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Article by DailyStocks_admin    (07-23-08 05:36 AM)

The Daily Magic Formula Stock for 07/23/2008 is Aeropostale Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% 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. We generally locate our stores in mall locations near popular teen gathering spots, including food courts, music stores and other teen-oriented retailers. As of February 2, 2008, we operated 828 stores in the following 47 U.S. states and two Canadian provinces:

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.

Information Systems

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


• point-of-sale;

• inventory management;

• supply chain;

• planning and replenishment; and

• financial reporting.

We continue to invest in technology to align our systems with our business requirements and to support our continuing growth. In the past year we invested in, among other things, a roll-out across all of our stores of a new point-of-sale system and the development of a new merchandise allocation system. We plan to continue to invest strategically in our infrastructure in the future.

Trademarks

We own, through our wholly owned subsidiary, Aéropostale West, Inc., a Delaware corporation, federal trademark registrations in the U.S. Patent and Trademark Office for our principal marks AÉROPOSTALE ® , AÉRO ® , 87 ® 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 also have certain registrations pending for trademarks and service marks for clothing, retail stores and online services. Additionally, we have applied for or have already obtained a registration for the AÉROPOSTALE and related marks in over 60 foreign countries. We plan to continue this focus on expanding our international registrations of our marks in the future.

In 2004, we acquired the rights to and existing registrations for the JIMMY’Z ® 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’Z 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 of the Company 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 ® , Hollister ® , Old Navy ® , Pacific Sunwear ® , and Tween Brands ® . Stores in our sector compete primarily on the basis of design, price, quality, service and selection.

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 2, 2008, we employed 3,210 full-time and 7,945 part-time employees. We employed 500 of our employees at our corporate offices and in the field, and 10,655 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. As a result, our working capital requirements fluctuate during the year, increasing in mid-summer in anticipation of the third and fourth quarters. Our business is also subject, at certain times, to calendar shifts which may occur during key selling times such as school holidays, Easter and regional fluctuations in the calendar during the back-to-school selling season.

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

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.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of net sales.

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.

Operating Activities

Cash flows from operating activities, our principal form of liquidity on a full-year basis, decreased by $6.4 million in fiscal 2007 and increased by $33.1 million in fiscal 2006, as compared to the prior fiscal year. The primary components of cash flows from operations for fiscal 2007 included an increase in net income, as adjusted for depreciation and amortization and other non-cash items, of $41.5 million. This increase was more than offset by an increase in cash used for accrued expenses, which resulted from the timing of income tax payments.

In accordance with the provisions of SFAS No. 123 (R), excess tax benefits from stock-based compensation of $5.5 million and $7.6 million were reported as a financing activity for fiscal 2007 and fiscal 2006, respectively. Excess tax benefits from stock-based compensation of $4.8 million in fiscal 2005 was reported as an operating activity.

The primary components of cash flows from operations for fiscal 2006 were net income, as adjusted for non-cash items, of $119.9 million, tenant allowances received from landlords of $13.4 million, and excess tax benefits from stock-based compensation of $7.6 million. The primary components of cash flows from operations for fiscal 2005 were net income, as adjusted for non-cash items, of $111.8 million, tenant allowances received from landlords of $21.1 million, and excess tax benefits from stock-based compensation of $4.8 million.

Working capital decreased to $87.3 million at February 2, 2008 from $234.0 million at February 3, 2007 primarily due to the increase in stock repurchases in fiscal 2007 (see below for further discussion). Total inventories increased by 20% on a square foot basis as of February 2, 2008 compared to last year. This increase was due to a change in the timing of our floor-sets, primarily resulting from an earlier Easter holiday in 2008.

Investing Activities

We invested $82.3 million in capital expenditures in fiscal 2007, primarily for the construction of 88 new AĂ©ropostale stores, to remodel seven existing stores, to complete the rollout of upgraded point of sale systems to our store chain, to open a second distribution center and for certain other information technology investments. Our future capital requirements will depend primarily on the number of new stores we open, the number of existing stores we remodel and other strategic investments. We plan to invest approximately $80.0 million in capital expenditures in fiscal 2008. These plans include investments of approximately $50.0 million to open approximately 85 new AĂ©ropostale stores in our new store format including approximately 15 in Canada and our first three new stores in Puerto Rico. Capital expenditure plans also include approximately $10.0 million to remodel approximately 18 existing stores to our new store format and approximately $20.0 million for other initiatives.

