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Aeropostale, Inc. (NYSE:ARO)

Q4 2007 Earnings Call

March 13, 2008 4:30 pm ET

Executives

Ken Ohashi - Vice President of Investor and Media Relations.

Julian Geiger - Chairman and Chief Executive Officer

Mindy Meads - President and Chief Merchandising Officer

Tom Johnson - Chief Operating Officer

Michael Cunningham - Chief Financial Officer

Analysts

Brad Stephens - Morgan Keegan

Christine Chen - Needham & Company

Michelle Clark – Morgan Stanley

Stephanie Wissink - Piper Jaffray

Eric Beder - Brean Murray

Janet Kloppenburg - JJK Research

Marni Shapiro - The Retail Tracker

Linda Tsai - Mkm Partners

Michelle Tan - UBS

Lorraine Maikis - Merrill Lynch

David Glick - Buckingham Research Group

Robin Murchison – Suntrust

Howard Tubin – RBC Capital Markets

Operator

Thank you for joining us for the Aeropostale conference call to review fourth quarter 2007 financial results. (Operator Instructions) I would now like to introduce Ken Ohashi, the Company’s Vice President of Investor and Media Relations.

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 fourth quarter and fiscal 2007 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 forecast of future financial performance. Forward-looking information and statements involve known and unknown risks and uncertainties which may cause our actual results in 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 ask everyone to limit themselves to one question during our Q&A session to allow everyone a chance to speak. Once we have gone through a 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 Geiger

Thanks Ken. Good afternoon everyone and thank you for joining us for our fourth quarter conference call. All of us at Aeropostale are extremely pleased with our record-breaking performance for the fourth quarter and our impressive finish to fiscal 2007. The strategic initiatives that we outlined and have implemented since 2005 are continuing to have a dramatic and positive impact on our business. Our record financial performance is a result of the dedication and talent of our entire organization.

During the fourth quarter we achieved a 16.7% increase in net sales and a 9.2% increase in same store sales. The balance of bulk of our assortments and our powerful preplanned promotions contributed to our strong top line sales and continued gross margin improvement. As a result of our solid performance, we are able to achieve pro forma earnings of $0.93 per share during the fourth quarter a 39% increase over the previous year.

For the full year we achieved a net sales increase of 12.6% and an increase in same store sales of 3.3% marking the tenth consecutive year of positive comp store sales increases for Aeropostale. We ended the year with pro forma net earnings of a $1.70 per share, a 36% increase over pro forma net earnings per share in fiscal 2006. Throughout the year we maintained strong momentum and executed consistently to reach our corporate goals. By delivering a balanced merchandise assortment and exciting shopping experience and great values we demonstrated that we are a powerful, destination, life style brand.

Capitalizing on the strength of the Aeropostale business domestically we successfully entered the Canadian market by opening 12 stores. We continue our expansion in home by opening 75 Aeropostale stores in the U.S. as planned. We continue to demonstrate our confidence in the Aeropostale brand and at the end in our overall business by repurchasing one $0.25 billion of our common stock in the second half of the year which included a $125 million ASR. Operationally we are pleased with a seamless opening of our West Coast D.C. as well as with the progress we have made with a new allocation system which will begin operating in the second half of this year.

As we look to 2008 we will continue to build upon our past accomplishments while investing in long term profitability and growth of our business. 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 we are very pleased with the execution of our merchandising strategies for the holiday selling season. For the quarter our women’s comp was up 8% and men’s was up 13%. During the holiday season our overall success was driven by distorting key classifications such as fleece, bare knit top, denim and men’s graphics. We are very pleased with our ability to gain significant increases to in both comp store sales and merchandise margins in a challenging and competitive environment.

Our e-com business for the quarter also continued to generate tremendous results and exceeded our plan. Additionally we ended the season with significant less clearance inventory versus the prior year. As we discussed on our third quarter call in November we strategically shifted our spring and summer floor set calendar to maximize peak selling season. As a result our inventories at the end of 2007 were planned to be higher than the prior year.

