AEROPOSTALE INC - 10-Q Quarterly Report

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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 2, 2003

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 [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b-2). Yes [X] No [ ]

As of September 4, 2003, the registrant had 37,054,067 shares of common
stock outstanding.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION......................................... 2
Item
1. Condensed Consolidated Financial Statements (unaudited)..... 2
Condensed Consolidated Balance Sheets as of August 2, 2003
and February 1, 2003........................................ 2
Condensed Consolidated Statements of Operations for the
thirteen and twenty-six weeks ended August 2, 2003 and
August 3, 2002.............................................. 3
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended August 2, 2003 and August 3, 2002.... 5
Notes to the Condensed Consolidated Financial Statements.... 6
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item
3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 17
Item
4. Controls and Procedures..................................... 17

PART II. OTHER INFORMATION............................................ 17
Item
4. Submission of Matters to a Vote of Security Holders......... 17
Item
5. Other Information........................................... 18
Item
6. Exhibits and Reports on Form 8-K............................ 18
SIGNATURES............................................................ 19
Certifications........................................................ 20

1

PART I.

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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Note (1) Balance sheet derived from the audited consolidated financial
statements

See notes to condensed consolidated financial statements.
2

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.
3

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.
4

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements.
5

AEROPOSTALE, INC.

NOTES TO UNAUDITED 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" or "Aeropostale") is a mall-based specialty retailer
of casual apparel and accessories for young women and young men. The Company
provides customers with a focused selection of high-quality, active-oriented,
fashion basic merchandise at compelling values. Aeropostale maintains complete
control over its proprietary brand by designing and sourcing all of its
merchandise. The Company's products can be purchased only in its stores or
through organized sales events at college campuses. The Company's stores creates
a fun and high energy shopping experience through the use of creative visual
merchandising, colorful in-store signage, bright lighting, popular music and an
enthusiastic, well-trained sales force. The Company's average store size of
approximately 3,500 square feet is generally smaller than that of its mall-based
competitors and the Company believes that this enables it to achieve higher
sales productivity and project a sense of activity and excitement. As of August
2, 2003, the Company operated 427 stores in 40 states.

The accompanying Unaudited Condensed Consolidated Financial Statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
and do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Those
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods, have been made. The results
of operations for such interim periods are not necessarily indicative of the
results of operations for a full year. The Unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the Audited Consolidated
Financial Statements and notes thereto filed with the Company's Annual Report on
Form 10-K for the year ended February 1, 2003, which was filed with the
Securities and Exchange Commission on April 29, 2003.

References to a particular year are to the Company's fiscal year, which is the
52 or 53 week period ending on the Saturday closest to January 31st of the
following calendar year. For example, references to "2002" mean the fiscal year
ending February 1, 2003 and a reference to "2003" is a reference to the fiscal
year ending January 31, 2004. Certain reclassifications have been made to prior
year balances to conform with the current year presentation.

2. STOCK OPTIONS

The Company applies Accounting Principles Board Opinion ("APB") No. 25,
Accounting For Stock Issued to Employees, and Related Interpretations in
Accounting For Stock Option Grants. Therefore, no compensation expense has been
recognized for employee stock options. Set forth below are the Company's net
income and net income per share presented "as reported" and pro forma as if
compensation cost had

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AEROPOSTALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

been recognized in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123:

The weighted average fair value of the Company's stock options was
calculated using the Black-Scholes Option Pricing Model with the following
weighted average assumptions used for grants in the respective periods: no
dividend yield; expected volatility of 70%; risk free interest rate of 2.81%;
and expected life of 4.72 years. There were 496,200 option grants during the
twenty six weeks ended August 2, 2003. The weighted average fair value of
options granted during the twenty six weeks ended August 2, 2003 was $3.9
million. There were no options issued or granted for the thirteen and twenty six
weeks ended August 3, 2002.

In March 2003, the Financial Accounting Standards Board ("FASB") added a
project to its agenda to address whether compensation paid in the form of equity
instruments should be recognized and how such compensation should be measured.

