UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark
One)
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R
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the Fiscal Year Ended January 31, 2009
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or
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£
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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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No.
31-1443880
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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112 West
34th Street, 22nd floor
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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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Registrant’s
telephone number, including area code:
(646) 485-5410
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, $0.01 par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes R No £
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes £ No R
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, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes R No
£
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filed”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer R
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Accelerated
filer £
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Non-accelerated
filer £
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Smaller
reporting company £
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes £ No R
The
aggregate market value of voting stock held by non-affiliates of the registrant
as of August 2, 2008 was $2,126,536,259.
67,001,545 shares
of Common Stock were outstanding at March 20, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement, to be filed with the Securities
and Exchange Commission within 120 days after the end of the registrant’s
fiscal year covered by this Annual Report on Form 10-K, with respect to the
Annual Meeting of Stockholders to be held on June 18, 2009, are
incorporated by reference into Part III of this Annual Report on
Form 10-K. This report consists of 53 sequentially numbered pages. The
Exhibit Index is located at sequentially numbered
page 51.
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INC.
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As used in this Annual Report on
Form 10-K, unless the context otherwise requires, all references to “we”,
“us”, “our”, “Aéropostale” or the “Company’ refer to Aéropostale, Inc., and its
subsidiaries. The term
“common stock” means our common stock, $0.01 par value. Our website
is located at www.aeropostale.com (this and any other references in this Annual
Report on Form 10-K to Aéropostale.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 Annual Report on Form 10-K).
On our website, we make available, as soon as reasonably practicable after
electronic filing with the Securities and Exchange Commission, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, annual Proxy
filings and current reports on Form 8-K, and any amendments to those
reports. All of these reports are provided to the public free of
charge.
Cautionary Note Regarding
Forward-Looking Statements
This
Annual Report on Form 10-K 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 our 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 Part I, Item 1A
should be read in connection with evaluating our 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.
Overview
Aéropostale,
Inc., a Delaware corporation, originally incorporated as MSS-Delaware, Inc. on
September 1, 1995 and later changed to Aéropostale, Inc. on February 1, 2000, is
a mall-based specialty retailer of casual apparel and accessories. We design,
market and sell our own brand of merchandise principally targeting 14 to
17 year-old young women and young men. We also sell Aéropostale
merchandise through our e-commerce website, www.aeropostale.com. As of
January 31, 2009, we operated 914 stores, consisting of 874 Aéropostale
stores in 48 states and Puerto Rico, 29 Aéropostale stores in Canada, and 11
Jimmy’Z stores in 10 states. We plan to close all of the Jimmy’Z
stores by the end of the second quarter of fiscal 2009 (see Note 3 to
the Notes to Consolidated Financial Statements for a further
discussion).
Our
Aéropostale concept provides the customer with a focused selection of
high-quality, active-oriented, fashion and fashion basic merchandise at
compelling values. We maintain control of our proprietary brands by
designing and sourcing all of our merchandise. Our Aéropostale products are sold
only at our stores and online through our e-commerce website, www.aeropostale.com.
We strive to create a fun, high-energy shopping experience through the use of
creative visual merchandising, colorful in-store signage, popular music and an
enthusiastic well-trained sales force. Our average Aéropostale store is
generally smaller than that of our mall-based competitors. We believe
this enables us to achieve higher sales productivity and project a sense of
greater action and excitement in the store.
The
Aéropostale brand was established by R.H. Macy & Co., Inc., as a
department store private label initiative, in the early 1980’s targeting men in
their twenties. Macy’s subsequently opened the first mall-based Aéropostale
specialty store in 1987. Over the next decade, Macy’s, and then Federated
Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100
stores. In August 1998, Federated sold its specialty store division to our
management team and Bear Stearns Merchant Banking. In May of 2002, Aéropostale
management took us public through an initial public offering and listed our
common stock on the New York Stock Exchange.
Our
fiscal year ends on the Saturday nearest to January 31. Fiscal 2008 was the
52-week period ended January 31, 2009, fiscal 2007 was the 52-week period ended
February 2, 2008 and fiscal 2006 was the 53-week period ended
February 3, 2007. Fiscal 2009 will be the 52-week period ending
January 30, 2010.
Growth
Strategy
Continue to open new Aéropostale
stores. We consider our merchandise in our stores as having
broad appeal that continues to provide us with new store expansion
opportunities. Over the last three fiscal years we opened 251 new Aéropostale
stores. We plan to continue our growth by opening a total of approximately 40
new Aéropostale stores during fiscal 2009, which will include approximately 15
new Aéropostale stores in Canada. We plan to open stores both in
markets where we currently operate stores, and in new markets. (see the section
“Stores — Store design and environment”
below).
New Concept. We
have developed a new retail store concept called “P.S. from
Aéropostale”. Our new concept will offer casual clothing and
accessories focusing on elementary school children between the ages of 7 and
12. Our new brand will draw from the core competencies of
Aéropostale, offering the customer trend-right merchandise at compelling
values. The innovative store format will strive to be a fun, playful
and inviting shopping experience for both the parent and child. The
first P.S. from Aéropostale store is planned to open during the second quarter
of fiscal 2009. In addition, we will be launching an e-commerce
website at www.ps4u.com shortly
thereafter. We plan to open approximately 10 P.S. from Aéropostale
stores during fiscal 2009.
Enhance our brand and increase our
store productivity. We seek to capitalize on the success of
our core Aéropostale brand, while continuing to enhance our brand recognition
through in-store as well as external marketing initiatives.
We seek
to generate comparable store sales growth by increasing net sales per average
square foot, increasing average unit retail and increasing transactions. We
expect to continue employing our promotional pricing strategies, while also
identifying and capitalizing upon developing trends in the market.
E-Commerce. We
launched our Aéropostale e-commerce business in May 2005. The Aéropostale web
store is accessible at our website, www.aeropostale.com. A third party provides
fulfillment services for our e-commerce business, including warehousing our
inventory and fulfilling our customers’ sales orders. We purchase, manage and
own the inventory sold through our website and we recognize revenue from the
sale of these products when the customer receives the merchandise.
International
Licensing. During 2008, we signed our first international
licensing agreement. Under that agreement, as licensor we will receive
guaranteed minimum annual royalty payments from the licensee throughout the term
of the agreement, as well as certain support and administrative fees. The
licensee expects to open a minimum of three Aéropostale retail stores in the
Dubai region during fiscal 2009, and additional stores during the term of the
license agreement. We assume no inventory risk on the Aéropostale
merchandise sold in licensee’s stores and we do not own or lease the underlying
real estate where the stores operate. In addition, our international
licensing agreement contains other customary terms and conditions governing our
business relationship with the licensee. We will continue to evaluate
other international licensing opportunities on a periodic basis.
Stores
Existing
stores. We locate our stores primarily in shopping malls,
outlet centers and, to a much lesser degree, lifestyle and off-mall shopping
centers, all located in geographic areas with the highest possible
concentrations of our target customers. We generally locate our
stores in mall locations near popular teen gathering spots, such as
food courts and other teen-oriented retailers. As of January 31,
2009, we operated 903 stores in the following 48 U.S. states, Puerto Rico
and four Canadian provinces. Additionally, as of January 31, 2009, we
operated 11 Jimmy’Z stores in 10 states. We have subsequently decided
to close all of those Jimmy’Z stores and anticipate those closures to be
completed by the end of the second quarter of fiscal 2009 (see Note 3 to the
Notes to Consolidated Financial Statements for a further discussion).
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United States
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Number
of
Aéropostale
Stores
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Alabama
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16
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Arkansas
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8
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Arizona
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16
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California
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74
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Colorado
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14
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Connecticut
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10
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Delaware
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4
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Florida
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54
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Georgia
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26
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Idaho
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5
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Illinois
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32
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Indiana
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22
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Iowa
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12
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Kansas
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8
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Kentucky
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10
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Louisiana
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15
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Massachusetts
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26
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Maryland
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19
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Maine
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3
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Michigan
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30
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Minnesota
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16
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Mississippi
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8
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Missouri
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17
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Montana
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3
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North
Carolina
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25
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North
Dakota
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4
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Nebraska
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5
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New
Hampshire
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7
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New
Jersey
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23
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New
Mexico
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3
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Nevada
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7
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New
York
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47
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Ohio
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37
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Oklahoma
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7
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Oregon
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7
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Pennsylvania
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54
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Puerto
Rico
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3
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Rhode
Island
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2
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South
Carolina
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15
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South
Dakota
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2
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Tennessee
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22
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Texas
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71
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Utah
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12
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Vermont
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2
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Virginia
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27
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Washington
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20
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West
Virginia
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6
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Wisconsin
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17
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Wyoming
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1
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Canada
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Alberta
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1
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British
Columbia
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2
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New
Brunswick
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1
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Ontario
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25
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Total
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903
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The
following table highlights the number of Aéropostale stores opened and closed
since the beginning of fiscal 2006:
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Stores
Opened
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Stores
Closed
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Total
Number of
Stores at End
of
Period
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Fiscal
2006
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74
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3
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728
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Fiscal
2007
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88
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2
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814
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Fiscal
2008
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89
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—
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903
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Store design and
environment. We launched our new Aéropostale store design
during fiscal 2006, and we currently operate 204 stores in this format that
average approximately 3,600 square feet. We design and build all of our new
Aéropostale stores, as well as our existing store remodels, in this
format. We design our stores in an effort to create an energetic
shopping environment, featuring powerful in-store promotional signage, creative
visuals and popular music. The enthusiasm of our well-trained associates is
integral to our store environment. Our stores feature display windows that
provide high visibility for mall traffic. Our strategy is to create fresh and
exciting merchandise presentations by updating our floor sets numerous times
throughout the year. Visual merchandising directives are initiated at the
corporate level, in order to maintain consistency throughout all of our
stores.
