Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ARO > SEC Filings for ARO > Form 10-K on 3-Apr-2013All Recent SEC Filings

Show all filings for AEROPOSTALE INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for AEROPOSTALE INC


3-Apr-2013

Annual Report


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.

Overview

During 2012, we made progress on our key initiatives which include adding new talent, integrating more relevant fashion, communicating our brand message and fashion projection to the consumer, investing in processes and technology and developing our future growth drivers.

While the United States macro-economic environment and a decline in mall traffic continue to remain challenging, we are focused on executing our key initiatives to improve our financial performance. Our product development team continues to refine and broaden our fashion offering, while enhancing processes to leave more open to buy, increase speed to market and create greater flexibility in our sourcing model. We are also in the process of implementing new technologies such as assortment planning and product lifecycle management systems.

We are continuing to develop our future growth drivers including P.S from Aéropostale, international licensing and ecommerce. We plan to operate approximately 160 P.S. from Aéropostale stores by the end of fiscal 2013, compared to 100 P.S. from Aéropostale stores at the end of fiscal 2012. We continue to expand our international license business. Our licensees ended the year operating 27 stores, and we signed three additional licensing agreements to expand into new markets and territories. By the end of fiscal 2013, across approximately 11 countries, our licensees plan to operate 45 to 50 stores and a number of shop in shops. To further develop and increase our e-commerce business, we recently acquired substantially all of the assets of on-line women's fashion footwear and apparel retailer GoJane (See Note 2 to the Notes to Consolidated Financial Statements for a further discussion).

In an on-going effort to optimize our real estate portfolio, we have identified up to 100 locations for store closure over the next several years. Of these, we plan to close approximately 15 to 20 Aéropostale stores in 2013, in addition to the 20 Aéropostale stores we closed in 2012.

On February 5, 2013, we announced that Michael J. Cunningham, our President will retire effective on March 29, 2013. Mr. Cunningham will continue as a member of our Board of Directors and as a part-time adviser to the Company.

The discussion in the following section is on a consolidated basis, unless indicated otherwise.


Table of Contents

Key Performance Indicators

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table. In the first quarter of 2012, we began presenting certain key performance indicators such as comparable store sales change, on both the basis of excluding the e-commerce channel and including the e-commerce channel as further detailed below. The fiscal 2012 retail calendar includes a 53rd week and therefore fiscal 2011 comparable statistics are compared to the 53-week period ended February 4, 2012.

                                                                Fiscal Year Ended
                                                  February 2,      January 28,      January 29,
                                                      2013             2012             2011
Net sales (in thousands)                         $   2,386.2      $   2,342.3      $   2,400.4
Total store count at end of period                     1,084            1,057            1,012
Comparable store count at end of period                1,027              974              918
Net sales change                                           2  %            (2 )%             8  %
Comparable sales change (including the
e-commerce channel)                                       (2 )%            (8 )%             3  %
Comparable store sales change (excluding the
e-commerce channel)                                       (4 )%            (9 )%             1  %
Comparable average unit retail change (including
the e-commerce channel)                                   (4 )%            (9 )%            (4 )%
Comparable units per sales transaction change
(including the e-commerce channel)                         4  %             8  %             4  %
Comparable sales transaction change (including
the e-commerce channel)                                   (3 )%            (6 )%             3  %
Net sales per average square foot                $       538      $       561      $       626
Average net sales per store (in thousands)       $     1,991      $     2,064      $     2,267
Gross profit (in millions)                       $     589.4      $     608.3      $     886.2
Income from operations (in millions)             $      59.5      $     113.5      $     386.8
Diluted earnings per share                       $      0.43      $      0.85      $      2.49
Average square footage growth over comparable
period                                                     4  %             7  %             6  %
Change in total inventory over comparable period          (5 )%             4  %            18  %
Change in inventory per retail square foot over
comparable period                                         (9 )%            (5 )%             9  %
Percentages of net sales by category:
Young Women's                                             64  %            66  %            69  %
Young Men's                                               36  %            34  %            31  %

Results of Operations

The following table sets forth our results of operations expressed as a percentage of net sales. We also use this information to evaluate the performance of our business:

                                                         Fiscal Year Ended
                                             February 2,    January 28,    January 29,
                                                 2013           2012           2011
Net sales                                         100.0 %        100.0 %        100.0 %
Gross profit                                       24.7 %         26.0 %         36.9 %
Selling, general and administrative expenses       22.2 %         21.1 %         20.8 %
Income from operations                              2.5 %          4.9 %         16.1 %
Income before income taxes                          2.5 %          4.9 %         16.1 %
Income taxes                                        1.0 %          1.9 %          6.5 %
Net income                                          1.5 %          3.0 %          9.6 %