3. PUBLIC OFFERING OF COMMON STOCK

On August 1, 2003, certain stockholders of the Company completed a
secondary offering of 8,222,500 shares of common stock, at a price to the public
of $25.00. The Company did not receive any proceeds from the sale of shares of
common stock sold by the selling stockholders. The Company incurred
approximately $0.6 million in offering expenses related to the secondary
offering.

7

AEROPOSTALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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
were converted into approximately 1,851,000 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. The Company incurred a $0.1
million compensation charge in the second quarter of fiscal 2002 for a bonus for
certain management stockholders in connection with the completion of the initial
public offering.

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 were
available for 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 per 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 an approximately $8.5 million equity
based compensation charge as a result of the grant of these options of which
$4.0 million and $0.6 million were recorded in the year ended February 2, 2002
and the thirteen weeks ended May 4, 2002, respectively. Upon the initial public
offering, the Company recorded acceleration of the unamortized balance of $3.9
million in the thirteen weeks ended August 3, 2002.

4. RECENT ACCOUNTING STANDARDS

In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN
45"), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires certain
guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, liability or an equity security of the guaranteed party; performance
guarantees involving contracts which require the guarantor to make payments to
the guaranteed party based on another entity's failure to perform under an
obligating agreement; indemnification agreements that contingently require the
guarantor to make payments to an indemnified party based on changes in an
underlying that is related to an asset, liability or an equity security of the
indemnified party; or indirect guarantees of the indebtedness of others. The
initial recognition and initial measurement provisions of FIN 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
Disclosure requirements under FIN 45 are effective for financial statements
ending after December 15, 2002 and are applicable to all guarantees issued by
the guarantor subject to FIN 45's scope, including guarantees issued prior to
FIN 45. The Company has evaluated the accounting provisions of the
interpretations and there was no material impact on the financial condition,
results of operations or cash flows for the thirteen and twenty-six weeks ended

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AEROPOSTALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

August 2, 2003. The Company has made the required disclosures in the condensed
consolidated financial statements.

In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on issues raised in EITF 02-16, Accounting by a Reseller for Cash
Consideration Received from a Vendor ("EITF 02-16"). This EITF issue addresses
the timing of recognition for rebates that are earned by resellers based on
specified levels of purchases or over specified periods. This guidance, related
to timing of recognition, is to be applied prospectively to new rebate
arrangements entered into in fiscal periods beginning after January 1, 2003.
This EITF issue also addresses the classification of cash consideration received
from vendors in a reseller's statement of operations. The guidance related to
income statement classification is to be applied in annual and interim financial
statements for periods beginning after January 1, 2003. The Company has adopted
this application and it did not have a material impact on the condensed
consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based
Compensation -- Transition and Disclosure. The standard provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements for SFAS No. 123 to require more prominent
and more frequent disclosures in financial statements about the effects of stock
based compensation. SFAS No. 148 is effective for fiscal years ending after
December 31, 2002. The Company will continue to account for stock-based equity
compensation using the intrinsic value method of APB Opinion No. 25. The Company
is required to follow the prescribed disclosure format and have provided the
additional disclosures required by SFAS No. 148 for the thirteen and twenty-six
weeks ended August 2, 2003.

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities with the objective of improving
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period after January 31, 2003, regardless of when the
variable interest entity was established. The Company has evaluated the
accounting provisions of the interpretations and there was no material impact on
the financial condition, results of operations or cash flows for the thirteen
and twenty-six weeks ended August 2, 2003, because the Company does not have any
variable interest entities.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
This statement is effective for contracts entered into or modified after June
30, 2003. The Company is currently evaluating the impact of adopting this
statement on its consolidated financial position and results of operations.

9

AEROPOSTALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. Although we are still
in the process of reviewing the new statement, we believe this statement will
have no impact on our condensed consolidated financial statements.

