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Aéropostale, Inc. (NYSE:ARO)

Q2 2009 Earnings Call

August 20, 2009 04:15 PM ET

Executives

Kenneth Ohashi - Vice President, Investor and Media Relations

Julian R. Geiger - Chairman and Chief Executive Officer

Mindy C. Meads - President and Chief Merchandising Officer

Michael J. Cunningham - Executive Vice President and Chief Financial Officer

Thomas P. Johnson - Executive Vice President and Chief Operating Officer

Analysts

Christine Chen - Needham & Company

Betty Chen - Wedbush Morgan

Jeff Klinefelter - Piper Jaffray

Roxanne Meyer - UBS

Michelle Tan - Goldman Sachs

Stacy Park - SP Research

Edward J. Yruma - KeyBanc Capital Markets

Brian Tunick - JPMorgan

John Morris - BMO Capital Markets

Kimberly Greenberger - Citigroup

Janet Kloppenburg - JJK Research

Dana Telsey - Telsey Advisory Group

Laura Champine - Cowen and Company

Michelle Clark - Morgan Stanley

Linda Tsai - MKM Partners

Robin Murchinson - SunTrust Robinson Humphrey

Richard Jaffe - Stifel Nicolaus

Marni Shapiro - The Retail Tracker

Howard Tubin - RBC Capital Markets

Lorraine Hutchinson - Bank of America Merrill Lynch

Operator

Good day and thank you for joining us for the Aéropostale Conference Call to review Second Quarter Fiscal 2009 Financial Results. At this time, all parties are in listen-only mode. Following the management presentation, we will conduct a question-and-answer session Instructions will be provided at that time, for you to queue up for your questions (Operator Instructions). I would like to remind everyone that this conference is being recorded.

I would now like to introduce Ken Ohashi, the company's Vice President of Investor and Media Relations. Please go ahead sir.

Kenneth 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 second quarter financial results. A copy of the release can be found on our corporate website.

Before we begin, I'd like to remind you that during this earnings conference call certain statements and responses to questions may contain forward-looking information such as forecast of the 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 on our 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 obligations up date 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 ask everyone to limit themselves to one question during our Q&A session to allow everyone a chance to speak. Once we've gone through the round of questions, we will go back and you may queue up again at that time.

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

Julian R. Geiger

Thanks, Ken. Good afternoon, everyone. All of us thank you for participating in today's conference call.

As you can well imagine, we are very pleased with our results for the second quarter which once again exceeded expectations. Our performance represented another period of record-setting sales, record-setting operating margins and record-setting earnings. At this point, I would like to highlight some of the key financials of the quarter for you.

Net earnings were a record $0.57 per share, an 84% increase over the same period last year. Net sales increased 20% to a record $453 million. Same stores sales increased 12% on top of an 11% increase last year. Net sales from our e-commerce business increased 49% to $15.8 million and operating margins increased 480 basis points, driven by increased merchandise margins, by strategic expense controls and by the leverage of our business.

Results such as these are not the by-product to good luck. They are the direct result of the expertise, commitment and determination of an entire organization. Mindy, Tom, Michael and I thank everyone within the Aéropostale family for their impressive contributions to an outstanding second quarter and a memorable first half of fiscal 2009.

The ability of our organization to excel even in times of economic distress, clearly underscores not only our unique culture and competitive spirit, but also the real power of the Aéropostale brand. It is reassuring to know that the current generation of teen customers has truly embraced Aéropostale as one of its top brands of choice.

Today's teenage customers are uniquely sophisticated, knowing exactly what they want to wear and enormously pragmatic understanding just how much they are willing to pay for their cloths. Our entire product development team has done an outstanding job understanding our customer and delivering to them a fresh focused and balanced merchandise assortment. Our unique positioning as a promotional specialty store enables us to bring fashion and value to our stores in a compelling and consistent manner.

Clearly this is a winning combination, no wonder we anticipate being important to the customer for many seasons to come.

Now, I will turn the call over to Mindy, who will discuss some of the merchandising highlights of the second quarter with you.

Mindy C. Meads

Thank you, Julian. During the second quarter, the entire team did an excellent in executing on merchandising strategies and our promotional plans. We continue to drive increases in the same-store sales, merchandise margins, store transaction and average unit retail.

