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ARO > SEC Filings for ARO > Form 10-Q on 11-Dec-2013All Recent SEC Filings

Show all filings for AEROPOSTALE INC

Form 10-Q for AEROPOSTALE INC


11-Dec-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve certain risks and uncertainties, including statements regarding 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. Among the factors that could cause actual results to materially differ from those projected in the forward-looking statements, include changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors; changes in the economy and other events leading to a reduction in discretionary consumer spending; seasonality; risks associated with changes in social, political, economic and other conditions and the possible adverse impact of changes in import restrictions; risks associated with uncertainty relating to the Company's ability to implement its growth strategy. In addition, the risk factors included in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 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.

Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations, or "MD&A," is intended to provide information to help you better understand our financial condition and results of operations. Our business is highly seasonal, and historically we realize a significant portion of our sales, net income, and cash flow in the second half of the year, driven by the impact of the back-to-school selling season in our third quarter and the holiday selling season in our fourth quarter. Therefore, our interim period unaudited condensed consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows. We recommend that you read this section along with the unaudited condensed consolidated financial statements and notes included in this report and along with our Annual Report on Form 10-K for the year ended February 2, 2013.

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

Results of Operations

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

                                                    13 weeks ended                 39 weeks ended
                                              November 2,    October 27,     November 2,    October 27,
                                                 2013            2012           2013            2012
Net sales                                       100.0  %          100.0 %      100.0  %          100.0 %
Gross profit                                     17.1  %           27.9 %       19.0  %           27.1 %
Selling, general and administrative expenses     25.1  %           20.9 %       26.5  %           23.4 %
(Loss) income from operations                    (8.0 )%            7.0 %       (7.4 )%            3.7 %
Interest expense                                    -  %              - %          -  %              - %
(Loss) income before income taxes                (8.0 )%            7.0 %       (7.4 )%            3.7 %
Income tax (benefit) provision                   (3.0 )%            2.9 %       (2.4 )%            1.5 %
Net (loss) income                                (5.0 )%            4.1 %       (5.0 )%            2.2 %


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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. Comparable changes for the 13-weeks and 39-weeks
ended November 2, 2013 are compared to the 13-weeks and 39-weeks ended November
3, 2012. The shift in comparable information is due to the 53rd week in the
fiscal 2012 retail calendar.

                                               13 weeks ended                    39 weeks ended
                                        November 2,      October 27,      November 2,      October 27,
                                            2013             2012             2013             2012
Net sales (in millions)                $     514.6      $     605.9      $   1,420.9      $   1,588.5
Total store count at end of period           1,124            1,091            1,124            1,091
Comparable store count at end of
period                                       1,038            1,018            1,038            1,018
Net sales change                               (15 )%             2  %           (11 )%             4  %
Comparable sales change (including the
e-commerce channel)                            (15 )%            (1 )%           (15 )%             1  %
Comparable average unit retail change
(including the e-commerce channel)              (7 )%            (5 )%            (7 )%            (2 )%
Comparable units per sales transaction
change (including the e-commerce
channel)                                         2  %             3  %             2  %             3  %
Comparable sales transaction change
(including the e-commerce channel)             (10 )%             2  %           (10 )%            (1 )%
Net sales per average square foot      $       110      $       137      $       308      $       367
Gross profit (in millions)             $      87.9      $     169.0      $     270.5      $     430.8
(Loss) income from operations (in
millions)                              $     (41.0 )    $      42.5      $    (105.3 )    $      59.8
Diluted (loss) earnings per share      $     (0.33 )    $      0.31      $     (0.91 )    $      0.44
Average square footage growth over
comparable period                                3  %             4  %             3  %             5  %
Change in total inventory over
comparable period                               (5 )%             5  %            (5 )%             5  %
Change in inventory per retail square
foot over comparable period                    (11 )%             1  %           (11 )%             1  %
Percentages of net sales by category:
Young Women's                                   65  %            64  %            65  %            64  %
Young Men's                                     35  %            36  %            35  %            36  %

Comparison of the 13 weeks ended November 2, 2013 to the 13 weeks ended October 27, 2012

Net Sales

Net sales consist of sales from comparable stores, non-comparable stores, our e-commerce business and licensing revenue. A store is included in comparable store sales after 14 months of operation. Additionally, we will include GoJane sales in our comparable sales after 14 months from the acquisition date, beginning in February 2014. 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. Licensing revenue is included in non-comparable store sales information.