5. 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 outstanding, after deducting preferred
dividend requirements. Diluted earnings per share gives effect to outstanding
stock options.

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(a) Options to purchase 3,565 shares were not included in the computation of
dilutive shares because of their anti dilutive effect.

10

AEROPOSTALE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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(b) Options to purchase 3,683 shares were not included in the computation of
dilutive shares because of their anti dilutive effect.

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 $0.2 million, which is being amortized over the term of the
Credit Facility. Such amount is recorded as additional interest expense. At
August 2, 2003 and February 1, 2003, the Company had $0 in borrowings
outstanding and had not issued any stand-by or commercial letters of credit. At
August 2, 2003, the Company was in compliance with the financial covenants of
the credit facility, that 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.

7. GUARANTEES

The Company has not provided any financial guarantees as of August 2, 2003.

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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.

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.

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 Company's accounting policies are more fully described in Note 2 of the
Notes to Consolidated Financial Statements in the Company's Annual Report on
Form 10-K for the fiscal year ended February 1, 2003. As disclosed in Note 1 of
the Notes to Consolidated Financial Statements, the preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America ("GAAP") requires management to make estimates and
assumptions about future events that affect the amounts reported in the
consolidated financial statements and accompanying notes. Since future events
and their effects cannot be determined with absolute certainty, actual results
will differ from those estimates. The Company evaluates its estimates and
judgments on an ongoing basis and predicates those estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. Actual results will differ from these under
different assumptions or conditions.

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.

Finite-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

12

long-lived assets' carrying values and useful lives continues to be appropriate.
Further adverse changes in 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:

Thirteen weeks ended August 2, 2003 (unaudited) compared to thirteen weeks
ended August 3, 2002 (unaudited).

Net sales. Our net sales for the thirteen weeks ended August 2, 2003
increased to approximately $129.9 million from approximately $90.1 million for
the thirteen weeks ended August 3, 2002, an increase of approximately $39.8
million. Of this increase, comparable store sales contributed approximately $7.5
million and non-comparable store sales contributed approximately $32.3 million.
Comparable store sales increased by 9.2% for the thirteen weeks ended August 2,
2003, compared to an increase of 11.2% in comparable store sales in the thirteen
weeks ended August 3, 2002. This increase was primarily due to higher comparable
sales in the young women's and accessories categories. The increase in
non-comparable store sales was primarily due to 92 net new stores open at the
end of the thirteen weeks ended August 2, 2003 as compared to the prior period.

Gross profit. Our gross profit dollars increased approximately $11.5
million in the thirteen weeks ended August 2, 2003 to approximately $35.6
million from approximately $24.1 million for the thirteen weeks ended August 3,
2002. As a percentage of net sales, gross profit increased to 27.4% from 26.7%
during these periods due to the equity based compensation charge of
approximately $0.8 million or 0.9% of net sales recorded in the thirteen weeks
ended August 3, 2002. The remaining change in gross profit is primarily
attributable to a decrease in our merchandise margins primarily in the young
women's and young men's category, partially offset by the leveraging of
occupancy and warehousing costs.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $3.9 million for the thirteen
weeks ended August 2, 2003 to approximately $31.3 million from approximately
$27.4 million for the thirteen weeks ended August 3, 2002. As a percent of net
sales, selling, general and administrative expenses decreased to 24.1% from
30.4% during these periods due to the equity based compensation charge of
approximately $3.0 million or 3.3% of net sales in the thirteen weeks ended
August 3, 2002. The remaining change was attributable to a decrease in incentive
bonus programs and a decrease in marketing expenses.

Interest income, net. Our net interest income for the thirteen weeks ended
August 2, 2003 was approximately $0.3 million compared to net interest income of
approximately $19,000 for the thirteen

13

weeks ended August 3, 2002. The increase is attributable to higher cash balances
for the thirteen weeks ended August 2, 2003 compared to the thirteen weeks ended
August 3, 2002.

