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 NOVEMBER 1, 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 December 1, 2003, the registrant had 37,497,721 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 November 1, 2003
and February 1, 2003........................................ 2
Condensed Consolidated Statements of Income for the thirteen
and thirty-nine weeks ended November 1, 2003 and November 2,
2002........................................................ 3
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended November 1, 2003.................... 4
Notes to the Condensed Consolidated Financial Statements.... 5
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item
3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 15
Item
4. Controls and Procedures..................................... 15

PART II. OTHER INFORMATION............................................ 16
Item
1. Legal Proceedings........................................... 16
Item
2. Changes in Securities and Use of Proceeds................... 16
Item
3. Defaults Upon Senior Securities............................. 16
Item
4. Submission of Matters to a Vote of Security Holders......... 16
Item
5. Other Information........................................... 16
Item
6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES............................................................ 17
Certifications........................................................

1

FINANCIAL INFORMATION

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

See notes to condensed consolidated financial statements.
2

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See notes to condensed consolidated financial statements.
3

AEROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements.
4

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
organized sales events at college campuses. The 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
November 1, 2003, the Company operated 460 stores in 41 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

5

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 thirty-nine weeks ended
November 1, 2003: no dividend yield; expected volatility of 70%; risk free
interest rate of 2.81%; and expected life of 4.7 years. There were 496,200
option grants during the thirty-nine weeks ended November 1, 2003. The weighted
average fair value of options granted during the thirty-nine weeks ended
November 1, 2003 was $3.9 million. During the thirteen weeks ended November 1,
2003, there were 10,000 options granted. The weighted average fair value of
options granted during the thirteen weeks ended November 1, 2003 was $0.1
million.

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 $0.6 million
in offering expenses related to the secondary offering.

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
6

AEROPOSTALE, INC.

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

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 $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 $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 December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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
has provided the additional disclosures required by SFAS No. 148 for the
thirteen and thirty-nine weeks ended November 1, 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

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AEROPOSTALE, INC.

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

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 thirty-nine weeks ended November 1, 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. We believe this statement will have no impact on our condensed
consolidated balance sheet and statement of income.

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. 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.

8

AEROPOSTALE, INC.

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

6. REVOLVING CREDIT FACILITY

During the thirteen weeks ended November 1, 2003, the Company amended its
loan and security agreement with Fleet Retail Finance Inc. Under the Amended and
Restated Loan and Security agreement, the Company may borrow or obtain letters
of credit up to an aggregate of $25 Million (the "Credit Facility") with letters
of credit having a sub-limit of $15 million. The Credit Facility matures on
September 30, 2005. The maximum borrowing availability under the Credit Facility
of $25 million is a reduction of $30 million from amounts previously available
under the Credit Facility. The Company elected to reduce its Credit Facility by
$30 million based upon its current cash balances and projections for its future
cash flows. Under the Credit Facility, the Company will realize cost savings due
to lower loan commitment fees. 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 1.25% to 1.75%, depending upon the
Company's financial performance. Additionally, the Company must pay commitment
fees on any unused portion of the Credit Facility at an annualized rate of
0.375% on the difference between the loan aggregate of $25 million and the
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 $0.1 million, which is being amortized over the term of the
Credit Facility. Such amount is recorded as additional interest expense. There
are no covenants in the Credit Facility requiring the Company to achieve certain
earnings levels and there are no capital spending limitations. There are certain
negative covenants under the Credit Facility, including but not limited to,
limitations on the Company's ability to incur other indebtedness or encumber its
assets. Additionally, the Company is required to maintain a ratio of 2:1 for the
value of the Company's inventory to the amount of the loans under the Credit
Facility. As of November 1, 2003, the Company was in compliance with all
covenants under the Credit Facility. On November 1, 2003 and February 1, 2003,
the Company had $0 in borrowings outstanding under the Credit Facility and no
stand-by or commercial letters of credit had been issued under the Credit
Facility.

7. GUARANTEES

The Company has not provided any financial guarantees as of November 1,
2003.

9

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 income, net. Interest income, net of interest expense, includes
interest relating to our cash balances.

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
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
finite-lived assets, we perform an analysis of the anticipated undiscounted
future net cash flows of the related finite-lived assets and reduce their
carrying value by the excess, if any, of the result of such calculation. We
believe at this time

10

that the finite-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 result of operations expressed as a
percentage of total net sales for the period indicated:

Thirteen weeks ended November 1, 2003 (unaudited) compared to thirteen weeks
ended November 2, 2002 (unaudited).

Net sales. Our net sales for the thirteen weeks ended November 1, 2003
increased to $220.1 million from $169.2 million for the thirteen weeks ended
November 2, 2002, an increase of $50.9 million. Of this increase, comparable
store sales contributed $7.8 million and non-comparable store sales contributed
$43.1 million. Comparable store sales increased by 5.2% for the thirteen weeks
ended November 1, 2003, compared to an increase of 5.0% in comparable store
sales in the thirteen weeks ended November 2, 2002. This current period increase
was primarily due to higher comparable sales in the young women's and
accessories categories, offset by a decrease in the young men's category. The
increase in non-comparable store sales was primarily due to a net increase of 95
new stores open at the end of the thirteen weeks ended November 1, 2003 as
compared to the prior period.

Gross profit. Our gross profit dollars increased $23.0 million in the
thirteen weeks ended November 1, 2003 to $73.9 million from $50.9 million for
the thirteen weeks ended November 2, 2002. As a percentage of net sales, gross
profit increased to 33.6% from 30.1% during these periods. The increase in gross
profit is primarily attributable to an increase in our merchandise margins in
the young men's category of 2.4% due to fewer markdowns as a result of an
improved inventory position as compared to the prior period. The remaining
increase is attributable to 0.8% leveraging of occupancy costs and 0.4%
attributable to efficiencies realized in our warehouse and distribution
processes.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased $12.3 million for the thirteen weeks ended
November 1, 2003 to $38.1 million from $25.8 million for the thirteen weeks
ended November 2, 2002. As a percent of net sales, selling, general and
administrative expenses increased to 17.3% from 15.2%. The increase in selling,
general and administrative expenses is primarily attributable to 2.0% increase
in incentive bonus programs, 0.4% increase in general operating costs and 0.4%
increase in payroll related costs selling, offset by 0.7% decrease in marketing
expenses.

Interest income, net. Our net interest income for the thirteen weeks ended
November 1, 2003 was $0.1 million compared to net interest expense of $0.1
million for the thirteen weeks ended November 2,

11

2002. The increase is attributable to higher cash balances for the thirteen
weeks ended November 1, 2003 compared to net borrowings for the thirteen weeks
ended November 2, 2002.

Income taxes. Our effective tax rate of 39.0% for the thirteen weeks ended
November 1, 2003 compares to an effective tax rate of 40.0% for the thirteen
weeks ended November 2, 2002. This decrease was due to a reduction in our
effective state tax rate.

Net income. Our net income was $21.9 million for the thirteen weeks
November 1, 2003 compared to net income of $15.0 million in the thirteen weeks
ended November 2, 2002.

Thirty-nine weeks ended November 1, 2003 (unaudited) compared to thirty-nine
weeks ended November 2, 2002 (unaudited).

Net sales. Our net sales for the thirty-nine weeks ended November 1, 2003
increased to $462.2 million from $344.5 million for the thirty-nine weeks ended
November 2, 2002, an increase of $117.7 million. Of this increase, comparable
store sales contributed $16.8 million and non-comparable store sales contributed
$100.9 million. Comparable store sales increased by 5.4% for the thirty-nine
weeks ended November 1, 2003, compared to an increase of 10.8% in comparable
store sales in the thirty-nine weeks ended November 2, 2002. This current period
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 a net increase of 95 new stores open at the end of the thirty-nine weeks
ended November 1, 2003 as compared to the prior period.

Gross profit. Our gross profit dollars increased $40.7 million in the
thirty-nine weeks ended November 1, 2003 to $139.8 million from $99.1 million
for the thirty-nine weeks ended November 2, 2002. As a percentage of net sales,
gross profit increased to 30.2% from 28.8% during these periods. Included in
cost of sales for the thirty-nine weeks ended November 2, 2002 is a charge of
$1.0 million or 0.3% related to equity based compensation. The remaining
increase in gross profit is primarily attributable to an increase in our
merchandise margins in the young men's category of 0.5% due to fewer markdowns
as compared to the prior period, 0.5% leveraging of occupancy costs and 0.3%
attributable to efficiencies realized in our warehouse and distribution process
offset by 0.2% increase in depreciation and buying costs.

Selling, general and administrative expenses. Our selling, general and
administrative expenses increased $20.0 million for the thirty-nine weeks ended
November 1, 2003 to $96.4 million from $76.4 million for the thirty-nine weeks
ended November 2, 2002. As a percent of net sales, selling, general and
administrative expenses decreased to 20.9% from 22.2%. Included in selling,
general and administrative expenses for the thirty-nine weeks ended November 2,
2002 is a charge of $3.5 million or 1.0% related to equity based compensation.
The remaining decrease was primarily attributable to 0.8% decrease in marketing
expenses, offset by 0.4% increase in general operating costs and 0.2% increase
in incentive bonus programs.

Interest income, net. Our net interest income for the thirty-nine weeks
ended November 1, 2003 was $0.5 million compared to net interest expense of $0.1
million for the thirty-nine weeks ended November 2, 2002. The increase is
attributable to higher cash balances for the thirty-nine weeks ended November 1,
2003 compared to the thirty-nine weeks ended November 2, 2002.

Income taxes. Our effective tax rate of 39.0% for the thirty-nine weeks
ended November 1, 2003 compares to an effective tax rate of 40.0% for the
thirty-nine weeks ended November 2, 2002. This decrease was due to a reduction
in our effective state tax rate.

12

Net income. Our net income was $26.7 million for the thirty-nine weeks
November 1, 2003 compared to a net income of $13.6 million in the thirty-nine
weeks ended November 2, 2002.

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. ("Fleet"). At November 1, 2003, we had working capital of
$119.4 million.

During the thirty-nine weeks ended November 1, 2003, our net cash provided
by operations was $22.0 million.

Our cash provided by operations was generated by net income and an increase
in accounts payable, accrued expenses and other liabilities partly offset by a
seasonal increase of inventory.

Our cash used in investing activities for the thirty-nine weeks ended
November 1, 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 $31.4 million for the thirty-nine
weeks ended November 1, 2003. Our future capital requirements will depend
primarily on the number of new stores we open, the number of existing stores we
remodel and the timing of these expenditures. We opened 95 new stores in the
thirty-nine weeks ended November 1, 2003, and expect to open approximately 95
stores in fiscal 2003. Additionally, on November 18, 2003 our Board of Directors
authorized a $35 million share repurchase program. Projected capital
expenditures are approximately $39.0 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
finance our capital expenditures and share repurchase programs primarily from
cash from operations during fiscal 2003.

In the thirty-nine weeks ended November 1, 2003, we had a net decrease in
cash and cash equivalents of $8.9 million. Our secured revolving credit facility
with Fleet provides us with up to $25 million (the "Credit Facility").
Borrowings bear interest at our option at either (i) 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 1.25% to 1.75% or (ii) the base rate announced
from time to time by Fleet. As of November 1, 2003, there were no amounts
outstanding under the Credit Facility. The Credit Facility contains certain
negative covenants, including but not limited to, limitations on the Company's
ability to incur other indebtedness or encumber its assets. Additionally, the
Company is required to keep a ratio of 2:1 of the value of the Company's
inventory to the amounts outstanding at any time under the Credit Facility. The
Credit Facility has a termination date of September 2005. There are fees for
early termination.

Events of default under the Credit Facility include, subject to grace
periods and notice provisions in certain circumstances, failure to pay principal
amounts when due, breaches of covenants, misrepresentation, default of leases or
other indebtedness, 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. 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 thereunder and requiring that all such amounts be immediately paid
in full as well as taxed possession and sale of all assets that have been used
as collateral.

We have not issued any letters of credit for the purchase of merchandise
inventory or any capital expenditure.

As of November 1, 2003 we had $78.5 million in cash available to fund
operations and future store growth. In addition, we had $25.0 million available
for borrowings under our Credit Facility as of November 1, 2003. We believe that
cash flows from operations, our current cash balance and funds
13

available under our Credit Facility will be sufficient to meet our working
capital needs and planned capital expenditures for fiscal 2003.

Contractual Obligations and Commercial Commitments

The following tables summarize our contractual obligations and commercial
commitments as of November 1, 2003:

There were no commercial commitments outstanding as of November 1, 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, as amended and
Section 21E of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"). 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
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 prospectus dated
July 25, 2003, filed with the Securities and Exchange Commission.

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. We believe this statement will have no impact on our condensed
consolidated balance sheet and statement of income.

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

14

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. 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 interest rate change market fluctuations. As borrowing
patterns are seasonal, the Company is not dependent on borrowing for the entire
year. A sudden increase in interest rates (which under the Credit Agreement is
dependent on the prime rate), during peak borrowing may negatively impact the
Company's 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 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.

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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:

10.1 [Fifth] Amendment to Loan and Security Agreement, dated October 7,
2003 by and between Fleet Retail Finance Inc. (f/k/a Bank Boston
Retail Finance), as agent for the Lenders, the Lenders and
Aeropostale, Inc. (f/k/a MSS-Delaware, Inc.)

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.

Reports on Form 8-K:

1. The Registrants Current Report on Form 8-K, dated October 8, 2003,
related to monthly historical net sales.

2. The Registrants Current Report on Form 8-K, dated September 30, 2003,
related to the resignation of one of the members on Company's Board
of Directors.

3. The Registrants Current Report on Form 8-K, dated September 3, 2003,
related to monthly historical net sales.

4. The Registrants Current Report on Form 8-K, dated August 21, 2003,
related to quarterly earnings monthly historical net sales.

5. The Registrants Current Report on Form 8-K, dated August 6, 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: December 8, 2003

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