Item 1. Business
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 30, 2010, we operated 938 Aéropostale stores consisting of 894 stores in 49 states and Puerto Rico and 44 stores in Canada. In addition, our new concept, P.S. from Aéropostale, offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. As of January 30, 2010, we operated 14 P.S. from Aéropostale stores in five states. In addition, pursuant to a Licensing Agreement, our international licensee operated five Aéropostale stores in the United Arab Emirates as of January 30, 2010.
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 the Company public through an initial public offering and listed our common stock on the New York Stock Exchange.
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.
During fiscal 2009, we completed the closure of our 14 store Jimmy’Z concept that was launched in 2005. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., was a contemporary lifestyle brand targeting trend-aware young women and men aged 18 to 25.
On February 3, 2010, we announced a three-for-two stock split on all shares of our common stock. The stock split was distributed on March 5, 2010 in the form of a stock dividend to all shareholders of record on February 24, 2010. All share and per share amounts presented in this report were retroactively adjusted for the common stock split, as were previously reported periods contained herein.
Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2009 was the 52-week period ended January 30, 2010, fiscal 2008 was the 52-week period ended January 31, 2009 and fiscal 2007 was the 52-week period ended February 2, 2008. Fiscal 2010 will be the 52-week period ending January 29, 2011.
Executive Transition
We previously announced planned executive changes as described in our Form 8-K filed on September 25, 2009. On February 1, 2010, Julian R. Geiger, our Chairman and former Chief Executive Officer, provided us with formal notice of election in accordance with the terms of his employment agreement, thereby ending his service as Chief Executive Officer effective February 12, 2010. Mr. Geiger has served as our Chairman and CEO since 1996. Mr. Geiger continues to serve as Chairman of our Board of Directors and as a part-time advisor to the Company. Effective February 12, 2010, Ms. Meads and Mr. Johnson were each promoted to the position of Co-Chief Executive Officer. In addition, also effective February 12, 2010, Mr. Cunningham was promoted to the position of President and Chief Financial Officer (see Note 3 to the Notes to Consolidated Financial Statements for a further discussion).
Growth Strategy
Store Productivity. We seek to generate sales growth by increasing sales per square foot, increasing average unit retail and increasing transactions. In an effort to accomplish that growth, we invest in strategic initiatives such as enhancing our supply chain and store productivity technologies. Additionally, we currently have over 170 stores in our chain operating at over $800 of sales per square foot, compared to the total chain average of $624 per square foot. We recognize the opportunity to increase the square footage in a number of these highly productive locations, where appropriate, with the expectation that we will be able to generate additional sales growth.
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 216 new Aéropostale stores. We plan to continue our growth by opening a total of approximately 25 new Aéropostale stores during fiscal 2010. We plan to open stores both in markets where we currently operate, as well as in new markets (see the section “Stores - Store design and environment” below).
P.S. from Aéropostale. During 2009, we launched a new retail store concept called “P.S. from Aéropostale” by opening our first 14 stores in five states. P.S. from Aéropostale offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. The P.S. brand draws from the core competencies of Aéropostale, offering the customer trend-right merchandise at compelling values. The innovative store format strives to be a fun, playful and inviting shopping experience for both the parent and child. In addition, we launched an e-commerce website at www.ps4u.com shortly thereafter. We plan to open approximately 25 to 30 additional P.S. from Aéropostale stores during fiscal 2010.
E-Commerce. We launched our Aéropostale e-commerce business in May 2005. The Aéropostale web store is accessible at our website, www.aeropostale.com. We also sell P.S. from Aéropostale merchandise on our e-commerce website. 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 fiscal 2008, we signed our first international licensing agreement. As licensor we 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 opened five Aéropostale brand retail stores in the United Arab Emirates during fiscal 2009, and expects to open approximately eight additional stores during fiscal 2010. We assume no inventory risk on the 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 continue to evaluate additional international licensing in various locations around the world.
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. We have also begun, on a very select basis, opening street level stores in the New York City area. As of January 30, 2010, we operated 938 Aéropostale stores consisting of 894 stores in 49 states and Puerto Rico and 44 stores in Canada and 14 P.S. from Aéropostale stores in five states.
The following table highlights the number of Aéropostale, Jimmy’Z and P.S. from Aéropostale stores opened and closed since the beginning of fiscal 2007:
Store design and environment. Our stores average approximately 3,600 square feet. 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 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 or a group district manager manages each of our 13 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 further penetrate the existing markets we are already in, as well as to enter new markets. We plan to continue increasing our store base during fiscal 2010 by opening approximately 25 new Aéropostale stores and 25 to 30 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. We have also begun, on a very select basis, opening street level stores in the New York City area. A primary site evaluation criteria includes average sales per store 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 2009, our average net investment was approximately $463,000 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).
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 design and merchandising teams focus on designing merchandise that meets the demands of our 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 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. In 2008 we began a phased implementation of new assortment planning and allocation systems. We recently implemented the latest phase of our allocation system in 2009 and in 2010 we expect to supplement that system with an order optimization component, which we expect will allow us to further improve our inventory position at the store level. In 2011, we expect to begin the implementation of an integrated assortment planning tool.
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 2009, we sourced approximately 81% 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 and Central America. 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 performs audits at each factory and as a result, 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.
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
To support our stores in the United States and Puerto Rico, we maintain two distribution centers to process merchandise and 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 these 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.
During fiscal 2009, we entered into an agreement with a third party to perform distribution services for our stores in Canada. The distribution center is located in Etobicoke, Ontario, Canada, and is independently owned and operated. In Canada, the third party distribution center receives, processes and warehouses our merchandise for all of our stores in Canada. Unlike in the United States however, we do not lease the facility and we are not the only company with product in this warehouse. Prior to opening the facility in Canada, all of our products destined for our stores in Canada were first shipped to the United States and processed through our South River, New Jersey distribution center.
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.
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, since 2008 we have been implementing phases of new planning and allocation systems, as discussed above. During 2010 we will begin implementing a workforce management system, which we believe will improve our labor scheduling at the store level. We are also completing implementation of a data warehouse system during 2010, which we believe will enhance our business intelligence reporting capabilities. We expect 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®, P.S. FROM AÉROPOSTALE™, 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®, P.S. FROM AÉROPOSTALE™, and related marks in over 70 foreign countries. We plan to continue this focus on expanding our international registrations of our marks in the future.
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 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, our Aéropostale brand competes primarily with other teen apparel retailers including, but not limited to, Abercrombie & Fitch®, American Eagle Outfitters®, Hollister®, Old Navy®, and Pacific Sunwear®. Our P.S. from Aéropostale brand competes primarily with other retailers such as Justice® and Children’s Place®. as well as department stores, mail order retailers and mass merchandisers. Retailers in our sector compete primarily on the basis of design, price, quality, service and product assortment.
Employees
As of January 30, 2010, we employed 3,656 full-time and 10,804 part-time employees. We employed 611 of our employees at our corporate offices and in the field, and 13,849 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 2009, our then 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.
Item 1A.
Item 1A. Risk Factors
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 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 changes in consumer spending patterns affect us unfavorably. Therefore, our growth, sales and profitability may be adversely affected by 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 the “Aéropostale”, “Aéro” or “P.S. from Aéropostale” 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 loss of an anchor or other significant tenant in a shopping mall in which we have a store, or 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:
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actions of competitors or mall anchor tenants;
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changes in general economic conditions and consumer spending patterns;
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fashion trends;
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changes in our merchandise mix;
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the effectiveness of our inventory management;
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calendar shifts of holiday or seasonal periods;
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the timing of promotional events; and
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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.
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:
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identify suitable markets and sites for new store locations;
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negotiate acceptable lease terms;
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hire, train and retain competent store personnel;
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foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise;
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manage inventory and distribution effectively to meet the needs of new and existing stores on a timely basis;
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expand our infrastructure to accommodate growth; and
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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.