Now, let me take you through some of the highlights from the quarter. We experienced strength in both genders; woman's up low double-digit and men's up mid teen.

Our units per transactions were up mid-single digit and both our transactions and average unit retail was up low single-digit. We remain very positive with a positive trend in our average unit retail particularly as our competitors continue to lower their prices. This trend reflects a strong reaction to our merchandise assortment and tight inventory control.

We are also encouraged by our positive transaction despite overall negative mall traffic. Geographically, we experienced consistent strength in all regions further underscoring the transportability and the broad-based acceptance of our brand.

For the quarter, we improved merchandise margins by 210 basis points, which was primarily driven by strong initial sale through and also the distortion of trending (ph) classification.

Moving into the third quarter, we are very comfortable with both the level and the composition of our inventory. We continue to plan our inventories conservatively while utilizing contingencies and our speed to market to maximize both sales and margins.

While this is still early in the quarter, we had very positive reads on our initial back to school floor effect with particular strengths in those regions that have hit their peak selling period. We are very encouraged with our momentum and we will use the back to school business to read and react to key trends that will be important in maximizing our business in the second half of the year.

I would like to once again thank the entire product development team for their hard work and dedication in continuing to execute our merchandise strategies for this important back to school season.

I will now turn the call over to Michael, who will take you through the financials.

Michael J. Cunningham

Thank you, Mindy. Total net sales for the quarter were up 20% versus last year, driven by a weighted square footage increase of 8% and a 12% comp.

During the quarter, we opened 13 Aèro stores and our first five P.S. stores, and closed the remaining 11 Jimmy stores ending the quarter with a total 927 stores. Gross margins for the quarter were 36.6% versus 33.4% last year, an improvement 320 basis points. The largest drive of the increase was 210 basis points of higher merchandise margins with the leveraging of absentee cause (ph) of 70 basis points and lower distribution and transportation cost for 40 basis points.

SG&A for the quarter was 22.4% of sales versus 24% last year. The 160 basis point decrease was driven primarily by the leveraging of store line and other corporate expenses. The operating margin improved 280 basis points to 14.2% for the quarter.

Our tax rate for the quarter was 40.2%, which resulted in net income of 38.6 million, or $0.57 per share. Cash and cash equivalents together with short-term investments at the close of the quarter were 245.5 million versus 70.8 million last year.

During the quarter, we repurchased 381,000 shares of common stock for 13.5 million. We currently have approximately 114 million of remaining buyback availability under our $600 million program.

Inventory at the close of the quarter was 201 million, up 9% in total and up 3% per square foot. Our capital expenditures for the quarter were 16.1 million and depreciation and amortization was 12.7 million.

We expect our CapEx to be approximately 55 million for 2009.

We expect diluted earnings per share to be in a range of $0.76 to $0.78 per diluted share.

I will now turn the call back over to Julian for some closing comments.

Julian R. Geiger

Thank you, Michael. Looking at our performance in an objective manner, it is very exciting to know that by any statistical measure, our business has never been stronger.

For many quarters, we have generated record breaking sales and record breaking earnings. As we have said before, results such as these are extraordinary at any time but unique when contrasted against the current macroeconomic panorama.

While other retailers are forced to modify their business model, we have the luxury of focusing on our strengths, perpetuating our momentum and conceptualizing the strategic future growth of both our sales and our profitability.

While controlling our expenses, we continue to invest intelligently in those people, systems and technologies that will make us even more successful in the future.

In the Aéropostale, we foresee further gains in market shares in our stores domestically. Our e-commerce business, still relatively young when compared to our competitors, continues to have substantial growth ahead of it.

Our stores in Canada are performing at a very high level and should continue to do so.

The results of our stores in Dubai are strong and indicate that Aéropostale has the potential to develop into a powerful global brand. The recent launch of our new concept, P.S. from Aéropostale, a brand for elementary school kids the age of 7 to 12, has recorded a very solid start in the seven stores that are now open and online. It this clearly premature to discuss any of the current or project any of the future levels of sales of P.S. but clearly, we are pleased with its opening.

As you know we are approaching the middle of the back to school selling season, which takes place over an 8-week period from July through September migrating from the southern stores through the middle of the country to the stores in the north.