We feel it’s also important to highlight that this change in inventory is a change in timing not a change in our controlled inventory management. To highlight this at the end of last week we were only up 2% book stock inventory per square foot. At the end of first quarter we anticipate inventories being up mid teens per square foot. This shift will continue till the end of May when the timing of recedes for the back-to-school selling season are comparable. We continue to track within our buy plan of a 4% unit comp which we believe is appropriate for our current trends in the business.

Moving into the spring selling season we will continue to build on our merchandizing successes of 2007. These strategies include continuing to focus on key classification that will drive our business, further balancing our assortments by adding more fashion and fashion basics, integrating more color patterns and prints and continuing to refine the treatments in our graphics and knits, also developing new classifications such as dresses.

While it’s still early in the season we are very encouraged by the positive early reap on our spring merchandise. We are seeing strength in key classifications such as graphic T’s for both men’s and women’s, knit tops and shorts that will continue to be the drivers of our business as we head into the summer and early back-to-school selling season. We have a variety of fresh new marketing and promotion to support our merchandise.

For the year we are also focused on operational initiatives that will help to further improve our gross margins. We will focus on refining our strategies in sizing and also depth in fashion in higher performing stores. I'm very excited about our merchandise and our operational initiatives. We believe we are well positioned for successful spring and summer seasons.

Before I turn it over to Michael I would just like to thank the entire product development team for their hard work and commitment over the holiday season. They along with the rest of the Company have made my transition into the organization a true pleasure and I look forward to working with everyone to achieve our corporate goals in 2008.

Now I would like to turn it over to Michael.

Michael Cunningham

Thank you, Mindy. Total net sales for the quarter were up 16.7% versus last year driven by the average square footage growth of about 12% and a 9% comp which was partially offset by the impact of the calendar shift.

For the quarter our comp transactions were up 5%, our units per transactions were up 3% and our average unit retail was up slightly. During the quarter we opened five Aero stores ending with a total of 802 Aero stores in US, 12 stores in Canada and 144 Jimmy'Z stores.

Gross margins for the quarter were 37.8% versus 37.2% last year. On a pro forma basis gross margins for the quarter were 37.1% versus 35.8% last year. The 120 base point increase was driven primarily by an increase in our merchandise margins.

SG&A for the quarter was 19.8% of sales versus 19.2% last year or on a pro forma basis the SG&A rate for the 2007 quarter was 20.1%. This 90 basis point pro forma increase was driven primarily by 60 basis points in RE companies reflecting the doubling of sales in our business, a 40 basis point increase in store line expenses, and 40 basis points of higher incentive and stock-based compensation partially offset by a 50 basis points leverage of marketing and fixed corporate expenses.

We recorded a $9 million asset impairment charge related to the Jimmy'Z concept. The other income line represents our previously disclosed amount of $4.1 million with our former Chief Merchant.

Our tax rate for the quarter was 36.9% which resulted in net income of $64.7 million and $0.95 per share or $0.93 per share on a pro forma basis. Included in our results is an adjustment of our state tax accruals of $2.1 million or $0.03 per share which reduced our effective tax rate for the quarter and the year. Without this reduction our earnings per share for the quarter was $0.90 per share compared to a previously issued guidance of $0.87 per share.

Including the impairment of Jimmy’Z, the Jimmy’Z loss in the fourth quarter was $0.02 per share compared to $0.03 loss last year. Cash and cash equivalents together with short term securities at the close of the quarter were $111.9 million versus $276.2 million last year. The decrease of last year is attributable to increased stock repurchases and increased capital expenditures.

During the quarter we repurchased $4.8 million shares of our stock for approximately $125 million. As of February 2, 2008 we had approximately a $134 million remaining of our buy back under the current $600 million share repurchase program. Inventories closed at the quarter was $136.5 million up 34.5 % in total on a per square foot basis inventory was up 20% reflecting the accelerating receipts due to a shift in our process which Mindy discussed earlier.

Our capital expenditures for the quarter were $10.3 million and depreciation and amortization was $11.2 million. We expect first quarter earnings per share to be in a range of $0.20 to $0.22 per diluted share. For the full year 2008 we expect to open 85 new stores and achieve earnings per share growth of 18% compared to fiscal 2007 pro forma net earnings of $1.70 per share, which I would remind you include the band width and a lower tax rate of $0.03. For the first quarter and full year we will be assuming a share count to $67.6 million and a 40% tax rate.

