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Executives

Julian Geiger - Chairman and Chief Executive Officer

Mindy Meads - President and Chief Merchandising Officer

Michael Cunningham - Chief Financial Officer

Tom Johnson - Chief Operating Officer

Ken Ohashi - Vice President of Investor & Media Relations

Analysts

Betty Chen - Wedbush Morgan

Christine Chen - Needham & Company

Edward Yruma - KeyBanc

Michelle Tan - Goldman Sachs

Roxanne Meyer - UBS

Dana Telsey - Telsey Advisory Group

Adrienne Tennant - FBR Capital Markets

Stacy Pak - SP Research

Jeff Klinefelter - Piper Jaffray

Laura Champine - Cowen & Co.

Lorraine Hutchinson - Banc of America

Janet Kloppenburg - JJK Research

Kimberly Greenberger - Citi

Linda Tsai - MKM Partners

Richard Jaffe- Stifel Nicolaus

Marni Shapiro - The Retail Tracker

Robin Murchinson - Suntrust Robinson Humphrey

Josh Goldman - Barclays Capital

David Glick - Buckingham Research

Howard Tubin - RBC Capital Markets

Aeropostale Inc. (ARO) Q4 2008 Earnings Call March 12, 2009 4:15 PM ET

Operator

Thank you for joining us for this Aeropostale conference call to review fourth quarter fiscal 2008 financial results. At this time, all parties are in a listen-only mode. Following the management presentation, we’ll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded and I would like to introduce Mr. Ken Ohashi, the company’s Vice President of Investor & Media Relations.

Ken Ohashi

Thank you all for joining us this afternoon. With me here today are Julian Geiger, our Chairman and Chief Executive Officer, Mindy Meads, our President and Chief Merchandising Officer, Tom Johnson, our Chief Operating Officer and Michael Cunningham, our Chief Financial Officer. We issued a press release earlier this afternoon announcing our fourth quarter and fiscal 2008, financial results. A copy of the release can be found on our corporate website.

Before we begin, I would like to remind you that during this earnings conference call, certain statements and responses to questions may contain forward-looking information such as forecasts of future financial performance. Forward-looking information and statements involve known and unknown risks and uncertainties, which may cause our actual results and future periods to differ materially from our forecasted results.

Those risks are described in our annual report on Form 10-K and our quarterly reports on Form 10-Q, all of which have been filed with the SEC and are available on our website. We undertake no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Listeners of this call are referred to those filings. Before I turn the call over to Julian, I would like to remind everyone to limit themselves to one question during our Q and A session to allow everyone to speak.

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

Julian Geiger

Thanks, Ken. Good afternoon everyone and thank you for joining us today. All of us at Aeropostale are extremely pleased with our record results for both the fourth quarter and fiscal 2008. While the results would be impressive in any economic climate, they are truly extraordinary given the uncertain and challenging times and which we are operated.

Our performance underscores the vitality of the Aeropostale brand, the strength of our operating model and our ability to understand the team customers. Let me take you through some of the financial highlights of both the quarter and the year. During Q4 our net sales increased 17% to $690 million and our same-store sales increased 6% compared to a 9% increased last year.

Total net sales from our e-commerce business increased 88% to $41 million and earnings per share grew 6% to a record $1.01 per share from $0.95 per share last year. For the full year, net sales increased 19% to almost $1.9 billion. Total net sales from our e-commerce business increased 85% to $79 million. Same-store sales for the year increased 8% compared to a 3% increase last year.

Marking our 11 consecutive year of positive same-store sales and earnings per share reached $2.21, a 28% increased over earnings of $1.73 per share last year. A year ago at this time, we clearly outlined our strategic initiatives for the upcoming year. We are very pleased that the manner in which we executed each of these initiatives.

As you may remember, these initiatives included listening to our customer, maintaining a fresh and balanced merchandise assortment, delivering compelling values, creating a climate and exciting shopping experience through a preplanned promotion and innovative marketing programs focusing on inventory management, maintaining a strong balance sheet and managing costs effectively, developing our new concepts and continuing our expansion by opening 89 Aeropostale stores in North America, all of them in our New architectural format.

Our consistent performance throughout the year indicates that we have been successful in achieving these objectives. As a result, our brand had never been stronger and we are well positioned to continue to gain additional market share. I’m very proud of the entire organization’s dedication, determination and expertise.

