Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 21, 2016)
  • 10-Q (Jul 13, 2016)
  • 10-Q (Dec 7, 2015)
  • 10-Q (Sep 8, 2015)
  • 10-Q (Jun 11, 2015)
  • 10-Q (Dec 8, 2014)

 
8-K

 
Other

ARO Liquidation, Inc. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
10-Q

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2015
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
31-1443880
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
112 W. 34th Street, New York, NY
10120
(Address of Principal Executive Offices)
(Zip Code)

(646) 485-5410
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ    No ¨

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 whether the registrant is a large accelerated filer, an accelerated filer, a 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
 
 
(Do not check if a smaller reporting company)
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 Registrant had 79,994,458 shares of common stock outstanding as of December 2, 2015.

 



AÉROPOSTALE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

AÉROPOSTALE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
(Unaudited)
 
 
 
(Unaudited)
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents
$
41,828

 
$
151,750

 
$
109,198

Merchandise inventory
205,731

 
130,474

 
211,136

Income taxes receivable
4,212

 
18,306

 
9,198

Prepaid expenses and other current assets
39,487

 
48,757

 
47,958

Total current assets
291,258

 
349,287

 
377,490

Fixtures, equipment and improvements, net
111,897

 
130,109

 
151,196

Goodwill
13,919

 
13,919

 
13,919

Intangible assets, net
8,244

 
8,809

 
14,097

Other assets
9,176

 
10,065

 
21,622

TOTAL ASSETS
$
434,494

 
$
512,189

 
$
578,324

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current Liabilities:
 

 
 

 
 

Accounts payable
$
157,436

 
$
88,289

 
$
143,354

Accrued expenses and other current liabilities
68,826

 
110,560

 
99,319

Total current liabilities
226,262

 
198,849

 
242,673

 
 
 
 
 
 
Indebtedness to related party - non-current
142,822

 
138,540

 
136,042

 
 
 
 
 
 
Other non-current liabilities
81,196

 
81,248

 
95,766

 
 
 
 
 
 
Commitments and contingent liabilities


 


 


 
 
 
 
 
 
Stockholders’ (Deficit) Equity:
 

 
 

 
 

Preferred stock, $0.01 par value; 5,000 shares authorized; 1; 1 and 1 shares issued and outstanding

 

 

Common stock, $0.01 par value; 200,000 shares authorized; 80,221; 79,640 and 79,568 shares issued
802

 
796

 
796

Additional paid-in capital
253,970

 
247,775

 
244,910

Accumulated other comprehensive income
3,251

 
3,098

 
2,640

Accumulated deficit
(270,256
)
 
(154,965
)
 
(141,431
)
Treasury stock 615; 498 and 472 shares, at cost
(3,553
)
 
(3,152
)
 
(3,072
)
Total stockholders’ (deficit) equity
(15,786
)
 
93,552

 
103,843

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
434,494

 
$
512,189

 
$
578,324


See Notes to Unaudited Condensed Consolidated Financial Statements

3



AÉROPOSTALE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)


 
13 weeks ended
 
39 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net sales
$
363,325

 
$
452,889

 
$
1,008,829

 
$
1,244,902

Cost of sales (includes certain buying, occupancy and warehousing expenses) 1
288,755

 
384,011

 
816,807

 
1,042,977

Gross profit
74,570

 
68,878

 
192,022

 
201,925

Selling, general and administrative expenses
97,732

 
121,250

 
299,079

 
361,877

Restructuring (benefit) charges
(92
)
 
1,713

 
(6,100
)
 
39,221

Loss from operations
(23,070
)
 
(54,085
)
 
(100,957
)
 
(199,173
)
Interest expense 2
3,291

 
3,035

 
9,526

 
5,808

Loss before income taxes
(26,361
)
 
(57,120
)
 
(110,483
)
 
(204,981
)
Income tax expense (benefit)
2

 
(4,797
)
 
4,807

 
(12,057
)
Net loss
$
(26,363
)
 
$
(52,323
)
 
$
(115,290
)
 
$
(192,924
)
Basic loss per share
$
(0.33
)
 
$
(0.66
)
 
$
(1.45
)
 
$
(2.45
)
Diluted loss per share
$
(0.33
)
 
$
(0.66
)
 
$
(1.45
)
 
$
(2.45
)
Weighted average basic shares
79,607

 
79,015

 
79,484

 
78,775

Weighted average diluted shares
79,607

 
79,015

 
79,484

 
78,775


1 Includes cost of merchandise from related party of $14.6 million during the third quarter of 2015 and $34.2 million during the first thirty-nine weeks of fiscal 2015.

2 Includes interest expense to related party of $2.6 million during the third quarter of 2015 and $2.7 million during the third quarter of 2014. Includes interest expense to related party of $7.8 million during the first thirty-nine weeks of fiscal 2015 and $4.8 million during the first thirty-nine weeks of fiscal 2014.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
13 weeks ended
 
39 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
Net loss
$
(26,363
)
 
$
(52,323
)
 
$
(115,290
)
 
$
(192,924
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension liability adjustment, net of income taxes of $0 for all periods presented
15

 
3,658

 
(902
)
 
3,758

Foreign currency translation adjustment (See Note 6)
(3
)
 
(31
)
 
1,055

 
65

Other comprehensive income
$
12

 
$
3,627

 
$
153

 
$
3,823

Comprehensive loss
$
(26,351
)
 
$
(48,696
)
 
$
(115,137
)
 
$
(189,101
)

See Notes to Unaudited Condensed Consolidated Financial Statements

4


AÉROPOSTALE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
39 weeks ended
 
October 31,
2015
 
November 1,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(115,290
)
 
$
(192,924
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
28,818

 
39,388

Asset impairment charges
2,778

 
64,612

Amortization of intangible assets
565

 
564

Stock-based compensation
8,562

 
11,495

Other
4,096

 
(1,325
)
Changes in operating assets and liabilities:
 

 
 

Merchandise inventory
(77,792
)
 
(39,013
)
Income taxes receivable and other assets
23,356

 
29,604

Accounts payable
69,271

 
5,136

Advance volume purchase discount
17,500

 

Accrued expenses and other liabilities
(56,101
)
 
(19,090
)
Net cash used in operating activities
$
(94,237
)
 
$
(101,553
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(13,927
)
 
(21,127
)
Change in restricted cash

 
(2,210
)
Net cash used in investing activities
$
(13,927
)
 
$
(23,337
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net proceeds from financing transaction with related party

 
137,648

Borrowings under revolving credit facility

 
75,500

Repayments under revolving credit facility

 
(75,500
)
Fees related to financing transaction with related party

 
(6,165
)
GoJane contingent consideration payment

 
(1,531
)
Financing fees related to revolving credit facility
(1,057
)
 
(687
)
Purchase of treasury stock
(401
)
 
(1,466
)
Net cash (used in) provided by financing activities
$
(1,458
)
 
$
127,799

 
 
 
 
Effect of exchange rate changes
$
(300
)
 
$
(228
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(109,922
)
 
2,681

Cash and cash equivalents, beginning of year
151,750

 
106,517

Cash and cash equivalents, end of period
$
41,828

 
$
109,198




See Notes to Unaudited Condensed Consolidated Financial Statements

5


AÉROPOSTALE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Description of Business

Aéropostale, Inc. and its subsidiaries (“we”, “us”, “our”, the “Company” or “Aéropostale”) is a specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old 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.  We provide customers with a focused selection of high quality fashion and fashion basic merchandise at compelling values in an exciting and customer friendly store environment. Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise, other than in licensed stores.  Aéropostale products can be purchased in Aéropostale stores and online at www.aeropostale.com (this and any other references in this Quarterly Report on Form 10-Q to www.aeropostale.com, www.ps4u.com or www.gojane.com are solely references to a uniform resource locator, or URL, and are inactive textual references only, not intended to incorporate the websites into this Quarterly Report on Form 10-Q).  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. As of October 31, 2015, we operated 824 stores, consisting of 758 Aéropostale stores in all 50 states and in Puerto Rico, 41 Aéropostale stores in Canada, as well as 25 P.S. from Aéropostale stores in 12 states. In addition, pursuant to various licensing agreements, our licensees operated 303 Aéropostale and P.S. from Aéropostale locations in the Middle East, Asia, Europe and Latin America as of October 31, 2015. We recently announced new licensing agreements to bring stores to Thailand, Egypt and Indonesia, and our licensees recently opened stores in India and the Republic of Ireland.

