ARO Liquidation (AROP) 10-Q 2011 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)
R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2011
	OR
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-31314

Aéropostale, Inc.

(Exact name of registrant as specified in its charter)

Delaware	31-1443880
(State of incorporation)	(I.R.S. Employer Identification No.)
112 W. 34th Street, New York, NY	10120
(Address of Principal Executive Offices)	(Zip Code)

(646) 485-5410

(Registrant’s Telephone Number, Including Area Code)

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

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting
		(Do not check if a smaller reporting company)	company o

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The Registrant had 80,726,865 shares of common stock outstanding as of May 27, 2011.

AÉROPOSTALE, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements: (unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4	Controls and Procedures	18
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	19
Item 1A	Risk Factors	19
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	24
Item 4	Reserved	24
Item 5	Other Information	24
Item 6	Exhibits	25
SIGNATURES		26

2

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

AÉROPOSTALE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	April 30, 2011			January 29, 2011			May 1, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	139,103		$	265,553		$	312,716
Merchandise inventory		142,250			156,596			122,686
Deferred income taxes		13,593			13,593			21,680
Prepaid taxes		10,918			—			—
Prepaid expenses and other current assets		34,973			33,823			28,670
Total current assets		340,837			469,565			485,752
Fixtures, equipment and improvements, net		308,514			299,242			264,895
Other assets		4,531			4,390			7,337
TOTAL ASSETS	$	653,882		$	773,197		$	757,984
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	94,065		$	103,014		$	72,008
Accrued expenses and other current liabilities		78,002			113,088			121,033
Total current liabilities		172,067			216,102			193,041
Deferred rent, tenant allowances and other		113,472			109,331			97,621
Non-current retirement benefit plan liabilities		11,150			10,829			10,447
Uncertain tax contingency liabilities		4,327			4,298			4,009
Commitments and contingent liabilities (See notes 8, 9 and 10)
Stockholders’ Equity:
Preferred stock, $0.01 par value; 5,000 shares authorized, no shares issued or outstanding		—			—			—
Common stock, $0.01 par value; 200,000 shares authorized; 91,124; 90,692 and 138,099 shares issued		911			907			1,381
Additional paid-in capital		199,798			195,401			185,498
Accumulated other comprehensive income (loss)		2,129			(443	)		(5,254	)
Retained earnings		406,132			389,764			968,174
Treasury stock 10,398; 6,112 and 44,575 shares, at cost		(256,104	)		(152,992	)		(696,933	)
Total stockholders’ equity		352,866			432,637			452,866
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	653,882		$	773,197		$	757,984

See Notes to Unaudited Condensed Consolidated Financial Statements

3

AÉROPOSTALE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	13 weeks ended
	April 30, 2011		May 1, 2010
Net sales	$	469,183	$	463,641
Cost of sales (includes certain buying, occupancy and warehousing expenses)		332,525		280,822
Gross profit		136,658		182,819
Selling, general and administrative expenses		109,082		107,668
Income from operations		27,576		75,151
Interest expense, net		67		27
Income before income taxes		27,509		75,124
Income taxes		11,142		29,740
Net income	$	16,367	$	45,384
Basic earnings per share	$	0.20	$	0.48
Diluted earnings per share	$	0.20	$	0.48
Weighted average basic shares		82,605		93,912
Weighted average diluted shares		83,445		94,944

See Notes to Unaudited Condensed Consolidated Financial Statements

4

AÉROPOSTALE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	13 weeks ended
	April 30, 2011			May 1, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,367		$	45,384
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		15,967			13,366
Stock-based compensation		2,591			4,016
Excess tax benefits from stock-based compensation		(714	)		(3,744	)
Other		(1,377	)		(1,974	)
Changes in operating assets and liabilities:
Merchandise inventory		14,956			10,594
Prepaid taxes and other assets		(11,900	)		(107	)
Accounts payable		(9,192	)		(18,992	)
Accrued expenses and other liabilities		(30,174	)		(41,735	)
Net cash (used in) provided by operating activities		(3,476	)		6,808
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(25,430	)		(14,737	)
Net cash used in investing activities		(25,430	)		(14,737	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(100,118	)		(36,692	)
Proceeds from exercise of stock options		1,096			5,929
Excess tax benefits from stock-based compensation		714			3,744
Net cash used in financing activities		(98,308	)		(27,019	)
Effect of exchange rate changes		764			688
Net decrease in cash and cash equivalents		(126,450	)		(34,260	)
Cash and cash equivalents, beginning of year		265,553			346,976
Cash and cash equivalents, end of period	$	139,103		$	312,716
Supplemental Disclosure of Cash Flow Information:
Accruals related to purchases of property and equipment	$	3,275		$	11,408

See Notes to Unaudited Condensed Consolidated Financial Statements

5

AÉROPOSTALE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation

Aéropostale, Inc. is a primarily mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aéropostale stores and 7 to 12 year-old kids through its P.S. from Aéropostale stores.  The Company provides customers with a focused selection of high quality fashion and fashion basics at compelling values in an innovative and exciting store environment.  Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise.  Aéropostale products can be purchased in Aéropostale stores and online at www.aeropostale.com (this and any other references in this Quarterly Report on Form 10-Q to aeropostale.com or ps4u.com are solely references 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).  P.S. from Aéropostale products can be purchased in P.S. from Aéropostale stores, certain Aéropostale stores and online at www.ps4u.com.  As of April 30, 2011, we operated 973 Aéropostale stores, consisting of 913 stores in 49 states and Puerto Rico, 60 stores in Canada, as well as 54 P.S. from Aéropostale stores in 16 states.  In addition, pursuant to a Licensing Agreement, one of our international licensees operated 10 Aéropostale stores in the United Arab Emirates as of April 30, 2011.  During March 2011, we announced that we had signed a second licensing agreement.  The licensee to this agreement is expected to open approximately 25 stores in Singapore, Malaysia and Indonesia over the next five years.

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

Our business is highly seasonal, and historically we have realized 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 the third quarter and the holiday selling season in the fourth quarter.  Therefore, our interim period consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows.  These financial statements should be read in conjunction with our Annual Report on Form 10-K for our fiscal year ended January 29, 2011.