Before I turn the call over to Mindy, I want to comment briefly on Jimmy’Z. As you all know we made the difficult decision last month to close the concept. Once again I would like to thank the entire Jimmy’Z organization for its hard work, commitment and dedication to the brand.

Now I would like to turn the call over to Mindy, who will take you through some of the merchandising highlights from the fourth quarter.

Mindy Meads

Thank you, Julian. I too would like to reiterate how pleased I’m with the record results for both the fourth quarter and full year. During the important holiday season, we continue to experience strong brand momentum by offering the customer, the best combination of fashion and value. The entire product development team did an excellent job identifying evolving trends and product details that are happening in the marketplace and marking them relevant to the teams customer.

We focus on key classifications to drive our business. We also offered new and fresh promotions each week to drive traffic and create excitement in our stores. We believe that our unique promotional specialty store positioning, coupled with our strong merchandise assortment has enabled us to capture additional market share during this peak selling period.

Let me take you through some of the highlights. For the fourth quarter, we experienced strength in both genders with women’s comp was up mid-single digit and men’s continued in high single-digit. Our units per transactions were up in low single digit and comp transactions were up in the mid single, significantly above mall traffic trend. We were encouraged and continue to be encouraged by the trend in our average unit retail, which was flat for Q4 and up for both January and February.

Moving into the first quarter, I’m also very comfortable with both the level and the composition of our inventory. Our inventory ended the season was down 17% per square foot at the end of the fourth quarter due to stronger than expected sell-throughs in the holiday season and a slight shift in the timing of our spring to floor set.

While it is still early, we are pleased with the positive early reads on our spring merchandise assortment. We are experiencing broad based strength in our tops business, which continues to outperform both our sales and our margin plan. Moving on to next year, we will continue to build upon our merchandising strategies, while intensely focusing on inventory management. We will buy conservatively; remain nimble in order to maximize both sales and margin.

Before I turn the call over to Michael, I would like to thank the entire product development team for their hard work and commitment over the holiday season. I’m very proud of the entire team for pulling together and contributing to another record quarter and record year.

Now I will turn it over to Michael, who will take you through the financials.

Michael Cunningham

Thank you, Mindy. Total net sales for the quarter were up 17% driven by a 12% increase in square footage, coupled with our 6% comp. During the quarter, we opened 12 stores ending with a total of 903 Aero stores. Gross margins for the quarter were 35.3%, versus 37.8% last year. Gross margin last year included an 80 basis point benefit due to the initial recognition of gift card breakage income of $7.7 million. The remaining 170 basis point decline is primarily due to a decrease in our merchandise margins.

SG&A for the quarter was 18.8% of sales versus 19.8% last year, 20 basis points pertained to the previously mentioned initial gift card breakage, including sales and gross margin last year. Accordingly, the remaining 120 basis point decline in SG&A for the quarter reflect 90 basis point of store line related expense leverage and a 40 basis point decline in incentive compensation expense. Partially offset by a 20 basis point increase in e-com fees related to the 88% growth in sales for that business.

Our tax rate for the quarter was 39.9%, which resulted in net income of $68.2 million or $1.01 per share. Cash and cash equivalent together with short term securities at the close of the quarter were $228.5 million versus $111.9 million last year. We have no auction rate securities and we have no borrowings under our $150 million credit facility. Our liquidity reflects over $115 million in free cash flow generated during the year.

Inventory at the close of the quarter was $126.4 million and was down 7% in total. On a per square foot basis, inventory was down 17% as mentioned by Mindy, it reflects the decrease due to the stronger than expected sell-throughs as well as the shift and timing of the floor-sets.

Our CapEx for the quarter was $10.6 million and depreciation and amortization was $15.2 million. So the full year 2009, we expect to open a total of 15 new stores, 40 Aero and 10 stores in our new concept. We also plan on remodeling 20 stores with a total 2009 CapEx projected at $55 million.

Our guidance for the first quarter for EPS is a range of $0.22 to $0.24 per diluted share, which includes $3 million or $0.03 of onetime closing costs related to Jimmy’Z. As we had indicated previously, we expect to incur an additional $2 million or $0.02 of EPS cost for Jimmy’Z’s in the second quarter of this year.

I’ll now turn the call back over to Julian.