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. Our merchandise is sourced directly from foreign vendors whose manufacturing facilities are located primarily in Asia and Central America. 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 2009, we sourced approximately 81% of our merchandise from our top five merchandise vendors. During fiscal 2008, we sourced approximately 76% 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.
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 2009, we opened 24 Aéropostale stores in the U.S. including Puerto Rico, 15 Aéropostale stores in Canada and 14 P.S. from Aéropostale stores. 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. 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 now closed, 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 or labor disruption 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 unexpected 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 Mindy C. Meads, our Co-Chief Executive Officer; Thomas P. Johnson, our Co-Chief Executive Officer, or Michael J. Cunningham, our 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.
A significant decrease in sales during peak shopping seasons could have an adverse effect on our financial condition and results of operations.
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 third parties to manage our distribution centers and transport our merchandise to our stores; a disruption of our distribution activities could have a material adverse effect on our business.
The efficient operation of our stores is dependent on our ability to distribute, in a timely manner, our merchandise to our store locations throughout the United States and Canada. We currently lease and maintain two, third party, independently operated 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 virtually all of our merchandise. In addition, we also utilize a third distribution center, located in Canada, which is independently owned and operated.
These third parties employ personnel represented by labor unions. Although there have been no work stoppages or disruptions since the inception of our relationships with these third party providers, 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 distribution centers to our stores. Any failure by any of these third parties to respond adequately to our warehousing, distribution and transportation needs could have a material adverse effect on our business, financial condition and results of operations.
We rely on a third party to manage the warehousing and order fulfillment for our E-Commerce business; any disruption of these activities could have a material adverse effect on this 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® 87® and 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.
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 not be possible, in those few foreign countries where we were not 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.
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, would adversely affect our operating results and financial condition.
Item 1B.
Item 1B. Unresolved Staff Comments
None
Item 2.
Item 2. Properties
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 2015 and 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.
Item 3.
Item 3. Legal Proceedings
In January 2008, we became aware 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.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 3, 2008.
As of March 19, 2010, there were 58 stockholders of record. However, when including others holding shares in broker accounts under street name, we estimate the shareholder base at approximately 57,500.
All stock prices in the above table were adjusted for the three-for-two stock split on all shares of our common stock that was distributed on March 5, 2010.
PERFORMANCE GRAPH
The following graph shows the changes, for the period commencing January 31, 2005 and ended January 29, 2010 (the last trading day during fiscal 2009), 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.
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 stock repurchase program. On December 7, 2009, our Board of Directors approved a $250.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $850.0 million. The repurchase program may be modified or terminated by the Board of Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, opening and closing of our stock trading window, and liquidity and capital resource requirements going forward. Our purchases of treasury stock for the fourth quarter of fiscal 2009 and remaining availability pursuant to our share repurchase program were as follows:
__________
(a)
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.
(b)
Includes additional $250.0 million of repurchase availability that was approved on December 7, 2009.
Item 6.
Item 6. Selected Financial Data
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:
__________
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction
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 30, 2010, we operated 938 Aéropostale stores consisting of 894 stores in 49 states and Puerto Rico and 44 stores in Canada. In addition, our new concept, P.S. from Aéropostale, offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. As of January 30, 2010, we operated 14 P.S. from Aéropostale stores in five states. In addition, pursuant to a Licensing Agreement, our international licensee operated five Aéropostale stores in the United Arab Emirates as of January 30, 2010.
We previously announced planned executive changes as described in our Form 8-K filed on September 25, 2009. On February 1, 2010, Julian R. Geiger, our Chairman and former Chief Executive Officer, provided us with formal notice of election in accordance with the terms of his employment agreement, thereby ending his service as Chief Executive Officer effective February 12, 2010. Mr. Geiger has served as our Chairman and CEO since 1996. Mr. Geiger continues to serve as Chairman of our Board of Directors and as a part-time advisor to the Company. Effective February 12, 2010, Ms. Meads and Mr. Johnson were each promoted to the position of Co-Chief Executive Officer. In addition, also effective February 12, 2010, Mr. Cunningham was promoted to the position of President and Chief Financial Officer (see Note 3 to the Notes to Consolidated Financial Statements for a further discussion).
Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2009 was the 52-week period ended January 30, 2010, fiscal 2008 was the 52-week period ended January 31, 2009 and fiscal 2007 was the 52-week period ended February 2, 2008. Fiscal 2010 will be the 52-week period ending January 29, 2011.
The discussion in the following section is on a consolidated basis, unless indicated otherwise. All share and per share amounts presented in this report were retroactively adjusted for the common stock split announced on February 3, 2010 (see Note 2 to the Notes to Consolidated Financial Statements for a further discussion).
Overview
We achieved net sales of $2.230 billion during fiscal 2009, an increase of $344.6 million or 18% from fiscal 2008. Gross profit, as a percentage of net sales, increased by 3.3 percentage points for fiscal 2009. Selling, general and administrative expense, or SG&A, as a percentage of net sales, decreased by 0.7 percentage points in fiscal 2009. The effective tax rate was 40.1% for fiscal 2009, compared with 39.9% for fiscal 2008. Net income for fiscal 2009 was $229.5 million, or $2.27 per diluted share, compared with net income of $149.4 million, or $1.47 per diluted share, for fiscal 2008.
As of January 30, 2010, we had working capital of $288.2 million, cash and cash equivalents of $347.0 million, no short-term investments and no debt outstanding. We repurchased 7.6 million shares of common stock for $174.3 million during fiscal 2009 compared to 0.3 million shares of common stock for $6.7 million during fiscal 2008. Merchandise inventories decreased by 2% on a per store square foot basis as of January 30, 2010 compared to last year. Cash flows from operating activities were $334.4 million for fiscal 2009. We operated 952 total stores as of January 30, 2010, an increase of 4% 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:
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:
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 $344.6 million, or by 18% in fiscal 2009, as compared to fiscal 2008. The increase in net sales was driven by an increase in comparable store sales of 10% or $172.3 million, average store square footage growth of 7% (primarily from new stores) and from a 48% increase in our e-commerce business. Comparable store sales increased in both our young women’s and young men’s categories. The overall comparable store sales increase reflected increases of 3% in average unit retail, 4% in the number of sales transactions and 4% in units per sales transaction. Non-comparable store sales increased by $172.3 million due primarily to 38 more stores open at the end of fiscal 2009 compared to the end of fiscal 2008. Total non-comparable sales includes net sales from our e-commerce business which increased by $41.9 million during fiscal 2009 when compared to the prior year.
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 store 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 $177.6 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).
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, shipping and handling costs, 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, depreciation and amortization and impairment charges.
Gross profit, as a percentage of net sales, increased by 3.3 percentage points in fiscal 2009 compared to fiscal 2008. The increase was due to higher merchandise margin of 2.5 percentage points, and leveraging of occupancy costs of 0.5 percentage points and distribution and transportation costs of 0.2 percentage points. The improvement in merchandise margin was due primarily to improved merchandise sell-through and less markdowns.
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.
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 decreased by 0.7 percentage points, as a percentage of net sales, and increased by $58.6 million during fiscal 2009. The SG&A decrease during fiscal 2009, as a percentage of net sales, was due primarily to a 0.8 percentage point decrease in store-line expenses resulting primarily from payroll, and was partially offset by a 0.1 percentage point increase in e-commerce expenses, resulting from sales growth. The increase in SG&A was largely due to an increase in store-line expenses of $22.3 million, higher transaction costs of $11.9 million resulting primarily from new store growth and increased sales and $1.5 million of higher marketing costs. Additionally, the increase was due to a $23.0 million increase in corporate expenses, which included higher benefits of $5.5 million, incentive compensation of $4.9 million, stock-based compensation of $2.4 million, data processing of $1.8 million and charitable product donations of $1.7 million.