References to “2011” or “fiscal 2011” mean the 52-week period ending January 28, 2012 and references to “2010” or “fiscal 2010” mean the 52-week period ended January 29, 2011.  References to “the first quarter of 2011” mean the thirteen-week period ended April 30, 2011 and references to “the first quarter of 2010” mean the thirteen-week period ended May 1, 2010.

2.  Revenue Recognition

Sales revenue is recognized at the “point of sale” in our stores and at the time our e-commerce customers take possession of merchandise.  Allowances for sales returns are recorded as a reduction of net sales in the periods in which the related sales are recognized.  Shipping revenue from our e-commerce customers is also included in sales revenue.  Revenue from licensing arrangements is recognized when earned in accordance with the terms of the underlying agreement, generally based upon the greater of the contractually earned or guaranteed minimum royalty levels.  Revenue is not recorded on the purchase of gift cards or store credits.  A current liability is recorded upon purchase, and revenue is recognized when the gift card or store credits are redeemed for merchandise.  We also recognize breakage income for the portion of gift cards estimated to be unredeemed.  We have relieved our legal obligation to escheat the value of unredeemed gift cards to the relevant jurisdiction.  We therefore determined that the likelihood of certain gift cards being redeemed by the customer was remote, based upon historical redemption patterns of gift cards.  For those gift cards that we determined redemption to be remote, we reversed our liability and recorded gift card breakage income in net sales.  In the first quarter of 2011, we recorded $1.0 million in net sales related to gift card breakage income compared to $0.8 million in the first quarter of 2010.

6

3.  Cost of Sales and Selling, General and Administrative Expenses

Cost of sales includes costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center to the stores, shipping and handling costs, 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 and maintenance, depreciation and amortization and impairment charges.

Selling, general and administrative expenses, or “SG&A”, include 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 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.

4.  Stockholders’ Equity

Stock Repurchase Program

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 the first quarter of 2011, the Company repurchased 4.2 million shares of our common stock for $100.1 million, as compared to repurchases of 1.3 million shares for $36.7 million during the first quarter of 2010.

Program to date, we repurchased 57.1 million shares of our common stock for $1.0 billion, at an average price of $17.57 per share.  As of April 30, 2011, we have approximately $145.2 million of repurchase authorization remaining under our $1.15 billion share repurchase program.

Comprehensive Income (Loss)

The following table sets forth the components of total comprehensive income:

	13 weeks ended
	April 30, 2011		May 1, 2010
	(In thousands)
Net income	$	16,367	$	45,384
Other comprehensive income:
Changes in pension liability, net of tax		126		135
Changes in foreign currency translation adjustment 1		2,446		1,604
Total comprehensive income	$	18,939	$	47,123

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

	April 30, 2011			January 29, 2011			May 1, 2010
	(In thousands)
Pension liability, net of tax	$	(2,697	)	$	(2,823	)	$	(6,907	)
Cumulative foreign currency translation adjustment 1		4,826			2,380			1,653
Total accumulated other comprehensive income (loss)	$	2,129		$	(443	)	$	(5,254	)

1 Foreign currency translation adjustments are not adjusted for income taxes as they relate to a permanent investment in our subsidiary in Canada.

7

5.  Earnings Per Share

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

	13 weeks ended
	April 30, 2011		May 1, 2010
	(In thousands, except per share data)
Net income	$	16,367	$	45,384
Weighted average basic shares		82,605		93,912
Impact of dilutive securities		840		1,032
Weighted average diluted shares		83,445		94,944
Earnings per basic share	$	0.20	$	0.48
Earnings per diluted share	$	0.20	$	0.48

All options to purchase shares were included in the computation of diluted earnings per share during the first quarter of 2011 and the first quarter of 2010.

6.  Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

	April 30, 2011		January 29, 2011		May 1, 2010
Accrued gift cards	$	20,654	$	27,673	$	17,842
Accrued compensation and retirement benefit plan liabilities		17,747		25,165		38,538
Accrued rent		11,358		16,225		14,305
Other		28,243		44,025		50,348
	$	78,002	$	113,088	$	121,033

7.  Revolving Credit Facility

We have an amended and restated revolving credit facility with Bank of America, N.A. (the “Credit Facility”).  The Credit Facility provides for a $150.0 million revolving credit line.  The Credit Facility is available for working capital and general corporate purposes, including the repurchase of the Company’s capital stock and for its capital expenditures.  The Credit Facility is scheduled to expire on November 13, 2012 and is guaranteed by all of our domestic subsidiaries (the “Guarantors”).

Loans under the Credit Facility are secured by all our assets and are guaranteed by the Guarantors.  Upon the occurrence of a Cash Dominion Event (as defined in the Credit Facility and includes either any event of default or failure to maintain availability in an amount greater than 15% of the borrowing base) our ability to borrow funds, make investments, pay dividends and repurchase shares of our common stock would be limited, among other limitations. Direct borrowings under the Credit Facility bear interest at a margin over either LIBOR or a Base Rate (as each such term is defined in the Credit Facility).

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

·   incur additional debt or encumber assets of the Company;

·   merge with or acquire other companies, liquidate or dissolve;

·   sell, transfer, lease or dispose of assets; and

·   make loans or guarantees.

Events of default under the Credit Facility include, subject to grace periods and notice provisions in certain circumstances, failure to pay principal amounts when due, breaches of covenants, misrepresentation, default on leases or other indebtedness, excess uninsured casualty loss, excess uninsured judgment or restraint of business, business failure or application for bankruptcy, institution of legal process or proceedings under federal, state or civil statutes, legal challenges to loan documents, and a change in control.  If an event of default occurs, the Lender will be entitled to take various actions, including the acceleration of amounts due thereunder and requiring that all such amounts be immediately paid in full as well as possession and sale of all assets that have been used as collateral.  Upon the occurrence of an event of default under the Credit Facility, the lender may cease making loans, terminate the Credit Facility, and declare all amounts outstanding to be immediately due and payable.  As of April 30, 2011, we are not aware of any instances of noncompliance with any covenants or any other event of default under the Credit Facility.  During the first quarter of 2011 and as of April 30, 2011, we had no outstanding balances or stand-by or commercial letters of credit issued under the Credit Facility.  

