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
      1934For
      the quarterly period ended May 3, 2008OR£
            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 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. (Check
one):





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





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





SEC 1296
(02-08) Potential persons who
are to respond to the collection of information contained in this form are not
required to respond unless the form displays a currently valid OMB control
number.





The
Registrant had 66,926,511 shares of common stock issued and outstanding as of
May 30, 2008.




















AÉROPOSTALE, INC.





TABLE
OF CONTENTS




PART
      I — FINANCIAL INFORMATION
            PageItem
      1.
            Financial Statements (unaudited)
            3Condensed Consolidated Balance Sheets
            3Condensed Consolidated Statements of Income
            4Condensed Consolidated Statements of Cash
    Flows
            5Notes to Unaudited Condensed Consolidated Financial
      Statements
            6Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            12Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            17Item
      4.
            Controls and Procedures
            17PART
      II — OTHER INFORMATIONItem
      1.
            Legal Proceedings
            18Item
      1A.
            Risk Factors
            18Item
      2.
            Unregistered Sales of Equity Securities and Use
      of Proceeds
            23Item
      3.
            Defaults Upon Senior Securities
            23Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            23Item
      5.
            Other Information
            23Item
      6.
            Exhibits
            23SIGNATURES
            24





2
 Table of Contents




PART
I — FINANCIAL INFORMATION





Item
1.  Financial
Statements (unaudited)





AÉROPOSTALE, INC.





CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands)





May 3, 2008
            
            
            February 2, 2008
            
            
            May 5, 2007(Unaudited)
            
            
            
            
            
            (Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            64,469
            
            
            $
            111,927
            
            
            $
            154,119Short-term
      investments
            
            
            —
            
            
            
            —
            
            
            
            56,565Merchandise
      inventory
            
            
            134,976
            
            
            
            136,488
            
            
            
            107,575Tenant
      allowances receivable
            
            
            4,904
            
            
            
            5,147
            
            
            
            6,792Prepaid
      expenses
            
            
            13,643
            
            
            
            13,604
            
            
            
            11,636Deferred
      income taxes
            
            
            12,961
            
            
            
            12,961
            
            
            
            8,039Other
      current assets
            
            
            3,366
            
            
            
            4,560
            
            
            
            2,659Total
      current assets
            
            
            234,319
            
            
            
            284,687
            
            
            
            347,385Fixtures,
      equipment and improvements, net
            
            
            230,996
            
            
            
            213,831
            
            
            
            193,832Intangible
      assets
            
            
            —
            
            
            
            —
            
            
            
            1,400Deferred
      income taxes
            
            
            13,818
            
            
            
            13,073
            
            
            
            4,949Other
      assets
            
            
            2,567
            
            
            
            2,578
            
            
            
            1,608TOTAL
      ASSETS
            
            $
            481,700
            
            
            $
            514,169
            
            
            $
            549,174LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            67,817
            
            
            $
            99,369
            
            
            $
            43,416Accrued
      compensation
            
            
            14,349
            
            
            
            23,076
            
            
            
            11,259Income
      taxes payable
            
            
            10,701
            
            
            
            27,401
            
            
            
            12,608Accrued
      expenses
            
            
            46,341
            
            
            
            47,541
            
            
            
            46,208Total
      current liabilities
            
            
            139,208
            
            
            
            197,387
            
            
            
            113,491Deferred
      rent and tenant allowances
            
            
            98,544
            
            
            
            96,888
            
            
            
            90,949Retirement
      benefit plan liabilities
            
            
            19,975
            
            
            
            18,919
            
            
            
            16,332Uncertain
      tax contingency liabilities
            
            
            3,799
            
            
            
            3,699
            
            
            
            3,323Commitments
      and contingent liabilities (See note 11)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; 90,137; 89,908 and
      89,292 shares issued and outstanding, respectively
            
            
            901
            
            
            
            899
            
            
            
            893Additional
      paid-in capital
            
            
            130,880
            
            
            
            124,052
            
            
            
            106,838Accumulated
      other comprehensive loss
            
            
            (5,277
            )
            
            
            (4,650
            )
            
            
            (5,199
            )Retained
      earnings
            
            
            561,409
            
            
            
            543,911
            
            
            
            428,465Treasury
      stock, 23,254; 23,224 and 11,769 shares, respectively at
      cost
            
            
            (467,739
            )
            
            
            (466,936
            )
            
            
            (205,918
            )Total
      stockholders’ equity
            
            
            220,174
            
            
            
            197,276
            
            
            
            325,079TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            481,700
            
            
            $
            514,169
            
            
            $
            549,174





See Notes
to Unaudited Condensed Consolidated Financial Statements








3
 Table of Contents







AÉROPOSTALE, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(In
Thousands, Except Per Share Data)








13 weeks endedMay 3, 2008
            
            
            May 5, 2007(Unaudited)Net
      sales
            
            $
            336,332
            
            
            $
            275,782Cost
      of sales (includes certain buying, occupancy and warehousing
      expenses)
            
