AMERICAN EAGLE OUTFITTERS INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended January 29, 2011 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission File
Number: 1-33338
American Eagle Outfitters,
Inc.
(Exact name of registrant as
specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
No. 13-2721761
(I.R.S. Employer Identification No.) |
|
|
77 Hot Metal Street, Pittsburgh, PA
(Address of principal executive offices) |
15203-2329
(Zip Code) |
Registrant’s telephone number, including area code:
(412) 432-3300
Securities registered pursuant to Section 12(b) of the
Act:
|
Common Shares, $0.01 par value
(Title of class) |
New York Stock Exchange
(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES
þ
NO
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Sections 15(d) of
the
Act. YES
o
NO
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such a shorter period that the registrant
was required to file such reports), and (2) has been
subject to the filing requirements for at the past
90 days. YES
þ
NO
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). YES
þ
NO
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES
o
NO
þ
The aggregate market value of voting and non-voting common
equity held by non-affiliates of the registrant as of
July 31, 2010 was $2,196,680,330.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date: 194,690,703 Common Shares were outstanding at
March 7, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III — Proxy Statement for 2011 Annual
Meeting of Stockholders, in part, as indicated.
AMERICAN
EAGLE OUTFITTERS, INC.
TABLE OF
CONTENTS
1
Table of Contents
| ITEM 1. | BUSINESS. |
General
American Eagle Outfitters, Inc., a Delaware corporation, (the
“Company”) operates under the American
Eagle
®
,
aerie
®
by American
Eagle
®
,
and 77kids by american
eagle
®
brands. The Company operated the
MARTIN+OSA
®
brand (“M+O”) until its closure during the
52 weeks ended January 29, 2011.
Founded in 1977, American Eagle
Outfitters
®
is a leading apparel and accessories retailer that operates more
than 1,000 retail stores in the U.S. and Canada, and online
at
ae.com
®
.
Through its family of brands, American Eagle Outfitters, Inc.
offers high quality, on-trend clothing, accessories and personal
care products at affordable prices. Our online business, AEO
Direct, ships to 76 countries worldwide.
As used in this report, all references to “we,”
“our” and the “Company” refer to American
Eagle Outfitters, Inc. (“AEO, Inc.”) and its
wholly-owned subsidiaries. “American Eagle
Outfitters,” “American Eagle,” “AE” and
the “AE Brand” refer to our U.S. and Canadian
American Eagle Outfitters stores. “AEO Direct” refers
to our
e-commerce
operations, ae.com, aerie.com and 77kids.com.
“MARTIN+OSA” or “M+O” refers to the
MARTIN+OSA stores and
e-commerce
operation which we operated until its closure during the
52 week period ended January 29, 2011. “NLS”
refers to National Logistics Services which we operated in
Canada prior to its disposition during the 53 week period
ended February 3, 2007.
Our financial year is a 52/53 week year that ends on the
Saturday nearest to January 31. As used herein,
“Fiscal 2011” refers to the 52 week period ending
January 28, 2012. “Fiscal 2010,” “Fiscal
2009,” “Fiscal 2008” and “Fiscal 2007”
refer to the 52 week periods ended January 29, 2011,
January 30, 2010, January 31, 2009 and
February 2, 2008, respectively. “Fiscal 2006”
refers to the 53 week period ended February 3, 2007.
On March 5, 2010, the Company’s Board of Directors
(the “Board”) approved management’s
recommendation to proceed with the closure of the M+O brand. We
notified employees and issued a press release announcing this
decision on March 9, 2010. The decision to take this action
resulted from an extensive evaluation of the brand and review of
strategic alternatives, which revealed that it was not achieving
performance levels that warranted further investment. We
completed the closure of M+O stores and its
e-commerce
operation during the 13 weeks ended July 31, 2010. The
Consolidated Financial Statements reflect the presentation of
M+O as a discontinued operation. Refer to Note 14 to the
Consolidated Financial Statements for additional information
regarding the discontinued operations of M+O.
As of January 29, 2011, we operated 929 American Eagle
Outfitters stores, 148 aerie stand-alone stores and nine 77kids
stores.
Information concerning our segments and certain geographic
information is contained in Note 2 of the Consolidated
Financial Statements included in this
Form 10-K
and is incorporated herein by reference.
Growth
Strategy
Our primary growth strategies are focused on the following key
areas of opportunity:
AE
Brand
The American Eagle
Outfitters
®
brand targets 15 to
25-year
old
men and women, achieving the perfect combination of American
prep and current fashion. Denim is the cornerstone of the
American
Eagle
®
product assortment, which is complemented by other key
categories including sweaters, graphic t-shirts, fleece,
outerwear and accessories. American
Eagle
®
is honest, real, individual and fun. American
Eagle
®
is priced to be worn by everyone, everyday, delivering value
through quality and style.