8

8.  Retirement Benefit Plans

Retirement benefit plan liabilities consisted of the following:

	April 30, 2011		January 29, 2011		May 1, 2010
	(In Thousands)
Supplemental Executive Retirement Plan (“SERP”)	$	9,868	$	9,597	$	25,844
Long-term incentive deferred compensation plan		1,575		1,405		1,086
Postretirement benefit plan		1,034		1,154		974
Total		12,477		12,156		27,904
Less amount classified in accrued expenses related to SERP		1,327		1,327		17,457
Long-term retirement benefit plan liabilities	$	11,150	$	10,829	$	10,447

401(k) Plan

We maintain a qualified, defined contribution retirement plan with a 401(k) salary deferral feature that covers substantially all of our employees who meet certain requirements.  Under the terms of the plan, employees may contribute, subject to statutory limitations, up to 14% of their gross earnings and we will provide a matching contribution of 50% of the first 5% of gross earnings contributed by the participants.  We also have the option to make additional contributions or suspend the employer contribution at any time.  Each matching contribution vests over a five-year service period with 20% vesting after two years and 50% vesting after year three.  Vesting increases thereafter at a rate of 25% per year so that participants will be fully vested after five years of service.

Supplemental Executive Retirement Plan

We maintain a supplemental executive retirement plan, or SERP, which is a non-qualified defined benefit plan for certain executives.  The plan is non-contributory and not funded and provides benefits based on years of service and compensation during employment.  Participants are vested upon entrance in the plan. Pension expense is determined using various actuarial cost methods to estimate the total benefits ultimately payable to officers and this cost is allocated to service periods.  The actuarial assumptions used to calculate pension costs are reviewed annually.

The components of net periodic pension benefit cost are as follows:

	13 weeks ended
	April 30, 2011		May 1, 2010
	(In thousands)
Service cost	$	140	$	213
Interest cost		131		349
Amortization of prior experience cost		18		19
Amortization of net loss		52		221
Net periodic pension benefit cost	$	341	$	802

We had non-current liabilities of $8.5 million as of April 30, 2011, $8.3 million as of January 29, 2011 and $8.4 million as of May 1, 2010, in connection with this plan.  We had current liabilities of $1.3 million as of April 30, 2011, $1.3 million as of January 29, 2011 and $17.5 million as of May 1, 2010, in connection with this plan.

Long-term Incentive Plan

We have a long-term incentive deferred compensation plan established for the purpose of providing long-term incentives to a select group of management.  The plan is a non-qualified, non-contributory defined contribution plan and is not funded. Participants in this plan include all employees designated by us as Vice President, or other higher-ranking positions that are not participants in the SERP.  We record annual monetary credits to each participant’s account based on compensation levels and years as a participant in the plan.  Annual interest credits are applied to the balance of each participant’s account based upon established benchmarks.  Each annual credit is subject to a three-year cliff-vesting schedule, and participants’ accounts will be fully vested upon retirement after completing five years of service and attaining age 55.  We had liabilities of $1.6 million as of April 30, 2011, $1.4 million as of January 29, 2011 and $1.1 million as of May 1, 2010, in connection with this plan.

9

Postretirement Benefit Plan

We maintain a postretirement benefit plan for certain executives that provides retiree medical and dental benefits.  The plan is an other post-employment benefit plan, or OPEB, and is not funded.  We had recorded non-current liabilities of $1.0 million as of April 30, 2011, $1.2 million as of January 29, 2011 and $1.0 million as of May 1, 2010, for the accumulated postretirement benefit obligations.  Pension expense related to this plan was not material to our unaudited condensed consolidated financial statements for any period presented.

9.  Stock-Based Compensation

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

Non-Vested Stock

Certain of our employees and all of our directors have been awarded non-vested stock, pursuant to non-vested stock agreements. The non-vested stock awarded to employees generally cliff vests after up to three years of continuous service with us.  All non-vested stock immediately vests upon a change in control of the Company.  Initial grants of non-vested stock awarded to directors vest, pro-rata, over a three-year period, based upon continuous service. Subsequent grants of non-vested stock awarded to directors vest in full one year after the grant-date.

The following table summarizes non-vested shares of stock outstanding as of April 30, 2011:

	Shares			Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of January 30, 2011		753		$	22.22
Granted		395			23.84
Vested		(246	)		21.31
Cancelled		(5	)		21.56
Outstanding as of April 30, 2011		897		$	23.19

Total compensation expense is being amortized over the vesting period.  Compensation expense related to non-vested stock activity was $2.0 million for the first quarter of 2011 and $2.1 million for the first quarter of 2010.  As of April 30, 2011, there was $12.7 million of unrecognized compensation cost related to non-vested stock awards that is expected to be recognized over the weighted average period of two years.  The total fair value of shares vested was $5.3 million during the first quarter of fiscal 2011 and $7.2 million during the first quarter of fiscal 2010.

Performance Shares

Certain of our executives have been awarded performance shares, pursuant to performance shares agreements. The performance shares vest at the end of three years of continuous service with us, and the number of shares ultimately awarded is contingent upon meeting various cumulative consolidated earnings targets.  All performance shares immediately vest upon a change in control of the Company.  Compensation cost for the performance shares are periodically reviewed and adjusted based upon the probability of achieving certain performance targets.  If the probability of achieving targets changes, compensation cost will be adjusted in the period that the probability of achievement changes.

10

The following table summarizes performance shares of stock outstanding as of April 30, 2011:

	Shares			Weighted Average Grant-Date Fair Value
	(In thousands)
Outstanding as of January 30, 2011		422		$	18.44
Granted		116			22.64
Vested		(114	)		18.86
Cancelled		—			—
Outstanding as of April 30, 2011		424		$	19.48

Total compensation expense is being amortized over the vesting period.  Compensation expense related to performance shares was $0.2 million for the first quarter of 2011 compared to $1.0 million for the first quarter of 2010.  As of April 30, 2011, there was $4.9 million of unrecognized compensation cost related to performance shares that is expected to be recognized over the weighted average period of two years.