            
            225,054
            
            
            
            187,079Gross
      profit
            
            
            111,278
            
            
            
            88,703Selling,
      general and administrative expenses
            
            
            82,090
            
            
            
            68,219Income
      from operations
            
            
            29,188
            
            
            
            20,484Interest
      income
            
            
            240
            
            
            
            2,135Income
      before income taxes
            
            
            29,428
            
            
            
            22,619Income
      taxes
            
            
            11,930
            
            
            
            8,867Net
      income
            
            $
            17,498
            
            
            $
            13,752Basic
      earnings per share
            
            $
            0.26
            
            
            $
            0.18Diluted
      earnings per share
            
            $
            0.26
            
            
            $
            0.18Weighted
      average basic shares
            
            
            66,749
            
            
            
            77,483Weighted
      average diluted shares
            
            
            67,305
            
            
            
            78,204





See Notes
to Unaudited Condensed Consolidated Financial Statements





4
 Table of Contents







AÉROPOSTALE, INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
Thousands)





13 weeks endedMay 3, 2008
            
            
            May 5, 2007(Unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            17,498
            
            
            $
            13,752Adjustments
      to reconcile net income to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            9,873
            
            
            
            8,224Stock-based
      compensation
            
            
            3,981
            
            
            
            1,954Excess
      tax benefits from stock-based compensation
            
            
            (863
            )
            
            
            (1,232
            )Other
            
            
            (1,175
            )
            
            
            (2,138
            )Changes
      in operating assets and liabilities:Merchandise
      inventory
            
            
            1,433
            
            
            
            (6,099
            )Accounts
      payable
            
            
            (31,529
            )
            
            
            (20,502
            )Other
      assets and liabilities
            
            
            (29,294
            )
            
            
            (38,537
            )Net
      cash used in operating activities
            
            
            (30,076
            )
            
            
            (44,578
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
            
            
            (20,045
            )
            
            
            (19,104
            )Purchase
      of short-term investments
            
            
            —
            
            
            
            (173,436
            )Proceeds
      from sale of short-term investments
            
            
            —
            
            
            
            193,094Net
      cash (used in) provided by investing activities
            
            
            (20,045
            )
            
            
            554CASH
      FLOWS FROM FINANCING ACTIVITIES:Purchase
      of treasury stock
            
            
            —
            
            
            
            (5,674
            )Proceeds
      from exercise of stock options
            
            
            1,986
            
            
            
            2,521Excess
      tax benefits from stock-based compensation
            
            
            863
            
            
            
            1,232Net
      cash provided by (used in) financing activities
            
            
            2,849
            
            
            
            (1,921
            )Effect
      of exchange rate changes
            
            
            (186
            )
            
            
            —Net
      decrease in cash and cash equivalents
            
            
            (47,458
            )
            
            
            (45,945
            )Cash
      and cash equivalents, beginning of year
            
            
            111,927
            
            
            
            200,064Cash
      and cash equivalents, end of period
            
            $
            64,469
            
            
            $
            154,119Supplemental
      Disclosure of Cash Flow Information:Non-cash
      operating and investing activities
            
            $
            7,218
            
            
            $
            7,362








See Notes
to Unaudited Condensed Consolidated Financial Statements








5
 Table of Contents







AÉROPOSTALE, INC.





NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




1.  Basis of
Presentation





References
to the “Company,” “we,” “us,” or “our” means Aéropostale, Inc. and its
subsidiaries, except as expressly indicated to the contrary or unless the
context otherwise requires. We are a mall-based, specialty retailer of casual
apparel and accessories for young women and men. We design, market and sell our
own brand of merchandise principally targeting 14 to 17 year-old young women and
men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is
a California lifestyle-oriented brand targeting trend-aware young women and men
aged 18 to 25. As of May 3, 2008, we operated 848 stores, consisting of 819
Aéropostale stores in 47 states and Puerto Rico, 15 Aéropostale stores in Canada
and 14 Jimmy’Z stores in 11 states, in addition to our Aéropostale e-commerce
website, www.aeropostale.com
(this and any other references in this Quarterly Report on Form 10-Q to
aeropostale.com is solely a reference to a uniform resource locator, or URL, and
is an inactive textual reference only, not intended to incorporate the website
into this Quarterly Report on Form 10-Q).




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
known 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 will 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 February 2, 2008.





References
to “2008” mean the 52-week period ending January 31, 2009, and references to
“2007” mean the 52-week period ended February 2, 2008. References to “the first
quarter of 2008” mean the thirteen-week period ended May 3, 2008, and references
to “the first quarter of 2007” mean the thirteen-week period ended May 5,
2007.