SG&A decreased by 0.2 percentage points, as a percentage of net sales, and increased by $60.1 million during fiscal 2008. 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. 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.
Jimmy’Z Asset Impairment Charges
During the fourth quarter of fiscal 2007, we recorded asset impairment charges of $9.0 million. Subsequently, all 14 Jimmy’Z stores were closed during fiscal 2008 and fiscal 2009 (see Note 4 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 fiscal 2007 as a result of a settlement agreement with our former Executive Vice President and Chief Merchandising Officer (see Note 14 to the Notes to Consolidated Financial Statements for a further discussion).
Interest Income
Interest income, net of interest expense, decreased by $0.4 million from fiscal 2008 to fiscal 2009.
Interest income, net of interest expense, decreased by $6.0 million from fiscal 2007 to fiscal 2008. The decrease was due to lower interest rates and the cumulative impact of cash used for share repurchases in the fourth quarter of fiscal 2007 of $266.7 million.
Income Taxes
Our effective tax rate was 40.1% for fiscal 2009, compared to 39.9% for fiscal 2008 and 38.2% for fiscal 2007. The increase in the effective tax rate is due primarily to higher state taxes and nondeductible officers’ compensation.
Net Income and Earnings Per Share
Net income was $229.5 million, or $2.27 per diluted share, for fiscal 2009, compared with net income of $149.4 million, or $1.47 per diluted share, for fiscal 2008 and net income of $129.2 million, or $1.15 per diluted share, for fiscal 2007. Earnings per share increased by 54% in fiscal 2009 due to both the increase in net income and fewer weighted average shares outstanding, resulting from the Company’s repurchase of its common stock.
Net income for fiscal 2007 was favorably impacted by $7.7 million ($4.8 million after-tax, or $0.05 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 $0.03 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 $0.05 per diluted share) (see Note 4 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, if necessary. At January 30, 2010, we had working capital of $288.2 million, cash and cash equivalents of $347.0 million and no debt outstanding under our $150.0 million credit facility.
The following table sets forth our cash flows for the period indicated (in thousands):
Operating Activities
Cash flows from operating activities, our principal form of liquidity on a full-year basis, increased by $132.3 million in fiscal 2009. The primary components of the increase in cash flows from operations for fiscal 2009 over the prior fiscal year included an increase in net income of $80.0 million. Changes in operating assets and liabilities contributed $55.1 million of the increase in cash generated from operations, primarily related to changes in the timing of the payment of liabilities.
Cash flows from operating activities increased by $31.1 million in fiscal 2008 as compared to the prior fiscal year. The primary components of the increase in cash flows from operations for fiscal 2008 included an increase in net income of $20.2 million. Other non cash items included in net income increased $25.2 million over the prior year, and were partially offset by changes in operating assets and liabilities.
Investing Activities
We invested $53.9 million in capital expenditures in fiscal 2009, primarily for the construction of 39 new Aéropostale stores, 14 P.S. from Aéropostale stores, to remodel 15 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. In fiscal 2010, we plan to invest approximately $80.0 million in capital expenditures to open approximately 25 Aéropostale stores, approximately 25 to 30 P.S. from Aéropostale stores and approximately 40 store remodels, in addition to certain information technology investments.
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.
We invested $82.3 million in capital expenditures in fiscal 2007, primarily for the construction of 88 new Aéropostale stores, to remodel seven existing stores, to complete the rollout of upgraded point of sale systems to our store chain, to open a second distribution center and for certain other information technology investments.
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.
On December 7, 2009, our Board of Directors approved a $250.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $850.0 million.
We repurchased 7.6 million shares for $174.3 million during fiscal 2009, as compared to repurchases of 0.3 million shares for $6.7 million during fiscal 2008 and 17.5 million shares for $266.7 million during fiscal 2007. Program to date, we have returned $647.2 million to shareholders in the form of 42.7 million shares repurchased, at an average price of $15 per share. We have approximately $202.8 million of repurchase authorization remaining as of January 30, 2010 under the $850.0 million share repurchase program.
We have an amended and restated revolving credit facility with Bank of America, N.A. (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 during fiscal 2009 or as of January 30, 2010.
Contractual Obligations
The following table summarizes our contractual obligations as of January 30, 2010:
The real estate operating leases included in the above table do not include contingent rent based upon sales volume, which amounted to approximately 23% of minimum lease obligations in fiscal 2009. 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 2009.
Our open purchase orders are cancelable without penalty and are therefore not included in the above table.
As discussed in Note 11 to the Notes to Consolidated Financial Statements, we have a Supplemental Executive Retirement Plan (“SERP”) liability of $25.3 million at January 30, 2010; a Postretirement Benefit Plan liability of $0.9 million at January 30, 2010; and a Long-Term Incentive Deferred Compensation Plan liability of $0.9 million at January 30, 2010. Such liability amounts are not reflected in the table above. As a result of Mr. Geiger’s election and another employee retirement, we expect to make payments in the next 12 months of approximately $17.1 million from our SERP which amount is included in the total SERP liability of $25.3 million (see Notes 3 and 11 to the Notes to Consolidated Financial Statements).
There were no financial guarantees and no commercial commitments outstanding as of January 30, 2010.
Our total liabilities for unrecognized tax benefits were $4.9 million at January 30, 2010, of which $1.0 million is classified in accrued expenses. We cannot make a reasonable estimate of the amount and period of related future payments for these non-current liabilities of $3.9 million. 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 30, 2010, 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 30, 2010. 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 30, 2010 would have impacted net income by $1.0 million for the fiscal year ended January 30, 2010.
Income Taxes
Income taxes are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes” (“ASC 740”). Under ASC 740, 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.
ASC 740 clarifies the accounting for uncertainty in income tax recognized in an entity’s financial statements and 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 de-recognition, classification, accounting in interim periods, and expanded disclosure requirements (see Note 13 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. Additionally, we have recorded Aéropostale store impairment charges of $3.0 million for six stores in fiscal 2009 compared to $3.7 million for 11 stores in fiscal 2008 and $1.7 million for five stores in fiscal 2007, which were included in depreciation and amortization expense, which is a component of cost of sales (see Note 4 to the Notes to Consolidated Financial Statements for a further discussion). We believe that the carrying values of finite-lived assets, and their useful lives, are appropriate as of January 30, 2010. 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 current liability of $17.1 million and SERP non-current liability of $8.2 million are appropriately stated as of January 30, 2010. 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 2009, pension expense would have changed by less than $50,000.
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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As of January 30, 2010, 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’s 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 gain included in accumulated other comprehensive loss was approximately $49,000 as of January 30, 2010. A 10% movement in quoted foreign currency exchange rates could result in a fair value translation fluctuation of approximately $3.2 million, which would be recorded in accumulated 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.
Item 8.
Item 8. Financial Statements and Supplementary Data
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 30, 2010 and January 31, 2009, 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 30, 2010. 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 30, 2010 and January 31, 2009, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2010, 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.
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 30, 2010, 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 29, 2010 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte and Touche LLP
New York, New York
March 29, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 30, 2010, 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 30, 2010, 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 30, 2010, of the Company and our report dated March 29, 2010 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte and Touche LLP
New York, New York
March 29, 2010
AÉROPOSTALE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
AÉROPOSTALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See Notes to Consolidated Financial Statements.
AÉROPOSTALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
See Notes to Consolidated Financial Statements.
AÉROPOSTALE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
AÉROPOSTALE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
References to the “Company,” “we,” “us,” or “our” means Aéropostale, Inc. and its subsidiaries, except as expressly indicated or unless the context otherwise requires. We are a mall-based specialty retailer of casual apparel and accessories for young women and men. As of January 30, 2010, we operated 938 Aéropostale stores consisting of 894 stores in 49 states and Puerto Rico and 44 stores in Canada. In addition, our new concept, P.S. from Aéropostale, offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. As of January 30, 2010, we operated 14 P.S. from Aéropostale stores in five states. In addition, pursuant to a Licensing Agreement, our international licensee operated five Aéropostale stores in the United Arab Emirates as of January 30, 2010.
