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Article by dailystock_admin    (10-04-07 07:33 PM)

The Daily Magic Formula Stock for 10/4/2007 is Aeropostale. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75 - 100 %.

Our Dupont Ratio Analysis:
EBIT Margins are 12.4% in 2007, and 11.5% in 2006.
Gross Margins are 32.2% in 2007, and 30.1% in 2006.
Tax Rate is 39% in 2007, and 39.6% in 2006.
Asset Turnover is 2.6 times in 2007, and 2.65 times in 2006.
Financial Leverage is 1.86 times in 2007, and 1.87 times in 2006.

Overview

Aéropostale, Inc., a Delaware corporation, is a mall-based specialty retailer of casual apparel and accessories. We design, market and sell our own brand of merchandise principally targeting 14 to 17 year-old young women and young men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is a California lifestyle-oriented brand targeting trend-aware young women and men aged 18 to 25. We also sell Aéropostale merchandise through our e-commerce website, www.aeropostale.com. As of February 3, 2007, we operated 742 stores, consisting of 728 Aéropostale stores in 47 states and 14 Jimmy’Z stores in 11 states.

Aéropostale provides the customer with a focused selection of high-quality, active-oriented, fashion and fashion basic merchandise at compelling values. Jimmy’Z provides the customer with a broad selection of California lifestyle-oriented merchandise, targeting trend-aware young men and women. We maintain control over our proprietary brands by designing and sourcing all of our merchandise. Our products are sold only at our stores and online through our e-commerce website, www.aeropostale.com ,. We strive to create a fun, high-energy shopping experience through the use of creative visual merchandising, colorful in-store signage, popular music and an enthusiastic well-trained sales force. Our average Aéropostale store size of approximately 3,500 square feet is generally smaller than that of our mall-based competitors and we believe that this enables us to achieve higher sales productivity and project a sense of greater action and excitement in the store.

The Aéropostale brand was established by R.H. Macy & Co., Inc., as a department store private label initiative, in the early 1980’s targeting men in their twenties. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc., expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to our management team and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took us public through an initial public offering and listed our common stock on the New York Stock Exchange. In July of 2003, we effectuated a secondary offering of our common stock. In April 2004, we completed a three-for-two stock split on all shares of our common stock that was affected in the form of a stock dividend. All prior period share and per share amounts presented in this report have been restated to give retroactive recognition to the common stock split.

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2006 was the 53-week period ended February 3, 2007, Fiscal 2005 was the 52-week period ended January 28, 2006, and fiscal 2004 was the 52-week period ended January 29, 2005. Fiscal 2007 will be the 52-week period ending February 2, 2008.

Growth Strategy

Continue to open new A√©ropostale stores. We consider our merchandise and our stores as having broad national appeal that continues to provide substantial new store expansion opportunities. Over the last three fiscal years we opened 282 new A√©ropostale stores. We plan to continue our growth by opening a total of approximately 85 new A√©ropostale stores during fiscal 2007, which will include our first 10 international A√©ropostale stores in Canada. We plan to open stores both in markets where we currently operate stores, and in new markets, such as Canada. (see the section ‚ÄúStores ‚ÄĒ Store design and environment‚ÄĚ below).


Enhance and expand our brand. We seek to capitalize on the success of our core Aéropostale brand, while continuing to enhance our brand recognition through external as well as in-store marketing initiatives. We expect that, as our brand continues to gain increased awareness and greater overall recognition, our stores will continue to be preferred shopping destinations.

Continue high levels of store productivity. We seek to produce comparable store sales growth, increased average sales per square foot, and increased average unit retail. We expect to continue employing our promotional pricing strategies in order to maintain high levels of customer traffic. We will also continue testing our products with our core demographics, so that we can identify and capitalize upon developing trends and continue to evolve with the changing tastes of our customers.

E-Commerce. We launched our Aéropostale e-commerce business in May 2005. The Aéropostale web store is accessible at our website, www.aeropostale.com. A third party provides fulfillment services for our e-commerce business, including warehousing our inventory and fulfilling our customers’ sales orders. We purchase, manage and own the inventory sold through our website and we recognize revenue from the sale of these products when the customer receives the merchandise.

Jimmy‚ÄôZ. In 2004, we acquired the rights to and existing registrations for the JIMMY‚ÄôZ ¬ģ and Woody Car Design brand and trademarks in the United States and Canada for clothing and related goods and services. In 2005, we opened our first 14 Jimmy‚ÄôZ stores. These stores average approximately 3,800 square feet. Jimmy‚ÄôZ is positioned as a California lifestyle-oriented brand, targeting trend-aware young men and women aged 18 to 25. Merchandise sold at Jimmy‚ÄôZ stores is at initial price points higher than merchandise sold at our A√©ropostale stores. We are not planning to open any new Jimmy‚ÄôZ stores in fiscal 2007, but instead plan to focus on refining our merchandising and brand building strategies for Jimmy‚ÄôZ.