2.  Common Stock
Split




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





3.  Revenue
Recognition





Sales
revenue is recognized at the “point of sale” in the Company’s stores and at the
time its 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.  Also included in sales revenue is
shipping revenue from our e-commerce customers.  Sales revenue related
to gift cards and the issuance of store credits are recognized when they are
redeemed, along with a portion estimated to be unredeemed.  In the
fourth quarter of fiscal 2007, we 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 determine redemption to be remote, we
reverse the liability, and record gift card breakageincome in net sales.  Gift card breakage recorded during the first
quarter of 2008 was not material.





4.  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
and warehouse to the stores.  It also includes payroll for the
Company’s design, buying and merchandising departments and occupancy costs.
Occupancy costs include rent, contingent rents, common area maintenance, real
estate taxes, utilities, repairs, maintenance and all depreciation.






6
 Table of Contents






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, 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.




5.  Other Comprehensive
Income





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





13 weeks endedMay 3, 2008
            
            
            May 5, 2007(In Thousands)Net
      income
            
            $
            17,498
            
            
            $
            13,752Minimum
      pension liability, net of tax of $137 and $49,
respectively
            
            
            (205
            )
            
            
            75Foreign
      currency translation adjustment 1
            
            
            (422
            )
            
            
            —Other
      comprehensive income
            
            $
            16,871
            
            
            $
            13,827





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





6.  Earnings Per
Share





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





13 weeks endedMay 3, 2008
            
            
            May 5, 2007(In Thousands,
    ExceptPer
      Share Data)Net
      income
            
            $
            17,498
            
            
            $
            13,752Weighted
      average basic shares
            
            
            66,749
            
            
            
            77,483Impact
      of dilutive securities
            
            
            556
            
            
            
            721Weighted
      average diluted shares
            
            
            67,305
            
            
            
            78,204Earnings
      per basic share
            
            $
            0.26
            
            
            $
            0.18Earnings
      per diluted share
            
            $
            0.26
            
            
            $
            0.18








Options
to purchase 59,220 shares during the first quarter of 2008 and 229,500 shares
during the first quarter of 2007 were not included in the computation of diluted
earnings per share because the exercise price of the options was greater than
the average market price of the common shares.





7.  Revolving Credit
Facility





On
November 13, 2007, the Company entered into an amended and restated revolving
credit facility with Bank of America, N.A., as Lender which expanded
availability from a maximum of $75.0 million to $150.0 million (the
“New Credit Facility”).   The New Credit Facility provides for a
$150.0 million revolving credit line.  The New Credit Facility is
available for working capital and general corporate purposes, including the
repurchase of the Company’s capital stock and for its capital
expenditures.  A portion of the availability under the New Credit
Facility was used to fund the Company’s accelerated share repurchase program
(“ASR”) to repurchase $125.0 million of its common shares in fiscal
2007.  The New Credit Facility is scheduled to expire on
November 13, 2012 and is guaranteed by all of the Company’s domestic
subsidiaries (the “Guarantors”).





Loans
under the New Credit Facility are secured by all of the Company’s assets and are
guaranteed by the Guarantors. Upon the occurrence of a Cash Dominion Event (as
defined in the New Credit Facility) among other limitations, the Company’s
ability to borrow funds, make investments, pay dividends and repurchase shares
of its common stock would be
limited.






7
 Table of Contents





Except
for the use of a portion of the credit under the New Loan Facility to fund the
Company’s repurchase of shares as described below, the Company has had no direct
borrowings outstanding under the New Credit Facility.  Direct
borrowings under the New Credit Facility bear interest at a margin over either
LIBOR or a Base Rate (as each such term is defined in the New Credit
Facility).





The
New Credit Facility also contains covenants that, subject to specified
exceptions, restrict the Company’s 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 New 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 of 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 New Credit Facility, the lenders may cease making loans,
terminate the New Credit Facility, and declare all amounts outstanding to be
immediately due and payable.  As of
May 3, 2008, the Company is not aware of any events of default under the
New Credit Facility.  Also as of May 3, 2008, the Company is not
aware of any instances of noncompliance of financial covenants and had no
outstanding balances or stand-by or commercial letters of credit issued under
the New Credit Facility.





8.  Retirement Benefit
Plans





The
Company maintains a qualified, defined contribution retirement plan with a
401(k) salary deferral feature that covers substantially all of its employees
who meet certain requirements. Under the terms of the plan, employees may
contribute up to 14% of gross earnings and the Company will provide a matching
contribution of 50% of the first 5% of gross earnings contributed by the
participants. The Company also has the option to make additional contributions.
Matching contributions vest 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 year
five.





The
Company maintains a supplemental executive retirement plan, or SERP, which is a
non-qualified defined benefit plan for certain officers. 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 endedMay 3, 2008
            
            
            May 5, 2007(In Thousands)Service
      cost
            
            $
            164
            
            
            $
            134Interest
      cost
            
            
            287
            
            
            
            225Amortization
      of prior experience cost
            
            
            19
            
            
            
            19Amortization
      of net loss
            
            
            149
            
            
            
            105Net
      periodic pension benefit cost
            
            $
            619
            
            
            $
            483





8
 Table of Contents






The
Company maintains a long-term incentive deferred compensation plan for the
purpose of providing long-term incentive to a select group of management. The
plan is a non-qualified, defined contribution plan and is not funded.
Participants in this plan include all employees designated by the Company as
Vice President, or other higher-ranking positions, who are not participants in
the SERP. Annual monetary credits are recorded 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.