Stock Options

We have stock option plans under which we may grant qualified and non-qualified stock options to purchase shares of our common stock to executives, consultants, directors, or other key employees.  Stock options may not be granted at less than the fair market value at the date of grant. Stock options generally vest over four years on a pro-rata basis and expire after eight years. All outstanding stock options immediately vest upon (i) a change in control of the company and (ii) termination of the employee within one year of such change of control.  We did not grant any stock options during fiscal 2009, fiscal 2010 or first quarter of fiscal 2011.

The fair value of options was estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model requires certain assumptions, including estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the consolidated statements of income.

We have elected to adopt the simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee and director share-based awards that were outstanding.

The effects of applying the provisions of ASC 718 and the results obtained through the use of the Black-Scholes option-pricing model are not necessarily indicative of future values.

The following table summarizes stock option transactions for common stock during the first quarter of 2011:

	Number of Shares			Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In millions)
Outstanding as of January 30, 2011		746		$	15.68
Granted		—			—
Exercised		(73	)		15.08
Cancelled		(1	)		17.82
Outstanding as of April 30, 2011		672		$	15.74		3.32	$	6.6
Options vested as of April 30, 2011 and expected to vest1		669		$	15.74		3.32	$	6.5
Exercisable as of April 30, 2011		633		$	15.60		3.24	$	6.3

1 The number of options expected to vest takes into consideration estimated expected forfeitures.

We recognized $0.4 million in compensation expense related to stock options during the first quarter of 2011 and $0.9 million during the first quarter of 2010.  For the first quarter of 2011, the intrinsic value of options exercised was $0.8 million as compared to $7.1 million for the first quarter of 2010.

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The following table summarizes information regarding non-vested outstanding stock options as of April 30, 2011:

	Shares			Weighted Average Grant-Date Fair Value
	(In thousands)
Non-vested as of January 30, 2011		187		$	8.19
Granted		—			—
Vested		(147	)		8.22
Cancelled		(1	)		8.29
Non-vested as of April 30, 2011		39		$	8.06

As of April 30, 2011, there was $0.2 million of total unrecognized compensation cost related to non-vested options that we expect will be recognized over the remaining weighted-average vesting period of approximately one year.

10.  Commitments and Contingent Liabilities

We are party to various litigation matters and proceedings in the ordinary course of business.  In the opinion of our management, dispositions of these matters are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

As of April 30, 2011, we had not issued any third party guarantees.

11.  Income Taxes

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

We follow the provisions of ASC Topic 740, “Income Taxes”, which includes the accounting and disclosure for uncertainty in income taxes.  We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Uncertain tax position liabilities, inclusive of interest and penalties of $1.1 million, were $4.3 million as of April 30, 2011.  Reversal of these liabilities, along with reversal of related deferred tax assets, would favorably impact our effective tax rate.

We file income tax returns in the U.S. and in various states, Canada and Puerto Rico.  Our 2009 return is currently under audit by the IRS.  Currently, no significant issues have been identified and we expect the audit to be completed by mid-year of 2012.  All tax returns remain open for examination generally for our 2006 through 2010 tax years by various taxing authorities.  However, certain states may keep their statute open for six to ten years.

12.  Recent Accounting Developments

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.”  The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements.  The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively.  We do not expect the adoption of these provisions to have a material impact on our consolidated financial statements.

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

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve certain risks and uncertainties, including statements regarding our strategic direction, prospects and future results.  Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements.  The risk factors included in Part II, Item 1A should be read in connection with evaluating our business and future prospects.  All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made.

Introduction

Aéropostale, Inc. and its subsidiaries is a primarily mall-based, specialty retailer of casual apparel and accessories, principally targeting 14 to 17 year-old young women and men through its Aéropostale stores and 7 to 12 year-old kids through its P.S. from Aéropostale stores.  The Company provides customers with a focused selection of high quality fashion and fashion basics at compelling values in an innovative and exciting store environment.  Aéropostale maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise.  Aéropostale products can be purchased in Aéropostale stores and online at www.aeropostale.com.  P.S. from Aéropostale products can be purchased in P.S. from Aéropostale stores, certain Aéropostale stores and online at www.ps4u.com.  As of April 30, 2011, we operated 973 Aéropostale stores consisting of 913 stores in 49 states and Puerto Rico, 60 stores in Canada, as well as 54 P.S. from Aéropostale stores in 16 states.  In addition, pursuant to a Licensing Agreement, one of our international licensees operated 10 Aéropostale stores in the United Arab Emirates as of April 30, 2011.  During March 2011, we announced that we had signed a second licensing agreement.  The licensee to this agreement is expected to open approximately 25 stores in Singapore, Malaysia and Indonesia over the next five years.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A,” is intended to provide information to help you better understand our financial condition and results of operations.  Our business is highly seasonal, and historically we realize a significant portion of our sales, net income, and cash flow in the second half of the year, driven by the impact of the back-to-school selling season in our third quarter and the holiday selling season in our fourth quarter.  Therefore, our interim period consolidated financial statements may not be indicative of our full-year results of operations, financial condition or cash flows. We recommend that you read this section along with our condensed consolidated financial statements included in this report and along with our Annual Report on Form 10-K for the year ended January 29, 2011.

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

Results of Operations

Overview

We achieved net sales of $469.2 million for the first quarter of 2011, or a 1% increase when compared to the first quarter of 2010.  Gross profit, as a percentage of net sales, decreased by 10.3 percentage points and SG&A, as a percentage of net sales remained flat for the first quarter of 2011.  The effective income tax rate was 40.5% for the first quarter of 2011 and 39.6% for the first quarter of 2010.  Net income for the first quarter of 2011 was $16.4 million, or $0.20 per diluted share, compared to net income of $45.4 million, or $0.48 per diluted share, for the first quarter of 2010.

As of April 30, 2011, we had working capital of $168.8 million, cash and cash equivalents of $139.1 million, no short-term investments and no debt outstanding.  Average square footage growth was up 8% over the comparable prior year period.  Consolidated merchandise inventories increased by 16% and by 6% on a per retail square foot basis at April 30, 2011 compared to May 1, 2010.