Gaining market share in key categories, such as knit tops and
fleece, is a primary focus within the AE Brand. In addition, we
will build upon our number one position in denim. Delivering
value, variety and versatility to our customers remains a top
priority. We will offer value at all levels of the assortment,
punctuated with compelling,
2
Table of Contents
pre-planned promotions that are profitable to the business. We
are reducing production lead-times, which enables us to react
more quickly to emerging trends. Finally, we continue to
innovate our store experience to be more impactful from front to
back.
aerie
by American Eagle
In the fall of 2006, the Company launched
aerie
®
by American
Eagle
®
(“aerie”), a collection of
Dormwear
®
,
intimates and personal care products for the
AE
®
girl. What started as a
sub-brand
quickly became a standalone concept in its own right. The
collection is available in 148 standalone aerie stores
throughout the United States and Canada, online at aerie.com,
and at select American
Eagle
®
stores. aerie is being repositioned as a more complete lifestyle
brand with intimates as the inspiration. aerie is a lifestyle
brand for a modern
21-year-old
girl that is beautiful, feminine, soft, sensuous, yet
comfortable. It is simple and stylish apparel that is made to
live in and wear out.
77kids
by american eagle
Introduced in October of 2008 as an online-only brand, 77kids by
american
eagle
®
(“77kids”) offers on-trend, high-quality clothing and
accessories for kids ages two to 10 and babies under the brand
name
little77
tm
.
Beginning in Fiscal 2010, nine
77kids
®
stores were opened. The brand draws from the strong heritage of
American Eagle
Outfitters
®
,
with a
point-of-view
that’s thoughtful, playful and real. Like American
Eagle
®
clothing, 77kids focuses on great fit, value and style. All
77kids
®
clothing is backed by the brand’s
77wash
tm
and
77soft
tm
guarantees to maintain size, shape and quality and to be
extremely soft and comfortable through dozens of washes.
AEO
Direct
We sell merchandise via our
e-commerce
operations,
ae.com
®
,
aerie.com and 77kids.com, which are extensions of the lifestyle
that we convey in our stores. We currently ship to 76 countries.
In addition to purchasing items online, customers can experience
AEO Direct in-store through
Store-to-Door.
Store-to-Door
enables store associates to sell any item available online to an
in-store customer in a single transaction. Customers are taking
advantage of
Store-to-Door
by purchasing extended sizes that are not available in-store, as
well as finding a certain size or color that happens to be
out-of-stock
at the time of their visit. The ordered items are shipped to the
customer’s home free of charge. We accept
PayPal
®
and Bill Me
Later
®
as a means of payment from our
ae.com
®
,
aerie.com and 77kids.com customers. We are continuing to focus
on the growth of AEO Direct through various initiatives,
including improved site efficiency and faster check-out,
expansion of sizes and styles, on-line specialty shops and
targeted marketing strategies.
Real
Estate
We are continuing to take a more cautious stance on real estate
growth in light of the current economic environment. However, we
remain focused on the real-estate strategies that we have in
place to grow our business and strengthen our financial
performance.
We are continuing the expansion of our brands throughout the
United States. At the end of Fiscal 2010, we operated in all
50 states, Puerto Rico and Canada. During Fiscal 2010, we
opened 34 new stores, consisting of 14 AE stores, 11 aerie
stores and nine 77kids stores. These store openings, offset by
51 store closings that include all 28 M+O stores, decreased
our total store base to 1,086 stores.
Our gross square footage increased by approximately 2% during
Fiscal 2010, excluding the impact of M+O closings, with
approximately 71% attributable to new store openings and the
remaining 29% attributable to the incremental square footage
from 29 store remodels and refurbishes.
Remodeling of our AE stores into our current store format is
important to enhance our customer’s shopping experience. In
order to maintain a balanced presentation and to accommodate
additional product categories, we selectively enlarge our stores
during the remodeling process to an average 6,500 gross
square feet, either within their existing location or by
upgrading the store location within the mall. We believe the
larger format can better
3
Table of Contents
accommodate our expansion of merchandise categories. We select
stores for expansion or relocation based on market demographics
and store volume forecasts.
During Fiscal 2010, we remodeled 18 stores, including 17 AE
stores and one aerie store. Of the 18 remodeled stores, nine
stores were remodeled or refurbished with an expansion to their
existing locations, six stores were relocated to a larger space
within the mall and three stores were remodeled within their
existing locations. Additionally, 11 stores were refurbished as
discussed below.
We maintain a cost effective store refurbishment program
targeted towards our lower volume stores, typically located in
smaller markets. Stores selected as part of this program
maintain their current location and size but are updated to
include certain aspects of our current store format, including
paint and new fixtures.
In Fiscal 2011, we plan to open approximately 14 AE, 10 aerie
and 12 77kids stores. We also plan to remodel between 55 and 75
existing AE stores. Our square footage growth is expected to
increase slightly in Fiscal 2011. We believe that there are
attractive retail locations where we can continue to open
American Eagle stores and our other brands in enclosed regional
malls, urban areas and lifestyle centers.
