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ARO > SEC Filings for ARO > Form 10-K on 4-Apr-2014All Recent SEC Filings

Show all filings for AEROPOSTALE INC

Form 10-K for AEROPOSTALE INC


4-Apr-2014

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 Exchange Act. 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

While the United States macro-economic environment and a decline in mall traffic continue to remain challenging, we are focused on executing our key merchandising, operational and financial initiatives to improve our performance.

During 2013, we made progress on our key initiative of increasing the fashion in our overall assortment, including our exclusive sub-brand businesses, Live Love Dream and the Bethany Mota Collection. In addition to increasing our investment in fashion and adjusting our reliance on down-trending categories, in 2013 we also invested additional resources into our marketing and social media programs to communicate our brand message and increase customer adoption.

We have made progress on our key financial strategies of maintaining appropriate levels of liquidity, optimizing our real estate portfolio, and managing our capital spending prudently. With regard to liquidity, on February 21, 2014, we increased the aggregate borrowing capacity on our revolver from $175.0 to $230.0 million (see Note 8 to the Notes to Consolidated Financial Statements for a further discussion). Additionally, on March 13, 2014, we signed a commitment letter with Sycamore Partners and its affiliates for $150.0 million in senior secured credit facilities (see Note 16 to the Notes to Consolidated Financial Statements for further discussion).

In an on-going effort to optimize our real estate portfolio, we are considering approximately 170 to 180 locations for potential store closure. Such program began in 2013 and is expected to continue over the next several years. Of these, we endeavor to close approximately 50 Aéropostale stores and two P.S. from Aéropostale stores in 2014, in addition to the 48 Aéropostale stores and one P.S. from Aéropostale store we closed during fiscal 2013. We have also retained a real estate consulting firm to investigate the economics of accelerated lease buyouts, as well as to identify opportunities for rent relief across our real estate portfolio. We have authorized these consultants to enter into negotiations on our behalf regarding early lease buyouts and lease negotiations in 2014. The results derived from the real estate consulting firm retained by us may alter the number of store closures and the timing for such closures.

Operationally, we are working with a third party consulting firm to identify efficiencies, explore a potential reduction in our overall SKU count, and to optimize our product flows.

In 2014, we plan to refine our merchandising strategy for our e-commerce business to match the steps that we have taken in our brick and mortar stores. We are investing in product extensions, expanding online exclusives including third-party product and increasing our buys in extended sizes. Additionally, during 2012 we acquired and now operate GoJane.com, an online women's and apparel retailer. We continue to refine our P.S. from Aéropostale merchandise assortments and build brand awareness. In 2014, under licensing agreements, our licensees plan to distribute P.S. from Aéropostale product in their locations throughout Mexico and in the Philippines. In fiscal 2013, our international licensing business continued to grow. During fiscal 2013, we ended the year with eight licensees operating 96 locations in 16 countries. These licensees are expected to continue to open new locations in these regions. During March 2014, we signed an additional license agreement to open approximately 10 Aéropostale stores in Chile over the next four years.

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. The fiscal 2012 retail calendar includes a 53rd
week and therefore fiscal 2013 and fiscal 2011 comparable statistics are
compared to the 53-week period ended February 4, 2012.


                                                                  Fiscal Year Ended
                                                  February 1,      February 2,
                                                      2014             2013         January 28, 2012
Net sales (in thousands)                         $   2,090.9          2,386.2            2,342.3
Total store count at end of period                     1,100            1,084              1,057
Comparable store count at end of period                1,023            1,027                974
Net sales change                                         (12 )%             2  %              (2 )%
Comparable sales change (including the
e-commerce channel)                                      (15 )%            (2 )%              (8 )%
Comparable average unit retail change (including
the e-commerce channel)                                   (6 )%            (4 )%              (9 )%
Comparable units per sales transaction change
(including the e-commerce channel)                         2  %             4  %               8  %
Comparable sales transaction change (including
the e-commerce channel)                                  (11 )%            (3 )%              (6 )%
Net sales per average square foot                $       445      $       538      $         561
Average net sales per store (in thousands)       $     1,648      $     1,991      $       2,064
Gross profit (in millions)                       $     357.4      $     589.4      $       608.3
(Loss) income from operations (in millions)      $    (185.2 )    $      59.5      $       113.5
Diluted (loss) earnings per share                $     (1.81 )    $      0.43      $        0.85
Average square footage growth over comparable
period                                                     3  %             4  %               7  %
Change in total inventory over comparable period          11  %            (5 )%               4  %
Change in store inventory per retail square foot
over comparable period                                    12  %            (9 )%              (5 )%
Percentages of net sales by category:
Young Women's                                             65  %            64  %              66  %
Young Men's                                               35  %            36  %              34  %

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 1,
                                                      2014         February 2, 2013     January 28, 2012
Net sales                                            100.0  %              100.0 %              100.0 %
Gross profit                                          17.1  %               24.7 %               26.0 %
Selling, general and administrative expenses          25.9  %               22.2 %               21.1 %
(Loss) income from operations                         (8.8 )%                2.5 %                4.9 %
(Loss) income before income taxes                     (8.8 )%                2.5 %                4.9 %
Income tax (benefit) provision                        (2.0 )%                1.0 %                1.9 %
Net (loss) income                                     (6.8 )%                1.5 %                3.0 %


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. Additionally, we have included GoJane sales in our comparable sales beginning in February of fiscal 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.