2.  Basis of Presentation and Liquidity

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. However, in the opinion of our management, all adjustments necessary for a fair presentation of the results of the interim periods have been made. These adjustments consist primarily of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may differ materially from these estimates. The consolidated balance sheet as of January 31, 2015 was derived from audited financial statements.

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 the 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. Therefore, our interim period unaudited condensed consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows.  These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for our fiscal year ended January 31, 2015 (“Fiscal 2014 10-K”).

Declining mall traffic, a highly promotional and competitive teen retail environment and a shift in customer demand away from logo-based product have contributed to our unfavorable financial performance.  We have experienced declining store sales and incurred net losses from operations. This has led to cash outflows from operations of $55.7 million in fiscal 2014 and $38.4 million in fiscal 2013.  We took steps to enhance our liquidity position, including amending our Credit Facility (as defined in Note 11) on August 18, 2015, to increase borrowing availability and extend the maturity date, among other things (see Note 11). Additionally, we have obtained financing from affiliates of Sycamore Partners, (see Note 4), reduced our corporate headcount, restructured our P.S. from Aéropostale business, closed under-performing Aéropostale stores (see Note 5) and taken various other strategic actions directed toward improving our profitability. Our ability to fund operations and capital expenditures in the future will be dependent on our ability to generate cash from operations, maintain or improve margins, decrease significantly the rate of decline in store sales and to borrow funds available under our loan agreements. Our ability to borrow funds is dependent, in part, on our ability to meet all covenants, including a financial covenant in our loan agreement with affiliates of Sycamore Partners which requires a minimum liquidity coverage of $70.0 million of cash and availability under the revolving credit facility. At October 31, 2015, we had working capital of $65.0 million, including cash and cash equivalents of $41.8 million, and our revolving credit facility had availability of $214.8 million with no borrowings outstanding. Our cash on hand and availability under the revolving credit facility exceeded the $70.0 million minimum availability covenant by $186.6 million. We believe that cash on hand and availability under our revolving credit facility will be sufficient to fund operations and cash flow requirements for the next twelve months. However, there can be no assurance that we will be able to achieve our strategic initiatives or obtain additional funding on favorable terms in the future which would have a significant adverse effect on our operations. If we do not generate sufficient cash flow from operations to fund our

6


working capital needs and planned capital expenditures, and our cash reserves are depleted, and our revolving credit facility is fully drawn, we may need to take various further actions, such as down-sizing and/or eliminating certain operations, which could include exit costs, or reducing or delaying capital expenditures, strategic investments or other actions.      

References to “2015” or “fiscal 2015” mean the 52-week period ending January 30, 2016 and references to “2014” or “fiscal 2014” mean the 52-week period ended January 31, 2015.  References to “the third quarter of 2015” mean the thirteen-week period ended October 31, 2015 and references to “the third quarter of 2014” mean the thirteen-week period ended November 1, 2014.

3.  Supplier Agreement

On February 2, 2015, we revised and renewed a master sourcing agreement (“Supplier Agreement”) with 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, or a total cash payment of $17.5 million, in return for a commitment of meeting certain minimum thresholds. The Supplier Agreement requires us to meet an annual purchase minimum threshold that approximates 23% of our fiscal 2014 consolidated cost of sales. Should we fail to meet the annual purchase minimum thresholds, we would be required to make a shortfall payment to the supplier based on a scaled percentage of the applicable annual purchase minimum shortfall during the applicable period. If we exceed certain minimum purchase thresholds, we would have an opportunity to receive additional advance volume purchase discounts. We expect to meet the annual purchase minimum for fiscal 2015. 

4.  Closing of $150.0 Million Financing Transaction

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.

As of May 23, 2014 and September 30, 2015, Lemur LLC, an affiliate of Sycamore Partners, owned approximately 8% of our outstanding common stock. Stefan Kaluzny, a managing director at Sycamore Partners, joined our Board of Directors upon the closing of this transaction. In addition to Mr. Kaluzny, Sycamore Partners received the right to appoint one additional member to our Board, and appointed Julian R. Geiger, who subsequently agreed to become our CEO on August 18, 2014. Additionally, a third independent appointee was mutually agreed upon by Sycamore Partners and us. Mr. Kaluzny did not stand for re-election to our Board of Directors at our 2015 Annual Meeting. Sycamore Partners and its affiliates and Mr. Kaluzny are considered related parties due to their ownership interest in us (see Note 17 for a further discussion). In August 2015, Kent A. Kleeberger, a Sycamore Partners appointee, joined our Board of Directors.
   
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").

Simultaneously with entering into the Loan Agreement, we amended our existing revolving credit facility with Bank of America, N.A. to allow for the incurrence of the additional debt under the Loan Agreement.

The accounting guidance related to multiple deliverables in an arrangement provides direction on determining if separate contracts should be evaluated as a single arrangement and if an arrangement involves a single unit of accounting or separate units of accounting. We determined that there were four units of accounting or elements of the arrangement which included Tranche A Loan, Tranche B Loan, Series B convertible preferred stock and the Sourcing Agreement (as hereinafter defined). We allocated the initial value based on the relative fair values of each element in the transaction. We estimated the fair values of Tranche A Loan and Tranche B Loan using the discounted cash flow method. Under this method, the projected interest and principal payments are projected through the life of each loan. These cash flows are then discounted to the present value at an appropriate market-derived discount rate, taking into account market yields at the date of issuance and an assessment of the credit rating applicable to us based on the consideration of various credit metrics along with the terms of each loan (such as duration, coupon rate, etc.) to derive an indication of fair value. These instruments are classified as a Level 3 measurement, as they are not publicly traded and therefore, we are unable to obtain quoted market prices. The Series B Preferred Stock represents a convertible security that can be exchanged for shares of Company common stock upon the payment of a cash conversion price of $7.25 per common share equivalent.  Effectively, the Series B Preferred Stock has the characteristic of a warrant as each share represents an option to purchase 3,932.018 shares of common stock at an exercise price of $7.25 per common share and there is no dividend or liquidation preference associated with the Series B Preferred Stock. Accordingly, the Black-Scholes model was used to determine the fair value of the Convertible Shares with

7


an expected life of 10 years, a risk free interest rate of 2.54% and expected volatility of 50%. The Sourcing Agreement was determined to be at fair value and therefore no proceeds were allocated to the agreement.

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.

Loan Agreement

The Tranche A Loan bears interest at an interest 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 A Loan is scheduled to mature on May 23, 2019. The Tranche B Loan will not accrue any interest. The Tranche B Loan has no stated interest rate and will be repaid in equal annual installments of 10% per annum. The Tranche B Loan is scheduled to mature on the earlier of (a) the tenth anniversary of the end of the Start-Up Period (as such term is defined in the Sourcing Agreement) and (b) the expiration or termination of the Sourcing Agreement described below.

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.

The Loan Agreement contains representations, covenants and events of default that are substantially consistent with our existing revolving credit facility with Bank of America, N.A. The Loan Agreement also contains a $70.0 million minimum liquidity covenant. The Company was in compliance with the minimum liquidity covenant under the Loan Agreements at October 31, 2015.

The proceeds of the Term Loans were used for working capital and other general corporate purposes. Prepayment of the Tranche A Loan will require payment of a premium of 10% of the principal amount prepaid on or before the one year anniversary of the closing and 5% of the principal amount prepaid on or before the second anniversary of the closing. There is no prepayment penalty after the second anniversary of the closing. The Tranche B Loan may be prepaid at any time without premium or penalty.

We recorded liabilities for the Term Loans using imputed interest based on our best estimate of its incremental borrowing rates. The effective interest rate used for Tranche A Loan was 7.24%, resulting in an initial present value of $101.7 million and a resulting debt premium of $1.7 million. The premium is being amortized to interest expense over the expected term of the debt using the effective interest method. The effective interest rate for Tranche B Loan used was 7.86%, resulting in an initial present value of $30.0 million and a debt discount of $20.0 million, which is also being amortized to interest expense over the expected term of the debt. Additionally, we recorded deferred financing fees of $5.9 million related to the Term Loans which are being amortized to interest expense over the expected terms of the debt.