I will now turn the call back over to Julian.

Julian Geiger

Thanks Michael. I must tell you how gratified we all are by Aeropostale’s record breaking performance for 2007. It is particularly meaningful for us that this exceptional milestone coincides with our 20th anniversary. Based on the strength of our organization, the transport ability of our business model and existing opportunities in it’s unreserved segment. We are excited to announce that we are in the developmental stages of a new concept which will target the younger demographics in Aeropostale, will capitalize upon our core competencies and will contribute to our growth. As you can imagine we chose not to discuss this topic further at this time. We will advice you of our progress as we moved forward throughout the year.

Separately while we have taken an impairment charge related to our Jimmy’Z concept, we continue to believe the Jimmy’Z is a viable business and feel there is a niche in the market in which the concept can’t succeed. We will also keep you abreast of our progress at Jimmy’Z throughout the year.

Moving into 2008 we remain very excited about the continuing opportunities for our growth. Even against a backdrop of reduce mall traffic and a challenging macro economic environment, Aeropostale has demonstrated that it is a vibrant, life-style brand that is respected by and affordable for the vast majority of the team population in the United States. We remain dedicated to the principle of challenging ourselves everyday to make our business more efficient and more profitable. We remain focused on supporting the Aeropostale culture and the Aeropostale team that have differentiated us from our competition so clearly.

Aeropostale’s history is one of growth and our future is one of growth. Our brand has never been stronger and we believe it will continue to grow in the United States, in Canada and internationally in the coming years.

Before we go into questions-and-answers I would like to thank Mindy for the solid contribution she has made at Aeropostale during her first year. She has been a uniquely wonderful edition to our team I look forward to seeing her in the entire Aeropostale organization another year of record performance in 2008.

And operator, at this time we are ready to answer questions.

Question-and-Answer Session

Operator

We will take our first question from Brad Stephens with Morgan Keegan.

Brad Stephens - Morgan Keegan

Mindy, could you talk about your denim business, any changes that you see going on in that as we head into the back-to-school period?

Mindy Meads

Actually we had a very strong denim business in February particularly in men’s, women’s was on plan. Last year we did not have a lot of denim in first quarter. So we are very pleased with the level. It will then go down in second quarter and build back up for back-to-school.

Brad Stephens - Morgan Keegan

Do you see anything changing on the styling? Different lank’s, washes, etcetera?

Mindy Meads

I would say the styling is pretty similar. Probably the changes are more in washes and we continue just to fine tune which style the customer has preference, whether it’s getting flare, whether it’s a straighter leg, but at this point, it’s really a balance of having the right washes.

Brad Stephens - Morgan Keegan

Alright. Well, congrats on a great quarter and keep up the good work.

Mindy Meads

Thanks.

Julian Geiger

Thanks Brad.

Operator

We will take our next question from Christine Chen with Needham & Company.

Christine Chen - Needham & Company

Congratulations on a fabulous quarter.

Multiple Company Speakers

Thank you, Christie.

Christine Chen - Needham & Company

I wanted to ask about Jimmy'Z. How much are you using Jimmy'Z for kind of trend-spotting for fashion at Aero and when do you think the merchandise at Jimmy'Z will be where you would like it to be?

Julian Geiger

I encourage all of you to visit our stores by the way, especially the one in 33rd Street in New York which may be more attainable for you to get to. But I think the assortment has dramatically different and far more focused on a viable target customer than it has been in the past and we are pretty proud of what the assortment is and love for you guys to see it. Aeropostale by nature is an organization with a lot of curious people. So there is more on a reasonable basis, those styles that have application for the Aeropostale customer who is dramatically different from Jimmy'Z because they are being interpreted. It’s still a small percentage of the total but some of the things that you make as unique and special in terms of treatment or direction, I have had some inspiration from Jimmy'Z. So with using -- to some extent a research and development tool that we can use also.

Christine Chen - Needham & Company

Thank you. And then Mindy, could you just remind us what back-to-school last year -- I mean what opportunities might have missed during back-to-school last year that maybe you will put into back-to-school this year?