Julian Geiger

Thanks, Michael. Clearly, we are very proud to achieve our 11 consecutive year of positive same store sales with compounded annual earnings per share growth of 30% over the past nine years. Our business model has succeeded during times of economic growth and economic contraction.

It is now time to apply everything that makes us great at Aeropostale to a logical business extension. As such, we would like to discuss our new concepts. We are extremely excited about the upcoming launch of this concept, which we have named P.S. from Aeropostale. Over the summer, we will be opening our first P.S. from Aeropostale store. This business will target elementary school kids, ages seven through 12 and will complement our Aero business, which targets an older high school demographic.

Our P.S. stores will be innovative, playful and fun to shopping. We believe that both the merchandise assortment and the store environment will be loved by kids and endorsed by moms. Our first group of stores will be clustered around the metropolitan New York area and we look forward to walking you through our first store prior to its opening.

As our results in 2008 demonstrated, Aeropostale continues to be a bright spot in the retail sector. Our current success is not to buy product of a struggling economy or the need for a value proposition, no retailer can win on price alone. Aeropostale is more highly recognized and respected today than at any other time in it’s 21 year history and is a true destination lifestyle brand.

Our consistent performance is a result of our outstanding organization driven by success, never complacent with success. We listen to our customers, we deliver a fresh and balanced merchandise assortment, we have a nimble and flexible operating model and most importantly, we have an incredible corporate culture that can never be duplicated.

We are dedicated to challenging our self everyday to make our business even more vibrant and profitable than ever before. Our brand is strong, our momentum is undeniable and even in these times of economic challenge, Aeropostale’s future has never been brighter.

With that, we look forward to answering any questions you might have at this point and operator, we are now ready to open the lines for those questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Betty Chen - Wedbush Morgan.

Betty Chen - Wedbush Morgan

I was wondering, certainly it seems like so far we’ve already started the year on a great footing here and I know, Mindy, you’ve already talked about how pleased you’ve been with the strength in the tops business. I was wondering if you can talk a little bit about, what we maybe able to anticipate later on in spring or perhaps back-to-school in terms of the bottoms business and also what sort of merchandise margin opportunity we can see related to that. Thank you.

Mindy Meads

Betty, if you talk about the bottoms, we’re kind of trailing down on the Denim season right now and the short season hasn’t really started yet, we anticipate that coming into second quarter. As we move back into back-to-school, we do see the bottom of choice becoming Denim again. So, I think that right now, it’s just really turning into a very, very strong top and particularly, where now these first five weeks.

Operator

Your next question comes from Christine Chen - Needham & Company.

Christine Chen - Needham & Company

I wanted to see, could you possibly talk a little bit, how you was thinking and approaching the Easter shift and what impact that may have on March comps versus April comps and does your guidance reflect that the continuation of February same store sales trends?

Mindy Meads

Christine, I think that as we’re looking at it now, we see a high single-digit shift that’s going to come out of March into April.

Michael Cunningham

Christine, this is Mike. With regards to guidance, we don’t comment on more comps are assumed in that number, sorry.

Operator

Your next question comes from Edward Yruma - KeyBanc.

Edward Yruma - KeyBanc

Without the shift in the floor-set, what would inventory have been down year-over-year? Thanks.

Michael Cunningham

This is Mike. Approximately, half of the decrease was due to the floor-set timing. So, inventory is probably down about 8% per square foot.

Operator

Your next question comes from Michelle Tan - Goldman Sachs.

Michelle Tan - Goldman Sachs

Just following on that question on the inventory, how your receipts for Q1 and can you talk about your ability to chase inventory and also what you’ve sense beyond the gross margin front because you’re much leaner than I would have expected coming into the quarter, which is great.

Mindy Meads

Michelle, as we move into the quarter, we actually are starting to normalize our inventory, kind of as of this week and we’re really only down a couple of percentages at this point. I think the beauty of our model is that we have always been nimble, but we have now got our processes in place, so that we can react stronger to our trending classifications and as I said earlier, we’re keeping the inventories tight, but if the customers keep shopping, we can continue with this trend and get back into particularly the tops, where it’s a much faster turn, both the knits and the brackets that you know are such an important part of our business.

Operator

Your next question comes from Roxanne Meyer - UBS.

Roxanne Meyer - UBS

Just have a couple of questions related to your new concept. I’m just wondering, how you’re thinking about testing it and rolling it out, anything you can offer about the average store size and merchandise offerings and then how to think about startup costs for 2009, costs related to the concept? Thanks.