We had fair values of $142.8 million in borrowings outstanding under the Loan Agreement, with face value of $150.0 million as of October 31, 2015. Fair value outstanding for Tranche A Loan was $109.2 million, with a face value of $100.0 million. Fair value outstanding for Tranche B Loan was $33.6 million, with a face value of $50.0 million. Total interest associated with this transaction was $2.6 million for the third quarter of 2015 and $7.8 million for the first thirty-nine weeks of fiscal 2015.

Series B Convertible Preferred Stock

Concurrent with, and as a condition to, entering into the Loan Agreement, we issued 1,000 shares of Series B Preferred Stock to affiliates of Sycamore Partners at an aggregate offer price of $0.1 million. Each share of Series B Preferred Stock is convertible at any time at the option of the holder on or prior to May 23, 2024 into shares of common stock at an initial conversion rate of 3,932.018 for each share of Series B Preferred Stock. The common stock underlying the Series B Preferred Stock represents 5% of our issued and outstanding common stock as of May 23, 2014. The Series B Preferred Stock is convertible into shares of the common stock at an initial cash conversion price of $7.25 per share of the underlying common stock. The number of shares of Series B Preferred Stock or common stock to be issued upon exercise and the respective exercise prices are subject to adjustment for changes in the Series B Preferred Stock or common stock, such as stock dividends, stock splits, and similar changes. In the event of a change of control transaction, the Series B Preferred Stock will automatically convert into common stock subject to payment by the holder of such Series B Preferred Stock of the aggregate cash conversion price then in effect, if such conversion price is lower than the per share consideration to be received in the change of control transaction. If the per share consideration to be received in the change of control transaction is less than or equal to the per share cash conversion price then in effect, the Series B Preferred

8


Stock will be automatically converted into a right to receive an amount per share equal to the par value of such share of Series B Preferred Stock.

We analyzed the embedded conversion option for derivative accounting consideration under FASB ASC Subtopic 815-15, “Derivatives and Hedging” and determined that the conversion option should be classified as equity. We also analyzed the conversion option for beneficial conversion features consideration under ASC Subtopic 470-20 “Convertible Securities with Beneficial Conversion Features” and noted none. The Series B Preferred Stock was recorded in equity at a fair value of $5.9 million upon issuance, and was not recorded as a liability on the Consolidated Balance Sheet.

Non-Exclusive Sourcing Agreement

As a condition to funding the Tranche B Loan, we and one of our subsidiaries also entered into a non-exclusive Sourcing Agreement (the "Sourcing Agreement") with TSAM (Delaware) LLC (d/b/a MGF Sourcing US LLC), an affiliate of Sycamore Partners ("MGF"). The price of merchandise sold to us by MGF pursuant to the Sourcing Agreement is required to be competitive to market. We commenced sourcing goods with MGF pursuant to the Sourcing Agreement during the fourth quarter of 2014.

We guarantee the obligations of our subsidiary under the Sourcing Agreement. The Sourcing Agreement requires us to purchase a minimum volume of product for a period of 10 years commencing with our first fiscal quarter of 2016 (such period, the "Minimum Volume Commitment Period"), of between $240.0 million and $280.0 million per annum depending on the year (the "Minimum Volume Commitment"). If we fail to purchase the applicable Minimum Volume Commitment in any given year, we would be required to pay a shortfall commission to MGF, based on a scaled percentage of the applicable Minimum Volume Commitment shortfall during the applicable period.

Under the Sourcing Agreement, MGF is required to pay to us an annual rebate, equal to a fixed amount multiplied by the percentage of annual purchases made by us (including purchases deemed to be made by virtue of payment of the shortfall commission) relative to the Minimum Volume Commitment, to be applied towards the payment of the required amortization on the Tranche B Loan. The Sourcing Agreement also provides for certain carryover credits if we purchase a volume of product above the Minimum Volume Commitment during the applicable Minimum Volume Commitment Period.

We may terminate the Sourcing Agreement upon nine months' prior notice at any time after the first three years of the Minimum Volume Commitment Period have elapsed, subject to payment of a termination fee scaled to the term remaining under the Sourcing Agreement.

5.  Restructuring Program

On April 30, 2014, following an assessment of changing consumer shopping patterns, management and the Board of Directors approved a comprehensive plan to restructure the P.S. from Aéropostale business, which is included in our retail store and e-commerce segment, and to reduce costs. As of January 31, 2015, we closed 126 P.S. from Aéropostale stores, primarily in mall locations, and streamlined and improved the Company's expense structure. We also continue to focus on P.S. from Aéropostale sales channels with higher expectations for growth, including off-mall locations, e-commerce and international licensing. The cost reduction program also targeted direct and indirect spending across the organization during fiscal 2014.

The following is a summary of (benefit) expense recognized in restructuring charges in the statement of operations associated with this program:

 
13 weeks ended
 
39 weeks ended
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
 
(In thousands)
Asset impairment charges
$

 
$

 
$

 
$
30,497

Severance costs

 
1,236

 

 
3,749

Lease costs, net of liability reversals
(97
)
 
146

 
(6,482
)
 
1,198

Other exit costs
5

 
331

 
382

 
3,777

Total
$
(92
)
 
$
1,713

 
$
(6,100
)
 
$
39,221



9


The Company accrued liabilities for the above mentioned restructuring charges as of October 31, 2015 and November 1, 2014 as follows:
 
Severance
 
Lease Costs
 
Other Exit Costs
 
Total
 
(In thousands)
Liability as of February 1, 2015
$
28

 
$
12,593

 
$

 
$
12,621

Additions

 

 
254

 
254

Paid or Utilized
(28
)
 
(6,234
)
 
(254
)
 
(6,516
)
Adjustments

 
(6,359
)
 

 
(6,359
)
Liability as of October 31, 2015
$

 
$

 
$

 
$


 
Impairments
 
Severance
 
Lease Costs
 
Other Exit Costs
 
Total
 
(In thousands)
Liability/Charge at Program Inception
$
30,497

 
$
1,060

 
$
1,046

 
$
1,886

 
$
34,489

Additions

 
2,689

 
152

 
1,891

 
4,732

Paid or Utilized
(30,497
)
 
(1,435
)
 
(315
)
 
(3,754
)
 
(36,001
)
Liability as of November 1, 2014
$

 
$
2,314

 
$
883

 
$
23

 
$
3,220


We closed 115 P.S. from Aéropostale stores during the fourth quarter of fiscal 2014 related to the above mentioned restructuring program. We elected to early adopt the provisions of ASU 2014-08, "Discontinued Operations and Disclosures of Disposals of Components of an Entity", as of the beginning of the fourth quarter of fiscal 2014. We assessed the disposal group under this guidance and concluded the closure of the disposal group to be a "strategic shift". However, this strategic shift was not determined to be a "major" strategic shift based on the portion of our consolidated business that the disposal group represented. Accordingly the disposal group was not presented in the financial statements as discontinued operations. However, we have concluded that this disposal group was an individually significant disposal group. Pretax losses for this disposal group of stores were $1.1 million for the third quarter of 2014 and $37.8 million for the first thirty-nine weeks of fiscal 2014. The pretax loss included asset impairment charges of $30.2 million recorded during the first thirty-nine weeks of fiscal 2014.

6.  Fair Value Measurements

We follow the guidance in ASC Topic 820, “Fair Value Measurement” (“ASC 820”) as it relates to financial and nonfinancial assets and liabilities. ASC 820 prioritizes inputs used in measuring fair value into a hierarchy of three levels:

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs derived principally from or corroborated by observable market data.
 
Level 3 – Unobservable inputs reflecting the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability based on the best information available.