Store
management. Our Aéropostale stores are organized by region and
further broken down into districts. A regional manager manages each
of our 12 regions and each region encompasses approximately eight to 10
districts. Each district is managed by a district manager and encompasses
approximately seven to 10 individual stores. Our corporate headquarters directs
the merchandise assortments, merchandise pricing, store layout, inventory
management and in-store visuals for all of our stores.
Expansion opportunities and store
site selection. We focus on opening new stores in an effort to
penetrate further the existing markets we are already in, as well as enter new
markets. We plan to continue increasing our store base during fiscal 2009 by
opening approximately 40 new Aéropostale stores, including approximately 15 new
stores in Canada and our first 10 P.S. from Aéropostale stores (see the section
“Growth Strategy” above).
In
selecting a specific store site, we generally target high traffic locations in
malls, outlet centers and, to a much lesser degree, lifestyle and off-mall
shopping centers, with suitable demographics and favorable lease economics. As a
result, we tend to locate our stores in malls in which comparable teen-oriented
retailers have performed well. A primary site evaluation criteria includes
average sales per square foot, co-tenancies, traffic patterns and occupancy
costs.
We have
implemented our store format across a wide variety of mall classifications and
geographic locations. For new Aéropostale stores opened in fiscal 2008 under our
new store design, our average net investment was approximately $505,000 per
store location, which included capital expenditures adjusted for landlord
contributions and initial inventory at cost, net of payables (see the
section “Store design and
environment” above for a further discussion).
Aéropostale
stores in the new format which opened in fiscal 2007 and fiscal 2006 achieved,
during their first twelve months of their operations, average net sales of
approximately $1.7 million and net sales of $456 per average square
foot.
Pricing
We
believe that a key component of our success is our ability to understand what
our customers want and what they can afford. Our merchandise, which we believe
is of comparable quality to that of our primary competitors, is generally priced
lower than our competitors’ merchandise. We conduct promotions in our stores
throughout the year generally lasting anywhere from two to four weeks in
length.
Design
and Merchandising
Our
Aéropostale design and merchandising teams focus on designing merchandise that
meets the demands of their core customers’ lifestyles. We maintain separate
design and merchandising groups for each of our brands and within those brands,
for each of the young women’s and young men’s product lines.
Design. We offer a
focused collection of apparel, including graphic t-shirts, tops, bottoms,
sweaters, jeans, outerwear and accessories. Our “design-driven,
merchant-modified” philosophy, in which our designers’ visions are refined by
our merchants’ understanding of the current market for our products, helps to
ensure that our merchandise styles reflect the latest trends while not becoming
too fashion-forward for our customers’ tastes. Much of our merchandise features
our brands’ logos. We believe that our Aéropostale logo apparel appeals to our
young customers and reinforces our brand image.
Merchandising and
Planning. Our merchandising organization, together with our
planning organization, determines the quantities of units needed for each
product category. By monitoring sales of each style and color and employing our
flexible sourcing capabilities, we are able to adjust our merchandise
assortments to capitalize upon emerging trends.
Sourcing
We seek
to employ a sourcing strategy that expedites our speed to market and allows us
to respond quickly to our customers’ preferences. We believe that we have
developed strong relationships with our vendors, some of who rely upon us for a
significant portion of their overall business.
During
fiscal 2008, we sourced approximately 76% of our merchandise from our top five
merchandise vendors. Most of our vendors maintain sourcing offices in
the United States, with the majority of their production factories located in
Asia, Central America and the United States. In an effort to minimize
currency risk, all payments to our vendors and sourcing agents are made in
U.S. dollars. We engage a third party independent contractor to visit the
production facilities that supply us with 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 fair trade and
business practices.
During
fiscal 2007, we ceased doing business with South Bay Apparel Inc., previously
one of our largest suppliers of graphic T-shirts and fleece. We have
replaced this business both with new vendors and our existing vendor base (see
Note 4 to the Notes to Consolidated Financial Statements for a further
discussion).
Marketing
and Advertising
We
utilize numerous initiatives to increase our brand recognition and communicate
our merchandise assortment. We view our stores as the primary means to
communicate our message and provide our brand experience. Our marketing efforts
are focused on in-store communications, promotions and internal as well as
external advertising. We expand, test and modify our marketing efforts based on
focus groups, surveys and consumer feedback.
We
believe that the enthusiasm and commitment of our store-level employees are key
elements in enhancing our brand with our target customers. We also view the use
of our logo on our merchandise as a means for expanding our brand awareness and
visibility. We market in-store with large images in the store-front windows and
at the checkout area, information alongside product displays and other touch
points such as shopping bags. We also invest in select external advertising
during key selling periods. Our advertisements appear in publications and in
malls and on the radio on a regional basis. Periodically, we also
partner with select third parties such as magazines, television shows and
musical bands, to create marketing programs which we believe will be appealing
to our customers.
Our
website, www.aeropostale.com supports all of our internet marketing and
promotional initiatives and also offers a large portion of our merchandise
assortment for purchase. We maintain a database of our customers and send emails
and distribute information on special offers and promotions on a frequent
basis.
Distribution
We
maintain two distribution centers to process merchandise and to warehouse
inventory needed to replenish our stores. We lease a
315,000 square foot distribution center facility in South River, New
Jersey. We also lease a second distribution facility in Ontario, California with
360,000 square feet of space.
The
staffing and management of both distribution facilities are outsourced to a
third party provider that operates each distribution facility and processes our
merchandise. This third party provider employs personnel represented by a labor
union. There have been no work stoppages or disruptions since the inception of
our relationship with this third party provider in 1991, and we believe that the
third party provider has a good relationship with its employees. In addition, we
outsource the shipment of our merchandise through third party transportation
providers. These third parties ship our merchandise from our distribution
facilities to our stores.
We
continue to invest in systems and automation to improve processing efficiencies,
automate functions that were previously performed manually and to support our
store growth. Our distribution facilities utilize automated sortation materials
handling equipment to receive, process and ship goods to our stores. These
facilities also serve our other warehousing needs, such as storage of new store
merchandise, floor set merchandise and packaging supplies.
Currently,
all of our products destined for our stores in Canada are first shipped to the
United States and processed through our distribution centers. We have
engaged a third party to assist us in recapturing certain U.S. duties and
tariffs which we paid on these goods. During fiscal 2009, we
anticipate entering into an agreement with a third party distribution center in
Canada. This third party distribution center will receive, process
and warehouse our Canadian merchandise. Unlike in the United States
however, we will not be the only company with product in this
warehouse. Once this Canadian distribution center is in place and
receiving our product directly from our vendors, there will be no need to
continue our contractual relationship with the third party which is attempting
to assist us in recapturing U.S. duty and tariffs.
Information
Systems
Our
management information systems provide a full range of retail, financial and
merchandising applications. We utilize industry specific software systems to
provide various functions related to point-of-sale, inventory management, supply
chain, planning and replenishment, and financial reporting. We
continue to invest in technology to align our systems with our business
requirements and to support our continuing growth. For example, we
are currently implementing a new allocation system and have completed the
implementation of a new financial accounting system. We plan to
continue to invest strategically in our infrastructure in the
future.
Trademarks
We own,
through our wholly owned subsidiary, Aéropostale West, Inc., a Delaware
corporation, federal trademark registrations in the U.S. Patent and
Trademark Office for our principal marks AÉROPOSTALE®,
AÉRO®, 87® and
other related marks for clothing, a variety of accessories, including
sunglasses, belts, socks and hats, and as a service mark for retail clothing
stores, as well as state registrations for these marks. We also have certain
registrations pending for trademarks and service marks for clothing, retail
stores and online services. Additionally, we have applied for or have already
obtained a registration for the AÉROPOSTALE® and
related marks in over 60 foreign countries. We plan to continue this
focus on expanding our international registrations of our marks in the
future.
During
the second quarter of fiscal 2009, we will launch our new store concept P.S.
FROM AÉROPOSTALE™ and have applied for trademark registrations for P.S. FROM
AÉROPOSTALE™ and variations thereof, for clothing, accessories, retail stores
and online services.
We
continue to maintain certain registrations of our JIMMY’Z® brand
and related marks in the United States for clothing and related goods and
services.
We regard
our trademarks and other proprietary intellectual property as valuable assets of
the Company that we continually maintain and protect.
Competition
The teen
apparel market is highly competitive. We compete with a wide variety of
retailers including other specialty stores, department stores, mail order
retailers and mass merchandisers. Specifically, we compete with other teen
apparel retailers including, but not limited to, American Eagle Outfitters®,
Hollister®,
Old Navy®, Pacific
Sunwear®, and
Tween Brands®. Stores
in our sector compete primarily on the basis of design, price, quality, service
and selection.
Many of
our competitors are considerably larger and have substantially greater
financing, marketing, and other resources. We cannot assure you that we will be
able to compete successfully in the future, particularly in geographic locations
that represent new markets for us.