The table below shows certain information relating to our
historical store growth.
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Consolidated stores at beginning of period
|
1,103 | 1,098 | 987 | 911 | 869 | |||||||||||||||
|
Consolidated stores opened during the period
|
34 | 29 | 122 | 80 | 50 | |||||||||||||||
|
Consolidated stores closed during the period
|
(51 | ) | (24 | ) | (11 | ) | (4 | ) | (8 | ) | ||||||||||
|
Total consolidated stores at end of period
|
1,086 | 1,103 | 1,098 | 987 | 911 | |||||||||||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
AE Brand stores at beginning of period
|
938 | 954 | 929 | 903 | 869 | |||||||||||||||
|
AE Brand stores opened during the period
|
14 | 8 | 35 | 30 | 42 | |||||||||||||||
|
AE Brand stores closed during the period
|
(23 | ) | (24 | ) | (10 | ) | (4 | ) | (8 | ) | ||||||||||
|
Total AE Brand stores at end of period
|
929 | 938 | 954 | 929 | 903 | |||||||||||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
aerie stores at beginning of period
|
137 | 116 | 39 | 3 | — | |||||||||||||||
|
aerie stores opened during the period
|
11 | 21 | 77 | 36 | 3 | |||||||||||||||
|
aerie stores closed during the period
|
— | — | — | — | — | |||||||||||||||
|
Total aerie stores at end of period
|
148 | 137 | 116 | 39 | 3 | |||||||||||||||
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
77kids stores at beginning of period
|
— | — | — | — | — | |||||||||||||||
|
77kids stores opened during the period
|
9 | — | — | — | — | |||||||||||||||
|
77kids stores closed during the period
|
— | — | — | — | — | |||||||||||||||
|
Total 77kids stores at end of period
|
9 | — | — | — | — | |||||||||||||||
4
Table of Contents
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
M+O stores at beginning of period
|
28 | 28 | 19 | 5 | — | |||||||||||||||
|
M+O stores opened during the period
|
— | — | 10 | 14 | 5 | |||||||||||||||
|
M+O stores closed during the period
|
(28 | ) | — | (1 | ) | — | — | |||||||||||||
|
Total M+O stores at end of period
|
— | 28 | 28 | 19 | 5 | |||||||||||||||
Consolidated
Store Locations
Our stores average approximately 5,800 gross square feet
and approximately 4,700 on a selling square foot basis. As of
January 29, 2011, we operated 1,086 stores in the United
States and Canada under the American Eagle Outfitters, aerie and
77kids brands as shown below:
United
States, including the Commonwealth of Puerto Rico —
994 stores
|
Alabama
|
18 | Indiana | 22 | Nebraska | 8 | Rhode Island | 4 | |||||||||||||||
|
Alaska
|
5 | Iowa | 13 | Nevada | 4 | South Carolina | 16 | |||||||||||||||
|
Arizona
|
16 | Kansas | 10 | New Hampshire | 8 | South Dakota | 3 | |||||||||||||||
|
Arkansas
|
8 | Kentucky | 12 | New Jersey | 29 | Tennessee | 25 | |||||||||||||||
|
California
|
81 | Louisiana | 14 | New Mexico | 3 | Texas | 72 | |||||||||||||||
|
Colorado
|
12 | Maine | 5 | New York | 64 | Utah | 12 | |||||||||||||||
|
Connecticut
|
18 | Maryland | 18 | North Carolina | 30 | Vermont | 3 | |||||||||||||||
|
Delaware
|
5 | Massachusetts | 32 | North Dakota | 4 | Virginia | 28 | |||||||||||||||
|
Florida
|
50 | Michigan | 33 | Ohio | 39 | Washington | 19 | |||||||||||||||
|
Georgia
|
34 | Minnesota | 22 | Oklahoma | 12 | West Virginia | 9 | |||||||||||||||
|
Hawaii
|
4 | Mississippi | 8 | Oregon | 11 | Wisconsin | 18 | |||||||||||||||
|
Idaho
|
4 | Missouri | 19 | Pennsylvania | 66 | Wyoming | 2 | |||||||||||||||
|
Illinois
|
35 | Montana | 2 | Puerto Rico | 5 |
Canada —
92 stores
|
Alberta
|
14 | New Brunswick | 4 | Ontario | 46 | |||||||||||||||||
|
British Columbia
|
12 | Newfoundland | 1 | Quebec | 9 | |||||||||||||||||
|
Manitoba
|
2 | Nova Scotia | 2 | Saskatchewan | 2 |
International
Expansion
In Fiscal 2009, we entered into an international franchise
agreement with Alshaya Trading Co. to open a series of American
Eagle stores in the Middle East, Northern Africa and Eastern
Europe over the next several years. The first three franchised
stores opened during Fiscal 2010 in Dubai and Kuwait City and
are not included in the table above.