In accordance with the fair value hierarchy described above, the following table shows the fair value of our financial assets and liabilities that are required to be remeasured at fair value on a recurring basis:

10


 
Level 1
 
Level 2
 
Level 3
 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
(In thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents 1
$
18,571

 
$
110,022

 
$
80,005

 
$

 
$

 
$

 
$

 
$

 
$

Total
$
18,571

 
$
110,022

 
$
80,005

 
$

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GoJane performance plan liability 2
$

 
$

 
$

 
$

 
$

 
$

 
$
1,512

 
$
1,446

 
$
5,915

Total
$

 
$

 
$

 
$

 
$

 
$

 
$
1,512

 
$
1,446

 
$
5,915


1 Cash equivalents include money market investments valued as Level 1 inputs in the fair value hierarchy. The fair value of cash equivalents approximates their carrying value due to their short-term maturities.

2 Under the terms of the fiscal 2012 GoJane acquisition agreement, the purchase price also includes contingent cash payments of up to an aggregate of $8.0 million if certain financial metrics are achieved by the GoJane business during the five year period beginning on the acquisition date (the "GJ Performance Plan"). These performance payments are not contingent upon continuous employment by the two individual former stockholders of GoJane. The GJ Performance Plan liability is measured at fair value using Level 3 inputs as defined in the fair value hierarchy. The fair value of the contingent payments as of the acquisition date was estimated to be $7.0 million. This was based on a weighted average expected achievement probability and a discount rate over the expected payment stream. Each quarter, we remeasure the GJ Performance Plan liability at fair value. During the fourth quarter of 2014, we remeasured the liability and reversed $4.5 million based on the probability of achieving the payment targets.

The following table provides a reconciliation of the beginning and ending balances of the GJ Performance Plan measured at fair value using significant unobservable inputs (Level 3):
 
 
39 weeks ended
 
 
October 31, 2015
 
November 1, 2014
 
 
(In thousands)
Balance at beginning of period
 
$
1,446

 
$
7,416

Accretion of interest expense
 
66

 
99

GoJane consideration payment
 

 
(1,600
)
Balance at end of period
 
$
1,512

 
$
5,915


The $1.5 million liability as of October 31, 2015 was included in non-current liabilities. The $5.9 million liability as of November 1, 2014 was included in non-current liabilities.

Non-Financial Assets
 
We recorded asset impairment charges of approximately $2.8 million during the third quarter of 2015 and the first thirty-nine weeks of fiscal 2015. The impairment charges relate to 38 stores that were not previously impaired in addition to previously impaired stores. We recorded asset impairment charges of approximately $12.5 million during the third quarter of 2014 primarily for 59 stores. We recorded asset impairment charges of $64.6 million during the first thirty-nine weeks of fiscal 2014 primarily for 277 stores. Of these charges, $34.1 million was included in cost of sales and $30.5 million was included in restructuring charges for the first thirty-nine weeks of fiscal 2014. These amounts included the write-down of long-lived assets at stores that were assessed for impairment because of (a) changes in circumstances that indicated the carrying value of assets may not be recoverable, or (b) management’s intention to relocate or close stores.  Impairment charges were primarily related to revenues and/or gross margins not meeting targeted levels at the respective stores as a result of macroeconomic conditions, location related conditions and other factors that were negatively impacting the sales and cash flows of these locations.




11


The table below sets forth by level within the fair value hierarchy the fair value of long-lived assets for which impairment was recognized for the first thirty-nine weeks of fiscal 2015 and 2014:

 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
 
Total Fair Value
 
Total Losses
 
 
(In thousands)
October 31, 2015:
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
 
$

 
$

 
$
783

 
$
783

 
$
2,778

 
 
 
 
 
 
 
 
 
 
 
November 1, 2014:
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used
 
$

 
$

 
$
6,488

 
$
6,488

 
$
64,611


7.  Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following table sets forth the components of accumulated other comprehensive income (loss):

 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
(In thousands)
Pension liability, net of tax
$
1,035

 
$
1,937

 
$
1,751

Cumulative foreign currency translation adjustment
2,216

 
1,161

 
889

Total accumulated other comprehensive income
$
3,251

 
$
3,098

 
$
2,640


The changes in components in accumulated other comprehensive income (loss) are as follows:
 
39 weeks ended
 
October 31, 2015
 
Pension Liability
 
Foreign Currency Translation
 
Total
 
(In thousands)
Beginning balance at February 1, 2015
$
1,937

 
$
1,161

 
$
3,098

Other comprehensive income before reclassifications

 
1,055

 
1,055

Reclassified from accumulated other comprehensive income
(902
)
 

 
(902
)
Net current-period other comprehensive (loss) income
$
(902
)
 
$
1,055

 
$
153

Ending balance at October 31, 2015
$
1,035

 
$
2,216

 
$
3,251


 
39 weeks ended
 
November 1, 2014
 
Pension Liability
 
Foreign Currency Translation
 
Total
 
(In thousands)
Beginning balance at February 2, 2014
$
(2,007
)
 
$
824

 
$
(1,183
)
Other comprehensive income before reclassifications

 
65

 
65

Reclassified from accumulated other comprehensive loss
3,758

 

 
3,758

Net current-period other comprehensive income
$
3,758

 
$
65

 
$
3,823

Ending balance at November 1, 2014
$
1,751

 
$
889

 
$
2,640


12



Details related to the reclassifications out of accumulated comprehensive income for fiscal 2015 and 2014 are as follows:
 
 
39 weeks ended
 
 
October 31, 2015
 
November 1, 2014
 
 
(In thousands)
Amortization of defined benefit plan items:
 
 
 
 
Net (loss) gain
 
$
(948
)
 
$
3,633

Amortization of (gain) loss
 
(8
)
 
69

Amortization of prior service cost
 
54

 
56

Total before tax
 
$
(902
)
 
$
3,758

Net of tax
 
$
(902
)
 
$
3,758


Stock Repurchase Program

We have the ability to repurchase our common stock 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 will depend upon general business and market conditions, stock prices, opening and closing of the stock trading window, and liquidity and capital resource requirements going forward. During the first thirty-nine weeks of fiscal 2015 and 2014, we did not repurchase shares of our common stock under our stock repurchase program. Under the program to date, we have repurchased 60.1 million shares of our common stock for $1.0 billion.  As of October 31, 2015, we have approximately $104.4 million of repurchase authorization remaining under our $1.15 billion share repurchase program.

In addition to the above program, we withheld 0.1 million shares for minimum statutory withholding taxes of $0.4 million related to the vesting of stock awards during the first thirty-nine weeks of fiscal 2015 and 0.4 million shares for minimum statutory withholding taxes of $1.5 million during the first thirty-nine weeks of fiscal 2014.

8.  Loss Per Share

The following table sets forth the computations of basic and diluted loss per share:

 
13 weeks ended
 
39 weeks ended
 
October 31,
2015
 
November 1,
2014
 
October 31,
2015
 
November 1,
2014
 
(In thousands, except per share data)
Net loss
$
(26,363
)
 
$
(52,323
)
 
$
(115,290
)
 
$
(192,924
)
Weighted average basic shares
79,607

 
79,015

 
79,484

 
78,775

Impact of dilutive securities

 

 

 

Weighted average diluted shares
79,607

 
79,015

 
79,484

 
78,775

Basic loss per share
$
(0.33
)
 
$
(0.66
)
 
$
(1.45
)
 
$
(2.45
)
Diluted loss per share
$
(0.33
)
 
$
(0.66
)
 
$
(1.45
)
 
$
(2.45
)

All options to purchase shares, in addition to restricted, performance shares and convertible preferred shares, were excluded from the computation of diluted loss per share because the effect would be anti-dilutive.

9.  Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:


13


 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
 
(In thousands)
Accrued gift cards
$
16,369

 
$
22,164

 
$
17,030

Accrued compensation and retirement benefit plan liabilities
8,605

 
26,467

 
22,014

Current portion of tenant allowances
229

 
12

 
14,057

Current portion of exit cost obligations
617

 
10,771

 

Other
43,006

 
51,146

 
46,218

Total accrued expenses and other current liabilities
$
68,826

 
$
110,560

 
$
99,319

 
10.  Other Non-Current Liabilities

Other non-current liabilities consist of the following:

 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
 
(In thousands)
Deferred rent
$
38,063

 
$
38,407

 
$
43,685

Deferred tenant allowance
18,945

 
25,262

 
29,515

Advance volume purchase discount
11,355

 

 

Non-current portion of exit cost obligations
1,203

 
6,277

 

Retirement benefit plan liabilities
5,066

 
5,060

 
5,841

Other
6,564

 
6,242

 
16,725

Total other non-current liabilities
$
81,196

 
$
81,248

 
$
95,766


11.  Revolving Credit Facility

In September 2011, we entered into the Third Amended and Restated Loan and Security Agreement with Bank of America, N.A. (as amended, the “Credit Facility”). The Credit Facility originally provided for a revolving credit line up to $175.0 million. The Credit Facility is available for working capital and general corporate purposes. The Credit Facility was scheduled to expire on September 22, 2016, and is guaranteed by all of our domestic subsidiaries (the “Guarantors”).