In the first quarter of 2011, we opened nine Aéropostale stores, seven P.S. from Aéropostale stores, remodeled 12 Aéropostale stores and closed one Aéropostale store.  We operated 1,027 stores at April 30, 2011, an increase of 7% from the same period last year, attributable to new P.S. from Aéropostale stores in the U.S and new Aéropostale stores in both the U.S. and Canada.

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The following table sets forth our results of operations as a percentage of net sales. We also use this information to evaluate the performance of our business:

	13 weeks ended
	April 30, 2011			May 1, 2010
Net sales		100.0	%		100.0	%
Gross profit		29.1	%		39.4	%
Selling, general and administrative expenses		23.2	%		23.2	%
Income from operations		5.9	%		16.2	%
Interest income		0.0	%		0.0	%
Income before income taxes		5.9	%		16.2	%
Income taxes		2.4	%		6.4	%
Net income		3.5	%		9.8	%

Key Performance Indicators

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

	13 weeks ended
	April 30, 2011			May 1, 2010
Net sales (in millions)	$	469.2		$	463.6
Total store count at end of period		1,027			962
Comparable store count at end of period		905			882
Net sales growth		1	%		14	%
Comparable store sales change		(7	)%		8	%
Comparable average unit retail change		(11	)%		(2	)%
Comparable units per sales transaction change		9	%		3	%
Comparable sales transaction change		(4	)%		6	%
Net sales per average square foot	$	117		$	125
Gross profit (in millions)	$	136.7		$	182.8
Income from operations (in millions)	$	27.6		$	75.2
Diluted earnings per share	$	0.20		$	0.48
Average square footage growth over comparable period		8	%		5	%
Change in total inventory over comparable period		16	%		(5	)%
Change in inventory per square foot over comparable period		6	%		(11	)%
Percentages of net sales by category:
Young Women’s		68	%		71	%
Young Men’s		32	%		29	%

Comparison of the 13 weeks ended April 30, 2011 to the 13 weeks ended May 1, 2010

Net Sales

Net sales for the first quarter of 2011 increased by $5.5 million, or by 1% compared to the same period last year.  The increase in net sales was driven by an average store square footage growth of 8% primarily from new stores offset by a decrease of 7% in comparable store sales.  Comparable store sales increased in our young men’s category by 2% while the young women’s category decreased by 10%.  The overall comparable store sales reflected decreases of 11% in average unit retail and 4% in the number of sales transactions, partially offset by an increase of 9% in units per sales transaction.  Non-comparable store sales increased by $33.9 million due primarily to 65 more stores open at the end of the first quarter of 2011 compared to the end of the first quarter of 2010.  Total non-comparable store sales includes net sales from our e-commerce business which increased by 18% or $4.4 million to $28.2 million during the first quarter of 2011 when compared to the same period last year.

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Gross Profit

Cost of sales includes costs related to merchandise sold, including inventory valuation adjustments, distribution and warehousing, freight from the distribution center to the stores, shipping and handling costs, 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 and maintenance, depreciation and amortization and impairment charges.

Gross profit, as a percentage of net sales, decreased by 10.3 percentage points for the first quarter of 2011 compared to the same period last year.  The decrease was due to lower merchandise margin of 7.4 percentage points, primarily due to significantly increased promotional activity during the quarter as well as higher product costs.  The decrease in gross profit was also due to higher occupancy costs of 1.8 percentage points, which included rent for our New York City stores, higher depreciation costs of 0.5 percentage points and higher distribution and transportation costs of 0.5 percentage points.

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 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 as a percentage of net sales remained flat for the first quarter of 2011 compared to the first quarter of 2010.  Corporate expenses decreased by 1.2 percentage points due to lower incentive and stock-based compensation expense.  These decreases were offset primarily by higher store-line expenses of 0.8 percentage points and e-commerce transaction costs of 0.2 percentage points.

SG&A increased by $1.4 million for the first quarter of 2011 compared to the first quarter of 2010.  The increase in SG&A was largely due to an increase of $4.4 million in store-line expenses, an increase in store and e-commerce transaction expenses of $1.4 million, resulting primarily from new store growth and increased sales, and increased marketing expenses of $0.7 million.  These increases were partially offset by a decrease of $5.1 million in corporate expenses, primarily from lower incentive and stock-based compensation costs.

Income taxes

The effective income tax rate was 40.5% for the first quarter of 2011 and 39.6% for the first quarter of 2010.  The increase in the effective tax rate was due primarily to the mix of domestic and Canadian earnings during the quarter.

Net income

Net income was $16.4 million, or $0.20 per diluted share, for the first quarter of 2011, compared to net income of $45.4 million, or $0.48 per diluted share, for the first quarter of 2010.  Earnings per share decreased by 58% for the first quarter of 2011.

Balance of Year Outlook

For the balance of 2011, we expect to continue to experience challenging sales trends and a highly competitive business environment in addition to rising product costs that will reduce our overall profitability.  However, we will continue to execute our key initiatives which are focused in three primary areas: executing our product initiatives, enhancing processes and technology, and concentrating on our long-term growth drivers, including expanding our P.S. from Aéropostale business and pursuing additional international opportunities.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, construction of new stores, remodeling of existing stores, and the improvement or enhancement of our information technology systems.  Due to the seasonality of our business, we have historically realized a significant portion of our cash flows from operations during the second half of the year. Generally, 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, if necessary.  At April 30, 2011, we had working capital of $168.8 million, cash and cash equivalents of $139.1 million and no debt outstanding under our $150.0 million credit facility.  Additionally, we repurchase our common stock from time to time under a stock repurchase program (see Note 4 to the Notes to Unaudited Condensed Consolidated Financial Statements).

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The following table sets forth our cash flows for the period indicated:

	13 weeks ended
	April 30, 2011			May 1, 2010
	(In thousands)
Net cash (used in) provided by operating activities	$	(3,476	)	$	6,808
Net cash used in investing activities		(25,430	)		(14,737	)
Net cash used in financing activities		(98,308	)		(27,019	)
Effect of exchange rate changes		764			688
Net decrease in cash and cash equivalents	$	(126,450	)	$	(34,260	)

Operating activities— Net cash provided by operating activities decreased by $10.3 million for the first quarter of 2011 compared to the same period in 2010.  The decrease in cash flows from operating activities was primarily due to the decrease in net income of $29.0 million, partially offset by increases in cash flows from accounts payable of $9.8 million attributable to later merchandise product receipts for the Easter shift, and by increases in cash flows from inventory of $4.4 million.