Stores

Existing stores. As of February 3, 2007, we operated 742 stores in the following 47 states.
Overview

Aéropostale, Inc., a Delaware corporation, is a mall-based specialty retailer of casual apparel and accessories. We design, market and sell our own brand of merchandise principally targeting 14 to 17 year-old young women and young men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is a California lifestyle-oriented brand targeting trend-aware young women and men aged 18 to 25. We also sell Aéropostale merchandise through our e-commerce website, www.aeropostale.com. As of February 3, 2007, we operated 742 stores, consisting of 728 Aéropostale stores in 47 states and 14 Jimmy’Z stores in 11 states.

Aéropostale provides the customer with a focused selection of high-quality, active-oriented, fashion and fashion basic merchandise at compelling values. Jimmy’Z provides the customer with a broad selection of California lifestyle-oriented merchandise, targeting trend-aware young men and women. We maintain control over our proprietary brands by designing and sourcing all of our merchandise. Our products are sold only at our stores and online through our e-commerce website, www.aeropostale.com ,. We strive to create a fun, high-energy shopping experience through the use of creative visual merchandising, colorful in-store signage, popular music and an enthusiastic well-trained sales force. Our average Aéropostale store size of approximately 3,500 square feet is generally smaller than that of our mall-based competitors and we believe that this enables us to achieve higher sales productivity and project a sense of greater action and excitement in the store.

The Aéropostale brand was established by R.H. Macy & Co., Inc., as a department store private label initiative, in the early 1980’s targeting men in their twenties. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc., expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to our management team and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took us public through an initial public offering and listed our common stock on the New York Stock Exchange. In July of 2003, we effectuated a secondary offering of our common stock. In April 2004, we completed a three-for-two stock split on all shares of our common stock that was affected in the form of a stock dividend. All prior period share and per share amounts presented in this report have been restated to give retroactive recognition to the common stock split.

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2006 was the 53-week period ended February 3, 2007, Fiscal 2005 was the 52-week period ended January 28, 2006, and fiscal 2004 was the 52-week period ended January 29, 2005. Fiscal 2007 will be the 52-week period ending February 2, 2008.

Growth Strategy

Continue to open new A√©ropostale stores. We consider our merchandise and our stores as having broad national appeal that continues to provide substantial new store expansion opportunities. Over the last three fiscal years we opened 282 new A√©ropostale stores. We plan to continue our growth by opening a total of approximately 85 new A√©ropostale stores during fiscal 2007, which will include our first 10 international A√©ropostale stores in Canada. We plan to open stores both in markets where we currently operate stores, and in new markets, such as Canada. (see the section ‚ÄúStores ‚ÄĒ Store design and environment‚ÄĚ below).


Enhance and expand our brand. We seek to capitalize on the success of our core Aéropostale brand, while continuing to enhance our brand recognition through external as well as in-store marketing initiatives. We expect that, as our brand continues to gain increased awareness and greater overall recognition, our stores will continue to be preferred shopping destinations.

Continue high levels of store productivity. We seek to produce comparable store sales growth, increased average sales per square foot, and increased average unit retail. We expect to continue employing our promotional pricing strategies in order to maintain high levels of customer traffic. We will also continue testing our products with our core demographics, so that we can identify and capitalize upon developing trends and continue to evolve with the changing tastes of our customers.

E-Commerce. We launched our Aéropostale e-commerce business in May 2005. The Aéropostale web store is accessible at our website, www.aeropostale.com. A third party provides fulfillment services for our e-commerce business, including warehousing our inventory and fulfilling our customers’ sales orders. We purchase, manage and own the inventory sold through our website and we recognize revenue from the sale of these products when the customer receives the merchandise.

Jimmy‚ÄôZ. In 2004, we acquired the rights to and existing registrations for the JIMMY‚ÄôZ ¬ģ and Woody Car Design brand and trademarks in the United States and Canada for clothing and related goods and services. In 2005, we opened our first 14 Jimmy‚ÄôZ stores. These stores average approximately 3,800 square feet. Jimmy‚ÄôZ is positioned as a California lifestyle-oriented brand, targeting trend-aware young men and women aged 18 to 25. Merchandise sold at Jimmy‚ÄôZ stores is at initial price points higher than merchandise sold at our A√©ropostale stores. We are not planning to open any new Jimmy‚ÄôZ stores in fiscal 2007, but instead plan to focus on refining our merchandising and brand building strategies for Jimmy‚ÄôZ.

Stores

Existing stores. As of February 3, 2007, we operated 742 stores in the following 47 states.