Mindy Meads

If you look at the introduction, we’ve said we’re going to start with 10 stores starting in mid June this year and as we get closer to that timeframe, I’m sure we’re going to having a presentation for many of you, so that you can see the product and Michael, do you want to take the second part of the question.

Michael Cunningham

Sure. Well included in our guidance for the first quarter is not only the onetime Jimmy’Z cost, but we anticipate a $0.02 cost for the P.S. business in the first quarter and that too continue into the second and third quarters and it should be somewhat mitigated as again into the fourth quarter and start to see the benefits of the sales in the stores.

Julian Geiger

Let me just add something. This is Julian. We don’t consider this a test, we have watched with amazement for years, how moms when come shopping with Aeropostale with an older and younger sibling, with the younger sibling desperately trying to fit into the merchandise that was obviously too big for them.

We are expanding and extending all the things we’ve done well for the high school student to the elementary school student. They can finally fit in merchandise that looks like Aeropostale, that comes from Aeropostale, but which will have a different brand representation, a different name than Aeropostale. So, we are enormously focused on this and pleased with where we are for the opening this summer.

Operator

Your next question comes from Dana Telsey - Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good afternoon, everyone. Can you talk a little bit about pricing trends, how you’re thinking about balance of ‘09, sourcing costs and opportunities on the gross margin, what you’re seeing there? Thank you.

Mindy Meads

Dana, if you think about pricing trends as we mentioned, we are already up a little bit based on that as sell-throughs. So, I think we are planning to be relatively flat, but as the consumer continues to respond to the product, we have opportunity to be able to get a slight uptick.

On the costs, we are getting great costs from our suppliers, they are great partners. We know there is a lot of opportunity out there. So, if there is we will be able to take advantage of that, but in some cases we will continue to add even a little more quality into it to make our value fashion, price equation even stronger than it is today.

Dana Telsey - Telsey Advisory Group

How do you see back-to-school changing this year compared to last year either in terms of timing inflow or assortment?

Mindy Meads

The timing, we did not see any shift for back-to-school that are happening. The timing is very, very similar and as far as the assortment, it too soon to talk specifics, but we will really be building on the strength as we see it and I’m sure it’s going to be very strong denim and I think the tops business, which is really what we stand for and graphics will continue to be very strong.

Operator

Your next question comes from Adrienne Tennant - FBR Capital Markets.

Adrienne Tennant - FBR Capital Markets

My question is on the estimate, you exhibited a tremendous SG&A control in the fourth quarter, I was very impressed with that and I was just wondering should we look at kind of that low double-digit dollar growth going forward into 2009? What are the main categories that are helping that out? Thank you.

Michael Cunningham

Sure. As we’ve been doing all year long, we’ve been leveraging our store line related that was easier when we were doing a 10 comp the first couple of quarters, but I think the fourth quarter reflects the tremendous activity at store level with our comp and moving through the number of units we did and that reflects the great deal of reengineering work that our store line organization has performed with the rest of the company. So, that is a solid leverage point for us and we expect to see going into 2009 from that group and from that expense.

Incentive comp expense which declined in the fourth quarter this year reflects the fact that we’ve been having a much stronger year and have accrued incentive comps at a more even pace this year than we had in 2007. So, in 2007 fourth quarter, we had increase in incentive comp accrual reflecting the strong fourth quarter performance relative to the rest of the year.

So, incentive comp going forward into 2009 we should be at a target level and if we exceed our target, you’ll see that number go up. If we fall below the target, the incentive comp will decrease and provide a leveraging opportunity and the last piece is the e-com related costs. As you can see we disclosed the tremendous growth in e-com sales, which more than justify our fleet increase in expense line as we go forward.

So, next year we continue to project e-com will outpace the overall sales of the stores. So you will see e-com as a percent of sales overall continue to increase. We continue to expect benefits from store line and incentive comp should be, if we are target, it would be down a little bit and if we are better, it will go up.

Operator

Your next question comes from the line of Stacy Pak - SP Research.

Stacy Pak - SP Research

Just following up on that, so on the SG&A, can you just tell us Mike, comp leverage point or whether the leverage point should be down in the back half and will you commit to an SG&A dollar growth rate?

