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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-31314
AEROPOSTALE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1443880
(State of incorporation) (I.R.S. Employer Identification No.)
1372 BROADWAY, 8TH FLOOR, NEW YORK, NY 10018
(Address of Principal Executive Offices) (Zip Code)
(646) 485-5398
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 13, 2002, the registrant had 35,070,638 of shares of common
stock outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION......................................... 2
Item
1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets as of August 3, 2002
(unaudited) and February 2, 2002............................ 2
Condensed Consolidated Statements of Operations for the
thirteen and twenty six weeks ended August 3, 2002
(unaudited) and August 4, 2001 (unaudited).................. 3
Condensed Consolidated Statement of Stockholders' Equity for
the twenty six weeks ended August 3, 2002 (unaudited)....... 4
Condensed Consolidated Statements of Cash Flows for the
twenty six weeks ended August 3, 2002 (unaudited) and August
4, 2001 (unaudited)......................................... 5
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item
3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 16
Item
4. Controls and Procedures..................................... 16
PART II. OTHER INFORMATION............................................ 17
Item
1. Legal Proceedings........................................... 17
Item
2. Changes in Securities and Use of Proceeds................... 17
Item
3. Defaults Upon Senior Securities............................. 17
Item
4. Submission of Matters to a Vote of Security Holders......... 17
Item
5. Other Information........................................... 17
Item
6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES............................................................ 18
1
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 3, FEBRUARY 2,
2002 2002
----------- -----------
(UNAUDITED) (1)
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,818 $ 44,958
Merchandise inventory..................................... 95,440 37,979
Tenant allowance receivables.............................. 7,781 1,753
Other current assets...................................... 8,358 5,090
-------- --------
Total current assets................................... 120,397 89,780
FIXTURES, EQUIPMENT AND IMPROVEMENTS -- Net................. 64,162 48,646
OTHER ASSETS................................................ 8,449 8,501
-------- --------
TOTAL ASSETS......................................... $193,008 $146,927
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility................................. 16,983 --
Accounts payable.......................................... 25,712 13,995
Accrued expenses.......................................... 22,608 37,604
-------- --------
Total current liabilities.............................. 65,303 51,599
OTHER NONCURRENT LIABILITIES:
Deferred tenant allowances................................ 24,816 17,732
Other liabilities......................................... 8,884 7,789
SERIES B REDEEMABLE PREFERRED STOCK:
$0.01 par value per share; 5 and 6 shares authorized, 0
and 6 shares issued and outstanding, 6 shares
liquidation preference $6,250; 12.5% cumulative........ -- 9,617
COMMITMENT AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock -- par value, $0.01 per share; 200,000 and
75,266 shares authorized, 34,997 and 31,047 shares
issued and outstanding................................. 350 310
Common stock -- Nonvoting, par value, $0.01 per share;
75,266 shares authorized, 0 and 1,118 shares issued and
outstanding............................................ -- 11
Additional paid-in capital................................ 40,382 9,321
Deferred compensation..................................... -- (4,473)
Retained earnings......................................... 53,273 55,021
-------- --------
Total stockholders' equity............................. 94,005 60,190
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $193,008 $146,927
======== ========
- ---------------
Note (1) Balance sheet derived from audited financial statements
See notes to condensed consolidated financial statements.
2
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13 WEEKS ENDED 26 WEEKS ENDED
------------------------- -------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
NET SALES....................................... $90,141 $63,769 $175,271 $120,398
COST OF SALES (including $820 and $952 equity
based compensation in 2002 and certain buying,
occupancy and warehousing expenses)........... 66,047 49,836 127,208 94,007
------- ------- -------- --------
Gross profit.................................. 24,094 13,933 48,243 26,391
------- ------- -------- --------
COSTS AND EXPENSES:
Selling, general and administrative expenses
(including $3,033 and $3,521 equity based
compensation in 2002)....................... 27,410 15,739 50,623 31,447
Store closing expense......................... -- 815 -- 815
Amortization of negative goodwill............. -- (58) -- (117)
------- ------- -------- --------
Total costs and expenses.................... 27,410 16,496 50,623 32,145
------- ------- -------- --------
LOSS FROM OPERATIONS............................ (3,316) (2,563) (2,380) (5,754)
INTEREST (INCOME) EXPENSE -- Net................ (19) 340 (69) 589
------- ------- -------- --------
LOSS BEFORE INCOME TAXES........................ (3,297) (2,903) (2,311) (6,343)
BENEFIT FOR INCOME TAXES........................ (1,319) (1,172) (925) (2,563)
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS................. (1,978) (1,731) (1,386) (3,780)
GAIN ON DISCONTINUED OPERATIONS................. -- 15 -- 17
------- ------- -------- --------
NET LOSS........................................ $(1,978) $(1,716) $ (1,386) $ (3,763)
======= ======= ======== ========
BASIC AND DILUTED LOSS PER COMMON SHARE
From continuing operations.................... $ (0.06) $ (0.06) $ (0.05) $ (0.14)
From discontinued operations.................. -- -- -- --
------- ------- -------- --------
Net loss per share............................ $ (0.06) $ (0.06) $ (0.05) $ (0.14)
======= ======= ======== ========
Basic and diluted weighted average number of
shares Outstanding............................ 34,568 31,521 33,610 31,501
See notes to condensed consolidated financial statements.