Store design and environment. We launched a new Aéropostale prototype store design during fiscal 2006, and we currently operate three stores in this new format. We plan to open all new Aeropostale stores in this new format, and all Aéropostale stores planned for remodel will be renovated into this new design. We design our stores in an effort to create an energetic shopping environment, featuring powerful in-store promotional signage, creative visuals and popular music. The enthusiasm of our associates is integral to our store environment. Our stores feature display windows that provide high visibility for mall traffic. The front of our stores generally feature the newest, and what we anticipate will be the most desirable, of our merchandise offerings at that time, in an effort to draw shoppers into the store. Our strategy is to create fresh and exciting merchandise assortments by updating our floor sets numerous times throughout the year. Visual merchandising directives are initiated at the corporate level, seeking to maintain consistency throughout all of our stores. We generally locate our stores in central mall locations near popular teen gathering spots, including food courts, music stores and other teen-oriented retailers.

We believe that by keeping our store size generally smaller than that of many of our competitors, we are able to achieve a higher level of productivity and help reinforce the sense of activity and energy that we want our stores to project. In addition, we generally implement renovations at the time of renewal of that store’s lease.

Store management. Our stores are organized into two zones and within each zone by region and further into districts. Each of the zones is managed by a Zone Vice President and encompasses 3 to 4 regions. A regional manager manages each of our 7 regions and each region encompasses approximately 8 to 10 districts. Each district is managed by a district manager and encompasses approximately 7 to 10 individual stores. We typically staff each store with one store manager, two assistant managers and 10 to 15 part-time sales associates, the number of which generally increases during our peak selling seasons. Store managers are responsible for the operations of the store including executing guidelines for merchandise presentation and maintenance, scheduling, hiring and training of sales associates. Store managers also provide the leadership and direction of the selling effort. Our corporate headquarters directs the merchandise assortments, merchandise pricing, store layout, inventory management and in-store visuals for our stores.

Expansion opportunities and site selection. Over the past four years, we have focused on opening new stores in an effort to penetrate existing markets as well as enter new markets. We plan to continue to increase our store base during fiscal 2007 by opening approximately 85 new A√©ropostale stores, including approximately 10 stores in Canada (see the section ‚ÄúGrowth Strategy‚ÄĚ above).

In selecting a specific site, we generally target high traffic locations in malls with suitable demographics and favorable lease economics. As a result, we tend to locate our stores in malls in which comparable teen-oriented retailers have performed well. A primary site evaluation criterion includes average sales per square foot, co-tenancies, traffic patterns and occupancy costs.

We have implemented our store format across a wide variety of mall classifications and geographic locations. For new Aeropostale stores opened in fiscal 2006, our average net investment was approximately $310,000 per store location, which included capital expenditures adjusted for landlord contributions and initial inventory at cost, net of payables. Average net investment for stores using our new Aéropostale store design is expected to approximate $430,000 (see the section Store design and environment above for a further discussion).

Aeropostale stores which we opened in fiscal 2005 and fiscal 2004 achieved, during their first twelve months of their operations, average net sales of approximately $1.7 million and net sales of $492 per average square foot. These amounts exclude certain outlet locations that are not considered profit centers and are utilized primarily to sell end of season merchandise.

Pricing

We believe that a key component of our success is our ability to understand what our customers want and what they can afford. Our merchandise, which we believe is of comparable quality to that of our primary competitors, is generally priced lower than our competitors’ merchandise. We conduct promotions in our stores throughout the year. Each promotion typically lasts approximately two to four weeks.

Design and Merchandising

Both our Aéropostale and Jimmy’Z design and merchandising teams focus on designing merchandise that meets the demands of their core customers’ lifestyles. We maintain separate, dedicated, design and merchandising groups for each of our brands and within those brands, for each of the young women’s, young men’s and accessories product lines.

Design. We offer a focused collection of fashion basic apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Our ‚Äúdesign-driven, merchant-modified‚ÄĚ philosophy, in which our designers‚Äô visions are refined by our merchants‚Äô understanding of the current market for our products, helps to ensure that our merchandise styles reflect the latest trends while not becoming too fashion-forward for our customers‚Äô tastes. Much of our merchandise features our brands‚Äô logos. We believe that both our A√©ropostale and Jimmy‚ÄôZ logo apparel appeals to our young customers and reinforces our brand image.

Merchandising. Our merchandise planning organization determines the quantities of units needed for each product category. By monitoring sales of each style and color and employing our flexible sourcing capabilities, we are able to adjust our merchandise assortments to capitalize upon emerging trends.

The following chart provides a historical breakdown of our percentages of sales by category:


Fiscal
2006 2005 2004

Young Women’s
60% 61% 60%
Young Men’s
25% 25% 26%
Accessories
15% 14% 14%

Sourcing

We seek to employ a sourcing strategy that expedites our speed to market and allows us to respond quickly to our customers’ preferences. We believe that we have developed strong relationships with our vendors, some of whom rely upon us for a significant portion of their overall business. The majority of our vendors can respond to orders quickly. We will cease doing business with South Bay Apparel Inc., one of our largest suppliers of graphic T-shirts and fleece, in July 2007 (see note 5 to the Notes to Consolidated Financial Statements for a further discussion). We are in the process of replacing this business with new vendors, and with our existing vendor base. We monitor the quality of our vendors’ products by inspecting pre-production samples, arranging for periodic site visits to vendors’ foreign production factories and by selectively inspecting inbound product shipments at our distribution center and conducting store quality inspection audits.


