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ARO > SEC Filings for ARO > Form 10-Q on 9-Jun-2014All Recent SEC Filings

Show all filings for AEROPOSTALE INC

Form 10-Q for AEROPOSTALE INC


9-Jun-2014

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 and risks asscociated with the Company's ability to implement and realize the anticipated benefits of the Company's strategic initiatives and cost reduction program. 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 1, 2014 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 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 1, 2014.

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

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. We continue to make 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. We also continue to make 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 million to $230.0 million (see Note 9 to the Notes to Unaudited Condensed Consolidated Financial Statements for a further discussion). Additionally, on May 23, 2014, to enhance our liquidity, we entered into $150.0 million in senior secured credit facilities with Sycamore Partners (see Note 16 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion).

Operationally, on April 30, 2014, following a strategic review and assessment of changing consumer patterns, management and the Board of Directors approved a comprehensive plan to both restructure the P.S. from Aéropostale business and to reduce costs. We have identified key initiatives we estimate will generate approximately $30.0 million to $35.0 million in annualized pre-tax savings, of which approximately $5.0 million to $10.0 million is expected to be achieved during fiscal 2014. Based on changing consumer patterns, we plan to close approximately 125 mall-based P.S. from Aéropostale stores by the end of fiscal 2014. We plan to focus on faster growing sales channels, including off-mall locations (including outlets), e-commerce and international licensing. We are also exploring other potential third party distribution channels. By taking these steps, we expect to eliminate pre-tax losses of approximately $15.0 million that were generated in the mall-based business in fiscal 2013, excluding any impairment charges. We anticipate that substantially all of the planned store closures will be completed by the end of fiscal 2014. As of May 3, 2014, one store had been closed. The cost reduction program will also target both direct and indirect spending across the organization. This included the reduction of corporate headcount by eliminating approximately 100 open or occupied positions to align with our current business strategies.


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We estimate that we will incur pre-tax restructuring and impairment charges related to these actions totaling approximately $40.0 million to $65.0 million throughout fiscal 2014, of which approximately $25.0 million to $40.0 million are estimated to be cash expenses. Included in the estimate of total pre-tax charges are approximately:

• $4.0 million of consulting and severance expenses resulting from the announced corporate cost reduction initiatives, of which $2.9 million were recorded during the first quarter of 2014.

• $30.5 million of the charges relate to fixed asset impairments resulting primarily from the expected closures of the P.S. from Aéropostale stores, all of which were recorded during the first quarter of 2014.

• $3.0 million of the charges relate to additional severance resulting from the store closures, which are expected to be recorded over the remainder of fiscal 2014.

• The remainder of the charges relate to estimated lease costs in conjunction with the store closures, which are expected to be recorded during the remainder of fiscal 2014. We cannot yet estimate when the lease charges will be paid.

The charges will be recognized in restructuring charges in the statement of operations. The amounts of these estimated costs and charges are preliminary and remain subject to change, pending, among other factors, the outcome of negotiations with third parties. Total charges, actual savings and timing may vary positively or negatively from these estimates due to changes in the scope, underlying assumptions or execution risk of the program throughout its duration.

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
                                              May 3,     May 4,
                                               2014       2013
Net sales                                    100.0  %   100.0  %
Gross profit                                  17.8  %    22.4  %
Selling, general and administrative expenses  30.2  %    27.0  %
Restructuring charges                          8.7  %       -  %
Loss from operations                         (21.1 )%    (4.6 )%
Interest expense                               0.1  %       -  %
Loss before income taxes                     (21.2 )%    (4.6 )%
Income tax benefit                            (1.8 )%    (1.9 )%
Net loss                                     (19.4 )%    (2.7 )%


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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 ended May 3,
2014 are compared to the 13-weeks ended May 4, 2013.