Basis of Consolidation and Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”). The consolidated financial statements include the accounts of Aéropostale, Inc. and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2009 was the 52-week period ended January 30, 2010, fiscal 2008 was the 52-week period ended January 31, 2009 and fiscal 2007 was the 52-week period ended February 2, 2008. Fiscal 2010 will be the 52-week period ending January 29, 2011.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ materially from those estimated.
The most significant estimates made by management include those made in the areas of merchandise inventory, defined benefit retirement plans, long-lived assets, and income taxes. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based on such periodic evaluations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company invests its excess cash in demand deposits and money market funds that are classified as cash equivalents. The Company has established guidelines that relate to credit quality, diversification and maturity and that limit exposure to any one issuer of securities.
Seasonality
Our business is highly seasonal, and historically we have realized a significant portion of our sales, net income, and cash flow in the second half of the fiscal year, attributable to the impact of the back-to-school selling season in the third quarter and the holiday selling season in the fourth quarter. Additionally, working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters.
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
The financial statements of our Canadian subsidiary have been translated into United States dollars by translating balance sheet accounts at the year-end exchange rate and statement of income accounts at the average exchange rates for the year. Foreign currency translation gains and losses are reflected in the equity section of our consolidated balance sheet in accumulated other comprehensive loss and are not adjusted for income taxes as they relate to a permanent investment in our subsidiary in Canada. The balance of the unrealized foreign currency translation adjustment included in accumulated other comprehensive loss was income of approximately $49,000 as of January 30, 2010 compared to a loss of $2.7 million as of January 31, 2009. Foreign currency transaction gains and losses are charged or credited to earnings as incurred.
Cash Equivalents
We include credit card receivables and all short-term investments that qualify as cash equivalents with an original maturity of three months or less in cash and cash equivalents.
Fair Value Measurements
We follow the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurement Disclosures” (“ASC 820”) as it relates to financial and nonfinancial assets and liabilities. We currently have no financial assets or liabilities that are measured at fair value. Our non-financial assets, which include property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and we are required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the fair value. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels: Level 1-quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2-inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and Level 3-unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
The fair value of cash and cash equivalents, receivables, and accounts payable approximates their carrying value due to their short-term maturities.
Merchandise Inventory
Merchandise inventory consists of finished goods and is valued utilizing the cost method at the lower of cost or market determined on a weighted-average basis. Merchandise inventory includes warehousing, freight, merchandise and design costs as an inventory product cost. We 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 recorded adjustments to inventory and cost of sales for lower of cost or market of $9.3 million as of January 30, 2010 and $9.5 million as of January 31, 2009.
Vendor Rebates
We receive vendor rebates from certain merchandise suppliers. The vendor rebates are earned as we receive merchandise from the suppliers and are computed at an agreed upon percentage of the purchase amount. Vendor rebates are recorded as a reduction of merchandise inventory, and are then recognized as a reduction of cost of sales when the related inventory is sold. Vendor rebates recorded as a reduction of merchandise inventory were $1.5 million as of January 30, 2010 and $0.9 million as of January 31, 2009. Vendor rebates recorded as a reduction of cost of sales were $8.8 million for fiscal 2009, $8.3 million for fiscal 2008, and $7.4 million for fiscal 2007.
Fixtures, Equipment and Improvements
Fixtures, equipment and improvements are stated at cost. Depreciation and amortization are provided for by the straight-line method over the following estimated useful lives:
Fixtures and equipment
10 years
Leasehold improvements
Lesser of 10 years or lease term
Computer equipment
5 years
Software
3 years
Evaluation for Long-Lived Asset Impairment
We periodically evaluate the need to recognize impairment losses relating to long-lived assets in accordance with FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC 360”). Long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, we estimate the future undiscounted cash flows expected to result from the use of the asset and eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, we write the asset down to fair value and we record impairment charges, accordingly. The estimation of fair value is measured by discounting expected future cash flows. The recoverability assessment related to store-level assets requires judgments and estimates of future revenues, gross margin rates and store expenses. The Company bases these estimates upon its past and expected future performance. The Company believes its estimates are appropriate in light of current market conditions. However, future impairment charges could be required for certain store locations if the Company does not achieve its current revenue or cash flow projections (see note 4 for a further discussion).
Pre-Opening Expenses
New store pre-opening costs are expensed as they are incurred.
Leases
Our store operating leases typically provide for fixed non-contingent rent escalations. Rent payments under our store leases typically commence when the store opens. These leases include a pre-opening period that allows us to take possession of the property to construct the store. We recognize rent expense on a straight-line basis over the non-cancelable term of each individual underlying lease, commencing when we take possession of the property (see note 14 for a further discussion).
In addition, our store leases require us to pay additional rent based on specified percentages of sales, after we achieve specified annual sales thresholds. We use store sales trends to estimate and record liabilities for these additional rent obligations during interim periods. Most of our store leases entitle us to receive tenant allowances from our landlords. We record these tenant allowances as a deferred rent liability, which we amortize as a reduction of rent expense over the non-cancelable term of each underlying lease.
Revenue Recognition
Sales revenue is recognized at the “point of sale” in our stores, and at the time our e-commerce customers take possession of merchandise. Allowances for sales returns are recorded as a reduction of net sales in the periods in which the related sales are recognized. Also included in sales revenue is shipping revenue from our e-commerce customers. Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum royalty levels.
Gift Cards
We sell gift cards to our customers in our retail stores, through our Web site, and through select third parties. We do not charge administrative fees on unused gift cards and our gift cards do not have an expiration date. We recognize income from gift cards when the gift card is redeemed by the customer. In addition, in the fourth quarter of fiscal 2007, we relieved our legal obligation to escheat the value of unredeemed gift cards to the relevant jurisdiction. We therefore determined that the likelihood of certain gift cards being redeemed by the customer was remote, based upon historical redemption patterns of gift cards. For those gift cards that we determined redemption to be remote, we reversed our liability, and recorded gift card breakage income. In fiscal 2009, we recorded $4.0 million in net sales related to gift card breakage income. In fiscal 2008, we recorded $2.9 million in net sales related to gift card breakage income compared to the initial recognition of $7.7 million in the fourth quarter of fiscal 2007, of which, $5.9 million was related to gift cards issued prior to fiscal 2007 (see note 7 for a further discussion).
Cost of Sales
Cost of sales includes costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center to the stores, shipping and handling costs, payroll for our design, buying and merchandising departments, and occupancy costs. Occupancy costs include rent, contingent rent, common area maintenance, real estate taxes, utilities, repairs, maintenance, depreciation and amortization and impairment charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, include costs related to selling expenses, store management and corporate expenses such as payroll and employee benefits, marketing expenses, employment taxes, information technology maintenance costs and expenses, insurance and legal expenses, store pre-opening and other corporate level expenses. Store pre-opening expenses include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.
Self-Insurance
We self-insure our workers compensation claims and our employee medical benefits. The recorded liabilities for these risks are calculated primarily using historical experience and current information. The liabilities include amounts for actual claims and estimated claims incurred but not yet reported. Self-insurance liabilities were $4.8 million at January 30, 2010 and $4.3 million at January 31, 2009. We paid workers compensation claims of $0.7 million in fiscal 2009, $0.4 million in fiscal 2008 and $0.3 million in fiscal 2007. In addition, we paid employee medical claims of $11.8 million in fiscal 2009, $9.0 million in fiscal 2008 and $7.1 million in fiscal 2007.
Retirement Benefit Plans
Our retirement benefit plan costs are accounted for using actuarial valuations required by FASB ASC Topic 715 “Compensation - Retirement Benefits” (“ASC 715”). ASC 715 requires an entity to recognize the funded status of its defined pension plans on the balance sheet and to recognize changes in the funded status that arise during the period but are not recognized as components of net periodic benefit cost, within other comprehensive loss, net of income taxes (see note 11 for a further discussion).