Net sales for the third quarter of 2013 decreased by $91.3 million, or by 15%, compared to the same period last year. The decrease in net sales was driven by the decrease in comparable sales of 15%. The net sales decrease reflects:

• a decrease of $97.9 million in comparable store sales (excluding the e-commerce channel)

• an increase of $6.6 million in non-comparable store sales due primarily to our licensing revenue. The sales resulting from the increase in stores opened as of the third quarter of 2013 compared to the prior period was offset by sales related to store closures.

• our e-commerce business, which as a result of including our GoJane business, was flat for the third quarter of 2013 compared to the same period in the prior year.


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Consolidated comparable sales, including the e-commerce channel, decreased by 15% 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 10% in the number of sales transactions, 7% in average unit retail, partially offset by an increase of 2% 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 store impairment charges.

Gross profit, as a percentage of net sales, decreased by 10.8 percentage points for the third quarter of 2013 compared to the same period last year. Included in gross profit for 2013 are asset impairment charges of 1.0 percentage point. There were no asset impairment charges recorded during the third quarter of 2012. Merchandise margin decreased by 6.9 percentage points due to an increase in promotional activity. The decrease in gross profit was also due to 2.9 percentage points of deleverage impact in occupancy expense, distribution and transportation expense, depreciation expense and buying expense resulting from the above mentioned decrease in store sales.

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, was 25.1% for the third quarter of 2013 compared to 20.9% for the same period last year. The increase in SG&A, as a percentage of sales, was due primarily to increased corporate and marketing expenses, as well as the deleverage impact of store-line expenses resulting from the above mentioned decrease in store sales.

SG&A, in dollars, increased by $2.4 million for the third quarter of 2013 compared to the third quarter of 2012. The increase was due to higher corporate expenses of $6.2 million, which included increased stock and incentive compensation of $2.5 million, benefits of $1.6 million, legal costs of $1.5 million and a SERP charge of $0.6 million, and marketing expenses of $0.9 million. These increases were partially offset by a decrease in store-line expenses of $3.2 million and transaction-related expenses of $1.5 million.

Income taxes

The effective tax rate was 38.0% for the third quarter of 2013 and 41.2% for the third quarter of 2012. The decrease in the effective tax rate was a result of lower taxable income and the mix of U.S. taxable losses and Canadian losses during the third quarter of 2013.

Net (loss) income

Net loss was $25.6 million, or $0.33 per diluted share, for the third quarter of 2013, compared to net income of $24.9 million, or $0.31 per diluted share, for the third quarter of 2012. The net loss for the third quarter of 2013 included an after-tax charge of $2.8 million, or $0.04 per diluted share, resulting from store asset impairment charges.

Comparison of the 39 weeks ended November 2, 2013 to the 39 weeks ended October 27, 2012

Net Sales

Net sales for the first thirty-nine weeks of 2013 decreased by $167.6 million, or by 11%, compared to the same period last year. The decrease in net sales was driven by the decrease in comparable sales of 15%, and was partially offset by the average store square footage growth of 3% primarily from new stores. The net sales decrease reflects:

• a decrease of $234.1 million in comparable store sales (excluding the e-commerce channel)

• an increase of $54.7 million in non-comparable store sales due to 33 more stores open at the end of the first thirty-nine weeks of 2013 compared to the end of the first thirty-nine weeks of 2012 and the increase in licensing revenue


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• an increase of $11.8 million, or 10% to $132.0 million in net sales from our e-commerce business due to the inclusion of net revenues from the GoJane.com business during the first thirty-nine weeks of 2013.