During Fiscal 2010, we entered into a franchise agreement with
Dickson Concepts (International) Limited to open a series of
American Eagle stores in Hong Kong, China and Macau beginning in
Fiscal 2011. Additionally, we entered into franchise agreements
with Sumikin Bussan Corporation and Fox-Wizel, Ltd. to open a
series of American Eagle and aerie stores in Japan and Israel,
respectively. The first stores are scheduled to be opened in
Fiscal 2012. These franchise arrangements do not involve a
capital investment from AEO and require minimal operational
involvement.
5
Table of Contents
Purchasing
We purchase merchandise from suppliers who either manufacture
their own merchandise, supply merchandise manufactured by others
or both. During Fiscal 2010, we purchased a majority of our
merchandise from non-North American suppliers.
All of our merchandise suppliers receive a vendor compliance
manual that describes our quality standards and shipping
instructions. We maintain a quality control department at our
distribution centers to inspect incoming merchandise shipments
for uniformity of sizes and colors and for overall quality of
manufacturing. Periodic inspections are also made by our
employees and agents at manufacturing facilities to identify
quality problems prior to shipment of merchandise.
Corporate
Responsibility
The Company is firmly committed to the principle that the people
who make our clothes should be treated with dignity and respect.
We seek to work with apparel suppliers throughout the world who
share our commitment to providing safe and healthy workplaces.
At a minimum, we require our suppliers to maintain a workplace
environment that complies with local legal requirements and
meets universally-accepted human rights standards.
Our Vendor Code of Conduct (the “Code”), which is
based on universally-accepted human rights principles, sets
forth our expectations for suppliers. The Code must be posted in
every factory that manufactures our clothes in the local
language of the workers. All suppliers must agree to abide by
the terms of our Code before we will place production with them.
We maintain an extensive factory inspection program, through our
Hong Kong compliance office, to monitor compliance with our
Code. The Hong Kong team validates the inspection reporting of
our third-party vendor compliance auditors and works with new
and existing factories on remediation of issues. New garment
factories must pass an initial inspection in order to do
business with us. Once new factories are approved, we then
strive to re-inspect them at least once a year. We review the
outcome of these inspections with factory management with the
goal of helping them to continuously improve their performance.
In cases where a factory is unable or unwilling to meet our
standards, we will take steps up to and including the severance
of our business relationship.
Security
Compliance
During recent years, there has been an increasing focus within
the international trade community on concerns related to global
terrorist activity. Various security issues and other terrorist
threats have brought increased demands from the Bureau of
Customs and Border Protection (“CBP”) and other
agencies within the Department of Homeland Security that
importers take responsible action to secure their supply chains.
In response, we became a certified member of the
Customs — Trade Partnership Against Terrorism program
(“C-TPAT”) during 2004. C-TPAT is a voluntary program
offered by CBP in which an importer agrees to work with CBP to
strengthen overall supply chain security. Our internal security
procedures were reviewed by CBP during February 2005 and a
validation of processes with respect to our external partners
was completed in June 2005 and then re-evaluated in June 2008.
We received formal written validations of our security
procedures from CBP during Fiscal 2006 and Fiscal 2008, each
indicating the highest level of benefits afforded to C-TPAT
members.
Historically, we took significant steps to expand the scope of
our security procedures, including, but not limited to: a
significant increase in the number of factory audits performed;
a revision of the factory audit format to include a review of
all critical security issues as defined by CBP; a review of
security procedures of our other international trading partners,
including forwarders, consolidators, shippers and brokers; and a
requirement that all of our international trading partners be
members of C-TPAT. In Fiscal 2007, we further increased the
scope of our inspection program to strive to include
pre-inspections of all potential production facilities. In
Fiscal 2009, we again expanded the program to require all
suppliers that have passed pre-inspections and reached a
satisfactory level of security compliance through annual factory
re-audits to provide us with security self-assessments on at
least an annual basis. Additionally, in Fiscal 2009, we began
evaluating additional oversight options for high-risk security
countries and among other things, implemented full third-party
audits on an annual basis.
6
Table of Contents
Trade
Compliance
We act as the importer of record for substantially all of the
merchandise we purchase overseas from foreign suppliers.
Accordingly, we have an affirmative obligation to comply with
the rules and regulations established for importers by the CBP
regarding issues such as merchandise classification, valuation
and country of origin. We have developed and implemented a
comprehensive series of trade compliance procedures to assure
that we adhere to all CBP requirements. In its most recent
review and audit of our import operations and procedures, CBP
found no unacceptable risks of non-compliance.
Merchandise
Inventory, Replenishment and Distribution
Merchandise is generally shipped directly from our vendors and
routed through third-party transloaders at key ports of entry to
our three U.S. distribution centers, one in Warrendale,
Pennsylvania and the other two in Ottawa, Kansas, or to our
Canadian distribution center in Mississauga, Ontario.
