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Article by DailyStocks_admin    (02-18-09 09:52 AM)

The Daily Magic Formula Stock for 02/18/2009 is Aeropostale Inc. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

Aéropostale, Inc., a Delaware corporation, originally incorporated as MSS-Delaware, Inc. on September 1, 1995 and later changed to Aéropostale, Inc. on February 1, 2000, 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 2, 2008, we operated 828 stores, consisting of 802 Aéropostale stores in 47 states, 12 Aéropostale stores in Canada, and 14 Jimmy’Z stores in 11 states.

Our Aéropostale concept provides the customer with a focused selection of high-quality, active-oriented, fashion and fashion basic merchandise at compelling values. Our Jimmy’Z concept 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 Aéropostale products are sold only at our stores and online through our e-commerce website, www.aeropostale.com , while Jimmy’Z products are sold only at our Jimmy’Z stores. We strive to create a fun, high-energy shopping experience through the use of creative visual merchandising, colorful in-store signage, popular music and an enthusiastic well-trained sales force. Our average Aéropostale store is generally smaller than that of our mall-based competitors. We believe this 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. (now Macy’s, 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 and then again in August 2007, we completed three-for-two stock splits on all shares of our common stock. Both of these stock splits were distributed in the form of a stock dividend. All prior period share and per share amounts presented in this report were restated to give retroactive recognition to these common stock splits.

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2007 was the 52-week period ended February 2, 2008, fiscal 2006 was the 53-week period ended February 3, 2007 and fiscal 2005 was the 52-week period ended January 28, 2006. Fiscal 2008 will be the 52-week period ending January 31, 2009.

Growth Strategy

Continue to open new Aéropostale 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 281 new Aéropostale stores. We plan to continue our growth by opening a total of approximately 85 new Aéropostale stores during fiscal 2008, which will include approximately 15 new Aéropostale stores in Canada and our first three new stores in Puerto Rico. We plan to open stores both in markets where we currently operate stores, and in new markets. (see the section “Stores — Store design and environment” below).

Enhance our brand and increase our store productivity. We seek to capitalize on the success of our core AĂ©ropostale brand, while continuing to enhance our brand recognition through in-store as well as external marketing initiatives.

We seek to produce comparable store sales growth, increased net sales per average square foot, and increased average unit retail. We expect to continue employing our promotional pricing strategies, while also identifying and capitalizing upon developing trends in the market.

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’Z. In 2004, we acquired the rights to and existing registrations for the JIMMY’Z ® 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’Z stores. These stores average approximately 3,800 square feet. Jimmy’Z is positioned as a California lifestyle-oriented brand, targeting trend-aware young men and women aged 18 to 25. Merchandise sold at Jimmy’Z stores is at initial price points higher than merchandise sold at our Aéropostale stores. We are not planning to open any new Jimmy’Z stores in fiscal 2008, but instead plan on further refining our merchandising and brand building strategies.

New Concept. We are developing a new retail store concept that we believe will build upon our core competencies, while targeting a younger demographic than the AĂ©ropostale customer. We anticipate opening the first stores of this new concept during fiscal 2009.

Stores

Existing stores. We locate our stores primarily in shopping malls, outlet centers and, to a lesser degree, lifestyle and off-mall shopping centers, all located in geographic areas with the highest possible concentrations of our target customers.

Store design and environment. We launched our new AĂ©ropostale store design during fiscal 2006, and we currently operate 97 stores in this new format. We plan to design all of our new AĂ©ropostale stores in this format. In addition, all AĂ©ropostale stores planned for remodel will be renovated into the new format. 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. 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.

Store management. Our stores are organized by region and further into districts. A regional manager manages each of our ten regions and each region encompasses approximately eight to ten districts. Each district is managed by a district manager and encompasses approximately seven to ten individual stores. 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. We focus on opening new stores in an effort to penetrate further the existing markets we are already in, as well as enter new markets. We plan to continue increasing our store base during fiscal 2008 by opening approximately 85 new Aéropostale stores, including approximately 15 new stores in Canada and our first three new stores in Puerto Rico (see the section “Growth Strategy” above).

In selecting a specific site, we generally target high traffic locations in malls, outlet centers and, to a lesser degree, lifestyle and off-mall shopping centers, 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 Aéropostale stores opened in fiscal 2007 under our new store design, our average net investment was approximately $469,000 per store location, which included capital expenditures adjusted for landlord contributions and initial inventory at cost, net of payables (see the section “ Store design and environment ” above for a further discussion).

AĂ©ropostale stores which we opened in fiscal 2006 and fiscal 2005 achieved, during their first twelve months of their operations, average net sales of approximately $1.8 million and net sales of $492 per average square foot.

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 generally lasting anywhere from two to four weeks in length.

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 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 apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear and accessories. Our “design-driven, merchant-modified” philosophy, in which our designers’ visions are refined by our merchants’ 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’ tastes. Much of our merchandise features our brands’ logos. We believe that both our Aéropostale and Jimmy’Z logo apparel appeals to our young customers and reinforces our brand image.

Merchandising and Planning. Our merchandising organization, together with our 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.

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 who rely upon us for a significant portion of their overall business.

During fiscal 2007, we sourced approximately 69% of our merchandise from our top five merchandise vendors. Most of our vendors maintain sourcing offices in the United States, with the majority of their production factories located in 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.

