| AEROPOSTALE INC Item 1A Risk Factors Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K 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 the company’s strategic direction, prospects and future results |
| Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements |
| The following risk factors should be read in connection with evaluating the Company’s business and future prospects |
| All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made |
| Such uncertainties include, among others, the following factors: Fluctuations in Comparable Store Sales and Quarterly Results of Operations May Cause the Price of our Common Stock to Decline Substantially |
| Our comparable store sales and quarterly results of operations have fluctuated in the past and are likely to continue to fluctuate in the future |
| In addition, there can be no assurance that we will be able to maintain our recent levels of comparable store sales as our business continues to expand |
| Our comparable store sales and quarterly results of operations are affected by a variety of factors, including: • fashion trends; • changes in our merchandise mix; • the effectiveness of our inventory management; • actions of competitors or mall anchor tenants; • calendar shifts of holiday or seasonal periods; • changes in general economic conditions and consumer spending patterns; • the timing of promotional events; and • weather conditions |
| If our future comparable store sales fail to meet the expectations of investors, then the market price of our common stock could decline substantially |
| You should refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information |
| If We Are Unable to Identify and Respond to Consumers’ Fashion Preferences in a Timely Manner, our Profitability Would Decline |
| We may not be able to keep pace with the rapidly changing fashion trends and consumer tastes inherent in the apparel industry |
| Accordingly, we produce casual, comfortable apparel, a majority of which displays either the “Aeropostale” or “Aero” logo |
| There can be no assurance that fashion trends will not move away from casual clothing or that we will not have to alter our design strategy to reflect a consumer change |
| Failing to anticipate, identify or react appropriately to changes in styles, trends, desired images or brand preferences, could have a material adverse effect on the Company’s sales, financial condition and results of operations |
| 8 _________________________________________________________________ [60]Table of Contents Our Business Could Suffer As a Result of a Manufacturer’s Inability to Produce Merchandise on Time and to Specifications |
| We do not own or operate any manufacturing facilities and therefore we depend upon independent third parties to manufacture all of our merchandise |
| We utilize both domestic and international manufacturers to produce our merchandise |
| The inability of a manufacturer to ship orders in a timely manner or meet our quality standards could cause delivery date requirements to be missed, which could result in lost sales |
| Our Business Could Suffer if a Manufacturer Fails to Use Acceptable Labor Practices |
| Our sourcing agents and independent manufacturers are required to operate in compliance with all applicable foreign and domestic laws and regulations |
| While our vendor operating guidelines promote ethical business practices for our vendors and suppliers, we do not control these manufacturers or their labor practices |
| The violation of labor or other laws by an independent manufacturer, or by one of the sourcing agents, or the divergence of an independent manufacturer’s or sourcing agent’s labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products or damage the Company’s reputation |
| Any of these, in turn, could have a material adverse effect on the Company’s financial condition and results of operations |
| To help mitigate this risk, we engage a third party independent contractor to visit the production facilities we receive our products from |
| This independent contractor assesses the compliance of the facility with, among other things, local and United States labor laws and regulations as well as foreign and domestic fair trade and business practices |
| In fiscal 2005, we sourced approximately 33prca of our merchandise from our top three suppliers; one company supplied approximately 15prca of our merchandise, and two others each supplied approximately 9prca of our merchandise |
| In addition, approximately 67prca of our merchandise was directly sourced from our top ten suppliers, and one company acted as our agent with respect to the sourcing of approximately 21prca of our merchandise |
| Our relationships with our suppliers generally are not on a long-term contractual basis and do not provide assurances on a long-term basis as to adequate supply, quality or acceptable pricing |
| Most of our suppliers could discontinue selling to us at any time |
| If one or more of our significant suppliers were to sever their relationship with us, we could be unable to obtain replacement products in a timely manner, which could cause our sales to decrease |
| Foreign Suppliers Manufacture Most of Our Merchandise and the Availability and Costs of These Products May Be Negatively Affected by Risks Associated with International Trade |
| Trade restrictions such as increased tariffs or quotas, or both, could affect the importation of apparel generally and increase the cost and reduce the supply of merchandise available to us |
| Much of our merchandise is sourced directly from foreign vendors in Europe, Asia and Central America |
| In addition, many of our domestic vendors maintain production facilities overseas |
| Some of these facilities are also located in regions that may be affected by political instability that could cause a disruption in trade |
| Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local political issues could have a material adverse effect on our results of operations |