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 Company 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 continued to include a $40.0 million sublimit for the issuance of letters of credit). In addition, the accordion feature of the Credit Facility, under which the Company may request an increase in the commitments of the Lenders thereunder from time to time, was reduced from $75.0 million to $50.0 million. GoJane LLC, an indirect wholly-owned subsidiary of the Company, also joined the Credit Facility as a new guarantor.

On May 23, 2014, we entered into $150.0 million secured credit facilities with affiliates of Sycamore Partners. In connection with this agreement, we further amended the Credit Facility to allow for the incurrence of this additional debt under the Loan Agreement (see Note 4).

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 million to $215 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 million the maximum aggregate principal amount of loans that may be borrowed under the FILO loan facility contained in the Credit Facility and provides

14


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 last eighteen months, thus reducing inventory levels.

Loans under the Credit Facility are secured by substantially all of our assets and are guaranteed by the Guarantors. Upon the occurrence of a Suspension Event (which is defined in the Credit Facility as an event of default or any occurrence, circumstance or state of facts which would become an event of default after notice, or lapse of time, or both) or, in certain circumstances, a Cash Dominion Event (any event of default or failure to maintain availability in an amount greater than 12.5% of the lesser of the Borrowing Base (Revolving Credit) and Commitments (Revolving Credit) (as such terms are defined in the Credit Facility)), our ability to borrow funds, make investments, pay dividends and repurchase shares of our common stock may be limited, among other limitations. Direct borrowings under the Credit Facility bear interest at a margin over either LIBOR or the Prime Rate (as each such term is defined in the Credit Facility).

The Credit Facility also contains covenants that, subject to specified exceptions, restrict our ability to, among other things:

incur additional debt or encumber assets of the Company;
merge with or acquire other companies;
liquidate or dissolve;
sell, transfer, lease or dispose of assets; and
make loans or guarantees.

Events of default under the Credit Facility include, without limitation and subject to grace periods and notice provisions in certain circumstances, failure to pay principal amounts when due, breaches of covenants, misrepresentation, default on leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, failure to maintain specified availability levels, business failure or application for bankruptcy, legal challenges to loan documents or a change in control. Upon the occurrence of an event of default under the Credit Facility, the Lenders may, including but not limited to, cease making loans, terminate the Credit Facility and declare that all amounts outstanding are immediately due and payable, and take possession of and sell all assets that have been used as collateral. 

The Company is subject to a fixed charge coverage ratio if availability levels are lower than the lesser of 10% of the Borrowing Base (Revolving Credit) or Dollar Commitments (Revolving Credit), as defined in the Credit Facility.  

Availability under the Credit Facility is based on a borrowing base consisting of merchandise inventory, certain intellectual property and receivables. As of October 31, 2015, January 31, 2015 and November 1, 2014 we had no borrowings under the Credit Facility. Our remaining availability was $214.8 million as of October 31, 2015. In June 2012, Bank of America, N.A. issued a stand-by letter of credit under the Credit Facility. As of October 31, 2015, the outstanding letter of credit was immaterial and expires on June 30, 2016. We do not have any other stand-by or commercial letters of credit outstanding as of October 31, 2015 under the Credit Facility.  
 
As of October 31, 2015, we are not aware of any instances of noncompliance with any financial covenants.  Management has no reason at this time to believe that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the Credit Facility in the event of our election to draw funds in the foreseeable future.

12.  Retirement Benefit Plans

Retirement benefit plan liabilities consisted of the following:


15


 
October 31,
2015
 
January 31,
2015
 
November 1,
2014
 
(In thousands)
Supplemental Executive Retirement Plan (“SERP”)
$
1,465

 
$
7,531

 
$
7,511

Other retirement plan liabilities
4,027

 
4,226

 
4,140

Total
$
5,492

 
$
11,757

 
$
11,651

Less amount classified in accrued expenses related to SERP

 
6,044

 
5,810

Less amount classified in accrued expenses related to other retirement plan liabilities
426

 
653

 

Long-term retirement benefit plan liabilities
$
5,066

 
$
5,060

 
$
5,841


401(k) Plan

We maintain a qualified, defined contribution retirement plan with a 401(k) salary deferral feature that covers substantially all of our employees who meet certain requirements.  Under the terms of the plan, employees may contribute, subject to statutory limitations, up to 100% of gross earnings and historically, we have provided a matching contribution of 50% of the first 5% of gross earnings contributed by the participants.  We also have the option to make additional contributions or to suspend the employer contribution at any time. The employer's matching contributions vest over a five-year service period with 20% vesting after two years and 50% vesting after year three.  Vesting increases thereafter at a rate of 25% per year so that participants will be fully vested after five years of service. We suspended the Company's matching contribution under the plan for fiscal 2014 and have re-instated it for fiscal 2015. During fiscal 2011, we established separate defined contribution plans for eligible employees in both Canada and Puerto Rico who meet certain requirements. Contribution expense for all plans was not material to the unaudited condensed consolidated financial statements for any period presented.

Supplemental Executive Retirement Plan

We maintain a Supplemental Executive Retirement Plan, or "SERP". This plan is a non-qualified defined benefit plan for one remaining executive.  The plan is non-contributory and not funded and provides benefits based on years of service and compensation during employment.  Participants are fully vested upon entrance in the plan. Pension expense is determined using the projected unit credit cost method to estimate the total benefits ultimately payable to officers and this cost is allocated to service periods.  The actuarial assumptions used to calculate pension costs are reviewed annually. We expect to make contributions to the SERP when the remaining participant ceases employment with us. The amount of cash contributions we are required to make to the plan could increase or decrease depending on when the remaining employee makes a retirement election and other factors which are not in the control of the Company. Our expected cash contributions to the plan are equal to the expected benefit payments. The liabilities related to the SERP were $1.5 million as of October 31, 2015, $7.5 million as of January 31, 2015 and $7.5 million as of November 1, 2014. During March 2015, we paid Thomas P. Johnson, our former Chief Executive Officer, $6.0 million from our SERP. Accordingly, the SERP liability related to Mr. Johnson was classified as a current liability in our consolidated balance sheet as of January 31, 2015. In conjunction with the payment to Mr. Johnson, we recorded a benefit of $1.0 million in SG&A, with a corresponding amount recorded to relieve accumulated other comprehensive loss included in our stockholders' equity. This accounting treatment is in accordance with settlement accounting procedures under the provisions of ASC Topic 715, "Compensation - Retirement Benefits". This plan was not material to our unaudited condensed consolidated financial statements.
 
Other Retirement Plan Liabilities

We have a long-term incentive deferred compensation plan established for the purpose of providing long-term incentives to a select group of management. The plan is a non-qualified, non-contributory defined contribution plan and is not funded. Participants in this plan include all employees designated by us as Vice President, or other higher-ranking positions that are not participants in the SERP. We record annual monetary credits to each participant's account based on compensation levels and years as a participant in the plan. Annual interest credits are applied to the balance of each participant's account based upon established benchmarks. Each annual credit is subject to a three-year cliff-vesting schedule, and participants' accounts will be fully vested upon retirement after completing five years of service and attaining age 55. The liabilities related to this plan were $4.0 million as of October 31, 2015, $4.2 million as of January 31, 2015 and $4.0 million as of November 1, 2014. Compensation expense related to this plan was not material to our unaudited condensed consolidated financial statements for any period presented.


16


We maintain a postretirement benefit plan for certain executives that provides retiree medical and dental benefits. The plan is an "other post-employment benefit plan", or "OPEB", and is not funded. Pension expense and the liability related to this plan were not material to our unaudited condensed consolidated financial statements for any period presented.

