaware,
Inc., MSS Acquisition Corp. II, Federated Specialty Stores,
Inc., Julian R. Geiger, David R. Geltzer and John S. Mills.
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10
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.1
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Aéropostale, Inc. 1998 Stock
Option Plan.
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10
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.2
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Aéropostale, Inc. 2002
Long-Term Incentive Plan.
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10
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.3
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Management Services Agreement,
dated as of July 31, 1998, between MSS-Delaware, Inc. and
MSS Acquisition Corp. II.
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10
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.4
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Loan and Security Agreement, dated
July 31, 1998 between Bank Boston Retail Finance Inc., as
agent for the lenders party thereto (the Lenders),
the Lenders and MSS-Delaware, Inc.
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10
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.5
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First Amendment to Loan and
Security Agreement, dated November 8, 1999, by and between
Bank Boston Retail Finance Inc., as agent for the Lenders, the
Lenders and MSS-Delaware, Inc.
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10
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.6
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Second Amendment to Loan and
Security Agreement, dated May 2, 2002, by and between Fleet
Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as agent
for the Lenders, the Lenders and Aéropostale, Inc. (f/k/a
MSS-Delaware, Inc.).
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10
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.7
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Third Amendment to Loan and
Security Agreement, dated June 13, 2001, by and between
Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as
agent for the Lenders, the Lenders and Aéropostale, Inc.
(f/k/a MSS-Delaware, Inc.).
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10
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.8
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Fourth Amendment to Loan and
Security Agreement, dated February 2, 2002, by and between
Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as
agent for the Lenders, the Lenders and Aéropostale, Inc.
(f/k/a MSS-Delaware, Inc.).
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10
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.9
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Sublease Agreement, dated
February 5, 2002, between the United States Postal Services
and Aéropostale, Inc.
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25
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Exhibit
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No.
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Description
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10
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.10
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Merchandise Servicing Agreement,
dated April 1, 2002, between American Distribution, Inc.
and Aeropostale, Inc.
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10
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.11
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Interim Merchandise Servicing
Agreement, dated as of February 11, 2002, by and between
American Consolidation Inc. and Aéropostale, Inc.
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10
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.12
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Sourcing Agreement, dated
July 22, 2002, by and among Federated Department Stores,
Inc., Specialty Acquisition Corporation and Aéropostale,
Inc.
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10
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.13
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Fifth Amendment to Loan and
Security Agreement, dated April 15, 2002, by and between
Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as
agent for the Lenders, the Lenders and Aéropostale, Inc.
(f/k/a MSS-Delaware, Inc.).
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10
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.14
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Amendment No. 1 to
Stockholders Agreement, dated April 23, 2002, by and
among Aéropostale, Inc., Bear Stearns MB 1998-1999
Pre-Fund, LLC and Julian R. Geiger.
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10
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.15
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Employment Agreement, dated as of
February 1, 2002, between Aéropostale, Inc. and Julian
R. Geiger.
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10
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.16
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Employment Agreement, dated
February 1, 2002, between Aéropostale, Inc. and
Christopher L. Finazzo.
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10
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.18
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Fifth Amendment to Loan and
Security Agreement, dated October 7, 2003, by and between
Fleet Retail Finance Inc. (f/k/a Bank Boston Retail Finance), as
agent for the Lenders, the Lenders and Aéropostale, Inc.
(f/k/a MSS-Delaware, Inc).
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10
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.19
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Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and Julian
R. Geiger.
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10
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.20
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Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and
Christopher L. Finazzo.
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10
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.22
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Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and
Michael J. Cunningham.
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10
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.23
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Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and Thomas
P. Johnson.
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10
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.24
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Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and
Olivera Lazic-Zangas.
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10
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.25
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Amendment No. 1, dated as of
April 11, 2005, to Employment Agreement, dated as of
February 1, 2004, between Aéropostale, Inc. and Julian
R. Geiger.
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31
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.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
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.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
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.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
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.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.*
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* |
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Filed herewith. |
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Incorporated by reference to the Registration Statement on
Form S-1,
originally filed by Aéropostale, Inc. on March 8, 2002
(Registration
No. 333-84056). |
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Incorporated by reference to the Registrants Annual Report
on 10-K, for
the fiscal year ended February 1, 2003 (File No. 001-31314). |
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Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q,
for the quarterly period ended November 1, 2003 (File
No. 001-31314). |
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Incorporated by reference to the Registrants Annual Report
on
Form 10-K,
for the fiscal year ended January 31, 2004 (File
No. 001-31314). |
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Incorporated by reference to the Registrants Annual Report
on
Form 10-K,
for the fiscal year ended January 28, 2005 (File
No. 001-31314). |
26
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.
Aeropostale, Inc.
Julian R. Geiger
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Michael
J. Cunningham
Michael J. Cunningham
Executive Vice President Chief Financial
Officer
(Principal Financial Officer)
Dated: December 7, 2006
27