The
Company maintains a postretirement benefit plan for certain officers. The
Company had liabilities of $0.7 million as of May 3, 2008 and $0.6 million at
May 5, 2007 in connection with this plan.




9.  Stock Repurchase
Program





The
Company repurchases its 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 2008, the Company repurchased no
shares of our common stock, as compared to repurchases of 210,000 shares for
$5.7 million during the first quarter of 2007.





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





10.  Stock-Based
Compensation





The
Company follows the provisions of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based Compensation, or
SFAS No. 123(R), as interpreted by SEC Staff Accounting
Bulletin No. 107, or SAB 107.  Under
SFAS No. 123(R), all forms of share-based payment to employees and
directors, including stock options, must be treated as compensation and
recognized in the income statement.





The fair
value of options is 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
the Company’s 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.





The
Company determined expected volatilities based on the Company’s past four years
of historical volatilities.  The Company has elected to use the
simplified method for estimating its expected term as allowed by SAB 107, and
extended by SAB 110, to determine expected life.  The risk-free rate
is indexed to the five-year Treasury note interest at the date of grant and
expected forfeiture rate is based on the Company’s historical forfeiture
information.





In
accordance with SFAS No. 123(R), the fair value of each option grant
is estimated on the date of grant based on the following assumptions for grants
in the respective periods:





2008
            
            
            2007Expected
      volatility
            
            
            43
            %
            
            
            45
            %Expected
      term
            
            5.25 years
            
            
            5.25 yearsRisk-free
      interest rate
            
            
            2.61
            %
            
            
            4.50
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %Expected
      forfeiture rate
            
            
            25
            %
            
            
            20
            %





The
Company has 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 condensed consolidated statements of cash flows of
the tax effects of employee and director share-based awards that were
outstanding upon adoption of SFAS No. 123(R).




9
 Table of Contents





The
effects of applying SFAS No. 123(R) and the results obtained through
the use of the Black-Scholes option-pricing model are not necessarily indicative
of future values.





During
the first quarter of 2008, the Company granted 100,600 stock options at a
weighted-average grant-date fair value of $12.80.




A summary
of stock option activity during the first quarter of 2008 is as
follows:





Number
      ofShares
            
            
            Weighted
      Average
              Exercise Price
            
            
            Weighted-Average
              Remaining
              Contractual Term
            
            
            Aggregate
              Intrinsic
              Value(In
      thousands)
            
            
            
            
            
            (In years)
            
            
            (In
      millions)Outstanding
      as of February 2, 2008
            
            
            1,659
            
            
            $
            19.58Granted
            
            
            101
            
            
            $
            28.29Exercised
            
            
            (123
            )
            
            $
            16.17Cancelled
            
            
            (16
            )
            
            $
            24.58Outstanding
      as of May 3, 2008
            
            
            1,621
            
            
            $
            20.33
            
            
            
            5.52
            
            
            $
            19.6Exercisable
      as of May 3, 2008
            
            
            539
            
            
            $
            13.09
            
            
            
            3.86
            
            
            $
            10.4




During
the first quarter of 2008, the Company granted 155,275 shares of non-vested
stock at a weighted-average grant-date fair value of $28.43.





A summary
of non-vested stock activity during the first quarter of 2008 is as
follows:





Number
      of Shares(In
      Thousands)Non-vested
      stock as of February 2, 2008
            
            
            907Granted
            
            
            155Vested
            
            
            (108
            )Cancelled
            
            
            (7
            )Non-vested
      stock as of May 3, 2008
            
            
            947








11.  Commitments and
Contingent Liabilities





The
Company is party to various litigation matters and proceedings in the ordinary
course of business. In the opinion of the Company’s management, dispositions of
these matters are not expected to have a material adverse affect on its
financial position, results from operations or cash flows.  As of May
3, 2008, the Company has not issued any third party guarantees.





12. 
Income Taxes




In
determining the Company’s quarterly provision for income taxes, the Company used
an estimated annual effective tax rate which is based on its expected annual
income, statutory tax rates and tax planning opportunities available to it in
the various jurisdictions in which it operates. Subsequent recognition,
de-recognition and measurement of a tax position taken in a previous period are
separately recognized in the quarter in which they occur.




Effective
at the beginning of the first quarter of 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), which clarifies the accounting and disclosure for
uncertainty in income taxes. The Company recognizes interest and penalties
related to unrecognized tax benefits as a component of income tax
expense.