During fiscal 2007, we ceased doing business with South Bay Apparel Inc., previously one of our largest suppliers of graphic T-shirts and fleece. We have replaced this business both with new vendors and our existing vendor base (see Note 6 to the Notes to Consolidated Financial Statements for a further discussion).

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 internal as well as external advertising. We expand, test and modify our marketing efforts based on 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 with large images in the store-front windows and at the checkout area, information alongside product displays and other touch points such as handouts and shopping bags. We also 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. Periodically, we also partner with select third parties such as magazines, television shows and musical bands, to create marketing programs which we believe will be appealing to our customers.

Our website, www.aeropostale.com supports all of our internet marketing and promotional initiatives and also offers a large portion of our merchandise assortment for purchase. We maintain a database of our customers and send emails and distribute information on special offers and promotions on a frequent basis.

Distribution

We maintain two distribution centers to process merchandise and to warehouse inventory needed to replenish our stores. We lease a 315,000 square foot distribution center facility in South River, New Jersey. We also lease a second distribution facility in Ontario, California with 360,000 square feet of space that began operations in September 2007.

The staffing and management of both distribution facilities are outsourced to a third party provider that operates each 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 facilities to our stores.

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 facilities utilize automated sortation materials handling equipment to receive, process and ship goods to our stores. These facilities also serve our other warehousing needs, such as storage of new store merchandise, floor set merchandise and packaging supplies.

All of our products destined for our Canada stores are first shipped to the United States and processed through our distribution centers. We have engaged a third party to assist us in recapturing certain duties and tariffs which we paid on these goods.

CEO BACKGROUND

Bodil Arlander , 44, has served as a director since August 1998 and currently is a Senior Managing Director at Bear, Stearns & Co. Inc., which she joined in April 1997, as well as a partner in the Bear Stearns Private Equity Fund. She is also a member of the board of directors of the publicly traded company New York & Company, Inc., as well as several privately held corporations. Ms. Arlander is a member of the Compensation Committee of the Board.

Ronald R. Beegle , 45, has served as director since August 2003 and is a founding Partner of Goode Partners LLC, a private equity firm focused on investments in small to middle market consumer product, retail, and restaurant companies. Prior to forming Goode Partners, from 2004 through 2005, Mr. Beegle was the Chairman of Credit Suisse Group’s Global Consumer/Retail Investors Unit. Previously, Mr. Beegle had been employed by Gap Inc. from 1996 until 2003 and had most recently served as Chief Operating Officer of the company’s flagship Gap division. While at Gap, Inc., he also served as Senior Vice President of Operations and Finance of Banana Republic and Executive Vice president and General Manager of Gap, Inc. Direct. He is a member of the Audit and Nominating and Corporate Governance Committees of the Board.

Robert B. Chavez , 53, has served as a director since April 2004 and currently is the President and Chief Executive Officer of Hermes of Paris, Inc., which he joined in August 2000. Between 1992 and August 2000 Mr. Chavez was the Chief Executive Officer at Etienne Aigner. Mr. Chavez was also President of Frederic Fekkai (Hair Services and Products), a division of Chanel, Inc. from May 2000 through July 2000. Mr. Chavez is Chairman of the Compensation Committee and a member of the Nominating and Corporate Governance Committee of the Board.

Evelyn Dilsaver , 53, has served as director since October 2007. Ms. Dilsaver joined The Charles Schwab Corporation in December of 1991 and held various senior management positions within the organization including Executive Vice President, The Charles Schwab Corporation and President and Chief Executive Officer of Charles Schwab Investment Management. Prior to becoming President and Chief Executive Officer of Charles Schwab Investment Management, from July 2003 to July 2004, Ms. Dilsaver held the position of Senior Vice President, Asset Management Products and Services. Ms. Dilsaver is a member of the Audit Committee of the Board and a member of the Nominating and Corporate Governance Committee of the Board.

Julian R. Geiger , 62, 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.

Karin Hirtler-Garvey , 51 , has served as a director since August 2005 and was formerly Chief Operating Officer, Global Markets for Bank of America (formerly Nations Bank). Ms. Hirtler-Garvey joined Bank of America in September of 1995 and held various senior management positions within the organization until March of 2005. Prior to becoming Chief Operating Officer, Global Markets, from April to October of 2004, Ms. Hirtler-Garvey held the position of President of Trust and Credit Banking Products. From June 2001 to March 2004, Ms. Hirtler-Garvey held the position of Chief Financial Officer/Chief Operating Officer for the Wealth and Investment Management division. Ms. Hirtler-Garvey is currently a principal in a start-up real estate development venture based in New Jersey. Ms. Hirtler-Garvey is a certified public accountant. Ms. Hirtler-Garvey is a director of a privately held corporation. Ms. Hirtler-Garvey is Chairperson of the Audit Committee and a member of the Nominating and Corporate Governance Committee of the Board. Ms. Hirtler-Garvey is also the Company’s Lead Independent Director.