While we will share the all-year results with you fully in the future, the results from the earliest regions are both positive and encouraging especially when one considers changes in tax-free days and a later Labor Day. All of us at Aéropostale are pleased with and proud of our accomplishments.

Our progress is an energizing stimulus to reach higher, to achieve more, and to become the company we believe that we are destined to be. We appreciate your interest and support and we'll now open this call to you for questions.

Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Christine Chen of Needham & Company.

Christine Chen - Needham & Company

Thank you and congratulations on yet another amazing quarter.

Julian Geiger

Thank you.

Michael Cunningham

Thank you.

Kenneth Ohashi

Thank you.

Christine Chen - Needham & Company

Wanted to ask, what do you think are some of the drives that will enable you to surpass your peak operating margins of 14% in 2004 given that the structure of the company is now very different than what is was five years ago? Thank you.

Michael Cunningham

Sure Christine, this is Michael. I think we've never been more optimistic about ability to continue to grow the business as well as search out and optimize those areas of opportunities across both the sales and the margin lines.

One of the most exciting technology investments we've made over the last couple of years has been in our planning and allocation systems that I just like may be Tom talk a little about the exciting things happening there.

Thomas Johnson

Sure, thanks Michael. We continue to make great progress in our multi-year supply chain enhancement to beat the market. We are starting in '07, fall of '07 was the West Coast, DC.

Fall of '08, we started the store and delivered multi-pre tax to the stores.

Spring '09 I think as you know, we turned on our allocation system which is given the terrific results in sales and margin areas. Next steps, we will migrate to an increased splitting of the POs, we have split them in multiple ways which is kind of a next phase and our final will wrap up 2010 affecting our holiday trading period of 2010, with us being able to affect allocation and understanding loss sales as well.

It's been a very complicated and interesting implementation period over the last few years, we are very pleased with where we are today.

Next steps will affect our assortment and assortment planning into 2010 and 2011. Our planning allocation teams have been working hand in hand with the merchants, doing a terrific job of understanding how to make the right purchases upfront. And we like to believe that it's the science behind the art. And obviously without the art its not going to work and Mindy will take us through a little bit of art that will help propel us to new highs of operating margin.

Mindy Meads

Christine, this is Mindy and as you know it really works on some product and having the right fashion at the right time. We are continuing to focus on moving the product forward adding in the right details, the right styles that will also give us the opportunity to build a higher AUR.

Sourcing opportunities still exist and that is an area that we continue to get lower costs but we are selective in identifying, putting some of that back into details or quality. But we do have that lever that we can use at anytime based on the strong relationships that we have our suppliers that allows us to get very low cost.

I think those really are the key levers that we see, will allow us to sustain this both top and bottom-line growth.

Operator

We'll go next to Betty Chen with Wedbush Morgan.

Betty Chen - Wedbush Morgan

Hey, good afternoon and my congratulations as well.

Julian Geiger

Thank you.

Michael Cunningham

Thank you.

Betty Chen - Wedbush Morgan

Julian, you have mentioned earlier in your remarks there that you are very encouraged by some of the practical selling trends you're seeing especially at some of the regions kick off peak back to school selling. I was wondering if you can give us some additional color perhaps in the South where back to school has already begun in July and maybe what regions you are also seeing some color?

And then I think related to that; any quantification if you can on how the tax free holidays shift and the later Labor Day shift could impact August or September? Thank you.

Mindy Meads

Okay, Betty if you start talking about the strength in our business, we really have built on the successes that we had in Q1. Continued strength in net tops across both genders with graphics been the key across all, frankly our customer cannot get enough of our names and they respond to rather we put our in T-shirt, a polo or candy.

And as Julian said, we are very encouraged with the reads across all classifications in the stores that peaked early in July.

Julian Geiger

And then I think you already know what the results were by region. The South continued to be the top performing region even with the tax shift. So we feel very good about that and across all regions ours performed very well including West which is been the challenged for many of the other retailers out there. We feel very good about it across the board.