During fiscal 2006, we sourced approximately 30% of our merchandise from our top three suppliers, and approximately 64% from our top ten suppliers. In addition, one company acted as our agent in sourcing approximately 19% of our total merchandise. Most of our vendors maintain sourcing offices in the United States, with the majority of their production factories located in Europe, Asia and Central America. In an effort to minimize currency risk, all payments to our vendors and sourcing agents are made in U.S. dollars. We engage a third party independent contractor to visit the production facilities that supply us with our products. This independent contractor assesses the compliance of the facility with, among other things, local and United States labor laws and regulations as well as fair trade and business practices.

Marketing and Advertising

We utilize numerous initiatives to increase our brand recognition and communicate our merchandise assortment. We view our stores as the primary means to communicate our message and provide our brand experience. Our marketing efforts are focused on in-store communications, promotions and advertising. We expand, test and modify our marketing efforts based on frequent focus groups, surveys and consumer feedback.

We believe that the enthusiasm and commitment of our store-level employees is a key element in enhancing our brand with our target customers. We also view the use of our logo on our merchandise as a means for expanding our brand awareness and visibility. We market in-store in the form of large images in windows and at the checkout area, information alongside product displays and other touch points such as handouts and shopping bags. We invest in select external advertising during key selling periods. Our advertisements appear in publications and in malls and on the radio on a regional basis.

Our website, www.aeropostale.com supports all of our internet marketing and promotional initiatives as well as offering a large portion of our merchandise assortment for purchase by the consumer. We maintain a database of our consumers and send emails and distribute information on special offers and promotions to these customers.

We believe that our target customers aspire to a collegiate lifestyle. Accordingly, we sponsor a number of major collegiate athletic conference tournaments, such as the Men’s and Women’s Big East Basketball Tournaments, provide co-branded athletic apparel and donate to various collegiate scholarship programs.

Distribution

We lease a 315,000 square foot distribution facility in South River, New Jersey, to process merchandise and to warehouse inventory needed to replenish our stores. The timely and efficient replenishment of our merchandise is key to our overall business strategy. We continue to invest in systems and automation to improve processing efficiencies, automate functions that were previously performed manually and to support our store growth. Our distribution facility uses automated sortation materials handling equipment to receive, process and ship to our stores. Our distribution facility services all of our Aéropostale and Jimmy’Z stores. This facility also serves our other warehousing needs, such as storage of new store merchandise, floor set merchandise and packaging supplies.

The staffing and management of the distribution facility is outsourced to a third party provider that operates the distribution facility and processes our merchandise. This third party provider employs personnel represented by a labor union. There have been no work stoppages or disruptions since the inception of our relationship with this third party provider in 1991, and we believe that the third party provider has a good relationship with its employees. In addition, we outsource the shipment of our merchandise through third party transportation providers. These third parties ship our merchandise from our distribution facility to our stores.

In January 2007, we entered into a lease agreement for a second distribution facility in Ontario, California with 360,000 square feet of space. We believe that this will allow us to more effectively flow goods, which enter the United States through various ports on either coast, more quickly and efficiently to our stores. The new distribution facility will also provide additional capacity as we continue to grow our store base. The staffing and management model in Ontario will be outsourced to the same third party provider that operates the South River, New Jersey distribution facility (see above) and processes our merchandise there. The facility will also be equipped with material handling equipment similar to the equipment in our South River, New Jersey facility. The Ontario facility, together with the South River facility, will have the processing capacity to support all Aéropostale and Jimmy’Z stores. We plan to begin operating this distribution facility in the second half of fiscal 2007.

Information Systems

Our management information systems provide a full range of retail, financial and merchandising applications. We utilize industry specific software systems to provide various functions related to:


‚ÄĘ point-of-sale;

‚ÄĘ inventory management;

‚ÄĘ supply chain;

‚ÄĘ planning and replenishment; and

‚ÄĘ financial reporting.

We continue to invest in technology to align our technology and systems with our business requirements and to support our continuing growth. In the past year we focused on key aspects of critical infrastructure requirements, and we plan to continue this focus in the future. To date, we have upgraded our point-of-sale system in more than half of our stores and plan to complete this chain-wide upgrade by mid 2007.