John Haugh , 45, has served as a director since June 2007. Mr. Haugh currently serves as President of It’s Sugar, LLC, a candy and confectionary retailer. Previously, Mr. Haugh served as President of Mars Retail Group from January 2004 to December 2007, where he led all retail business operations for this subsidiary of Mars, Incorporated. Prior to this position, he was Chief Marketing Officer and Senior Vice President, Worldwide Business Development at Payless ShoeSource, Inc. Before his promotion, he was Chief Marketing Officer and Senior Vice President, Domestic Business Development from January 2002 to January 2003 and SVP, Marketing from January 2000 to January 2002. Mr. Haugh is a member of the Compensation and Nominating and Corporate Governance Committees of the Board.

John D. Howard , 55, has served as a director since August 1998 and is currently a Senior Managing Director of Bear, Stearns & Co. Inc. and is the Chief Executive Officer of Bear Stearns Merchant Banking LLC, an affiliate of Bear, Stearns & Co. Inc. Mr. Howard has been the head of the merchant banking department of Bear, Stearns & Co. Inc. since its inception in 1997. Mr. Howard is also a member of the board of directors of the publicly traded companies New York & Company, Inc. and Vitamin Shoppe Industries, as well as a director of several privately held corporations.

Mindy C. Meads , 56, has served as our President and Chief Merchandising Officer since March 2007. Ms. Meads most recently served as President and Chief Executive Officer of Victoria’s Secret Direct, a division of Limited Brands, Inc from August 2006 to January, 2007. From 1998 to 2005 Ms. Meads served in senior executive positions at Lands’ End, Inc./Sears Holding including President and Chief Executive Officer, Executive Vice President Sears Apparel and Executive Vice President Lands’ End Apparel and Sourcing. From 1996 to 1998 Ms. Meads was Senior Vice President Merchandising, Design, Planning & Allocation at Gymboree Corporation. From 1991 to 1996 she served as Senior Vice President Merchandising, Design and Vice President General Merchandise Manager for Lands’ End.

David B. Vermylen , 57, has served as a director since May 2003. Since January 2005 he has been President & COO of Treehouse Foods. Previously, Mr. Vermylen had been employed by Keebler Company from 1996 until 2002 and had served as its Chief Executive Officer and President from 2001. Mr. Vermylen also serves as a director of a privately held corporation. Mr. Vermylen is Chairman of the Nominating and Corporate Governance Committee and a member of the Compensation Committee of the Board.

Each of the directors listed above has agreed to serve, if elected, and management has no reason to believe that they will be unavailable to serve. In the event that any of the nominees is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee who may be designated by the present Board of Directors to fill the vacancy. Unless otherwise instructed, the proxy holders will vote the proxies received by them FOR the election of each of the directors listed above. The proxies solicited by this Proxy Statement cannot be voted for a greater number of persons than the number of nominees named.

MANAGEMENT DISCUSSION FROM LATEST 10K

Aéropostale, Inc. is a mall-based specialty retailer of casual apparel and accessories. Our target customers are both young women and young men from age 14 to 17, and we provide our customers with a selection of high-quality, active-oriented, fashion basic merchandise at compelling values in a high-energy store environment. We maintain control over our proprietary brand by designing and sourcing all of our own merchandise. Our products can be purchased in our stores, which sell Aéropostale merchandise exclusively and on-line through our e-commerce website, www.aeropostale.com . 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. As of February 2, 2008, we operated 828 stores, consisting of 802 Aéropostale stores in 47 states, 12 Aéropostale stores in Canada, and 14 Jimmy’Z stores in 11 states, in addition to www.aeropostale.com , our e-commerce site (see the section “Growth Strategy” in Item I of this report for a further discussion).

Our fiscal year ends on the Saturday nearest to January 31. Fiscal 2007 was the 52-week period ended February 2, 2008, fiscal 2006 was the 53-week period ended February 3, 2007 and fiscal 2005 was the 52-week period ended January 28, 2006. Fiscal 2008 will be the 52-week period ending January 31, 2009.

On July 11, 2007, we announced a three-for-two stock split on all shares of our common stock that was completed on August 21, 2007 in the form of a stock dividend to all shareholders of record on August 6, 2007. All share and per share amounts presented in this report were retroactively adjusted for the common stock split, and all previously reported periods were restated for such.

The discussion in the following section is on a consolidated basis, unless indicated otherwise. In addition, comparable store sales data included in this section are compared to the corresponding period in the prior year, due to the 53rd week in the fiscal 2006 calendar. We believe that the disclosure of comparable store sales data on a pro-forma basis due to the 53rd week in fiscal 2006, which is a non-GAAP financial measure, provides investors useful information to help them better understand our results.

Overview

We achieved net sales of $1.591 billion during fiscal 2007 (52 weeks), an increase of $177.7 million or 12.6% from fiscal 2006 (53 weeks). Net sales for the fourth quarter of fiscal 2007 included $7.7 million of sales related to our initial recognition of gift card breakage. Gross profit, as a percentage of net sales, increased by 2.6 percentage points for fiscal 2007, primarily due to a 2.8 percentage point increase in merchandise margin. Selling, general and administrative expense, or SG&A, as a percentage of net sales, increased by 1.2 percentage points in fiscal 2007. We recorded asset impairment charges of $9.0 million during the fourth quarter related to our Jimmy’Z stores. Other operating income of $4.1 million in fiscal 2007 was the result of an agreement with our former Executive Vice President and Chief Merchandising Officer. Interest income decreased by $0.5 million in fiscal 2007 due primarily to an increase in share repurchases. The effective tax rate was 38.2% for fiscal 2007, compared with 39.0% for fiscal 2006. Net income for fiscal 2007 was $129.2 million, or $1.73 per diluted share, compared with net income of $106.6 million, or $1.32 per diluted share, for fiscal 2006.