Additionally, certain product is eligible to be shipped directly
to stores, by-passing our distribution centers.
Upon receipt at one of our distribution centers, merchandise is
processed and prepared for shipment to the stores or forwarded
to a warehouse holding area to be used as store replenishment
goods. The allocation of merchandise among stores varies based
upon a number of factors, including geographic location,
customer demographics and store size. Merchandise is shipped to
our stores two to five times per week depending upon the season
and store requirements.
The expansion of our Kansas distribution center in Fiscal 2007
enabled us to bring fulfillment services for AEO Direct
in-house. The second phase of this expansion was completed in
Fiscal 2008 to enhance operating efficiency and support our
future growth.
Customer
Credit and Returns
We offer a co-branded credit card (the “AEO Visa
Card”) and a private label credit card (the “AEO
Credit Card”) under the American Eagle, aerie, and 77kids
brands. These credit cards are issued by a third-party bank (the
“Bank”), and we have no liability to the Bank for bad
debt expense, provided that purchases are made in accordance
with the Bank’s procedures. Once a customer is approved to
receive the AEO Visa Card or the AEO Credit Card and the card is
activated, the customer is eligible to participate in our credit
card rewards program that was implemented on January 1,
2010. Customers who make purchases at AE, aerie and 77kids earn
discounts in the form of savings certificates when certain
purchase levels are reached. Also, AEO Visa Card customers who
make purchases at other retailers where the card is accepted
earn additional discounts. Savings certificates are valid for
90 days from issuance. AEO Credit Card holders will also
receive special promotional offers and advance notice of all
American Eagle in-store sales events. The AEO Credit Card is
accepted at all of our stores and at ae.com, aerie.com, and
77kids.com. The AEO Visa Card is accepted in all of our stores
and AEO Direct sites as well as merchants worldwide that accept
Visa
®
.
Customers in our U.S. and Canada stores may also pay for
their purchases with American
Express
®
,
Discover
®
,
MasterCard
®
,
Visa
®
,
bank debit cards, cash or check. Our AEO Direct customers may
pay for their purchases using American
Express
®
,
Discover
®
,
MasterCard
®
and
Visa
®
.
They may also pay for their purchases using
PayPal
®
and Bill Me
Later
®
.
Customers may also use gift cards to pay for their purchases.
AE, aerie, and 77kids gift cards can be purchased in our
American Eagle, aerie, and 77kids stores, respectively, and can
be used both in-store and online. In addition, AE, aerie and
77kids gift cards are available for purchase through ae.com,
aerie.com or 77kids.com. When the recipient uses the gift card,
the value of the purchase is electronically deducted from the
card and any remaining value can be used for future purchases.
Our gift cards do not expire and we do not charge a service fee
on inactive gift cards.
We offer our retail customers a hassle-free return policy. We
believe that our competitors offer similar credit card and
customer service policies.
7
Table of Contents
Competition
The retail apparel industry, including retail stores and
e-commerce,
is highly competitive. We compete with various individual and
chain specialty stores, as well as the casual apparel and
footwear departments of department stores and discount
retailers, primarily on the basis of quality, fashion, service,
selection and price.
Trademarks
and Service Marks
We have registered AMERICAN EAGLE
OUTFITTERS
®
,
AMERICAN
EAGLE
®
,
AE
®
and
AEO
®
with the United States Patent and Trademark Office. We have also
registered or have applied to register these trademarks with the
registries of many of the foreign countries in which our stores
and/or
manufacturers are located
and/or
where
our product is shipped.
We have registered AMERICAN EAGLE
OUTFITTERS
®
and have applied to register AMERICAN
EAGLE
tm
with the Canadian Intellectual Property Office. In addition, we
are exclusively licensed in Canada to use
AE
tm
and
AEO
®
in connection with the sale of a wide range of clothing products.
In the United States and around the world, we have also
registered, or have applied to register, a number of other marks
used in our business, including
aerie
®
,
77kids by american
eagle
®
and little77 by american
eagle
tm
.
These trademarks are renewable indefinitely and their
registrations are properly maintained in accordance with the
laws of the country in which they are registered. We believe
that the recognition associated with these trademarks makes them
extremely valuable and, therefore, we intend to use and renew
our trademarks in accordance with our business plans.
Employees
As of January 29, 2011, we had approximately
39,900 employees in the United States and Canada, of whom
approximately 33,000 were part-time and seasonal hourly
employees. We consider our relationship with our employees to be
good.
Seasonality
Historically, our operations have been seasonal, with a large
portion of net sales and operating income occurring in the third
and fourth fiscal quarter, reflecting increased demand during
the
back-to-school
and year-end holiday selling seasons, respectively. As a result
of this seasonality, any factors negatively affecting us during
the third and fourth fiscal quarters of any year, including
adverse weather or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results
of operations for the entire year. Our quarterly results of
operations also may fluctuate based upon such factors as the
timing of certain holiday seasons, the number and timing of new
store openings, the acceptability of seasonal merchandise
offerings, the timing and level of markdowns, store closings and
remodels, competitive factors, weather and general economic
conditions.