Trademarks

We own, through our wholly owned subsidiary, Aeropostale West, Inc., a Delaware corporation, federal trademark registrations in the U.S. Patent and Trademark Office for our principal marks A√ČROPOSTALE ¬ģ , A√ČRO ¬ģ , 87 ¬ģ and other related marks for clothing, a variety of accessories, including sunglasses, belts, socks and hats, and as a service mark for retail clothing stores, as well as state registrations for these marks. We have several registrations pending for trademarks and service marks for clothing, retail stores and online services. Additionally, we have applied for or have obtained a registration for the A√ČROPOSTALE and related marks in over 26 foreign countries where we obtain supplies, manufacture goods or have the potential of doing so in the future.

In 2004, we acquired the rights to and existing registrations for the JIMMY‚ÄôZ ¬ģ and Woody Car Design brand and marks in the United States and Canada for clothing and related goods and services. We have also made further filings for the JIMMY‚ÄôZ and Woody Car Design marks for use in the United States and Canada that are pending.

We regard our trademarks and other proprietary intellectual property as valuable assets that we continually maintain and protect.

Competition

The teen apparel market is highly competitive. We compete with a wide variety of retailers including other specialty stores, department stores, mail order retailers and mass merchandisers. Specifically, we compete with other teen apparel retailers including, but not limited to, American Eagle Outfitters ¬ģ , Hollister ¬ģ , Hot Topic ¬ģ , Old Navy ¬ģ , Pacific Sunwear ¬ģ , and Too ¬ģ . Stores in our sector compete primarily on the basis of design, price, quality, service and selection. We believe that our competitive advantage lies with our differentiated brand and our unique combination of quality, comfort and value. Moreover, we believe that we target a younger, value-oriented customer, while many of our competitors cater to a customer who is either older or seeking cutting-edge fashion.

Many of our competitors are considerably larger and have substantially greater financing, marketing, and other resources. We cannot assure you that we will be able to compete successfully in the future, particularly in geographic locations that represent new markets for us.

Employees

As of February 3, 2007, we employed 2,696 full-time and 8,060 part-time employees. We employed 333 of our employees at our corporate offices, and 10,423 at our store locations. The number of part-time employees fluctuates
depending on our seasonal needs. None of our employees are represented by a labor union and we consider our relationship with our employees to be good.

Seasonality

Our business is highly seasonal, and historically we have realized a significant portion of our sales, net income 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. Additionally, working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters.

CEO Background, Share Ownership and Compensation

Julian R. Geiger , 61, has served as our Chairman and Chief Executive Officer since August 1998. From 1996 to 1998, he held the position of President and Chief Executive Officer of Federated Specialty Stores, a division of Federated Department Stores, Inc., which included Aéropostale. Before joining Federated, he was President of the Eagle Eye Kids wholesale and retail divisions of Asian American Partners from 1993 to 1996. Prior to that time, Mr. Geiger held a wide range of merchandising positions from 1975 to 1993 at R.H. Macy & Co., Inc., including President of Merchandising for Macy’s East responsible for Young Men’s, Juniors, Misses Coats and Misses Swimwear.

Julian R. Geiger owns 304,806 shares of Aeropostale, including 232,992 shares for options and common stock underlying restricted stock awards exercisable within 60 days of April 20, 2007.

For 2006, Julian Geiger received salary of $945,289 and total compensation including stock awards, options of $6,432,862 dollars.

Compensation Policy
" Aeropostale’s executive compensation program is designed to ensure that the interests of executive officers are closely aligned with those of stockholders. We believe that this program is effective in allowing us to attract, retain and motivate highly-qualified senior talent who can successfully deliver exceptional performance.

We generally target total compensation for executive officers at the 50th percentile of the competitive market on average and believe that this practice allows us to attract and retain executive officers and to provide rewards that are competitive based on the market value for skills provided by our executive officers. In addition, we believe that this approach is appropriate in light of the high level of commitment, job demands and the expected performance contribution required by each of our executive officers in our extremely competitive marketplace.

We strongly believe that pay realized by executive officers should be very closely aligned with actual performance outcomes that benefit our stockholders. To this end, we maintain an executive compensation program that is flexible in significantly enhancing or reducing compensation payout levels based upon the Company’s actual financial performance.

n determining the overall compensation level for our executives, the Company and the Committee reviewed publicly available data on base salary, bonus and long-term incentive compensation for certain executives for a peer group consisting of 26 national and regional, specialty and department store retail organizations to benchmark the appropriateness and competitiveness of their compensation. This list of peer companies is reviewed by the Compensation Committee each year. For the 2006 Fiscal Year, the comparison companies were:

Abercrombie & Fitch,Coach,Nordstrom,Ame rican Eagle Outfitter,Federated Department Stores,
Polo Ralph Lauren,Ann Taylor Stores,Gap,Ross Stores,Buckle,Guess?,Bon- Ton Stores
Kenneth Cole Eddie Bauer Pacific Sunwear California Hot Topic New York & Co.,Urban Outfitters
Tween Brands,The Finish Line,Wet Seal,Children’s Place Retail Stores
,Phillips ‚ÄĒ Van Heusen Corp.,Sports Authority,Charming Shoppes and Neiman Marcus "

From Proxy: http://yahoo.brand.edgar-online.com/fetchFilingFra...