Marketing Costs
Marketing costs, which include e-commerce, print, radio and other media advertising and collegiate athletic conference sponsorships, are expensed at the point of first broadcast or distribution, and were $8.5 million in fiscal 2009, $9.5 million in fiscal 2008, and $7.6 million in fiscal 2007.
Stock-Based Compensation
We follow the provisions from the FASB ASC Topic 718 “Compensation - Stock Compensation” (“ASC 718”). Under such guidance, all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the income statement.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting” (“ASC 280”), establishes standards for reporting information about a company’s operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. We operate in and report as a single aggregated operating segment, which includes the operations of our Aéropostale retail stores, P.S. from Aéropostale retail stores, our Aéropostale e-commerce site, and licensing revenue. We do not rely on any major customers as a source of revenue. Licensing revenue was less than 1% of total net sales for each period presented.
The following tables present summarized geographical information (in thousands):
1 Amounts represent sales from Aéropostale U.S. retail stores, as well as e-commerce sales, that are billed to and/or shipped to foreign countries and licensing revenue.
Our consolidated net sales mix by merchandise category was as follows:
During fiscal 2009, we sourced approximately 81% of our merchandise from our top five merchandise vendors. During fiscal 2008, we sourced approximately 76% of our merchandise from our top five merchandise vendors. The loss of any of these sources could adversely impact our ability to operate our business. We ceased doing business with South Bay Apparel Inc., one of our largest suppliers of graphic T-shirts and fleece, in July 2007 (see note 14 for a further discussion). We have replaced this business both with new vendors and our existing vendor base.
Income Taxes
Income taxes are accounted for in accordance with FASB ASC Topic 740, “Income Taxes” (“ASC 740”). Under ASC 740, 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. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and 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. Interest and penalties, if any, are recorded within the provision for income taxes in the Company’s Consolidated Statements of Income and are classified on the Consolidated Balance Sheets with the related liability for uncertain tax contingency liabilities.
Subsequent Events
For the fiscal year ended January 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through the date of financial statement issuance (see notes 2 and 3 for a further discussion).
Recent Accounting Developments
In June 2009, the FASB issued authoritative guidance which established the FASB Accounting Standards Codification (“Codification”). The Codification became the source of authoritative generally accepted accounting principles in the United States of America. It changed the referencing of financial standards but was not intended to change or alter existing U.S. GAAP. The Codification was effective for interim or annual financial periods ending after September 15, 2009 and was effective for us in the third quarter of 2009. This new guidance applies only to financial statement disclosures and therefore we have updated our references for the accounting guidance.
In May 2009, the FASB issued authoritative guidance now codified as FASB ASC Topic 855, “Subsequent Events”. The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this guidance sets forth: a) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; b) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and c) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In accordance with this guidance, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009. We adopted the new guidance in the second quarter of 2009. The adoption did not have an impact on our consolidated financial statements.
In December 2008, the FASB issued authoritative guidance now codified as FASB ASC Topic 715, “Compensation - Retirement Benefits” (“ASC 715”). The guidance requires more detailed disclosures about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. The new guidance was effective for fiscal years ending after December 15, 2009 and the adoption did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued authoritative guidance now codified as FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This guidance applies under other accounting pronouncements that require or permit fair value measurements, the FASB having concluded in those other accounting pronouncements that fair value is the relevant measurement attribute. It is effective in financial statements issued for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued additional ASC 820 guidance which delayed application of certain guidance related to nonrecurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. We adopted the provisions of ASC 820 as it related to nonrecurring fair value measurements of non-financial assets and liabilities at the beginning of fiscal 2009. The adoption did not have a material impact on our consolidated financial statements.
2. Stock Split
On February 3, 2010, we announced a three-for-two stock split on all shares of our common stock. The stock split was consummated and distributed on March 5, 2010 in the form of a stock dividend to all shareholders of record on February 24, 2010. All share and per share amounts presented in this report were retroactively adjusted for the common stock split, as were all previously reported periods contained herein. This stock split resulted in the issuance of 31.3 million additional shares of common stock and was accounted for in accordance with FASB ASC Topic 260, “Earnings Per Share” (“ASC 260”) by the transfer of $0.3 million from additional paid-in capital to common stock, which is the amount equal to the par value of the additional shares issued to effect the stock split on March 5, 2010.
3. Executive Transition
On February 1, 2010, Julian R. Geiger, our Chairman and former Chief Executive Officer, provided us with formal notice of election in accordance with the terms of his employment agreement, thereby ending his service as Chief Executive Officer effective February 12, 2010. Mr. Geiger has served as our Chairman and CEO since 1996. Mr. Geiger continues to serve as Chairman of our Board of Directors and as a part-time advisor to the Company. Effective February 12, 2010, Mindy C. Meads and Thomas P. Johnson were each promoted to the position of Co-Chief Executive Officer. In addition, also effective February 12, 2010, Michael J. Cunningham was promoted to the position of President and Chief Financial Officer. On February 12, 2010, Ms. Meads and Mr. Johnson each received a grant of 43,092 shares of restricted stock, 50% of which will vest one year from the grant date, and 50% two years from the grant date. Additionally, Mr. Cunningham received a grant of 19,103 shares of restricted stock in September 2009, 50% of which will vest in September 2010 and 50% in September 2011.
In connection with his advisory role, Mr. Geiger will receive an annual advisory fee of $250,000 and an annual grant of not less than 30,000 shares, or more than 60,000 shares of restricted stock, depending upon Company performance during that fiscal year. As a result of the election by Mr. Geiger, we expect to make a payment to Mr. Geiger, in August 2010, of approximately $16.5 million from our Supplemental Executive Retirement Plan (“SERP”). Accordingly, the SERP liability related to Mr. Geiger has been classified as a current liability in our consolidated balance sheet as of January 30, 2010 (see note 11 for a further discussion). Such amount will be paid from our cash flows from operations. At the date of payment to Mr. Geiger, we will record a charge of approximately $5.7 million in selling, general and administrative expenses, with a corresponding amount recorded to relieve accumulated other comprehensive loss included in our stockholder’s equity. This accounting treatment is in accordance with settlement accounting procedures under the provisions of ASC 715-30-35-79. In February 2010, we recorded a charge of $0.5 million in selling, general and administrative expenses for the accelerated amortization of stock compensation expense in connection with the accelerated vesting of Mr. Geiger’s remaining stock awards.
4. Asset Impairment and Jimmy’Z Store Concept Closing
Asset Impairment
We have recorded Aéropostale store impairments of $3.0 million in fiscal 2009 for six stores, $3.7 million in fiscal 2008 for 11 stores and $1.7 million in fiscal 2007 for five stores. These charges were included in depreciation and amortization expense, which is included as a component of cost of sales. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of changes in circumstances that indicated the carrying value of an asset may not be recoverable or management’s intention to relocate or close the stores. The 2009 impairment charges were primarily related to revenues not meeting targeted levels of the respective stores as a result of the macroeconomic conditions, location related conditions and other factors that are negatively impacting the sales and cash flows of these locations.
Long-lived assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 3 inputs as defined in the fair value hierarchy as described in note 1. The fair value of long-lived assets is determined by estimating the amount and timing of net future discounted cash flows. We estimate future cash flows based on our experience, current trends and local market conditions.
The table below sets forth by level within the fair value hierarchy the long-lived assets as of January 30, 2010 for which an impairment assessment was performed.
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of ASC 360, long-lived assets held and used with a carrying amount of $3.0 million were written down to zero, which is their fair value, resulting in an impairment charge of $3.0 million, which was included in earnings for the period.