Available
Information
Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to those reports are available, free of charge,
under the “About AEO, Inc.” section of our website at
www.ae.com. These reports are available as soon as reasonably
practicable after such material is electronically filed with the
Securities and Exchange Commission (the “SEC”).
Our corporate governance materials, including our corporate
governance guidelines, the charters of our audit, compensation,
and nominating and corporate governance committees, and our code
of ethics may also be found under the “About AEO,
Inc.” section of our website at www.ae.com. Any amendments
or waivers to our code of ethics will also be available on our
website. A copy of the corporate governance materials is also
available upon written request.
Additionally, our investor presentations are available under the
“About AEO, Inc.” section of our website at
www.ae.com. These presentations are available as soon as
reasonably practicable after they are presented at investor
conferences.
8
Table of Contents
Certifications
As required by the New York Stock Exchange (“NYSE”)
Corporate Governance Standards Section 303A.12(a), on
June 30, 2010 our Chief Executive Officer submitted to the
NYSE a certification that he was not aware of any violation by
the Company of NYSE corporate governance listing standards.
Additionally, we filed with this
Form 10-K,
the Principal Executive Officer and Principal Financial Officer
certifications required under Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.
| ITEM 1A. | RISK FACTORS |
Our
ability to anticipate and respond to changing consumer
preferences and fashion trends in a timely manner
Our future success depends, in part, upon our ability to
identify and respond to fashion trends in a timely manner. The
specialty retail apparel business fluctuates according to
changes in the economy and customer preferences, dictated by
fashion and season. These fluctuations especially affect the
inventory owned by apparel retailers because merchandise
typically must be ordered well in advance of the selling season.
While we endeavor to test many merchandise items before ordering
large quantities, we are still susceptible to changing fashion
trends and fluctuations in customer demands.
In addition, the cyclical nature of the retail business requires
that we carry a significant amount of inventory, especially
during our peak selling seasons. We enter into agreements for
the manufacture and purchase of our private label apparel well
in advance of the applicable selling season. As a result, we are
vulnerable to changes in consumer demand, pricing shifts and the
timing and selection of merchandise purchases. The failure to
enter into agreements for the manufacture and purchase of
merchandise in a timely manner could, among other things, lead
to a shortage of inventory and lower sales. Changes in fashion
trends, if unsuccessfully identified, forecasted or responded to
by us, could, among other things, lead to lower sales, excess
inventories and higher markdowns, which in turn could have a
material adverse effect on our results of operations and
financial condition.
The
effect of economic pressures and other business
factors
The global economic crisis that began during the second half of
2008 continues to cause uncertainty and a wide-ranging lack of
liquidity in the credit markets. This market uncertainty
continues to result in a lack of consumer confidence and
spending.
The success of our operations depends to a significant extent
upon a number of factors relating to discretionary consumer
spending, including economic conditions affecting disposable
consumer income such as employment, consumer debt, interest
rates, increases in energy costs and consumer confidence. There
can be no assurance that consumer spending will not be further
negatively affected by general or local economic conditions,
thereby adversely impacting our continued growth and results of
operations.
Our
ability to react to raw material cost increases, labor and
energy prices
Increases in our costs, such as raw materials, labor and fuel,
may reduce our overall profitability. Specifically, fluctuations
in the price of cotton that is used in the manufacture of
merchandise we purchase from our suppliers have begun to
negatively impact our cost of sales. We have strategies in place
to mitigate the rising cost of raw materials and our overall
profitability depends on the success of those strategies.
Additionally, increases in other costs, including labor and
energy, could further reduce our profitability if not mitigated.
Our
ability to grow through new store openings and existing store
remodels and expansions
Our continued growth and success will depend in part on our
ability to open and operate new stores and expand and remodel
existing stores on a timely and profitable basis. During Fiscal
2011, we plan to open 14 new American Eagle stores in the
U.S. and Canada, 10 aerie stand-alone stores and 12 77kids
stores. Additionally, we plan to remodel or expand between 55
and 75 existing American Eagle stores during Fiscal 2011.
Accomplishing our new and existing store expansion goals will
depend upon a number of factors, including the ability to obtain
suitable sites
9
Table of Contents
for new and expanded stores at acceptable costs, the hiring and
training of qualified personnel, particularly at the store
management level, the integration of new stores into existing
operations and the expansion of our buying and inventory
capabilities. There can be no assurance that we will be able to
achieve our store expansion goals, manage our growth
effectively, successfully integrate the planned new stores into
our operations or operate our new and remodeled stores
profitably.