As of February 2, 2008, we had working capital of $87.3 million, cash and cash equivalents of $111.9 million, no short-term investments and no third party debt outstanding. Merchandise inventories increased by 20% on a square foot basis as of February 2, 2008 compared to last year. Cash flows from operating activities were $171.1 million for fiscal 2007. We operated 828 total stores as of February 2, 2008, an increase of 11.6% 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 $177.7 million, or by 12.6% in fiscal 2007 (52 weeks), as compared to fiscal 2006 (53 weeks). This increase was due to average square footage growth of 10.3%, as well as an increase in comparable store sales. Comparable store sales increased by $43.8 million, or by 3.3%, reflecting comparable store sales increases in our young men’s and women’s categories and a slight decrease in our accessories category. The comparable store sales increase reflected a 2.4% increase in units per sales transaction, a 3.4% increase in the number of sales transactions, and a 2.5% decrease in average unit retail. The decrease in the average unit retail reflected lower pricing in certain categories, in addition to a shift in sales mix. Non-comparable store sales increased by $126.1 million, or by 8.7%, primarily due to 86 more stores open at the end of fiscal 2007 versus fiscal 2006. Net sales for the fourth quarter of fiscal 2007 also included $7.7 million of sales related to our initial recognition of gift card breakage, of which $5.9 million related to gift cards issued in periods prior to fiscal 2007 (see Note 1 to the Notes to Consolidated Financial Statements for a further discussion).

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 reflected lower promotional activity. 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.

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 2.6 percentage points in fiscal 2007. This increase was due to a 2.8 percentage point increase in merchandise margin, primarily from lower unit costs from graphic tee shirts and improved levels and composition of our merchandise assortment. This increase was partially offset by a 0.2 percentage point increase in depreciation, primarily as a result of store growth and strategic investments, and occupancy costs.

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 6 to the Notes to Consolidated Financial Statements for a further discussion). The remaining increase in merchandise margin was primarily due to decreased 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, store pre-opening and other corporate expenses, and e-commerce shipping expenses. Store pre-opening expenses include store payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

SG&A increased by $56.1 million, or by 1.2 percentage points, as a percentage of net sales, during fiscal 2007. The increase in SG&A was largely due to a $26.7 million increase in store-line expenses. The remainder of the increase was due to higher store transaction costs and store operations costs of $13.4 million resulting primarily from new store growth and increased sales. The balance of the increase in SG&A was primarily due to a $13.8 million increase in corporate expenses consisting of higher incentive compensation of $4.9 million, stock-based compensation of $3.5 million, and other corporate expenses of $5.4 million. The SG&A increase during fiscal 2007, as a percentage of net sales, was primarily due to a 0.5 percentage point increase in store-line expenses, primarily resulting from increased payroll due to minimum wage increases and loss prevention initiatives; a 0.5 percentage point increase in corporate incentive and stock-based compensation; and a 0.4 percentage point increase in e-commerce expenses, resulting from growth in related sales.

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 Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123(R)”) (see Note 11 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.

Other Operating Income

We recognized $4.1 million in net other operating income during the fourth quarter of 2007 as a result of an agreement with our former Executive Vice President and Chief Merchandising Officer (see Note 6 to the Notes to Consolidated Financial Statements for a further discussion).

We recognized $2.1 million in other operating income during the second quarter of fiscal 2006 in connection with the resolution of a dispute with a vendor regarding the enforcement of our intellectual property rights.

Interest Income

Interest income, net of interest expense, decreased by $0.5 million in fiscal 2007. The decrease was primarily due to cash used for share repurchases of $266.7 million during 2007, including the ASR in the fourth quarter of 2007 (see below under Financing Activities for a further discussion).

Interest income, net of interest expense, increased by $3.4 million in fiscal 2006. Increases in interest rates and increases in cash and cash equivalents, together with short-term investments, were the primary drivers of the increase in net interest income. Cash and cash equivalents, together with short-term investments, increased by $51.0 million at the end of fiscal 2006.

Income Taxes

Our effective tax rate was 38.2% for fiscal 2007, compared to 39.0% for fiscal 2006, and 39.6% for fiscal 2005. The decrease in the effective tax rate during fiscal 2007 is primarily due to favorable state tax accrual adjustments. The decrease in the effective income tax rate during fiscal 2006 was primarily due to a decrease in certain net permanent differences. The tax rate for fiscal 2008 is estimated to approximate 40.0%.

Net Income and Earnings Per Share

Net income was $129.2 million, or $1.73 per diluted share, for fiscal 2007, compared with net income of $106.6 million, or $1.32 per diluted share, for fiscal 2006 and net income of $84.0 million, or $1.00 per diluted share, for fiscal 2005.

Net income for fiscal 2007 was favorably impacted by $7.7 million ($4.8 million after-tax, or $0.07 per diluted share), resulting from our initial recognition of gift card breakage (see Note 1 to the Notes to Consolidated Financial Statements for a further discussion). Net income for fiscal 2007 was also favorably impacted by $4.1 million ($2.6 million after-tax, or $0.04 per diluted share), from the above mentioned other operating income. The asset impairment charges unfavorably impacted net income for fiscal 2007 by $9.0 million ($5.7 million after-tax, or $0.08 per diluted share) (see Note 5 to the Notes to Consolidated Financial Statements for a further discussion).