3
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
COMMON STOCK NONVOTING ADDITIONAL
--------------- --------------- PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------ ------ ------ ------ ---------- ------------ -------- -------
(IN THOUSANDS)
BALANCE, FEBRUARY 2, 2002:..... 31,047 $310 1,118 $ 11 $ 9,321 $(4,473) $55,021 $60,190
Net loss..................... -- -- -- -- -- -- (1,386) (1,386)
Stock options exercised...... 224 2 733 8 185 -- -- 195
Tax benefit related to
exercise of stock
options.................... -- -- -- -- 1,500 -- -- 1,500
Deferred offering costs...... -- -- -- -- (1,993) -- -- (1,993)
Initial public offering...... 1,875 19 -- -- 31,369 -- -- 31,388
Amortization of equity based
compensation............... -- -- -- -- -- 4,473 -- 4,473
Conversion of common stock
non voting to common
stock...................... 1,851 19 (1,851) (19) -- -- -- --
Accrued dividend --
redeemable preferred
stock...................... -- -- -- -- -- -- (362) (362)
------ ---- ------ ---- ------- ------- ------- -------
BALANCE, AUGUST 3, 2002
(unaudited):................. 34,997 $350 -- $ -- $40,382 $ -- $53,273 $94,005
====== ==== ====== ==== ======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
AEROPOSTALE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
26 WEEKS ENDED
--------------------------
AUGUST 3, AUGUST 4,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (1,386) $ (3,763)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 3,698 2,755
Amortization of tenant allowances and above market
leases................................................ (1,461) (1,048)
Amortization of negative goodwill...................... -- (117)
Equity based compensation charge....................... 4,473 --
Gain on discontinued operations........................ -- 17
Deferred rent, net..................................... 1,206 591
Pension expense........................................ 250 113
Changes in operating assets and liabilities:
Merchandise inventory................................ (57,461) (24,994)
Other current assets................................. (9,296) 1,652
Other assets......................................... 17 2,171
Accounts payable..................................... 11,717 5,152
Accrued expenses and other liabilities............... (5,312) (1,736)
-------- --------
Net cash used by operating activities............. (53,555) (19,207)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixtures, equipment and improvements......... (19,179) (12,641)
-------- --------
Cash used in investing activities...................... (19,179) (12,641)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised................................... 195 8
Net proceeds from initial public offering................. 31,388 --
Offering costs related to initial public offering......... (1,993) --
Redemption and payment of dividends on preferred stock.... (9,979) --
Net borrowings under revolving credit facility............ 16,983 33,555
-------- --------
Cash provided by financing activities.................. 36,594 33,563
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (36,140) (1,715)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 44,958 4,791
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,818 $ 6,506
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 13,275 $ 2,303
======== ========
Interest expense paid..................................... $ 132 $ 504
======== ========
SIGNIFICANT NONCASH INVESTING AND FINANCING TRANSACTIONS:
Accrued dividends on Series B Redeemable Preferred
Stock.................................................. $ 362 $ 540
======== ========
See notes to condensed consolidated financial statements.
5
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA)
1. BASIS OF PRESENTATION
Aeropostale, Inc. (together with its wholly-owned subsidiary Aeropostale
West, Inc., the "Company") is a mall-based specialty retailer of casual apparel
and accessories for young women and young men with a total of 335 stores as of
August 3, 2002 located in 35 states. On February 3, 2002, Aeropostale, Inc.
contributed all of the assets relating to 10 stores that are located in Arizona
and California to its wholly-owned subsidiary Aeropostale, West Inc. as part of
a tax-free reorganization.
The condensed consolidated financial statements, except for the February 2,
2002 balance sheet, are unaudited. These condensed consolidated financial
statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments considered necessary to present
fairly the financial position of the Company as of August 3, 2002 and the
results of operations for the thirteen and twenty six weeks ended August 3, 2002
and August 4, 2001 and cash flows for the twenty six weeks ended August 3, 2002
and August 4, 2001, but are not necessarily indicative of the results of
operations for a full fiscal year. These condensed consolidated financial
statements and related notes should be read in conjunction with the Company's
audited financial statements for the year ended February 2, 2002, which were
included as part of the Company's registration statement on Form S-1
(Registration No. 333-84056), as declared effective by the Securities and
Exchange Commission on May 15, 2002.