Our
ability to achieve planned store financial performance
The results achieved by our stores may not be indicative of
long-term performance or the potential performance of stores in
other locations. The failure of stores to achieve acceptable
results could result in store asset impairment charges, which
could adversely affect our continued growth and results of
operations.
Our
ability to grow through the internal development of new
brands
We launched our new brand concepts, aerie and 77kids, during
Fiscal 2006 and Fiscal 2008, respectively. Our ability to
succeed in these new brands requires significant expenditures
and management attention. Additionally, any new brand is subject
to certain risks including customer acceptance, competition,
product differentiation, the ability to attract and retain
qualified personnel, including management and designers, and the
ability to obtain suitable sites for new stores at acceptable
costs. There can be no assurance that these new brands will grow
or become profitable. If we are unable to succeed in developing
profitable new brands, this could adversely impact our continued
growth and results of operations.
Our
international merchandise sourcing strategy
Substantially all of our merchandise is purchased from foreign
suppliers. Although we purchase a significant portion of our
merchandise through a single foreign buying agent, we do not
maintain any exclusive commitments to purchase from any vendor.
Since we rely on a small number of foreign sources for a
significant portion of our purchases, any event causing the
disruption of imports, including the insolvency of a significant
supplier or a significant labor dispute, could have an adverse
effect on our operations. Other events that could also cause a
disruption of imports include the imposition of additional trade
law provisions or import restrictions, such as increased duties,
tariffs, anti-dumping provisions, increased CBP enforcement
actions, or political or economic disruptions.
We have a Vendor Code of Conduct (the “Code”) that
provides guidelines for all of our vendors regarding working
conditions, employment practices and compliance with local laws.
A copy of the Code is posted on our website, www.ae.com, and is
also included in our vendor manual in English and multiple other
languages. We have a factory compliance program to audit for
compliance with the Code. However, there can be no assurance
that our factory compliance program will be fully effective in
discovering all violations. Publicity regarding violation of our
Code or other social responsibility standards by any of our
vendor factories could adversely affect our sales and financial
performance.
We believe that there is a risk of terrorist activity on a
global basis, and such activity might take the form of a
physical act that impedes the flow of imported goods or the
insertion of a harmful or injurious agent to an imported
shipment. We have instituted policies and procedures designed to
reduce the chance or impact of such actions including, but not
limited to, factory audits and self-assessments, including audit
protocols on all critical security issues; the review of
security procedures of our other international trading partners,
including forwarders, consolidators, shippers and brokers; and
the cancellation of agreements with entities who fail to meet
our security requirements. In addition, the United States CBP
has recognized us as a validated, tier three member of the
Customs — Trade Partnership Against Terrorism program,
a voluntary program in which an importer agrees to work with
customs to strengthen overall supply chain security. However,
there can be no assurance that terrorist activity can be
prevented entirely and we cannot predict the likelihood of any
such activities or the extent of their adverse impact on our
operations.
10
Table of Contents
Our
reliance on external vendors
Given the volatility and risk in the current markets, our
reliance on external vendors leaves us subject to certain risks
should one or more of these external vendors become insolvent.
Although we monitor the financial stability of our key vendors
and plan for contingencies, the financial failure of a key
vendor could disrupt our operations and have an adverse effect
on our cash flows, results of operations and financial condition.
Seasonality
Historically, our operations have been seasonal, with a large
portion of net sales and operating income occurring in the third
and fourth fiscal quarter, reflecting increased demand during
the
back-to-school
and year-end holiday selling seasons, respectively. As a result
of this seasonality, any factors negatively affecting us during
the third and fourth fiscal quarters of any year, including
adverse weather or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results
of operations for the entire year. Our quarterly results of
operations also may fluctuate based upon such factors as the
timing of certain holiday seasons, the number and timing of new
store openings, the acceptability of seasonal merchandise
offerings, the timing and level of markdowns, store closings and
remodels, competitive factors, weather and general economic
conditions.
Our
reliance on our ability to implement and sustain information
technology systems
We regularly evaluate our information technology systems and are
currently implementing modifications
and/or
upgrades to the information technology systems that support our
business. Modifications include replacing legacy systems with
successor systems, making changes to legacy systems or acquiring
new systems with new functionality. We are aware of inherent
risks associated with replacing and modifying these systems,
including inaccurate system information and system disruptions.
We believe we are taking appropriate action to mitigate the
risks through testing, training and staging implementation, as
well as securing appropriate commercial contracts with
third-party vendors supplying such replacement technologies.
Information technology system disruptions and inaccurate system
information, if not anticipated and appropriately mitigated,
could have a material adverse effect on our results of
operations.
Our
reliance on key personnel
Our success depends to a significant extent upon the continued
services of our key personnel, including senior management, as
well as our ability to attract and retain qualified key
personnel and skilled employees in the future. Our operations
could be adversely affected if, for any reason, one or more key
executive officers ceased to be active in our management.