Consolidated comparable sales, including the e-commerce channel, decreased by 13% in our young men's category and decreased in our young women's category by 15%. The overall comparable sales, including the e-commerce channel, reflected decreases of 10% in the number of sales transactions, 7% in average unit retail, partially offset by an increase of 2% in units per sales transaction.

Cost of Sales and Gross Profit

Gross profit, as a percentage of net sales, decreased by 8.1 percentage points for the first thirty-nine weeks of 2013 compared to the same period last year. Included in gross profit are asset impairment charges of 1.0 percentage points during the first thirty-nine weeks of 2013. Merchandise margin decreased by 4.1 percentage points primarily due to an increase in promotional activity. The decrease in gross profit was also due to 3.1 percentage points of deleverage impact in occupancy expense, distribution and transportation expense, depreciation expense and buying expense resulting from the above mentioned decrease in store sales.

SG&A

SG&A, as a percentage of net sales, was 26.5% for the first thirty-nine weeks of 2013 compared to 23.4% for the same period last year. The increase in SG&A, as a percentage of sales, was due primarily to deleverage in marketing expenses, corporate expenses and store-line expenses resulting from the above mentioned decrease in store sales.

SG&A, in dollars, increased by $4.8 million for the first thirty-nine weeks of 2013 compared to the first thirty-nine weeks of 2012. The increase was due to increases in corporate expenses of $7.5 million, which included stock compensation of $5.3 million and legal costs of $2.8 million. The increase in stock compensation includes $2.7 million of accelerated expense resulting from the formalization of retirement features of our stock based compensation plan, and the rescission of restricted stock awards (See Note 11 to the Notes to Unaudited Condensed Consolidated Financial Statements for a further discussion). Additionally, marketing expenses increased by $5.5 million. These were offset by decreases in store-line expenses of $6.1 million and store transaction related expenses of $2.0 million.

Income taxes

The effective income tax rate was 32.5% for the first thirty-nine weeks of 2013 and 40.1% for the first thirty-nine weeks of 2012. The decrease in the effective tax rate was a result of lower taxable income and the mix of U.S. taxable losses and Canadian losses during the first thirty-nine weeks of 2013.

Net (loss) income

Net loss was $71.5 million, or $0.91 per diluted share, for the first thirty-nine weeks of 2013, compared to net income of $35.6 million, or $0.44 per diluted share, for the first thirty-nine weeks of 2012. The net loss for the first thirty-nine weeks of 2013 included an after-tax charge of $8.3 million, or $0.10 per diluted share, resulting from store asset impairment charges.

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 meet our cash requirements for the next twelve months primarily through cash flows from operations, existing cash and cash equivalents, and when necessary, our Credit Facility (as hereinafter defined). At November 2, 2013, we had working capital of $166.7 million, cash and cash equivalents of $68.0 million and no debt outstanding under our $175.0 million Credit Facility. Additionally, we may repurchase our common stock from time to time under a stock repurchase program. On November 13, 2012, we used $25.2 million of cash on hand as partial consideration to acquire the assets of GoJane.com, Inc. Please see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements for a further discussion regarding this acquisition. We may also utilize cash to make other strategic acquisitions.


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The following table sets forth our cash flows for the period indicated:

                                                            39 weeks ended
                                                     November 2,     October 27,
                                                        2013             2012
                                                            (In thousands)
Net cash (used in) provided by operating activities $   (93,491 )   $     55,374
Net cash used in investing activities                   (68,394 )        (54,946 )
Net cash used in financing activities                    (1,362 )        (39,699 )
Effect of exchange rate changes                            (236 )             15
Net decrease in cash and cash equivalents           $  (163,483 )   $    (39,256 )

Operating activities - Net cash used in operating activities increased by $148.9 million for the first thirty-nine weeks of 2013 compared to the same period in 2012. The change in cash flows used in operating activities was due primarily to the decrease in period to period net income of $107.1 million, in addition to the timing of cash used for other assets and liabilities.