Management discussion from 10-K :
http://yahoo.brand.edgar-online.com/fetchFilingFra...

Overview

We achieved net sales of $1,413.2 million during fiscal 2006 (53 weeks), an increase of $208.9 million or 17.3% from fiscal 2005 (52 weeks). This increase was attributable to average per store square footage growth of 14%, coupled with a 2.0% comparable store sales increase. Gross profit, as a percentage of net sales, increased by 2.1 percentage points for fiscal 2006, primarily due to a 2.5 percentage point increase in merchandise margin, and partially offset by a 0.4 percentage point increase in depreciation and occupancy costs. Merchandise margin for fiscal 2006 was favorably impacted by $7.4 million, or by 0.5 percentage points, of vendor concessions, primarily from an agreement with South Bay Apparel Inc., (see note 5 to the Notes to Consolidated Financial Statements for a further discussion). Selling, general and administrative expense, or SG&A, as a percentage of net sales, increased by 1.6 percentage points in fiscal 2006, primarily due to a 0.5 percentage point increase in incentive compensation, a 0.3 percentage point increase in both stock-based compensation and marketing costs, and a 0.2 percentage point increase in store payroll. Other income of $2.1 million in fiscal 2006 was the result of the resolution of a dispute with a vendor regarding the enforcement of our intellectual property rights. Interest income increased by $3.6 million in fiscal 2006 due to increases in interest rates and increases in cash and cash equivalents, together with short-term investments. The effective tax rate was 39% for fiscal 2006, compared with 39.6% for fiscal 2005. Net income for fiscal 2006 was $106.6 million, or $1.98 per diluted share, compared with net income of $84.0 million, or $1.50 per diluted share, for fiscal 2005. The above-mentioned vendor concessions favorably impacted net income for fiscal 2006 by $4.5 million, or $0.08 per diluted share.

As of February 3, 2007, we had working capital of $234.0 million, cash and cash equivalents of $200.1 million, short-term investments of $76.2 million, and no third party debt outstanding. Merchandise inventories increased by 10% as of February 3, 2007, compared to last year, and were constant on a per square foot basis. Cash flows from operating activities were $177.4 million for fiscal 2006. We operated 742 total stores as of February 3, 2007, an increase of 11% from the same period last year.

Sales

Net sales consist of sales from comparable stores and non-comparable stores, and from our e-commerce business. A store is included in comparable store sales after 14 months of operation. We consider a remodeled or relocated store with more than a 25% change in square feet to be a new store. Prior period sales from stores that have closed are not included in comparable store sales, nor are sales from our e-commerce business.

Net sales increased by $208.9 million, or by 17.3% in fiscal 2006 (53 weeks), as compared to fiscal 2005 (52 weeks). Average square footage growth of 14% drove the net sales increase, as well as an increase in comparable store sales. Comparable store sales increased by $22.6 million, or by 2.0%, reflecting comparable store sales increases in our young men's and accessories categories and a slight decrease in our young women's category. The comparable store sales increase reflected a 3.0% increase in average unit retail, a 0.5% increase in the number of sales transactions, and a 1.5% decrease in units per sales transaction. The increase in the average unit retail reflects lower promotional activity this year. Non-comparable store sales increased by $186.3 million, or by 14.3%, primarily due to 71 more stores open at the end of fiscal 2006 versus fiscal 2005. The fifty-third week accounted for $16.4 million of the net sales increase during fiscal 2006.

Net sales increased by $240.1 million, or by 24.9% in fiscal 2005. Average square footage growth of 20% drove the net sales increase, as well as an increase in comparable store sales. Comparable store sales increased by $31.2 million, or by 3.5%, reflecting comparable store sales increases in all of our categories: young women's, young men's, and accessories. The comparable store sales increase reflected a 1.8% increase in units per transaction, a 10.4% increase in the number of sales transactions, and an 8.0% decrease in average unit retail. Due to lower than expected sales performance during the third quarter of fiscal 2005, we increased our promotional activity throughout the balance of fiscal 2005 in an effort to stimulate customer demand for our merchandise offerings. Non-comparable store sales increased by $208.9 million, or by 21.4%, primarily due to 110 more stores open at the end of fiscal 2005 versus fiscal 2004.

Cost of Sales and Gross Profit

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

Gross profit, as a percentage of net sales, increased by 2.1 percentage points in fiscal 2006, primarily due to a 2.5 percentage point increase in merchandise margin, and partially offset by a 0.4 percentage point increase in depreciation, primarily as a result of store growth and strategic investments, and occupancy costs. Merchandise margin for fiscal 2006 was favorably impacted by $7.4 million, or by 0.5 percentage points, of vendor concessions, primarily from an agreement with South Bay Apparel, Inc. (see note 5 to the Notes to Consolidated Financial Statements for a further discussion). The remaining increase in merchandise margin was primarily due to decreased promotional activity.