Mindy Meads

I would say the biggest area that we missed in back-to-school was women’s graphics. That was an area that we had a tougher first half of the year. It didn’t really come onto holiday and right now it is incredibly explosive and I would say bear with those strong, we probably didn’t have enough. Those are probably two things that I can think of.

Christine Chen - Needham & Company

Great. Congratulations and keep up the good work.

Julian Geiger

Thanks, thank you.

Operator

We will take our next question from Michelle Clark with Morgan Stanley.

Michelle Clark – Morgan Stanley

Guys the first question is can you give us the sense of what your inventory position would have been if we adjust for the accelerated recede flow. That’s the first question.

Michael Cunningham

Yeah, Michelle this Mike. Basically what we said was of the buy plan for the first quarter is 4% unit comp. So, basically will be up to the mid single digits for a square foot. Both the level composition an ageing of our inventory had significantly proved this year when compared to the prior year end.

Michelle Clark – Morgan Stanley

Okay and then the second question is can you give us a sense of what you are seeing in terms of apparel product comps. Have you started to see inflation?

Mindy Meads

At this point we have not and through our third quarter recedes which is really through fall we have not seen increases. We are starting to hear about it as we are moving into ’09 but at this point where we are pretty flat.

Michelle Clark – Morgan Stanley

Okay and then just one last question. If you can give us the sense of what mall types you are seeing the strongest performance. Is it still B type models where you are outperforming?

Thomas Johnson

Actually Michelle at this Tom. We are seeing the growth fairly consistent across the board with the AMB centers exceeding just slightly but -- it’s fairly much across the board.

Michelle Clark – Morgan Stanley

Across the board, great thank you.

Operator

We will take our next question from Stephanie Wissink with Piper Jaffray.

Stephanie Wissink - Piper Jaffray

You guys all have my congratulations.

Julian Geiger

Thank you.

Thomas Johnson

Thank you.

Stephanie Wissink - Piper Jaffray

Mindy, I just have a high level questions for you. As you look at the merchandise assortments can you talk to the opportunities in the greater level of sophistication that your management systems are giving you? How much more benefit do you see to the margin going forward, thanks.

Mindy Meads

I would say that the operational efficiencies, particularly on the allocations side will start to happen towards the second half of the year and that’s really just going to give us better visibility to get the right sizes and the right proportions per store as far as, the second question is on gross margin.

Stephanie Wissink - Piper Jaffray

Yes correct, thank you.

Mindy Meads

I think at this point we are planning the gross margin to be pretty up.

Julian Geiger

Up for the year. We haven’t disclosed on a fair looking basis because this brand new allocation system we are very eager to get it in. We expect it to improve both sales and margins but to the extent a hard estimate at this point in time and we will talk about as we get to the back half of the year.

Stephanie Wissink - Piper Jaffray

Thanks guys, good luck.

Julian Geiger

Thank you.

Operator

We will take our next question from Eric Beder with Brean Murray.

Eric Beder - Brean Murray

Could you talk a little bit about dress and how that has been for spring? I know it’s a new segment for you guys and higher price points and such.

Mindy Meads

Okay we have a nice reaction to the dresses. I think it will actually continue to even be stronger as we move into Q2, because if you have been in our stores you will a see that a lot of them are very bare, but particularly strong in their southern states and nice reaction as we are going to anticipate in the next couple of weeks. We are pleased and are on plan.

Eric Beder - Brean Murray

Great, in terms of -- if you look at the -- the dresses are nice. When you look at the shorts you were a little more aggressive in running the shorts this year. What it’s kind of been and you also look a little more aggressive in the pricing there where some of the more fashion start. What has your response been to some of the fashion shorts and some are a little bit higher priced in the short category.

Mindy Meads

Okay actually we had an incredibly strong February in shorts on the women side in particular and we actually had a higher ADU that we ran in February, so we were very pleased with the results and as we look through the next month and month and a half we plan to be similar to last year in our pricing.

Eric Beder - Brean Murray

Great and congratulations again.

Julian Geiger

Thanks Eric, thank you.

Operator

We will take our next question from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Hi guys, congratulations.

Mindy Meads

Hello.

Julian Geiger

Thank you, Janet.