Table of Contents

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 $43.9 million, or by 2% in fiscal 2012 (53 weeks), as compared to fiscal 2011 (52 weeks). The increase in net sales was driven by average store square footage growth of 4%, a 19% increase in our e-commerce revenue to $217.0 million, which includes the GoJane business commencing on November 14, 2012, and a 1% increase due to the extra week in fiscal 2012. These increases were partially offset by a 4% decline in comparable store sales. Comparable sales, including the e-commerce channel, decreased 2% when compared to the same period last year. Comparable sales, including the e-commerce channel, decreased in our young women's category while our young men's category was flat. Overall comparable sales, including the e-commerce channel, reflected increases of 4% in units per sales transaction, offset by decreases of 4% in average unit retail and 3% in the number of sales transactions.

Net sales decreased by $58.2 million, or by 2% in fiscal 2011, as compared to fiscal 2010. The decrease in net sales was driven by a decrease in comparable store sales of 9%, partially offset by average store square footage growth of 7%, primarily from new stores, and a 14% increase in our e-commerce business to $182.1 million from $160.2 million. Comparable sales, including the e-commerce channel, decreased 8% when compared to the same period last year. Comparable sales, including the e-commerce channel, decreased in our young men's category and in our young women's category. The overall comparable sales, including the e-commerce channel, reflected decreases of 9% in average unit retail and 6% in the number of sales transactions partially offset by an increase of 8% in units per sales transaction.

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 and maintenance, depreciation and amortization and impairment charges.

Gross profit, as a percentage of net sales, decreased by 1.3 percentage points in fiscal 2012 compared to fiscal 2011. Gross profit included the unfavorable impact of store asset impairment charges. Store asset impairment charges unfavorably impacted costs of sales for fiscal 2012 by 1.4 percentage points, or by $32.6 million, and for fiscal 2011 by 0.7 percentage points, or by $16.0 million. Gross profit for 2011 also included a favorable impact of 0.4 percentage points or $8.7 million, resulting from the resolution of a dispute with one of our sourcing agents. (See Note 1 to the Notes to Consolidated Financial Statements for a further discussion). The remaining decrease in gross profit was primarily due to a 1.4 percentage point deleverage impact from depreciation, occupancy, and distribution and transportation expenses. Gross profit included slightly higher merchandise margin of 0.1 percentage points compared to the prior year.

Gross profit, as a percentage of net sales, decreased by 10.9 percentage points in fiscal 2011 compared to fiscal 2010. The decrease in gross profit was due primarily to lower merchandise margin of 8.2 percentage points primarily resulting from significantly increased product costs and promotional activity compared to the prior year. Additionally, the decrease in gross margin was due to a 2.6 percentage point deleverage impact from occupancy, depreciation, and distribution and transportation expenses. Gross profit for fiscal 2011 was unfavorably impacted by 0.7 percentage points, or by $16.0 million, related to store asset impairment charges recorded during fiscal 2011. Gross profit for fiscal 2011 was also favorably impacted by 0.4 percentage points or by $8.7 million, resulting from the above mentioned resolution of a dispute with one of our sourcing agents.

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, e-commerce transaction expenses, store pre-opening costs and other corporate level expenses. Store pre-opening costs include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

SG&A, as a percentage of net sales, increased by 1.1 percentage points during fiscal 2012 compared to fiscal 2011, or by $35.0 million. The increase in SG&A, as a percentage of net sales, was due primarily to a 1.2 percentage point deleverage


Table of Contents

impact from store-line, corporate and marketing expenses, and higher e-commerce transaction expenses resulting from the growth of this business.

SG&A, as a percentage of net sales, increased by 0.3 percentage points but decreased by $4.5 million during fiscal 2011. SG&A for fiscal 2010 included a retirement plan settlement payment of $6.4 million, or 0.3 percent points, that did not recur in fiscal 2011. The remaining increase in SG&A as a percentage of net sales was due primarily to a 0.8 percentage point deleverage impact from store-line expenses and higher e-commerce transaction expenses resulting from the growth of this business. This was partially offset by a 0.2 percentage point decrease in incentive and stock-based compensation expense.