For the
first quarter of 2008, the Company’s unrecognized tax benefits decreased by
$7.6 million, due to the settlement of an IRS examination as described
below.  As a result, the Company had $3.8 million of unrecognized tax
benefit liabilities as of May 3, 2008, including accrued penalties and interest
of $0.9 million.  Net uncertain tax positions of $2.7 million as of
May 3, 2008, which is inclusive of interest and penalties, would favorably
impact our effective tax rate if these net liabilities were
reversed.





10
 Table of Contents





The
Company files income tax returns in the U.S. federal jurisdiction and in various
states. The Company’s U.S. federal filings for the years 2002 through 2005 were
examined and the Company reached a settlement with the IRS in the fourth quarter
of fiscal 2007.  In the first quarter of 2008, the Company paid
approximately $7.7 million related to this examination.  The
examination liability related to the timing of taxable revenue from non-redeemed
gift cards.  For state tax purposes, the Company’s 2003 through 2006
tax years remain open for examination by the tax authorities under a four-year
statute of limitations. However, certain states may keep their statute open for
six to ten years.


13.
Recent Accounting Developments
  In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162,
The Hierarchy of Generally
Accepted Accounting Principles.  This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States.  The Company expects that the
adoption of SFAS No. 162 will not have a material impact on its consolidated
financial statements.
 In
February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an
amendment of FASB Statement No. 115(“SFAS No. 159”).This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS No. 159 is effective at the beginning of an
entity’s first fiscal year that begins after November 15, 2007. While
SFAS No. 159 became effective for the Company’s 2008 fiscal year, the
Company did not elect the fair value measurement option for any of its financial
assets or liabilities.
 
 In
September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements(“SFAS No. 157”). This statement defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement applies under other accounting pronouncements that require or
permit fair value measurements, the Board having concluded in those other
accounting pronouncements that fair value is the relevant measurement
attribute.  Beginning in the first quarter of fiscal 2008, the Company
adopted SFAS No. 157 for its recorded financial assets and financial
liabilities.   The adoption of SFAS No. 157 did not have a
material impact on the disclosures in the Company’s consolidated financial
statements as the Company currently does not have any financial assets or
liabilities subject to these disclosure requirements.  In February
2008, the FASB issued FASB Staff Position (“FSP”) 157-2, “Effective Date of FASB
Statement No. 157”, which defines the effective date of SFAS No. 157 as it
applies to nonfinancial assets and liabilities.  The Company will
adopt the provisions of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities in the first quarter of fiscal 2009 and expects that the adoption
will not have a material impact on the Company’s consolidated financial
statements.
 11
 Table of Contents







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





References
to the “Company,” “we,” “us,” or “our” mean Aéropostale, Inc. and its
subsidiaries, except as expressly indicated to the contrary or unless the
context otherwise requires. We are a mall-based, specialty retailer of casual
apparel and accessories for young women and men. We design, market and sell our
own brand of merchandise principally targeting 14 to 17 year-old young women and
men. Jimmy’Z Surf Co., Inc., a wholly owned subsidiary of Aéropostale, Inc., is
a California lifestyle-oriented brand targeting trend-aware young women and men
aged 18 to 25. As of May 3, 2008, we operated 848 stores, consisting of 819
Aéropostale stores in 47 states and Puerto Rico, 15 Aéropostale stores in Canada
and 14 Jimmy’Z stores in 11 states, in addition to our Aéropostale e-commerce
website, www.aeropostale.com
(this and any other references in this Quarterly Report on Form 10-Q to
aeropostale.com is solely a reference to a uniform resource locator, or URL, and
is an inactive textual reference only, not intended to incorporate the website
into this Quarterly Report on Form 10-Q).





Management’s
Discussion and Analysis of Financial Condition and Results of Operations, or
“MD&A,” is intended to provide information to help you better understand our
financial condition and results of operations. Our business is highly seasonal,
and historically we realize a significant portion of our sales, net income, and
cash flow in the second half of the year, driven by the impact of the
back-to-school selling season in our third quarter and the holiday selling
season in our fourth quarter. Therefore, our interim period consolidated
financial statements will not be indicative of our full-year results of
operations, financial condition or cash flows. We recommend that you read this
section along with our condensed consolidated financial statements included in
this report and along with our Annual Report on Form 10-K for the year ended
February 2, 2008.