Jimmy’Z Store Concept Closing
During the second quarter of fiscal 2009, we closed all 11 Jimmy’Z stores. During the first twenty-six weeks of fiscal 2009, we recorded inventory related charges of $1.3 million, severance charges of $1.1 million, and net lease termination charges of $0.7 million. Of these costs, $2.8 million was recorded in cost of sales and $0.3 million was recorded in selling, general and administrative expenses. All of the above costs were paid as of January 30, 2010 and there are no remaining costs to be incurred in connection with the closings.
5. Accumulated Other Comprehensive Loss
The following table sets forth the components of accumulated other comprehensive loss:
1 Foreign currency translation adjustments are not adjusted for income taxes as they relate to a permanent investment in our subsidiary in Canada.
6. Fixtures, Equipment and Improvements
Fixtures, equipment and improvements consist of the following (in thousands):
Depreciation and amortization expense was $52.9 million in fiscal 2009, $45.8 million in fiscal 2008, and $36.8 million in fiscal 2007. Included in depreciation and amortization expense are Aéropostale store impairment charges of $3.0 million in fiscal 2009, $3.7 million in fiscal 2008 and $1.7 million in fiscal 2007.
7. Accrued Expenses
Accrued expenses consist of the following (in thousands):
8. Revolving Credit Facility
We have an amended and restated revolving credit facility with Bank of America, N.A. (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, including the repurchase of the Company’s capital stock and for its capital expenditures. The Credit Facility is scheduled to expire on November 13, 2012 and is guaranteed by all of our domestic subsidiaries (the “Guarantors”).
Loans under the Credit Facility are secured by all our assets and are guaranteed by the Guarantors. Upon the occurrence of a Cash Dominion Event (as defined in the Credit Facility) among other limitations, our ability to borrow funds, make investments, pay dividends and repurchase shares of our common stock would be limited. Direct borrowings under the Credit Facility bear interest at a margin over either LIBOR or a Base Rate (as each such term is defined in the Credit Facility).
The Credit Facility also contains covenants that, subject to specified exceptions, restrict our ability to, among other things:
•
incur additional debt or encumber assets of the Company;
•
merge with or acquire other companies, liquidate or dissolve;
•
sell, transfer, lease or dispose of assets; and
•
make loans or guarantees.
Events of default under the Credit Facility include, subject to grace periods and notice provisions in certain circumstances, failure to pay principal amounts when due, breaches of covenants, misrepresentation, default of leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, business failure or application for bankruptcy, institution of legal process or proceedings under federal, state or civil statutes, legal challenges to loan documents, and a change in control. If an event of default occurs, the Lender will be entitled to take various actions, including the acceleration of amounts due thereunder and requiring that all such amounts be immediately paid in full as well as possession and sale of all assets that have been used as collateral. Upon the occurrence of an event of default under the Credit Facility, the lenders may cease making loans, terminate the Credit Facility, and declare all amounts outstanding to be immediately due and payable. As of January 30, 2010, we are not aware of any instances of noncompliance with any covenants or any other event of default under the Credit Facility. As of January 30, 2010, we had no outstanding balances or stand-by or commercial letters of credit issued under the Credit Facility.
9. Earnings Per Share
In accordance with ASC 260, basic earnings per share has been computed based upon the weighted average of common shares during the applicable fiscal year. Diluted net income per share includes the additional dilutive effect of our potentially dilutive securities, which include certain stock options, restricted stock units and performance shares.
Earnings per common share has been computed as follows (in thousands, except per share data):
Options to purchase 6,000 shares in fiscal 2009, 1,572,764 shares in fiscal 2008, and 766,500 in fiscal 2007 were excluded from the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares.
10. Stock-Based Compensation
Under the provisions of ASC 718, all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the income statement.
Stock Options
We have stock option plans under which we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees. As of January 30, 2010, a total of 4,296,008 shares were available for future grant under our plans compared to a total of 5,150,118 shares as of January 31, 2009. Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over four years on a pro rata basis and expire after eight years. All outstanding stock options and restricted stock immediately vest upon (i) a change in control of the company and (ii) termination of the employee within one year of such change of control. We did not grant any stock options during fiscal 2009.
The fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model requires certain assumptions, including estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the consolidated statements of income.
In accordance with the provisions of ASC 718, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model based on certain assumptions for the grants in the respective periods. For fiscal 2008, our expected volatility was 43%, expected term was 5.25 years, risk-free interest rate was 2.68% and expected forfeiture rate was 25%. For fiscal 2007, our expected volatility was 45%, expected term was 5.25 years, risk-free interest rate was 4.49% and expected forfeiture rate was 25%.
We have elected to adopt the simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC Pool and condensed consolidated statements of cash flows of the tax effects of employee and director share-based awards that were outstanding.
The effects of applying the provisions of ASC 718 and the results obtained through the use of the Black-Scholes option-pricing model are not necessarily indicative of future values.
The following tables summarize stock option transactions for common stock for fiscal 2009:
1 The number of options expected to vest takes into consideration estimated expected forfeitures.
We recognized $2.7 million in compensation expense related to stock options in fiscal 2009, $3.7 million in fiscal 2008 and $4.7 million in fiscal 2007. The weighted-average grant-date fair value of options granted was $8.07 during fiscal 2008, and $8.23 during fiscal 2007. The intrinsic value of options exercised was $8.0 million in fiscal 2009, $1.7 million in fiscal 2008, and $15.4 million in fiscal 2007.
The following tables summarize information regarding non-vested outstanding stock options as of January 30, 2010:
As of January 30, 2010, there was $2.6 million of total unrecognized compensation cost related to non-vested options that we expect to be recognized over the remaining weighted-average vesting period of one year. We expect to recognize $1.9 million of this cost in fiscal 2010, $0.6 million in fiscal 2011 and $0.1 million in fiscal 2012.
Non-Vested Stock
Certain of our employees and all of our directors have been awarded non-vested stock, pursuant to non-vested stock agreements. The non-vested stock awarded to employees cliff vest after up to three years of continuous service with us. Initial grants of non-vested stock awarded to directors vest, pro-rata, over a three-year period, based upon continuous service. Subsequent grants of non-vested stock awarded to directors vest in full one year after the grant-date.
The following table summarizes non-vested shares of stock outstanding at January 30, 2010:
Total compensation expense is being amortized over the vesting period. Compensation expense was $8.1 million for fiscal 2009, $11.4 million for fiscal 2008 and $4.1 million for fiscal 2007. As of January 30, 2010, there was $7.2 million of unrecognized compensation cost related to non-vested stock awards that is expected to be recognized over the weighted average period of one year. The total fair value of shares vested were $8.2 million during fiscal 2009, $7.7 million during fiscal 2008 and $1.3 million during fiscal 2007.
Performance Shares
Certain of our executives have been awarded performance shares, pursuant to performance shares agreements. The performance shares vest at the end of three years of continuous service with us, and the number of shares ultimately awarded is contingent upon meeting various cumulative consolidated earnings targets. Compensation cost for the performance shares are periodically reviewed and adjusted based upon the probability of achieving certain performance goals targets. If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes.
The following table summarizes performance shares of stock outstanding at January 30, 2010:
Total compensation expense is being amortized over the vesting period. Compensation expense was $3.9 million for fiscal 2009, $1.5 million for fiscal 2008 and $0.6 million in fiscal 2007. As of January 30, 2010, there was $5.6 million of unrecognized compensation cost related to performance shares awards that is expected to be recognized over the weighted average period of two years.
11. Retirement Benefit Plans
Retirement benefit plan liabilities consisted of the following (in thousands):
401(k) Plan
We maintain a qualified, defined contribution retirement plan with a 401(k) salary deferral feature that covers substantially all of our employees who meet certain requirements. Under the terms of the plan, employees may contribute, subject to statutory limitations, up to 14% of gross earnings and we will provide a matching contribution of 50% of the first 5% of gross earnings contributed by the participants. We also have the option to make additional contributions. The terms of the plan provide for vesting in our matching contributions to the plan over a five-year service period with 20% vesting after two years and 50% vesting after year three. Vesting increases thereafter at a rate of 25% per year so that participants will be fully vested after year five. Contribution expense was $1.1 million in fiscal 2009, $0.8 million in fiscal 2008 and $0.7 million in fiscal 2007.