Income Taxes

The effective tax rate was 40.8% for fiscal 2012, compared to 38.5% for fiscal 2011 and 40.2% for fiscal 2010. The increase in the effective tax during fiscal 2012 was due primarily from the lower overall profitability in fiscal 2012 and mix of Canadian losses and U.S. taxable income, as well as favorable tax accrual adjustments in fiscal 2011 (See Note 11 to the Notes to the Consolidated Financial Statements).

Net Income and Earnings Per Share

Net income was $34.9 million, or $0.43 per diluted share, for fiscal 2012, compared with net income of $69.5 million, or $0.85 per diluted share, for fiscal 2011 and net income of $231.3 million, or $2.49 per diluted share, for fiscal 2010.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling of existing stores, and the improvement or 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. Generally, 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 if necessary, our credit facility. At February 2, 2013, we had working capital of $236.4 million, cash and cash equivalents of $231.5 million and no debt outstanding under our $175.0 million credit facility. Additionally, we repurchase our common stock from time to time under a stock repurchase program (see Note 4 to the Notes to Consolidated Financial Statements.) On November 13, 2012, we used $25.2 million of cash on hand as partial consideration to acquire the assets of GoJane. Please see Note 2 to the Notes to Consolidated Financial Statements for further discussion regarding this acquisition. We may also utilize cash to make other strategic acquisitions.

The following table sets forth our cash flows for the period indicated (in thousands):

                                                                            Fiscal Year Ended

                                                        February 2, 2013     January 28, 2012     January 29, 2011
Net cash provided by operating activities              $        144,811     $        129,301     $        263,731
Net cash used in investing activities                           (97,484 )            (73,323 )           (100,807 )
Net cash used in financing activities                           (39,501 )            (98,179 )           (245,379 )
Effect of exchange rate changes                                     (37 )                360                1,032
Net increase (decrease) in cash and cash equivalents   $          7,789     $        (41,841 )   $        (81,423 )

Operating Activities

Cash flows from operating activities, our principal form of liquidity, increased by $15.5 million to $144.8 million in fiscal 2012 from $129.3 million in the prior year. This increase was due primarily to the decreases in cash flows used for accrued compensation of $11.4 million, and income taxes of $22.2 million as well as timing of operating assets and liabilities, and was partially offset by the decrease in net income.

Cash flows from operating activities decreased by $134.4 million in fiscal 2011 from fiscal 2010. This decrease was due primarily to the decrease in net income of $161.8 million, and was partially offset by the cash flow timing of operating assets and liabilities.


Table of Contents

Investing Activities

During fiscal 2013, we plan to invest approximately $89.0 million in capital expenditures to open approximately 14 Aéropostale stores, approximately 60 P.S. from Aéropostale stores, to remodel approximately 30 stores to the new store model and for a number of information technology investments. Additionally, in an on-going effort to optimize our real estate portfolio, we plan to close up to 100 locations over the next several years, including approximately 15 to 20 Aéropostale underperforming stores in 2013.

We invested $72.3 million in capital expenditures in fiscal 2012, primarily to construct 18 new Aéropostale stores, 31 P.S. from Aéropostale stores, to remodel five existing stores and for a number of 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 addition, cash used for investing activities included $25.2 million as partial consideration to acquire the assets of GoJane (see Note 2 to the Notes to Consolidated Financial Statements).

We invested $73.3 million in capital expenditures in fiscal 2011, primarily to construct 24 new Aéropostale stores, 25 P.S. from Aéropostale stores, to remodel 50 existing stores and for a number of information technology investments. We invested $100.8 million in capital expenditures in fiscal 2010, primarily to construct 35 new Aéropostale stores, 33 P.S. from Aéropostale stores, to remodel 40 existing stores and for a number of information technology investments.

Financing Activities

We have the ability to repurchase our common stock 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 windows, and liquidity and capital resource requirements going forward. During fiscal 2012, we repurchased 3.0 million shares of our common stock for $40.8 million. During fiscal 2011 and 2010, we repurchased 4.2 million shares for $100.1 million and 10.3 million shares for $257.5 million, respectively. Under the program to date, we have repurchased 60.1 million shares of our common stock for $1.0 billion. As of February 2, 2013, we have approximately $104.4 million of repurchase authorization remaining under our $1.15 billion share repurchase program.

Revolving Credit Facility

In September 2011, we entered into an amended and restated revolving credit facility with Bank of America, N.A. (the "Credit Facility"). The Credit Facility provides for a revolving credit line up to $175.0 million. The Credit Facility is available for working capital and general corporate purposes. The Credit Facility is scheduled to expire on September 22, 2016, and is guaranteed by all of our domestic subsidiaries (the "Guarantors"). No amounts were outstanding during fiscal 2012 or as of February 2, 2013 under the Credit Facility. Management has no reason at this time to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Credit Agreement in the event of our election to draw funds in the foreseeable future.