Michael Cunningham

We will not commit to an SG&A dollar growth rate and I think, if you look at the Aeropostale model, it’s one with incredible flexibility and if you look at, the store related expenses, we manage very tightly two sales. So, as sales grow up, we gain efficiencies. If sales were to not go up as fast, we would still manage very tightly to the sales line. So that’s a variable expense.

Incentive comp, again totally variable with that our related performance and overall just like every other company, we are tightly managing controlling our costs going forward. So continue to focus on SG&A, but at this point, we are not giving out any dollar guidance for next year.

Stacy Pak - SP Research

Is the leverage point down in the back half, will you comment on that?

Michael Cunningham

The leverage point overall, if you look at it in on an annualized basis, because each quarter it will differ compared to the incentive comp cools in prior year, prior quarter, but on an annualized basis, we will start to see some leverage in SG&A, probably around the mid single-digit range.

Operator

Your next question comes from Jeff Klinefelter - Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Wanted to just ask you a little bit about the leasing environment in the new stores you’re opening this year. One, the 40 new Aero stores, can you give us a sense for where those are opening? Are they all fill in markets, are they concentrated in one region? Two, are you seeing leasing rates comedown just given, what’s happening in the environment for both your remodels and for new stores and on that same topic, are you closing any stores or considering in some of those in the tertiary markets that might be slowing down because of the economic issues?

Tom Johnson

We absolutely are filling in markets. There are no individual states that we need to penetrate further at this point in time. With the 25 locations that are domestic and 15 in Canada, the predominance of those are in A doors, so we feel very good about the fact that we are filling in markets, where in the past, we may not have filled in some locations.

Like, I don’t know if you saw this year, we filled in a couple of other terrific locations like Toronto, Eaton Center, West Edmonton, Water Tower, which is in downtown Chicago, and we’re performing very, very well, which is more a more upscale center, if you will.

This year, we’re looking at other centers like Mission Viejo, Lennox Square and we’re happy to say that we’re entering Hawaii with Alama Wana. So with centers like that still to pickoff, we feel very encouraged even with the current environment. We’re happy with some of the locations that we’ve chosen this year in 2009. While the number is down, we feel very good about the locations.

With closings, as the normal course of business for us we will pair the inventory of stores as we see fit, with impairments with regard to closures. Thankfully, our business has been very strong overall and four mall types so far for year last year and so far for this year. So, the spread between the A, B and C doors has been fairly minor and the outlets continue to outperform, so we feel good about it.

With regard to landlords in terms of mall closures, I know you didn’t ask that, but that would be a logical follow-up. There are the potential of those happening certainly for the rest of the year, but it’s very minimal and we have got a couple on the watch list, but nothing significant.

Jeff Klinefelter - Piper Jaffray

What about lease rates, Tom?

Tom Johnson

Lease rates overall in B and C centers and in lifestyle centers, the leasing rates have been, obviously, a little bit more advantageous than in the past, but as we’ve always said, we have great relationships with our landlords, we work together as partners in the business and the A rents are continuing to hold their values, but where we see opportunities, we’ll take advantage of it.

Operator

Your next question comes from Laura Champine - Cowen and Company.

Laura Champine - Cowen & Co.

Hi. Could you just split out your $55 million CapEx budget between new stores, the investment in the PS concept and maintenance CapEx?

Michael Cunningham

Laura, basically the CapEx for the stores are not going to be that much materially different and remodels are a similar cost as the new stores. There are some corporate items budgeted in there, probably to the tune of $10 million to $15 million.

Laura Champine - Cowen & Co.

And as far as the CapEx investment in PS, what does that look like for this year?

Michael Cunningham

The CapEx for PS this year is just the new stores, and the new store books are probably slightly under the average of Aero cost. So you can use an average and be safe.

Operator

Your next question comes from Brian Tunick – JP Morgan.

Brian Tunick – JP Morgan

I guess maybe for Mindy or Julian. Obviously, you guys are significantly outperforming the rest of the retail right now. I would just love to get your view if you think you’re either acquiring new customers or existing customers spending more; are you expanding the age range of your customer on either side of the business? Just what are your general thoughts around that?

Julian Geiger

It’s Julian, Brian. Clearly, we are capturing market share. It’s undeniable; it’s easy to look at the numbers and extrapolate from them. If you go back to our history, the merchandise has never looked better, and teenage kids thrive on merchandise. Merchandise they do not want and any price has no value. We are reinforcing the minds of our traditional customers that we’re the destination, and we’re capturing customers from a variety of other stores, both those that are less expensive than we are and those that are more expensive than we are.