Income taxes. Our effective tax rate of 39.0% for the thirteen weeks ended
August 2, 2003 compares to an effective tax rate of 40.0% for the thirteen weeks
ended August 3, 2002. This decrease was due to a reduction in our effective
state tax rate.

Net income (loss). Our net income was approximately $2.7 million for the
thirteen weeks August 2, 2003 compared to a net loss of approximately $(2.0)
million in the thirteen weeks ended August 3, 2002.

Twenty-six weeks ended August 2, 2003 (unaudited) compared to twenty-six weeks
ended August 3, 2002 (unaudited).

Net sales. Our net sales for the twenty-six weeks ended August 2, 2003
increased to approximately $242.2 million from approximately $175.3 million for
the twenty-six weeks ended August 3, 2002, an increase of approximately $66.9
million. Of this increase, comparable store sales contributed approximately $9.0
million and non-comparable store sales contributed approximately $57.9 million.
Comparable store sales increased by 5.5% for the twenty-six weeks ended August
2, 2003, compared to an increase of 16.4% in comparable store sales in the
twenty-six weeks ended August 3, 2002. This increase was primarily due to higher
comparable sales in the young women's and accessories categories. The increase
in non-comparable store sales was primarily due to 92 net new stores open at the
end of the twenty-six weeks ended August 2, 2003 as compared to the prior
period.

Gross profit. Our gross profit dollars increased approximately $17.6
million in the twenty-six weeks ended August 2, 2003 to approximately $65.8
million from approximately $48.2 million for the twenty-six weeks ended August
3, 2002. As a percentage of net sales, gross profit decreased to 27.2% from
27.5% during these periods. The decrease is primarily attributable to a decrease
in our merchandise margins in the young women's and young men's category of
approximately 1.3% due to an increase in promotional activity, which was
partially offset by an approximately 0.4% related to the leveraging of occupancy
costs. Additionally, we had an equity based compensation charge of approximately
$1.0 million or 0.5% of net sales in the twenty-six weeks ended August 3, 2002.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased approximately $7.7 million for the twenty-six
weeks ended August 2, 2003 to approximately $58.3 million from approximately
$50.6 million for the twenty-six weeks ended August 3, 2002. As a percent of net
sales, selling, general and administrative expenses decreased to 24.1% from
28.9% during these periods due to the equity based compensation charge of
approximately $3.5 million or 2.0% of net sales in the twenty-six weeks ended
August 3, 2002. The remaining change was attributable to a decrease in incentive
bonus programs and a decrease in marketing expenses.

Interest income, net. Our net interest income for the twenty-six weeks
ended August 2, 2003 was approximately $0.4 million compared to net interest
income of approximately $69,000 for the twenty-six weeks ended August 3, 2002.
The increase is attributable to higher cash balances for the twenty-six weeks
ended August 2, 2003 compared to the twenty-six weeks ended August 3, 2002.

Income taxes. Our effective tax rate of 39.0% for the twenty-six weeks
ended August 2, 2003 compares to an effective tax rate of 40.0% for the
twenty-six weeks ended August 3, 2002. This decrease was due to a reduction in
our effective state tax rate.

Net income (loss). Our net income was approximately $4.9 million for the
twenty-six weeks August 2, 2003 compared to a net loss of approximately $(1.4)
million in the twenty-six weeks ended August 3, 2002.

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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. At August 2, 2003, we had working capital of approximately
$97.4 million.

During the twenty-six weeks ended August 2, 2003, our net cash provided by
operations was approximately $10.4 million.

Our cash provided by operations was generated by an increase in accounts
payable, accrued expenses, and other liabilities partly offset by an increase up
of inventory for the back to school season.

Our cash used in investing activities for the twenty-six weeks ended August
2, 2003 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 $22.0 million for the
twenty-six weeks ended August 2, 2003. 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 61 new stores
in the twenty-six weeks ended August 2, 2003, and expect to open approximately
90 stores in fiscal 2003. Projected capital expenditures are approximately $36.4
million, to be used primarily to fund new store openings, the remodeling of
existing stores 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 2003.