Supplemental Executive Retirement Plan
Our SERP is a non-qualified defined benefit plan for certain officers. The plan is non-contributory and not funded and provides benefits based on years of service and compensation during employment. Participants are fully vested upon entrance in the plan. Pension expense is determined using the projected unit credit cost method to estimate the total benefits ultimately payable to officers and this cost is allocated to service periods. The actuarial assumptions used to calculate pension costs are reviewed annually.
The following information about the SERP is provided below (in thousands):
Pension expense includes the following components (in thousands):
1 Rate of compensation is used for determining the benefit obligation and net periodic pension cost.
The estimated net loss and prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $544,000 and $74,000, respectively. The estimated net loss and prior service cost for the other postretirement plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $14,000 and $17,000, respectively.
The discount rates were determined by matching a published set of zero coupon yields and associated durations to expected plan benefit payment streams to obtain an implicit internal rate of return.
Long-term Incentive Deferred Compensation Plan
We have a long-term incentive deferred compensation plan established for the purpose of providing long-term incentives to a select group of management, with liabilities of $0.9 million as of January 30, 2010 and $0.6 million at January 31, 2009. The plan is a non-qualified, defined contribution plan and is not funded. Participants in this plan include all employees designated by us as Vice President, or other higher-ranking positions that are not participants in the SERP. We record annual monetary credits to each participant’s account based on compensation levels and years as a participant in the plan. Annual interest credits are applied to the balance of each participant’s account based upon established benchmarks. Each annual credit is subject to a three-year cliff-vesting schedule, and participants’ accounts will be fully vested upon retirement after completing five years of service and attaining age 55.
Postretirement Benefit Plan
We have a postretirement benefit plan for certain executives that provides retiree medical and dental benefits. The plan is an other post-employment benefit plan and is not funded. We have recorded non-current liabilities of $0.9 million as of January 30, 2010 and $0.7 million as of January 31, 2009 for the accumulated postretirement benefit obligation. Pension expense and the liability related to this plan was not material to our consolidated financial statements for any period presented.
We expect to contribute approximately $17.6 million to the SERP and $19,000 to the Postretirement Benefit Plan in fiscal 2010. The amount of cash contributions we are required to make to the plans could increase or decrease depending on when employees make retirement elections and other factors which are not in the control of the Company. Our expected cash contributions to the plans are equal to the expected benefit payments as shown in the table below.
Future benefit payments are expected to be (in thousands):
12. Stock Repurchase Program
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. During fiscal 2009, we repurchased 7.6 million shares for $174.3 million, as compared to repurchases of 0.3 million shares for $6.7 million during fiscal 2008 and 17.5 million shares for $266.7 million during fiscal 2007. On December 7, 2009, our Board of Directors approved a $250.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $850.0 million. As of January 30, 2010, we have approximately $202.8 million of repurchase authorization remaining under our $850.0 million share repurchase program.
13. Income Taxes
Domestic and foreign pretax income are as follows (in thousands):
The provision for income taxes consists of the following (in thousands):
Reconciliation of the U.S. statutory tax rate with our effective tax rate is summarized as follows:
The components of the net deferred income tax assets are as follows (in thousands):
As of January 30, 2010, we had approximately $40.5 million of NOL’s from certain states that were generated principally by our Jimmy’Z subsidiary that will expire between 2011 and 2030. We have recorded valuation allowances against certain of these NOL’s. Subsequent recognition of these deferred tax assets that were previously reduced by valuation allowances would result in an income tax benefit in the period of such recognition.
We have not recognized any United States (“U.S.”) tax expense on undistributed foreign earnings as they are intended to be indefinitely reinvested outside of the U.S.
We follow the provisions of FASB ASC Topic 740, “Income Taxes” (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in income taxes. On February 4, 2007, the first day of our 2007 fiscal year, we recorded a decrease to beginning retained earnings of approximately $0.2 million and correspondingly increased our liabilities for uncertain tax positions and related interest and penalties. In addition, we recorded liabilities of $10.7 million for uncertain tax positions inclusive of interest and penalties. Also as of February 4, 2007, we recorded deferred tax assets of $7.9 million for federal and state benefits related to the uncertain tax positions. Net uncertain tax positions inclusive of interest and penalties of $2.8 million as of the adoption date, $2.4 million as of February 2, 2008, $2.6 million as of January 31, 2009 and $4.9 million as of January 30, 2010, would favorably impact our effective tax rate if these net liabilities were reversed. As of January 30, 2010, $1.0 million of uncertain tax positions were classified in accrued expenses.
We recognize interest and, if applicable, penalties, which could be assessed, related to uncertain tax positions in income tax expense. As of February 4, 2007, the total amount of accrued interest and penalties was $1.7 million before federal and, if applicable, state effect. We recorded approximately $0.9 million, $0.3 million and $0.2 million in additional interest and penalties, before federal and, if applicable, state tax effect in fiscal 2009, 2008 and 2007, respectively. We had liabilities for accrued interest and penalties of $1.6 million as of January 30, 2010 and $0.7 million as of January 31, 2009.
Below is a reconciliation of the beginning and ending amount of the gross unrecognized tax benefits relating to uncertain tax positions, which are recorded in our Consolidated Balance Sheets.
We file U.S. and Canadian federal, various state and provincial income tax returns. Our U.S. federal filings for the years 2002 through 2005 were examined by the IRS and were settled in the fourth quarter of fiscal 2007. We paid approximately $7.7 million relating to this settlement in the first quarter of fiscal 2008. This liability was included in the above balance of uncertain tax position liabilities at February 2, 2008. The examination liability related to the timing of taxable revenue from unredeemed gift cards. Our 2006 and 2007 returns are currently under audit by the IRS. Currently, no significant issues have been identified and we expect the audit to be completed by the end of 2010. All tax returns remain open for examination generally for our 2005 through 2007 tax years by various taxing authorities. However, certain states may keep their statute open for six to ten years.
14. Commitments and Contingencies
Leases - We are committed under non-cancelable leases for our entire store, distribution centers and office space locations, which generally provide for minimum rent plus additional increases in real estate taxes, certain operating expenses, etc. Certain leases also require contingent rent based on sales.
The aggregate minimum annual real estate rent commitments as of January 30, 2010 are as follows (in thousands):
Additionally, as of January 30, 2010, we were committed to equipment leases in aggregate of $6.6 million through fiscal 2013.
Rental expense consists of the following (in thousands):
Employment Agreements - As of January 30, 2010, we had outstanding employment agreements with certain members of our senior management totaling $7.0 million. These employment agreements expire at February 12, 2012, except for the advisory role agreement with our Chairman and former Chief Executive Officer, which expires at the end of fiscal 2010.
Legal Proceedings - In January 2008, we learned that the SEC had issued a formal order of investigation with respect to matters arising 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.
In November 2007, we entered into an agreement (the "Agreement") with Mr. Finazzo settling disputes between us. In the fourth quarter of fiscal 2007, pursuant to the terms of the Agreement, Mr. Finazzo paid us $5.0 million, and in turn, we paid Mr. Finazzo, simultaneously with his payment to us, approximately $0.9 million, which represented the value of Mr. Finazzo’s benefits under our Supplemental Executive Retirement Plan. We recorded net other operating income of approximately $4.1 million in the fourth quarter of fiscal 2007.