Gross profit, as a percentage of net sales, decreased by 3.1 percentage points in fiscal 2005. Gross profit for fiscal 2004 was unfavorably impacted by a one-time, non-cash pre-tax rent charge of $4.7 million, or 0.5 percentage points, related to a correction to our lease accounting policies associated with the timing of rent expense (see note 1 to the Notes to Consolidated Financial Statements for a further discussion). The decrease in gross profit was attributable to a 3.0 percentage point decline in merchandise margin, and a 0.3 percentage point increase in occupancy costs and depreciation. The decline in merchandise margin was primarily attributable to significantly higher promotional activity.

SG&A

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

SG&A increased by $62.7 million, or by 1.6 percentage points, as a percentage of net sales, during fiscal 2006. The increase in SG&A was due largely to a $28.0 million increase in payroll and benefits, consisting primarily of store payroll from new store growth. The remainder of the increase was predominantly due to increased store transaction costs of $8.8 million, resulting from both sales growth and new store growth, a $7.4 million increase in incentive compensation, a $5.9 million increase in marketing costs and a $4.1 million increase in stock-based

compensation, primarily as a result of the adoption of SFAS No. 123(R) (see note 10 to the Notes to Consolidated Financial Statements for a further discussion). The SG&A increase during fiscal 2006, as a percentage of net sales, was primarily due to a 0.5 percentage point increase in incentive compensation, a 0.3 percentage point increase in both stock-based compensation and marketing costs, and a 0.2 percentage point increase in store payroll.

SG&A increased by $43.1 million in fiscal 2005, due largely to a $29.6 million increase in payroll and benefits, consisting primarily of store payroll from new store growth. The remainder of the increase was predominantly due to increased store transaction costs of $8.6 million, resulting from both sales growth and new store growth, and a $3.0 million increase in marketing costs. SG&A, as a percentage of net sales, decreased by 0.2 percentage points, primarily due to a 0.6 percentage point reduction in incentive compensation and a 0.3 percentage point decrease in benefit costs. These savings were partially offset by a 0.3 percentage point increase in store transaction expenses and a 0.2 percentage point increase in store payroll.

From MD&A 10-Q: http://biz.yahoo.com/e/070912/aro10-q.html

Overview

We achieved net sales of $311.2 million for the second quarter of 2007, or a 13.3% increase over the second quarter of 2006. We achieved net sales of $587.0 million for the first twenty-six weeks of 2007, or a 12.7% increase over the same period in 2006. Our fiscal 2006 calendar included an additional 53rd week that resulted in a fiscal calendar shift for fiscal 2007. The impact of this fiscal calendar shift accounted for $17.1 million of the total sales increase for the second quarter of 2007 and $20.6 million for the first twenty-six weeks of fiscal 2007. The remaining increase in net sales was driven primarily by average square footage growth of 9%. Comparable store

Table of Contents

sales decreased by 4.1% during the second quarter of 2007. Gross profit, as a percentage of net sales, increased by 4.7 percentage points for the second quarter of 2007 and by 4.2 percentage points for the first twenty-six weeks of 2007 primarily due to increased merchandise margin. The increase in merchandise margin reflects improved composition and levels of our merchandise assortment and lower graphic tee shirt costs. SG&A, as a percentage of net sales, increased by 1.2 percentage points for both the second quarter and first twenty-six weeks of 2007, primarily attributable to higher incentive compensation and higher transaction costs. Interest income increased by $0.5 million for the second quarter of 2007 and by $1.1 million for the first twenty-six weeks of 2007 compared with 2006. Increases in interest rates and cash and cash equivalents were the primary drivers of the increase in net interest income. The effective income tax rate was 39.2% for 2007 compared to 39.0% for 2006. Net income for the second quarter of 2007 was $14.7 million, or $0.19 per diluted share, compared to net income of $8.4 million, or $0.10 per diluted share, for the second quarter of 2006. Net income for the first twenty-six weeks of 2007 was $28.5 million, or $0.36 per diluted share, compared to net income of $16.8 million, or $0.21 per diluted share for the first twenty-six weeks of 2006.

As of August 4, 2007, we had working capital of $235.8 million, cash and cash equivalents of $164.5 million, short-term investments of $39.5 million, and no third party debt outstanding. Merchandise inventories decreased by 3%, and by 11% on a square foot basis, at August 4, 2007, compared to the second quarter of 2006. The decrease in merchandise inventories was primarily due to a shift in composition, our continued emphasis on inventory management, and lower unit costs of graphic tee shirts.