2. PUBLIC OFFERING OF COMMON STOCK
On May 21, 2002, the Company completed an initial public offering of
14,375,000 shares of common stock of which 1,875,000 and 12,500,000 shares were
offered by the Company and certain selling stockholders, respectively, at a
price to the public of $18.00 per share. Upon completing the offering, net
proceeds of $31.4 million and $209.3 million were distributed to the Company and
selling stockholders, respectively. The Company is now authorized to issue
200,000,000 shares of common stock $0.01 par value, and 5,000,000 shares of
undesignated preferred stock, $0.01 par value. In connection with the Company's
offering, all of the Company's outstanding shares of non-voting common stock as
of February 2, 2002 were converted into 1,118,447 shares of common stock.
Approximately $10.0 million of the approximately $31.4 million of the net
proceeds to the Company were used to redeem all of the outstanding shares of
12 1/2% Series B redeemable preferred stock and pay all accrued and unpaid
dividends thereon. The remainder of the proceeds were used for working capital,
general corporate purposes and new store openings.
On February 27, 2002, the Company adopted the Aeropostale 2002 Long-Term
Incentive Plan that became effective upon the consummation of the initial public
offering. A total of 1,735,556 shares of the Company's common stock became
available under issuance under the plan. All references to share information
reflects a 376.328 for 1 stock split of the Company's common stock and nonvoting
common stock which was approved by the Company's Board of Directors and became
effective on May 10, 2002. The respective share and share amounts and conversion
ratios included in the condensed consolidated financial statements reflect the
stock split for all periods presented.
On December 21, 2001, the Company granted 565,997 options with an exercise
price of $0.85 per share which was at a price less than the fair market value of
$15.77 per share. The Company incurred approximately $8,445 equity based
compensation charge as a result of the grant of these options of which
6
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3,972 and $620 was recorded in the year ended February 2, 2002 and thirteen
weeks ended May 4, 2002, respectively. The Company recorded acceleration of the
unamortized balance of $3,853 in the thirteen weeks ended August 3, 2002, of
which $820 and $3,033 is recorded in cost of sales and selling, general and
administrative expenses, respectively.
The Company also incurred a $142 compensation charge for a bonus for
certain management stockholders in connection with the completion of the initial
public offering in the thirteen weeks ended August 3, 2002.
3. RECENT ACCOUNTING STANDARDS
New Accounting Standards -- In October 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. This Statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of, but retains the
fundamental provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. However, SFAS No. 144 applies the
fair value method for testing of impairment, which differs from SFAS No. 121.
SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30 as it pertains to disposal of a business segment but retains the
requirement of that opinion to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of or is classified as held for sale. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, thereby
applying to the Company upon the commencement of its fiscal 2003 fiscal year.
The adoption of SFAS No. 144 did not have a material impact on the consolidated
financial statements.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Company has
determined that the adoption of this statement will not have an impact on the
consolidated financial statements.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. The Statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company has determined that the adoption of this Statement will
not have a material impact on the consolidated financial statements.
4. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share. Basic earnings per share have been computed based upon the
weighted average of common shares and nonvoting common
7
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares outstanding, after deducting preferred dividend requirements. Diluted
earnings per share gives effect to outstanding stock options.
13 WEEKS ENDED 13 WEEKS ENDED
AUGUST 3, 2002 AUGUST 4, 2001
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Loss from continuing operations................ $(1,978) $(1,978) $(1,731) $(1,731)
Preferred stock dividends...................... (62) (62) (274) (274)
------- ------- ------- -------
Loss from continuing operations available for
per-share calculation........................ (2,040) (2,040) (2,005) (2,005)
Gain from discontinued operations.............. -- -- 15 15
------- ------- ------- -------
Net loss available for per-share calculation... $(2,040) $(2,040) $(1,990) $(1,990)
======= ======= ======= =======
Average shares of common stock outstanding..... 34,568 34,568 31,521 31,521
Stock options.................................. -- (a) -- (a)
------- ------- ------- -------
Total average equivalent shares................ 34,568 34,568 31,521 31,521
======= ======= ======= =======
Per Common Share:
Loss from continuing operations................ $ (0.06) $ (0.06) $ (0.06) $ (0.06)
Income from discontinued operations............ -- -- -- --
------- ------- ------- -------
Net loss....................................... $ (0.06) $ (0.06) $ (0.06) $ (0.06)
======= ======= ======= =======
- ---------------
(a) Options to purchase 3,565 and 4,250 shares of common stock were not included
in the computation of dilutive loss per share for the thirteen weeks ended
August 3, 2002 and August 4, 2001 because to do so would have been
anti-dilutive.