In November 2006, we announced that Mr. Finazzo had been terminated for cause, based upon information uncovered by management and after an independent investigation was conducted at the direction, and under the supervision, of a special committee of our Board of Directors. The investigation revealed that Mr. Finazzo:
•
concealed from management and our Board of Directors, and failed to disclose in corporate disclosure documents, his personal ownership interests in, and officer positions of, certain corporate entities affiliated with one of our primary vendors at the time, South Bay Apparel, Inc.,
•
without the knowledge or authorization of our management, executed a corporate Guaranty Agreement in March 1999, that, had it been enforceable, would have obligated us to guarantee any payments due from South Bay Apparel, Inc. to Tricot Richelieu, Inc., an apparel manufacturer and vendor to South Bay Apparel, Inc., and
•
failed to disclose unauthorized business relationships and transactions between immediate and extended family members of Mr. Finazzo and certain other of our vendors.
In December 2006, we entered into an agreement with South Bay Apparel, Inc. and Douglas Dey, South Bay Apparel, Inc.’s President, whereby the parties resolved certain outstanding matters between them. As such, South Bay Apparel, Inc. paid us $8.0 million, representing (i) a concession of $7.1 million by South Bay Apparel, Inc. and Mr. Dey concerning prior purchases of merchandise by us, which was reflected as a reduction in the cost of merchandise in fiscal 2006, and (ii) reimbursement by South Bay Apparel, Inc. of $0.9 million, which offset professional fees that we incurred associated with the negotiation of the Agreement and the investigation of the underlying facts associated with those outstanding matters. In addition, South Bay Apparel, Inc. and Mr. Dey reduced the price of merchandise sold to us to a price that we believed represented fair value, based on costs of comparable merchandise. We also agreed to purchase excess merchandise held at the time by South Bay Apparel, Inc. Once the excess inventory was fully depleted during the third quarter of fiscal 2007, we ceased doing business with South Bay Apparel Inc.
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.
Guarantees - We had no financial guarantees outstanding at January 30, 2010. We had no commercial commitments outstanding as of January 30, 2010.
15. Selected Quarterly Financial Data (Unaudited)
The following table sets forth certain unaudited quarterly financial information (in thousands, except per share amounts):
Item 9.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Management’s Report On Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of January 30, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on that assessment, our management believes that, as of January 30, 2010, our internal control over financial reporting is effective.
Evaluation of Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation, under the supervision and with the participation of our Co-Chief Executive Officers along with our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and procedures. Based upon that evaluation, our Co-Chief Executive Officers along with our President and Chief Financial Officer concluded that as of the end of our fiscal year ended January 30, 2010, our disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls or in other factors during our fourth fiscal quarter that materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 11.
Item 11. Executive Compensation
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table provides certain information, as of January 30, 2010, about our common stock that may be issued upon the exercise of options, warrants and rights, as well as the issuance of restricted shares granted to employees, consultants or members of our Board of Directors, under our two existing equity compensation plans, the Aéropostale, Inc. 1998 Stock Option Plan and the Aéropostale, Inc. 2002 Long-Term Incentive Plan.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC not later than 120 days after the end of our fiscal year.
Item 14.
Item 14. Principal Accountant Fees and Services
Information with respect to this item is incorporated by reference from our definitive Proxy Statement to be filed with the SEC not later than 120 days after the end of our fiscal year.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
1.
The financial statements listed in the “Index to Consolidated Financial Statements” at page 27 are filed as a part of this Annual Report on Form 10-K
2.
Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto
3.
Exhibits included or incorporated herein:
See Exhibit Index
EXHIBIT INDEX
Exhibit No.
Description
3.1
Form of Amended and Restated Certificate of Incorporation.(1)
3.2
Form of Amended and Restated By-Laws. (2)
4.1
Specimen Common Stock Certificate. (1)
10.1
Aéropostale, Inc. Amended and Restated 1998 Stock Option Plan. (3)**
10.2
Aéropostale, Inc. Amended and Restated 2002 Long-Term Incentive Plan. (3)**
10.3
Employment Agreement, dated and effective on September 23 2009, between Aéropostale, Inc. and Michael J. Cunningham.(4)**
10.4
Employment Agreement, dated and effective on September 23, 2009, between Aéropostale, Inc. and Thomas P. Johnson.(4)**
10.5
Employment Agreement, dated as of January 30, 2008, between Aéropostale, Inc. and Julian R. Geiger.(6)**
10.6
Employment Agreement, dated and effective on September 23, 2009, between Aéropostale, Inc. and Mindy Meads.(4)**
10.7
Second Amended and Restated Loan and Security Agreement, dated November 13, 2007, by and between Bank of America, N.A. and Aéropostale, Inc.(5)
10.8
Collared Forward Repurchase Agreement, dated November 12, 2007, by and between Bank of America, N.A. and Aéropostale, Inc.(5)
10.9
Employment Agreement, dated as of January 30, 2008, between Aéropostale, Inc. and Julian R. Geiger.(6)**
Subsidiaries of the Company.*
23.1
Consent of Deloitte & Touche LLP.*
31.1
Certification by Thomas P. Johnson, Co Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1
Certification by Mindy C. Meads, Co Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Michael J. Cunningham, President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Thomas P. Johnson, Co Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.1
Certification by Mindy C. Meads, Co Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
32.2
Certification by Michael J. Cunningham pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.***
__________
*
Filed herewith.
**
Management contract or compensatory plan.
***
Furnished, not filed.
(1)
Incorporated by reference to the Registration Statement on Form S-1, as amended, originally filed by Aéropostale, Inc. on March 8, 2002 (Registration No. 333-84056).
(2)
Incorporated by reference to the Registrant’s Current Report on Form 8-K, dated March 15, 2010 (File No. 001-31314).
(3)
Incorporated by reference to the Registrant’s Proxy Statement, dated May 5, 2006 (File No. 001-31314).
(4)
Incorporated by reference to the Registrant’s Current Report on Form 8-K, dated September 25, 2009 (File No. 001-31314).
(5)
Incorporated by reference to the Registrant’s Current Report on Form 8-K, dated November 15, 2007 (File No. 001-31314).
(6)
Incorporated by reference to the Registrant’s Current Report on Form 8-K, dated January 31, 2008 (File No. 001-31314).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AÉROPOSTALE, INC.
By: /s/ THOMAS P. JOHNSON
Thomas P. Johnson
Co-Chief Executive Officer and Director
/s/ MINDY C. MEADS
Mindy C. Meads
Co-Chief Executive Officer and Director
Date: March 29, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the Registrant, and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ THOMAS P. JOHNSON
Co-Chief Executive Officer
March 29, 2010
Thomas P. Johnson
and Director
/s/ MINDY C. MEADS
Co-Chief Executive Officer
March 29, 2010
Mindy C. Meads
and Director
/s/ MICHAEL J. CUNNINGHAM
President and Chief Financial Officer
March 29, 2010
Michael J. Cunningham
(Principal Financial Officer)
/s/ ROSS A. CITTA
Group Vice President
March 29, 2010
Ross A. Citta
and Chief Accounting Officer
(Principal Accounting Officer)
/s/ JULIAN R. GEIGER
Chairman of the Board
March 29, 2010
Julian R. Geiger
of Directors
/s/ BODIL ARLANDER
Director
March 29, 2010
Bodil Arlander
/s/ RONALD R. BEEGLE
Director
March 29, 2010
Ronald R. Beegle
/s/ ROBERT B. CHAVEZ
Director
March 29, 2010
Robert B. Chavez
/s/ EVELYN DILSAVER
Director
March 29, 2010
Evelyn Dilsaver
/s/ JOHN N. HAUGH
Director
March 29, 2010
John N. Haugh
/s/ KARIN HIRTLER - GARVEY
Director
March 29, 2010
Karin Hirtler - Garvey
/s/ JOHN D. HOWARD
Director
March 29, 2010
John D. Howard
/s/ DAVID B. VERMYLEN
Director
March 29, 2010
David B. Vermylen
AÉROPOSTALE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS