Annual Reports

  • 10-K (May 20, 2016)
  • 10-K (Mar 30, 2015)
  • 10-K (Apr 4, 2014)
  • 10-K (Apr 3, 2013)
  • 10-K (Mar 28, 2012)
  • 10-K (Mar 28, 2011)

 
Quarterly Reports

 
8-K

 
Other

ARO Liquidation, Inc. 10-K 2016
SEC Document

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Fiscal Year Ended January 30, 2016
 
or
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31314
_______________
AÉROPOSTALE, INC.
(Exact name of registrant as specified in its charter)
Delaware
No. 31-1443880
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
112 West 34th Street, 22nd floor
 
New York, NY
10120
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:
(646) 485-5410

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
OTC Pink
Series B Convertible Preferred Stock, $0.01 par value
OTC Pink

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes ¨     No þ

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, and (2) has been subject to the filing requirements for at least the past 90 days.  Yes ¨    No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer þ     
Non-accelerated filer ¨
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨     No þ

The aggregate market value of voting stock held by non-affiliates of the registrant as of August 1, 2015 was $120,206,205.

80,627,791 shares of Common Stock were outstanding at April 29, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

None.
 

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AÉROPOSTALE, INC.

TABLE OF CONTENTS

PART I
PART II
PART III
PART IV





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As used in this Annual Report on Form 10-K, unless the context otherwise requires, all references to “we”, “us”, “our”, “Aéropostale” or the “Company’ refer to Aéropostale, Inc., and its subsidiaries. The term “common stock” means our common stock, $0.01 par value. Our website is located at www.aeropostale.com (this and any other references in this Annual Report on Form 10-K to Aéropostale.com is solely a reference to a uniform resource locator, or URL, and is an inactive textual reference only, not intended to incorporate the website into this Annual Report on Form 10-K). On our website, we make available, as soon as reasonably practicable after electronic filing with or furnishing to the Securities and Exchange Commission (the "SEC"), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements and Current Reports on Form 8-K, and any amendments to such reports. All of these reports are provided to the public free of charge through our website or through the SEC's website at www.sec.gov.

 Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this filing that address activities, events or developments that the Company expects, believes, targets or anticipates will or may occur in the future are forward-looking statements. The Company’s actual results may differ materially from those anticipated in these forward-looking statements as a result of certain risks and other factors which could include the following: the ability to operate and reorganize under the Chapter 11 Cases (as hereinafter defined), including but not limited to, the Company’s ability to obtain Bankruptcy Court approval with respect to motions in the Chapter 11 Cases, the effects of the Chapter 11 Cases on the Company and on the interests of various constituents, Bankruptcy Court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, the length of time the Company will operate under the Chapter 11 Cases, risks associated with third-party motions in the Chapter 11 Cases, the potential adverse effects of the Chapter 11 Cases on the Company’s liquidity or results of operations and increased legal and other professional costs necessary to execute the Company’s reorganization, the Company’s future financial condition, results of operations, plans and prospects, expectations, operating improvements and cost savings, and the timing of any of the foregoing, and the Company’s ability to make debt payments to remain in compliance with financial covenants under post-petition financing arrangements, and to obtain appropriate court approval, waivers or amendments with respect to any noncompliance or other actions under such arrangements; the Company’s post-petition financing is subject to certain conditions, which conditions may not be satisfied for various reasons, including for reasons outside of the Company’s control; the Company’s liquidity and ability to continue as a going concern; the impact of and ability to successfully implement store closures and to right-size store footprint; the Company’s ability to implement operational improvement efficiencies; successful implementation of our two-chain factory, mall strategy and merchandise repositioning; uncertainty associated with evaluating and completing any strategic or financial alternative as well as the Company’s ability to implement and realize any anticipated benefits associated with any alternative that may be pursued; the consequences of the acceleration of our debt obligations; the Company’s ability to generate or obtain from external sources sufficient liquidity for operations and debt service; the impact of the failure of a key vendor to deliver merchandise in accordance with our contemplated arrangement and the Company’s ability to come to a final resolution with this vendor in a timely manner; our ability to source merchandise on acceptable terms; changes in the competitive marketplace, including the introduction of new products or pricing changes by the Company’s competitors; changes in the economy and other events leading to a reduction in discretionary consumer spending; seasonality; risks associated with changes in social, political, economic and other conditions and the possible adverse impact of changes in import restrictions; as well as other risk factors set forth in the Company’s Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission.

The Company therefore cautions readers against relying on these forward-looking statements. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the foregoing cautionary statements. All such statements speak only as of the date made, and, except as required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.


PART I

Item 1.  Business

Overview

Aéropostale, Inc. is a specialty retailer of casual apparel and accessories, principally serving young women and men through its Aéropostale stores and website and 4 to 12 year-olds through its P.S. from Aéropostale stores and website.  The Company provides customers with a focused selection of high quality fashion and fashion basic merchandise at compelling values through its retail stores and e-commerce channel. Aéropostale maintains control over its proprietary brands by

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designing, sourcing, marketing and selling all of its own merchandise, other than in licensed stores outside the United States.  Aéropostale products can be purchased in Aéropostale stores and online at www.aeropostale.com.  P.S. from Aéropostale products can be purchased in P.S. from Aéropostale stores, in certain Aéropostale stores and online at www.ps4u.com and www.aeropostale.com. We also operate GoJane.com, an online women's fashion footwear and apparel retailer. GoJane products can be purchased online at www.gojane.com.

Recent Developments

Bankruptcy Proceedings

On May 4, 2016, (the “Petition Date”), Aéropostale, Inc. and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) and the filings therein (the “Chapter 11 Filings”). The chapter 11 cases (the “Chapter 11 Cases”) have been consolidated for procedural purposes only and are being administered jointly under the caption “In re Aéropostale, Inc., et al.,” Case No. 16-11275. During the pendency of the Chapter 11 Cases, we will continue to operate our business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

DIP Financing

In connection with the Chapter 11 Filings, Aéropostale, Inc., as borrower, certain Debtors as guarantors, the lenders party thereto from time to time, and Crystal Financial, LLC, entered into an asset-based credit facility in an aggregate principal amount of up to $160 million (the “DIP Facility”). On May 6, 2016, the Bankruptcy Court granted interim approval to the Company to draw $100 million in financing from the DIP Facility, which the Company is using for general purposes and also has utilized to pay off the Credit Facility (as defined below). The DIP Facility is subject to the final approval of the Bankruptcy Court.

For further discussion see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 20. Subsequent Events, to the Notes to Consolidated Financial Statements.”

Financial Performance and Liquidity

Amongst other things, declining mall traffic due to a shift in customer demand away from apparel to technology and personal experiences, a highly promotional and competitive retail environment and a change in our customers' taste and preference have contributed to unfavorable financial performance. We have experienced declining comparable store sales and incurred net losses from operations. This has led to cash outflows from operations of $68.5 million in fiscal 2015, $55.7 million in fiscal 2014 and $38.4 million in fiscal 2013.

As we discuss further below, we have taken numerous steps to enhance our liquidity position, including, among other things, amending our Credit Facility on August 18, 2015 to increase borrowing availability and extend the maturity date (see Note 11 to the Notes to Consolidated Financial Statements), effectuating our plan to restructure the P.S. from Aéropostale business and to reduce costs and close under-performing Aéropostale stores in the United States and Canada, focusing on merchandising and operational initiatives described throughout this Report, and taking various other strategic actions directed toward improving our profitability and liquidity. During fiscal 2015, we reduced our capital expenditures to $15.7 million from $23.8 million in fiscal 2014, and expect to further reduce capital expenditures to less than $14.0 million during fiscal 2016. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”

In addition, following a strategic business review in the fourth quarter of 2015, we instituted an aggressive cost reduction program targeting both direct and indirect spending across the organization (“2015 Cost Reduction Program”).  The Company expects this program to generate approximately $35.0 million to $40.0 million in annualized pre-tax savings which is expected to be fully achieved in fiscal 2016. As part of this program, we have reduced our corporate headcount by approximately 100 positions, or 13%, at the end of fiscal 2015. In fiscal 2014, we reduced our corporate headcount by 100 open or occupied corporate positions (“2014 Cost Reduction Program”).

In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement (as hereinafter defined). This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to approval of the Bankruptcy Court.

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In the first quarter of 2016, our Board of Directors authorized management to explore a full range of strategic alternatives, including a potential sale or restructuring of the Company. The Company retained financial and other advisors to assist in a review of alternatives.

On May 4, 2016, the Company filed the Chapter 11 Filings and entered into the DIP Facility to assist with financing its ongoing operations. The Company announced the closure of 113 U.S. locations, as well as all 41 stores in Canada. The Company also announced that as a part of its effort to position the Company for long-term success, it is reviewing its leases and other contracts to ensure they are competitive with current market dynamics and other financial considerations, which may lead to additional store closings.

We expect to continue to operate in the normal course of business during the reorganization process. Unless otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits us from making payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods furnished and services provided after the Petition Date in the ordinary course of business. Further, while we continue to explore strategic alternatives through the reorganization process, we will also continue to focus internally on improving our performance through our merchandising, operational and financial initiatives. We expect to implement our strategic initiatives and our additional merchandising and operational initiatives as described above in an effort to improve liquidity and profitability; however, there can be no assurance of whether or when we will successfully emerge from bankruptcy or if any of the alternatives we are considering will be successfully completed on acceptable terms.

While our financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern, our liquidity constraints have raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other things, the consummation of a plan of reorganization and our ability to comply with the financial and other covenants contained in the DIP Facility.

Company History

The Aéropostale brand was established by R.H. Macy & Co., Inc. ("Macy's"), as a department store private label initiative, in the early 1980’s targeting men in their twenties. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to Aéropostale management and Bear Stearns Merchant Banking. In May 2002, Aéropostale management took the Company public through an initial public offering and listed our common stock on the New York Stock Exchange under the symbol "ARO".
 
We strive to create a fun, high-energy shopping experience through the use of creative visual merchandising, colorful in-store signage, popular music and an enthusiastic well-trained sales force. Our average Aéropostale store is generally smaller than that of our mall-based competitors.  We believe this should enable us to achieve higher sales productivity and project a sense of greater action and excitement in the store. We maintain control of our proprietary brands by designing and sourcing all of our merchandise, complemented with select licensed product.

The P.S. from Aéropostale brand offers the customer trend-right casual clothing and accessories focusing on 4 to 12 year olds at compelling values.  The store format strives to be a fun, playful and inviting shopping experience for both the parent and child.  During April 2014, following a strategic review and assessment of changing consumer patterns, management and the Board of Directors approved a comprehensive plan to restructure the P.S. from Aéropostale business. Based on changing consumer shopping patterns, we closed 126 P.S. from Aéropostale stores, primarily in mall locations as of and during the fiscal year ended January 31, 2015. We continue to focus on P.S. from Aéropostale sales channels with higher expectations for growth, including off-mall locations, e-commerce and international licensing.

Since November 2012, our Company operates GoJane.com, Inc. (“GoJane”), an online women's fashion footwear and apparel retailer. Based in Los Angeles, California, GoJane focuses primarily on fashion footwear, with a select offering of contemporary apparel and other accessories. We believe this strategic acquisition of GoJane allows us to expand into new fashion categories online. We are currently utilizing and leveraging our existing infrastructure to develop and grow the GoJane business.

As of January 30, 2016, we operated 811 stores, consisting of 745 Aéropostale stores in all 50 states and Puerto Rico, 41 Aéropostale stores in Canada. We also operated 25 P.S. from Aéropostale stores in 12 states, primarily in off-mall locations.


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We also have license agreements with unaffiliated third party retail operators located outside the United States. The agreements are largely structured with royalty income paid as a percentage of inventory purchases or sales, for the use of our trademarks, trade name and branding and/or income from buying commissions from inventory purchased by the international licensees from the Company’s vendors. We continue to look for opportunities for market expansion globally. Pursuant to these licensing agreements, our licensees operated 320 Aéropostale and P.S. from Aéropostale locations in the Middle East, Asia, Europe and Latin America as of January 30, 2016.

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2015 was the 52-week period ended January 30, 2016, fiscal 2014 was the 52-week period ended January 31, 2015, and fiscal 2013 was the 52-week period ended February 1, 2014.  Fiscal 2016 will be the 52-week period ending January 28, 2017.

Business Strategy

Factory and Mall Strategies. During the first quarter of 2016, we divided our store base into two groups, the Factory Chain and the Mall Chain, based on several factors including customer demographics and store performance. The Factory Chain attracts customers interested in purchasing more basic items at a competitive price while the Mall Chain attracts customers focused on buying fashion merchandise. Both chains will continue to provide updated classic merchandise to our customers, with some Factory and Mall exclusive merchandise arriving for Fall 2016. Each chain will have allocation strategies, marketing messages and in-store presentations specific to product demand and store base characteristics. We believe that an immediate focus on the Factory Chain will accelerate the pace of the Company’s financial improvement.

The Factory channel, representing approximately 60% of the store base, caters to families, as well as young women and men, shopping for compelling values. The product assortment is narrower with greater depth in key basic items and logo merchandise. These Factory stores will have a more simplified merchandise presentation including high-capacity fixtures. The marketing for Factory will have powerful and consistent promotional messages and will be flexible in order to highlight promotions that are either classification specific or store-wide. The majority of the Factory stores are located in outlets and select B and C malls. The majority of the Factory stores will also have the exterior store sign changed to include the Factory tag below the Aéropostale name.

The Mall Chain stores are primarily located in higher-end, or A and B, malls, representing approximately 40% of the store base. We currently do not have any plans to update the Mall Chain exterior sign. For Back-to-School, the Mall Chain will have a merchandise assortment focused on updated classics with a twist and a reduced assortment of logo merchandise which, in aggregate, we believe will resonate with the more fashion oriented customer. These locations are focused on catering to young women and men. Additionally, we anticipate making prudent investments in the quality and look of the merchandise for these stores, in order to reinforce that the merchandise assortments in Mall stores are a combination of fashion, quality and value.

Both chains will be supported by one design and merchandising team.

Brand Differentiation. Our priority is to gain market share by differentiating the Aéropostale brand from our competitors through compelling product. During fiscal 2016, we will be more focused on products that resonate with our core customers’ every day style choices and to a lesser extent on the existing contemporary, fashion focused brands. We have integrated our merchandising strategy with our marketing and social media plans to create authentic and emotional marketing campaigns that deliver a cohesive brand message.

Customer Insight and Engagement. In order to gain greater insight into our customer base and better understand our customers' needs, we conduct independent focus groups on a periodic basis and harness the knowledge of our employee base. In addition to analyzing the findings from these sources to make informed decisions about our business, we also engage our customers through our marketing and social media efforts to communicate our brand messaging. Our marketing outreach includes the use of updated imagery, compelling visual, marketing materials and exciting store events nationwide to accelerate customer adoption. We have also invested in our social media program to connect with our customers and increase traffic to our stores and our e-commerce websites.

Targeted Merchandise Allocation.  We continue to be more targeted in our patterns of merchandise allocation and distribution. In fiscal 2016, we will be allocating merchandise based on our Factory and Mall Chain strategy rather than universally allocating product.

Store Productivity.  We strive to generate sales growth by increasing sales per square foot, increasing units per transaction and increasing transactions.  Our most significant initiative to achieve this growth is to execute the Factory and Mall Chain strategy.  We utilize a workforce management system which enables more efficient store payroll planning.  


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Real Estate Portfolio Optimization. In an effort to right size our store base and optimize our real estate portfolio, we closed 50 stores in the United States and Canada during fiscal 2015, compared with our original plan of approximately 50 to 75 store closures. We closed 122 Aéropostale stores in the United States and Canada during fiscal 2014. Criteria used to evaluate potential store closings include recent store profitability trends as well as an assessment of overall mall performance. During Fiscal 2016, we have closed 6 locations and, in connection with the Chapter 11 Cases, we announced that we are closing an additional 113 U.S. locations, as well as all 41 stores in Canada. We are currently reviewing our leases to ensure they are competitive with current market dynamics and other financial considerations, which may lead to additional closings. We plan to remodel or update a limited number of existing stores during fiscal 2016 when circumstances warrant, such as when required by lease agreements.

E-commerce.  In fiscal 2015, we focused on increasing the profitability of our e-commerce division by reducing our inventories to increase margins and by better utilizing our various channels of distribution to fulfill customer demand and maximize inventory efficiency. In fiscal 2016, while continuing to focus on profitability, we will also look to improve traffic to the website and increase transactions. The Aéropostale online store is accessible at our website, www.aeropostale.com.  P.S. from Aéropostale merchandise can be purchased online at www.aeropostale.com or www.ps4u.com.  GoJane merchandise can be purchased at www.gojane.com. A third party provides fulfillment services for our Aéropostale and P.S. from Aéropostale e-commerce business, including warehousing our inventory and fulfilling our customers' orders. We purchase, manage and own the inventory sold through our websites and we recognize revenue from the sale of these products when the customer receives the merchandise.
  
International.  As of January 30, 2016, we had numerous license agreements covering various countries.  These licensees operated 320 Aéropostale and P.S. from Aéropostale locations in the following countries: 
Countries
 
Number of
Aéropostale
 Locations
 
 
Number of
P.S. from Aéropostale
 Locations
 
 
Number of
Combination
 Locations
 
Total
Number
 Locations
Bahrain
 
1

 
1

 

 
2

Chile
 
3

 

 
2

 
5

Colombia
 
3

 

 

 
3

Guatemala
 
1

 

 

 
1

India
 
1

 

 

 
1

Ireland
 
1

 

 

 
1

Kuwait
 
1

 

 

 
1

Malaysia
 
2

 

 

 
2

Mexico 1
 
125

 
102

 

 
227

Oman
 
3

 
1

 

 
4

Panama
 
1

 

 

 
1

Philippines
 
13

 
2

 
3

 
18

Qatar
 
1

 

 

 
1

Saudi Arabia
 
8

 
4

 

 
12

Singapore
 
5

 

 

 
5

Turkey
 
15

 

 

 
15

United Arab Emirates
 
16

 
5

 
 
 
21

Total
 
200

 
115

 
5

 
320


1 Represents predominately the number of licensee department stores that include Aéropostale shop-in-shops.

Our licensees are expected to continue to open new Aéropostale locations in the regions listed above. In addition, our licensees are expected to continue to open new P.S. from Aéropostale locations throughout Mexico and the Middle East. During fiscal 2015, we entered into new licensing agreements to bring stores to the Republic of Ireland, India, Thailand, Egypt and Indonesia. In early fiscal 2016, we extended our Mexico licensing agreement with the licensor. We currently assume no inventory risk on the merchandise sold in our licensees' stores and we do not own or lease the underlying real estate where retail locations operate.  In addition, our international licensing agreements contain other customary terms and conditions

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governing our business relationship with the licensees.  We will continue to pursue a number of similar license agreements in other territories, and will continue to evaluate additional international opportunities.

Stores

Existing stores.  We locate our stores primarily in shopping malls, outlet centers and, to a much lesser degree, lifestyle and off-mall shopping centers, all located in geographic areas with high concentrations of our target customers.  We generally locate our stores in mall locations near popular teen gathering spots, such as food courts and other teen-oriented retailers.  We have a 19,000 square foot Aéropostale flagship store in the Times Square section of New York City.  We highlight and offer both Aéropostale and P.S. from Aéropostale products in the Times Square store.  

As of January 30, 2016, we operated 811 stores, consisting of 745 Aéropostale stores in all 50 states and Puerto Rico, 41 Aéropostale stores in Canada, as well as 25 P.S. from Aéropostale stores in 12 states, primarily in off-mall locations as follows:
 
 
 
 
 
United States
 
 
 
Number of
Aéropostale
 Stores
 
 
Number of
P.S. from Aéropostale
 Stores
 
 
 
Total
Number
 Stores
Alabama
 
10

 

 
10

Alaska
 
3

 

 
3

Arizona
 
12

 
3

 
15

Arkansas
 
7

 

 
7

California
 
70

 
2

 
72

Colorado
 
12

 

 
12

Connecticut
 
10

 

 
10

Delaware
 
4

 

 
4

Florida
 
56

 
1

 
57

Georgia
 
24

 
2

 
26

Hawaii
 
3

 

 
3

Idaho
 
4

 

 
4

Illinois
 
29

 
1

 
30

Indiana
 
19

 

 
19

Iowa
 
4

 

 
4

Kansas
 
4

 

 
4

Kentucky
 
11

 

 
11

Louisiana
 
14

 

 
14

Maine
 
3

 

 
3

Maryland
 
19

 
1

 
20

Massachusetts
 
17

 

 
17

Michigan
 
22

 

 
22

Minnesota
 
12

 

 
12

Mississippi
 
9

 

 
9

Missouri
 
9

 

 
9

Montana
 
1

 

 
1

Nebraska
 
3

 

 
3

Nevada
 
6

 

 
6

New Hampshire
 
7

 

 
7

New Jersey
 
23

 
2

 
25

New Mexico
 
5

 

 
5

New York
 
41

 
1

 
42

North Carolina
 
24

 
1

 
25

North Dakota
 
1

 

 
1


8


Ohio
 
30

 

 
30

Oklahoma
 
6

 

 
6

Oregon
 
6

 

 
6

Pennsylvania
 
35

 

 
35

Puerto Rico
 
8

 

 
8

Rhode Island
 
2

 

 
2

South Carolina
 
11

 
1

 
12

South Dakota
 
2

 

 
2

Tennessee
 
18

 
1

 
19

Texas
 
68

 
9

 
77

Utah
 
9

 

 
9

Vermont
 
1

 

 
1

Virginia
 
20

 

 
20

Washington
 
11

 

 
11

West Virginia
 
6

 

 
6

Wisconsin
 
13

 

 
13

Wyoming
 
1

 

 
1

 
 
 
 
 
 
 
Canada
 


 
 
 
 

Alberta
 
6

 

 
6

British Columbia
 
4

 

 
4

Manitoba
 
3

 

 
3

New Brunswick
 
1

 

 
1

Newfoundland
 
1

 

 
1

Nova Scotia
 
1

 

 
1

Ontario
 
24

 

 
24

Saskatchewan
 
1

 

 
1

Total
 
786

 
25

 
811


The following table highlights the number of Aéropostale and P.S. from Aéropostale stores opened and closed since the beginning of fiscal 2013:
 
 
 
 
 
 
 
Aéropostale
Stores
Opened
 
 
P.S. from
Aéropostale
Stores
Opened
 
 
 
Aéropostale
Stores
Closed
 
 
P.S. from
Aéropostale
Stores
Closed
 
 
Total
Number of
Stores at End
of Period
Fiscal 2013
 
13

 
52

 
48

 
1

 
1,100

Fiscal 2014
 
7

 
1

 
122

 
126

 
860

Fiscal 2015
 
1

 

 
49

 
1

 
811


Store design and environment.  Our Aéropostale stores average approximately 3,900 square feet each and our P.S. from Aéropostale stores average approximately 3,600 square feet each.  Our stores are designed to create an energetic shopping environment, featuring powerful in-store promotional signage, creative visuals and popular music. The enthusiasm of our associates is integral to our store environment. Our stores feature display windows that provide high visibility for mall traffic. Our strategy is to create fresh and exciting merchandise presentations by updating our floor sets numerous times throughout the year. Visual merchandising directives are initiated at the corporate level in order to maintain consistency throughout all of our stores.

In an effort to continue providing our customers with a fun and fresh shopping environment, we developed an updated store design for our Aéropostale stores.  We plan to remodel or update a limited number of existing stores with many of the special features found in the new store model during fiscal 2016. Such upgrades will include new flooring, new finishes to the cash wrap and fitting rooms.

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The store layout for our Factory Chain has been updated to distinguish it from the Mall Chain design. The Factory Chain incorporates new window and in-store signage to draw the customer's attention to the additional values in these stores. With a greater focus on key items and driving unit sales in the Factory Chain, these stores will have a more simplified merchandising presentation including high-capacity fixtures.

Store management.  Our Aéropostale stores, along with our P.S. from Aéropostale stores, are organized by region and further broken down into districts.  A regional manager manages each of our nine regions and each region encompasses approximately eight to 10 districts. Each district is managed by a district manager and encompasses an average of eight stores. Our corporate headquarters directs the merchandise assortments, merchandise pricing, store layout, inventory management and in-store visuals for all of our stores.

Pricing

We believe that a key component of our success is our ability to understand what our customers desire and what they can afford. Our merchandise, which we believe is of comparable quality to that of our primary competitors, is generally priced lower than our primary competitors’ merchandise. In addition, our business is highly promotional. The development of the Factory and Mall Chain strategy will allow us to align our promotional strategy with the target customers' shopping preferences. We continue to vary sales promotions by season to drive traffic and increase conversion. These promotions are typically referenced in our store windows, throughout our stores, online, and in other marketing touch points.

Design and Merchandising

Our design and merchandising teams focus on designing merchandise that meets the demands of our customers’ casual and active lifestyles. Our designers build assortments predicated on key items that are an integral part of the wardrobe of our target customers. We do this by infusing fashion into our assortment mix, creating brand extensions, and expanding into new categories. We are balancing updated classic merchandise with contemporary additions that we believe will result in an exciting, but unique, total store assortment and presentation. We have a “design-driven, merchant-modified” philosophy, in which our designers’ concepts are further refined by our merchant team to ensure that our merchandise assortments reflect current fashion trends that our customers desire. We are evaluating new trends in fabrics, washes, and silhouettes, and are building a comprehensive testing program with expanded capabilities. Both the Factory Chain and Mall Chain are supported by one design team and one merchandising team. For the Back-to-School 2016 period, we will differentiate the assortment between the two chains by offering merchandise that will target each chain’s core customer.

Planning and Allocation

Our planning organization, in coordination with the merchandising team, determines the quantities of units needed for each product category. By monitoring sales of each style and color and employing our flexible sourcing capabilities, we are able to adjust our merchandise assortments to capitalize upon emerging trends. We believe we have greater opportunity to distort our assortment by store, based on customer profile. In 2016, we will be allocating merchandise based on our Factory Chain and Mall Chain strategy rather than universally allocating product.

Sourcing

We have a sourcing strategy that we believe includes sourcing goods at market or below market cost without sacrificing quality. We balance sourcing core merchandise during non-peak periods to minimize costs with improving speed to market in order to respond quickly to our customers’ changing fashion preferences, as well as capitalize on trending classifications. In addition, while we have capabilities today to chase into product, our goal is to be able to maintain lead times within 21 to 120 days. A product life cycle management system is utilized for both our Aéropostale and P.S. from Aéropostale businesses.

During fiscal 2015, we sourced approximately 81% of our merchandise from our top five merchandise vendors.  Most of our vendors maintain sourcing offices in the United States, with the majority of their production factories located in Asia and Central America.  In an effort to minimize currency risk, all payments to our vendors and sourcing suppliers are made in U.S. dollars. We engage a third party independent contractor to visit the production facilities that supply us with our products. This independent contractor performs audits at each factory and as a result, assesses the compliance of the facility with, among other things, local and United States labor laws and regulations as well as fair trade and business practices.

Since May 2014, we have been party to a non-exclusive sourcing agreement ("Sourcing Agreement") with MGF Sourcing US, LLC, an affiliate of Sycamore Partners (see Note 3 to the Notes to Consolidated Financial Statements for the terms of the

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Sourcing Agreement). In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise, and resulted in a liquidity constraint. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to the approval of the Bankruptcy Court. If approved by the Bankruptcy Court, the Sourcing Agreement will terminate when the parties comply with their respective obligations under outstanding orders. The Company plans to obtain its supply from other vendors when the Sourcing Agreement terminates. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" below.

During February 2015, we revised and renewed a master sourcing agreement (the "Supplier Agreement") with another merchandise vendor. Under the Supplier Agreement, we have a ten-year sourcing commitment, which we believe will foster greater competition among our sourcing suppliers.

On April 19, 2016, we amended and restated the Supplier Agreement, pursuant to which we received an advance rebate payment as a purchase discount equivalent to approximately $1.75 million per annum throughout the life of the Supplier Agreement as a commitment of meeting certain minimum thresholds. Should we fail to meet the annual purchase minimum thresholds we would be required to make certain agreed upon shortfall payments. This amendment also decreased the annual purchase commitment under the Supplier Agreement and removed the opportunity to receive additional purchase discounts. See Notes 2 and 20 to the Notes to Consolidated Financial Statements for a further discussion regarding sourcing arrangements.

Corporate Responsibility
 
We are committed to the principle that the people who make our products should be treated with dignity and respect. We seek to work with apparel suppliers throughout the world that share our commitment to providing safe and healthy workplaces. At a minimum, we require our suppliers to maintain a workplace environment that complies with local legal requirements and meets universally-accepted human rights standards. In addition, we are committed to giving back to the community and helping our employees in times of hardship.

Social Responsibility

Our Vendor Code of Conduct (the “Code”), which is based on universally-accepted human rights principles, sets forth our expectations for suppliers. The Code must be posted in every factory that manufactures our clothes in the local language of the workers. All suppliers must agree to abide by the terms of our Code before we will place production with them.
 
We maintain an extensive factory inspection program, through our compliance department, to monitor compliance with our Code. The compliance team validates the inspection reporting of our globally recognized third party inspection and auditing firm and works with new and existing factories on remediation of issues. New garment factories must pass an initial inspection in order to do business with us. Once new factories are approved, we then re-inspect them on a periodic basis. We review the outcome of these inspections with factory management with the goal of helping them to continuously improve their performance. In cases where a factory is unable or unwilling to meet our standards, we will take steps up to and including the severance of our business relationship with that factory.

Charitable Giving

Through the work of our charitable foundations Aero Gives and Aero Cares, Aéropostale is committed to giving back not only to the external community, but also assisting our own employees in times of hardship.  Aero Gives, the corporate foundation of Aéropostale, is focused on meeting the needs of our community by enriching the lives of young people and their families through its charitable actions and programs.  Aero Cares, a 501(c)(3) not-for-profit organization, is primarily funded through voluntary contributions by Aéropostale employees, and provides financial assistance to Aéropostale employees and their immediate family during times of extreme financial hardship or need resulting from personal tragedy.    

Marketing and Advertising

We utilize numerous initiatives to increase our brand recognition and promote our merchandise assortment. We believe our stores, our e-commerce websites, and social media channels are the primary means to communicate our message and provide our brand experience. Our marketing efforts are focused on online and in-store communications, promotions and internal as well as external advertising. We expand, test and modify our marketing efforts based on focus groups, surveys and consumer feedback.


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We believe that the enthusiasm and commitment of our store-level employees are key elements in enhancing our brand with our target customers.  We market in-store with large images in the store-front windows and at the checkout area.  In addition, we display promotional messages and images alongside product displays and on other touch points, which will vary based on Factory Chain and Mall Chain locations. We also utilize select external advertising during key selling periods. Our advertisements appear in publications, online, in malls and on the radio on a regional basis.  Periodically, we also partner with select third parties such as magazines, television shows, celebrities, athletes, social media personalities, and musical bands to create marketing programs which we believe will be appealing to our customers.

Our www.aeropostale.com, www.ps4u.com and www.gojane.com websites support all of our internet marketing and promotional initiatives and also offer a large portion of our merchandise assortment for purchase. We maintain a database of our customers and send emails and distribute information on special offers and promotions on a frequent basis.  In addition, we support our brand through social media outlets such as Facebook, Twitter, Instagram, YouTube and Pinterest.

Distribution

To support our stores in the United States and Puerto Rico, we maintain two distribution centers to process merchandise and warehouse inventory. We lease a 315,000 square foot distribution center facility in South River, New Jersey. We also lease a second distribution facility in Ontario, California with 360,000 square feet of space.  The staffing and management of these distribution facilities is outsourced to a third party provider that operates each distribution facility and processes our merchandise. This third party provider employs personnel, some of whom are represented by a labor union. There have been no work stoppages or disruptions since the inception of our relationship with this third party provider in 1991, and we believe that the third party provider has a good relationship with its employees.  In addition, a third party provides fulfillment services in Kentucky for our Aéropostale and P.S. from Aéropostale e-commerce business, including warehousing our inventory and fulfilling our customers’ sales orders.  In addition, we outsource the shipment of our merchandise through third party transportation providers. These third parties ship our merchandise from our distribution facilities to our stores.

We have an agreement with a third party to perform distribution services for our stores in Canada.  The distribution center is located in Etobicoke, Ontario, Canada, and is independently owned and operated.  This third party distribution center receives, processes and warehouses our merchandise for all of our stores in Canada. We do not lease the facility and we are not the only company with product in this warehouse.

We receive, fulfill and ship e-commerce orders for GoJane from our Ontario, California distribution center. This operation is managed and operated by the same third party that services Aéropostale and P.S. from Aéropostale store fulfillment.

We continue to invest in systems and automation to improve processing efficiencies. Our distribution facilities utilize automated sortation materials handling equipment to receive, process and ship goods to our stores. These facilities also serve our other warehousing needs, such as storage of new store merchandise, floor set merchandise and packaging supplies.

Information Systems

Our management information systems provide a full range of retail, financial and merchandising applications. We utilize industry specific software systems to provide various functions related to point-of-sale, inventory management, logistics and sourcing, planning and replenishment, and financial reporting.  We strategically invest in technology to support and enhance our business processes. 

Trademarks

We own, through certain of our wholly owned subsidiaries, federal trademark registrations in the U.S. Patent and Trademark Office for our principal marks AÉROPOSTALE®, AÉRO®, 87®, P.S. FROM AÉROPOSTALE®, P.S.09®, LIVE LOVE DREAM® and the LLD® logo, TOKYO DARLING® and BROOKLYN CALLING® and other related marks for clothing, a variety of accessories, including bags, belts, socks, hats, footwear and, in many instances, sunglasses, eyewear, home goods and jewelry, and as a service mark for retail services (including online retail services), as well as supporting state registrations for selected marks. We also have certain registrations pending for trademarks and service marks for additional marks and categories, including PRINCE & FOX and CAPE JUBY. Additionally, we own registrations for the AÉROPOSTALE, P.S. FROM AÉROPOSTALE, AERO, 87, and LIVE LOVE DREAM and related marks and have pending applications for these and related marks in over 85 foreign countries.  We plan to continue to focus on expanding our international portfolio of marks in the future.


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In connection with the acquisition of GoJane, we were assigned and now own certain trademarks and intellectual property. The trademarks include GOJANE® and GOJANE.COM®.

We regard our trademarks and other proprietary intellectual property as valuable assets of the Company that we continually enhance, maintain, protect and enforce throughout the world.

Competition

The apparel market is highly competitive. We compete with a wide variety of retailers including other specialty stores, department stores, online retailers, mail order retailers, mass merchandisers and off-price retailers.  Specifically, our Aéropostale brand competes primarily with other teen apparel retailers and P.S. from Aéropostale competes with other children’s retailers.  Retailers in our sector compete primarily on the basis of brand reputation, design, price, quality, service and product assortment.

Employees

As of January 30, 2016, we employed 3,020 full-time and 17,310 part-time employees. We employed 640 of our employees at our corporate offices and in our distribution centers and 19,690 at our store locations. The number of part-time employees fluctuates depending on our seasonal needs. None of our employees are represented by a labor union and we consider our relationship with our employees to be good.

Seasonality

Our business is highly seasonal, and historically we have realized a significant portion of our sales and cash flows in the second half of the year, attributable to the impact of the back-to-school selling season in the third quarter, and the holiday selling season in our fourth quarter. As a result, our working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters.  Our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the calendar during the back-to-school selling season.

Financial Information About Our Segments

Financial information about our reportable segments and our operations in different geographical areas for the last three fiscal years is set forth in Note 18 to the Consolidated Financial Statements entitled “Segment Information.” We have two reportable segments: (a) retail stores and e-commerce, and (b) international licensing.

Available Information

We maintain www.aeropostale.com and www.ps4u.com internet websites, through which access is available free of charge to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements and Current Reports on Form 8-K, and all amendments of these reports filed, or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed with, or furnished to, the Securities and Exchange Commission.

Our Corporate Governance Guidelines and the charters for our Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee may also be found on our internet websites at www.aeropostale.com or www.ps4u.com. In addition, our websites contain the Charter for the Lead Independent Director as well as our Code of Business Conduct and Ethics, which is our code of ethics and conduct for our directors, officers and employees.

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Item 1A.  Risk Factors

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain risks and uncertainties, including statements regarding our strategic direction, prospects and future results. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements. The following risk factors should be read in connection with evaluating our business and future prospects. All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:


Risks Relating to our Chapter 11 Filings

Our voluntary petitions for relief under Chapter 11, our ability to operate and reorganize under the Chapter 11 Cases, and our ability to successfully emerge from bankruptcy are subject to a number of risks and uncertainties.

On May 4, 2016, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 proceedings are being jointly administered under the caption “In re Aéropostale, Inc., et al.,” Case No. 16-11275. We will continue to operate our business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

The timing of our emergence from bankruptcy and the terms of our emergence may affect our relationship with our creditors, customers, suppliers and employees and have a significant impact on our businesses, financial condition and results of operations. Our ability to continue to operate in bankruptcy and to emerge from bankruptcy will depend on various factors, including but not limited to:

our ability to comply with and operate under the terms of any cash management orders entered by the Bankruptcy Court from time to time, which subject us to restrictions on transferring cash and other assets;
our ability to maintain adequate cash on hand and to generate cash from operations throughout the Chapter 11 Cases;
our ability to fund our emergence and to fund our operations after emergence from the bankruptcy process on reasonable terms;
our ability to retain key employees during the pendency of our bankruptcy proceedings;
our ability to maintain good customer and supplier relationships in light of developments in our bankruptcy proceedings and the terms of our emergence and our ability to manage contracts that are critical to our operations; and
risks associated with third party motions in Chapter 11 Cases.

As a result of the commencement of the Chapter 11 Cases, we are subject to the risks and uncertainties associated with bankruptcy proceedings.

For the duration of the Chapter 11 Cases, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with the bankruptcy proceedings. These risks include:
    
our ability to continue as a going concern;
our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time;
our ability to comply with the covenants and conditions of the DIP Facility;
our ability to confirm and consummate a plan of reorganization or a sale; and
our ability to fund and execute our strategic business plan.

These risks and uncertainties could adversely affect our relationships with our vendors and employees, as well as with customers, which in turn could adversely affect our operations and financial condition. Also, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond timely to certain events or take advantage of opportunities. In addition, while the Chapter 11 Cases continue, our senior management will be required to spend a significant amount of time and effort focusing on the cases, which may materially adversely affect the conduct of our business, and, as a result, our financial condition and results of operations. Because of the risks and uncertainties

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associated with the Chapter 11 Cases, we cannot predict or quantify the ultimate impact that events occurring during the Chapter 11 reorganization process may have on our business, financial condition and results of operations, and there is no certainty as to our ability to continue as a going concern.


Our business, financial condition and results of operations could be negatively impacted by the loss of customers and suppliers.

Difficulties of providing services while attempting to reorganize our businesses in bankruptcy may make it more difficult to maintain and promote our services and attract customers to our services and to keep our suppliers. As a result of the Chapter 11 Cases, we may experience collection issues with otherwise valid receivables of certain customers. Adverse resolution of these disagreements may impact our revenues and other costs of services, both prospectively and retroactively. It is too soon for us to predict with any certainty the ultimate impact of these disagreements. Our suppliers, vendors and services providers may require stricter terms and conditions, and we may not find these terms and conditions acceptable. In addition, we may experience a loss of confidence by current and prospective suppliers, customers, landlords, employees or other stakeholders, which could make it more difficult for us to operate and have an adverse effect on our businesses, financial condition and results of operations. Any failure to timely obtain suitable supplies at competitive prices could materially adversely affect our businesses, financial condition and results of operations.

As a result of the Chapter 11 Cases, we may not be able to retain key personnel or recruit additional qualified personnel, which could materially affect our business and require the incurrence of substantial additional costs to recruit replacement personnel.

Our key executive officers have substantial experience and expertise in the retail industry and have made significant contributions to the growth and success of our brands. We are highly dependent on the continuing efforts of our key executive officers and other personnel. As a result of the Chapter 11 Cases, current and prospective employees could experience uncertainty about their future roles. This uncertainty may adversely affect our ability to attract and retain key personnel. Any failure to attract and retain key executive officers and other personnel could have a material adverse effect on our business and require the incurrence of substantial additional costs to recruit replacement personnel.

The Chapter 11 Cases limit the flexibility of our management team in running our business.

While we operate our businesses as debtor-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court and, in some cases, certain lenders prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with the various creditors’ committees and other parties-in-interest and one or more hearings. The creditors’ committees and other parties-in-interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process delays major transactions and limits our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.

We may be unable to maintain compliance with the budget or liquidity covenants or other covenants in our DIP Facility, which could result in an event of default under the credit agreements governing the DIP Facility that, if not cured or waived, would have a material adverse effect on our business, financial condition and results of operations.

The DIP Facility requires the Company to maintain minimum excess availability of at least (a) $25,000,000 during the month of May 2016 and (b) $13,000,000 at all times thereafter. In addition, the DIP Facility includes a covenant that requires the Company to limit expenditures to amounts provided in an agreed DIP budget, subject to certain permitted variances. Furthermore, the DIP Facility includes a series of milestones related to the Chapter 11 Cases. While these milestones allow the Company to simultaneously pursue both a plan of reorganization and a sale process, either path requires the Company to achieve a series of intermediate process benchmarks and, in any event, requires that a plan become effective or a sale be consummated, in either case, within 145 days after the Petition Date. Failure to comply with these covenants or milestones would result in an event of default under the DIP Facility and permit the lenders thereunder to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility.



Our DIP Facility contains covenants that limit our flexibility in operating our business.

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The agreement governing our DIP Facility contains various covenants that require us to have a specified minimum amount of liquidity. These covenants also limit our ability to engage in specified types of transactions, and may adversely affect our ability to operate our business. A breach of any of these covenants could result in a default, which could prompt the lenders to declare all amounts outstanding under the agreement to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the lenders under the agreement accelerate the repayment of borrowings, we may not have sufficient assets and funds to repay the borrowings under the agreement.

We may not obtain final approval by the Bankruptcy Court of the DIP Facility, which would limit our access to funding for operations.

The DIP Facility remains subject to final approval by the Bankruptcy Court. In the event that the DIP Facility is not approved, we will face a liquidity shortfall that, if not resolved, could jeopardize our ability to continue as a going concern and could ultimately result in our liquidation.

Trading in our securities during the Chapter 11 proceedings is highly speculative and poses substantial risks. Our common stock may be canceled and holders of common stock may not receive any distribution with respect to, or be able to recover any portion of, their investments.

At this time it is not possible to predict the ultimate effect of the Chapter 11 reorganization on our business, various creditors and security holders, or when it may be possible to emerge from Chapter 11. Trading prices for the Company's securities may bear little or no relationship to the actual recovery, if any, by the holders of the Company's securities in the Chapter 11 Cases. The Company expects that its equity holders could experience a significant or complete loss on their investment, depending on the outcome of the Chapter 11 Cases. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our equity securities and any of our other securities.

Adverse publicity in connection with the Chapter 11 Cases or otherwise could negatively affect our businesses.

Adverse publicity or news coverage relating to us, including, but not limited to, publicity or news coverage in connection with the Chapter 11 Cases, may negatively impact our efforts to establish and promote name recognition and a positive image after emergence from the Chapter 11 Cases.

There is substantial doubt about our ability to continue as a going concern.

Our liquidity constraints have raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other things, the consummation of a plan of reorganization and our ability to comply with the financial and other covenants contained in the DIP Facility. Further, there can be no assurance that our planned operational improvements, including reorganization under Chapter 11 of the Bankruptcy Code, will be successful.


Risks Relating to Aéropostale’s Common Stock

Our common stock was delisted from the NYSE and is not expected to be listed on any other national securities exchange during our Chapter 11 process.

Trading in our common stock was suspended and removed from listing on the NYSE on April 21, 2016. We will not be able to re-list our common stock on a national securities exchange during our Chapter 11 process, although our common stock has been trading in the over-the-counter, or the “OTC,” market. The trading of our common stock in the OTC market rather than NYSE may negatively impact the trading price of our common stock and the levels of liquidity available to our stockholders.

Our common stock is currently traded in the Pink market, operated by OTC Markets Group Inc., which involves additional risks compared to being listed on a national securities exchange.

Securities traded in the OTC market generally have significantly less liquidity than securities traded on a national securities exchange due to factors such as the reduced number of investors that will consider investing in the securities, the reduced number of market makers in the securities, and the reduced number of securities analysts that follow such securities. As a result, holders of shares of our common stock may find it difficult to resell their shares at prices quoted in the market or at all.

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Furthermore, because of the limited market and generally low volume of trading in our common stock that could occur, the share price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets perception of our business, and announcements made by us, our competitors, parties with whom we have business relationships or third parties with interests in the Chapter 11 Cases.

Because our common stock trades on the OTC market, in some cases, we may be subject to additional compliance requirements under applicable state laws in the issuance of our securities. The lack of liquidity in our common stock may also make it difficult for us to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future. Accordingly, we urge that extreme caution be exercised with respect to existing and future investments in our common stock.

Risks Relating to Our Business

There can be no assurance that our exploration of strategic or financial alternatives will result in any transaction being consummated or any other specific action; and speculation and uncertainty regarding the outcome of our exploration of such alternatives may adversely impact our business.

In parallel with executing on our reorganization, further to our March 2016 announcement and pursuant to the authorization of the Board of Directors, management is continuing to explore a full range of strategic alternatives, including a potential sale of the Company. The Company has retained advisors to assist in a review of alternatives. Substantial uncertainty exists as to as to the outcome of these discussions, and there are no assurances that these efforts will result in any transaction, agreement, or any other specific action, which if implemented will be successful, and the process of exploring strategic alternatives will involve the dedication of significant resources and the incurrence of significant costs and expenses.

Failure to effectively execute or to realize the anticipated benefits of our announced new cost reduction program could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.

In January 2016, we announced plans to optimize our cost structure through an aggressive new cost reduction program targeting both direct and indirect spending across the organization, which will also include reducing our corporate headcount. We also announced that as a part of its effort to position the Company for long-term success, we are reviewing our leases and other contracts to ensure they are competitive with current market dynamics and that we are closing 113 U.S. locations, as well as all 41 stores in Canada. Risks related to our cost reduction program include delays in implementation, changes in plans that impact associated costs, impact on employee morale, failure to meet operational and strategic targets and the recording of additional charges. The inability to successfully implement these initiatives or failure to do so as timely as we anticipate, could impact our ability to achieve anticipated cost reductions or may otherwise harm our business and could have an adverse effect on our financial condition, results of operations, cash flow and liquidity.

We may continue to experience declines in comparable store sales and there can be no guarantee that the strategic initiatives we are implementing to improve our results will be successful.

Our comparable sales have declined by 9% in fiscal 2015, 11% in fiscal 2014 and 15% in fiscal 2013 and we experienced declining operating results over these periods. Our comparable sales and quarterly results of operations are affected by a variety of factors, including:

mall traffic and the actions of our competitors or mall anchor tenants;
changes in general economic conditions and consumer spending patterns;
fashion trends;
changes in our merchandise mix;
the effectiveness of our inventory management;
calendar shifts of holiday or seasonal periods;
the timing and effectiveness of promotional events; 
weather conditions; and
the seasonality of our business reflecting the general peak sales for clothing and accessories during the back-to-school and holiday shopping seasons.

We have taken steps focused on executing our key merchandising, operational and financial initiatives to improve our performance. Our ability to fund operations and capital expenditures in the future is dependent on our ability to generate cash from operations to fund our liquidity needs, maintain or improve margins, decrease the rate of decline in store sales and to

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borrow funds available under its loan agreements.  In addition, if our comparable sales and/or results of operations fail to meet the expectations of investors then the market price of our common stock could decline substantially. There can be no assurance that we will be able to achieve our strategic initiatives, including our recent initiative to divide our existing stores into a Factory chain and a Mall chain. If such strategic initiatives are not achieved this could have a significant adverse effect on our operations. The inability to access sufficient liquidity could have a material adverse effect on us and we may need to take various actions, which also could have material adverse consequences to us. For further discussion see “Management's Discussion and Analysis of Financial Condition and Results of Operations” for more information.

A significant decrease in sales or existence of excess inventory could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.

Our net sales are disproportionately higher from August through January each year due to increased sales from back-to-school and holiday shopping. Our net sales from February through July are typically lower due to, in part, the traditional retail slowdown immediately following the winter holiday season. Any significant decrease in sales during any season, but in particular the back-to-school and holiday shopping seasons, would have a material adverse effect on our financial condition, results of operations, cash flows and liquidity. In addition, in order to prepare for the back-to-school and holiday shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year. Any unanticipated decrease in demand for our products would require us to sell excess inventory at a substantial markdown, which would reduce our net sales and gross margins and negatively impact our profitability. Additionally, our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the calendar during the back-to-school selling season.

If we cannot revitalize our brand, our business will be adversely impacted.

As we discuss above in Item 1. “Business,” in the first quarter of 2016 we have taken, and intend to take strategic and operational actions designed to reconnect with our customers to revitalize our brand and return to profitability. However, we cannot be assured that the changes we have made, or the additional actions we are taking or intend to take, will be successful, or that such actions and changes will be successful.

If we cannot successfully revitalize our brand, or if the revitalization takes longer than anticipated, our business and our financial condition and results of operations will be adversely impacted. If customer purchases lag behind our expectations, we may experience decreased net merchandise sales, negative comparable store sales and higher operating losses.

We rely on a small number of vendors to supply a significant amount of our merchandise.

During fiscal 2015 and 2014, we sourced approximately 81% of our merchandise from our top five merchandise vendors. Most of our suppliers could discontinue selling to us at any time. If one or more of our significant suppliers were to sever their relationship with us, or if an agreement with a supplier is terminated, we may not be able to obtain replacement products in a timely manner, which would have a material adverse effect on our sales, financial condition and results of operations. In addition, we do not own or operate any of our own manufacturing facilities and therefore we depend upon independent third party vendors to manufacture all of the merchandise we sell in our stores. If any of our vendors, especially our primary vendors which manufacture the majority of our merchandise, ship orders to us late, do not meet our quality standards, or otherwise fail to deliver us product in accordance with our plans and we are unable to obtain replacement products in a timely fashion, then there would be a material adverse effect on our results of operations.

In the event that a vendor fails to deliver merchandise in a timely manner under our contract, we may be forced to find an alternative arrangement. If an alternative arrangement is not possible or practical, it may result in a lack of supply and liquidity constraints. The Company has been in a dispute with MGF Sourcing US, LLC, an affiliate of Sycamore Partners, relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to the approval of the Bankruptcy Court. If approved by the Bankruptcy Court, the Sourcing Agreement will terminate when the parties comply with their respective obligations under outstanding orders. The Company plans to obtain its supply from other vendors when the Sourcing Agreement terminates.

If we are unable to anticipate, identify and respond to consumers' fashion preferences, domestically and/or internationally, in a timely manner, our profitability will decline.

If we are not able to keep pace with the rapidly changing fashion trends, both domestically and/or internationally, and consumer apparel tastes, our profitability will decline, as it did in fiscal 2015, 2014, 2013 and 2012. We produce casual and

18


active, comfortable apparel, some of which displays the “Aéropostale”, “Aéro” or “P.S. from Aéropostale” logo and also fashion oriented apparel. There can be no assurance that fashion trends will not move away from casual clothing or that we will not have to alter our design strategy to reflect changes in consumer preferences. Failure to anticipate, identify or react appropriately to changes in styles, trends, desired images or brand preferences, and to allocate the mix of product optimally by store criteria has had, and could continue to have a material adverse effect on our results of operations.

Industry conditions are increasingly competitive.

The teen and children's specialty retail industries have historically been highly competitive. One of our competitive advantages throughout our history has been our promotional business model. A number of our competitors are now also operating a more promotional business, similar to our own. As a result, we now face increased competition based upon price and promotion. Greater or continued promotional activity in the teen or child specialty retail industries could have a material adverse effect on our sales and results of operations.

Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which we are located.

In order to generate customer traffic, we must locate our stores in prominent locations within successful shopping malls. We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new shopping malls, or the success of individual shopping malls. We have experienced a decrease in shopping mall traffic which has had an adverse effect on our results of operations. Additionally, the loss of an anchor or other significant tenant in a shopping mall in which we have a store, or the closure of a significant number of shopping malls in which we have stores, either by a single landlord with a large portfolio of malls, or by a number of smaller individual landlords, may have a material adverse effect on our results of operations.

The effect of global, national, regional and local economic pressures and conditions may adversely affect our sales.

Our business is highly sensitive to consumer spending patterns and preferences. Various economic conditions affect the level of disposable income consumers have available to spend on the merchandise we offer, including unemployment rates (including the high level of teenage unemployment), interest rates, taxation, energy costs, the availability of consumer credit, the price of gasoline, consumer confidence in future economic conditions and general business conditions. Accordingly, consumer purchases of discretionary items and retail products, including our products, may decline during recessionary periods and periods of economic uncertainty, and also may decline at other times when changes in consumer spending patterns affect us unfavorably. In addition, any significant decreases in shopping mall traffic could also have a material adverse effect on our results of operations. Therefore, our growth, sales and profitability may be adversely affected by economic conditions on a local, regional, national and/or global level. Our customer continues to be adversely impacted by the current macroeconomic environment. In addition, we believe that a decline in mall traffic has adversely affected our results of operations.

Our ability to react to raw material cost fluctuations, labor and energy prices could reduce our overall profitability.

Global inflationary economic conditions have contributed to our reduced overall profitability. In addition, any reduction in merchandise available to us or any significant increase in the costs to produce that merchandise would have a material adverse effect on our results of operations. We have strategies in place to mitigate the rising cost of raw materials and our overall profitability depends on the success of those strategies. Additionally, increases in other costs, including labor and energy, could also adversely impact our results of operations as well.

Internet sales are subject to numerous risks.

We sell merchandise over the internet through our e-commerce websites, www.aeropostale.com, www.ps4u.com and www.gojane.com. Our internet operations are subject to numerous risks, including:

the successful implementation of new systems and internet or mobile platforms;
the failure of the computer systems that operate our websites and their related support systems, causing, among other things, website downtimes and other technical failures;
reliance on third-party computer hardware/software;
rapid technological change;
liability for online content;
violations of state or federal laws, including those relating to online privacy;
credit card fraud; and
telecommunications failures and vulnerability to electronic break-ins and similar disruptions.

19



Our failure to successfully address and respond to these risks could reduce internet sales, increase costs and damage the reputation of our brand.

Closing stores could result in significant costs to us.

We have announced plans to close underperforming stores and could, in the future, decide to close additional stores that are producing losses or that are not as profitable as we expect. If we decide to close any stores before the expiration of their lease terms, we may incur payments to landlords to terminate or “buy out” the remaining term of the lease. We also may incur costs related to the employees at such stores, whether or not we terminate the leases early. Upon any such closure, the closing costs, including fixed assets and inventory write-downs, could adversely affect our results and could adversely affect our cash on hand.

Failure of new business concepts would have a negative effect on our results of operations.

We expect that the introduction of new brand concepts will play an important role in our overall business strategy. Our ability to succeed with a new brand concept requires significant expenditures and management attention. Additionally, any new brand is subject to certain risks including customer acceptance, competition, product differentiation, the ability to attract and retain qualified personnel, including management and designers, diversion of management's attention from our core Aéropostale business and the ability to obtain suitable sites for new stores.

Our revenues, product costs and other expenses are subject to foreign economic and currency risks due to our operations outside of the United States.

We have operations in Canada and our vendors, independent manufacturers and licensees are located around the world. The value of the U.S. dollar against other foreign currencies has seen significant volatility recently. While our business is conducted in U.S. dollars (other than our operations in Canada), we source virtually all of our production overseas, all of our licensees operate outside of the United States and we generate revenues in Canada. Cost increases caused by currency exchange rate fluctuations could make our products less competitive or have a material adverse effect on our profitability. Currency exchange rate fluctuations could also disrupt the business of our independent manufacturers that produce our products by making their purchases of raw materials or products more expensive and more difficult to finance. Additionally, fluctuations in exchange rates could impact the operations of our international licensees, which could have an adverse effect on our financial position, results of operations, and cash flows.

Our foreign sources of production may not always be reliable, which may result in a disruption in the flow of new merchandise to our stores.

The large majority of the merchandise that we purchase is manufactured overseas. We generally do not have any long-term merchandise supply contracts with our vendors and the imports of our merchandise by our vendors are subject to existing or potential duties, tariffs and quotas. We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) labor instability/employee unrest (iii) enhanced security measures at foreign and United States ports, which could delay delivery of goods; (iv) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region within which we do business; (v) imposition of additional or greater duties, taxes, and other charges on imports; (vi) delayed receipt or non-delivery of goods due to the failure of our vendors to comply with applicable import regulations; and (vii) delayed receipt or non-delivery of goods due to unexpected or significant port congestion or labor unrest at United States ports. Any disruption to our vendors and our foreign sources of production due to any of the factors listed above or due to other unforeseeable events or circumstances could have a material adverse effect on our results of operations.

Our business could suffer if a manufacturer fails to use acceptable labor practices.

Our sourcing suppliers and independent manufacturers are required to operate in compliance with all applicable foreign and domestic laws and regulations. While our vendor operating guidelines promote ethical business practices for our vendors and suppliers, we do not control these third parties or their labor practices. The violation of labor or other laws by an independent manufacturer, or by one of the sourcing suppliers, or the divergence of an independent manufacturer's or sourcing supplier's labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. To help mitigate this risk, we engage a third party independent contractor to visit the production facilities from which we receive our products. This independent contractor assesses the compliance of the

20


facility with, among other things, local and United States labor laws and regulations as well as foreign and domestic fair trade and business practices.

Because of our international licensing operations, we could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

The United States Foreign Corrupt Practices Act, and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to governmental officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. However, we cannot provide assurance that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

Modifications and/or upgrades to our information technology systems may disrupt our operations.

We regularly evaluate our information technology systems and requirements. Modifications may include replacing existing systems with successor systems, making changes to existing systems, or acquiring new systems with new functionality. We are aware of the inherent risks associated with replacing, modifying, upgrading, maintaining and expanding these systems, including inaccurate system information, system disruptions and user acceptance and understanding. Information technology system disruptions and inaccurate system information, if not anticipated and appropriately mitigated, could have a material adverse effect on our financial condition and results of operations. Additionally, there is no assurance that a successfully implemented system will deliver the anticipated value to us.

We could face liability from, or our ability to conduct business could be adversely affected by, government and private actions concerning personally identifiable information, including privacy.

Our direct marketing business is subject to federal and state laws regarding the collection, maintenance and disclosure of personally identifiable information we collect and maintain in our database. If we do not comply, we could become subject to liability. While these provisions do not currently unduly restrict our ability to operate our business, if those regulations become more restrictive, they could adversely affect our business. In addition, laws or regulations that could impair our ability to collect and use user names and other information on our e-commerce websites may adversely affect our business. For example, the Children’s Online Privacy Protection Act of 1999, as amended, currently limits our ability to collect personal information from website visitors who may be under age 13. Further, we could be subject to a claim based on other alleged misuse of personal information, such as use for unauthorized marketing purposes. If we violate any of these laws, we could face civil penalties. In addition, the attorneys general of various states review company websites and their privacy policies from time to time. In particular, an attorney general may examine our privacy policies to assure that the policies overtly and explicitly inform users of the manner in which the information they provide will be used and disclosed by the Company. If one or more attorneys general were to determine that our privacy policies fail to conform to state law, we also could face fines or civil penalties, any of which could adversely affect our business. Our failure to appropriately safeguard the personally identifiable information of customers, employees and third parties could subject us to reputational damage and/or legal liability.

We rely on a third party to manage the web-hosting, operation, warehousing and order fulfillment for our e-commerce business; any disruption of these activities could have a material adverse effect on our e-commerce business.

We rely on one third party, eBay Enterprise Inc., to host our e-commerce websites, warehouse all of the inventory sold through our e-commerce websites, and fulfill all of our e-commerce sales to our customers, excluding GoJane. It also performs additional services to support our e-commerce business. Any significant interruption in the operations of eBay Enterprise Inc., over which we have no control, would have a material adverse effect on our e-commerce business.

Information technology system disruption and cyber security risks could harm our net sales, increase our expenses, harm our reputation, expose us to litigation and adversely affect our business.
    
We depend on information technology systems for the successful operation of our business, including email communications, the design, manufacture and distribution of our products, marketing efforts, collection and retention of customer data, employee information, processing of credit card transactions, e-commerce activities and the use of social media to interact with our customers. Although we take protective measures, including measures to effectively secure information through system security technology, the possibility of a cyber-attack on any one or all of these systems is a serious threat. In addition to our own networks and databases, we use third party service providers to store, process and transmit certain of this information on our behalf. We also rely on one third-party, eBay Enterprise Inc., to host our e-commerce website, warehouse

21


all of the inventory sold through our e-commerce website, and fulfill all of our e-commerce sales to our customers. It also performs additional services for us to support our e-commerce business. We collect, retain and transmit confidential information over such systems. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future in their systems. We have confidential security measures in place to protect our physical facilities and information technology systems from attacks. Despite these measures, we may be vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events.

Any misappropriation of confidential or personally identifiable information gathered, stored or used by us could have a material impact on the operation of our business, including damaging our reputation with our customers, employees, third parties and investors. We maintain cyber liability insurance coverage for risks including third party claims alleging personal injury, damage caused by breach of network, third party intellectual property damage claims via website and advertising, customer information stolen, as well as costs of response, legal and regulatory penalties. We could also incur significant costs implementing additional security measures to comply with applicable federal, state or international laws and regulations governing the unauthorized disclosure of confidential or personally identifiable information as well as increased costs such as organizational changes, implementing additional protection technologies, training employees, engaging consultants. In addition, we could incur lost revenues and face increased litigation as a result of any potential cyber security breach. We have not experienced any material misappropriation, loss or other unauthorized disclosure of confidential or personally identifiable information as a result of a cyber security breach or other act, however, a cyber security breach or other act and/or disruption to our information technology systems could have a material adverse effect on our business, prospects, financial condition or results of operations.

We rely on third parties to manage our distribution centers and transport our merchandise to our stores; a disruption of our distribution activities could have a material adverse effect on our business.

The efficient operation of our stores is dependent on our ability to distribute our merchandise in a timely manner to our store locations throughout the United States, Canada and Puerto Rico. We currently lease and maintain two third-party independently operated distribution facilities, one in South River, New Jersey, and the other in Ontario, California. In addition, we also utilize a third distribution center, located in Canada, which is independently owned and operated. These distribution centers manage the receipt, storage, sortation, packaging and distribution of virtually all of our merchandise.

These third parties employ personnel represented by labor unions. Although there have been no work stoppages or disruptions since the inception of our relationships with these third party providers, there can be no assurance that work stoppages or disruptions will not occur in the future. We also use separate third party transportation companies to deliver our merchandise from our distribution centers to our stores. Any failure by any of these third parties to respond adequately to our warehousing, distribution and transportation needs could have a material adverse effect on our results of operations.

Failure to protect our trademarks adequately could negatively impact our brand image and limit our ability to penetrate new markets.

We believe that our key trademarks including AÉROPOSTALE®, AERO® and 87®, LIVE LOVE DREAM® and P.S. FROM AÉROPOSTALE® and variations thereof, are integral to certain aspects of our design strategy. In addition, the trademarks for our GoJane business acquired in late 2012 are important to our business strategy. We have obtained federal registrations of or have pending applications for these trademarks in the United States and have applied for or obtained registrations in most foreign countries in which our merchandise is produced and licensees are located, as well as elsewhere. We use these trademarks in our constantly changing designs and logos even though we have not applied to register every variation or combination thereof for apparel and related accessories. There can be no assurance that the registrations we own and have obtained will prevent the imitation of our products or infringement of our intellectual property rights by others. If any third party imitates our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected.

There can be no assurance that others will not try to block the manufacture, export or sale of our products to prevent an alleged violation of their trademarks or other proprietary rights. Other entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for apparel and accessories in foreign countries in which products are manufactured are located. There may also be other prior registrations in other foreign countries of which we are not aware. Accordingly, it may not be possible, in those few foreign countries where we were not able to register our marks, to enjoin the manufacture, sale or exportation of AÉROPOSTALE, P.S. FROM AÉROPOSTALE or GOJANE branded goods to the United States. If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries. Our inability to register our trademarks or purchase or license the right to use

22


our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from or manufacture in less costly markets or enter new markets should our business plan change to include selling our merchandise in those jurisdictions outside the United States.

Failure to comply with regulatory requirements could have a material adverse effect on our business.

As a public company, we are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the Sarbanes-Oxley Act of 2002, the SEC and any exchange on which our common stock may be traded from time to time. Failure to comply with such laws and regulations could have a material adverse effect on our reputation, financial condition and on the market price of our common stock. We are subject to customs, child labor, tax, employment, privacy, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and distribution and fulfillment centers. Additional legal and regulatory requirements, and the fact that foreign laws occasionally conflict with domestic laws, have increased the complexity of the regulatory environment and the cost of compliance. If these laws change without our knowledge, or are violated by importers, designers, manufacturers or distributors, we could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could adversely affect our business. Moreover, legal actions may be filed against us from time to time, including class actions. These actions may assert commercial, tort, intellectual property, customer, employment, data privacy, securities or other claims. We may also be impacted by litigation trends, including class action lawsuits involving consumers and shareholders, that could have a material adverse effect on our reputation, the market price of our common shares, or our results of operations, financial condition and cash flows.

We are subject to litigation risk due to the nature of our business, which may have a material adverse effect on our results of operations and business.
    
From time to time, we are involved in lawsuits or other legal proceedings arising in the ordinary course of our business. These may relate to, for example, trademark, servicemark, copyright or other intellectual property matters, employment law matters, commercial disputes, consumer protection claims, claims of regulatory authorities, or other matters. In addition, as a public company we could from time to time face claims relating to corporate or securities law matters. In connection with such litigation, we may be subject to significant damages or equitable remedies. Any of such litigation, whether as plaintiff or defendant, could be costly and time consuming and could divert management and key personnel from our regular business operations. We do not currently believe that any of our outstanding litigation will have a material adverse effect on our business, prospects, financial condition or results of operations. However, due to the uncertainty of litigation and depending on the amount and the timing of any claims, an unfavorable resolution of such claims could materially affect our business, prospects, financial condition and results of operations.

We have recorded store asset impairment charges in the past and we may be required to recognize impairment charges in the future.

Pursuant to generally accepted accounting principles, we are required to recognize an impairment charge when circumstances indicate that the carrying value of long-lived assets and intangible assets with finite lives may not be recoverable. Management’s policy in determining whether an impairment indicator exists (i.e., a triggering event) comprises measurable operating performance criteria as well as qualitative measures. If a determination is made that the asset’s carrying value is not recoverable over its estimated useful life, the asset is written down to estimated fair value, if lower. The determination of fair value of the assets is generally based on estimated expected discounted future net cash flows, which is generally measured by discounting expected future cash flows identifiable with the long-lived asset at our weighted-average cost of capital. If these estimates or projections change, we may be required to record additional impairment charges on certain of these assets. We have recognized impairment charges related to under-performing store locations of approximately $11.1 million in fiscal 2015 for 87 stores, $77.2 million in fiscal 2014 for 341 stores and $46.1 million in fiscal 2013 for 230 stores.

Additionally, pursuant to generally accepted accounting principles, we are required to perform impairment tests on our identifiable intangible assets with indefinite lives, including goodwill, annually or at any time when certain events occur, which could impact the value and earnings of our operating segments. Our determination of whether impairment has occurred is based on a comparison of the assets’ estimated fair market values with the assets’ carrying values. Significant and unanticipated changes to these estimates could require impairment charges in a future period that could substantially affect our statement of operations in the period of such change. We recognized impairment charges of $5.1 million in fiscal 2014 for impairments to the GoJane trademark. There were no impairment charges recorded for our identifiable intangible assets in fiscal 2015 and fiscal 2013.

23


As previously announced, in connection with Chapter 11 cases and the Company’s closure of 113 U.S. locations, as well as all 41 stores in Canada, the Company estimates that it will incur pre-tax restructuring and impairment charges related to these actions totaling approximately $60 million to $70 million through the second quarter of fiscal 2016, which includes approximately $44 million to $56 million of future cash expenses primarily related to lease termination costs.


Changes in accounting standards and estimates could materially impact our results of operations.
    
Generally accepted accounting principles and the related authoritative guidance, for many aspects of our business, including revenue recognition, inventories, long-lived assets, goodwill, intangible assets, leases, income taxes and stock-based compensation are complex and involve subjective judgments. Changes in these rules or changes in the underlying estimates, assumptions or judgments by our management could have a material impact on our results of operations. For example, the updated guidance for lease accounting may have a material impact on our results of operations and financial position.

The effects of war, acts of terrorism, natural disasters or other unforeseen wide-scale events could have a material adverse effect on our operating results and financial condition.

The continued threat of terrorism and the associated heightened security measures and military actions in response to acts of terrorism have disrupted commerce and have intensified uncertainties in the U.S. economy. Any further acts of terrorism, a future war or a widespread natural disaster may disrupt commerce and undermine consumer confidence, which could negatively impact our sales revenue by causing consumer spending and/or mall traffic to decline. Furthermore, an act of terrorism or war, or the threat thereof, or any other natural disaster that results in unforeseen interruptions of commerce, could negatively impact our business by interfering with our ability to obtain merchandise from our vendors.

Item 1B.  Unresolved Staff Comments

None

Item 2.  Properties

We lease all of our store locations. Most of our stores are located in shopping malls throughout the U.S. and Canada. Most of our store leases have a term of ten years and require us to pay additional rent based on specified percentages of sales after we achieve specified annual sales thresholds. Generally, our store leases do not contain extension options. Our store leases typically include a pre-opening period of approximately 90 days that allows us to take possession of the property to fixture and merchandise the store. Typically rent payment commences when the stores open. We recognize rent expense in our Consolidated Financial Statements on a straight-line basis over the non-cancellable term of each individual underlying lease, commencing when we take possession of the property. Generally, our leases allow for termination by us after a certain period of time if sales at that site do not exceed specified levels. Additionally, our leases generally have co-tenancy clauses giving us the right to pay reduced rent in the event the mall or center fails to maintain a certain occupancy percentage. After a certain period of time of reduced rent payments, we may be able to terminate the lease. On May 4, 2016, we announced that as a part of our effort to position the Company for long-term success, we are reviewing our leases and other contracts to ensure they are competitive with current market dynamics.

We lease 121,000 square feet of office space in New York, New York under various leases. The facilities are used as our corporate headquarters and for our design, sourcing and production teams. These leases expire in 2016, 2020 and 2021.

We lease 69,000 square feet of office space in Lyndhurst, New Jersey.  This facility is used as our administrative offices for finance, operations and information systems personnel. This lease expires in 2028 and provides us with a five year option to extend at the end of the initial term.  

In addition, we lease a 315,000 square foot distribution and warehouse facility in South River, New Jersey. This lease expires in 2021. We also lease a second 360,000 square foot distribution facility in Ontario, California.  This lease expires in 2019 with a five year option to extend at the end of the initial term.  These facilities are used to warehouse inventory needed to replenish and back-stock all of our U.S. and Puerto Rico stores, as well as to serve our general warehousing needs. In addition, we receive, fulfill and ship e-commerce orders for GoJane from our Ontario, California distribution center.

We lease 1,400 square feet of office space in Ontario, Canada for administrative purposes. The lease expires in 2018.


24


We lease 11,000 square feet of office space in Los Angeles, California. This facility is used as the administrative office for GoJane. This lease expires in 2022.  The lease provides us with two terms of three-year options to renew at 95% of fair market value.

Item 3.  Legal Proceedings

On the Petition Date, we filed voluntary petitions for Chapter 11 relief under the Bankruptcy Code in the Bankruptcy Court. The cases are being jointly administered. We continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. As of the Petition Date, all pending litigation wherein we are named as a defendant is generally stayed by operation of federal bankruptcy law, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, also subject to certain exceptions, to recover on pre-petition claims against us. At this time, it is not possible to predict the outcome of the Chapter 11 Cases or their effect on our business.

We are party to various litigation matters and proceedings in the ordinary course of business.  In the opinion of our management, dispositions of these matters are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

Item 4.  Mine Safety Disclosures

None


25


PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Through April 21, 2016, our common stock had been traded on the New York Stock Exchange under the symbol "ARO." On April 21, 2016 the New York Stock Exchange determined that our common stock was no longer suitable for listing pursuant to Section 82.01D of the NYSE's Listed Company Manual due to an "abnormally low" stock price and trading in the company's stock was suspended.
From April 22, 2016 through May 4, our common stock was traded on the OTCQX® Best Market, which is operated by OTC Markets Group Inc., under the symbol “AROP.” In connection with the Chapter 11 Cases, as of May 5, 2016, the Company’s common equity was transferred to the Pink market, operated by OTC Markets Group, Inc., under the symbol “AROPQ.” The following table sets forth the range of high and low sales prices of our common stock, as reported on the New York Stock Exchange and the OTCQX® Best Market and Pink market, for the indicated periods since February 2, 2014.


 
 
Market Price
 
 
High
 
Low
Fiscal 2015
 
 
 
 
4th quarter                                                                                                                                       
 
$
0.83

 
$
0.24

3rd quarter                                                                                                                                       
 
1.58

 
0.47

2nd quarter                                                                                                                                       
 
3.17

 
1.42

1st quarter                                                                                                                                       
 
4.33

 
2.40

Fiscal 2014
 
 

 
 

4th quarter                                                                                                                                       
 
$
3.54

 
$
2.20

3rd quarter                                                                                                                                       
 
4.25

 
2.81

2nd quarter                                                                                                                                       
 
4.88

 
3.14

1st quarter                                                                                                                                       
 
7.67

 
4.48


As of March 28, 2016, there were 517 stockholders of record. However, when including others holding shares in broker accounts under street name, we estimate the shareholder base at approximately 21,825.



























26









PERFORMANCE GRAPH

The following graph shows the changes, for the five-year period ended January 30, 2016, in the value of $100 invested in shares of our common stock, the Standard & Poor’s MidCap 400 Composite Stock Price Index (the “S&P MidCap 400 Index”) and the Standard & Poor’s Apparel Retail Composite Index (the “S&P Apparel Retail Index”). The plotted points represent the closing price on the last trading day of the fiscal year indicated.

As of fiscal 2015, Aéropostale, Inc. is not a component of the S&P Midcap 400 or the S&P Smallcap 600.

 
1/29/2011

1/28/2012

2/2/2013

2/1/2014

1/31/2015

1/30/2016

 
 
 
 
 
 
 
Aéropostale, Inc.
$
100.00

$
67.71

$
55.46

$
28.96

$
10.02

$
1.07

S&P Midcap 400
100.00

102.71

121.77

148.39

164.55

153.54

S&P Smallcap 600
100.00

107.50

124.11

159.41

169.22

161.28

S&P Apparel Retail
100.00

131.87

177.10

205.30

259.06

278.63


We have not paid a dividend on our common stock during our last three fiscal years, and we do not have any current intention to pay a dividend on our common stock. See Note 11 to the Notes to Consolidated Financial Statements for a description of terms that may limit the Company’s ability to pay dividends.


27


Purchases of Equity Securities by the Issuer

We repurchase our common stock from time to time under a stock repurchase program.  The repurchase program may be modified or terminated by the Board of Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases depends upon general business and market conditions, stock prices, opening and closing of our stock trading window, and liquidity and capital resource requirements going forward. There were no purchases of common stock during fiscal 2015 under the stock repurchase program. As of January 30, 2016, we have $104.4 million of repurchase authorization remaining under our share repurchase program (see Note 7 to the Notes to Consolidated Financial Statements for further discussion regarding this program).
  
Sale of Unregistered Securities

None.

Item 6.  Selected Financial Data

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with our Consolidated Financial Statements and other financial information appearing elsewhere in this document. The fiscal 2012 retail calendar includes a 53rd week and therefore fiscal 2013 comparable statistics are compared to a shifted fiscal 2012 calendar.

 
 
Fiscal Year Ended
 
 
 
January 30,
2016
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013 (7)
 
January 28,
2012
 
 
(In thousands, except per share and store data)
Statements of Operation Data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,506,867

 
$
1,838,663

 
$
2,090,902

 
$
2,386,178

 
$
2,342,260

Gross profit (1)
 
$
293,002

 
$
336,438

 
$
357,363

 
$
589,357

 
$
608,344

Gross profit, as a percent of sales (1)
 
19.4
 %
 
18.3
 %
 
17.1
 %
 
24.7
 %
 
26.0
 %
SG&A, as a percent of sales (2)
 
27.8
 %
 
27.7
 %
 
25.9
 %
 
22.2
 %
 
21.1
 %
(Loss) income from operations (3) (4) (5)
 
$
(119,410
)
 
$
(213,138
)
 
$
(185,206
)
 
$
59,511

 
$
113,515

(Loss) income from operations, as a percent of sales (3) (4) (5)
 
(7.9
)%
 
(11.6
)%
 
(8.8
)%
 
2.5
 %
 
4.9
 %
Net (loss) income, as a percent of sales (6)
 
(9.1
)%
 
(11.2
)%
 
(6.8
)%
 
1.5
 %
 
3.0
 %
Net (loss) income (6)
 
$
(136,943
)
 
$
(206,458
)
 
$
(141,831
)
 
$
34,923

 
$
69,515

Diluted earnings (loss) per common share
 
$
(1.72
)
 
$
(2.62
)
 
$
(1.81
)
 
$
0.43

 
$
0.85

Selected Operating Data:
 
 
 
 
 
 
 
 

 
 

Number of stores open at end of period
 
811

 
860

 
1,100

 
1,084

 
1,057

Comparable sales change (including the e-commerce channel)
 
(9
)%
 
(11
)%
 
(15
)%
 
(2
)%
 
(8
)%
Comparable average unit retail change (including the e-commerce channel)
 
(4
)%
 
5
 %
 
(6
)%
 
(4
)%
 
(9
)%
Average net sales per store (in thousands)
 
$
1,570

 
$
1,507

 
$
1,648

 
$
1,991

 
$
2,064

Average square footage per store
 
3,865

 
3,830

 
3,717

 
3,703

 
3,698

Net store sales per average square foot
 
$
408

 
$
403

 
$
445

 
$
538

 
$
561



28


 
 
As of
 
 
 
January 30,
2016
 
January 31,
2015
 
February 1,
2014
 
February 2,
2013 (7)
 
January 28,
2012
 
 
(In thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
51,691

 
$
150,438

 
$
136,260

 
$
236,434

 
$
248,588

Total assets
 
$
354,383

 
$
512,189

 
$
647,641

 
$
740,844

 
$
735,233

Long-term liabilities
 
$
76,354

 
$
81,248

 
$
126,588

 
$
126,974

 
$
132,588

Total debt
 
$
142,960

 
$
138,540

 
$

 
$

 
$

Accumulated (deficit) earnings (8)
 
$
(291,908
)
 
$
(154,965
)
 
$
51,493

 
$
193,324

 
$
459,279

Total stockholders’ (deficit) equity
 
$
(35,646
)
 
$
93,552

 
$
280,692

 
$
410,364

 
$
409,434

_____



29


(1)
Cost of sales includes asset impairment charges of $11.1 million ($11.1 million after tax, or $0.14 per diluted share) for fiscal 2015, $46.7 million ($41.9 million after tax, or $0.53 per diluted share) for fiscal 2014, $46.1 million ($29.5 million after tax, or $0.38 per diluted share) for fiscal 2013, $32.6 million ($19.7 million after tax, or $0.25 per diluted share) for fiscal 2012 and $16.0 million ($9.9 million after tax, or $0.12 per diluted share) for 2011 (see Note 4 to the Notes to Consolidated Financial Statements for a further discussion).
 
 
 
During fiscal 2011, we also recorded a benefit in cost of sales of $8.7 million ($5.3 million after tax, or $0.06 per diluted share), resulting from a dispute with one of our sourcing suppliers, related to prior period allowances.
 
 
(2)
SG&A includes consulting fees of $2.0 million ($2.0 million after tax, or $0.02 per diluted share), severance costs of $1.4 million ($1.4 million after tax, or $0.02) and the relinquishment of our CEO's stock options of $1.5 million ($1.5 million after tax, or $0.02 per diluted share) during fiscal 2015. It was partially offset by a SERP settlement benefit of $1.1 million ($1.1 million after tax, or $0.01 per diluted share).
 
 
 
SG&A includes consulting fees of $5.5 million ($5.0 million after tax, or $0.06 per diluted share), lease termination benefits of $2.7 million ($2.3 million after tax, or $0.03 per diluted share), severance costs for our former Chief Executive Officer of $2.3 million ($2.0 million after tax, or $0.03) and exit cost obligations of $1.9 million ($1.6 million after tax, or $0.02 per diluted share) during fiscal 2014. It was partially offset by the reversal of stock-based compensation related to the departure of our former Chief Executive Officer of $2.0 million ($1.8 million after tax, or $0.02 per diluted share).
 
 
 
SG&A includes a settlement of litigation matters of $4.4 million ($2.9 million after tax, or $0.04 per diluted share) during fiscal 2013.
 
 
(3)
Restructuring benefit for fiscal 2015 included lease costs, net of liability reversals of $6.5 million ($6.5 million after tax, or $0.08 per diluted share) partially offset by other restructuring charges of $0.4 million ($0.4 million after tax, or $0.00 per diluted share).
 
 
 
Restructuring charges for fiscal 2014 included store asset impairment charges of $30.5 million ($29.1 million after tax, or $0.37 per diluted share), exit cost obligations of $6.4 million ($5.7 million after tax, or $0.07 per diluted share), lease termination benefits of $4.7 million ($4.2 million after tax, or $0.05 per diluted share) and other restructuring charges of $8.2 million ($7.6 million after tax, or $0.10 per diluted share).
 
 
(4)
During fiscal 2014, we recorded intangible asset impairment charges for GoJane of $5.1 million ($4.0 million after tax, or $0.05 per diluted share) (see Note 6 to the Notes to Consolidated Financial Statements).
 
 
(5)
During fiscal 2015, we recorded a benefit for an adjustment for fair value related to contingent consideration for GoJane of $0.8 million ($0.8 million after tax, or $0.01 per diluted share) (see Note 5 and 6 to the Notes to Consolidated Financial Statements).
 
 
 
During fiscal 2014, we recorded a benefit for an adjustment for fair value related to contingent consideration for GoJane of $4.5 million ($3.5 million after tax, or $0.04 per diluted share) (see Note 5 and 6 to the Notes to Consolidated Financial Statements).
 
 
(6)
Income tax benefit included the establishment of reserves against net deferred tax assets of $3.4 million after tax, or $0.04 per diluted share for fiscal 2014 and $30.6 million after tax, or $0.39 per diluted share for fiscal 2013.
 
 
(7)
Our fiscal year ends on the Saturday nearest to January 31 of each calendar year. With the exception of fiscal 2012, which included 53 weeks, all other fiscal years presented include 52 weeks.
 
 
(8)
On January 11, 2013, we retired 13.6 million shares of our treasury stock.  These shares remain as authorized stock; however they are now considered unissued.  In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 505, “Equity” (“ASC 505”), the treasury stock retirement resulted in a reduction of the following on our consolidated balance sheet: common stock by $0.1 million, treasury stock by $301.0 million and retained earnings by $300.9 million.  There was no effect on total stockholders’ equity position as a result of the retirement (See Note 7 to the Notes to Consolidated Financial Statements for a further discussion).


30


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve certain risks and uncertainties, including statements regarding our strategic direction, prospects and future results. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements. The risk factors included in Part I, Item 1A should be read in connection with evaluating our business and future prospects. All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made.

Overview

The retail environment remains highly competitive and promotional, and mall traffic continues to remain challenging. We believe that fast-fashion retailers have absorbed some market share from more traditional teen retailers.  Additionally, we believe that over the last few years, our customers' taste and preference has shifted.  We also think that apparel retailers are competing with technology products, like smart phones and apps, for our core teen customer’s discretionary spending.  These factors have contributed to our unfavorable financial results.  Therefore, we are focused on executing our key merchandising, operational and financial initiatives to improve our performance.

Chapter 11 Bankruptcy Proceedings

On May 4, 2016 (the “Petition Date”), Aéropostale, Inc. and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) and the filings therein (the “Chapter 11 Filings”). The Chapter 11 cases have been consolidated for procedural purposes only and are being administered jointly under the caption “In re Aéropostale, Inc., et al.,” Case No. 16-11275. During the pendency of the Chapter 11 Cases, we will continue to operate our business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

DIP Financing

In connection with the Chapter 11 Filings, Aéropostale, Inc., as borrower, certain Debtors as guarantors, the lenders party thereto from time to time, and Crystal Financial, LLC, entered into an asset-based credit facility in an aggregate principal amount of up to $160 million (the “DIP Facility”). On May 6, 2016, the Bankruptcy Court granted approval to the Company to draw $100 million in interim financing from the DIP Facility, which the Company intends to use for general purposes and also to pay off the Credit Facility (as defined below).

Further information on the terms of the DIP Facility is included below under “Liquidity and Capital Resources.”

Financial Performance and Liquidity Update

Amongst other things, declining mall traffic due to a shift in customer demand away from apparel to technology and personal experiences, a highly promotional and competitive retail environment and a change in our customers' taste and preference have contributed to unfavorable financial performance. We have experienced declining comparable store sales and incurred net losses from operations. This has led to cash outflows from operations of $68.5 million in fiscal 2015, $55.7 million in fiscal 2014 and $38.4 million in fiscal 2013.

As we discuss further below, we have taken numerous steps to enhance our liquidity position, including, among other things, amending our Credit Facility on August 18, 2015 to increase borrowing availability and extend the maturity date (see Note 11 to the Notes to Consolidated Financial Statements), effectuating our plan to restructure the P.S. from Aéropostale business and to reduce costs and close under-performing Aéropostale stores in the United States and Canada, focusing on merchandising and operational initiatives described throughout this Report, and taking various other strategic actions directed toward improving our profitability and liquidity. During fiscal 2015, we reduced our capital expenditures to $15.7 million from $23.8 million in fiscal 2014, and expect to further reduce capital expenditures to less than $14.0 million during fiscal 2016.

In addition, following a strategic business review in the fourth quarter of 2015, we instituted an aggressive cost reduction program targeting both direct and indirect spending across the organization ("2015 Cost Reduction Program").  The Company

31


expects this program to generate approximately $35.0 million to $40.0 million in annualized pre-tax savings which is expected to be fully achieved in fiscal 2016. As part of this program, we have reduced our corporate headcount by approximately 100 positions, or 13%, at the end of fiscal 2015. In fiscal 2014, we reduced our corporate headcount by 100 open or occupied corporate positions ("2014 Cost Reduction Program").

In March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to approval of the Bankruptcy Court.

In the first quarter of 2016, our Board of Directors authorized management to explore a full range of strategic alternatives, including a potential sale or restructuring of the Company. The Company retained financial and other advisors to assist in a review of alternatives.

On May 4, 2016, the Company filed the Chapter 11 Filings and entered into the DIP Facility to assist with financing its ongoing operations subject to final Bankruptcy Court approval. The Company also announced that as a part of its effort to position the Company for long-term success, it is reviewing its leases and other contracts to ensure they are competitive with current market dynamics and is closing an additional 113 U.S. locations, as well as all 41 stores in Canada.

We expect to continue to operate in the normal course of business during the reorganization process. Unless otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits us from making payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods furnished and services provided after the Petition Date in the ordinary course of business. Further, while we continue to explore strategic alternatives through the reorganization process, we will also continue to focus internally on improving our performance through our merchandising, operational and financial initiatives. We expect to implement our strategic initiatives in 2016 and our additional merchandising and operational initiatives as described in this report, in an effort to improve liquidity and profitability; however, there can be no assurance of whether or when we will successfully emerge from bankruptcy or if any of the alternatives we are considering will be successfully completed on acceptable terms.

While our financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern, our liquidity constraints have raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other things, the consummation of a plan of reorganization and our ability to comply with the financial and other covenants contained in the DIP Facility.

Aéropostale Common Stock

On April 21, 2016, the NYSE notified the Company that the NYSE had suspended trading in our common stock, effective immediately, and had commenced proceedings to delist the stock from the NYSE pursuant to Section 802.01D of the NYSE’s Listed Company Manual due to an “abnormally low” trading price. From April 22, 2016 through May 4, 2016, the Company’s common stock was traded on the OTCQX® Best Market, which is operated by OTC Markets Group, Inc., under the symbol “AROP.” In connection with the Chapter 11 Cases, as of May 5, 2016, the Company’s common equity was transferred to the Pink market, operated by OTC Markets Group, Inc.

Sourcing Arrangements

During May 2014, we entered into a non-exclusive sourcing agreement with MGF Sourcing US, LLC, an affiliate of Sycamore Partners (the “Sourcing Agreement”), which included $150.0 million in secured credit facilities (see Note 3 to the Notes to Consolidated Financial Statements). As discussed above, in March 2016, we announced that the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to approval of the Bankruptcy Court.

On February 2, 2015, we revised and renewed a master sourcing agreement (the “Supplier Agreement”) with another one of our suppliers. Under the ten-year agreement, we received an advance volume purchase discount equivalent to approximately $1.75 million per annum throughout the life of the Supplier Agreement as commitment of meeting certain minimum thresholds. Should we fail to meet the annual purchase minimum thresholds we would be required to make certain agreed upon shortfall payments. See Note 2 to the Notes to Consolidated Financial Statements.


32


On April 19, 2016, we amended and restated the Supplier Agreement. This amendment decreased the annual purchase commitment and removed the opportunity to receive an additional purchase discount. See Note 20, Subsequent Event, to the Notes to Consolidated Financial Statements.

Merchandising and Operational Initiatives

Merchandising and operational initiatives that we are implementing include, but are not limited to, the following:

We have redefined our merchandising model to emphasize updated classic merchandise enhanced with contemporary additions that we believe will result in an exciting and unique total store assortment and presentation.
In fiscal 2016, we have divided our store base into two chains, the Factory Chain and the Mall Chain, to better serve our core customers. We will differentiate the product assortments between Factory Chain and Mall Chain so that while much of the product will be common to both, there will be Factory Chain exclusives and Mall Chain exclusives which will be suited specifically to the customer preferences we have identified.
We are refining the manner in which we promote merchandise and our use of in-store marketing, tailoring the messages for each customer group of the two store chains.
We are more targeted in our patterns of merchandise allocation and distribution. We are therefore moving towards a more targeted product allocation method rather than universally allocating product. In fiscal 2016, we will be allocating merchandise based on our Factory and Mall Chain strategy rather than universally allocating product.
We continue to focus on the growth of our international licensing business. We recently announced new licensing agreements to bring Aéropostale stores to Thailand, Egypt and Indonesia, and our licensees recently opened stores in India and the Republic of Ireland. We also announced the extension of our licensing agreement with our partner in Mexico.


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


































33


Key Performance Indicators

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table.
 
Fiscal Year Ended
 
January 30,
2016
 
January 31,
2015
 
February 1, 2014
Net sales (in thousands)
$
1,506.9

 
$
1,838.7

 
$
2,090.9

Retail stores and e-commerce net sales
$
1,474.0

 
$
1,804.0

 
$
2,069.4

International licensing net sales
$
32.9

 
$
34.7

 
$
21.5

Total store count at end of period
811

 
860

 
1,100

Comparable store count at end of period
807

 
833

 
1,023

Net sales change
(18
)%
 
(12
)%
 
(12
)%
Comparable sales change (including the e-commerce channel)
(9
)%
 
(11
)%
 
(15
)%
Comparable average unit retail change (including the e-commerce channel)
(4
)%
 
5
 %
 
(6
)%
Comparable units per sales transaction change (including the e-commerce channel)
(1
)%
 
(6
)%
 
2
 %
Comparable sales transaction change (including the e-commerce channel)
(4
)%
 
(10
)%
 
(11
)%
Net store sales per average square foot
$
408

 
$
403

 
$
445

Average net sales per store (in thousands)
$
1,570

 
$
1,507

 
$
1,648

Gross profit (in millions)
$
293.0

 
$
336.4

 
$
357.4

Loss from operations (in millions)
$
(119.4
)
 
$
(213.1
)
 
$
(185.2
)
Retail stores and e-commerce loss from operations
$
(135.9
)
 
$
(144.6
)
 
$
(153.5
)
International licensing income from operations
$
29.2

 
$
31.2

 
$
20.0

Other 1
$
(12.7
)
 
$
(99.7
)
 
$
(51.8
)
Diluted loss per share
$
(1.72
)
 
$
(2.62
)
 
$
(1.81
)
Average square footage change
(19
)%
 
(3
)%
 
3
 %
Change in total inventory over comparable period
(8
)%
 
(24
)%
 
11
 %
Change in store inventory per retail square foot
(3
)%
 
(9
)%
 
12
 %
Percentages of net sales by category:
 
 
 
 
 
Young Women’s
65
 %
 
65
 %
 
65
 %
Young Men’s
35
 %
 
35
 %
 
35
 %

1 Other items include income (charges) that are not included in the segment income (loss) from operations reviewed by the Company’s chief operating decision maker, our Chief Executive Officer. See Note 18 to the Notes to the Consolidated Financial Statements for a further discussion.

















34


Results of Operations

The following table sets forth our results of operations expressed as a percentage of net sales. We also use this information to evaluate the performance of our business:

 
Fiscal Year Ended
 
January 30,
2016
 
January 31, 2015
 
February 1, 2014
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Gross profit
19.4
 %
 
18.3
 %
 
17.1
 %
Selling, general and administrative expenses
27.8
 %
 
27.7
 %
 
25.9
 %
Restructuring (benefit) charge
(0.4
)%
 
2.2
 %
 
 %
Intangible asset impairment
 %
 
0.3
 %
 
 %
Reversal of contingent consideration
(0.1
)%
 
(0.3
)%
 
 %
Loss from operations
(7.9
)%
 
(11.6
)%
 
(8.8
)%
Interest expense, net
1.0
 %
 
0.5
 %
 
 %
Loss before income taxes
(8.9
)%
 
(12.1
)%
 
(8.8
)%
Income tax (benefit) expense
0.2
 %
 
(0.9
)%
 
(2.0
)%
Loss income
(9.1
)%
 
(11.2
)%
 
(6.8
)%

Net Sales

Net sales consist of sales from comparable stores, non-comparable stores and from our e-commerce business. A store is included in comparable sales after 14 months of operation. Stores are excluded from comparable sales at the beginning of the month of closure. Additionally, we have included GoJane sales in our comparable sales beginning in February of fiscal 2014. We consider a remodeled or relocated store with more than a 25% change in square feet to be a new store. Prior period sales from stores that have closed are not included in comparable sales.

Net sales decreased by $331.8 million, or by 18% in fiscal 2015, as compared to fiscal 2014. The decrease in net sales was driven by:

a decrease of $133.8 million, or 9%, in comparable sales, including e-commerce revenue;
a decrease in average square footage of 19%, resulting from the closing of 50 stores during fiscal 2015; and
a decrease of $196.2 million in non-comparable sales.
a decrease of $1.8 million in our international licensing revenue

Consolidated comparable sales, including the e-commerce channel, decreased by 11% in our young men's and by 7% in our young women's category in fiscal 2015. The overall comparable sales, including the e-commerce channel, reflected decreases of 4% in the number of sales transactions, 4% in average unit retail and 1% in units per sales transaction.

Net sales decreased by $252.2 million, or by 12% in fiscal 2014, as compared to fiscal 2013. The decrease in net sales was driven by:

a decrease of $212.0 million, or 11%, in comparable sales, including e-commerce revenue;
a decrease in average square footage of 3%, resulting from the closing of 248 stores during fiscal 2014; and
a decrease of $53.4 million in non-comparable sales.

Additionally, revenue from our international licensing segment increased to $34.7 million during fiscal 2014 from $21.5 million in fiscal 2013. The increase was primarily due to the increase in licensee operated locations to 239 as of January 31, 2015 from 96 as of February 1, 2014.

Consolidated comparable sales, including the e-commerce channel, decreased by 12% in our young men's and by 11% in our young women's category in fiscal 2014. The overall comparable sales, including the e-commerce channel, reflected decreases of 10% in the number of sales transactions and 6% in units per sales transaction, offset by an increase of 5% in average unit retail.


35


Cost of Sales and Gross Profit

Cost of sales includes costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center to the stores, shipping and handling costs, payroll for our design, buying and merchandising departments, licensed design costs and occupancy costs. Occupancy costs include rent, contingent rents, common area maintenance, real estate taxes, utilities, repairs and maintenance, depreciation and amortization and impairment charges.

Gross profit decreased by $43.4 million during fiscal 2015 versus fiscal 2014. The decrease was primarily due to the decrease in net sales and the lower margin as a percentage of sales as discussed below. Gross profit also includes the impact of asset impairment charges of $11.1 million in fiscal 2015 and $46.7 million in fiscal 2014.

Gross profit, as a percentage of net sales, increased by 1.1 percentage points in fiscal 2015 compared to fiscal 2014. This was due to a decrease in merchandise margin of 0.2 percentage points offset by 1.3 percentage points of leverage impact in occupancy expense, depreciation expense, distribution and transportation costs and buying costs.

Gross profit decreased by $20.9 million during fiscal 2014 versus fiscal 2013. The decrease was primarily due to the decrease in net sales and was partially offset by increased margin as a percentage of sales as discussed below. Additionally, closed Aéropostale store lease obligation charges of $4.6 million were recorded during fiscal 2014.

Gross profit, as a percentage of net sales, increased by 1.2 percentage points in fiscal 2014 compared to fiscal 2013. This improvement was due to an increase in merchandise margin of 3.2 percentage points, which was partially offset by 1.7 percentage points of deleverage impact in occupancy expense. Gross profit also includes the impact of asset impairment charges of $46.7 million in fiscal 2014 and $46.1 million in fiscal 2013. In addition, we recorded Aéropostale closed store lease obligation charges of 0.2 percentage points during fiscal 2014.

SG&A

SG&A includes costs related to selling expenses, store management and corporate expenses such as payroll and employee benefits, marketing expenses, employment taxes, information technology maintenance costs and expenses, insurance and legal expenses, e-commerce transaction expenses, store pre-opening costs and other corporate level expenses. Store pre-opening costs include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

SG&A decreased by $89.3 million during fiscal 2015 compared to fiscal 2014. The decrease was due in part to the closure of stores during fiscal 2015 and expense savings initiatives. Store expenses, primarily payroll, decreased by $42.9 million, and store transaction expense decreased by $3.4 million. In addition, corporate expenses decreased by $29.3 million, e-commerce transaction expenses decreased by $9.6 million as a result of the decrease in sales, and marketing expenses decreased by $4.1 million.

SG&A, as a percentage of net sales, increased by 0.1 percentage points during fiscal 2015 compared to fiscal 2014.  The increase in SG&A, as a percentage of net sales, was due primarily to a 0.4 percentage point deleverage impact from marketing expenses partially offset by a 0.3 percentage point leverage from lower corporate expenses.
 
SG&A decreased by $34.0 million during fiscal 2014 compared to fiscal 2013. The decrease was due in part to the closure of stores during fiscal 2014 and expense savings initiatives. Specifically, store expenses, primarily payroll, decreased by $23.5 million, some of which was a result of strategic savings initiatives, and store transaction expense decreased by $5.9 million. Also, e-commerce transaction expenses decreased by $6.7 million as a result of the decrease in sales. These decreases were partially offset by an increase in planned marketing expenses of $1.4 million, which were net of savings from strategic initiatives.

SG&A, as a percentage of net sales, increased by 1.8 percentage points during fiscal 2014 compared to fiscal 2013.  The increase in SG&A, as a percentage of net sales, was due primarily to a 1.0 percentage point deleverage impact from corporate expenses, 0.5 percentage point deleverage impact from store expenses and 0.4 percentage point deleverage impact from marketing expenses.

Restructuring Charges and Other Income (Loss)

Restructuring charges related to the 2014 Cost Reduction Program included a benefit of $6.1 million for fiscal 2015. The benefit was due to reversals of exit cost obligation liabilities resulting from subsequent lease terminations.

36



During 2014, we recorded restructuring charges of $40.4 million related to the 2014 Cost Reduction Program. Restructuring charges consisted primarily of asset impairment charges of $30.5 million, severance of $4.1 million, consulting costs of $3.8 million, net lease exit costs of $1.7 million and other exit costs of $0.3 million (see Note 4 to the Notes to the Consolidated Financial Statements for a further discussion). Additionally, we recorded an intangible asset impairment charge of $5.1 million related to the write-down of the GoJane trademark and a benefit from the reversal of a portion of the previously established contingent consideration of $4.5 million during fiscal 2014 related to the acquisition of GoJane (see Note 6 to the Notes to the Consolidated Financial Statements for a further discussion).

(Loss) Income from Operations

As a result of the above, loss from operations was $119.4 million for fiscal 2015, compared to $213.1 million for fiscal 2014 and $185.2 million for fiscal 2013. The income from operations from our international licensing segment was $29.2 million for fiscal 2015, compared with $31.2 million for fiscal 2014 and $20.0 million for fiscal 2013. In addition, other items, which include charges that are not included in the segment income (loss) from operations reviewed by the Company’s chief operating decision maker, our Chief Executive Officer, were $12.7 million for fiscal 2015, $99.7 million for fiscal 2014 and $51.8 million for fiscal 2013 (see Note 18 to the Notes to the Consolidated Financial Statements for a further discussion).

Income Tax (Benefit) Provision

The effective tax rate was an expense rate of 3.5% for fiscal 2015, compared to benefit rates of 7.0% for fiscal 2014 and 23.8% for fiscal 2013.  During fiscal 2014, we accounted for the utilization of our remaining available net operating loss carrybacks.  While the balance of 2014 and 2015's losses can be carried forward and utilized against future taxable income, the related deferred tax assets have a full valuation allowance applied against them.  The lower tax rate for fiscal 2015 was due to various minimum taxes and the full valuation allowance provided against all of the company’s deferred tax assets.
 
We expect our effective tax expense rate for fiscal 2016 to be 4% to 5% due to the continued establishment of valuation allowances against deferred tax assets.

Net Loss and Loss Per Share

As a result of the above, net loss was $136.9 million, or $1.72 per diluted share, for fiscal 2015, compared with net loss of $206.5 million, or $2.62 per diluted share, for fiscal 2014 and net loss of $141.8 million, or $1.81 per diluted share, for fiscal 2013.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, debt interest payments, remodeling or updating existing stores, the improvement or enhancement of our information technology systems and the construction of a limited number of new stores. Due to the seasonality of our business, we have historically realized a significant portion of our cash flows from operations during the second half of the year.

Amongst other things, declining mall traffic due to a shift in customer demand away from apparel to technology and personal experiences, a highly promotional and competitive retail environment and a change in our customers' taste and preference has contributed to unfavorable financial performance. We have incurred declining comparable sales and net losses from operations. This has led to cash outflows from operations of $68.5 million in fiscal 2015 and $55.7 million in fiscal 2014. Over the past years, we have taken the following steps to enhance our liquidity position, reduce costs and increase sales:
 
The Company instituted a 2015 Cost Reduction Program.  The Company expects this new program to generate approximately $35.0 million to $40.0 million in annualized pre-tax savings which is expected to be fully achieved in fiscal 2016. As part of its new cost reduction program, Aéropostale has reduced corporate headcount by approximately 100 positions, or 13%, by the end of fiscal 2015. This is in addition to the corporate headcount reduction of 100 open or occupied corporate positions effectuated in connection with the 2014 Cost Reduction Program.
In August 2015, we amended our Credit Facility to increase borrowing availability and extend the maturity date, among other things (see Note 11 to the Notes to Consolidated Financial Statements). 
In February 2015, we received an advance volume purchase discount of $17.5 million from a supplier (see Note 2 to the Notes to the Consolidated Financial Statements for a further discussion).