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





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





Results
of Operations





Overview





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










12
 Table of Contents






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





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 endedMay 3, 2008
            
            
            May 5, 2007Net
      sales
            
            
            100.0
            %
            
            
            100.0
            %Gross
      profit
            
            
            33.1
            %
            
            
            32.2
            %Selling,
      general and administrative expenses
            
            
            24.4
            %
            
            
            24.7
            %Income
      from operations
            
            
            8.7
            %
            
            
            7.5
            %Interest
      income
            
            
            0.1
            %
            
            
            0.7
            %Income
      before income taxes
            
            
            8.8
            %
            
            
            8.2
            %Income
      taxes
            
            
            3.5
            %
            
            
            3.2
            %Net
      income
            
            
            5.3
            %
            
            
            5.0
            %





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 endedMay 3, 2008
            
            
            May 5, 2007Net
      sales (in millions)
            
            $
            336.3
            
            
            $
            275.8Total
      store count at end of period
            
            
            848
            
            
            
            765Comparable
      store count at end of period
            
            
            735
            
            
            
            665Net
      sales growth
            
            
            22
            %
            
            
            12
            %Comparable
      store sales change
            
            
            10
            %
            
            
            3
            %Comparable
      average unit retail change
            
            
            0
            %
            
            
            (2
            )%Comparable
      units per sales transaction change
            
            
            3
            %
            
            
            (1
            )%Comparable
      sales transaction change
            
            
            7
            %
            
            
            5
            %Net
      sales per average square foot
            
            $
            110
            
            
            $
            102Gross
      profit (in millions)
            
            $
            111.3
            
            
            $
            88.7Income
      from operations (in millions)
            
            $
            29.2
            
            
            $
            20.5Diluted
      earnings per share
            
            $
            0.26
            
            
            $
            0.18Average
      square footage growth over comparable period
            
            
            11
            %
            
            
            9
            %Change
      in total inventory over comparable period
            
            
            25
            %
            
            
            (1
            )%Change
      in inventory per square foot over comparable period
            
            
            13
            %
            
            
            (9
            )%Percentages
      of net sales by category:Young
      Women’s
            
            
            73
            %
            
            
            76
            %Young
      Men’s
            
            
            27
            %
            
            
            24
            %




Comparison of the 13 weeks ended May
3, 2008 to the 13 weeks ended May 5, 2007 
 Net
Sales
 
 Net sales
for the first quarter of 2008 increased by $60.6 million, or by 22% compared to
the same period last year.  The increase in net sales was driven
primarily by average square footage growth of 11% and an increase in comparable
store sales of 10%.  Comparable store sales increased in both our
young women’s and young men’s categories.  The overall comparable
store sales increase reflected a 7% increase in the number of sales transactions
and a 3% increase in units per sales transaction.  Average unit retail
for the first quarter of 2008 remained consistent compared to the prior
year.  Non-comparable store sales increased by $34.2 million, or by
12%, primarily due to 83 more stores open at the end of the first quarter of
2008 compared to the end of the first quarter of 2007.


13
 Table of Contents






Gross
Profit





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





Gross
profit, as a percentage of net sales, increased by 0.9 percentage points for the
first quarter of 2008 compared to the same period last year. The increase was
due to an increase in merchandise margin by 1.1 percentage points and lower
occupancy costs, partially offset by higher distribution and transportation
costs.  The increase in merchandise margin is primarily due to
improved assortment of key merchandise classifications, primarily women's
graphic tee shirt merchandise.




SG&A





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





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





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





Interest
income and income taxes





Interest
income decreased by $1.9 million for the first quarter of 2008 compared to the
same period in 2007.  The decrease was primarily due to cash used for
share repurchases of $266.7 million during fiscal 2007, including the
accelerated share repurchase program (“ASR”) to repurchase $125.0 million of our
common shares in the fourth quarter of 2007.





The
effective income tax rate was 40.5% for the first quarter of 2008 and 39.2% for
2007.  The increase in the effective tax rate was primarily due to
nondeductible officers’ compensation and a reduction in tax exempt interest
income.





Net
income





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





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




Liquidity
and Capital Resources
 
 Our cash
requirements are primarily for working capital, construction of new stores,
remodeling of existing stores, and the improvement and enhancement of our
information technology systems. Due to the seasonality of our business, we have
historically realized a significant portion of our cash flows from operations
during the second half of the year. Most recently, our cash requirements have
been met primarily through cash and cash equivalents on hand during the first
half of the year, and through cash flows from operations during the second half
of the year. We expect to continue to meet our cash requirements for the next
twelve months primarily through cash flows from operations, existing cash and
cash equivalents and through periodic use of our credit facility.  At
May 3, 2008, we had working capital of $95.1 million and cash and cash
equivalents of $64.5 million.






14
 Table of Contents






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





13 weeks endedMay 3, 2008
            
            
            May 5, 2007(In
      Thousands)Net
      cash used in operating activities
            
            $
            (30,076
            )
            
            $
            (44,578
            )Net
      cash (used in) provided by investing activities
            
            
            (20,045
            )
            
            
            554Net
      cash provided by (used in) financing activities
            
            
            2,849
            
            
            
            (1,921
            )Effect
      of exchange rate changes
            
            
            (186
            )
            
            
            —Net
      decrease in cash and cash equivalents
            
            $
            (47,458
            )
            
            $
            (45,945
            )




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


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





Capital
requirements— Investments in
capital expenditures are principally for the construction of new stores,
remodeling of existing stores, and investments in information technology. Our
future capital requirements will depend primarily on the number of new stores we
open, the number of existing stores we remodel and the timing of these
expenditures.  We opened 21 Aéropostale stores in our new store format
during the first quarter of 2008, which included three stores in Canada and one
store in Puerto Rico.  We plan to open approximately 65 additional
Aéropostale stores during the remainder of fiscal 2008, which will include
approximately 12 additional stores in Canada and two additional stores in Puerto
Rico.  In addition, during the first quarter of 2008, we remodeled and
renovated two existing Aéropostale stores.  Capital expenditures for
the full year of 2008 are expected to approximate $80.0 million for new and
remodeled stores as well as for other initiatives.