So, it really is a very gratifying time and one in which we really are putting our nose into the grindstone to get that much better. As I said, we thrive on the success, we never complacent with it and the organization has worked very hard and this encourages them to work that much harder to gain even more market share.

Operator

Your next question comes from Lorraine Hutchinson - Banc of America.

Lorraine Hutchinson - Banc of America

Thank you, good afternoon. Just wanted to follow up on the gross margin, it sounded like it started off positive in February, but your guidance seems to imply that going negative. So if you wouldn’t mind talking either specifically to the first quarter or maybe generally what you expect the trends to be, where you see sourcing costs and what we should expect for merchandise margin for the year?

Michael Cunningham

Lorraine, this is Mike. I just want to reiterate that the guidance does imply, we haven’t specified anything with regard to gross margin guidance, but clearly, we had said for our February sales, the margins were up. I just want to clarify for everybody, to understand that our guidance at $0.22 to $0.24 includes the $0.03 cost for Jimmy’Z.

So, I know most consensus is excluded. So if you excluded that $0.03 cost, the guidance for Q1 would be $0.25 to $0.27. Now additionally within that I also indicated we included the $0.02 impact for PS. So, again, that’s I just want to clarify that guidance out there.

Operator

Your next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

So just to clarify on the gross margins, on the merchandise margins and I do not mean to keep harping on it, but I think Mindy, you said that you thought that there was opportunity for merchandise margin improvement to lower costs, better sourcing and that. Perhaps you would pass on either greater quality or improved value, which I took to mean that you could be more promotionally oriented? Is that a fair assessment?

Mindy Meads

What I said about cost, we continue to get incredibly sharp prices and in some cases, lower and as we evaluate that, we may take some of those savings and improve the product even more.

Janet Kloppenburg - JJK Research

But not necessarily take prices down lower than…

Mindy Meads

No. I’m very excited about the progress we’ve made the last two months and that the customer is responding and we are able to raise retail. We hate to predict out where that’s going to be, but if we continue to produce the product that the customers like and we have an opportunity to raise that AUR the rest of the year.

Janet Kloppenburg - JJK Research

Then on the SG&A front, Michael, I was wondering in the back half, should we be looking for some pressure from the opening of the 10 PS stores or would that be offset because Jimmy’Z will no longer be pressuring the P&L?

Michael Cunningham

That’s absolutely; we do not expect to see pressure, particularly the fourth quarter. We do expect a little bit of drag in PS in the third quarter, because we’re going to be opening stores sometime during the third quarter and as we had the pre-opening expense, but by the time we hit the fourth quarter, our hope is that the costs would be offset, PS should be neutral and then we will actually get a little bit of benefit from the elimination of the Jimmy’Z loss.

Janet Kloppenburg - JJK Research

Have you thought, Julian, about the any cannibalization or fact that there might be from your younger age Aeropostale customers and the PS concept? How distinct can you keep the concept?

Julian Geiger

We have thought about it a lot clearly; Janet and I think when you give ages out its less descriptive than talking about an elementary school kid and a high school kid. We feel very good that the sizes are substantially different, the demand is different and the look will be marginally different. Mindy can give you more color on it.

Mindy Meads

Yes Janet, if you look at a 10 year-old and then you look at a 16 year-old, we view those customers as totally different. There is to doubt there will be some trends coming down from the teen market, but we are designing with the specific design team for a 7 to 12 year old and really focusing on that 9, 10 year old that is really is different and actually has a lot of opportunities in classifications that Aero is not even in.

Operator

Your next question comes from Kimberly Greenberger - Citi.

Kimberly Greenberger - Citi

The gross margin in fourth quarter, I know you commented in December specifically that the merchandise margin was down and that’s what I’m assuming drove the quarter down. Can you just talk about your outlook for merchandise margin? I know you started Q1 in a healthy position, but I’m just having a tough time getting to your guidance unless there might be some gross margin pressure coming?

Michael Cunningham

We are not spelling out the details of the margin, either in comp sales or margin or SG&A. There are a number of moving pieces particularly, obviously, the components of the Jimmy’Z exit course, which probably two-thirds of that cost is going to show up in the gross margin line and the balance is going to be showing up in the SG&A. For us to try to reconcile that right now in the fall would be tremendously difficult to do.