13.  Stock-Based Compensation

Under the provisions of Financial Accounting Standards Board ("FASB") ASC Topic 718, “Compensation - Stock Compensation” (“ASC 718”), all forms of share-based payment to employees and directors, including stock options, must be treated as compensation and recognized in the statement of operations.

On May 8, 2014, the Board unanimously approved the 2014 Omnibus Incentive Plan (the “Omnibus Plan”), which is an amendment and restatement of our Second Amended and Restated 2002 Long-Term Incentive Plan, as amended (the “2002 Plan”). The Omnibus Plan became effective upon stockholder approval at the Annual Meeting of Stockholders on June 30, 2014. Stock-based compensation awarded after June 30, 2014 is awarded under the Omnibus Plan.

Restricted Stock Units

Certain of our employees have been awarded restricted stock units, pursuant to restricted stock unit agreements. The restricted stock units awarded to employees cliff vest at varying times, most typically following between one and three years of continuous service from the award date. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes 10 years of service, attains age 55 and retires. All restricted stock units awarded under the 2002 Plan immediately vest upon a change in control of the Company. 

The following table summarizes restricted stock units outstanding as of October 31, 2015:

 
 
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
(In thousands)
 
 
Outstanding as of February 1, 2015
398

 
$
4.60

Granted
795

 
3.14

Vested
(272
)
 
2.96

Cancelled
(113
)
 
3.16

Outstanding as of October 31, 2015
808

 
$
3.91


Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period.  Compensation expense related to restricted stock unit activity was $0.3 million for the third quarter of 2015 and $0.2 million for the third quarter of 2014.  Compensation expense related to restricted stock unit activity was $1.1 million for the first thirty-nine weeks of fiscal 2015 and $1.9 million for the first thirty-nine weeks of fiscal 2014. As of October 31, 2015, there was $1.4 million of unrecognized compensation cost related to restricted stock units that is expected to be recognized over the weighted average period of 1.7 years.  No restricted stock units vested during the third quarter of 2015. The total fair value of restricted stock units vested was $0.8 million during the first thirty-nine weeks of fiscal 2015 and $9.8 million during the first thirty-nine weeks of fiscal 2014. The total fair value of shares vested was $1.5 million during the third quarter of 2014.

Additionally, certain of our employees have been awarded cash-settled restricted stock units, pursuant to cash-settled restricted stock unit agreements. The cash-settled restricted stock units awarded to employees cliff vest at varying times up to approximately three years of continuous service. Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby the awardee completes 10 years of service, attains age 55 and retires. All cash-settled restricted stock units awarded under the 2002 Plan immediately vest upon a change in control of the Company.  We may, in our sole discretion, at any time during the term, convert the cash-settled restricted stock units into stock-settled restricted stock units. The cash-settled restricted stock units are treated as liability awards in accordance with ASC 718. During January 2015, we converted 262,000 shares of cash-settled restricted stock units to stock-settled restricted stock units.
  
The following table summarizes cash-settled restricted stock units outstanding as of October 31, 2015:


17


 
 
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
(In thousands)
 
 
Outstanding as of February 1, 2015
747

 
$
2.44

Granted

 

Vested
(46
)
 
3.63

Cancelled
(133
)
 
1.79

Outstanding as of October 31, 2015
568

 
$
0.62


Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period.  Compensation expense related to restricted shares activity was a benefit of $0.3 million for the third quarter of 2015 and an expense of $0.4 million for the third quarter of 2014. Compensation expense related to restricted shares activity was a benefit of $0.2 million for the first thirty-nine weeks of fiscal 2015 and an expense of $1.1 million for the first thirty-nine weeks of fiscal 2014. As of October 31, 2015, there was $0.2 million of unrecognized compensation cost related to cash-settled restricted stock units that is expected to be recognized over the weighted average period of 1.4 years.  

Restricted Shares

Certain of our employees and all of our directors have been awarded non-vested common stock (restricted shares), pursuant to non-vested stock agreements. The restricted shares awarded to employees generally cliff vest after up to three years of continuous service.  Certain shares awarded may also vest upon a qualified retirement at or following age 65, or upon a qualified early retirement under the provisions adopted in 2012 whereby an awardee completes 10 years of service, attains age 55 and retires. All restricted shares awarded under the 2002 Plan immediately vest upon a change in control of the Company.  Grants of restricted shares awarded to directors vest in full after one year after the date of the grant.

The following table summarizes non-vested shares of stock outstanding as of October 31, 2015:

 
 
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
(In thousands)
 
 
Outstanding as of February 1, 2015
1,451

 
$
11.61

Granted
446

 
2.88

Vested
(286
)
 
5.58

Cancelled
(222
)
 
10.51

Outstanding as of October 31, 2015
1,389

 
$
10.23


Total compensation expense is being amortized over the shorter of the achievement of retirement or early retirement status, or the vesting period.  Compensation expense related to restricted shares activity was $1.2 million for the third quarter of 2015 and $2.0 million for the third quarter of 2014.  Compensation expense related to restricted shares activity was $3.2 million for the first thirty-nine weeks of fiscal 2015 and $5.7 million for the first thirty-nine weeks of fiscal 2014. As of October 31, 2015, there was $1.3 million of unrecognized compensation expense related to restricted share awards that is expected to be recognized over the weighted average period of less than one year.  The total fair value of shares vested was $0.0 million during the third quarter of 2015 and $1.5 million during the third quarter of 2014. The total fair value of shares vested was $1.6 million during the first thirty-nine weeks of fiscal 2015 and $9.8 million during the first thirty-nine weeks of fiscal 2014.

In connection with the GoJane acquisition, we granted restricted shares to the two individual former stockholders of GoJane, with compensation expense recognized over the three year cliff vesting period. If the aggregate dollar value of the restricted shares on the vesting date is less than $8.0 million, then we shall pay to the two individual former stockholders an amount in cash equal to the difference between $8.0 million and the fair market value of the restricted shares on the vesting date. For the third quarter of 2015, we recorded additional compensation expense of $1.1 million and have a corresponding liability of $7.5 million based on the Company's stock price as of October 31, 2015. For the first thirty-nine weeks of fiscal 2015, we recorded additional compensation expense of $2.7 million. For the third quarter of 2014, we recorded additional compensation expense of $0.6 million and had a

18


corresponding liability of $4.0 million based on the Company's stock price as of November 1, 2014. For the first thirty-nine weeks of fiscal 2014, we recorded additional compensation expense of $2.6 million.
 
Performance Shares

Certain of our executives have been awarded performance shares, pursuant to performance share agreements. The performance shares cliff vest at the end of three years of continuous service with us and are contingent upon meeting various separate performance conditions based upon consolidated earnings targets or market conditions based upon total shareholder return targets. All performance shares awarded under the 2002 Plan immediately vest upon a change in control of the Company. Compensation cost for the performance shares with performance conditions related to consolidated earnings targets is periodically reviewed and adjusted based upon the probability of achieving certain performance targets. If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes. The fair value of performance based awards is based upon the fair value of the Company's common stock on the date of grant. For market based awards that vest based upon total shareholder return targets, the effect of the market conditions is reflected in the fair value of the awards on the date of grant using a Monte-Carlo simulation model. A Monte-Carlo simulation model estimates the fair value of the market based award based upon the expected term, risk-free interest rate, expected dividend yield and expected volatility measure for the Company and its peer group. The annual grant issued during the first quarter of 2015 included performance conditions with both a consolidated earnings target and a total shareholder return target. Compensation expense for market based awards is recognized over the vesting period regardless of whether the market conditions are expected to be achieved.