26 WEEKS ENDED 26 WEEKS ENDED
AUGUST 3, 2002 AUGUST 4, 2001
----------------- -----------------
BASIC DILUTED BASIC DILUTED
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Loss from continuing operations................ $(1,386) $(1,386) $(3,780) $(3,780)
Preferred stock dividends...................... (362) (362) (540) (540)
------- ------- ------- -------
Loss from continuing operations available for
per-share calculation........................ (1,748) (1,748) (4,320) (4,320)
Loss from discontinued operations.............. -- -- 17 17
------- ------- ------- -------
Net loss available for per-share calculation... $(1,748) $(1,748) $(4,303) $(4,303)
======= ======= ======= =======
Average shares of common stock outstanding..... 33,610 33,610 31,501 31,501
Stock options.................................. -- (b) -- (b)
------- ------- ------- -------
Total average equivalent shares................ 33,610 33,610 31,501 31,501
======= ======= ======= =======
Per Common Share:
Loss from continuing operations................ $ (0.05) $ (0.05) $ (0.14) $ (0.14)
Income from discontinued operations............ -- -- -- --
------- ------- ------- -------
Net loss....................................... $ (0.05) $ (0.05) $ (0.14) $ (0.14)
======= ======= ======= =======
- ---------------
(b) Options to purchase 3,683 and 4,258 shares of common stock were not included
in the computation of dilutive loss per share for the twenty six weeks ended
August 3, 2002 and August 4, 2001 because to do so would have been
anti-dilutive.
8
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the purchase by Bear Stearns Merchant Banking and our
management team of all the shares of the Company from Federated Specialty
Stores, Inc. (a wholly-owned subsidiary of Federated Department Stores, Inc.) on
August 3, 1998, the Company recorded gross negative goodwill in the amount of
$12.8 million that was being amortized over an estimated life of ten years.
In connection with the decision to discontinue the operations of the
Chelsea Cambell business in February 2000, an allocation of the negative
goodwill was made between the Aeropostale and the Chelsea Cambell businesses
based upon their relative fair values at the Acquisition date. As a result of
such allocation, approximately $8.8 million of unamortized negative goodwill was
written off as part of the gain on disposal of the Chelsea Cambell business. The
remaining negative goodwill was allocated to Aeropostale and was amortized over
its estimated life of ten years. Amortization of negative goodwill was
approximately $0 and $58 for the thirteen weeks ended August 3, 2002 and August
4, 2001, respectively, and $0 and $117 for the twenty six weeks ended August 3,
2002 and August 4, 2001, respectively.
The Company adopted SFAS 142, Goodwill and Intangibles, which changed the
accounting for goodwill from an amortization method to an impairment approach on
August 5, 2001. With the adoption of SFAS 142, the remaining negative goodwill
was recorded as income from a cumulative effect of accounting change.
Net income and income from continuing operations for the thirteen and
twenty six weeks ended August 4, 2001 has been adjusted to reflect net income
and income from continuing operations as though no negative goodwill
amortization was recorded.
13 WEEKS ENDED 26 WEEKS ENDED
--------------------- ---------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Loss from continuing operations....................... $(1,978) $(1,731) $(1,386) $(3,780)
Adjusted loss from continuing operations.............. (1,978) (1,673) (1,386) (3,663)
Net loss.............................................. (1,978) (1,716) (1,386) (3,763)
Adjusted net loss..................................... (1,978) (1,658) (1,386) (3,646)
Diluted loss from continuing operations per share..... $ (0.06) $ (0.06) $ (0.05) $ (0.14)
Adjusted diluted loss from continuing operations per
share............................................... (0.06) (0.06) (0.05) (0.13)
Diluted net loss per share............................ (0.06) (0.06) (0.05) (0.14)
Adjusted net loss per share........................... (0.06) (0.06) (0.05) (0.13)
6. REVOLVING CREDIT FACILITY
The Company has a revolving credit agreement, as amended, with a bank under
which the Company may borrow or obtain letters of credit up to an aggregate of
$55 million (the "Credit Facility"), with letters of credit having a sub-limit
of $15 million. The facility matures by its terms on July 31, 2004. Indebtedness
under the Credit Facility is collateralized by the assets of the Company.
Borrowings under the Credit Facility bear interest, at the Company's option,
either at (a) the lender's prime rate or (b) the Euro Dollar Rate plus 1.50% to
2.00%, depending on excess availability. Additionally, the Company must pay
commitment fees on any unused portion of the Credit Facility at an annualized
rate of 0.375 percent of the difference between the unused portion and
borrowings (including outstanding letters of credit) at the preceding month-end.