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





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





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




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






15
 Table of Contents






Contractual
Obligations





The
following table summarizes our contractual obligations as of May 3,
2008:





Payments DueBalance
      of
            
            
            In
      2009
            
            
            In
      2011
            
            
            AfterTotal
            
            
            2008
            
            
            And 2010
            
            
            and 2012
            
            
            2012(In
      Thousands)Contractual
      ObligationsOperating
      leases
            
            $
            628,875
            
            
            $
            76,228
            
            
            $
            178,668
            
            
            $
            158,208
            
            
            $
            215,771Employment
      agreements
            
            
            21,803
            
            
            
            2,419
            
            
            
            19,384
            
            
            
            —
            
            
            
            —Sponsorship
      and advertising contracts
            
            
            725
            
            
            
            725
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      contractual obligations
            
            $
            651,403
            
            
            $
            79,372
            
            
            $
            198,052
            
            
            $
            158,208
            
            
            $
            215,771




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





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




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




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





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





Off-Balance
Sheet Arrangements





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





Critical
Accounting Policies and Estimates





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










16
 Table of Contents






As of May
3, 2008, there have been no material changes to any of the critical accounting
policies as disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended February 2, 2008.





Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





As of May
3, 2008, the Company had no outstanding borrowings under its Credit
Facility.  In addition, the Company had no stand-by or commercial
letters of credit issued under the Credit Facility. To the extent that the
Company may borrow pursuant to the Credit Facility in the future, it may be
exposed to market risk related to interest rate fluctuations.





The
Company is exposed to foreign currency risk as aresult of entering the
Canadian market in July 2007.The Company is subject to changes in the foreign currency exchange
rates in the Canadian dollar, which could impact its financial condition. 
Foreign exchange risk arises from the Company’s exposure to fluctuation in
foreign currency exchange rates because its reporting currency is the U.S.
dollar.  The Company also faces transactional currency exposures relating
to merchandise that its Canadian subsidiary purchases using U.S.
dollars.  The Company does not hedge its exposure to this currency exchange
fluctuation.  A 10 percent movement in quoted foreign currency exchange
rates could result in a fair value translation fluctuation of approximately $1.8
million in the Company’s net investment, which would be recorded in other
comprehensive income as an unrealized gain or loss.





Item 4.Controls and
Procedures





(a) Evaluation of Disclosure Controls
and Procedures:Pursuant to Exchange Act 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 Chairman and Chief Executive Officer along with our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls (as defined in Rule 13a-15(e) of the Exchange Act) and
procedures. 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 May 3, 2008, our disclosure controls and procedures are
effective.





(b) Changes in internal
controls:During the period covered by this quarterly report,
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




On
January 15, 2008, we learned that the Securities and Exchange Commission
(the “SEC”) had issued a formal order of investigation with respect to matters
arising from those events disclosed in our Form 8-K, dated November 8,
2006, which resulted from the activities of Christopher L. Finazzo, our former
Executive Vice President and Chief Merchandising Officer. The SEC’s
investigation is an on-going non-public, fact-finding inquiry to determine
whether any violations of law have occurred. We are cooperating fully with the
SEC in its investigation.




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 affect 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 were 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 teen apparel industry. We produce casual, comfortable
apparel, a majority of which displays either the “Aéropostale” or “Aéro” 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 sales, financial condition and
results of operations.




Our
retail store operations may be adversely affected by unfavorable local, regional
or national economic conditions.





Our
business is sensitive to consumer spending patterns and preferences. Various
economic conditions affect the level of spending on the merchandise we offer,
including general business conditions, interest rates, taxation, fuel costs, the
availability of consumer credit and consumer confidence in future economic
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 disposable income is lower. Therefore, our
growth, sales and profitability may be adversely affected by unfavorable
economic conditions on a local, regional or national level.





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





•
            fashion
      trends;





•
            changes
      in our merchandise mix;






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•
            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.




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. If manufacturing costs were to rise significantly, our business may
be adversely affected.





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





During
fiscal 2007, we sourced approximately 69% of our merchandise from our top five
merchandise vendors.  During fiscal 2006, we sourced approximately 66%
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.