The following table summarizes performance shares of stock outstanding as of October 31, 2015:

 
Performance-based
 
Market-based
 
Performance Shares
 
Performance Shares
 
 
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
(In thousands)
 
 
 
(In thousands)
 
 
Outstanding as of February 1, 2015

 
$

 
489

 
$
10.25

Granted
820

 
4.44

 

 

Vested

 

 

 

Cancelled
(542
)
 
5.01

 
(188
)
 
10.06

Outstanding as of October 31, 2015
278

 
$
3.34

 
301

 
$
10.37


Total compensation expense is being amortized over the vesting period. During the third quarter of 2015, we recorded no compensation expense related to the market-based performance shares which we granted, and recorded a benefit $1.5 million related to market-based performance shares for the third quarter of 2014. Compensation expense related to the market-based performance shares which we granted was expense of $0.1 million for the first thirty-nine weeks of fiscal 2015 and an expense of $0.2 million for the first thirty-nine weeks of fiscal 2014. Compensation expense related to performance-based shares during the third quarter of 2015 was a benefit of $0.2 million and an expense of $0.2 million for the first thirty-nine weeks of fiscal 2015 based on our determination of the likelihood of achieving the performance conditions associated with the respective shares. No compensation expense related to performance-based shares was recognized during the first thirty-nine weeks of fiscal 2014.

The following table summarizes unrecognized compensation cost and the weighted-average years expected to be recognized related to performance share awards outstanding as of October 31, 2015:
 
Performance-based
 
Market-based
 
Performance Shares
 
Performance Shares
Total unrecognized compensation (in thousands)
$
744

 
$
766

Weighted-average years expected to recognize compensation cost (years)
2

 
1






19


Cash-Settled Stock Appreciation Rights ("CSARs")

In conjunction with the execution of the employment agreement with Mr. Johnson, our former CEO, on May 3, 2013, we granted him an award of CSARs, with an award date value of $5.6 million. The number of CSARs granted was determined in accordance with the agreement by dividing $5.6 million by the Black Scholes value of the closing price of a share of the Company's common stock on the award date. For the first thirty-nine weeks of fiscal 2015, we did not record an expense or benefit related to this incentive award. For the third quarter of 2014, we recorded less than $0.1 million of benefit related to this incentive award and $0.3 million of benefit during the first thirty-nine weeks of fiscal 2014. As of October 31, 2015, there was no unrecognized compensation cost related to CSARs.  As a result of the departure of Mr. Johnson after the end of the second quarter of 2014, 2/3 of these CSARs were forfeited. The remaining vested shares expired on August 29, 2015.

Performance Based Bonus

The Employment Agreement with Julian R. Geiger, our Chief Executive Officer, provides for a special performance based bonus. If, during any consecutive 90 calendar day period during the third year of the term of the Employment Agreement the average closing price per share of the Company’s common stock is $15.93 or higher, Mr. Geiger will be entitled to a performance-based cash bonus equal to 2% of the amount, if any, by which the Company’s average market capitalization during the period with the highest 90 day average stock price during the third year of the term of the Employment Agreement exceeds $255.4 million (the “Effective Date Market Cap”). If prior to the achievement of such performance metric, Mr. Geiger’s employment is terminated by the Company without Cause, by Mr. Geiger for Good Reason, upon Mr. Geiger’s death or by the Company due to his Disability, or there is a Change of Control (each a “Qualifying Event”), and as of the date of such Qualifying Event the common stock price exceeds $3.24, then, the amount of the performance-based cash bonus will instead be 2% of the amount, if any, by which the Company’s average market capitalization over the 30 calendar day period immediately preceding the Qualifying Event exceeds the Effective Date Market Cap.

We have recorded a liability for this award that was immaterial to the unaudited condensed financial statements as of October 31, 2015.
 
Stock Options

Under the Omnibus Plan, we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees.  Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over four years on a pro-rata basis and expire after eight years. All outstanding stock options immediately vest upon (i) a change in control of the company (as defined in the plan) and (ii) termination of the employee within one year of such change of control.

For the first thirty-nine weeks of fiscal 2015, the weighted average assumptions used in our Black-Scholes option pricing model were expected volatility of 61.4%, expected term of 4.70 years, a risk-free interest rate of 1.40%, and an expected forfeiture rate of 0%.
 




















20


The following table summarizes stock option transactions for common stock during the third quarter of 2015:

 
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted-Average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
(In thousands)
 
 
 
(In years)
 
(In millions)
Outstanding as of February 1, 2015
2,247

 
$
4.62

 
 
 
 
Granted
1,510

 
3.16

 
 
 
 
Exercised

 

 
 
 
 
Cancelled1 
(194
)
 
16.70

 
 
 
 
Outstanding as of October 31, 2015
3,563

 
$
3.35

 
6.03
 
$

Options vested as of October 31, 2015 and expected to vest
3,563

 
$
3.35

 
6.03
 
$

Exercisable as of October 31, 2015
1,202

 
$
3.60

 
5.94
 
$


1 The number of options cancelled includes approximately 193,700 expired shares.

In accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase 1.5 million shares of our common stock during the first quarter of 2015. These stock options have a strike price of $3.17 per share, vest over two years on a pro-rata basis, and have a seven year life. During the third quarter of 2014, and also in accordance with his employment agreement, Mr. Geiger was granted an award of options to purchase 2.0 million shares, that had a strike price of $3.24 and vest over three years on a pro-rata basis with a seven year life.

We recognized $0.5 million in compensation expense related to stock options during the third quarter of 2015 and $0.2 million during the third quarter of 2014.   We recognized $1.7 million in compensation expense related to stock options during the first thirty-nine weeks of fiscal 2015 and $0.2 million during the first thirty-nine weeks of fiscal 2014.

The following table summarizes information regarding non-vested outstanding stock options as of October 31, 2015:

 
 
 
 
Shares
 
Weighted Average
Grant-Date Fair Value
 
(In thousands)
 
 
Non-vested as of February 1, 2015
2,035

 
$
1.52

Granted
1,510

 
1.62

Vested
(1,177
)
 
1.57

Canceled
(10
)
 
1.47

Non-vested as of October 31, 2015
2,358

 
$
1.56


As of October 31, 2015, there was $3.3 million of total unrecognized compensation cost related to non-vested options that we expect will be recognized over the remaining weighted-average vesting period of 1.8 years.

14.  Commitments and Contingent Liabilities

Legal Proceedings - During February 2014, we settled litigations related to California wage and hour matters. We made settlement payments of $3.6 million in fiscal 2014 and $0.6 million during the first thirty-nine weeks of fiscal 2015. In addition, we have remaining liabilities of $0.2 million as of October 31, 2015 related to these settlements.
 
We are also 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.


21


Contingencies - During May 2014, we entered into a $150.0 million secured credit facility with affiliates of Sycamore Partners. In connection with this agreement, we also entered into a sourcing agreement with an affiliate of Sycamore Partners that requires us to purchase a minimum volume of product for 10 years. This purchase commitment will commence during the first quarter of fiscal 2016 and is between $240.0 million and $280.0 million per annum depending on the year (see Note 4).

On February 2, 2015, we revised and renewed a Supplier Agreement with one of our suppliers. Should we fail to meet annual purchase minimum thresholds in this agreement we would be liable to make certain agreed upon shortfall payments to this supplier (see Note 3).

In June 2012, Bank of America, N.A. issued a stand-by letter of credit under the Credit Facility. As of October 31, 2015, the outstanding letter of credit was immaterial and expires on June 30, 2016. We do not have any other stand-by or commercial letters of credit as of October 31, 2015.

We have a product license agreement that obligates us to pay the licensor at least the guaranteed minimum royalty amount based on sales of their products.

We have not issued any third party guarantees or commercial commitments as of October 31, 2015.

Executive Severance Plan - We have a Change of Control Severance Plan (“the Plan”), which entitles certain executive level employees to receive certain payments upon a termination of employment after a change of control (as defined in the Plan) of the Company. The adoption of the Plan did not have any impact on the unaudited condensed consolidated financial statements for any periods presented.

15.  Income Taxes

We review the annual effective tax rate on a quarterly basis and make necessary changes if information or events merit.  The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates.  The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for deferred tax assets; changes to actual or forecasted permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occur), or impacts from tax law changes.  To the extent such changes impact our deferred tax assets or liabilities, these changes would generally be recorded discretely in the quarter in which they occur. During the third quarter of 2015, we recorded an unfavorable tax provision related to expected utilization of our estimated net operating losses.