Michael Cunningham

And I think in terms of the tax issue I believe at the end of July, we did indicate that July was impact -- negatively impacted by two or three points of the shift into August. August will -- and we see the benefit of that but then we'll also feel the impact of the Labor Day shift which is to be quantified but although too probably in some of you the range of the benefit that always received. We do believe for the quarter, September is going to be the biggest upside market with regard to top as a result of this year.

Mindy Meads

And if you look at last year, you know that August and July are two higher comp months. So that's a big opportunity for us.

Operator

We'll go next to Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Yes, great job on the quarter to everyone.

Michael Cunningham

Thank you.

Jeff Klinefelter - Piper Jaffray

So, may just a follow up on this merchant margins, Mindy you've done a fantastic job the two years driven significant merchant margin increase, the gross margin increases driven in large part by merchant margins. Based on and you described is the distortion of the categories is a big part of that; how much higher do you think you can take those and still maintain the pricing in the stores? Just curious as to the development of your assortments if the distortion is something that can continue over the next couple of years?

Mindy Meads

Well, as I said before I don't really think its one piece. There are many factors that are going to be able to allow us to keep growing that from the systems that Tom talked about to having the ability to as I think, edge up our AUR a little bit, we think that's an opportunity. We are still significantly below our competitor. So that's an opportunity for us as we continue to improve around the product and making sure that we are managing the supply chain to be as effective as we can.

So we frankly think there's still opportunity to keep this growing. We have not hit our peak.

Julian Geiger

And Jeff just a follow up as well; yes, obviously hold up the products but we are very good at operating small very productive boxes and for us moving on average of 180,000 units for the 3500 stores, sizes or size really matters and we have been intently focused on getting a right size to the right stores. And with that, we believe that we will continue to operate at record margin level because of the in stock ability of an existence that we put in to place.

So the good news of that is a long-term solution and we feel that will continue to pay dividends for us every time.

Operator

We'll go next to Roxanne Meyer with the UBS.

Roxanne Meyer - UBS

Let me add my congratulations.

Michael Cunningham

Thank you.

Julian Geiger

Thank you.

Mindy Meads

Thank you, Roxanne.

Roxanne Meyer - UBS

Just a question about how you are thinking about the trade-off between comp and margin as you head into what is likely to be a pretty promotional back to school season. As you alluded to, a lot of your competitors are bringing down price points. You are obviously competitively priced to start with, but how are you thinking about managing between those two components? Thanks.

Michael Cunningham

But clearly our guidance assumes positive comp and margin increase as well as leverage of SG&A and with that (inaudible).

Mindy Meads

Well the secret to our success is frankly how we balance and look at each item and I think I talked about before how we kind of dial up and dial it down. So we have the ability on any given week to raise prices, take them down at the peak selling period. So we're very excited that this model -- actually this timetable contemplates into our strength.

Operator

We'll go next to Michelle Tan with Goldman Sachs.

Michelle Tan - Goldman Sachs

Thanks. I was wondering if you could give us an update, you mentioned product cost before, are you seeing an accelerating benefit in Q3 and Q4 on the product side, cost side? And then if the plan is to reinvest it in quality to drive higher AUR, do you still capture the same level of IMU benefit or does some of that get reinvested and you trade off some of the IMU upside?

Mindy Meads

Actually, we don't look at it on an IMU basis but we really look at it item by item and we are able to get advantageous prices almost up the board. But it just depends on the item if we decide we want to add a little bit more detail or quality. But we do have a very balanced assortment of costing. So we still believe in that three tier so that we look our core, it's very little cost, and as you move up the fashion, it really tears up. So, again, we see the ability to kind of take advantage if we need it and have some select lower priced items mixed in, but ultimately, long term we still see believing and moving the AUR slightly.

Operator

We'll go next to Stacy Park with SP Research.

Stacy Park - SP Research

Following up on the margins first, can you share with us how much of the gain in this quarter was due to the cost side of the equation? And then can you also address on that point, should you be able to achieve the same kind of merchandise margin gains in the back half and would you expect SG&A dollar growth in the back half to be similarly controlled?

Mindy Meads

On the first question in the cost, that's actually the smallest part of our margin growth. Obviously we are very low cost now there are opportunities to selectively make them lower but that is really not where we're getting our biggest part of our margin. We're not going to really go into detail of forward-looking margins, but Michael, you want to take this one?