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 and includes either any event of default or failure to maintain availability in an amount greater than 12.5% of the lesser of the borrowing base and facility commitment), our ability to borrow funds, make investments, pay dividends and repurchase shares of our common stock would be limited, among other limitations. Direct borrowings under the Credit Facility bear interest at a margin over either LIBOR or at the Prime 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 on leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, business failure or application for


Table of Contents

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 lender may cease making loans, terminate the Credit Facility and declare all amounts outstanding to be immediately due and payable.

Upon the occurrence of our loan availability under the Credit Facility decreasing below 10% of the lesser of the borrowing base and the dollar amount of commitments under the Credit Facility, we would be required to meet a financial covenant for a Minimum Consolidated Fixed Charge Coverage Ratio of not less than 1.0 to 1.0.

During fiscal 2012 and as of February 2, 2013, we had no outstanding balances under the Credit Facility. In June 2012, Bank of America, N.A. issued a stand-by letter of credit. As of February 2, 2013, the outstanding letter of credit was $0.2 million and expires on June 30, 2013. We do not have any other stand-by or commercial letters of credit as of February 2, 2013 under the Credit Facility.

In conjunction with the GoJane acquisition, we obtained a Waiver and Consent from Bank of America, N.A. on November 8, 2012 for the Permitted Acquisition clause in the Credit Facility (see Note 2 to the Notes to Consolidated Financial Statements for a further discussion regarding this acquisition.)

As of February 2, 2013, we are not aware of any instances of noncompliance with any covenants or any other event of default under the Credit Facility.

Contractual Obligations

The following table summarizes our contractual obligations as of February 2,
2013:

                                                         Payments Due by Period
                                            Less Than       1 -3         3 -5       More Than
                                Total        1 Year        Years        Years        5 Years
                                                       (In thousands)
Contractual Obligations
Real estate operating leases  $ 948,780    $  143,978    $ 253,859    $ 199,491    $  351,452
Equipment operating leases        6,459         3,565        2,894            -             -
Employment agreements             1,065         1,065            -            -             -
Total contractual obligations $ 956,304    $  148,608    $ 256,753    $ 199,491    $  351,452

The real estate operating leases included in the above table do not include contingent rent based upon sales volume, which amounted to approximately 11% of minimum lease obligations in fiscal 2012. In addition, the above table does not include variable costs paid to landlords such as maintenance, insurance and taxes, which represented approximately 59% of minimum lease obligations in fiscal 2012.

We have an employment agreement with Thomas P. Johnson, our Chief Executive Officer, which is reflected in the above table.

Additionally, we have a one-year advisory contract with Mr. Cunningham, which commenced in March 2013. The total contractual commitment for the agreement is $0.3 million and is not included in the above table.

As discussed in Note 10 to the Notes to Consolidated Financial Statements, we have a SERP liability of $12.6 million and other retirement plan liabilities of $3.0 million at February 2, 2013. Such liability amounts are not reflected in the table above. We expect to make a payment in the next 12 months of approximately $2.1 million from our SERP which is included in the total SERP liability of $12.6 million.

Our total liabilities for unrecognized tax benefits were $2.7 million at February 2, 2013. We cannot make a reasonable estimate of the amount and timing of related future payments for these non-current liabilities of $2.7 million. Therefore these liabilities were not included in the above table.


Table of Contents

In August 2011, we entered into a new three-year sourcing agreement with one of our sourcing agents. The sourcing agreement may be terminated at any time during the term by mutual agreement of the parties and provided that appropriate notice is given in accordance with the agreement. In connection with the sourcing agreement, we have a guaranteed minimum product purchase commitment of $350.0 million that is measured over any consecutive two-year period during the term of the agreement. If we purchase less than this amount over the two-year measurement period, then we will be obligated to pay the contracted commission on the shortfall from the guaranteed minimum. As of February 2, 2013, we had met the first two year minimum product purchase commitment. In addition, if we were to cancel purchase orders with this sourcing agent, we may have to reimburse the agent for costs and expenses, if any, that it had incurred. All other open purchase orders are cancellable without penalty and are therefore not included in the above table. We have not issued any other third party guarantees or commercial commitments as of February 2, 2013.

In June 2012, Bank of America, N.A. issued a stand-by letter of credit. As of . . .

  Add ARO to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ARO - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.