                                                                   13 weeks ended
                                                               May 3,          May 4,
                                                                2014            2013
Net sales (in millions)                                     $    395.9      $    452.3
Total store count at end of period                               1,081           1,106
Comparable store count at end of period                          1,005           1,027
Net sales change                                                   (12 )%           (9 )%
Comparable sales change (including the e-commerce channel)         (13 )%          (14 )%
Comparable average unit retail change (including the
e-commerce channel)                                                  3  %           (9 )%
Comparable units per sales transaction change (including
the e-commerce channel)                                             (5 )%            5  %
Comparable sales transaction change (including the
e-commerce channel)                                                (10 )%          (10 )%
Net sales per average square foot                           $       86      $       99
Gross profit (in millions)                                  $     70.5      $    101.4
Loss from operations (in millions)                          $    (83.4 )    $    (20.5 )
Diluted loss per share                                      $    (0.98 )    $    (0.16 )
Average square footage growth over comparable period                 -  %            3  %
Change in total inventory over comparable period                    (4 )%            3  %
Change in store inventory per retail square foot over
comparable period                                                   (3 )%           (3 )%
Percentages of net sales by category:
Young Women's                                                       65  %           65  %
Young Men's                                                         35  %           35  %

Comparison of the 13 weeks ended May 3, 2014 to the 13 weeks ended May 4, 2013

Net 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 for the first quarter of 2014 decreased by $56.4 million, or by 12%, compared to the same period last year. The decrease in net sales was driven by the decrease in comparable sales of 13%. The net sales decrease reflects:

• a decrease of $45.3 million in comparable store sales (excluding the e-commerce channel)

• a decrease of $9.2 million in non-comparable store sales

• a decrease of $7.3 million in our e-commerce business

• an increase of $5.4 million in international licensing revenue primarily due to the increase in licensee operated locations to 121 as of May 3, 2014 from 28 as of May 4, 2013.

Consolidated comparable sales, including the e-commerce channel, decreased by 12% in our young men's category and 13% 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 and 5% in units per sales transaction, partially offset by an increase of 3% in average unit retail.


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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 4.6 percentage points for the first quarter of 2014 compared to the same period last year. Included in gross profit for the first quarter of 2014 are asset impairment charges of 0.7 percentage points compared to asset impairment charges of 0.1 percentage points recorded in the same period last year. Merchandise margin for the first quarter of fiscal 2014 decreased by 1.4 percentage points compared to the first quarter of fiscal 2013 due to an increase in promotional activity. However, the promotional activity for the first quarter of fiscal 2014 was less than anticipated as we entered the quarter. The decrease in gross profit was also due to 2.7 percentage points of deleverage impact in occupancy expense, distribution and transportation expense and depreciation 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 30.2% for the first quarter of 2014 compared to 27.0% for the same period last year. The increase in SG&A, as a percentage of sales, was due primarily to the deleverage in corporate expenses of 1.3 percentage points, store-line expenses, which primarily consists of payroll of 1.1 percentage points and marketing expenses of 1.1 percentage points. These increases were partially offset by 0.4 percentage points of leverage from transaction costs.

SG&A decreased by $2.5 million for the first quarter of 2014 compared to the first quarter of 2013. The decrease was due to lower store-line expenses of $3.5 million and transaction expenses of $3.2 million, which was partially offset by higher marketing costs of $3.1 million and corporate expenses of $1.0 million.

Restructuring Charges

Restructuring charges related to the cost reduction program discussed above were $34.5 million, or 8.7% as a percentage of net sales, for the first quarter of 2014. These charges included P.S. from Aéropostale store impairment charges of $30.5 million and other restructuring charges of $4.0 million.

Loss from Operations

As a result of the above, loss from operations was $83.4 million for the first quarter of 2014, compared to $20.5 million for the first quarter of 2013. The income from operations from our international licensing segment was $6.9 million for the first quarter of 2014 compared with of $1.8 million for the first quarter of 2013. The increase from international licensing was due to the increase in licensee locations as discussed above.

Income taxes

The effective tax rate was 8.4% for the first quarter of 2014 and 41.2% for the first quarter of 2013. During the first quarter of 2014, we have accounted for the utilization of all remaining available NOL carrybacks. While the balance of 2014 anticipated losses can be carried forward and utilized against future taxable income, the majority of related deferred tax assets have a full valuation allowance. The lower tax rate for the first quarter of 2014 was primarily due to the valuation allowance provided for these 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.

Net loss

Net loss was $76.8 million, or $0.98 per diluted share, for the first quarter of 2014, compared to net loss of $12.2 million, or $0.16 per diluted share, for the first quarter of 2013.


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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 operating and investing net cash requirements for the next twelve months through existing cash and cash equivalents and by utilizing our revolving credit facility. As of May 3, 2014, we had working capital of $82.7 million, cash and cash equivalents of $24.5 million and $8.5 million of short-term borrowings outstanding under our revolving credit facility. On May 23, 2014, the revolving credit facility was repaid. 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 9 to the Notes to Unaudited Condensed Consolidated Financial Statements for a further discussion).