Uncertain tax positions, inclusive of interest and penalties were $7.6 million as of October 31, 2015, $7.2 million at January 31, 2015, and $8.2 million at November 1, 2014.  Of these amounts, $5.3 million was recorded as a direct reduction of the related deferred tax assets as of October 31, 2015 and January 31, 2015 and $6.2 million was recorded as of November 1, 2014. Reversal of uncertain tax positions, net of related deferred tax assets, would favorably impact our effective tax rate. These uncertain tax positions are subject to change based on future events, the timing of which is uncertain, however the Company does not anticipate that the balance of such uncertain tax positions will significantly change during the next twelve months.

We file income tax returns in the U.S. and in various states, Canada and Puerto Rico. All tax returns remain open for examination generally for our 2011 through 2014 tax years by various taxing authorities. However, certain states may keep their statute of limitations open for six to ten years. Our U.S. federal filings for the years 2010 to 2014 are currently under examination by the Internal Revenue Service.

16.  Segment Information

FASB ASC Topic 280, “Segment Reporting” (“ASC 280”), establishes standards for reporting information about a company’s operating segments. We have two reportable segments: a) retail stores and e-commerce; and b) international licensing. Our reportable segments were identified based on how our business is managed and evaluated. The reportable segments represent the Company’s activities for which discrete financial information is available and which is utilized on a regular basis by our chief operating decision maker (“CODM”), our Chief Executive Officer, to evaluate performance and allocate resources. The retail stores and e-commerce segment includes the aggregation of the Aéropostale U.S., Aéropostale Canada, P.S. from Aéropostale and GoJane operating segments. In identifying our reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The accounting policies of the Company’s reportable segments are consistent with those described in Note 1 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2015. All intercompany transactions are eliminated in consolidation. We do not rely on any customer as a major source of revenue.

22



The following tables provide summary financial data for each of our reportable segments (in thousands):

 
 
13 weeks ended
 
39 weeks ended
 
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
Net sales:
 
 
 
 
 
 
 
 
Retail stores and e-commerce net sales                                                                                               
 
$
356,192

 
$
442,906

 
$
983,775

 
$
1,219,668

International licensing revenue                                                                                                   
 
7,133

 
9,983

 
25,054

 
25,234

Total net sales                                                                                                             
 
$
363,325

 
$
452,889

 
$
1,008,829

 
$
1,244,902


 
 
13 weeks ended
 
39 weeks ended
 
 
October 31, 2015
 
November 1, 2014
 
October 31, 2015
 
November 1, 2014
(Loss) income from operations:
 
 
 
 
 
 
 
 
Retail stores and e-commerce 1                                                                                                    
 
$
(27,330
)
 
$
(43,839
)
 
$
(120,920
)
 
$
(140,191
)
International licensing                                                                                                      
 
6,028

 
9,253

 
21,798

 
23,048

Other 2
 
(1,768
)
 
(19,499
)
 
(1,835
)
 
(82,030
)
Total loss from operations                                                                                             
 
$
(23,070
)
 
$
(54,085
)
 
$
(100,957
)
 
$
(199,173
)

1 Such amounts include all corporate overhead and shared service function costs and we have not allocated a portion of these costs to international licensing in this presentation.

2 Other items for all periods presented above, which are all related to the retail stores and e-commerce segment, included store closing costs, restructuring charges (See Note 5), store asset impairment charges and other income (charges) that are not included in the segment income (loss) from operations reviewed by the CODM.

Depreciation expense and capital expenditures have not been separately disclosed as the amounts primarily relate to the retail stores and e-commerce segment. Such amounts are not material for the international licensing segment.

 
 
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Total assets:
 
 
 
 
 
 
Retail stores and e-commerce                                                                                               
 
$
426,235

 
$
496,220

 
$
567,032

International licensing                                                                                                     
 
8,259

 
15,969

 
11,292

Total assets                                                                                                          
 
$
434,494

 
$
512,189

 
$
578,324


17.  Related Parties

During May 2014, we entered into a strategic sourcing relationship with an affiliate of Sycamore Partners, which included $150.0 million in secured credit facilities (see Note 4 for a further discussion). As of May 23, 2014 and September 30, 2015, Lemur LLC, an affiliate of Sycamore Partners owned approximately 8% of our outstanding common stock. Sycamore Partners and its affiliates are considered related parties due to the agreements described above combined with their ownership interest in us. In addition to the related party transactions presented on the Consolidated Statement of Operations during the third quarter of 2015 and the first thirty-nine weeks of fiscal 2015, we had the following transactions with these related parties during that period:

Merchandise purchased from an affiliate of Sycamore Partners was $25.4 million during the third quarter of 2015 and $53.7 million during the first thirty-nine weeks of fiscal 2015, of which $23.6 million was included in our merchandise inventories as of October 31, 2015,

Accounts payable of $17.3 million to an affiliate of Sycamore Partners as of October 31, 2015, and


23


Payments of $40.7 million to an affiliate of Sycamore Partners during the first thirty-nine weeks of fiscal 2015.

Additionally, Scopia Capital Management, LLC owned approximately 12.4% of our common stock as of September 30, 2015, and is considered a related party due to their ownership interest in us. We did not have any transactions with this related party during the third quarter of 2015 or the first thirty-nine weeks of fiscal 2015.

18.  Recent Accounting Developments

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory, Simplifying the Measurement of Inventory ("ASU 2015-11") which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of ASU 2015-11 is not expected to have a material effect on our consolidated financial statements.
 
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customers' Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"). ASU 2015-05 will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The adoption of ASU 2015-05 is not expected to have a material effect on our consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-04, Compensation—Retirement Benefits (Topic 715) ("ASU 2015-04"). This update provides a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. ASU 2015-04 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of ASU 2015-04 is not expected to have a material effect on our consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct reduction from the carrying amount of debt liability, consistent with debt discounts or premiums. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of ASU 2015-03 is not expected to have a material effect on our consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ("ASU 2014-15"). Under ASU 2014-15, management is required to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The new standard applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 is effective for us on February 5, 2018. Management is still assessing the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. In addition, the ASU expands the disclosure requirements for disposals that meet the definition of a discontinued operation, requires entities to disclose information about disposals of individually significant components and defines “discontinued operations” similarly to how it is defined under International Financial Reporting Standards 5, Non-current Assets Held for Sale and Discontinued Operations. The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014, with early adoption permitted. We elected to early adopt this guidance effective as of the beginning of the fourth quarter of fiscal 2014.


24


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve certain risks and uncertainties, including statements regarding our strategic direction, prospects and future results.  Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will”, “may”, “could”, “expect”, “believe”, “anticipate”, “intend”, “estimate”, “seek” or other similar words. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements.  The factors that could cause actual results to materially differ from those projected in the forward-looking statements include changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors; changes in the economy and other events leading to a reduction in discretionary consumer spending; seasonality; risks associated with changes in social, political, economic and other conditions and the possible adverse impact of changes in currency exchange rates and import restrictions; risks associated with the Company's debt arrangements; risks associated with uncertainty relating to the Company's ability to implement its strategies and risks associated with the Company’s ability to implement and realize the anticipated benefits of the Company’s strategic initiatives and cost reduction program and risks associated with Company’s ability to regain compliance with the NYSE minimum trading price and average global market capitalization listing standards. The following discussion as well as any evaluation of our business and future prospects should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 and the Risk Factors in Part 1, Item 1A thereof, as well as other reports filed with the SEC. All forward-looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made.

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A,” is intended to provide information to help you better understand our financial condition and results of operations.  Our business is highly seasonal, and historically we realize a significant portion of our sales and cash flow in the second half of the year, driven by the impact of the back-to-school selling season in our third quarter and the holiday selling season in our fourth quarter.  Therefore, our interim period unaudited condensed consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows. We recommend that you read this section along with the unaudited condensed consolidated financial statements and notes included in this report and along with our Annual Report on Form 10-K for the year ended January 31, 2015.

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

Overview

The teen 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 have shifted demand away from logo-based product.  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. Merchandising and operational initiatives that we are implementing include the following:

We recently implemented a vertical organization structure in Merchandising, Planning, Production and Design. Roles are primarily focused on product categories through all of our various distribution channels.
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.
We are refining the manner in which we promote merchandise and our use of in-store marketing.
We are focused strategically on the development of the “tops” merchandise classification, primarily in knit tops, and also in woven tops in order to increase the number of tops sold relative to bottoms.