37


As part of our plan to restructure the P.S. from Aéropostale business and to reduce costs, we closed 126 P.S. from Aéropostale stores, primarily in mall locations (see Note 4 to the Notes to the Consolidated Financial Statements).
We also closed 122 under-performing Aéropostale stores in the United States and Canada during fiscal 2014 and closed additional stores during 2015.
During fiscal 2015, we reduced our capital expenditures to $15.7 million from $23.8 million in fiscal 2014, and expect to further reduce capital expenditures to less than $14.0 million during fiscal 2016.
We have focused on strategic initiatives to improve our financial performance as discussed above under the Overview section of Item 7.

In May 2014, we received net proceeds of $137.6 million from the $150.0 million debt facilities with affiliates of Sycamore Partners. We used the proceeds of this financing transaction for working capital and other general corporate purposes. See Note 3 to the Consolidated Financial Statements for further discussion of these arrangements.

In conjunction with this arrangement, we also entered into a sourcing agreement with MGF Sourcing US, LLC, an affiliate of Sycamore Partners. As previously disclosed, the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to approval of the Bankruptcy Court.

At January 30, 2016, we had working capital of $51.7 million, including cash and cash equivalents of $65.1 million, and our revolving credit facility had availability of $130.8 million with no borrowings outstanding. Our cash on hand and availability under the Credit Facility exceeded the $70.0 million minimum availability covenant under the Loan Agreement with affiliates of Sycamore Partners by $125.9 million. As of January 30, 2016, we were not aware of any instances of noncompliance with any financial covenants in the Credit Facility.

In the first quarter of 2016, our Board of Directors authorized management to explore a full range of strategic alternatives, including a potential sale or restructuring of the Company. The Company retained financial and other advisors to assist in a review of alternatives.

On May 4, 2016, we filed the Chapter 11 Filings and entered into the DIP Facility to assist with financing our ongoing operations. The Chapter 11 Filings constituted an event of default and automatic acceleration of our prepetition loans. Notwithstanding the defaults and automatic acceleration, the lenders cannot exercise any remedies because of an automatic stay that is in place under Bankruptcy Laws in connection with the Chapter 11 Filings.

On May 6, 2016, the Bankruptcy Court granted approval for us to draw $100 million in interim financing from the DIP Facility, which we are using for general purposes and also have utilized to pay off the Credit Facility (as defined below). The DIP Facility requires that we maintain minimum excess availability of at least (a) $25,000,000 during the month of May 2016 and (b) $13,000,000 at all times thereafter. In addition, the DIP Facility includes a covenant that requires us to limit expenditures to amounts provided in an agreed DIP budget, subject to certain permitted variances. Furthermore, the DIP Facility includes a series of milestones related to the Chapter 11 Cases. While these milestones allow us to simultaneously pursue both a plan of reorganization and a sale process, either path requires us to achieve a series of intermediate process benchmarks and, in any event, requires that a plan become effective or a sale be consummated, in either case, within 145 days after the Petition Date. Failure to comply with these covenants or milestones would result in an event of default under the DIP Facility and permit the lenders thereunder to accelerate the loans and otherwise exercise remedies under the loan documentation for the DIP Facility.

The Company also announced that as a part of its efforts to position the Company for long-term success, it is reviewing its leases and other contracts to ensure they are competitive with current market dynamics and it is also closing 113 U.S. locations, as well as all 41 stores in Canada.

We expect to continue to operate in the normal course of business during the reorganization process. Unless otherwise authorized by the Bankruptcy Court, the Bankruptcy Code prohibits us from making payments to creditors on account of pre-petition claims. Vendors are, however, being paid for goods furnished and services provided after the Petition Date in the ordinary course of business. Further, while we continue to explore strategic alternatives through the reorganization process, we will also continue to focus internally on improving our performance through our merchandising, operational and financial initiatives. We expect to implement our strategic initiatives in 2016 and our additional merchandising and operational initiatives as described above in an effort to improve liquidity and profitability; however, there can be no assurance of whether or when we will successfully emerge from bankruptcy or if any of the alternatives we are considering will be successfully completed on acceptable terms.

38



While our financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should we be unable to continue as a going concern, our liquidity constraints have raised substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other things, the consummation of a plan of reorganization and our ability to comply with the financial and other covenants contained in the DIP Facility.

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

 
 
Fiscal Year Ended
 
 
 
January 30, 2016
 
January 31, 2015
 
February 1, 2014
Net cash used in operating activities
 
$
(68,491
)
 
$
(55,710
)
 
$
(38,373
)
Net cash used in investing activities
 
(15,712
)
 
(25,844
)
 
(84,470
)
Net cash (used in) provided by financing activities
 
(1,720
)
 
127,719

 
(1,387
)
Effect of exchange rate changes
 
(730
)
 
(932
)
 
(754
)
Net (decrease) increase in cash and cash equivalents
 
$
(86,653
)
 
$
45,233

 
$
(124,984
)

Operating Activities

Cash flows used in operating activities increased by $12.8 million to $68.5 million in fiscal 2015 from $55.7 million in the prior year.  This increase in cash used was due primarily to $40.4 million less in tax refunds in fiscal 2015 compared to the prior year, which was partially offset by the advance volume purchase discount of $17.5 million received in the current year as well as the timing of vendor payments. The decrease in net income of $69.5 million was partially offset by a net reduction in non-cash items of $59.9 million.

Cash flows used in operating activities increased by $17.3 million to $55.7 million in fiscal 2014 from $38.4 million in the prior year.  This increase in cash used was due primarily to the decrease in net income of $64.6 million offset in part by cash received for income tax refunds of approximately $52.0 million. Merchandise inventory decreased by $41.8 million or 24% in total, or 9% on a per retail square foot basis as of January 31, 2015 compared to February 1, 2014. The elimination of merchandise inventory from the 248 closed stores during 2014, along with a continued focus on inventory management drove these decreases. Accounts payable decreased by $50.0 million or 36% primarily as a result of the decrease in merchandise inventories and the timing of certain payments.

Investing Activities

During fiscal 2016, we plan to invest not more than $14.0 million in capital expenditures to remodel a limited number of stores when circumstances warrant, such as when required by lease agreements and for a number of information technology investments. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and other strategic investments.  

We invested $15.7 million in capital expenditures in fiscal 2015, primarily to construct one new Aéropostale store, to remodel 28 existing stores and for a number of information technology investments. 
 
We invested $23.8 million in capital expenditures in fiscal 2014, primarily to construct seven new Aéropostale stores, one P.S. from Aéropostale store, to remodel 13 existing stores and for a number of information technology investments.  

We invested $84.1 million in capital expenditures in fiscal 2013, primarily to construct 13 new Aéropostale stores, 52 P.S. from Aéropostale stores, to remodel 32 existing stores and for a number of information technology investments.  

Financing Activities

During fiscal 2015, net cash used in financing activities was $1.7 million. During fiscal 2014, net cash provided by financing activities was $127.7 million, which included $137.6 million of net proceeds related to the Sycamore Transaction offset by $5.9 million of related deferred financing fees paid in connection with the transaction (see Note 3 to the Notes to Consolidated Financial Statements for a further discussion). During fiscal 2013, net cash provided by financing activities was $1.4 million.

39



Transaction with Affiliates of Sycamore Partners

On May 23, 2014, we entered into (i) a Loan and Security Agreement (the "Loan Agreement") with affiliates of Sycamore Partners, (ii) a Stock Purchase Agreement (the "Stock Purchase Agreement") with Aero Investors LLC, an affiliate of Sycamore Partners for the purchase of 1,000 shares of Series B Convertible Preferred Stock of the Company, $0.01 par value (the "Series B Preferred Stock") and (iii) an Investor Rights Agreement with Sycamore Partners (collectively "Sycamore Transactions"). See Note 3 to the Notes to the Consolidated Financial Statements for a further discussion.

Sycamore Partners is considered a related party due to the agreements with its affiliates described above combined with its ownership interest in us. As of May 23, 2014 and December 31, 2015, Lemur LLC, an affiliate of Sycamore Partners, owned approximately 8% of our outstanding common stock. As of February 9, 2016, Lemur LLC ceased to be the beneficial owner of more than five percent of the Company's common stock.

The Loan Agreement made term loans available to us in the principal amount of $150.0 million, consisting of two tranches: a five-year $100.0 million term loan facility (the "Tranche A Loan") and a 10-year $50.0 million term loan facility (the "Tranche B Loan" and, together with the Tranche A Loan, the "Term Loans"). The Loan Agreement also contained a $70.0 million minimum liquidity covenant.

On May 23, 2014, the Term Loans were disbursed in full and we received net proceeds of $137.6 million from affiliates of Sycamore Partners, after deducting the first year interest payment and certain issuance fees. The proceeds of the Term Loans were used for working capital and other general corporate purposes.

The Tranche A Loan bears interest at a rate equal to 10% per annum and, at our election, up to 50% of the interest can be payable-in-kind during the first three years and up to 20% of the interest can be payable-in-kind during the final two years. The first year of interest under the Tranche A Facility in the amount of $10.0 million was prepaid in cash in full on May 23, 2014, and no other interest payments were required to be paid during the first year of the Tranche A Loan. The Tranche A Loan has no annual scheduled repayment requirements. The Tranche B Loan does not accrue any interest and is to be repaid in equal annual installments of 10% per annum beginning in fiscal 2016. As of May 6, 2016, there was an aggregate outstanding principal amount of $151.25 million: $101.25 million in Tranche A and $50 million in Tranche B.

The Term Loans are guaranteed by certain of our domestic subsidiaries and secured by a second priority security interest in all assets of the Company and certain of our subsidiaries that were already pledged for the benefit of Bank of America, N.A., as agent, under its existing revolving credit facility, and a first priority security interest in our, and certain of our subsidiaries', remaining assets.

Prior to the Chapter 11 Filings, the Tranche A Loan was scheduled to mature on May 23, 2019 and the Tranche B Loan was scheduled to mature on the earlier of (a) tenth anniversary of the end of the Start-Up Period (as such term is defined in the Sourcing Agreement described in Note 2 to the Notes to the Consolidated Financial Statements) and (b) the expiration or termination of the Sourcing Agreement described below in the “Contractual Obligations” section. However, the Chapter 11 Filings triggered events of default and an automatic acceleration of the Term Loans. Notwithstanding the defaults and automatic acceleration, the counterparties to the Term Loans may not exercise any remedies due to the automatic stay under Bankruptcy Laws resulting from the Chapter 11 Cases.

As discussed above, the Company was engaged in a dispute with MGF Sourcing relating to the Sourcing Agreement. This caused a disruption in the supply of merchandise and resulted in both a liquidity constraint and lost sales. On May 11, 2016, the Company reached an agreement in principle with MGF Sourcing to resolve the dispute subject to approval of the Bankruptcy Court. If approved by the Bankruptcy Court, the Sourcing Agreement will terminate when the parties comply with their respective obligations under outstanding orders. The Company plans to obtain its supply from other vendors when the Sourcing Agreement terminates.

Revolving Credit Facility

In September 2011, we entered into an amended and restated revolving credit facility with Bank of America, N.A. (as further amended, the “Credit Facility”), which was guaranteed by all of our domestic subsidiaries (the “Guarantors”) and secured by substantially all of our assets. The Credit Facility originally provided for a revolving credit line up to $175.0 million. The Credit Facility was available for working capital and general corporate purposes. The Credit Facility was scheduled to expire on September 22, 2016.


40


In June 2012, Bank of America, N.A. issued to us a stand-by letter of credit in the amount of approximately $250,000.



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

In connection with the above mentioned Sycamore Transactions, we amended the Credit Facility with Bank of America N.A. to allow for the incurrence of this additional debt under the Loan Agreement.

On August 18, 2015, the Company entered into a Fourth Amendment to the Credit Facility and Amendment to Certain Other Loan Documents (the “Fourth Amendment”). Among other things, the Fourth Amendment extends the maturity date of the Credit Facility until at least February 21, 2019, with automatic extensions, under certain circumstances set forth in the Fourth Amendment, to August 18, 2020; provides for a reduction in the maximum principal amount of extensions of credit that may be made under the Credit Facility from $230.0 million to $215.0 million; provides for a seasonal increase in the advance rate on inventory under the borrowing base formula for the revolving credit facility contained in the Credit Facility; increases to $40.0 million the maximum aggregate principal amount of loans that may be borrowed under the FILO loan facility contained in the Credit Facility and provides for an annual decrease, commencing in 2017, in the advance rate under the borrowing base formula for FILO loans; and reflects the addition of General Electric Capital Corporation as an additional lender under the Credit Facility. The reduction in the maximum principal amount of extensions of credit under the Credit Facility was primarily driven by the Company’s strategic decision to close underperforming stores over the previous eighteen months, thus reducing inventory levels.

As of January 30, 2016, our remaining availability under the Credit Facility was approximately $130.8 million.

The Chapter 11 Filings triggered an event of default and an automatic acceleration of our loans under the Credit Facility. On May 9, 2016, we repaid the $73.4 million outstanding, using the funds available under our DIP Facility, and we also cash collateralized the standby letter of credit, which currently remains outstanding.
  

Contractual Obligations

The following table summarizes our contractual obligations as of January 30, 2016.

As previously noted, on May 4, 2016, the Company and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under the Bankruptcy Code in Bankruptcy Court. In connection with the Chapter 11 Filings, Aéropostale, Inc., as borrower, certain Debtors as guarantors, the lenders party thereto from time to time, and Crystal Financial, LLC, entered into the DIP Facility. The table and the corresponding footnotes below do not reflect the effect of the Bankruptcy Filings or the payment obligations under our DIP Facility.



41


 
 
 
Payments Due by Period
 
 
 
 
 
In 2017
 
In 2019
 
After
 
Total
 
2016
 
and 2018
 
and 2020
 
2021
 
(In thousands)
Contractual Obligations:
 
 
 
 
 
 
 
 
 
Real estate operating leases
$
620,888

 
$
127,244

 
$
188,780

 
$
140,357

 
$
164,507

Sycamore Tranche A Loan principal
100,000

 

 

 
100,000

 

Sycamore Tranche B Loan principal 1
50,000

 
5,000

 
10,000

 
10,000

 
25,000

Sycamore Tranche A Loan interest
33,944

 
10,000

 
20,000

 
3,944

 

Employment agreement 2
2,250

 
1,500

 
750

 

 

Equipment operating leases
5,638

 
2,568

 
3,070

 

 

Total contractual obligations
$
812,720

 
$
146,312