In connection with the Credit Facility, the Company incurred a one-time
financing fee of $220, which is being amortized over the term of the Credit
Facility, such amount is recorded as additional interest expense. At February 2,
2002 and August 3, 2002, the Company had $0 and $16,983 in borrowings
outstanding and had not issued any stand-by or commercial letters of credit. At
9
AEROPOSTALE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
August 3, 2002, the Company was in compliance with the financial covenants of
the credit facility, which require the Company to achieve certain earnings
before interest, income taxes, depreciation and amortization ("EBITDA" as
defined in the Agreement) amounts and capital spending limitations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Net sales. Net sales consist of sales from comparable stores and
non-comparable stores. A store is not included in comparable store sales until
the first day of the fiscal month following the fourteenth full fiscal month of
sales. Non-comparable store sales include sales in the current fiscal year from
our stores opened during the previous fiscal year before they are considered
comparable stores and new stores opened during the current fiscal year. In
addition, all sales generated from stores that we have closed and through our
arrangements with colleges and universities for organized sales events are
included in non-comparable store sales.
Cost of sales. Cost of sales includes the cost of merchandise,
distribution and warehousing, freight from the distribution center and warehouse
to the stores, payroll for our design, buying and merchandising personnel and
store occupancy costs. Store occupancy costs include rent, contingent rents,
common area maintenance, real estate taxes, utilities, repairs, maintenance and
depreciation. Included in cost of sales is a charge related to equity based
compensation of approximately $820,000 and approximately $952,000 for the
thirteen and twenty six weeks ended August 3, 2002, respectively.
Selling, general and administrative expenses. Selling, general and
administrative expenses include selling, store management and corporate
expenses, including payroll and employee benefits, other than for our design,
buying and merchandising personnel, employment taxes, management information
systems, marketing, insurance, legal, store pre-opening and other corporate
level expenses. Store pre-opening expenses include store level payroll, grand
opening event marketing, travel, supplies and other store opening expenses.
Corporate level expenses are primarily attributable to our corporate offices in
New York, New York, and Wayne, New Jersey. Included in selling, general and
administrative expenses is a charge related to equity based compensation of
approximately $3,033,000 and $3,521,000 for the thirteen and twenty six weeks
ended August 3, 2002, respectively.
Interest expense, net. Interest expense, net of interest income, includes
interest relating to our revolving credit facility and amortization of deferred
financing costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the appropriate application of certain
accounting policies, many of which require us to make estimates and assumptions
about future events and their impact on amounts reported in our condensed
consolidated financial statements and related notes. Since future events and
their impact cannot be determined with certainty, the actual results will
inevitably differ from our estimates. Such differences could be material to the
condensed consolidated financial statements.
We believe application of accounting policies, and the estimates inherently
required therein, are reasonable. These accounting policies and estimates are
constantly reevaluated, and adjustments are made when facts and circumstances
dictate a change. Historically, we have found our application of accounting
policies to be appropriate, and actual results have not differed materially from
those determined using necessary estimates.
Merchandise inventory. Our merchandise inventory is carried at the lower
of cost or market on a first-in, first-out basis. We make certain assumptions to
adjust inventory based on historical experience and current information in order
to assess that inventory is recorded properly at the lower of cost or market.
These assumptions can have a significant impact on current and future operating
results and financial position.
Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated undiscounted future
net cash flows of the related long-lived assets and reduce their carrying value
by the excess, if any, of the result of such calculation. We believe at this
time that the long-lived assets' carrying values and useful lives continues to
be appropriate. Further adverse changes in
11
market conditions or poor operating results of underlying investments could
result in an inability to recover the carrying value of the investments that may
not be reflected in an investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total net sales for the period indicated:
13 WEEKS ENDED 26 WEEKS ENDED
------------------------- -------------------------
AUGUST 3, AUGUST 4, AUGUST 3, AUGUST 4,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales............................. 100.0% 100.0% 100.0% 100.0%
Gross profit.......................... 26.7 21.8 27.5 21.9
Selling, general and administrative
expenses............................ 30.4 24.7 28.9 26.1
Amortization of negative goodwill..... -- (0.1) -- (0.1)
Loss from operations.................. (3.7) (4.1) (1.4) (4.8)
Interest expense, net................. -- 0.5 -- 0.5
Loss before income taxes.............. (3.7) (4.6) (1.3) (5.3)
Benefit for income taxes.............. (1.5) (1.8) (0.5) (2.1)
Loss from continuing operations....... (2.2) (2.7) (0.8) (3.1)
Gain on discontinued operations....... -- -- -- --
Net loss.............................. (2.2)% (2.7)% (0.8)% (3.1)%
Thirteen weeks ended August 3, 2002 (unaudited) compared to thirteen weeks
ended August 4, 2001 (unaudited).