We had no short-term investments at February 2, 2008. We had $76.2 million in short-term investments as of February 3, 2007, consisting of auction rate debt and preferred stock securities. These securities were all sold during fiscal 2007.

Financing Activities

We repurchase our common stock from time to time under a stock repurchase program. The repurchase program may be modified or terminated by the Board of Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, opening and closing of the stock trading window, and liquidity and capital resource requirements going forward. During fiscal 2007, including the ASR program, we repurchased 11.7 million shares of our common stock for $266.7 million, as compared to 4.7 million shares for $91.4 million during fiscal 2006 and 2.7 million shares for $44.5 million during fiscal 2005.

On November 12, 2007, our Board of Directors approved a $250.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $600.0 million. We used a portion of the additional authorization to immediately execute an ASR program to repurchase $125.0 million of common shares as described below.

On November 13, 2007, we entered into a confirmation agreement with Bank of America. Pursuant to the ASR, Bank of America purchased shares of our common stock in the open market during the fourth quarter of fiscal 2007. The final number of shares repurchased by Bank of America under the ASR amounted to 4,786,759, which was based upon the volume weighted average share price of our common shares over the term of the ASR. The ASR was subject to collar provisions that established the minimum and maximum price for the shares, which in turn determined the final number of shares repurchased under the ASR. The initial price of the shares purchased by us from Bank of America was subject to a price adjustment based on the volume weighted average price of the shares during this period. The ASR transaction was completed on January 11, 2008.

With the latest increase in repurchase authorization, and after taking into account the $125.0 million ASR, total Company share repurchases since inception of the program are $466.2 million. Accordingly, we have approximately $133.8 million of repurchase authorization remaining under our share repurchase program as of February 2, 2008.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 California lifestyle-oriented brand targeting trend-aware young women and men aged 18 to 25. As of May 3, 2008, we operated 848 stores, consisting of 819 Aéropostale stores in 47 states and Puerto Rico, 15 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 will 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. 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.

Results of Operations

Overview

We achieved net sales of $336.3 million for the first quarter of 2008, or a 22% increase when compared to the first quarter of 2007. The increase in net sales for the first quarter of 2008 was driven primarily by average square footage growth of 11% and an increase in comparable store sales of 10%. Gross profit, as a percentage of net sales, increased by 0.9 percentage points for the first quarter of 2008 primarily due to increased merchandise margin. SG&A, as a percentage of net sales, decreased by 0.3 percentage points for the first quarter of 2008. Interest income decreased by $1.9 million for the first quarter of 2008 compared to the same period in 2007. The effective income tax rate was 40.5% for the first quarter of 2008 compared to 39.2% for the first quarter of 2007. Net income for the first quarter of 2008 was $17.5 million, or $0.26 per diluted share, compared to net income of $13.8 million, or $0.18 per diluted share, for the first quarter of 2007.

As of May 3, 2008, we had working capital of $95.1 million, cash and cash equivalents of $64.5 million and no short-term investments. Consolidated merchandise inventories increased by 25% and by 13% on a per square foot basis, at May 3, 2008, compared to the first quarter of 2007.

We operated 848 stores at May 3, 2008, an increase of 11% from the same period last year.

Comparison of the 13 weeks ended May 3, 2008 to the 13 weeks ended May 5, 2007

Net Sales

Net sales for the first quarter of 2008 increased by $60.6 million, or by 22% 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 10%. Comparable store sales increased in both our young women’s and young men’s categories. The overall comparable store sales increase reflected a 7% increase in the number of sales transactions and a 3% increase in units per sales transaction. Average unit retail for the first quarter of 2008 remained consistent compared to the prior year. Non-comparable store sales increased by $34.2 million, or by 12%, primarily due to 83 more stores open at the end of the first quarter of 2008 compared to the end of the first 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 0.9 percentage points for the first quarter of 2008 compared to the same period last year. The increase was due to an increase in merchandise margin by 1.1 percentage points and lower occupancy costs, partially offset by higher distribution and transportation costs. The increase in merchandise margin is primarily due to improved assortment of key merchandise classifications, primarily women's graphic tee shirt merchandise.

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 $13.9 million for the first quarter of 2008 compared to the first quarter of 2007. The increase in SG&A was primarily attributable to a $6.8 million increase in store-line expenses; a $3.8 million increase in corporate expenses, consisting of incentive, stock-based compensation and other corporate expenses; $1.5 million of higher store transaction costs, including e-commerce costs and store operations costs resulting primarily from new store growth and higher sales; a $1.0 million increase in benefits, and higher marketing costs of $0.8 million.