Janet Kloppenburg - JJK Research

Hi everybody. Mindy, I think there is going to be a little concern about the ending inventory number and I think I would like you to just focus a little bit on where the inventory is now at plus 2% and just maybe if you could talk a little bit about those flows and how it ended the year up -- I think 20 and now it’s only at 2%, if you could talk us through that, I think we would all be a little more comfortable and Julian if you could elaborate on the $9 million asset impairment charge of Jimmy'Z, was does that mean? What is the outlook for Jimmy'Z? Will you open more stores, and is this new concept something that you think will help near-term greater growth opportunity than Jimmy'Z? Thank you.

Michael Cunningham

Okay Janet, this is Mike, I will cover the inventory.

Janet Kloppenburg - JJK Research

Thank you.

Michael Cunningham

The simplest way to explain it as we gave up with our heads up in November is that we moved our flow sets up earlier. Inventory therefore was in our warehouse earlier at the end of the fourth quarter; flat in 2006 it came in late.

Janet Kloppenburg - JJK Research

It seems a little higher than you even told us it would be though Michael, my notes were going to be up low double digits and you are up 20.

Michael Cunningham

The two primary reasons for it being slightly higher actually very positives for us. The first is it would shrink. We came in better than expected through the investments we made in our store link expenses that we talked about on the third quarter call and obviously we have more inventory that was available to sell for us and obviously it helped us in the month of February. That’s positive number one. Positive number two, is they said earlier both the composition aging of inventory was much better than a year before. So therefore the required reserves we calculate and booked which generally reduces the inventory was less than it was in our forecast. So two positives for the benefit reflecting the strength of the fourth quarter and that led to the balance of stream what we said on the third quarter and how we actually ended.

Mindy Meads

And the other thing is that we are very happy with where we are distorting it. If you remember in fourth quarter we were very successful when we distorted into key classifications and the level of our inventory is focused on the graphics up there and the shorts that go into the second quarter and we are below in Clarence inventory as I said before and some of the down trending categories, we have significantly lower inventory now than we did last year.

Michael Cunningham

Janet, this is Mike. I will answer the accounting impairment. Julian will talk more about Jimmy'Z but we are -- for every quarter we look at all of our assets in the Company and we had to evaluate whether or not they are impaired and the basic cause for that is looking at the current asset balance remain on our books and what’s the projected cash flows or the life of the asset or in some cases the life of the remaining lease term on the stores. Then we look at a projection cash flows and determine is there enough cash to recover the current asset balance. So it’s an accounting flash cash flow determination which basically I and our team calculate with our with our best estimates and at that point determine that the cash flows did not cover the asset balance, we took the impairment charge, this is separate from the viability concept that Julian can talk about.

Julian Geiger

Right, and clearly we have made substantive change in the assortments of Jimmy'Z and there is vitality to the comp store sales at Jimmy'Z right now. We feel that with 14 stores we really don’t have to add anymore stores this year to test the increasing viability of the merchandise assortment and its appeal to the customer. So we are not going to add stores there. We will continue to refine the brand and the product as we have in the last year. As although we said we are not going to say anything about the new concept I will say that in the terms we use was leveraging the core competencies away at the stall, this business will be much more like the core Aeropostale business towards a universal customer at the age we choose and not the advanced fashion spectrum that we pursue with Jimmy’Z.

Janet Kloppenburg - JJK Research

Okay thank you very much and wish you luck you guys.

Julian Geiger

You’re welcome thank you.

Operator

We will take our next question from Marni Shapiro, The Retail Tracker.

Marni Shapiro - The Retail Tracker

Hey guys congratulations and happy anniversary as well.

Julian Geiger

Thanks.

Marni Shapiro - The Retail Tracker

I have two quick questions and sorry Ken. But the first is what percentage of the change has been renovated and is other renovated source reaching their hurdles and are you seeing good comp results out of these stores and then Mindy if you can just give us an update on accessories I know it’s the segment that had lagged but one they obviously focused on with things like back for springs so and the new dorm set. If you could just give us any color there.