Ken can probably take some additional questions and walk through some more discussions after the call.

Kimberly Greenberger – Citi

Can I just ask a follow-up then? On the fourth quarter, did the buying occupancy and distribution expenses in gross margin, were they roughly flat?

Michael Cunningham

There are a number of different items. We did leverage occupancy depreciation was up and then all other items net out to be essentially flat.

Kimberly Greenberger – Citi

Was it just December that the merchandise margin was down or was it November as well?

Michael Cunningham

We generally do not disclose that within each particular month. We were more promotional after Black Friday. So, a majority of the merchandise margin decline was generated post Black Friday.

Operator

Your next question comes from the line of Linda Tsai - MKM Partners.

Linda Tsai - MKM Partners

I think last quarter you indicated a 30% SKU reduction. How much did your SKUs go down this quarter and might there be an opportunity to reduce this further as you move through the year?

Mindy Meads

I would say we are pretty close to, the last two years, we brought it down to that level and at this point now, we are kind of maintaining that. We think it’s a good level. It’s really a well balanced assortment between our core fashion and veneer; we really have that perfected. So, I think you are going to see similar to what you see in the stores today.

Operator

Your next question comes from Richard Jaffe - Stifel Nicolaus.

Richard Jaffe- Stifel Nicolaus

Just some color on the PS business. Should we assume that the merchandise assortment, that is say the men’s versus or boys versus girls, tops versus bottoms, that a lot of ratios will be very similar to the adult store. Similar SKU counts or are you going to adjust it given the age and that the preferences of these kids?

Mindy Meads

I would say generally you are going to see probably more girls than boys. We think that but we will have boys in there which we think is a great distinguisher for us. I think you will see some classifications, be it dresses and accessories will come alive, but I think generally you’re going to see a strong top business on both boys and girls. We will learn and we’ve certainly studied the classifications from Aero and then as we move forward, we will make the necessary adjustments.

Richard Jaffe- Stifel Nicolaus

When you say more girls and boys, that’s when you compare to the adult business?

Mindy Meads

Yes, our women’s business is bigger than our men’s business in the teen area and so, but we do think we’ve got a nice opportunity and a niche in the boy’s side too. Some of our competitors are only doing girls. So, we think it’s a great distinguisher to have it.

Operator

Your next question comes from Marni Shapiro - The Retail Tracker.

Marni Shapiro - The Retail Tracker

I have a personal question. I love the name will the store be open before my daughter goes to sleep away camp, so I can shop. I think at the end of June, right? When does camp start these days?

Mindy Meads

I think she is going to be okay.

Julian Geiger

If not, we can send her something.

Marni Shapiro - The Retail Tracker

Thank you. I’m very excited and I have a million questions, but for competitive reasons for you guys, I’ll take them offline. I have one simple question. With the economy going south, typically crime goes up, and I’m curious if you guys feel good about your shrink and shrink reserves and any surprises there and if you can just, a quick housekeeping, a tax rate for ‘09 that we should be thinking about?

Michael Cunningham

Sure. Tax rate, I would use the same tax rate 39.9%. Marni, yes, with regards to theft, obviously it does go up as the economy gets bad. We’ve added a number of initiatives as well as bolted our loss prevention staff. So we’re working very hard to combat any potential increase, and obviously it’s something we worry about, we work against, we have a number of initiatives, and we feel we’re doing the best we can to deter it and prevent it.

Operator

Your next question comes from Robin Murchinson - Suntrust.

Robin Murchinson - Suntrust Robinson Humphrey

This is for Mindy. Any categories you wish you had greater intensification of? And I apologize if you mentioned this; did you say how large the PS Aero might grow to be? I assume about the same as core Aero?

Mindy Meads

The size of the stores or…?

Robin Murchinson - Suntrust Robinson Humphrey

The total unit count, ultimate unit count?

Mindy Meads

We don’t know yet, but we do think it can be sizable. We’re certainly going towards a thousand stores at Aero, and we think that at least three quarters of that we could get there. Beyond that, I would just be making a guess at this point. We do want to go slow, go fast. We think it’s an opportunity that Julian mentioned earlier, since it’s such a logical translated business, that we may be able to move a lot faster as we start to learn.

Robin Murchinson - Suntrust Robinson Humphrey

Okay and in terms of any categories you might like to have greater intensification of or not?

Mindy Meads

Any categories in Aero?