SG&A decreased by 0.3 percentage points, as a percentage of net sales, for the first quarter of 2008 compared to the first quarter of 2007. The 0.3 percentage point improvement was primarily due to the leveraging of store-line expenses, which was partially offset by higher stock-based compensation and increased e-commerce transaction costs, in line with the growth of that business.

Interest income and income taxes

Interest income decreased by $1.9 million for the first quarter of 2008 compared to the same period in 2007. The decrease was primarily due to 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 40.5% for the first quarter of 2008 and 39.2% for 2007. The increase in the effective tax rate was primarily due to nondeductible officers’ compensation and a reduction in tax exempt interest income.

Net income

Net income was $17.5 million, or $0.26 per diluted share, for the first quarter of 2008, compared to net income of $13.8 million, or $0.18 per diluted share, for the first quarter of 2007. Earnings per share increased by 44% for the first quarter of 2008 due to both an increase in net income and less weighted average shares outstanding, resulting from the Company’s repurchase of its common stock.

Consolidated net income included net losses from the Company’s Jimmy’Z subsidiary of $1.3 million, or $0.02 per diluted share, for the first quarter of 2008 compared to losses of $1.9 million, or $0.02 per diluted share for the first quarter of 2007.

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 through periodic use of our credit facility. At May 3, 2008, we had working capital of $95.1 million and cash and cash equivalents of $64.5 million.

Operating activities — Net cash used in operating activities, our primary form of liquidity on a full-year basis, decreased by $14.5 million for the first quarter of 2008 compared to the same period in 2007. Cash generated through net income, as adjusted for depreciation and amortization and other non-cash items, increased by $8.8 million. In addition, cash used for accrued expenses decreased by $6.6 million due primarily to the timing of income tax payments. Consolidated merchandise inventories increased by 25%, and by 13% on a per square foot basis, as of May 3, 2008 as compared to May 5, 2007, primarily due to an acceleration in the timing of our floor-sets this year.

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 21 Aéropostale stores in our new store format during the first quarter of 2008, which included three stores in Canada and one store in Puerto Rico. We plan to open approximately 65 additional Aéropostale stores during the remainder of fiscal 2008, which will include approximately 12 additional stores in Canada and two additional stores in Puerto Rico. In addition, during the first quarter of 2008, we remodeled and renovated two 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.

We had no short-term investments at either May 3, 2008 or February 2, 2008. We had $56.6 million in short-term investments as of May 5, 2007, consisting of auction rate debt and preferred stock securities. These securities were all sold during fiscal 2007.

Financing activities and capital resources — The Company repurchases its common stock from time to time under a stock repurchase program. On November 12, 2007, our Board of Directors approved a $250.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $600.0 million.

The repurchase program may be modified or terminated by the Board of Directors at any time, and there is no expiration date for the program. The extent and timing of repurchases will depend upon general business and market conditions, stock prices, opening and closing of the stock trading window, and liquidity and capital resource requirements going forward.

The Company has approximately $133.8 million of repurchase authorization remaining under its $600.0 million share repurchase program as of May 3, 2008.

On November 13, 2007, the Company entered into an amended and restated revolving credit facility with Bank of America, N.A., as Lender which expanded its availability from a maximum of $75.0 million to $150.0 million (the “New Credit Facility”). The New Credit Facility provides for a $150.0 million revolving credit line. The New Credit Facility is available for working capital and general corporate purposes. A portion of the availability under the New Credit Facility was used to fund the Company’s ASR to repurchase $125.0 million of its common shares in fiscal 2007. The New Credit Facility is scheduled to mature on November 13, 2012. At November 13, 2007, the Company had $31.3 million outstanding under the New Credit Facility that was repaid in full on November 27, 2007 (see Note 7 to the Notes to Unaudited Condensed Consolidated Financial Statements).

The operating leases included in the above table do not include contingent rent based upon sales volume, which represents approximately 15% of minimum lease obligations, or variable costs such as maintenance, insurance and taxes, which represents approximately 60% of minimum lease obligations.

Our open purchase orders are cancelable at any time prior to our receipt of the applicable goods without penalty to us, and were therefore not included in the above table.

In addition to the above table, we project making a benefit payment of approximately $14.6 million from our supplementary executive retirement plan in 2010, which reflects expected future service of our Chairman and Chief Executive Officer through an assumed retirement age of 65.

There were no financial guarantees outstanding as of May 3, 2008. We had no commercial commitments outstanding as of May 3, 2008.

Effective at the beginning of the first quarter of 2007, we adopted FIN No. 48 as described in Note 12 to the Notes to Unaudited Condensed Financial Statements. Our total liabilities for unrecognized tax benefits were $3.8 million at May 3, 2008. We cannot reasonably estimate the period of future payments for these liabilities. Therefore these liabilities were not included in the above table.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources. As of May 3, 2008, we have not issued any letters of credit.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

Critical accounting policies are those that are most important to the portrayal of the Company's financial condition and the results of operations and require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's most critical accounting policies have been discussed in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2008. In applying such policies, management must use significant estimates that are based on its informed judgment. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.

CONF CALL

Kenneth Ohashi

With me here today are Julian Geiger, our Chairman and Chief Executive Officer; Tom Johnson our Chief Operating Officer and Michael Cunningham our Chief Financial Officer. Mindy Meads our President and Chief Merchandising Officer is joining us telephonically. We issued a press release earlier this afternoon announcing our first quarter financial results. A copy of the release can be found on our corporate website.

Before we begin I would 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 through 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-and-A session to allow everyone a chance to speak. Once we have gone through a round of questions we will go back and you may queue up again at that time.

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

Julian Geiger

I thank you for joining us today and I welcome you to our first quarter conference call. All of us at Aeropostale are thrilled with our first quarter results which represent a very strong start to the 2008 fiscal year. The last three months were another period of record sales, record operating margins and record earnings for Aeropostale. During the quarter we grew net sales by 22% to $336 million and achieved a same store sales increase of 10%.

Our merchandise margins improved by 110 basis points and our net earnings grew 44% to $0.26 per share from $0.18 per share last year. It is rewarding for our entire organization to deliver such strong financial results and especially rewarding to do so, on a consistent basis. It is equally gratifying for all of us to see how powerful and compelling the Aeropostale brand has become.

All indicators demonstrate that Aeropostale is currently at a level of recognition and respect never previously achieved in our 20-year history. The number of transactions in an average store continues to increase, even during a time when mall traffic is less than robust.

Our merchandise assortments are fresh and focused; our new store shopping environment is exciting and fun. Retail team surveys indicate that the Aeropostale brand has continued to advance and is now recognized as a top brand of choice for our target customer. We remain dedicated to and focused on the principal of listening to our customers and giving them what they want to wear at a price they can afford.

We believe that two of the primary factors that distinguish Aeropostale from our competitors are our nimble and flexible operating model and entrepreneurial but disciplined attitude. Our new and changing promotions create excitement in our stores and enable us to spur the demand for merchandise on an item and classification basis.

We believe that this unique positioning coupled with our great merchandise allows us to navigate successfully through the kaleidoscopic changes that characterize the dynamic retail landscape in which we live. During times such as these, our focus on inventory management is intense and is supported by making investments in people, process and systems.

Our focus and scrutiny have enabled us to maintain inventory levels consistently in line with perceived opportunity, while maximizing the sales and margin and contributions. Our west coast distribution centre has helped us to become a more efficient organization, improving our speed to market and supporting our future growth.

During the quarter, we opened 20 new stores on a net basis, keeping us on track to open the 85 new stores; we have previously indicated we would add this year. These stores will represent a double-digit square foot increase for the year. The successes of the brand and our strong and growing reputation have led us to capturing additional market share. As you know, we entered the Canadian market last year and our stores north of the border continue to generate results in excess of our expectations.

Our successful and seamless opening of stores in new markets highlights the strength, vitality and transportability of the Aeropostale brand. We remain excited about the potential for future expansion of the brand into more underserved or untapped markets. In order to share some of the merchandising highlights of the last quarter with you I will now turn the call over to Mindy.

Mindy Meads

We are very pleased with the execution of our merchandising strategies for the spring selling season. As you recall, this strategy included distorting key classifications, further balancing our assortment by adding more fashion, fashion basics within attention to detail, integrating more patterns and prints and also developing new classifications such as dresses.

The success of this strategy has translated into our women’s comp being up 7% and our men’s comp being up 20%. During the quarter we experienced particular strength in men’s and women’s graphics and denim and women’s short and bare knit top. We are encouraged by the strong underlying trends in these key classifications, as they will be an important part of both; our summer and early back-to-school seasons.

Our team has been focused on identifying key trending classifications and strategically investing in these businesses. Graphics, which has been the cornerstone of our business is one in which we have significant expertise and is emerging as of a classification with extraordinary opportunity. Our graphics business is significantly outperforming both our sales and margin plans. Our logo graphics with the Aeropostale name remain our top sellers further reflecting the strength in the brand.

We've continued to add newness to our graphics by refining texture treatments and appliqués and more importantly we’ve been able to drive sales trends in this business due to our very short lead time with key vendors. The entire product development team is very excited about our merchandising initiatives for the upcoming back-to-school selling season. We look forward to building on the successes for the spring and summer and offering the team customers the best combination of fashion and value.

In addition we have a new line-up of new marketing promotions, which we believe will drive both the teen and parent shopper into our stores. We look forward to further sharing these details with you with our back-to-school line preview on Thursday, June 19 in New York city.

Now I would like to turn the call over to Michael, who will share with you the financial.

Michael Cunningham

Total net sales for the quarter were up 26% versus last year driven by average square footage growth of about 1% and a 10% comp. For the quarter our comp transactions were up 7%, our units per transactions were up 3% and our average unit retail was essentially flat. During the quarter we opened 21 stores and closed one, ending the quarter with a total of 819 Aero stores in US, 15 stores in Canada and 14 Jimmy’Z stores.

Our gross profit increased 25% while our gross margins for the quarter were at 33.1% versus 32.2% last year. The 90 basis point increase was driven by higher merchandise margin and the leveraging of occupancy cost partially offset by higher distribution and transportation costs. SG&A for the quarter increased 20%, over 24.4% sales versus 24.7% last year. The 30 basis point improvement was primarily due to leveraging of store line operational expenses partially offset by stock-based compensation, higher incentive comp reflecting our bulk plan performance this quarter and RAE comp related fees due to the doubling of sales in that business.

As a result our operating income was up 42% and our operating margin reached a record 8.7% for the first quarter. Our tax rate for the quarter was 40.5%, which resulted in net income of $17.5 million or $0.26 per share. Cash and equivalents at the close of the quarter was $64.5 million versus $210.7 million together of cash and cash equivalents, together with short-term securities last year. The $146.2 million decrease of last year reflects to our increased stock repurchase activity during the second half of 2007.

As of May 3, 2008 we had approximately $134 million of remaining buyback availability under the current $600 million share repurchase program. Inventory at the close of the quarter was $135 million, now we are up 25% in total. On a per square foot basis inventories were up 13%. As we discussed on our last two conference calls we strategically shifted our spring and summer floor-set calendar to maximize the spring selling season. These proved to be the right strategy as demonstrated by our results. We’d also noted that this shift would continue till the May when timing receipts to the back-to-school selling season became comparable.

As such high comparable floor sets schedule, our inventory per square foot was up 4% to last year, and we do not anticipate any major flows that shifts in the future. We are comfortable with the level, age and composition of our inventory, as we headed into the second quarter and the early part to the back-to-school selling season. Our capital expenditures for the quarter were $20 million and depreciation and amortizations was $9.9 million. We expect second quarter earnings to be in a range of $0.22 to $0.24 per diluted share compared to $0.19 per share last year.

I will now turn the call over to Julian.

Julian Geiger

I would like to reiterate, how pleased I am with our accomplishments during the first quarter. I am so proud of the entire organizations commitment and achievement. I believe that we are well positioned to maintain a momentum headed into the second quarter and for the back-to-school selling season. While we are excited about the continued present opportunities for the Aeropostale brand we are also investing in our future growth. We have been working on refining our merchandising strategies of Jimmy'Z and we have been very encouraged by the recent trends in that concept.

We are also making solid progress in building the team and infrastructure for our third concept. We look forward to keeping you abreast of our progress on this concept throughout the remainder of this year. By any statistical measure, our business is never been stronger. We continue to generate same-store sales and margin increases even against the backdrop of a challenging economic environment.

Sales trends in all geographical regions are positive. We believe that the success of our business is predicated on our solid and consistent financial model, a proven operating formula and our unique and special corporate sprit. I believe that the Aeropostale organization is the most talented and dedicated group of professionals in our industry. I cannot thank them enough for the heroic efforts or the great accomplishments.

I also thank all of you for your support and interest. We look forward to answering any questions you all might have at this time. Operator at this point we are now ready to take those questions.

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