Net sales. Our net sales for the thirteen weeks ended August 3, 2002
increased to approximately $90.1 million from approximately $63.8 million for
the thirteen weeks ended August 4, 2001, an increase of approximately $26.3
million. Of this increase, comparable store sales contributed approximately $6.7
million and non-comparable store sales contributed approximately $19.7 million.
Comparable store sales increased by 11.2% for the thirteen weeks ended August 3,
2002, compared to a decrease of 0.4% in comparable store sales in the thirteen
weeks ended August 4, 2001. This increase was due to higher comparable sales in
all merchandise categories: young women's, accessories, and young men's. The
increase in non-comparable store sales was primarily due to 83 more stores open
at the end of the thirteen weeks ended August 3, 2002 as compared to the prior
period.
Gross profit. Our gross profit increased approximately $10.2 million in
the thirteen weeks ended August 3, 2002 to approximately $24.1 million from
approximately $13.9 million for the thirteen weeks ended August 4, 2001. As a
percentage of net sales, gross profit increased to 26.7% from 21.8% during these
periods. This increase is primarily attributable to an increase in our
merchandise margin of approximately 4.7% primarily due to higher merchandise
margins in the young women's and accessories category. The remaining increase
was attributable a leveraging of occupancy costs offset by an equity based
compensation charge of approximately $820,000 which is included in cost of sales
during the thirteen weeks ended August 3, 2002.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $11.7 million for the thirteen
weeks ended August 3, 2002 to approximately $27.4 million from approximately
$15.7 million for the thirteen weeks ended August 4, 2001. As a percent of net
sales, selling, general and administrative expenses increased to 30.4% from
24.7%. On an absolute dollar basis, this increase was partially due to an
approximate $8.8 million increase in payroll expenses that resulted from new
store growth in addition to compensation costs incurred in connection with
incentive
12
bonus programs. Furthermore, we incurred a charge of approximately $3.0 million
for equity based compensation during the thirteen weeks ended August 3, 2002.
Interest expense, net. Our net interest income for the thirteen weeks
ended August 3, 2002 was approximately $19,000 compared to net interest expense
of approximately $340,000 for the thirteen weeks ended August 4, 2001. The
Company had average borrowings of approximately $1.7 million on its credit
facility in the thirteen weeks ended August 3, 2002 as compared to average
borrowings of $10.8 million for the thirteen weeks ended August 4, 2001.
Income taxes. Our effective tax rate of 40.0% for the thirteen weeks ended
August 3, 2002 compares to an effective tax rate of 39.7% for the thirteen weeks
ended August 4, 2001. Our effective tax rate increased as a result of the
increase in our federal tax rate, partially offset by the elimination of the
negative goodwill amortization.
Loss from continuing operations. Our loss from continuing operations was
approximately $2.0 for the thirteen weeks ended August 3, 2002 compared to a net
loss from continuing operations of approximately $1.7 million for the thirteen
weeks August 4, 2001.
Gain on discontinued operations. All Chelsea Cambell stores were closed by
the end of December 2000; therefore, no activity occurred during the thirteen
weeks August 3, 2002. For the thirteen weeks ended August 4, 2001, our Chelsea
Cambell stores had net income of $15,000.
Net loss. Our net loss was approximately $2.0 million for the thirteen
weeks August 3, 2002 compared to a net loss of approximately $1.7 million in the
thirteen weeks ended August 4, 2001.
Twenty six weeks ended August 3, 2002 (unaudited) compared to twenty six weeks
ended August 4, 2001 (unaudited).
Net sales. Our net sales for the twenty six weeks ended August 3, 2002,
increased to approximately $175.3 million from approximately $120.4 million for
the twenty six weeks ended August 4, 2001, an increase of approximately $54.9
million. Of this increase, comparable store sales contributed approximately
$18.8 million and non-comparable store sales contributed approximately $36.1
million. Comparable store sales increased by 16.4% for the twenty six weeks
ended August 3, 2002, compared to an increase of 1.2% in comparable store sales
in the twenty six weeks ended August 4, 2001. This increase was due to higher
comparable sales in the young women's and accessories categories. The increase
in non-comparable store sales was primarily due to 83 more stores open at the
end of the twenty six weeks ended August 3, 2002 as compared to the prior
period.
Gross profit. Our gross profit increased approximately $21.8 million in
the twenty six weeks ended August 3, 2002 to approximately $48.2 million from
approximately $26.4 million for the twenty six weeks ended August 4, 2001. As a
percentage of net sales, gross profit increased to 27.5% from 21.9% during these
periods. This increase is primarily attributable to an increase in our
merchandise margin of approximately 3.2% primarily due to higher merchandise
margins in the young women's and young men's category. The remaining increase
was attributable to a 2.9% decrease in occupancy and warehousing expenses,
partially offset by an equity based compensation charge of approximately
$952,000, which is included in cost of sales for the twenty six weeks ended
August 3, 2002.
Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $19.2 million for the twenty six
weeks ended August 3, 2002 to approximately $50.6 million from approximately
$31.4 million for the twenty six weeks ended August 4, 2001. As a percent of net
sales, selling, general and administrative expenses increased to 28.9% from
26.1%. On an absolute dollar basis, this increase was partially due to an
approximate $13.8 million increase in payroll expenses that resulted from new
store growth in addition to compensation costs incurred in connection with
incentive bonus programs. We also incurred a charge of approximately $3.5
million for equity-based compensation during the twenty six weeks ended August
3, 2002.
13
Interest expense, net. Our net interest income for the twenty six weeks
ended August 3, 2002 was approximately $69,000 compared to net interest expense
of approximately $589,000 for the twenty six weeks ended August 4, 2001. The
Company had average borrowings of approximately $0.9 million on its credit
facility in the twenty six weeks ended August 3, 2002 as compared to average
borrowings of $8.5 million for the twenty six weeks ended August 4, 2001.
Income taxes. Our effective tax rate of 40.0% for the twenty six weeks
ended August 3, 2002 compares to an effective tax rate of 39.7% for the twenty
six weeks ended August 4, 2001. Our effective tax rate increased as a result of
the increase in our federal tax rate, partially offset by the elimination of the
negative goodwill amortization.
Loss from continuing operations. Our loss from continuing operations was
approximately $1.4 million for the twenty six weeks ended August 3, 2002
compared to a loss from continuing operations of $3.8 million for the twenty six
weeks August 4, 2001.
Gain on discontinued operations. All Chelsea Cambell stores were closed by
the end of December 2000; therefore, no activity occurred during the twenty six
weeks August 3, 2002. For the twenty six weeks ended August 4, 2001, our Chelsea
Cambell stores had net income of $17,000.
Net loss. Our net loss was approximately $1.4 million in the twenty six
weeks August 3, 2002 compared to a net loss of approximately $3.8 million in the
twenty six weeks ended August 4, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements are primarily for working capital, the construction
of new stores, the remodeling of existing stores and the investment in our
information systems. Historically, these cash requirements have been met through
cash flow from operations and borrowings under our credit facility with Fleet
Retail Finance, Inc. As of August 3, 2002, we had working capital of
approximately $55.1 million.
On May 21, 2002, the Company received net proceeds of approximately $31.4
million through its sale of 1,875,000 shares of common stock as part of the
initial public offering of a total of 14,375,000 shares of common stock. The
Company used approximately $10.0 million of the proceeds to redeem all of the
Company's preferred stock and preferred stock dividends. The Company also used
approximately $2.0 million for offering costs in connection with the initial
public offering. The balance of approximately $19.4 million is being used for
general corporate purposes.
During the twenty six weeks ended August 3, 2002, our net cash used by
operations was approximately $53.6 million. Our cash used by operations was due
to the seasonal increase in inventory, for the back to school season.
Our cash used in investing activities for the twenty six weeks ended August
3, 2002 and August 4, 2001 was entirely used for capital expenditures. These
expenditures, consisting primarily of the construction of new stores, remodeling
of existing stores and investments in technology, were approximately $19.2
million for the twenty six weeks ended August 3, 2002 and approximately $12.6
million for the twenty six weeks ended August 4, 2001. Our future capital
requirements will depend primarily on the number of new stores we open and the
number of existing stores we remodel and the timing of these expenditures. We
opened 57 net new stores during the twenty six ended August 3, 2002 and 28 net
new stores during the twenty six weeks ended August 4, 2001, and we expect to
open approximately 80 stores in fiscal 2002. Projected capital expenditures for
fiscal 2002 are approximately $29.5 million, to be used primarily to fund new
store openings, store remodelings and technology investments. Historically, we
have financed such capital expenditures with cash from operations and borrowings
under our credit facility. We believe that we will continue to finance capital
expenditures in this manner during fiscal 2002.
In the twenty six weeks ended August 3, 2002, we had a net decrease in cash
and cash equivalents of approximately $36.1 million and we had net borrowings
under our credit facility of approximately $17.0 million compared to net
borrowing of approximately $33.6 million for the twenty six weeks ended
14
August 4, 2001. Our secured revolving credit facility with Fleet, as agent,
provides us with up to $55.0 million based upon our inventory balances, seasonal
advance rates and third party credit card balances. Borrowings bear interest at
our option at either the rate per annum at which deposits on U.S. dollars are
offered to Fleet in the Eurodollar market, referred to as the eurodollar rate,
plus 1.50% to 2.00% or the base rate announced from time to time by Fleet,
dependent upon excess availability. The revolving credit facility contains
financial performance and capital expense covenants, and has a termination date
of July, 2004. There are fees for early termination. The revolving credit
facility contains a minimum EBITDA covenant, tested monthly. The facility also
contains a maximum capital expenditures covenant, tested quarterly.