Employees
As of
January 31, 2009, we employed 3,639 full-time and
11,050 part-time employees. We employed 621 of our employees at our
corporate offices and in the field, and 14,068 at our store locations. The
number of part-time employees fluctuates depending on our seasonal needs. None
of our employees are represented by a labor union and we consider our
relationship with our employees to be good.
Seasonality
Our
business is highly seasonal, and historically we have realized a significant
portion of our sales, net income and cash flows in the second half of the year,
attributable to the impact of the back-to-school selling season in the third
quarter, and the holiday selling season in our fourth quarter. As a result, our
working capital requirements fluctuate during the year, increasing in mid-summer
in anticipation of the third and fourth quarters. Our business is
also subject, at certain times, to calendar shifts which may occur during key
selling times such as school holidays, Easter and regional fluctuations in the
calendar during the back-to-school selling season.
Available
Information
We
maintain an internet website, www.aeropostale.com, through which access is
available free of charge to our annual reports on Form 10-K, quarterly
reports on Form 10-Q, Proxy Statements and current reports on
Form 8-K, and all amendments of these reports filed, or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, after
they are filed with the Securities and Exchange Commission.
Our
Corporate Governance Guidelines and the charters for our Audit Committee,
Nominating and Corporate Governance Committee and Compensation Committee may
also be found on our internet website at www.aeropostale.com. In addition, our
website contains the Charter for our Lead Independent Director and Code of
Business Conduct and Ethics, which is our code of ethics and conduct for our
directors, officers and employees. Any waivers to our Code of Business Conduct
and Ethics will be promptly disclosed on our website.
In fiscal
2008, our Chief Executive Officer certified, in accordance with
section 303.12(a) of the NYSE Listed Company Manual, that he was not aware
of any violation by us of the NYSE’s corporate governance listing standards as
of the date of such certification.
Cautionary
Note Regarding Forward-Looking Statements
This
Annual Report on Form 10-K 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 our 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 our 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:
Our
sales and operations may be adversely affected by unfavorable local, regional or
national economic conditions.
Our
business is sensitive to consumer spending patterns and preferences. Various
economic conditions affect the level of disposable income consumers have
available to spend on the merchandise we offer; including employment, interest
rates, taxation, energy costs, the availability of consumer credit, consumer
confidence in future economic conditions and general business conditions.
Accordingly, consumer purchases of discretionary items and retail products,
including our products, may decline during recessionary periods and also may
decline at other times when disposable income is lower. Therefore, our growth,
sales and profitability may be adversely affected by unfavorable economic
conditions on a local, regional and/or national level. In addition, any
significant decreases in shopping mall traffic could also have a material
adverse effect on our results of operations.
If we were unable
to identify and respond to consumers’ fashion preferences, domestically and/or
internationally, in a timely manner,
our profitability would decline.
We may
not be able to keep pace with the rapidly changing fashion trends, both
domestically and/or internationally, and consumer tastes inherent in the teen
apparel industry. 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 changes in consumer preferences. Failure
to anticipate, identify or react appropriately to changes in styles, trends,
desired images or brand preferences could have a material adverse effect on our
sales, financial condition and results of operations.
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 could have a material adverse
effect on our results of operations. Additionally, the closure of a
significant number of shopping malls in which we have stores, either by a single
landlord with a large portfolio of malls, or by a number of smaller individual
landlords, may have a material adverse effect on our results of
operations.
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 historic levels
of comparable store sales. 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;
|
|
|
•
|
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 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for more information.
Foreign suppliers
manufacture most of our merchandise and the availability and costs of these products
may be negatively affected by risks associated with inflationary economic
conditions or international trade.
Trade
restrictions such as increased tariffs or quotas, or both, could affect the
importation of apparel in general and increase the cost and reduce the supply of
merchandise available to us. Much of our merchandise is sourced directly from
foreign vendors in Asia, Central America and Europe. In addition, many of our
domestic vendors maintain production facilities overseas. Global inflationary
economic conditions would likely increase the costs of manufacturing the goods
we sell in our stores. Any reduction in merchandise available
to us or any increase in its cost due to inflationary economic conditions or
tariffs, quotas or local political issues could have a material adverse effect
on our results of operations. If manufacturing costs were to rise significantly,
our business may be adversely affected.
We rely on a
small number of vendors to supply a significant amount of our merchandise.
During
fiscal 2008, we sourced approximately 76% of our merchandise from our top five
merchandise vendors. During fiscal 2007, we sourced approximately 69%
of our merchandise from our top five merchandise vendors. 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 may not be able to obtain replacement products in a
timely manner, which would have a material adverse effect on our sales,
financial condition and results of operations.
10
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, in turn, 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 and distribution 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.
|
There are
a finite number of suitable locations and malls within the United States and
Canada in which to locate our Aéropostale stores. Our inability to
open new stores successfully and/or penetrate new markets would have a material
adverse effect on our revenue and earnings growth. Additionally, as
we reach that maximum number of Aéropostale locations in North America, there
can be no assurance we will continue to locate additional suitable locations for
our Aéropostale stores, and as such, the future store growth of Aéropostale in
the United States and Canada will be adversely affected.
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. In fiscal 2008, we opened 72 Aéropostale stores in the
U.S. including Puerto Rico and 17 Aéropostale stores in Canada. In
fiscal 2007, we opened 76 Aéropostale stores in the U.S. and 12 Aéropostale
stores in Canada, and in fiscal 2006 we opened 74 Aéropostale stores in the
U.S. We expect to continue to open new stores in the future. We also
anticipate remodeling a portion of our existing Aéropostale store base at the
appropriate times. 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. There are however a finite number of
suitable locations and malls within the United States and Canada in which to
locate our Aéropostale stores. As we reach that maximum number of
locations, there can be no assurance we will continue to find additional
locations which are suitable for our Aéropostale stores, and as such, the future
store growth of Aéropostale in the United States and Canada will be adversely
affected.
Failure of new
business concepts would have a negative effect on our results of operations.
We expect
that the introduction of new brand concepts, such as the launch in fiscal 2009
of our new store brand concept P.S. from Aéropostale, as well as other new
business opportunities, such as international expansion, will play an
important role in our overall growth strategy. Our ability to succeed
in a new brand concept requires significant expenditures and management
attention. Additionally, any new brand is subject to certain risks including
customer acceptance, competition, product differentiation, the ability to
attract and retain qualified personnel, including management and designers,
diversion of management’s attention from our core Aéropostale business and the
ability to obtain suitable sites for new stores. Our experience with our Jimmy’Z
brand, which we have previously announced that we are closing, demonstrates that
there can be no assurance that new brands will grow or become
profitable.
Our business
could suffer as a result of a manufacturer’s inability to produce merchandise on
time and to our 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. In addition, if manufacturing costs were
to rise significantly, our business may be adversely affected.
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
manufacturer’s or sourcing agent’s labor practices from those generally accepted
as ethical in the United States, could interrupt, or otherwise disrupt the
shipment of finished products or damage our reputation. Any of these, in turn,
could have a material adverse effect on our 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.
Our
foreign sources of production may not always be reliable, which may result in a
disruption in the flow of new merchandise to our stores.
The large
majority of the merchandise we purchase is manufactured overseas. We do not have
any long-term merchandise supply contracts with our vendors and the imports of
our merchandise by our vendors are subject to existing or potential duties,
tariffs and quotas. We also face a variety of other risks generally associated
with doing business in foreign markets and importing merchandise from abroad,
such as: (i) political instability; (ii) enhanced security measures at
United States ports, which could delay delivery of goods; (iii) imposition
of new legislation relating to import quotas that may limit the quantity of
goods which may be imported into the United States from countries in a region
within which we do business; (iv) imposition of additional or greater
duties, taxes, and other charges on imports; (v) delayed receipt or
non-delivery of goods due to the failure of our vendors to comply with
applicable import regulations; and (vi) delayed receipt or non-delivery of
goods due to unexpected or significant port congestion at United States ports.
Any inability on our part to rely on our vendors and our foreign sources of
production due to any of the factors listed above could have a material adverse
effect on our business, financial condition and results of
operations.
The loss of the
services of key personnel could have a material adverse effect on our
business.
Our key
executive officers have substantial experience and expertise in the retail
industry and have made significant contributions to the growth and success of
our brands. The unexpected loss of the services of one or more of these
individuals could adversely affect us. Specifically, if we were to unexpectedly
lose the services of Julian R. Geiger, our Chairman and Chief Executive Officer;
Mindy C. Meads, our President and Chief Merchandising Officer; Thomas P.
Johnson, our Executive Vice President and Chief Operating Officer, or Michael J.
Cunningham, our Executive Vice President and Chief Financial Officer, our
business could be adversely affected. In addition, departures of any other
senior executives or key performers in the Company could also adversely affect
our operations.
A substantial
interruption in our information systems could have a material adverse
effect on
our business.
We depend
on the security and integrity of electronic data and our management information
systems for many aspects of our business. We may be materially adversely
affected if our management information systems are disrupted or compromised or
we are unable to improve, upgrade, maintain, and expand our management
information systems.
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. Additionally, our business is
also subject, at certain times, to calendar shifts which may occur during key
selling times such as school holidays, Easter and regional fluctuations in the
calendar during the back-to-school selling season.
We
rely on a third party to manage our distribution centers.
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 two distribution and
warehouse
facilities. 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 separate third party
transportation companies to deliver our merchandise from our warehouse to our
stores. Any failure by any of these third parties to respond adequately to our
warehousing and distribution needs would disrupt our operations and negatively
impact our profitability.