Net income for fiscal 2006 was favorably impacted by $7.4 million ($4.5 million after-tax, or $0.05 per diluted share), resulting from the recognition of vendor concessions, primarily from an agreement with South Bay Apparel, Inc. (see Note 6 to the Notes to Consolidated Financial Statements for a further discussion). Net income for fiscal 2006 was also favorably impacted by $2.1 million ($1.3 million after-tax, or $0.02 per diluted share), from the above mentioned other operating income. The previously discussed adoption of SFAS No. 123(R) unfavorably impacted net income for fiscal 2006 by $2.2 million, or $0.03 per diluted share.

Consolidated net income included net losses from our Jimmy’Z subsidiary of $12.4 million, or $0.17 per diluted share, for fiscal 2007 (includes above mentioned asset impairment charges of $5.7 million after-tax, or $0.08 per diluted share), compared with net losses of $6.7 million, or $0.08 per diluted share, for fiscal 2006 and $4.7 million, or $0.06 per diluted share, for fiscal 2005.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling of existing stores, and the improvement and enhancement of our information technology systems. Due to the seasonality of our business, we have historically realized a significant portion of our cash flows from operations during the second half of the year. Most recently, our cash requirements have been met primarily through cash and cash equivalents on hand during the first half of the year, and through cash flows from operations during the second half of the year. We expect to continue to meet our cash requirements for the next twelve months primarily through cash flows from operations, existing cash and cash equivalents and our credit facility. In addition, on November 13, 2007, we amended and restated our revolving credit facility (the “New Credit Facility”) with Bank of America, N.A. (“Bank of America”), which expanded our availability from a maximum of $75.0 million to $150.0 million (see Note 9 to the Notes to Consolidated Financial Statements). A portion of the availability under the New Credit Facility was used to fund the ASR to repurchase $125.0 million of our common shares (see Note 13 to the Notes to Consolidated Financial Statements). At February 2, 2008, we had working capital of $87.3 million and cash and cash equivalents of $111.9 million.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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. Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements. The risk factors included in Part II, Item 1A should be read in connection with evaluating our business and future prospects. All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made.

Introduction

References to the “Company,” “we,” “us,” or “our” mean Aéropostale, Inc. and its subsidiaries, except as expressly indicated to the contrary or unless the context otherwise requires. We are a mall-based, specialty retailer of casual apparel and accessories for young women and men. We design, market and sell our own brand of merchandise principally targeting 14 to 17 year-old young women and men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is a contemporary lifestyle brand targeting trend-aware young women and men aged 18 to 25. As of November 1, 2008, we operated 905 stores, consisting of 863 Aéropostale stores in 48 states and Puerto Rico, 28 Aéropostale stores in Canada and 14 Jimmy’Z stores in 11 states, in addition to our Aéropostale e-commerce website, www.aeropostale.com (this and any other references in this Quarterly Report on Form 10-Q to aeropostale.com is solely a reference to a uniform resource locator, or URL, and is an inactive textual reference only, not intended to incorporate the website into this Quarterly Report on Form 10-Q).

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, net income, 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 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 our condensed consolidated financial statements included in this report and along with our Annual Report on Form 10-K for the year ended February 2, 2008.

On July 11, 2007, the Company announced a three-for-two stock split on all shares of its common stock. The stock split was distributed on August 21, 2007 in the form of a stock dividend to all shareholders of record on August 6, 2007.

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

Results of Operations

Overview

We achieved net sales of $482.0 million for the third quarter of 2008, or a 17% increase when compared to the third quarter of 2007. The increase in net sales for the third quarter of 2008 was driven primarily by average square footage growth of 11% and an increase in comparable store sales of 7%. Gross profit, as a percentage of net sales, increased by 1.1 percentage points for the third quarter of 2008 due primarily to increased merchandise margin. SG&A, as a percentage of net sales, increased by 0.5 percentage points for the third quarter of 2008. Interest income decreased by $1.8 million for the third quarter of 2008 compared to the same period in 2007, which was due primarily to a lower average balance of cash and cash equivalents during the period as a result of cash used for share repurchases during fiscal 2007. The effective income tax rate was 39.6% for both the third quarter of 2008 and 2007. Net income for the third quarter of 2008 was $42.6 million, or $0.63 per diluted share, compared to net income of $36.0 million, or $0.48 per diluted share, for the third quarter of 2007.

As of November 1, 2008, we had working capital of $135.4 million, cash and cash equivalents of $107.2 million and no short-term investments. Consolidated merchandise inventories increased by 8% but decreased by 3% on a per square foot basis, at November 1, 2008, compared to November 3, 2007.

We operated 905 stores at November 1, 2008, an increase of 10% from the same period last year, which was due to additional new stores in the U.S. and our expansion into Canada and Puerto Rico.