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, failure to perform covenant or liability requirements,
misrepresentation, default of leases, excess uninsured casualty loss, excess
uninsured judgment or restraint of business, business failure or application for
bankruptcy, indictment of or institution of any legal process or proceeding
under federal, state, municipal or civil statutes, legal challenges to loan
documents, and a change in control, other than an initial public offering. If an
event of default occurs, the lenders under the credit facility will be entitled
to take various actions, including the acceleration of amounts due and requiring
that all such amounts be immediately paid in full as well as possession and sale
of all assets that have been used for collateral.
We have not issued any letters of credit for the purchase of merchandise
inventory or any capital expenditure.
As of August 3, 2002, we had approximately $8.8 million in cash and cash
equivalents. In addition, we had approximately $38.0 million available for
borrowings under our credit facility as of August 3, 2002, which availability is
limited by the credit facility's borrowing base collateral requirements. In
general, the borrowing base equals a seasonally adjusted percentage of the
retail value of our inventory and 80% of our third party credit card balances.
We believe that cash flows from operations, our current cash balance, funds
available under our revolving credit facility will be sufficient to meet our
working capital needs and planned capital expenditures for fiscal 2002.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables summarize our contractual obligations and commercial
commitments as of August 3, 2002:
PAYMENTS DUE
-------------------------------------------------------------
WITHIN WITHIN WITHIN AFTER
6 MONTHS 12 MONTHS 12 MONTH 12 MONTHS
ENDED FISCAL ENDED FISCAL ENDED FISCAL ENDED FISCAL
TOTAL 2003 2004 AND 2005 2006 AND 2007 2007
-------- ------------ ------------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
Contractual
Obligations
Employment
contracts........ $ 1,650 $ 450 $ 1,200 $ -- $ --
Merchandise
agreement........ 3,878 495 1,980 1,403 --
Operating leases.... 210,427 16,266 59,505 46,366 88,290
-------- ------- ------- ------- -------
Total contractual
obligations...... $215,955 $17,211 $62,685 $47,769 $88,290
======== ======= ======= ======= =======
15
AMOUNT OF COMMITMENT PER PERIOD
-----------------------------------------------------------
WITHIN WITHIN WITHIN AFTER
6 MONTHS 12 MONTHS 12 MONTH 12 MONTHS
ENDED FISCAL ENDED FISCAL ENDED FISCAL ENDED FISCAL
TOTAL 2003 2004 AND 2005 2006 AND 2007 2007
------- ------------ ------------- ------------- ------------
(IN THOUSANDS OF DOLLARS)
Commercial Commitments
Lines of credit........ $16,983 $16,983 $-- $-- $--
Total commercial
commitments......... $16,983 $16,983 $-- $-- $--
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of doing business, is theoretically
exposed to interest rate change market risk. As borrowing patterns are cyclical,
the Company is not dependent on borrowing throughout the year. Therefore, a
sudden increase in interest rates (which under the Loan Agreement is dependent
on the prime rate) may, during peak borrowing, have a negative impact on
short-term results.
ITEM 4. CONTROLS AND PROCEDURES
(a) Explanation of disclosure controls and procedures: The Company's Chief
Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a date within 90 days of
filing date of the quarterly report (the "Evaluation Date"), have concluded that
as of the Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities, particularly during the period in which this quarterly
report was being prepared.
(b) Changes in internal controls: There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's disclosure controls and procedures subsequent to the Evaluation
Date, nor any significant deficiencies or material weaknesses in such disclosure
controls and procedures requiring corrective actions. As a result, no corrective
actions were taken.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification by Julian R. Geiger and Michael J. Cunningham
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Julian R. Geiger pursuant to Rule 13a-14
promulgated under the Securities Exchange Act of 1934, as amended.
99.3 Certification by Michael J. Cunningham pursuant to Rule 13a-14
promulgated under the Securities Exchange Act of 1934, as amended.
(b) Reports on Form 8-K:
(i) The Company's Current Report on Form 8-K, filed June 11, 2002,
relating to the Company's release of monthly and quarterly net
sales and comparable store sales information
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AEROPOSTALE, INC.
/s/ JULIAN R. GEIGER
--------------------------------------
Julian R. Geiger
Chairman and Chief Executive Officer,
Director (Principal Executive Officer)
/s/ MICHAEL J. CUNNINGHAM
--------------------------------------
Michael J. Cunningham
Senior Vice President-Chief Financial
Officer
(Principal Financial Officer)
Dated: September 17, 2002
18