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 to host our e-commerce website, warehouse all
of the inventory sold through our e-commerce website, and fulfill all of our
e-commerce sales to our customers. Any significant interruption in the
operations of GSI Commerce, over which we have no control, could 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®,
AERO® and
87®
and our new store concept brand, P.S. FROM AÉROPOSTALE™ and
variations thereof, are integral to our logo-driven design strategy. We have
obtained federal registrations of or have pending applications for these
trademarks in the United States and have applied for or obtained registrations
in most foreign countries in which our vendors are located, as well as
elsewhere. We use these trademarks in many constantly changing designs and logos
even though we have not applied to register every variation or combination
thereof for adult clothing and related accessories. 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 our “AÉROPOSTALE” brand or our “P.S.
FROM AÉROPOSTALE” brand marks in all forms and categories 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.
There can
be no assurance that others will not try to block the manufacture, export or
sale of our products as a violation of their trademarks or other proprietary
rights. Other entities may have rights to trademarks that contain portions of
our marks or may have registered similar or competing marks for apparel and
accessories in foreign countries in which our vendors are located. There may
also be other prior registrations in other foreign countries of which we are not
aware. Accordingly, it may be possible, in those few foreign countries where we
were not been able to register our marks to enjoin the manufacture, sale or
exportation of AÉROPOSTALE or P.S. FROM AÉROPOSTALE 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.
Any disruption of
our distribution activities could have a material adverse impact on our
business.
We
currently operate two distribution facilities, one in South River, New Jersey,
and the other in Ontario, California. These distribution centers
manage collectively the receipt, storage, sortation, packaging and distribution
of our merchandise to all of our stores. Any significant interruption in the
operation of either of our distribution centers due to natural disasters,
accidents, system failures, economic and weather conditions, demographic and
population changes or other unforeseen events and circumstances could have a
material adverse effect on our business, financial condition and results of
operations.
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 and the associated heightened security measures
and military actions in response to acts of terrorism has disrupted commerce and
has intensified uncertainties in 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, or any other unforeseen interruption of commerce,
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.
None
We lease
all of our store locations. Most of our stores are located in shopping malls
throughout the U.S. and Canada. Most of our store leases have a term of ten
years and require us to pay additional rent based on specified percentages of
sales after we achieve specified annual sales thresholds. Generally, our store
leases do not contain extension options. Our store leases typically include a
pre-opening period of approximately 60 days that allows us to take
possession of the property to construct the store. Typically rent payment
commences when the stores open. We recognize rent expense in our consolidated
financial statements on a straight-line basis over the non-cancelable term of
each individual underlying lease, commencing when we take possession of the
property. Generally, our leases allow for termination by us after a certain
period of time if sales at that site do not exceed specified
levels.
We lease
89,000 square feet of office space at 112 West 34th Street in New
York, New York. The facility is used as our corporate headquarters and for our
design, sourcing and production teams. This lease expires in 2016.
We also
lease 40,000 square feet of office space at 201 Willowbrook Boulevard in
Wayne, New Jersey. This facility is used as administrative offices for finance,
operations and information systems personnel. This lease expires in 2012, but
provides us with a 5 year option to extend at the end of the initial
term.
In
addition, we lease a 315,000 square foot distribution and warehouse
facility in South River, New Jersey. This lease expires in 2016. We also lease a
second 360,000 square foot distribution facility in Ontario, California.
This lease expires in 2015. These facilities are used to warehouse
inventory needed to replenish and back-stock all of our stores, as well as to
serve our general warehousing needs.
On
January 15, 2008, we learned that the Securities and Exchange Commission
(the “SEC”) had issued a formal order of investigation with respect to matters
arising from those events disclosed in our Form 8-K, dated November 8,
2006, which resulted from the activities of Christopher L. Finazzo, our former
Executive Vice President and Chief Merchandising Officer. The SEC’s
investigation is a non-public, fact-finding inquiry to determine whether any
violations of law have occurred. We are cooperating fully with the SEC in its
investigation.
We are
also 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 of operations or cash flows.
No
matters were submitted to a vote of our shareholders during the fourth quarter
of the fiscal year covered by this report.
Our
common stock is traded on the New York Stock Exchange under the symbol “ARO”.
The following table sets forth the range of high and low sales prices of our
common stock as reported on the New York Stock Exchange since February 4,
2007. The stock prices below have been revised to reflect a
three-for-two stock split effected in August 2007.
|
Market Price
|
||||||||
|
High
|
Low
|
|||||||
| Fiscal 2008 | ||||||||
|
4th quarter
|
$ | 24.18 | $ | 12.75 | ||||
|
3rd quarter
|
36.79 | 20.76 | ||||||
|
2nd quarter
|
35.78 | 30.25 | ||||||
|
1st quarter
|
33.07 | 24.17 | ||||||
| Fiscal 2007 | ||||||||
|
4th quarter
|
$ | 29.03 | $ | 21.88 | ||||
|
3rd quarter
|
24.35 | 18.37 | ||||||
|
2nd quarter
|
31.65 | 23.77 | ||||||
|
1st quarter
|
28.97 | 23.34 | ||||||
As of
March 20, 2009, there were 57 stockholders of record. However, when
including others holding shares in broker accounts under street name, we
estimate the shareholder base at approximately 32,683.
PERFORMANCE
GRAPH
The
following graph shows the changes, for the period commencing January 31,
2004 and ended January 30, 2009 (the last trading day during fiscal 2008),
in the value of $100 invested in shares of our common stock, the
Standard & Poor’s MidCap 400 Composite Stock Price Index (the “S&P
MidCap 400 Index”) and the Standard & Poor’s Apparel Retail Composite
Index (the “S&P Apparel Retail Index”). The plotted points represent the
closing price on the last trading day of the fiscal year indicated.
|
Jan-04
|
Jan-05
|
Jan-06
|
Jan-07
|
Jan-08
|
Jan-09
|
|
|
Aéropostale
Inc.
|
$100
|
$140
|
$152
|
$181
|
$212
|
$159
|
|
S&P
Midcap 400
|
$100
|
$111
|
$136
|
$147
|
$143
|
$90
|
|
S&P
Apparel Retail
|
$100
|
$121
|
$115
|
$132
|
$126
|
$64
|
|
Copyright
© 2009, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
(www.researchdatagroup.com/S&P.htm)
|
||||||
We have
not paid a dividend on our common stock during our last three fiscal years, and
we do not have any current intention to pay a dividend on our common
stock.
We
repurchase our common stock from time to time under a $600.0 million stock
repurchase program. The repurchase program may be modified or
terminated by the Board of Directors at any time, and there is no expiration
date for the program. The extent and timing of repurchases will depend upon
general business and market conditions, stock prices, opening and closing of our
stock trading window, and liquidity and capital resource requirements going
forward. We made no purchases of treasury stock for the fourth quarter of fiscal
2008. The remaining availability pursuant to our share repurchase
program was as follows:
|
Period
|
Total
Number
of Shares
(or Units)
Purchased
|
Average
Price
Paid
per Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
Approximate
Dollar
Value
of Shares
that may yet be
Purchased
Under the
Plans
or Programs
(a)
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
November
2 to November 29, 2008
|
— | — | — | $ | 127,079 | |||||||||||
|
November
30 to January 3, 2009
|
— | — | — | $ | 127,079 | |||||||||||
|
January 4
to January 31, 2009
|
— | — | — | $ | 127,079 | |||||||||||
|
Total
|
— | — | — | |||||||||||||
The
following selected financial data should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and with our consolidated financial statements and other financial
information appearing elsewhere in this document:
|
Fiscal Year Ended
|
||||||||||||||||||||
|
January 31,
2009
|
February 2,
2008 (1)
|
February 3,
2007 (2) (3)
|
January 28,
2006
|
January 29,
2005
|
||||||||||||||||
|
(In
thousands, except per share and store data)
|
||||||||||||||||||||
|
Statements
of Income Data:
|
||||||||||||||||||||
|
Net
sales
|
$ | 1,885,531 | $ | 1,590,883 | $ | 1,413,208 | $ | 1,204,347 | $ | 964,212 | ||||||||||
|
Gross
profit, as a percent of sales
|
34.7 | % | 34.8 | % | 32.2 | % | 30.1 | % | 33.2 | % | ||||||||||
|
SG&A,
as a percent of sales
|
21.5 | % | 21.7 | % | 20.5 | % | 18.9 | % | 19.1 | % | ||||||||||
|
Net
income, as a percent of sales
|
7.9 | % | 8.2 | % | 7.5 | % | 7.0 | % | 8.7 | % | ||||||||||
|
Net
income
|
$ | 149,422 | $ | 129,197 | $ | 106,647 | $ | 83,954 | $ | 84,112 | ||||||||||
|
Diluted
earnings per common share
|
$ | 2.21 | $ | 1.73 | $ | 1.32 | $ | 1.00 | $ | 0.98 | ||||||||||
|
Selected
Operating Data:
|
||||||||||||||||||||
|
Number
of stores open at end of period
|
914 | 828 | 742 | 671 | 561 | |||||||||||||||
|
Comparable
store sales increase
|
8 | % | 3 | % | 2 | % | 4 | % | 9 | % | ||||||||||
|
Comparable
average unit retail change
|
2 | % | (3 | )% | 3 | % | (8 | )% | (2 | )% | ||||||||||
|
Average
net sales per store (in thousands)
|
$ | 2,042 | $ | 1,932 | $ | 1,924 | $ | 1,890 | $ | 1,849 | ||||||||||
|
Average
square footage per store
|
3,594 | 3,546 | 3,540 | 3,537 | 3,512 | |||||||||||||||
|
Net
sales per average square foot
|
$ | 572 | $ | 545 | $ | 543 | $ | 534 | $ | 526 | ||||||||||
|
As of
|
||||||||||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
January 28,
2006
|
January 29,
2005
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Working
capital
|
$ | 218,444 | $ | 87,300 | $ | 233,995 | $ | 212,986 | $ | 182,493 | ||||||||||
|
Total
assets
|
657,919 | 514,169 | 581,164 | 503,951 | 405,819 | |||||||||||||||
|
Long-term
liabilities
|
127,422 | 119,506 | 104,250 | 92,808 | 70,574 | |||||||||||||||
|
Total
debt
|
— | — | — | — | — | |||||||||||||||
|
Retained
earnings
|
693,333 | 543,911 | 414,916 | 308,269 | 224,315 | |||||||||||||||
|
Total
stockholder’s equity
|
355,060 | 197,276 | 312,116 | 284,790 | 238,251 | |||||||||||||||
|
Cash
dividends declared per common share
|
— | — | — | — | — | |||||||||||||||
__________
|
(1)
|
Includes
initial gift card breakage income of $7.7 million ($4.8 million, after
tax, or $0.07 per diluted share), other operating income of
$4.1 million ($2.6 million, after tax, or $0.04 per diluted
share) as a result of an agreement with our former Executive Vice
President and Chief Merchandising Officer, partially offset by an asset
impairment charge of $9.0 million ($5.7 million, after tax, or $0.08 per
diluted share).