Comparison of the 13 weeks ended November 1, 2008 to the 13 weeks ended November 3, 2007

Net Sales

Net sales for the third quarter of 2008 increased by $69.4 million, or by 17% compared to the same period last year. The increase in net sales was driven primarily by average square footage growth of 11% and an increase in comparable store sales of 7%. Comparable store sales increased in both our young women’s and young men’s categories. The overall comparable store sales increase reflected a 1% increase in units per sales transaction and an 8% increase in average unit retail, which was partially offset by a 1% decrease in the number of sales transactions. Non-comparable store sales increased by $42.5 million, or by 10%, due primarily to 82 more stores open at the end of the third quarter of 2008 compared to the end of the third quarter of 2007.

Gross Profit

Cost of sales include costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center and warehouse to the stores. It also includes 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 1.1 percentage points for the third quarter of 2008 compared to the same period last year. The increase was due to an increase in merchandise margin of 1.8 percentage points which was due primarily to improved initial sell-through of merchandise and a favorable shift in the sales mix. This was offset partially by higher occupancy costs and e-commerce freight costs.

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, store pre-opening costs and other corporate level expenses. Store pre-opening costs include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

SG&A increased by $16.8 million for the third quarter of 2008 compared to the third quarter of 2007. The increase in SG&A was attributable primarily to a $6.3 million increase in corporate expenses, consisting of incentive and stock-based compensation and other corporate expenses; a $5.8 million increase in store-line expenses, primarily volume-related payroll; $1.8 million of higher transaction costs, including e-commerce costs and store operations costs resulting primarily from new store growth and higher sales; a $1.6 million increase in marketing and $1.4 million increase in benefits costs, which consisted of medical expenses and payroll taxes resulting from increased headcount.

SG&A increased by 0.5 percentage points, as a percentage of net sales, for the third quarter of 2008 compared to the third quarter of 2007. The increase is attributed to 0.6 percentage points of higher incentive compensation, 0.3 percentage points of higher stock-based compensation and 0.2 percentage points of increased e-commerce fees reflecting sales growth in this business. This was offset partially by 0.6 percentage points related to the leveraging of store-line and corporate expenses.

Interest income and income taxes

Interest income decreased by $­­­1.8 million for the third quarter of 2008 compared to the same period in 2007. The decrease was due primarily to a lower average balance of cash and cash equivalents during the period as a result of cash used for share repurchases of $266.7 million during fiscal 2007, including the accelerated share repurchase program (“ASR”) to repurchase $125.0 million of our common shares during the fourth quarter of 2007.

The effective income tax rate was 39.6% for both the third quarter of 2008 and 2007.

Net income

Net income was $42.6 million, or $0.63 per diluted share, for the third quarter of 2008, compared to net income of $36.0 million, or $0.48 per diluted share, for the third quarter of 2007. Earnings per share increased by 31% for the third quarter of 2008 due to both an increase in net income and fewer weighted average shares outstanding, resulting from the Company’s repurchase of its common stock.

Comparison of the 39 weeks ended November 1, 2008 to the 39 weeks ended November 3, 2007

Net Sales

Net sales for the first thirty-nine weeks of 2008 increased by $195.9 million, or by 20% compared to the same period last year. The increase in net sales was driven primarily by average square footage growth of 11% and an increase in comparable store sales of 9%. Comparable store sales increased in both our young women’s and young men’s categories. The overall comparable store sales increase reflected a 4% increase in the number of sales transactions, a 3% increase in average unit retail and a 2% increase in units per sales transaction. Non-comparable store sales increased by $111.9 million, or by 11%, due primarily to 82 more stores open at the end of the first thirty-nine weeks of 2008 compared to the end of the first thirty-nine weeks of 2007.

Gross Profit

Cost of sales include costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center and warehouse to the stores. It also includes 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 1.4 percentage points for the first thirty-nine weeks of 2008 compared to the same period last year. The increase was due to an increase in merchandise margin of 1.9 percentage points and 0.2 percentage points due to leveraging of occupancy costs. The increase in merchandise margin is due primarily to improved initial sell-through of merchandise and a favorable shift in the sales mix to higher margin classifications. The above mentioned increases were offset partially by higher distribution and transportation costs.

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, store pre-opening costs and other corporate level expenses. Store pre-opening costs include store level payroll, grand opening event marketing, travel, supplies and other store pre-opening expenses.

SG&A increased by $46.8 million for the first thirty-nine weeks of 2008 compared to the first thirty-nine weeks of 2007. The increase in SG&A was attributable primarily to a $19.2 million increase in volume-related store-line payroll; a $16.0 million increase in corporate expenses, consisting of incentive and stock-based compensation and other corporate expenses; $5.1 million of higher store transaction costs, including e-commerce costs and store operations costs resulting from new store growth and higher sales; a $4.2 million increase in benefits, and higher marketing costs of $2.4 million.

SG&A increased by 0.1 percentage point, as a percentage of net sales, for the first thirty-nine weeks of 2008 compared to the first thirty-nine weeks of 2007.

Interest income and income taxes

Interest income decreased by $5.4 million for the first thirty-nine weeks of 2008 compared to the same period in 2007. The decrease was due primarily to a lower average balance of cash and cash equivalents during the period as a result of cash used for share repurchases of $266.7 million during fiscal 2007, including the accelerated share repurchase program (“ASR”) to repurchase $125.0 million of our common shares in the fourth quarter of 2007.

The effective income tax rate was 40% for the first thirty-nine weeks of 2008 and 39.4% for 2007. The increase in the effective tax rate was due primarily to nondeductible officers’ compensation and a reduction in tax exempt interest income offset partially by higher tax credits.