| Our Growth Strategy Relies on the Continued Addition of a Significant Number of New Stores Each Year, Which Could Strain Our Resources and Cause the Performance of Our Existing Stores to Suffer |
| Our growth will largely depend on our ability to open and operate new stores successfully |
| We opened 105 Aeropostale and 14 Jimmy’Z stores in fiscal 2005, 103 Aeropostale stores in fiscal 2004, and 95 Aeropostale stores in fiscal 2003 |
| Additionally, we plan to open approximately 70 to 75 Aeropostale and up to 5 new Jimmy’Z stores in fiscal 2006 |
| We expect to continue to open a significant number of new stores in future years while also remodeling a portion of our existing store base |
| Our planned expansion will place increased demands on our operational, managerial and administrative resources |
| These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores |
| In addition, 9 _________________________________________________________________ [61]Table of Contents to the extent that our new store openings are in existing markets, we may experience reduced net sales volumes in previously existing stores in those same markets |
| Our Continued Expansion Plan is Dependent on a Number of Factors Which, if Not Implemented, Could Delay or Prevent the Successful Opening of New Stores and Penetration into New Markets |
| Unless we continue to do the following, we may be unable to open new stores successfully and, if so, our continued growth would be impaired: • identify suitable markets and sites for new store locations; • negotiate acceptable lease terms; • hire, train and retain competent store personnel; • foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise; • manage inventory effectively to meet the needs of new and existing stores on a timely basis; • expand our infrastructure to accommodate growth; and • generate sufficient operating cash flows or secure adequate capital on commercially reasonable terms to fund our expansion plans |
| In addition, we will open new stores in markets in which we currently have few or no stores |
| Our experience in these markets is limited and there can be no assurance that we will be able to develop our brand in these markets or adapt to competitive, merchandising and distribution challenges that may be different from those in our existing markets |
| Our inability to open new stores successfully and/or penetrate new markets would have a material adverse effect on our revenue and earnings growth |
| The Company’s key executive officers have substantial experience and expertise in the retail business and have made significant contributions to the growth and success of the Company’s brands |
| The unexpected loss of the services of one or more of these individuals could adversely affect the Company |
| Specifically, if we were to lose the services of Julian R Geiger, our Chairman and Chief Executive Officer, and/or Christopher L Finazzo, our Executive Vice President-Chief Merchandising Officer, our business could be adversely affected |
| Geiger and Mr |
| Finazzo maintain many of our vendor relationships, and the loss of either of them could negatively impact present vendor relationships |
| Failure of New Business Concepts Would Have an Effect on Our Results of Operations |
| We expect that the introduction of new brand concepts and other business opportunities will play an important role in our overall growth strategy |
| In particular, we have and will continue to open our Jimmy’Z brand stores |
| The operation of the Jimmy’Z store is subject to numerous risks, including unanticipated operating problems; lack of prior experience; lack of customer acceptance; new vendor relationships; competition from existing and new retailers; and could be a diversion of management’s attention from the Company’s core Aeropostale business |
| The Jimmy’Z concept involves, among other things, implementation of a retail apparel concept which is subject to many of the same risks as Aeropostale, as well as additional risks inherent with a more fashion driven concept, including risks of difficulty in merchandising, uncertainty of customer acceptance, fluctuations in fashion trends and customer tastes, as well as the attendant mark-down risks |
| Risks inherent in any new concept are particularly acute with respect to Jimmy’Z because this is the first significant new venture by us, and the nature of the Jimmy’Z business differs in certain respects from that of our core Aeropostale business |
| There can be no assurance that the Jimmy’Z stores will achieve sales and profitability levels justifying our investments in this business |
| If those sales levels are not achieved we may be forced to impair the carrying value of our investments, which impairment would have an impact on our results of operations |
| 10 _________________________________________________________________ [62]Table of Contents Our Net Sales and Inventory Levels Fluctuate on a Seasonal Basis |
| Our net sales and net income are disproportionately higher from August through January each year due to increased sales from back-to-school and holiday shopping |
| Sales during this period cannot be used as an accurate indicator for our annual results |
| Our net sales and net income from February through July are typically lower due to, in part, the traditional retail slowdown immediately following the winter holiday season |
| Any significant decrease in sales during the back-to-school and winter holiday seasons would have a material adverse effect on our financial condition and results of operations |
| In addition, in order to prepare for the back-to-school and holiday shopping seasons, we must order and keep in stock significantly more merchandise than we would carry during other parts of the year |
| Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross margins and negatively impact our profitability |
| Consumer purchases of discretionary items and retail products, including the Company’s products, may decline during recessionary periods and also may decline at other times when disposable income is lower |
| A downturn in the economy may adversely affect our sales |