|
|
|
(2)
|
Includes
$7.4 million ($4.5 million, after tax, or $0.05 per diluted
share), net of professional fees, representing concessions, primarily from
South Bay Apparel Inc., to us for prior purchases of merchandise and other
operating income of $2.1 million ($1.3 million, after tax, or
$0.02 per diluted share) from the resolution of a dispute with a
vendor regarding the enforcement of our intellectual property
rights.
|
|
|
(3)
|
53 week
fiscal year.
|
|
Cautionary Note Regarding
Forward-Looking Statements
This
Annual Report on Form 10-K 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 our 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 Part I, Item 1A
should be read in connection with evaluating our 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.
Aéropostale,
Inc. is a mall-based specialty retailer of casual apparel and accessories. 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. We maintain control over our proprietary brand by designing and
sourcing all of our own merchandise. Our products can be purchased in our
stores, which sell Aéropostale merchandise exclusively and on-line through our
e-commerce website, www.aeropostale.com. As of January 31, 2009,
we operated 914 stores, consisting of 874 Aéropostale stores in 48 states and
Puerto Rico, 29 Aéropostale stores in Canada, and 11 Jimmy’Z stores in 10
states. We plan to close all of the Jimmy’Z stores by the end of the
second quarter of fiscal 2009.
Our
fiscal year ends on the Saturday nearest to January 31. Fiscal 2008 was the
52-week period ended January 31, 2009, fiscal 2007 was the 52-week period ended
February 2, 2008 and fiscal 2006 was the 53-week period ended
February 3, 2007. Fiscal 2009 will be the 52-week period ending
January 30, 2010.
The
discussion in the following section is on a consolidated basis, unless indicated
otherwise. In addition, comparable store sales data included in this section are
compared to the corresponding period in the prior year, due to the 53rd week in
the fiscal 2006 calendar. We believe that the disclosure of comparable store
sales data on a pro-forma basis due to the 53rd week in
fiscal 2006, which is a non-GAAP financial measure, provides investors useful
information to help them better understand our results.
Overview
We
achieved net sales of $1.886 billion during fiscal 2008, an increase of
$294.6 million or 19% from fiscal 2007. Gross profit, as a
percentage of net sales, decreased by 0.1 percentage points for fiscal
2008. Selling, general and administrative expense, or SG&A, as a
percentage of net sales, decreased by 0.2 percentage points in fiscal
2008. Interest income decreased by $6.0 million in fiscal
2008. The effective tax rate was 39.9% for fiscal 2008, compared with
38.2% for fiscal 2007. Net income for fiscal 2008 was $149.4 million, or
$2.21 per diluted share, compared with net income of $129.2 million,
or $1.73 per diluted share, for fiscal 2007.
As of
January 31, 2009, we had working capital of $218.4 million, cash and
cash equivalents of $228.5 million, no short-term investments and no third
party debt outstanding. We repurchased 0.2 million shares of common stock for
$6.7 million during fiscal 2008 compared to 11.7 million shares of common stock
for $266.7 million during fiscal 2007. Merchandise inventories
decreased by 17% on a square foot basis as of January 31, 2009 compared to
last year, reflecting the impact of stronger sell-through of fall merchandise
and timing of floor-set receipts. Cash flows from operating activities were
$202.1 million for fiscal 2008. We operated 914 total stores as of
January 31, 2009, 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, including the following:
|
Fiscal Year Ended
|
||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
||||||||||
|
Net
sales (in millions)
|
$ | 1,885.5 | $ | 1,590.9 | $ | 1,413.2 | ||||||
|
Total
store count at end of period
|
914 | 828 | 742 | |||||||||
|
Comparable
store count at end of period
|
811 | 734 | 664 | |||||||||
|
Net
sales growth
|
19 | % | 13 | % | 17 | % | ||||||
|
Comparable
store sales growth
|
8 | % | 3 | % | 2 | % | ||||||
|
Comparable
average unit retail change
|
2 | % | (3 | )% | 3 | % | ||||||
|
Comparable
units per sales transaction change
|
3 | % | 2 | % | (2 | )% | ||||||
|
Comparable
sales transaction growth
|
4 | % | 3 | % | 1 | % | ||||||
|
Net
sales per average square foot
|
$ | 572 | $ | 545 | $ | 543 | ||||||
|
Average
net sales per store (in thousands)
|
$ | 2,042 | $ | 1,932 | $ | 1,924 | ||||||
|
Gross
profit (in millions)
|
$ | 654.2 | $ | 553.2 | $ | 455.4 | ||||||
|
Income
from operations (in millions)
|
$ | 248.3 | $ | 202.5 | $ | 167.8 | ||||||
|
Diluted
earnings per share
|
$ | 2.21 | $ | 1.73 | $ | 1.32 | ||||||
|
Total
average square footage growth
|
12 | % | 10 | % | 14 | % | ||||||
|
Change
in total inventory at end of period
|
(7 | )% | 35 | % | 10 | % | ||||||
|
Change
in inventory per square foot at end of period
|
(17 | )% | 20 | % | 0 | % | ||||||
| Percentages of net sales by category | ||||||||||||
|
Women’s
|
71 | % | 72 | % | 73 | % | ||||||
|
Men’s
|
29 | % | 28 | % | 27 | % | ||||||
Results
of Operations
The
following table sets forth our results of operations expressed as a percentage
of net sales. We also use this information to evaluate the performance of our
business:
|
Fiscal Year Ended
|
||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Gross
profit
|
34.7 | 34.8 | 32.2 | |||||||||
|
SG&A
|
21.5 | 21.7 | 20.5 | |||||||||
|
Jimmy’Z
asset impairment charges
|
— | 0.6 | — | |||||||||
|
Other
operating income
|
— | 0.3 | 0.2 | |||||||||
|
Income
from operations
|
13.2 | 12.8 | 11.9 | |||||||||
|
Interest
income, net
|
— | 0.4 | 0.5 | |||||||||
|
Income
before income taxes
|
13.2 | 13.2 | 12.4 | |||||||||
|
Income
taxes
|
5.3 | 5.0 | 4.9 | |||||||||
|
Net
income
|
7.9 | % | 8.2 | % | 7.5 | % | ||||||
Sales
Net sales
consist of sales from comparable stores, non-comparable stores, and from our
e-commerce business. A store is included in comparable store sales after
14 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.
Net sales
increased by $294.6 million, or by 19% in fiscal 2008, as compared to
fiscal 2007. This increase was due to total average square footage
growth of 12%, as well as an increase in comparable store
sales. Comparable store sales increased by $117.0 million, or by
8%, reflecting comparable store sales increases in our young men’s and women’s
categories. The comparable store sales increase reflected a 3%
increase in units per sales transaction and a 4% increase in the number of sales
transactions. Non-comparable store sales increased by
$177.7 million, or by 11%, due primarily to 86 more stores open at the end
of fiscal 2008 versus fiscal 2007. Total non-comparable sales
includes net sales from our e-commerce business which increased by 85% to $79.1
million in fiscal 2008. Net sales for the fourth quarter of fiscal
2007 also included $7.7 million of sales related to our initial recognition of
gift card breakage, of which $5.9 million related to gift cards issued in
periods prior to fiscal 2007 (see Note 1 to the Notes to Consolidated Financial
Statements for a further discussion).
Net sales
increased by $177.7 million, or by 13% in fiscal 2007 (52 weeks), as
compared to fiscal 2006 (53 weeks). This increase
was due to total average square footage growth of 10%, as well as an increase in
comparable store sales. Comparable store sales increased by
$43.8 million, or by 3%, reflecting comparable store sales increases in our
young men’s and women’s categories. The comparable store sales
increase reflected a 2% increase in units per sales transaction, a 3% increase
in the number of sales transactions, and a 3% decrease in average unit retail.