Thomas Johnson

Sure Marni, its Tom. Right now we’ve not 96 stores out of the 700, 814. While the ones in Canada obviously are in a new design. By the end of ’08 about 25% of our store account will be in the new design as well. The performance of the new store has been on track with our projections as we project those stores out a year prior with our real estate process. The volume in the stores is trending at about 85% of the tour of the average store that we have existing, the mature store base so they are definitely performing on track for us and we are very pleased with that and we are more pleased if you will with the experience that the customer receives in the enhanced shopping environment that they get and we are thrilled with the projection of the brand.

Mindy Meads

Right, okay the accessory business has been a little tough not that got a little better in the two categories that we focused on our hand bags they were great for fall and they continue into springs and we are also getting great reaction to the swim work.

Marni Shapiro - The Retail Tracker

Alright hand bags include the total.

Mindy Meads

Yes

Marni Shapiro - The Retail Tracker

Okay and then you re-launched it looks like the dorm wear. Any kind of read on that yet or…

Mindy Meads

Actually that’s been a little slow. I think our learning’s are that we actually were a little too bare for early. So we are still excited about that business and as we move towards the end of year you will still see more.

Marni Shapiro - The Retail Tracker

Great good luck guys for spring.

Julian Geiger

Thanks

Operator

We will take our next question from Linda Tsai with MKM partners.

Linda Tsai - MKM Partners

I heard in your prepared comments what is a control launch means for the new concepts and have you reached -- recruited internally or externally to build an organization around the design team for the new concepts and then lastly how is your approach top the new concept going to be similar, just similar to how you created to Jimmy’Z?

Julian Geiger

That’s a lot of questions. Controlled launch means a limited number of stores in a finite geographical area, something that we can look at very closely. The team is being built as you would expect through internal promotions and external hires and the third part of the question was…

Linda Tsai - MKM Partners

I was asking about the design team and then how is your approach to new concept.

Julian Geiger

As we said the new business will share the core competencies of Aeropostale while Jimmy’Z is marginally outside the way that Aero approach its business or has been in the past. That too is being run much more like Aeropostale than it was in the future -- in the past.

Linda Tsai - MKM Partners

Okay, so -- okay thank you.

Julian Geiger

Thanks.

Operator

We will take our next question from Michelle Tan with UBS.

Michelle Tan - UBS

Great, thanks. I was wondering if you could help us think about -- I guess the first quarter guidance seems a little bit lower than the growth rate for the year just slightly. Is there anything going on there and then as far as the investment in the new concept, how should we think about the timing by quarter for ’08? Thanks.

Michael Cunningham

Sure. Well, the guidance reflects a wide range of assumptions. February, this small month of the quarter -- with regards to the investments obviously in little a -- the costs will ramp up throughout the year. Embedded in our assumptions in the full year EPS growth rate includes two drivers of SG&A both of which are familiar things, we have talked about it. The first one continues to be the e-com fees. As you know that is outsourced and we pay a rate associated with sales. The business doubled their sales last year, we are planning it to grow at least 75% or more this year. So that will be a de-leveraging effect on SG&A throughout the year. Stock compensation expense is growing also and that’s going to grow throughout the year. On a pro rata basis equally each quarter and since the sales in the first two quarters are much lower than the back half, that has more of a de-leveraging effect on our SG&A. The tax rate also is up slightly, 40% as well throughout the year.

Michelle Tan - UBS

Okay, that’s helpful. Thank you.

Michael Cunningham

Good, thank.

Operator

We will take our next question from Lorraine Maikis with Merrill Lynch.

Lorraine Maikis - Merrill Lynch

Thank you, sorry. Hi, thank you, good afternoon.

Michael Cunningham

Good afternoon.

Lorraine Maikis - Merrill Lynch

You have generated a lot of product cost reductions in 2007. Are there any further opportunities there in ’08 and also as a follow-up, with the environment becoming continuingly more promotional, how do you expect to hold gross margins as high as they are right now? Thanks.

Julian Geiger

We -- for 20 years we have been in promotional specialty store. So when times get tough we think that we have a substantial advantage over our competitors who really don’t this on a regular basis. We already said that we do not see costs rising for this year and that we think that in certain classifications we are putting more into the product, the customer is willing to pay more for it. Because there was such a value there compared to our competitors. The relationship between the look of our product and the price at which we sell it has never been more advantageous to us relative to our competitors. So we do see opportunities for our continued growth of gross margin and for growth of our market share because the product looks so good right now.