Consolidated merchandise inventories increased by 16% overall due to the store openings discussed below and the increase in average square footage.  Consolidated merchandise inventories increased by 6% on a per store square foot basis as of April 30, 2011 as compared to May 1, 2010.

Investing activities – Net cash used in investing activities related to capital expenditures was $25.4 million for the first quarter of 2011 compared to $14.7 million for the first quarter of 2010.

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.  During fiscal 2011, we plan to invest approximately $70.0 million in capital expenditures.  In the first quarter of 2011, we opened nine Aéropostale stores, seven P.S. from Aéropostale stores and remodeled 12 Aéropostale stores.  During the remainder of the fiscal year, we plan to open approximately 14 Aéropostale stores and approximately 19 P.S. from Aéropostale stores.  In addition, we expect to complete approximately 40 store remodels.

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 windows, and liquidity and capital resource requirements going forward.

During the first quarter of 2011, the Company repurchased 4.2 million shares of our common stock for $100.1 million, as compared to repurchases of 1.3 million shares for $36.7 million during the first quarter of 2010.

Program to date, we repurchased 57.1 million shares of our common stock for $1.0 billion, at an average price of $17.57 per share.  As of April 30, 2011, we have approximately $145.2 million of repurchase authorization remaining under our $1.15 billion share repurchase program.

We have an amended and restated revolving credit facility with Bank of America, N.A. (the “Credit Facility”).  The Credit Facility provides for a $150.0 million revolving credit line.  The Credit Facility is available for working capital and general corporate purposes.  The Credit Facility is scheduled to mature on November 13, 2012, and no amounts were outstanding during the first quarter of 2011 or as of April 30, 2011.

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Contractual Obligations

The following table summarizes our contractual obligations as of April 30, 2011:

			Payments Due
			Balance of		In 2012		In 2014		After
	Total		2011		and 2013		and 2015		2016
	(In thousands)
Contractual Obligations
Real estate operating leases	$	933,380	$	75,857	$	246,230	$	208,577	$	402,716
Equipment operating leases		8,047		2,709		4,689		649		—
Employment agreements		6,800		2,864		3,936		—		—
Total contractual obligations	$	948,227	$	81,430	$	254,855	$	209,226	$	402,716

The real estate operating leases included in the above table do not include contingent rent based upon sales volume, which amounted to approximately 20% of minimum lease obligations in fiscal 2010.  In addition, the real estate operating leases above do not include variable costs paid to landlords such as maintenance, insurance and real estate taxes, which represented approximately 55% of minimum lease obligations in fiscal 2010.

Our open purchase orders are cancelable without penalty and are therefore not included in the above table.

As discussed in Note 8 to the Notes to Unaudited Condensed Consolidated Financial Statements, we have a SERP liability of $9.9 million at April 30, 2011; a Postretirement Benefit Plan liability of $1.0 million at April 30, 2011; and a Long-Term Incentive Deferred Compensation Plan liability of $1.6 million at April 30, 2011.  Such liability amounts are not reflected in the table above.  We expect to make payments in the next 12 months of approximately $1.3 million from our SERP, which is included in the total SERP liability of $9.9 million.

There were no financial guarantees and no commercial commitments outstanding as of April 30, 2011.

Our total liabilities for unrecognized tax benefits were $4.3 million at April 30, 2011.  We cannot make a reasonable estimate of the amount and period of related future payments for these non-current liabilities of $4.3 million.  Therefore these liabilities were not included in the above table.

Off-Balance Sheet Arrangements

Other than operating lease commitments set forth in the table above, we are not party to any material off-balance sheet financing 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 April 30, 2011, we have not issued any letters of credit for the purchase of merchandise inventory or any capital expenditures.

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 our 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.  Our most critical accounting policies have been discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.  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.

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As of April 30, 2011, there have been no material changes to any of the critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of April 30, 2011, we had no outstanding borrowings under our Credit Facility.  In addition, we had no stand-by or commercial letters of credit issued under the Credit Facility.  To the extent that we may borrow pursuant to the Credit Facility in the future, we may be exposed to market risk from interest rate fluctuations.

Unrealized foreign currency gains and losses, resulting from the translation of our Canadian subsidiary financial statements into our U.S. dollar reporting currency are reflected in the equity section of our consolidated balance sheet in accumulated other comprehensive income (loss).  The balance of the unrealized gain included in accumulated other comprehensive income was approximately $4.8 million as of April 30, 2011.  A 10% movement in quoted foreign currency exchange rates could result in a fair value translation fluctuation of approximately $4.1 million, which would be recorded in other comprehensive income (loss) as an unrealized gain or loss.

We also face transactional currency exposures relating to merchandise that our Canadian subsidiary purchases using U.S. dollars.  These foreign currency transaction gains and losses are charged or credited to earnings as incurred.  We do not hedge our exposure to this currency exchange fluctuation and transaction gains and losses to date have not been significant.

Item 4.  Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:  Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer concluded that as of the end of our first quarter ended April 30, 2011, our disclosure controls and procedures are effective.

(b) Changes in internal controls:  During our first fiscal quarter, there have been no changes in our internal controls over our financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over our financial reporting.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

We are party to various litigation matters and proceedings in the ordinary course of business.  In the opinion of our management, dispositions of these matters are not expected to have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.  Risk Factors

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements involve certain risks and uncertainties, including statements regarding our strategic direction, prospects and future results.  Certain factors, including factors outside of our control, may cause actual results to differ materially from those contained in the forward-looking statements.  The following risk factors should be read in connection with evaluating our business and future prospects.  All forward looking statements included in this report are based on information available to us as of the date hereof, and we assume no obligation to update or revise such forward-looking statements to reflect events or circumstances that occur after such statements are made.  Such uncertainties include, among others, the following factors:

If we are unable to identify and respond to consumers’ fashion preferences, domestically and/or internationally, in a timely manner, our profitability would decline.