We operated 792 stores at August 4, 2007, an increase of 9% from the same period last year.
Results of Operations

Sales - Net sales consist of sales from comparable stores and non-comparable stores. A store is included in comparable store sales after fourteen months of operation. We consider a remodeled or relocated store with more than a 25% change in square feet to be a new store. Prior period sales from stores that have closed are not included in comparable store sales, nor are sales from our e-commerce business.

Net sales for the second quarter of 2007 increased by $36.6 million, or by 13.3% compared to the same period last year. The impact of the above mentioned fiscal calendar shift accounted for approximately $17.1 million, or 6.2%, of the total sales increase. Average square footage growth of 9% drove the remaining net sales increase for the quarter. Comparable store sales decreased 4.1% for the second quarter of 2007. Comparable store sales decreased in our young women's, young men's and accessories categories. The overall comparable store sales decrease reflected a 2.0% decrease in the number of sales transactions, a 4.5% decrease in average unit retail price due to mix shift, and a 2.4% increase in units per sales transaction. Non-comparable store sales increased by $48.2 million, or by 17.4%, primarily due to 66 more stores open at the end of the second quarter of 2007 compared to the end of the second quarter of 2006.

Net sales for the first twenty-six weeks of 2007 increased by $66.1 million, or by 12.7% compared to the same period last year. The impact of the fiscal calendar shift accounted for approximately $20.6 million, or 4.0%, of the total sales increase. Average square footage growth of 9% drove the remaining net sales increase for the quarter. Comparable store sales decreased 1.1% for the first twenty-six weeks of 2007.

Gross profit - Cost of sales includes costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing; freight from the distribution center and warehouse to the stores; payroll for our design, buying and merchandising departments, and occupancy costs. Occupancy costs include: rent, contingent rents, common area maintenance, real estate taxes, utilities, repairs, maintenance and all depreciation.

Gross profit and merchandise margin, as a percentage of net sales, increased by 4.7 percentage points for the second quarter of 2007 compared to the same period last year. Gross profit and merchandise margin, as a percentage of net sales, increased by 4.2 percentage points for the first twenty-six weeks of 2007 compared to the same period last year. Merchandise margin increased primarily due to improved levels and composition of our merchandise assortment, lower unit costs from graphic tee shirts and a continued emphasis on our planning process and inventory management.

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

SG&A increased by $12.3 million, or 1.2 percentage points, as a percentage of net sales, for the second quarter of 2007 compared to the second quarter of 2006. The increase in SG&A was primarily attributable to a $5.3 million increase in store payroll and benefits, a $3.8 million increase in corporate expenses, consisting of incentive, stock-based compensation and other corporate expenses, and $2.6 million of higher store transaction costs resulting primarily from new store growth and an increase in e-commerce fees associated with an increase in sales volume. As a percentage of net sales, the increase in corporate expenses resulted in 0.8 percentage points of the increase in SG&A, and transaction costs resulted in 0.5% of the increase.

SG&A increased by $22.3 million, or by 1.2 percentage points, as a percentage of net sales, for the first twenty -six weeks of 2007 compared to the same period last year, primarily due to the increases in the corporate expenses and transaction costs discussed above.

Interest income and income taxes - Interest income increased by $0.5 million for the second quarter of 2007, and by $1.1 million for the first twenty-six weeks of 2007, compared to the same periods in 2006. Increases in interest rates and increases in cash and cash equivalents were the primary drivers of the increase in net interest income.

The effective income tax rate was 39.2% for 2007 and 39.0% for 2006.

Net income - Net income was $14.7 million, or $0.19 per diluted share, for the second quarter of 2007, compared to net income of $8.4 million, or $0.10 per diluted share, for the second quarter of 2006. Net income was $28.5 million, or $0.36 per diluted share, for the first twenty-six weeks of 2007, compared to net income of $16.8 million, or $0.21 per diluted share, for the first twenty-six weeks of 2006.

Consolidated net income included net losses from the Company's Jimmy'Z subsidiary of $1.8 million, or $0.02 per diluted share, for the second quarter of 2007 compared to losses of $1.6 million, or $0.02 per diluted share for the second quarter of 2006. Consolidated net income included net losses from the Company's Jimmy'Z subsidiary of $3.8 million, or $0.05 per diluted share, for the first twenty-six weeks of 2007 compared to losses of $3.1 million, or $0.04 per diluted share for the first twenty-six weeks of 2006.


Buy or Sell ARO? Give us your opinion!

Is this a good business? Is this a good industry? Who are the suppliers and customers? Do they have a good product? Are the margins and ROIC sustainable? Tell us what you think!

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dailystock_admin 
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Posts: 249

Reg: 09-24-07

10-09-07 09:18 AM - Post#16    
    In response to dailystock_admin

Wachovia dimmed forecast for September same-store sales and stock is at new lows. It would be good to know why Wachovia dimmed the forecast and if that is temporary in nature. Sometimes, same-store sales' importance is overrated, but we must verify that this is not a long-term damage.

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