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 88 Aéropostale stores in fiscal 2007,
74 Aéropostale stores in fiscal 2006 and 105 Aéropostale and 14 Jimmy’Z
stores in fiscal 2005.  We plan to open approximately 85 new
Aéropostale stores in fiscal 2008, including approximately 15 stores in Canada
and three stores in Puerto Rico. We expect to continue to open new stores in the
future. We also anticipate remodeling a portion of our existing Aéropostale
store base at the appropriate times. 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 business
could suffer as a result of a manufacturer’s inability to produce merchandise on
time and to our 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.  In addition, if manufacturing costs were
to rise significantly, our business may be adversely affected.




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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.





Failure of new
business concepts would have a negative 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. The operation of any
new retail concept, including our Jimmy’Z concept, 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 also be a diversion of management’s attention from our core
Aéropostale business.




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.





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
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 at United States ports.
Any inability on our part to rely on our vendors and our foreign sources of
production due to any of the factors listed above could have a material adverse
effect on our business, financial condition and results of
operations.




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, 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;






20
 Table of Contents


•
            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 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 lose the
services of Julian R. Geiger, our Chairman and Chief Executive Officer or Mindy
C. Meads, our President and Chief Merchandising Officer, our business could be
adversely affected.  In addition, any significant departures by senior
executives or other key performers in the Company could adversely affect our
operations.





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





We depend
on our management information systems for many aspects of our business. We will
be materially adversely affected if our management information systems are
disrupted or we are unable to improve, upgrade, maintain, and expand our
management information systems.





There
is an increased risk in operating stores in foreign countries.





During
fiscal 2007, we opened 12 Aéropostale stores in Canada, and we plan to open
approximately 15 additional new Canadian stores during fiscal
2008.  There can be no assurance that we will be able to address in a
timely fashion the risks of operating stores in foreign countries, such as
governmental requirements over merchandise importation, employment, taxation and
multi-lingual requirements. Additionally, since entering Canada, we will have to
continue to obtain suitable store locations, hire personnel, establish
distribution methods, and advertise our brand and its distinguishing
characteristics to consumers who may not be familiar with them. There can be no
assurance that we will be able to open and operate new stores in Canada on a
timely and profitable basis. The costs associated with opening these new stores
in Canada may negatively affect our profitability.





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.  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.






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 Table of Contents


We
rely on a third party to manage our distribution centers.





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 two distribution and warehouse
facilities. 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 separate third party
transportation companies to deliver our merchandise from our warehouse to our
stores. Any failure by any of these third parties to respond adequately to our
warehousing and distribution needs would disrupt our operations and negatively
impact our profitability.





We rely on a
third party to manage the warehousing and order fulfillment for our E-Commerce
business.





We rely
on one third party, GSI Commerce, pursuant to an e-commerce agreement, 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.
Any significant interruption in the operations of GSI Commerce, over which we
have no control, would have a material adverse effect on our e-commerce
business.




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®are integral to our logo-driven design strategy. We have obtained federal
registrations of 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. We also believe that the
JIMMY’Z and Woody Car Design marks may become a part of our future growth
strategy. 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 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 “AÉROPOSTALE”,
“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 a 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 AÉROPOSTALE® 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
AÉROPOSTALE® 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 “AÉROPOSTALE”, “JIMMY’Z”
or the Woody Car Design to enjoin the manufacture, sale or exportation of
Aéropostale 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.





Any disruption of
our distribution activities could have a material adverse impact on our
business.





We
operate two 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 our
merchandise to all of our stores. Any significant interruption in the operation
of either of our distribution centers due to natural disasters, accidents,
system failures, economic and weather conditions, demographic and population
changes or other unforeseen events and circumstances could have a material
adverse effect on our business, financial condition and results of
operations.




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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 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 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, or any other unforeseen interruption of commerce,
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.





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





We
repurchase our common stock from time to time under a $600.0 million 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 our
stock trading window, and liquidity and capital resource requirements going
forward. We had no repurchases during the first quarter of 2008 and had $133.8
million remaining availability pursuant to our share repurchase program as of
May 3, 2008.







Item 3.Defaults Upon
Senior Securities





Not
applicable.





Item
4.Submission of
Matters to a Vote of Security Holders





Not
applicable.





Item 5.Other
Information





Not
applicable.





Item 6.Exhibits





Exhibit
              No.
            Description31.1
            Certification
      by Julian R. Geiger, Chairman and Chief Executive Officer, pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
            Certification
      by Michael J. Cunningham, Executive Vice President and Chief Financial
      Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.*32.1
            Certification
      by Julian R. Geiger 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 Michael J. Cunningham pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**


____________





*
            Filed
      herewith.**
            Furnished
      herewith.








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 Table of Contents






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/
      JULIAN R. GEIGERJulian
      R. GeigerChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)/s/
      MICHAEL J. CUNNINGHAMMichael
      J. CunninghamExecutive
      Vice President — Chief Financial Officer(Principal
      Financial Officer)


Dated:
June 9, 2008






24