The decrease in the average unit retail reflected lower pricing in certain
categories, in addition to a shift in sales mix. Non-comparable store sales
increased by $126.1 million, or by 9%, due primarily to 86 more stores open
at the end of fiscal 2007 versus fiscal 2006. Total non-comparable
sales includes net sales from our e-commerce business which increased by 100% to
$42.8 million in fiscal 2007. Net sales for the fourth quarter of
fiscal 2007 also included $7.7 million of sales related to our initial
recognition of gift card breakage, of which $5.9 million related to gift cards
issued in periods prior to fiscal 2007 (see Note 1 to the Notes to Consolidated
Financial Statements for a further discussion).
Cost
of Sales and Gross Profit
Cost of
sales includes costs related to merchandise sold, including inventory valuation
adjustments, distribution and warehousing, freight from the distribution center
to the stores, payroll for our design, buying and merchandising departments, and
occupancy costs. Occupancy costs include rent, contingent rents, common area
maintenance, real estate taxes, utilities, repairs, maintenance and all
depreciation.
Gross
profit, as a percentage of net sales, decreased by 0.1 percentage points in
fiscal 2008 compared to fiscal 2007. The decrease was due to higher
transportation costs and depreciation, which offset higher merchandise margin of
0.5 percentage points. Merchandise margin decreased during the fourth
quarter of fiscal 2008, primarily due to increased promotional activity. The
fourth quarter decrease partially offset a 1.9 percentage point increase in
merchandise margin through the first thirty-nine weeks of fiscal
2008.
Gross
profit, as a percentage of net sales, increased by 2.6 percentage points in
fiscal 2007. This increase was due to a 2.8 percentage point
increase in merchandise margin, primarily from lower unit costs from graphic tee
shirts and improved levels and composition of our merchandise
assortment. This increase was partially offset by a
0.2 percentage point increase in depreciation, primarily as a result of
store growth and strategic investments, and 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, information technology maintenance costs and expenses, insurance and
legal expenses, store pre-opening and other corporate expenses. Store
pre-opening expenses include store payroll, grand opening event marketing,
travel, supplies and other store pre-opening expenses.
SG&A
increased by $60.1 million, and decreased by 0.2 percentage points, as
a percentage of net sales, during fiscal 2008. The increase in SG&A was
largely due to a $23.9 million increase in store-line expenses and a $22.0
million increase in corporate expenses, which included higher stock-based
compensation of $7.3 million, incentive compensation of $7.2 million and
benefits of $4.9 million. Additionally, the increase was due to
higher store transaction costs of $9.7 million resulting primarily from new
store growth and increased sales and $4.5 million of higher marketing
costs. The SG&A decrease during fiscal 2008, as a percentage of
net sales, was due primarily to a 0.6 percentage point decrease in
store-line expenses, resulting primarily from payroll; and was partially offset
by a 0.3 percentage point increase in corporate incentive and stock-based
compensation; and a 0.1 percentage point increase in e-commerce expenses,
resulting from sales growth.
SG&A
increased by $56.1 million, or by 1.2 percentage points, as a
percentage of net sales, during fiscal 2007. The increase in SG&A
was largely due to a $26.7 million increase in store-line
expenses. The remainder of the increase was due to higher store
transaction costs and store operations costs of $13.4 million resulting
primarily from new store growth and increased sales. The balance of
the increase in SG&A was due primarily to a $13.8 million increase in
corporate expenses consisting of higher incentive compensation of $4.9 million,
stock-based compensation of $3.5 million, and other corporate expenses of $5.4
million. The SG&A increase during fiscal 2007, as a percentage of
net sales, was due primarily to a 0.5 percentage point increase in
store-line expenses, resulting primarily from increased payroll due to minimum
wage increases and loss prevention initiatives, a 0.5 percentage point
increase in corporate incentive and stock-based compensation, and a
0.4 percentage point increase in e-commerce expenses, resulting from growth
in related sales.
Jimmy’Z
Asset Impairment Charges
During
the fourth quarter of fiscal 2007, we recorded asset impairment charges of $9.0
million (see Note 3 to the Notes to Consolidated Financial Statements for a
further discussion).
Other
Operating Income
We
recognized $4.1 million in net other operating income during the fourth
quarter of 2007 as a result of an agreement with our former Executive Vice
President and Chief Merchandising Officer (see Note 4 to the Notes to
Consolidated Financial Statements for a further discussion).
We
recognized $2.1 million in other operating income during the second quarter
of fiscal 2006 in connection with the resolution of a dispute with a vendor
regarding the enforcement of our intellectual property rights.
Interest
Income
Interest
income, net of interest expense, decreased by $6.0 million in fiscal
2008. The decrease was due to the cumulative impact of cash used for
share repurchases in the fourth quarter of 2007 of $266.7 million and lower
interest rates.
Interest
income, net of interest expense, decreased by $0.5 million in fiscal
2007. The decrease was due primarily to the cumulative impact of cash
used for share repurchases of $266.7 million during fiscal 2007.
Income
Taxes
Our
effective tax rate was 39.9% for fiscal 2008, compared to 38.2% for fiscal 2007,
and 39.0% for fiscal 2006. The increase in the effective tax rate
during fiscal 2008 is due primarily to nondeductible officers’ compensation and
less tax exempt interest, as well as a lower rate in fiscal 2007, mainly due to
favorable tax provision adjustments.
Net
Income and Earnings Per Share
Net
income was $149.4 million, or $2.21 per diluted share, for fiscal
2008, compared with net income of $129.2 million, or $1.73 per diluted
share, for fiscal 2007 and net income of $106.6 million, or $1.32 per
diluted share, for fiscal 2006.
Net
income for fiscal 2007 was favorably impacted by $7.7 million ($4.8 million
after-tax, or $0.07 per diluted share), resulting from our initial
recognition of gift card breakage (see Note 1 to the Notes to Consolidated
Financial Statements for a further discussion). Net income for fiscal 2007 was
also favorably impacted by $4.1 million ($2.6 million after-tax, or $0.04
per diluted share), from the above mentioned other operating income. The asset
impairment charges unfavorably impacted net income for fiscal 2007 by $9.0
million ($5.7 million after-tax, or $0.08 per diluted share) (see Note
3 to the Notes to Consolidated Financial Statements for a further
discussion).
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, existing cash and
cash equivalents and our credit facility. At January 31, 2009, we had
working capital of $218.4 million, cash and cash equivalents of $228.5 million
and no debt outstanding under our $150.0 million credit facility.
On February 23, 2009, we announced plans to close all of our 11
Jimmy’Z stores by the end of the second quarter of fiscal 2009. We do
not believe that the closures will have a material impact on our
liquidity.
The
following table sets forth our cash flows for the period indicated (in
thousands):
|
Fiscal Year Ended
|
||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
||||||||||
|
Net
cash provided by operating activities
|
$ | 202,135 | $ | 171,081 | $ | 177,445 | ||||||
|
Net
cash used for investing activities
|
(83,035 | ) | (6,083 | ) | (101,135 | ) | ||||||
|
Net
cash used for financing activities
|
(1,445 | ) | (253,153 | ) | (81,481 | ) | ||||||
|
Effect
of exchange rate changes
|
(1,052 | ) | 18 | — | ||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 116,603 | $ | (88,137 | ) | $ | (5,171 | ) | ||||
Operating
Activities
Cash
flows from operating activities, our principal form of liquidity on a full-year
basis, increased by $31.1 million in fiscal 2008 and decreased by
$6.4 million in fiscal 2007, as compared to the prior fiscal year. The
primary components of cash flows from operations for fiscal 2008 included an
increase in net income, as adjusted for depreciation and amortization and other
non-cash items, of $45.4 million and lower merchandise inventories which
were partially offset by the timing of the payment of liabilities.
Cash
flows from operating activities decreased by $6.4 million in fiscal 2007 as
compared to the prior fiscal year. The primary components of cash
flows from operations for fiscal 2007 included an increase in net income, as
adjusted for non-cash items, of $41.5 million which was more than offset by
an increase in cash used for accounts payable and accrued expenses, which
resulted from the timing of income tax payments.
Working
capital increased to $218.4 million at January 31, 2009 from $87.3 million at
February 2, 2008 due primarily to the cumulative impact of cash used for share
repurchases of $266.7 million in fiscal 2007. Consolidated
merchandise inventories decreased by 7%, and by 17% on a square foot basis, as
of January 31, 2009 compared to last year. These decreases were
primarily due to stronger sell-through of merchandise and a shift in the timing
of floor-set receipts.
Investing
Activities
We
invested $83.0 million in capital expenditures in fiscal 2008, primarily
for the construction of 89 new Aéropostale stores, to remodel 18 existing stores
and for certain other information technology investments. Our future
capital requirements will depend primarily on the number of new stores we open,
the number of existing stores we remodel and other strategic investments. We
plan to invest approximately $55.0 million in capital expenditures in
fiscal 2009. These plans include investments of approximately $25.0 million
to open approximately 40 new Aéropostale stores in our new store format
including approximately 15 in Canada and 10 new P.S. from Aéropostale stores.
Capital expenditure plans also include approximately $15.0 million to
remodel approximately 23 existing stores to our new store format and
approximately $15.0 million for other initiatives which includes $6.0 million
for our new allocation system.