Net sales decreased by $295.3 million, or by 12% in fiscal 2013 (52 weeks), as compared to fiscal 2012 (53 weeks). The decrease in net sales was driven by the decrease in comparable store sales. Also, the additional week of sales in the same period last year contributed to 1% of the decrease. This was partially offset by a weighted average square footage increase of 3%. The net sales decrease also reflects:

•a decrease of $309.8 million in comparable store sales (excluding the e-commerce channel)
• an decrease of $0.4 million in non-comparable store sales

• an increase of $14.3 million in international licensing revenue primarily due to the increase in licensee operated locations to 96 as of February 1, 2014 from 27 as of February 2, 2013

• an increase of $0.6 million to $217.6 million in net sales from our e-commerce business which includes net revenues from the GoJane.com business beginning in November 2012.

Consolidated comparable sales, including the e-commerce channel, decreased by 13% in our young men's and by 15% in our young women's category. The overall comparable sales, including the e-commerce channel, reflected decreases of 11% in the number of sales transactions and 6% in average unit retail, offset by an increase of 2% in units per sales transaction.

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 included the GoJane business commencing on November 14, 2012, and a 1% increase due to the extra week in fiscal 2012. Additionally, international licensing revenue increased by $3.2 million in fiscal 2012 compared to fiscal 2011 primarily due to the increase in licensee operated locations to 27 as of February 2, 2013 from 14 as of January 28, 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.

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 7.6 percentage points in fiscal 2013 compared to fiscal 2012. Gross profit included the unfavorable impact of store asset impairment charges. Store asset impairment charges unfavorably impacted costs of sales for fiscal 2013 by 2.2 percentage points, or by $46.1 million, and for fiscal 2012 by 1.4 percentage points, or by $32.6 million. The remaining decrease in gross profit of 6.8 percentage points was primarily due to a decrease in merchandise margin of 4.0 percentage points and 2.7 percentage points of deleverage impact in depreciation, occupancy, and distribution and transportation expenses.

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 the 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 1.4 percentage points of deleverage impact in depreciation, occupancy, and distribution and transportation expenses. Gross profit included slightly higher merchandise margin of 0.1 percentage points compared to the prior year.


Table of Contents

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 3.7 percentage points during fiscal 2013 compared to fiscal 2012, or by $12.7 million. Litigation settlements unfavorably impacted SG&A for fiscal 2013 by 0.2 percentage points, or by $4.4 million. The remaining increase in SG&A, as a percentage of net sales, was due primarily to a 3.5 percentage point deleverage 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 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 impact from store-line, corporate and marketing expenses, and higher e-commerce transaction expenses resulting from the growth of this business.

(Loss) Income from Operations

As a result of the above, loss from operations was $(185.2) million for fiscal 2013, compared with income from operations of $59.5 million for fiscal 2012 and $113.5 million for fiscal 2011. The income from operations from our international licensing segment was $20.0 million for fiscal 2013, compared with of $6.3 million for fiscal 2012 and $2.8 million for fiscal 2011. The increase from international licensing was due to the increase in licensee locations as discussed above.

Income Tax (Benefit) Provision

The effective tax rate was 23.8% for fiscal 2013, compared to 40.8% for fiscal 2012 and 38.5% for fiscal 2011. The effective tax rate for fiscal 2013 was unfavorably impacted by $30.6 million from the establishment of valuation allowances against federal, state and Canadian deferred tax assets. We expect that our effective tax rate for fiscal 2014 will continue to be unfavorably impacted by the establishment of valuation allowances against deferred tax assets.

The increase in the effective tax rate 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.

Net (Loss) Income and (Loss) Earnings Per Share

As a result of the above, net loss was $(141.8) million, or $(1.81) per diluted share, for fiscal 2013, compared with net income of $34.9 million, or $0.43 per diluted share, for fiscal 2012 and net income of $69.5 million, or $0.85 per diluted share, for fiscal 2011.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling or updating 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 through existing cash and cash equivalents and by utilizing our revolving credit facility. At February 1, 2014, we had working capital of $136.3 million, cash and cash equivalents of $106.5 million and no debt outstanding under our revolving credit facility. On February 21, 2014, we increased the aggregate borrowing capacity under our revolving credit facility from $175.0 million to $230.0 million (see Note 8 to the Notes to Consolidated Financial Statements for a further discussion).

On March 13, 2014, we signed a commitment letter with Sycamore Partners and its affiliates for $150.0 million in senior secured credit facilities (see Note 16 to the Notes to Consolidated Financial Statements for a further discussion regarding this commitment letter).