Michael Cunningham

Yeah, I think everybody remember last year's fourth quarter probably the most competitive pricing quota in the history of retail with that our margins did drop, our gross margins dropped driven by the merchandise margins. So we look at the fourth quarter as a significant margin opportunity for the business.

With regards to SG&A, we will continue to manage that and monitor. We've done a great job of particularly focusing on the store line payroll and allocating enough dollars to serve the customer and manage the store, but also be as efficient as possible. So we expect that trend to continue in the back half of the year.

Operator

We'll go next to Edward Yruma with KeyBanc Capital Markets.

Edward Yruma - KeyBanc Capital Markets

Hi, thanks so much for taking my question. Can you talk about instead of comp going forward I now that your cycling or you'll begin the cycle of where instead of comps began to tick up and can you talk about whether you'd accrue it for correct in the quarter? Thank you.

Michael Cunningham

Can you do that again, repeat the last part of the question.

Edward Yruma - KeyBanc Capital Markets

Oh yeah, just in terms instead of comp kind of year-to-date and was there was any kind of change from the first quarter.

Michael Cunningham

The year-to-date this year versus last year, the incentive comp expense, as a really 2% of sales if you look is fairly consistent and as you go forward last year we had recruiting sets of comp in the third quarter as well the fourth quarter. So this year, too soon to tell where the back half of the year is going to end but nothing significant per se for this year versus last year.

Operator

We'll go next to Brian Tunick with JPMorgan.

Brian Tunick - JPMorgan

Hi, congrats again guys.

Michael Cunningham

Thank you.

Brian Tunick - JPMorgan

I guess a lot of conversation around your sales productivity versus your history and versus some other people in the mall, how many stores do you think right now in the base is undersized versus where you'd like it to be and sort of what are your thoughts on how many more remodels we could see the next few years?

Thomas Johnson

Sure Brian. It's Tom. We -- obviously where the productivity level chain wise 900 stores rapidly approaching $600 a foot. There is a substantial number of them, 140 be exact over $800 a foot. So we truly understand how to operate as I have mentioned earlier very productive process. We think that the most logical place to attack would be those stores that are performing over the $800 a foot and we've been doing little bit of that so far and we do think that it's something that we will continue to do over time. We are continued to be encouraged by our performance in new stores with 230 and new store design 130 in the comp base those stores are out performing the chain average and the initial result in the stores that we have in March is very encouraging for us.

We think that is absolutely a top-line sales driver as well as an earnings potential growth.

Operator

We'll go next to John Morris with BMO Capital Markets.

John Morris - BMO Capital Markets

Thanks, my congratulation as well.

Michael Cunningham

Thanks, John.

John Morris - BMO Capital Markets

A little bit on P.S. Julian can you tell us what your learnings are so far? I now it's still early but what are your learnings maybe in terms of merchandising and pricing and target? And also in your inventory, is that -- is P.S. moving that inventory number very much well I think your inventory was 3% per square feet.

Michael Cunningham

Hey John this is Mike on the inventory, P.S. is dimming (ph) as it relates to the inventory for the company. Right now there is a little bit of an impact from the movements of the tax rate, obviously we had the inventory on hand the sale was pushed so one week. So if you estimate the impact of the tax we shift on inventory levels we'd probably be down a little bit per square foot more then upgrade.

Mindy Meads

And John at this point we are not giving too much details on the specifics but I can tell you we are very pleased with the customer response both in the stores in e-commerce especially great reaction in e-com in parts of the country where they start to go back to school. So it's really giving us great read and the ability to look at give some initiative to figure what stores we should open for the future.

And we still are thrilled that it utilizes our core competencies and it really is a connecter from into this younger sibling. So, very, very credit.

I would say on the classification, they are pretty similar to Aèro and when we get on the next call, we will give a lot more flavor of how everything is working.

Operator

We'll go next to Kimberly Greenberger with Citigroup.

Kimberly Greenberger - Citigroup

Oh. Great. Thanks nice quarter.

Michael Cunningham

Thank you, Kimberly.

Kimberly Greenberger - Citigroup

Mindy I was hoping that on you could let sequentially know as you creep the ARU and I you're doing it very carefully, what sort of signs or signals are you looking at that will indicate to you that you've gone far enough with the pricing?