On May 23, 2014, to enhance our liquidity, we entered into $150.0 million in senior secured credit facilities with Sycamore Partners (see Note 16 to the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion).

Additionally, while we have in the past repurchased our common stock under a stock repurchase program (see Note 5 to the Notes to Unaudited Condensed Consolidated Financial Statements), we do not currently expect to do so during fiscal 2014.

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

                                                         13 weeks ended
                                                      May 3,        May 4,
                                                       2014          2013
                                                         (In thousands)
Net cash used in operating activities               $ (77,613 )   $ (64,702 )
Net cash used in investing activities                 (10,429 )     (16,795 )
Net cash provided by (used in) financing activities     6,046        (1,555 )
Effect of exchange rate changes                             -           (94 )
Net decrease in cash and cash equivalents           $ (81,996 )   $ (83,146 )

Operating activities - Net cash used in operating activities increased by $12.9 million for first quarter of 2014 compared to the same period in 2013. The change in cash flows used in operating activities was due primarily to the increase in period to period net loss of $64.6 million, partially offset by non-cash items of $31.7 million, in addition to the timing of cash used for other assets and liabilities. Merchandise inventory decreased by 4% in total, or 3% on a per retail square foot basis as of May 3, 2014 compared with May 4, 2013. Accounts payable increased by 13%, primarily as a result of cash management initiatives and the timing of payments.

Investing activities - Investments in capital expenditures are principally for the construction of new stores, remodeling of existing stores and investments in information technology. Net cash used in investing activities decreased by $6.4 million for the first quarter of 2014 compared to the same period in 2013 primarily due to lower capital expenditures. 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 2014, we plan to invest a total of approximately $22.0 million in capital expenditures. During the first quarter of 2014, we invested $8.0 million, which excludes accruals related to purchases of property and equipment. During first quarter of 2014, we did not open any Aéropostale or P.S. from Aéropostale stores and remodeled eight Aéropostale stores. During the remainder of the fiscal year, we plan to open seven Aéropostale stores and one combination store and remodel five Aéropostale stores.

During the first quarter of 2013, we invested $16.4 million in capital expenditures, primarily to construct one new Aéropostale store, 24 P.S. from Aéropostale stores, to remodel four Aéropostale stores and for a number of information technology investments.

Financing activities - Net cash provided by financing activities increased by $7.6 million for the first quarter of 2014 compared to the same period in 2013. During the first quarter of 2014, we borrowed $42.0 million against our revolving credit facility and repaid $33.5 million. As of May 3, 2014, we had $8.5 million outstanding against this facility. We had no outstanding borrowings against the facility during the first quarter of 2013.


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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 LLC, an indirect wholly-owned subsidiary of the Company, also joined the credit facility as a new guarantor.

On May 23, 2014 we entered into $150.0 million senior secured credit facilities with Sycamore Partners. In connection with this agreement, we simultaneously amended the revolving credit facility with Bank of America N.A. to allow for the incurrence of this additional debt under the Loan Agreement (see Note 16 to the Notes to Unaudited Condensed Consolidated Financial Statements for a further discussion).

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:

• 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, failure to maintain specified availability levels, 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. Upon the occurrence of an event of default under the Credit Facility, the Lenders may take action, including but not limited to, cease making loans, termination of the Credit Facility and declaration that all amounts outstanding are immediately due and payable, and taking possession of and sell all assets that have been used as collateral.

The Company is subject to a restriction requiring the maintenance of minimum availability levels based upon the lesser of 10% of the borrowing base or commitments, as defined in the Credit Facility.

Availability under the Credit Facility is based on a borrowing base consisting of merchandise inventory, certain intellectual property and receivables. As of May 3, 2014, we had $8.5 million in cash borrowings and our remaining availability was $174.4


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million. During fiscal 2013 and as of February 1, 2014, 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 May 3, 2014, the outstanding letter of credit was $0.2 million and expires on June 30, 2014. We do not have any other stand-by or commercial letters of credit as of May 3, 2014 under the Credit Facility.

As of May 3, 2014, we are not aware of any instances of noncompliance with any covenants or any other event of default under the Credit Facility.

Contractual Obligations
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