Table of Contents

Additionally, while we have in the past repurchased our common stock under a stock repurchase program (see Note 4 to the Notes to Consolidated Financial Statements), we do not currently expect to do so during fiscal 2014. In November 2012, we used $25.2 million of cash on hand as partial consideration to acquire the assets of GoJane (see Note 2 to the Notes to Consolidated Financial Statements for further discussion regarding this acquisition).

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

                                                                            Fiscal Year Ended

                                                        February 1, 2014     February 2, 2013     January 28, 2012
Net cash (used in) provided by operating activities    $        (38,373 )   $        144,811     $        129,301
Net cash used in investing activities                           (84,470 )            (97,484 )            (73,323 )
Net cash used in financing activities                            (1,387 )            (39,501 )            (98,179 )
Effect of exchange rate changes                                    (754 )                (37 )                360
Net (decrease) increase in cash and cash equivalents   $       (124,984 )   $          7,789     $        (41,841 )

Operating Activities

Cash flows from operating activities decreased by $183.2 million to $(38.4) million in fiscal 2013 from $144.8 million in the prior year. This decrease was due primarily to the decrease in net income of $176.8 million as well as cash used for merchandise inventory, and income taxes receivable resulting from the fiscal 2013 taxable loss. Merchandise inventory increased by 11% in total, or 12% on a per retail square foot basis as of February 1, 2014 compared February 2, 2013. The above mentioned decreases in cash from operating activities were partially offset by an increase in cash flows from accounts payable of $62.3 million, as a result of the increase in merchandise inventory and the timing of certain payments.

Cash flows from operating activities 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.

Investing Activities

During fiscal 2014, we plan to invest approximately $22.0 million in capital expenditures to open approximately seven Aéropostale stores, approximately one P.S. from Aéropostale store, to remodel, either full or partial, approximately 10 stores and for a number of information technology investments. Additionally, in an on-going effort to optimize our real estate portfolio, we are considering approximately 170 to 180 locations for potential store closure. Such program began in 2013 and is expected to continue over the next several years. Of these, we endeavor to close approximately 50 Aéropostale stores and two P.S. from Aéropostale stores in 2014, in addition to the 48 Aéropostale and one P.S. from Aéropostale store we closed during fiscal 2013. We have also retained a real estate consulting firm to investigate the economics of accelerated lease buyouts, as well as to identify opportunities for rent relief across our portfolio. We have authorized these consultants to enter into negotiations on our behalf regarding early lease buyouts and lease negotiations in 2014. The results derived from the real estate consulting firm retained by us may alter the number of store closures and the timing for such closures.

We invested $84.1 million in capital expenditures in fiscal 2013, primarily to construct 13 new Aéropostale stores, 52 P.S. from Aéropostale stores, to remodel 32 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.

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. 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.


Table of Contents

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 fiscal 2013 under the stock repurchase program, and we do not currently expect to do so during fiscal 2014. During fiscal 2012 and 2011, we repurchased 3.0 million shares for $40.8 million and 4.2 million shares for $100.1 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 1, 2014, we have approximately $104.4 million of repurchase authorization remaining under our $1.15 billion share repurchase program. We withheld 0.1 million shares for minimum statutory withholding taxes of $1.6 million related to the vesting of stock awards during fiscal 2013.

Revolving Credit Facility

In September 2011, we together with certain of our direct and indirect subsidiaries entered into a Third Amended and Restated Loan and Security Agreement with the Lenders party thereto, and Bank of America, N.A., as agent for the ratable benefit of the Credit Parties (the "Credit Facility"). The Credit Facility originally provided 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 2013 or as of February 1, 2014 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.

On February 21, 2014, the Company, certain of its direct and indirect subsidiaries, including GoJane LLC, the Lenders party thereto, and Bank of America, N.A., as agent for the ratable benefit of the Credit Parties (in such capacity, the "Agent"), entered into a Joinder and First Amendment to Third Amended and Restated Loan and Security Agreement and Amendment to Certain Other Loan Documents (the "First Amendment"). The First Amendment amended the Credit Facility, among other things, to increase from $175.0 million to $230.0 million the aggregate amount of loans and other extensions of credit available to the Borrower under the Credit Facility by (i) the addition of a $30.0 million first-in, last-out revolving loan facility based on the appraised value of certain intellectual property of the Company, and (ii) an increase in the Company's existing revolving credit facility by $25.0 million, from $175.0 million to $200.0 million (which continues to include a $40.0 million sublimit for the issuance of letters of credit). In addition, the accordion feature of the Credit Facility, under which the Company may request an increase in the commitments of the Lenders thereunder from time to time, was reduced from $75.0 million to $50.0 million. GoJane, an indirect wholly-owned subsidiary of the Company, also joined the credit facility as a new guarantor.

Loans under the Credit Facility are secured by substantially all of our assets and are guaranteed by the Guarantors. Upon the occurrence of a Suspension Event (which is defined in the Credit Facility as an event of default or any occurrence, circumstance or state of facts which would become and event of default after notice, or lapse of time, or both) or, in certain circumstances, a Cash Dominion Event (which is defined in the Credit Facility as 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 may 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:

. . .

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