Robin Murchinson - Suntrust Robinson Humphrey

Right, right. Skirts, dresses?

Mindy Meads

No. I think at this point, it’s pretty similar. We had dresses last year, and we have them again this year. They’re doing well, we’re excited about that. I think one nice change in the spring season is that we started to get a better lift in accessories. Its double digit is up and some of the strengths that we’ve taken from all the athletic appliqués in our sportswear has translated to sleep.

We continue to have a very strong fragrance business that we launched in holiday and also we’re getting some great items in both shoes and bags. So we could be starting to get this accessory business back on track.

Operator

Your next question comes from Josh Goldman - Barclays Capital.

Josh Goldman - Barclays Capital

I had a question for you on sales productivity. I think you’ve talked previously about the sort of long term target, about $600 a square foot. It looks like you ended 2008 pretty close to that and I was just wondering if you reassess that as a long term target? If so, where you see any additional opportunities coming from? Thanks.

Tom Johnson

Josh, it’s Tom, yes. We did talk about the magic $600 mark for years and obviously, as you noted, we’re rapidly approaching that, we had a terrific year. We think that we could continue to do that as we built the new store model. We feel good about the future of what the stores look like, as well as the capacity, but who knows ultimately where the number could go.

We continue to make very good improvements operationally, to get product to flow through our stores at the fastest rate speed in the market, but in the stores and the doors, and we think that that’s going to help us going forward. So while we’re at or close to $600 a foot, we still think that there is opportunity there. It’s difficult to quantify what that would be, but we know that there continues to be opportunity with regard to flowing goods to the stores and being better with that, and a new allocation system coming up into 2009 will help us at the balance of the year.

In some cases, I don’t know if you noticed, but we are taking a very close look at expanding some of our doors. We have expanded a handful at this point. We’ve identified probably 80 or so that are over $800 a foot that we know we could increase the absolute dollar volume and interestingly enough where we have increased those stores, 20%, 30%, 40%, within a year or so; they go back to their run rate or their productivity rate. The productivity continues to maintain itself, which is pretty amazing. So we think that there is continued opportunity.

Operator

Your next question comes from David Glick - Buckingham Research.

David Glick - Buckingham Research

Just wanted to see if we could give some color on productivity and returns on your remodels, some of the new store formats certainly look great. It look like they’re very productive, I suspect the returns are high, but I just wanted to get a sense for the contribution there, the ROI, maybe you could tell us the comp store spread between your remodels and your overall store base, and if you could refresh my memory, I know you said you’re doing 20 in 2009, how does that compare to 2008?

Tom Johnson

Actually the new stores are performing in line of what our expectations are prior to their anniversary date. As they’ve turned into their comp base, they’re actually performing mid singles above what our chain average has been, so we’re pleased with that rate as well.

With regard to the remodels, the remodel number is slightly larger than last year, this year, but what we’re really looking to do and we haven’t gotten full commitments yet as I mentioned earlier is expanding selective doors thoughtfully and carefully. So we do not have a total number on that yet, but it will be small to the total and with regard to returns on investment, we really haven’t made any comments on that just yet.

Operator

Your next question comes from Howard Tubin - RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Mindy, anything you can tell us about changes on the marking front for the remainder of spring season or back to school that you care to share with us?

Mindy Meads

Well, you know we don’t like to give forward information on our marketing for competitive reasons, but the success has been to mix it up and keep trying new ways to excite the customer. So you’re going to see lots of different changes, because that’s really what made a big difference in our holiday season and as we’re moving through into February, so more to come.

Howard Tubin - RBC Capital Markets

Great, thanks. And just one question on the new kids business. Is it going to be run similar to Aero in terms of it being a promotionally driven specialty store?

Mindy Meads

Yes it will be. We will create a destination promotional kid business that will really leverage on Aero’s strength and really have the same formula of having great fashion at great prices.

Operator

And that’s all of the time we have for questions today. I would now like to turn the call back over to management for additional or closing comments.

Julian Geiger

Well we thank you so much for your continued interest in and support of our business, clearly it’s been a great year. We look forward to talking about great things again with you on our first quarter conference call. So we will speak to you then. Thanks very much.

Operator

This does conclude today’s conference. We thank you for your participation. Have a wonderful day. You may now disconnect.

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Source: Aeropostale Inc. Q4 2008 Earnings Call Transcript
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