Financing
Activities
We
repurchase our common stock from time to time under a stock repurchase
program. The repurchase program may be modified or terminated by the
Board of Directors at any time, and there is no expiration date for the program.
The extent and timing of repurchases will depend upon general business and
market conditions, stock prices, opening and closing of the stock trading
window, and liquidity and capital resource requirements going
forward.
We
repurchased 0.2 million shares for $6.7 million during fiscal 2008, as compared
to repurchases of 11.7 million shares for $266.7 million during fiscal 2007
and 4.7 million shares for $91.4 million during fiscal 2006.
We
have approximately $127.1 million of repurchase authorization remaining as of
January 31, 2009 under the $600.0 million share repurchase
program.
In November 2007, we entered into
an amended
and restated revolving credit facility with Bank of America, N.A., as Lender
which expanded our availability from a maximum of $75.0 million to
$150.0 million (the “Credit Facility”). The Credit Facility
provides for a $150.0 million revolving credit line. The Credit Facility is
available for working capital and general corporate purposes. The
Credit Facility is scheduled to mature on November 13, 2012, and no amounts
were outstanding as of January 31, 2009.
Contractual
Obligations
The
following table summarizes our contractual obligations as of January 31,
2009:
|
Payments Due by Period
|
||||||||||||||||||||
|
Total
|
Less
Than
1 Year
|
1-3
Years
|
3-5
Years
|
More
Than
5 Years
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||||||||
|
Real
estate operating leases
|
$ | 646,187 | $ | 98,782 | $ | 186,245 | $ | 162,638 69 | $ | 198,522 | ||||||||||
|
Equipment
operating leases
|
4,165 | 2,273 | 1,892 | — | — | |||||||||||||||
|
Employment
agreements
|
20,818 | 11,534 | 9,284 | — | — | |||||||||||||||
|
Total
contractual obligations
|
$ | 671,170 | $ | 112,589 | $ | 197,421 | $ | 162,638 | $ | 198,522 | ||||||||||
The real
estate operating leases included in the above table do not include contingent
rent based upon sales volume, which amounted to approximately 20% of minimum
lease obligations in fiscal 2008. In addition, the above table does
not include variable costs paid to landlords such as maintenance, insurance and
taxes, which represented approximately 60% of minimum lease obligations in
fiscal 2008.
Our open
purchase orders are cancelable without penalty and are therefore not included in
the above table.
In
addition to the above table, we project making a benefit payment of
approximately $16.9 million from our supplementary executive retirement
plan in 2010, which assumes expected future service until retirement at
age 65 (see Note 10 to the Notes to Consolidated Financial Statements
for a further discussion).
There
were no financial guarantees outstanding as of January 31, 2009. We had no
commercial commitments outstanding as of January 31, 2009.
Our total
liabilities for unrecognized tax benefits were $2.6 million at January 31, 2009.
We cannot make a reasonable estimate of the amount and period of related future
payments for these liabilities. Therefore these liabilities were not included in
the above table.
Off-Balance
Sheet Arrangements
Other
than operating lease commitments set forth in the table above, we are not a
party to any material off-balance sheet financing arrangements. We have not
created, and are not a 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
January 31, 2009, 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 management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Estimates by their nature are based on
judgments and available information. Therefore, actual results could materially
differ from those estimates under different assumptions and
conditions.
Critical
accounting policies are those that are most important to the portrayal of our
financial condition and the results of operations and require management's most
difficult, subjective and complex judgments as a result of the need to make
estimates about the effect of matters that are inherently uncertain. Our most
critical accounting policies have been discussed in Note 1 of the Notes to
Consolidated Financial Statements. In applying such policies,
management must use significant estimates that are based on its informed
judgment. Because of the uncertainty inherent in these estimates, actual results
could differ from estimates used in applying the critical accounting policies.
Changes in such estimates, based on more accurate future information, may affect
amounts reported in future periods.
Merchandise
Inventory
Merchandise
inventory consists of finished goods and is valued utilizing the cost method at
lower of cost or market on a weighted-average basis. We use estimates during
interim periods to record a provision for inventory shortage. We also make
certain assumptions regarding future demand and net realizable selling price in
order to assess that our inventory is recorded properly at the lower of cost or
market. These assumptions are based on both historical experience and current
information. We believe that the carrying value of merchandise inventory is
appropriate as of January 31, 2009. However, actual results may differ
materially from those estimated and could have a material impact on our
consolidated financial statements. A 10% difference in our estimate of inventory
at the lower of cost or market as of January 31, 2009 would have impacted
net income by $1.0 million for the fiscal year ended January 31,
2009.
Income
Taxes
Income
taxes are accounted for in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (“SFAS No.
109”). Under
SFAS No. 109, income taxes are recognized for the amount of taxes
payable for the current year and deferred tax assets and liabilities for the
future tax consequence of events that have been recognized differently in the
financial statements than for tax purposes. Deferred tax assets and liabilities
are established using statutory tax rates and are adjusted for tax rate changes.
We consider accounting for income taxes critical to our operations because
management is required to make significant subjective judgments in developing
our provision for income taxes, including the determination of deferred tax
assets and liabilities, and any valuation allowances that may be required
against deferred tax assets.
Effective
at the beginning of the first quarter of fiscal 2007, we adopted FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). This interpretation clarifies the accounting for
uncertainty in income tax recognized in an entity’s financial statements in
accordance with SFAS No. 109. FIN 48 requires companies to determine
whether it is “more likely than not” that a tax position will be sustained upon
examination by the appropriate taxing authorities before any part of the benefit
can be recorded in the financial statements. For those tax positions
where it is “not more likely than not” that a tax benefit will be sustained, no
tax benefit is recognized. Where applicable, associated interest and penalties
are also recorded. This interpretation also provides guidance on derecognition,
classification, accounting in interim periods, and expanded disclosure
requirements (see Note 12 to the Notes to Consolidated Financial
Statements).
Long-Lived
Assets
We
periodically evaluate the need to recognize impairment losses relating to
long-lived assets. Long-lived assets are evaluated for recoverability whenever
events or changes in circumstances indicate that an asset may have been
impaired. Factors we consider important that could trigger an impairment review
include the following:
|
|
•
|
significant
changes in the manner of our use of assets or the strategy for our overall
business;
|
|
|
•
|
significant
negative industry or economic
trends;
|
|
|
•
|
store
closings; or
|
|
|
•
|
under-performing
business trends.
|
In
evaluating an asset for recoverability, we estimate the future cash flows
expected to result from the use of the asset and eventual
disposition. Management makes assumptions and applies judgment to
estimate future cash flows. These assumptions include factors such as
both historical and forecasted results and trends. If the sum of the expected
future cash flows is less than the carrying amount of the asset, we would write
the asset down to fair value and we would record an impairment
charge. Accordingly, we recorded asset impairment charges of
$9.0 million related to our Jimmy’Z store concept during fiscal 2007 (see
Note 3 to the Notes to Consolidated Financial Statements for a further
discussion). Additionally, we have recorded Aéropostale store
impairment charges of $3.7 million in fiscal 2008 compared to $1.7 million in
fiscal 2007 and $0.1 million in fiscal 2006, which were included in depreciation
and amortization expense, which is a component of cost of sales. We
believe that the carrying values of finite-lived assets, and their useful lives,
are appropriate as of January 31, 2009. However, actual results may differ
materially from those estimated and could have a material impact on our
consolidated financial statements.
Defined
Benefit Pension Plans
We
maintain a Supplemental Executive Retirement Plan, or SERP, which is a
non-qualified defined benefit plan for certain officers. The plan is
non-contributory, is not funded and provides benefits based on years of service
and compensation during employment. 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. We believe
that these assumptions have been appropriate and that, based on these
assumptions, the SERP liability of $21.2 million is appropriately stated as
of January 31, 2009. However, actual results may differ materially from
those estimated and could have a material impact on our consolidated financial
statements. If we had changed the expected discount rate by 0.5% in fiscal 2008,
pension expense would have changed by less than $50,000. We adopted Statement of
Financial Accounting Standards No. 158, Employer’s Accounting for Defined
Benefit Pension and
Other Postretirement Plans — an amendment of FASB Statements No. 87,
88, 106, and
132(R) (“SFAS No. 158”) during fiscal 2006.
Recent
Accounting Developments
See the
section “Recent Accounting
Developments” included in Note 1 in the Notes to Consolidated
Financial Statements for a discussion of recent accounting developments and
their impact on our consolidated financial statements.
As of
January 31, 2009, we had no outstanding borrowings under our Credit
Facility. In addition, we had no stand-by or commercial letters of
credit issued under the Credit Facility. To the extent that we may borrow
pursuant to the Credit Facility in the future, we may be exposed to market risk
related to interest rate fluctuations.
Unrealized
foreign currency gains and losses, resulting from the translation of our
Canadian subsidiary financial statements into our US dollar reporting currency
are reflected in the equity section of our consolidated balance sheet in
accumulated other comprehensive loss. The balance of the unrealized
loss included in accumulated other comprehensive loss was $2.7 million as of
January 31, 2009. A 10% movement in quoted foreign currency exchange
rates could result in a fair value translation fluctuation of approximately $1.5
million, which would be recorded in other comprehensive loss as an unrealized
gain or loss.
We also
face transactional currency exposures relating to merchandise that our Canadian
subsidiary purchases using U.S. dollars. These foreign currency
transaction gains and losses are charged or credited to earnings as
incurred. We do not hedge our exposure to this currency exchange
fluctuation, and transaction gains and losses to date have not been
significant.
|
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27
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29
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|
|
30
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31
|
|
|
32
|
|
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33
|
To the
Board of Directors and Stockholders of Aéropostale, Inc.