In the twenty-six weeks ended August 2, 2003, we had a net decrease in cash
and cash equivalents of approximately $11.3 million. Our secured revolving
credit facility with Fleet, as agent, provides us with up to $55 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. As of
August 2, 2003, there was no balance under the revolving credit facility. 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 2, 2003 we had approximately $76.2 million in cash available
to fund operations and future store growth. In addition, we had approximately
$55.0 million available for borrowings under our credit facility as of August 2,
2003, 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 and funds available under our revolving credit facility
will be sufficient to meet our working capital needs and planned capital
expenditures for fiscal 2003.

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Contractual Obligations and Commercial Commitments

The following tables summarize our contractual obligations and commercial
commitments as of August 2, 2003:

There were no commercial commitments outstanding as of August 2, 2003.

Off-balance Sheet Arrangements

The Company has not created, and is not party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or
operating the Company's business. The Company does not have any arrangements or
relationships with entities that are not consolidated into the financial
statements that are reasonably likely to materially affect the Company's
liquidity or the availability of capital resources.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

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 the company's
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. All forward looking
statements included in this quarterly 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. Such uncertainties and other risks are discussed
in the Company's Registration Statement on Form S-3, originally filed with the
Securities and Exchange Commission on June 22, 2003.

New Accounting Standards

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
This statement is effective for contracts entered into or modified after June
30, 2003. The Company is currently evaluating the impact of adopting this
statement on its consolidated financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement will be implemented by
reporting the cumulative effect of a change in accounting principle for
financial

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instruments created before the issuance date of the statement and still existing
at the beginning of the period of adoption. Although we are still in the process
of reviewing the new statement, we believe this statement will have no impact on
our condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, in the normal course of doing business, is theoretically
exposed to risks inherent in interest rate fluctuations. As borrowing patterns
are seasonal, the Company is not dependent on borrowing for the entire 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,
including its Chief Executive Officer and Chief Financial Officer, carried out
an evaluation, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, the Company's Chief Executive Officer along
with the Company's Chief Financial Officer concluded that as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective to ensure that information it is required to disclose in its
filings with the SEC under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms,
and to ensure that information that it is required to disclose in the reports
that it files under the Exchange Act is accumulated and communicated to its
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding disclosure. It
should be noted, however, that the design of any system of controls is limited
in its ability to detect errors and there can, therefore, be no assurance that
any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.

(b) Changes in internal controls: During the period covered by this
quarterly report, there have been no changes to the Company's internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect the Company's internal control over financial reporting.

PART II.

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a) In accordance with the Company's notice and proxy statement dated May
9, 2003, the Company held its 2002 Annual Meeting of Stockholders on June 11,
2003. Holders of 33,366,463 shares of the Company's common stock were present in
person or by proxy representing approximately 93% of the Company's 35,660,870
shares outstanding on the record date. The matters set forth in the paragraphs
below were submitted to a vote of the Company's stockholders.

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(b) The following persons were elected as members of the Board of Directors
to serve a term of one year and until their successors shall have been duly
elected and qualified.

(c) The reappointment of Deloitte and Touche LLP as the Company's
independent auditors for fiscal 2003 was recommended by the Company's Board of
Directors and was approved by a majority of the shares voted as follows:

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

31.1 Certification by Julian R. Geiger, Chairman and Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification by Michael J. Cunningham, Senior Vice President and
Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32.1 Certification by Julian R. Geiger pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

32.2 Certification by Michael J. Cunningham pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

1. The Registrant's Current Report on Form 8-K, dated July 9, 2003,
related to monthly historical net sales.

2. The Registrant's Current Report on Form 8-K, dated June 4, 2003,
related to monthly historical net sales.

3. The Registrant's Current Report on Form 8-K, dated May 22, 2003,
related to second quarter earnings.

4. The Registrant's Current Report on Form 8-K, dated May 7, 2003,
related to monthly historical net sales.

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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 9, 2003

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