Lorraine Maikis - Merrill Lynch

Thank you.

Julian Geiger

You welcome.

Operator

We will take our next question from David Glick with Buckingham Research Group.

David Glick - Buckingham Research Group

Good afternoon and another congratulations to the team.

Julian Geiger

Thank you, David.

David Glick - Buckingham Research Group

Mindy, just -- I mean a lot of my questions have been answered but one in terms of some of the trends we are seeing in color. Are you seeing the brighter colors become more important? Is it something that’s starting to drive sales, how well positioned are you if that’s the case, and how long do you see this influence lasting?

Mindy Meads

I would say the bright colors are doing extremely well. We started seeing that in the fall and the holiday season in particular and we are getting a higher percentage on the color, really across the board and I don’t think that’s something that’s changing as we look out in our travels there is a lot of color out there right now. So we see this continuing.

David Glick - Buckingham Research Group

Okay, great. And just to clarify, one last question on the inventory, if I understood you correctly that, the shifts and in -- at the end of May and you expect the inventory to be up in the mid-single-digit range. Is that correct?

Michael Cunningham

No. Well, the inventory at the end of the first quarter will be up I think may be said in mid teens per square foot.

David Glick - Buckingham Research Group

Right

Michael Cunningham

The shifts end as we end them up in May, so it normalizes mid -- second quarter.

David Glick - Buckingham Research Group

Okay and normalize means mid single digits?

Michael Cunningham

We are not giving guidance for the end of second quarter here at this point.

David Glick - Buckingham Research Group

Okay is normalize in line with your expectation for sales. Is it -- should there be a pretty consistent relationship there.

Michael Cunningham

Yeah somewhat consistent comparing – you are we are planning up.

David Glick - Buckingham Research Group

Okay great thanks a lot and good luck.

Michael Cunningham

Thank you

Operator

We will take our next question from Robin Murchison with Suntrust.

Robin Murchison – Suntrust

Hi thank you and congratulations. I accidentally hung up a minute ago so forgive me if you answered this question. With regard to the new concept or the test concept of the kids, there are some embedded -- you may not want to tell us but there are some embedded in 20% up guidance is that correct.

Michael Cunningham

Absolutely, the 20% guidance includes that it said the cost are a little late, includes the full year depreciation of the Westcoast system and includes the e-com and the other fees that we -- the stock compensation expenses.

Robin Murchison – Suntrust

Okay and just more if I can slide one in. Are you seeing any shift in your customer age base stock in the store are you seeing any sort of subtle age shift I would presume, a little bit over.

Julian Geiger

It’s a very, very subtle marginal change. We still target and attract a 14 to 17 year old customer but there are some indications that we are getting, we are more accepted it’s slightly higher ages too without loosing any with traditional that we have had.

Robin Murchison – Suntrust

Alright thank you congratulations.

Julian Geiger

Thank you

Operator

We will take our next question from Howard Tubin with RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Hi guys, thanks great quarter. As you guys acquiring one of the stand outs there in the team space if not the mall. Who do you think you are taking market share from?

Julian Geiger

I think it’s from all of the above. I mean we have really been focused on the new initiative since 2005. We looked at ourselves extraordinarily critically and came to the exclusion there are the things that we can do well. I think the execution of our strategies have been extraordinarily good and if you look at all the people who have dropped in the past or who are dropping currently, who competitors its safe to assume that based on the really fabulous look of our merchandise we are taking business from all of them and there is no way we can quantify the contributions individuals are making but we welcome all contributions from any competitor.

Michael Cunningham

Okay, great thanks keep it up.

Operator

There are no further questions at this time. Please continue with any closing comments.

Julian Geiger

Yes we do we really thank you for taking the time to listen to us today. We almost wish that you could be with us in person to understand both the confidence that we have of about our business and how pleased we are with the growth that we have had. Our entire organization has done a terrific job and we look forward to speaking to you in about three months. Thanks.

Operator

Ladies and gentleman that does conclude our conference call today. We thank you for your participation. You may now disconnect.

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