We may not be able to keep pace with the rapidly changing fashion trends, both domestically and/or internationally, and teen consumer apparel tastes.  We produce casual, comfortable on trend apparel, a majority of which displays the “Aéropostale”, “Aéro” or “P.S. from Aéropostale” 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 changes in consumer preferences.  Failure to anticipate, identify or react appropriately to changes in styles, trends, desired images or brand preferences could have a material adverse effect on our results of operations.

Competitive Industry Conditions

The child and teen specialty retail industries have historically been highly competitive.  One of our competitive advantages throughout our history has been our promotional business model.  A number of our competitors are now also operating a more promotional business, similar to our own.  As a result we now face increased competition based upon price and promotion which we have not experienced previously.  Greater or continued promotional activity in the child or teen specialty retail industries will have a material adverse effect on our sales and results of operations.

The effect of global, national, regional and local economic pressures and conditionsmay adversely affect our sales.

The global economic crisis continues to cause a great deal of uncertainty. This market uncertainty continues to result in a lack of consumer confidence and spending.  Our business is highly sensitive to consumer spending patterns and preferences.  Various economic conditions affect the level of disposable income consumers have available to spend on the merchandise we offer, including unemployment rates, interest rates, taxation, energy costs, the availability of consumer credit, consumer confidence in future economic conditions and general business conditions. Accordingly, consumer purchases of discretionary items and retail products, including our products, may decline during recessionary periods, and also may decline at other times when changes in consumer spending patterns affect us unfavorably.  In addition, any significant decreases in shopping mall traffic could also have a material adverse effect on our results of operations.  Therefore, our growth, sales and profitability may be adversely affected by economic conditions on a local, regional, national and/or global level.

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Our ability to react to raw material cost increases, labor and energy prices could reduce our overall profitability.

Global inflationary economic conditions, as well as increases in our product costs, such as raw materials, labor and fuel, will reduce our overall profitability. Specifically, increases in the price of cotton, that is used in the manufacture of merchandise we purchase from our suppliers, negatively impacts our cost of goods.  In addition, any reduction in merchandise available to us or any significant increase in the costs to produce that merchandise would have a material adverse effect on our results of operations.  We have strategies in place to mitigate the rising cost of raw materials and our overall profitability depends on the success of those strategies. Additionally, increases in other costs, including labor and energy, could adversely impact our results of operations as well.

A significant decrease in sales during peak shopping seasons could have an adverse effect on our financial condition and results of operations.

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.  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.  Sales during this period cannot be used as an accurate indicator for our annual results.  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.  Additionally, 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.

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 could have a material adverse effect on our results of operations.  Additionally, the loss of an anchor or other significant tenant in a shopping mall in which we have a store, or the closure of a significant number of shopping malls in which we have stores, either by a single landlord with a large portfolio of malls, or by a number of smaller individual landlords, may have a material adverse effect on our results of operations.

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.  Our comparable store sales and quarterly results of operations are affected by a variety of factors, including:

• actions of our competitors or mall anchor tenants;

• changes in general economic conditions and consumer spending patterns;

• fashion trends;

• changes in our merchandise mix;

• the effectiveness of our inventory management;

• calendar shifts of holiday or seasonal periods;

• the timing of promotional events; and

• weather conditions.

If our comparable store sales fail to meet the expectations of investors, as was the case in our first quarter, then the market price of our common stock could decline substantially as it did after the announcement of our first quarter fiscal 2011 results.  You should refer to the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

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Our continued expansion plan is dependent on a number of considerations which, if not successfully addressed, could delay or prevent the opening of new stores and our entry into new markets.

Unless we continue to do the following, we may be unable to open new stores successfully and, in turn, 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 and distribution 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.

There are a finite number of suitable locations and malls within the United States and Canada in which to locate our stores.  If we are unable to locate additional suitable locations to open new stores successfully and/or enter new markets, then there will be an adverse effect on the rate of our revenue and earnings growth.

We rely on a small number of vendors to supply a significant amount of our merchandise.

During fiscal 2010, we sourced approximately 85% of our merchandise from our top five merchandise vendors.  During fiscal 2009, we sourced approximately 81% of our merchandise from our top five merchandise vendors.  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 may not be able to obtain replacement products in a timely manner, which would have a material adverse effect on our sales, financial condition and results of operations.In addition, we do not own or operate any of our own manufacturing facilities and therefore we depend upon independent third party vendors to manufacture all of the merchandise we sell in our stores.  If any of our vendors, especially our primary vendors which manufacture the majority of our merchandise, ship orders to us late, do not  meet our quality standards, or otherwise fail to deliver us product in accordance with our plans, then there would be a material adverse effect on our results of operations.

Our foreign sources of production may not always be reliable, which may result in a disruption in the flow of new merchandise to our stores.

The large majority of the merchandise we purchase is manufactured overseas.  We do not have any long-term merchandise supply contracts with our vendors and the imports of our merchandise by our vendors are subject to existing or potential duties, tariffs and quotas.  We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) enhanced security measures at foreign and United States ports, which could delay delivery of goods; (iii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region within which we do business; (iv) imposition of additional or greater duties, taxes, and other charges on imports; (v) delayed receipt or non-delivery of goods due to the failure of our vendors to comply with applicable import regulations; and (vi) delayed receipt or non-delivery of goods due to unexpected or significant port congestion or labor unrest at United States ports.  Any disruption to our vendors and our foreign sources of production due to any of the factors listed above or due to other unforeseeable events or circumstances could have a material adverse effect on our results of operations.

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Failure of new business concepts would have a negative effect on our results of operations.

We expect that the introduction of new brand concepts, such as the launch in fiscal 2009 of our new store brand concept P.S. from Aéropostale, as well as other new business opportunities, such as international expansion, will play an important role in our overall growth strategy.  Our ability to succeed with a new brand concept requires significant expenditures and management attention. Additionally, any new brand is subject to certain risks including customer acceptance, competition, product differentiation, the ability to attract and retain qualified personnel, including management and designers, diversion of management’s attention from our core Aéropostale business and the ability to obtain suitable sites for new stores.  Our experience with our Jimmy’Z brand, which we closed in fiscal 2009, demonstrates that there can be no assurance that new brands will grow or become profitable.