Mindy Meads

I think it's simply watching a customer's response and as we turn the product to the same rate that we're turning in the past, we're able to dial that up and we are not at historical levels of an AUR that we were three or four years ago. So we have an opportunity to get to that level and may be further. But it's really item by item basis and it's again when I talked about earlier of how we really manage that dial up and dial down.

As we see when we develop product and we bring the right fashion in, we're able to take it up little.

Julian Geiger

Kim, said well and the merchandise sales through initially, we've been very thoughtful in the way that we claim the business. We've just had a significant decrease in mark down. So, we've been able to chop the mark down cycle back end of the item and that naturally grows the AUR. So, the initial price may not necessarily be higher but the end of the life cycle price is definitely slightly higher.

Operator

We'll go next to Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Congratulations.

Julian Geiger

Thank you.

Michael Cunningham

Thanks Janet.

Janet Kloppenburg - JJK Research

Mindy, I wonder if you could spend a minute to talk a little bit about the net category. It seems to just keep growing for Aéropostale and while other retailers in the same niche are having a very tough time with the category. I wonder if you worry about it becoming too big of a business for you, if it's becoming too dominant and how you think about that and how you might balance that out?

And also Michael, if you could just comment on how we should be thinking about incentive compensation in the SG&A estimates for the third and the fourth quarter versus last year? I can't remember whether you accrued last year in the third and fourth and if will just be anniversary those months this year or if there will be higher amounts this year? Thank you.

Michael Cunningham

Yes Janet, this is Mike.

Janet Kloppenburg - JJK Research

I know.

Michael Cunningham

I believe focus on incentive comp as an increase in SG&A instead of sales.

Janet Kloppenburg - JJK Research

Than it won't pressure the SG&A line of that part?

Michael Cunningham

It's in our pressure the SG&A back half the year.

Janet Kloppenburg - JJK Research

Okay.

Michael Cunningham

And then obviously there are comfortable.

Janet Kloppenburg - JJK Research

Excuse me?

Michael Cunningham

It is obviously dependent on the comp sales level but with the guidance we assumed it should not be a deleveraging back to first and the third and fourth quarter.

Janet Kloppenburg - JJK Research

All right. Thank you.

Mindy Meads

And Janet in our concerns about the net tops we are not at all concerned.

Janet Kloppenburg - JJK Research

No, no I don't mean, I didn't mean it as the concern, I just wonder it keeps growing and as you know most of the specialty retailers are having a very difficult time with that category. It's mature in their mind.

Mindy Meads

Actually we see it very much as a positive and whether it'd be polo, whether it'd be camy's (ph), whether it'd be some of our fashion tops and certainly are graphic tees. But customer is responding and we are able to, particularly in that area, we are able to drive the comps even further because we have such an ability we get back in and build a contingency. So it really is our strength. The customer is responding to it and we'll continue to react to what's their liking in middle of just the assortments.

So those are as I mentioned earlier is so strong and the graphic team that we have in place are very sophisticated and are continually coming up with new ideas, new techniques and lots of details that really makes our brand even stronger and right now there is no end in sight.

Operator

We'll go next to Dana Telsey with Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone and congratulations.

Julian Geiger

Thanks.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about the impact of your localization efforts? How that's helping, what you are seeing there? And as you think about assortment planning going forward, what opportunities do you see for either seasonal changes or timing of fore sets? How do you feel it going forward? Thank you.

Mindy Meads

Okay, Dana, as you are moving to back to school you're not seeing as much seasonality that comes really later in the year when we look at the North and build them and make sure that we are very careful with more likely product lets have -- lets at least in sweaters later in the season and I think that the teams have really done a great job of managing this early mid and late case, timing to flow of the product to go into the right stores at the right time and we even shifted a delivery of fall for the weekend prior to Labor Day which will have a huge impact in the September sales.

Operator

We'll go next to Laura Champine with Cowen and Company.

Laura Champine - Cowen and Company

Mindy, you talked about the brand snapping up anything with a logo on we certainly figure logo bigger and classier and the brand obviously has a ton of momentum. What would you expect to see if retail improves? Do you think there'll be a trade up away from the brand? How will you pivot as consumers hopefully at some point feel a little bit better spending money, will that hurt the Aèro brand which is known for promoting very effectively?