| Our Ability to Attract Customers to Our Stores Depends Heavily on the Success of the Shopping Malls in Which We are Located |
| In order to generate customer traffic, we must locate our stores in prominent locations within successful shopping malls |
| We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new shopping malls, or the success of individual shopping malls |
| A significant decrease in shopping mall traffic would have a material adverse effect on our results of operations |
| We Rely on a Single Distribution Center |
| We maintain one distribution center to receive, store and distribute merchandise to all of our stores |
| Any significant interruption in the operation of the distribution center due to natural disasters, accidents, system failures or other unforeseen causes could have a material adverse effect on the Company’s financial condition and results |
| We Rely on a Third Party to Manage Our Distribution Center |
| The efficient operation of our stores is dependent on our ability to distribute, in a timely manner, merchandise to our store locations throughout the United States |
| An independent third party operates our distribution and warehouse facility |
| We depend on this third party to receive, sort, pack and distribute substantially all of our merchandise |
| This third party employs personnel represented by a labor union |
| Although there have been no work stoppages or disruptions since the inception of our relationship with this third party provider beginning in 1991, there can be no assurance that work stoppages or disruptions will not occur in the future |
| We also use a separate third party transportation company to deliver our merchandise from our warehouse to our stores |
| Any failure by either of these third parties to respond adequately to our warehousing and distribution needs would disrupt our operations and negatively impact our profitability |
| We believe that our key trademarks AEROPOSTALE^® and, to a lesser extent, AERO^® are integral to our logo-driven design strategy |
| We have obtained a federal registration of the AEROPOSTALE^® trademark in the United States and have applied for or obtained registrations in most foreign countries in which our vendors are located |
| We use the AERO mark in many constantly changing designs and logos even though we have not applied to register every variation or combination thereof for adult clothing |
| We also believe that the newly obtained JIMMY’Z and Woody Car Design marks are an important part of our growth strategy and expansion of our business |
| We have acquired federal registrations in the United States and in Canada and have expanded the scope of our filings in the United States Patent and Trademark Office for a greater number of apparel and accessory categories |
| There can be 11 _________________________________________________________________ [63]Table of Contents no assurance that the registrations we own and have obtained will prevent the imitation of our products or infringement of our intellectual property rights by others |
| If any third party imitates our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially adversely affected |
| Because we have not registered the AERO mark in all forms and categories and have not registered the “AEROPOSTALE”, “JIMMY’Z” and Woody Car Design marks in all categories or in all foreign countries in which we now or may in the future source or offer our merchandise, international expansion and our merchandising of non-apparel products using these marks could be limited |
| In addition, there can be no assurance that others will not try to block the manufacture, export or sale of our products as violation of their trademarks or other proprietary rights |
| Other entities may have rights to trademarks that contain the word “AERO” or may have registered similar or competing marks for apparel and accessories in foreign countries in which our vendors are located |
| Our applications for international registration of the AEROPOSTALE^® mark have been rejected in several countries in which our products are manufactured because third parties have already registered the mark for clothing in those countries |
| There may also be other prior registrations in other foreign countries of which we are not aware |
| In addition, we do not own the Jimmy’Z brand outside of the United States and Canada |
| Accordingly, it may be possible, in those few foreign countries where we were not been able to register the AEROPOSTALE^® mark, or in the countries where the Jimmy’Z brand is owned by a third party, for a third party owner of the national trademark registration for “AEROPOSTALE”, “JIMMY’Z” or the Woody Car Design to enjoin the manufacture, sale or exportation of Aeropostale or Jimmy’Z branded goods to the United States |
| If we were unable to reach a licensing arrangement with these parties, our vendors may be unable to manufacture our products in those countries |
| Our inability to register our trademarks or purchase or license the right to use our trademarks or logos in these jurisdictions could limit our ability to obtain supplies from or manufacture in less costly markets or penetrate new markets should our business plan change to include selling our merchandise in those jurisdictions outside the United States |
| The Effects of War or Acts of Terrorism Could Have a Material Adverse Effect on Our Operating Results and Financial Condition |
| The continued threat of terrorism, heightened security measures and military action in response to an act of terrorism has disrupted commerce and has intensified the uncertainty of the US economy |
| Any further acts of terrorism or a future war may disrupt commerce and undermine consumer confidence, which could negatively impact our sales revenue by causing consumer spending and/or mall traffic to decline |
| Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from foreign vendors |
| Inability to obtain merchandise from our foreign vendors or substitute other vendors, at similar costs and in a timely manner, could adversely affect our operating results and financial condition |