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 our reputation.  Any of these, in turn, could have a material adverse effect on our financial condition and results of operations.  To help mitigate this risk, we engage a third party independent contractor to visit the production facilities from which we receive 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 foreign and domestic fair trade and business practices.

The unexpected loss of the services of key personnel could have a material adverse effect on our business.

Our key executive officers have substantial experience and expertise in the retail industry and have made significant contributions to the growth and success of our brands.  The unexpected loss of the services of one or more of these individuals could adversely affect us.  Specifically, if we were to unexpectedly lose the services of Thomas P. Johnson, our Chief Executive Officer, or Michael J. Cunningham, our President, our business could be adversely affected.  In addition, departures of any other senior executives or key performers in the Company could also adversely affect our operations.

A substantial interruption in our information systems could have a material adverse effect on our business.

We depend on the security and integrity of electronic data and our management information systems for many aspects of our business.  We may be materially adversely affected if our management information systems are disrupted or compromised or we are unable to improve, upgrade, maintain, and expand our management information systems.

We rely on third parties to manage our distribution centers and transport our merchandise to our stores; a disruption of our distribution activities could have a material adverse effect on our business.

The efficient operation of our stores is dependent on our ability to distribute, in a timely manner, our merchandise to our store locations throughout the United States, Canada and Puerto Rico.  We currently lease and maintain two, third party, independently operated distribution facilities, one in South River, New Jersey, and the other in Ontario, California.  These distribution centers manage, collectively, the receipt, storage, sortation, packaging and distribution of virtually all of our merchandise.  In addition, we also utilize a third distribution center, located in Canada, which is independently owned and operated.

These third parties employ personnel represented by labor unions.  Although there have been no work stoppages or disruptions since the inception of our relationships with these third party providers, there can be no assurance that work stoppages or disruptions will not occur in the future.  We also use separate third party transportation companies to deliver our merchandise from our distribution centers to our stores.  Any failure by any of these third parties to respond adequately to our warehousing, distribution and transportation needs would have a material adverse effect on our results of operations.

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Failure to comply with regulatory requirements could have a material adverse effect on our business.

As a public company, we are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission (“SEC”) and the NYSE. Failure to comply with such laws and regulations could have a material adverse effect on our reputation, financial condition and on the market price of our common stock.

We rely on a third party to manage the web-hosting, operation, warehousing and order fulfillment for our e-commerce business; any disruption of these activities could have a material adverse effect on our e-commerce business.

We rely on one third party, GSI Commerce, Inc. (“GSI”), to host our e-commerce website, warehouse all of the inventory sold through our e-commerce website, and fulfill all of our e-commerce sales to our customers.  GSI also performs additional services for us supporting our e-commerce business.  Any significant interruption in the operations of GSI, over which we have no control, could have a material adverse effect on our e-commerce business.  In addition, GSI recently announced a planned merger with Ebay.  There can be no assurance that certain aspects of our existing business relationship and e-commerce operations with GSI will not be affected as a result of its acquisition by Ebay.

Failure to protect our trademarks adequately could negatively impact our brand image and limit our ability to penetrate new markets.

We believe that our key trademarks AÉROPOSTALE®, AERO® and 87® and our new store concept brand, P.S. FROM AÉROPOSTALE™  and variations thereof, are integral to our logo-driven design strategy.  We have obtained federal registrations of or have pending applications for these trademarks in the United States and have applied for or obtained registrations in most foreign countries in which our vendors are located, as well as elsewhere.  We use these trademarks in many constantly changing designs and logos even though we have not applied to register every variation or combination thereof for adult clothing and related accessories. There can be 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.

There can be no assurance that others will not try to block the manufacture, export or sale of our products as a violation of their trademarks or other proprietary rights.  Other entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for apparel and accessories in foreign countries in which our vendors are located.  There may also be other prior registrations in other foreign countries of which we are not aware.  Accordingly, it may not be possible, in those few foreign countries where we were not able to register our marks, to enjoin the manufacture, sale or exportation of AÉROPOSTALE or P.S. FROM AÉROPOSTALE 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, acts of terrorism, natural disasters or other unforeseen wide-scale events could have a material adverse effect on our operating results and financial condition.

The continued threat of terrorism and the associated heightened security measures and military actions in response to acts of terrorism has disrupted commerce and has intensified uncertainties in the U.S. economy.  Any further acts of terrorism, a future war or a widespread natural disaster 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, or any other natural disaster that results in unforeseen interruptions of commerce, could negatively impact our business by interfering with our ability to obtain merchandise from our vendors.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

We repurchase our common stock from time to time under a stock repurchase program.  On November 11, 2010, our Board of Directors approved a $300.0 million increase in repurchase availability under the program, bringing total repurchase authorization, since inception of the program, to $1.15 billion.  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 our stock trading window, and liquidity and capital resource requirements going forward.  Our purchases of treasury stock for the first quarter of fiscal 2011 and remaining availability pursuant to our share repurchase program were as follows:

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that may yet be Purchased Under the Plans or Programs (a) (b)
							(In thousands)
January 30 to February 26, 2011		400,000	$	25.97		400,000	$	234,947
February 27 to April 2, 2011		3,763,000		23.85		3,763,000	$	145,219
April 3 to April 30, 2011		—		—		—	$	145,219
Total		4,163,000	$	24.05		4,163,000

__________

(a)	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.
(b)	After taking into account the additional $300.0 million of repurchase availability that was approved on November 11, 2010.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Reserved

Item 5.  Other Information

Not applicable.

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Item 6.  Exhibits

Exhibit No.	Description
31.1	Certification by Thomas P. Johnson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification by Marc D. Miller, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification by Thomas P. Johnson pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification by Marc D. Miller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS	XBRL Instance Document.*
101.SCH	XBRL Taxonomy Extension Schema.*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.*
101.LAB	XBRL Taxonomy Extension Label Linkbase.*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.*

____________

*	Filed herewith.
**	Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Aéropostale, Inc.

/s/ THOMAS P. JOHNSON

Thomas P. Johnson

Chief Executive Officer

(Principal Executive Officer)

/s/ MARC D. MILLER

Marc D. Miller

Senior Vice President — Chief Financial Officer

(Principal Financial Officer)

Dated: June 3, 2011

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