Investing activities - Investments in capital expenditures are principally for the construction of new stores, remodeling of existing stores and investments in information technology. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. During fiscal 2013, we plan to invest a total of approximately $82.0 million in capital expenditures. During the first thirty-nine weeks of 2013, we invested $68.0 million, which excludes accruals related to purchases of property and equipment. During the first thirty-nine weeks of 2013, we opened eight Aéropostale stores, 49 P.S. from Aéropostale stores and remodeled 23 Aéropostale stores. During the remainder of the fiscal year, we plan to open five Aéropostale stores, three P.S. from Aéropostale stores and nine remodeled Aéropostale stores.

During the first thirty-nine weeks of 2012, we invested $54.9 million in capital expenditures, primarily to construct 15 new Aéropostale stores, 30 P.S. from Aéropostale stores, to remodel five Aéropostale 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.

We did not repurchase shares of our common stock during the first thirty-nine weeks of 2013 under the stock repurchase program. During the first thirty-nine weeks of 2012, we repurchased 3.0 million shares of our common stock for $40.8 million. We have repurchased 60.1 million shares of our common stock for $1.0 billion under the program to date. As of November 2, 2013, we have approximately $104.4 million of repurchase authorization remaining under our $1.15 billion share repurchase program.

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 revolving credit line up to $175.0 million and is secured by primarily merchandise inventory, cash and receivables. 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 substantially all of our domestic subsidiaries (the "Guarantors"). No amounts were outstanding during the first thirty-nine weeks of 2013 or as of November 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.

Availability under the Credit Facility is determined by a borrowing base calculation that is based primarily upon levels of inventory and the Credit Facility is 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).


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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 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 (as defined in the Credit Facility) of not less than 1.0 to 1.0. If we are unable to meet the requirements of the financial covenant, we would be limited to borrowing 90% of the borrowing base and the dollar amount of commitments under the Credit Facility.

During the first thirty-nine weeks of 2013 and as of November 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 under the Credit Facility. As of November 2, 2013, the outstanding letter of credit was $0.2 million and expires on June 30, 2014. We have not issued any other stand-by or commercial letters of credit as of November 2, 2013 under the Credit Facility.

As of November 2, 2013, there were no 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 November 2,
2013:

                                                                       Payments Due
                                                   Balance of       In 2014       In 2016        After
                                      Total           2013         and 2015      and 2017        2018
                                                               (In thousands)
Contractual Obligations
Real estate operating leases       $ 970,606     $     37,806     $ 281,107     $ 224,889     $ 426,804
Equipment operating leases             3,684              790         2,894             -             -
Employment and advisory agreements     2,600              315         1,966           319             -
Total contractual obligations      $ 976,890     $     38,911     $ 285,967     $ 225,208     $ 426,804

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.

In May 2013, we entered into an employment agreement with Thomas P. Johnson, our Chief Executive Officer, of which the base salary and other benefits are reflected in the above table (see Note 12 to the Notes to Unaudited Condensed Consolidated Financial Statements). Additionally, we have a one-year advisory contract with our former President, which commenced in March 2013, and is also included in the above table.


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As discussed in Note 10 to the Notes to Unaudited Condensed Consolidated Financial Statements, we have a SERP liability of $10.4 million and other retirement plan liabilities of $3.7 million at November 2, 2013. Such liability amounts are not reflected in the table above.

Our total liabilities for unrecognized tax benefits were $3.3 million at November 2, 2013. We cannot make a reasonable estimate of the amount and timing of related future payments for these non-current liabilities. Therefore these liabilities were not included in the above table.

We have a sourcing agreement with one of our sourcing agents that expires in July 2014. The sourcing agreement may be terminated at any time during the term . . .

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