Mindy Meads

Actually based on the flexibility and the ability that we are still able to adapt the business, we can react very quickly to whatever the customer and we can immediate act to find out, we do selectively act to solid tops that are mixed in and have smaller logos on them. But that is in the mix. We're finding strength across the board. So, we will be able to read and react and really does whichever way the customer wanting us to go.

Operator

We'll go next to Michelle Clark with Morgan Stanley.

Michelle Clark - Morgan Stanley

Yes, good afternoon. Let me add my congratulations.

Michael Cunningham

Thank you.

Julian Geiger

Thank you.

Michelle Clark - Morgan Stanley

First question is for Mindy, are you back to school preview down was highlighted as an area of opportunity. We'd love to hear your thoughts on how that is trending thus far? And then second question, are you guys seeing anything in terms of rent concessions and is that helping to reduce your occupancy costs? Thank you.

Mindy Meads

Okay. Michele when you're taking about Denim, we're actually very pleased with the reaction to Denim in the early back to school stores. And if you -- as you thought from our June preview, it's really coming out pretty still alert to the way we projected with the skinny player which is in an important silhouette for and now skinny coming on with more importance, lot of focus on the dark which we invested in and also a very nice reaction to the destructed which was something that was new this year.

As we get further in, we'll be able to share more as we move along and get into some of the mid to late to be able get a little more information but so far so good and we're very encouraged.

Thomas Johnson

Michelle its Tom. As far as rent concessions are concerned, a lot of the landlords in most cases are allowing rent concessions to happen with businesses that are in very difficult financial status and they're concerned about them going bankrupt and it's going away. So that's where you get a positive rent concessions for us. Our business is obviously very strong where we've had very selective rent adjustment is around lease points we've kicked out et cetera. So, it's not wide spread and in anyway across the board for us.

We continue to have very good relationships with our landlords and as we have always attacked any opportunities to get good location. So I think for us, it's really about affording us locations and centers that may not have had opportunity in the past and for taking advantage of that this year with centers like Lennox, like Water Tower, and in the new store performance this year has been actually very, very positive.

So its kind of a backward way to look at it but with this macro environment, we are getting some better products, better locations within the centers and in some cases where the sea type of a center we will get more concession deal. But rent concessions are really going to the companies that are damaged and not the companies that are driving.

Operator

We'll go next to Linda Tsai with MKM Partners.

Linda Tsai - MKM Partners

Hi, let me add my congratulations.

Julian Geiger

Thank you

Linda Tsai - MKM Partners

Given the strength of your knits and graphics tees, it seems like these categories might be partly responsible for some of your AUR increases. Do you see any other categories where you might see opportunity for higher AURs?

Mindy Meads

As we move in the fourth quarter I see the ability in also pretty pleased it is important part of our fourth quarter business, so I feel positive that may be able to see some increases there also.

Operator

We'll go next to Robin Murchison with SunTrust.

Robin Murchinson – SunTrust Robinson Humphrey

Hi, and all congratulations.

Julian Geiger

Thank you, Robin.

Robin Murchinson - SunTrust Robinson Humphrey

I just wanted to ask you about unit growth. You're turned being turning about 4% or 4.2% or so now when can we assume that number might increase and assuming next year you will probably be a little more aggressive, I'm just looking that memorable (ph) uptick? Thank you.

Thomas Johnson

Yeah Robin, its Tom. We, obviously forward-looking we haven't talked about any square footage growth and we've -- on the call for 2010. We were very pleased with the growth that we had this year while it is essentially smaller or it is smaller than it has been in the past in terms of unit growth and square footage growth. We have had a nice top-line growth in the stores as I mentioned earlier. We took advantage of the climate and the majority of our stores we opened this year, we are on A type centers which yield a higher productivity, as well as outlets which has been very strong for us and continues to be very strong for us.

So we think that we will continue to get the growth there. Going forward as we had mentioned earlier, we see square footage growth coming in the ways of where we are over productive in stores that are over $800 per square foot in malls that we believe we will get paid so we're increasing the square footage and there are certainly still some centers, believe it or not that we're not in, that we think that we can continue to grow in and we would like to focus in on the centers that we have been in the past.