Net income

Net income was $81.2 million, or $1.20 per diluted share, for the first thirty-nine weeks of 2008, compared to net income of $64.5 million, or $0.84 per diluted share, for the first thirty-nine weeks of 2007. Earnings per share increased by 43% for the first thirty-nine weeks of 2008 due to both an increase in net income and fewer weighted average shares outstanding, resulting from the Company’s repurchase of its common stock.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling of existing stores, and the improvement or enhancement of our information technology systems. Due to the seasonality of our business, we have historically realized a significant portion of our cash flows from operations during the second half of the year. Most recently, our cash requirements have been met primarily through cash and cash equivalents on hand during the first half of the year, and through cash flows from operations during the second half of the year. We expect to continue to meet our cash requirements for the next twelve months primarily through cash flows from operations, existing cash and cash equivalents, and potentially through periodic use of our credit facility. At November 1, 2008, we had working capital of $135.4 million, cash and cash equivalents of $107.2 million and no debt outstanding.

Operating activities — Net cash provided by operating activities increased by $21.8 million for the first thirty-nine weeks of 2008 compared to the same period in 2007. This increase was attributable primarily to the increase of $30.5 million in cash generated through net income, as adjusted for depreciation and amortization and other non-cash items, which was offset partially by the timing of payment of accounts payable. Consolidated merchandise inventories increased by 8%, but decreased by 3% on a per square foot basis, as of November 1, 2008 as compared to November 3, 2007.

Due to the seasonality of our business, we have historically generated a significant portion of our cash flows from operating activities in the second half of the year, and we expect this trend to continue through the balance of this year.

Capital requirements — Investments in capital expenditures are principally for the construction of new stores, remodeling of existing stores, and investments in information technology. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. We opened 77 Aéropostale stores in our new store format during the first thirty-nine weeks of 2008, which included 16 stores in Canada and 3 stores in Puerto Rico. In addition, during the first thirty-nine weeks of 2008, we remodeled and renovated 18 existing Aéropostale stores. Capital expenditures for the full year of 2008 are expected to approximate $80.0 million for new and remodeled stores as well as for other initiatives.

CONF CALL

Kenneth Ohashi

Thank you all for joining us this afternoon. With me here today are Julian Geiger, our Chairman and Chief Executive Officer, Mindy Meads, our President and Chief Merchandising Officer, Tom Johnson, our Chief Operating Officer, and Michael Cunningham, our Chief Financial Officer.

We issued a press release earlier this afternoon announcing our third quarter financial results. A copy of the release can be found on our corporate website.

Before we begin, I'd like to remind you that during this earnings conference call certain statements and responses to questions may contain forward-looking information such as forecasts of future financial performance.

Forward-looking information and statements involve known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from our forecasted results. Those risks are described in our annual report on Form 10-K and our quarterly reports on Form 10-Q, all of which have been filed with the SEC and are available on our website. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Listeners of this call are referred to those filings.

Before I turn the call over to Julian, I would like to ask everyone to limit themselves to one question during our Q&A session.

I would now like to turn the call over to Julian.

Julian Geiger

Thanks, Ken. Good afternoon, everyone, and thank you for joining us today.

As I'm sure you have already heard, earlier today we announced that Aeropostale achieved record-breaking sales and profits for the third quarter. This performance is impressive in and of itself, but when put into perspective against the uniquely challenging economic panorama with which we are faced, it is extraordinary.

Throughout this entire year we have experienced unparalleled success. I must openly how the determination and talent of our entire organization, the clarity of our strategies, the precision of our execution, and the nimbleness of our operating model have enabled us to elevate respect for the Aeropostale brand to an all-time high.

I would like to highlight some of the statistical accomplishments of the quarter for you. Net sales for the period increased 17% to $482 million and same-store sales increased 7%. Gross profit grew by 110 basis points while operating margins improved by 60 basis points. Net earnings per share grew 31% to $0.63 per share this year from $0.48 per share last year. In addition, we continue to maintain a strong balance sheet with absolutely no debt.

As we have previously discussed, we have implemented a number of strategic initiatives and have made some systemic changes to our business over the past few years that have enabled us to navigate through this currently challenging environment and generate consistently strong results.

Specifically, we have placed greater emphasis on giving the customer a more balanced merchandise assortment that is both fresh and focused; offering new and changing promotions to create excitement in our stores and to spur demand for our product; managing inventory carefully and maximizing efficiencies in product flow by making investments in people, process and systems, and creating a fun and exciting shopping environment through our new store design and innovative marketing programs. In aggregate, these initiatives have enabled us to achieve impressive brand momentum and capture significant market share.

As we look at our accomplishments in the first nine months, we are even more gratified given the unprecedented challenges everyone has encountered in the retail sector. By design, we have a nimble and responsive business model that enables us to adapt quickly to change. We have also been and will continue to be pragmatic in running our business. We will leverage our speed and agility and stay ahead of a rapidly changing environment.

Moving into our third decade, the Aeropostale brand has become an important shopping destination for its customer. As we emerge from these challenging times, we believe that Aeropostale will be even stronger and better positioned than it is even today.

Now I'd like to turn the call over to Mindy, who will take you through some of the merchandising highlights from the third quarter and discuss our performance during the start of the holiday season.

Mindy Meads

Thank you, Julian. I, too, would like to reiterate how pleased I am with our record results for both the third quarter and year-to-date. The entire product development team has done an excellent job, not just knowing our customer but also executing our merchandising strategies.

We continue to offer the customer the best combination of fashion and value in a highly promotional environment. For the quarter we experienced strength in both genders. The women's comp was up mid single digits and men's were up in the low double digits. We're very pleased with the trend in both our merchandise margins and average unit retail. These increases were driven by an overall improvement in merchandise offerings to the integration of fashion, more fashion, the emphasis in trending key classification, and the reduction in SKU counts by 30%.

Moving into holiday, which is more top driven than back-to-school, graphics, fleece and thermals will remain our key drivers. The design and merchant teams have integrated the most current treatments and textures into our tops while improving the quality of the garment. We also continue to experience significant strength in our logo business, further underscoring the vitality of the Aeropostale brand.

Our comps for Black Friday increased in the low single digits on top of the high single digits last year. Trends since then have been somewhat inconsistent. We believe that this holiday season will be highly promotional and we are ready for that environment. We will be offering compelling promotions each week that convey exceptional value to our customer. We will be aligning these promotions with our ecommerce business, which has been producing tremendous results. We have specifically targeted the cross-channel shopper, making the Aeropostale brand easily accessible to them.

Gift cards are also an important part of the gift-giving season. This year we've increased the number of locations where we sell our cards through our third-party channel. This should be a nice addition to our holiday business.

Our inventories at the end of the quarter remain lean and current. We closed the third quarter with inventories on a per square foot basis down 3%. Going into next year, we will continue to maximize the flexibility with our vendors by building even stronger contingency strategies, which will allow us to react to the business faster and smarter as we move into next year.

In any economic environment, the customer will always respond to the right merchandise for the right price, and our entire team is focused on continuing to build on our successes and brand momentum.

Now I'd like to turn the call over to Michael, who will take you through the financials.

Michael Cunningham

Thanks, Mindy.

Total net sales for the quarter are up 17% versus last year, driven by an 11% increase in average square footage coupled with the 7% comp.

We opened 26 stores during the quarter, ending with a total of 863 Aero stores in the U.S. and Puerto Rico, 28 Aero stores in Canada, and 14 Jimmy'Z stores.

Gross margins for the quarter were 36% versus 34.9% last year. The 110 basis point increase was driven by higher merchandise margins.

SG&A for the quarter was 21.4% of sales versus 20.9% last year. This 50 basis point increase was driven by higher incentive comp expense of 60 basis points, higher share-based comp expense of 30 basis points, and increased ecom fees of 20 basis points reflecting sales growth in that business. These increases were partially offset by the 60 basis points of leverage of store line and other corporate expenses.

Our tax rate for the quarter was 39.6%, which resulted in net income of $42.6 million or $0.63 per share.

Cash and cash equivalents, together with short-term investments at the close of the quarter, were $107.2 million versus $122.6 million last year. The $15 million reduction over last year is primarily due to the $125 million in share repurchase activity during the fourth quarter of 2007. As a reminder, we have no auction rate securities in our portfolio and remain very liquid, with short-term U.S. Treasury investments.

During the quarter we repurchased 115,000 shares of our stock for approximately $3.8 million. At quarter end we had approximately $127 million of remaining buyback availability.

Inventory at the close of the quarter was $206.9 million, up 8% in total but down 3% per square foot.

Our CapEx for the quarter was $25.8 million, with depreciation and amortization of $10.7 million. We expect full year CapEx of approximately $80 million. As you may have seen in our release today, we are projecting CapEx of approximately $55 million for 2009.

Our fourth quarter EPS guidance of $0.84 to $0.90 is a broader range than we have typically issued for past quarters. This increased range reflects the difficulty of forecasting in an environment of significant economic uncertainty.

I will now turn the call back to Julian for some closing comments.

Julian Geiger

Thanks, Michael.

As you know, with Thanksgiving and Black Friday behind us, we are in the midst of the holiday season. We believe that all of the initiatives and approaches that made us so successful during the first nine months of the year will continue to help us maximize our performance during the fourth quarter.

I have tremendous confidence in our organization, in our brand, in our merchandise, and in our promotional operating model. Every reseller, however, must be respectful of the realities of the global economic situation.

As we progress to the end of this fiscal year and into the next, every one at Aeropostale will be focused on capitalizing on the many opportunities that we have. We will be doing so in a carefully conceived, clearly communicated fashion, while confident we remain controlled. We will remain committed to understanding our customer and to giving great clothes at great prices.

We will continue to strengthen our brand domestically and gain market share. We will be deliberate and measured in our approach to both the growth of our Jimmy'Z brand and the introduction of a third concept. We will open Aeropostale stores in Dubai early this spring as an initial phase of what we envision as a significant long-term international opportunity.

We will, I believe, continue to build upon a great American success story. This should be our 11th consecutive year of positive same-store sales, a feat never before accomplished in the teen specialty business. We will, I know, continue to be committed to the ideals and culture that differentiate us from our competitors.

I what to thank every member of the Aeropostale family for caring so consistently, for working so hard, and for achieving so much. I wish our entire Aero family and all of you on this call today a healthy and happy holiday and a new year of peace, promise and prosperity.

And with that, Operator, we are ready to open the lines for any questions that might exist.

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