New York,
New York
We have
audited the accompanying consolidated balance sheets of Aéropostale, Inc. and
subsidiaries (the "Company") as of January 31, 2009 and February 2, 2008, and
the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries as of January
31, 2009 and February 2, 2008, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As
discussed in Note 1 to the Notes to Consolidated Financial Statements, the
Company adopted (1) Financial Accounting Standards Board Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, effective
February 4, 2007 and (2) Statement of Financial Accounting Standards
No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, relating to the recognition and related disclosure
provisions, effective February 3, 2007.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of January 31, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 30, 2009 expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/
Deloitte and Touche LLP
New York,
New York
March 30,
2009
To the
Board of Directors and Stockholders of Aéropostale, Inc.
New York,
New York
We have
audited the internal control over financial reporting of Aéropostale, Inc. and
subsidiaries (the "Company") as of January 31, 2009, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 31, 2009, based on the criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended January 31, 2009, of
the Company and our report dated March 30, 2009 expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/
Deloitte and Touche LLP
New York,
New York
March 30,
2009
CONSOLIDATED
BALANCE SHEETS
|
January 31,
2009
|
February 2,
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 228,530 | $ | 111,927 | ||||
|
Merchandise
inventory
|
126,360 | 136,488 | ||||||
|
Prepaid
expenses
|
17,384 | 13,604 | ||||||
|
Deferred
income taxes
|
10,745 | 12,961 | ||||||
|
Other
current assets
|
10,862 | 9,707 | ||||||
|
Total
current assets
|
393,881 | 284,687 | ||||||
|
Fixtures,
equipment and improvements — net
|
248,999 | 213,831 | ||||||
|
Deferred
income taxes
|
12,509 | 13,073 | ||||||
|
Other
assets
|
2,530 | 2,578 | ||||||
|
Total
assets
|
$ | 657,919 | $ | 514,169 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 77,247 | $ | 99,369 | ||||
|
Accrued
expenses
|
98,190 | 98,018 | ||||||
|
Total
current liabilities
|
175,437 | 197,387 | ||||||
|
Deferred
rent and tenant allowances
|
102,393 | 96,888 | ||||||
|
Retirement
benefit plan liabilities
|
22,470 | 18,919 | ||||||
|
Uncertain
tax contingency liabilities
|
2,559 | 3,699 | ||||||
|
Commitments
and contingent liabilities
Stockholders’
equity
Common
stock — par value, $0.01 per share; 200,000 shares
authorized, 90,472 and 89,908 shares issued
|
905 | 899 | ||||||
|
Preferred
stock — par value, $0.01 per share; 5,000 shares
authorized, no shares issued or outstanding
|
— | — | ||||||
|
Additional
paid-in capital
|
145,951 | 124,052 | ||||||
|
Accumulated
other comprehensive loss
|
(8,998 | ) | (4,650 | ) | ||||
|
Retained
earnings
|
693,333 | 543,911 | ||||||
|
Treasury
stock at cost (23,542 and 23,224 shares)
|
(476,131 | ) | (466,936 | ) | ||||
|
Total
stockholders’ equity
|
355,060 | 197,276 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 657,919 | $ | 514,169 | ||||
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF INCOME
|
Fiscal Year Ended
|
||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
||||||||||
|
(In
thousands, except per share data)
|
||||||||||||
|
Net
sales
|
$ | 1,885,531 | $ | 1,590,883 | $ | 1,413,208 | ||||||
|
Cost
of sales (includes certain buying, occupancy and warehousing
expenses)
|
1,231,349 | 1,037,680 | 957,791 | |||||||||
|
Gross
profit
|
654,182 | 553,203 | 455,417 | |||||||||
|
Selling,
general and administrative expenses
|
405,883 | 345,805 | 289,736 | |||||||||
|
Jimmy’Z
asset impairment charges
|
— | 9,023 | — | |||||||||
|
Other
operating income
|
— | 4,078 | 2,085 | |||||||||
|
Income
from operations
|
248,299 | 202,453 | 167,766 | |||||||||
|
Interest
income
|
510 | 6,550 | 7,064 | |||||||||
|
Income
before income taxes
|
248,809 | 209,003 | 174,830 | |||||||||
|
Income
taxes
|
99,387 | 79,806 | 68,183 | |||||||||
|
Net
income
|
$ | 149,422 | $ | 129,197 | $ | 106,647 | ||||||
|
Basic
earnings per common share
|
$ | 2.24 | $ | 1.74 | $ | 1.33 | ||||||
|
Diluted
earnings per common share
|
$ | 2.21 | $ | 1.73 | $ | 1.32 | ||||||
|
Weighted
average basic shares
|
66,832 | 74,315 | 79,928 | |||||||||
|
Weighted
average diluted shares
|
67,576 | 74,846 | 80,637 | |||||||||
|
Fiscal Year Ended
|
||||||||||||
|
January 31,
2009
|
February 2,
2008
|
February 3,
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Net
income
|
$ | 149,422 | $ | 129,197 | $ | 106,647 | ||||||
|
Pension
liability (net of tax of $321, $229, and $69)
|
(474 | ) | (582 | ) | 110 | |||||||
|
Foreign
currency translation adjustment
|
(3,874 | ) | 1,206 | — | ||||||||
|
Comprehensive
income
|
$ | 145,074 | $ | 129,821 | $ | 106,757 | ||||||
See Notes
to Consolidated Financial Statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Treasury
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
|
Additional
|
Stock,
|
Other
|
||||||||||||||||||||||||||||||||||
|
Common Stock
|
Paid-in
|
Deferred
|
at Cost
|
Comprehensive
|
Retained
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Shares
|
Amount
|
Loss
|
Earnings
|
Total
|
||||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||||||
|
BALANCE,
JANUARY 29, 2006
|
87,897 | $ | 879 | $ | 87,920 | $ | (2,577 | ) | (6,822 | ) | $ | (108,144 | ) | $ | (1,557 | ) | $ | 308,269 | $ | 284,790 | ||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | 106,647 | 106,647 | |||||||||||||||||||||||||||
|
Stock
options exercised
|
1,078 | 11 | 2,343 | — | — | — | — | — | 2,354 | |||||||||||||||||||||||||||
|
Minimum
pension liability (net of tax of $69)
|
— | — | — | — | — | — | 110 | — | 110 | |||||||||||||||||||||||||||
|
Adoption
of SFAS No. 123(R)
|
— | — | (2,577 | ) | 2,577 | — | — | — | — | — | ||||||||||||||||||||||||||
|
Excess
tax benefit from stock-based compensation
|
— | — | 7,568 | — | — | — | — | — | 7,568 | |||||||||||||||||||||||||||
|
Adoption
of SFAS No. 158 (net of tax of $2,413)
|
— | — | — | — | — | — | (3,827 | ) | — | (3,827 | ) | |||||||||||||||||||||||||
|
Repurchase
of common stock
|
— | — | — | — | (4,709 | ) | (91,404 | ) | — | — | (91,404 | ) | ||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 5,878 | — | — | — | — | — | 5,878 | |||||||||||||||||||||||||||
|
Vesting
of stock
|
23 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
BALANCE,
FEBRUARY 3, 2007
|
88,998 | 890 | 101,132 | — | (11,531 | ) | (199,548 | ) | (5,274 | ) | 414,916 | 312,116 | ||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | 129,197 | 129,197 | |||||||||||||||||||||||||||
|
Stock
options exercised
|
805 | 8 | 8,020 | — | — | — | — | — | 8,028 | |||||||||||||||||||||||||||
|
Minimum
pension liability (net of tax of $229)
|
— | — | — | — | — | — | (582 | ) | — | (582 | ) | |||||||||||||||||||||||||
|
Excess
tax benefit from stock-based compensation
|
— | — | 5,519 | — | — | — | — | — | 5,519 | |||||||||||||||||||||||||||
|
Adoption
of FIN 48
|
— | — | — | — | — | — | — | (202 | ) | (202 | ) | |||||||||||||||||||||||||
|
Repurchase
of common stock
|
— | — | — | — | (11,665 | ) | (266,692 | ) | — | — | (266,692 | ) | ||||||||||||||||||||||||
|
Stock-based
compensation
|
— | — | 9,381 | — | — | — | — | — | 9,381 | |||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
— | — | — | — | — | — | 1,206 | — | 1,206 | |||||||||||||||||||||||||||
|
Vesting
of stock
|
105 | 1 | — | — | (28 | ) | (696 | ) | — | — | (695 | ) | ||||||||||||||||||||||||
|
BALANCE,
FEBRUARY 2, 2008
|
89,908 | 899 | 124,052 | — | (23,224 | ) | (466,936 | ) | (4,650 | ) | 543,911 | 197,276 | ||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | — | — | 149,422 | 149,422 | |||||||||||||||||||||||||||
|
Stock
options exercised
|
252 | 3 | 3,751 | — | — | — | — | — | 3,754 | |||||||||||||||||||||||||||
|
Minimum
pension liability (net of tax of $321)
|
— | — | — | — | — | — | (474 | ) | — | (474 | ) | |||||||||||||||||||||||||
|
Excess
tax benefit from stock-based compensation
|
— | — | 1,482 | |||||||||||||||||||||||||||||||||