Potentially the stronger centers aid towards in that the old-pipe format that we had would not necessarily play as well in and we feel very good about the continued growth of Aèro. And yes, no pun intended, we feel very good about the future EPS and we think it's just too premature to talk about store growth. But we know that we have win formula and we'll continue to roll that next year.

Operator

We'll go next to Richard Jaffe with Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus

Thanks very much. Just a couple of quick follow-on questions and first, congratulations, really great quarter and great gains.

Thomas Johnson

Thank you.

Michael Cunningham

Thank you.

Richard Jaffe - Stifel Nicolaus

How much further to go on the average retail and how high is up, how far do you think you can take it? And then the follow-on question would be about e-commerce. What's the opportunity and how much do you need to invest to get to the level you think is appropriate?

Mindy Meads

On the AUR we're not really predicting exactly where that's going to go. But as I said before, I really do think that we have ability to keep edging that up, a couple other categories I did mention although small in the second quarter, huge increases in woven and huge increases in dresses, right product, very focused, very strong AUR growth. And as we move into the fourth quarter, clutter business which has typically being smaller, good early reaction and I anticipate getting higher AURs for that category also.

And what was your second question?

Thomas Johnson

e-com. We not obviously cap on that since we outsource e-com. But I think we're always looking for opportunities on the marketing aspect of e-com to drive the business further and our e-com group has some additional ideas quite frankly funding and sort of investment we make, we don't either pay back with the amount on the sales.

Julian Geiger

And Richard, finally with the AUR just coming back around to follow-up to that, to show again very, very positive about how we're planning the business and we are allocating good and with that you have less markdowns. So again the lifecycle of chalking off the back end of the lifecycle feel very positive and continue growth there and have the right sizes at the right store, is allowing us to have less markdowns as well.

So all positive and very strong for the future potential for us to continue to grow the AUR without necessarily reading the prices.

Operator

We'll go next Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

Hey guys, congrats.

Thomas Johnson

Thank you, Marni

Marni Shapiro - The Retail Tracker

I think you really say MPS a little over your head forever.

Julian Geiger

I'm sorry even....

Marni Shapiro - The Retail Tracker

Obviously, I have -- I'm sorry to carve on the AUR section but I have noted in your stores and even online some very nice looking jackets for fall in addition some blazers, when you consider that into the next wouldn't that also impact the AURs that part of the story?

Mindy Meads

I guess Marni that would. We really don't have that much out of our assortment right now. There maybe a little bit more on the web but as we go under fourth quarter its again small caliber that definitely would be a category that would be able raise a lock.

Operator

We'll next Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Hey, guys great work.

Thomas Johnson

Thanks Howard.

Howard Tubin - RBC Capital Markets

Just one question on inventory, inventory portfolio hasn't been up in a couple of quarters. And should we expect it to get that back down during maybe at the end of the third quarter or in the fourth quarter as well?

Thomas Johnson

We are not give you forward-looking guidance on inventory though I will tell you on our third quarter call, we'll talk about fourth quarter inventory levels because there is a full set timing shift that will impact our year-end inventory to some extent but its too premature to discuss that now.

Operator

And we have time for one more question. We'll go next to Lorraine Hutchinson with Bank of America-Merrill Lynch.

Lorraine Hutchinson - Bank of America Merrill Lynch

Thank you. Good afternoon. Now that you have resumed your share repurchase program, can you just review if you have a minimum cash threshold that you'd like to keep on hand and should we expect your excess cash after CapEx go towards share repurchase going forward?

Thomas Johnson

Sure, Lorraine. We do have a minimum threshold that we look at internally but we don't disclose that. And yes at this point in time obviously beyond our investments in our CapEx for the business, the best use of cash right now is returning to the shareholders. And frankly its in our plan of our repurchases.

Operator

And that does conclude our question and answer session. I'd now like to turn the call back over to Julian Geiger for any additional closing remarks.

Julian Geiger

We thank all of you for participating with us today and asking a lot of good questions. As you see, we are very excited about the business. We'll go back to school and look forward to speaking to you next time.

Thanks very much.

Operator

And that does conclude today's call. We do appreciate everyone's participation.

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