Failure
to comply with regulatory requirements
As a public company, we are subject to numerous regulatory
requirements. Our policies, procedures and internal controls are
designed to comply with all applicable laws and regulations,
including those imposed by the Sarbanes-Oxley Act of 2002, the
SEC and the NYSE. Failure to comply with such laws and
regulations could have a material adverse effect on our
reputation, financial condition and on the market price of our
common stock.
Our
ability to obtain and/or maintain our credit
facilities
We believe that we have sufficient cash flows from operating
activities to meet our operating requirements. In addition, the
banks participating in our various credit facilities are
currently rated as investment grade, and all of the amounts
under the credit facilities are currently available to us. We
draw on our credit facilities to increase our cash position to
add financial flexibility. Although we expect to continue to
generate positive cash flow despite the current economy, there
can be no assurance that we will be able to successfully
generate positive cash flow in the future. Continued negative
trends in the credit markets
and/or
continued financial institution failures could lead to lowered
credit availability as well as difficulty in obtaining
financing. In the event of limitations on our access to credit
facilities, our liquidity, continued growth and results of
operations could be adversely affected.
11
Table of Contents
Our
efforts to expand internationally through franchising
We have entered into franchise agreements with multiple
franchisees to open and operate stores throughout the Middle
East, Northern Africa, Eastern Europe, Hong Kong, China, Macau,
Israel and Japan over the next several years. While the
franchise arrangements do not involve a capital investment from
us and require minimal operational involvement, the effect of
these arrangements on our business and results of operations is
uncertain and will depend upon various factors, including the
demand for our products in new markets internationally.
Furthermore, although we provide store operation training,
literature and support, to the extent that the franchisee does
not operate its stores in a manner consistent with our
requirements regarding our brand and customer experience
standards, the value of our brand could be negatively impacted.
A failure to protect the value of our brand or any other adverse
actions by a franchisee could have an adverse effect on our
results of operations and our reputation.
Other
risk factors
Additionally, other factors could adversely affect our financial
performance, including factors such as: our ability to
successfully acquire and integrate other businesses; any
interruption of our key infrastructure systems; any disaster or
casualty resulting in the interruption of service from our
distribution centers or in a large number of our stores; any
interruption of our business related to an outbreak of a
pandemic disease in a country where we source or market our
merchandise; changes in weather patterns; the effects of changes
in current exchange rates and interest rates; and international
and domestic acts of terror.
The impact of any of the previously discussed factors, some of
which are beyond our control, may cause our actual results to
differ materially from expected results in these statements and
other forward-looking statements we may make from
time-to-time.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
Not applicable.
| ITEM 2. | PROPERTIES. |
We own two buildings in urban Pittsburgh, Pennsylvania which
house our corporate headquarters. These buildings total
186,000 square feet and 150,000 square feet,
respectively. We lease two locations near our headquarters,
which are used primarily for store and corporate support
services, totaling approximately 60,000 square feet. These
leases expire with various terms through 2024.
We own a 423,000 square foot building located in a suburban
area near Pittsburgh, Pennsylvania, which houses our
distribution center and contains approximately
120,000 square feet of office space. We also own a
45,000 square foot building, which houses our data center
and additional office space. We lease an additional location of
approximately 18,000 square feet, which is used for storage
space. This lease expires in 2015.
We rent approximately 131,000 square feet of office space
in New York, New York for our designers and sourcing and
production teams. The lease for this space expires in May 2016.
We also lease an additional 55,000 square feet of office
space in New York, New York, with various terms expiring through
2018.
We own a distribution facility in Ottawa, Kansas consisting of
approximately 1,220,000 total square feet, including two
expansions of 544,000 square feet and 280,000 square
feet, respectively. This expanded facility is used to support
new and existing growth initiatives, including AEO Direct, aerie
and 77kids.
We lease a building in Mississauga, Ontario with approximately
294,000 square feet, which houses our Canadian distribution
center. The lease expires in 2017.
We lease our flagship store in the Times Square area of New
York, New York. The 25,000 square foot location has an
initial term of 15 years with three options to renew for
five years each. This flagship store opened in November 2009 and
the initial lease term expires in 2024.
12
Table of Contents
All of our stores in the United States and Canada are leased.
The store leases generally have initial terms of 10 years.
Certain leases also include early termination options, which can
be exercised under specific conditions. Most of these leases
provide for base rent and require the payment of a percentage of
sales as additional contingent rent when sales reach specified
levels. Under our store leases, we are typically responsible for
tenant occupancy costs, including maintenance and common area
charges, real estate taxes and certain other expenses. We have
generally been successful in negotiating renewals as leases near
expiration.
| ITEM 3. | LEGAL PROCEEDINGS. |
We are a party to various legal actions incidental to our
business, including certain actions in which we are the
plaintiff. At this time, our management does not expect the
results of any of the legal actions to be material to our
financial position or results of operations.
| ITEM 4. | RESERVED. |
| ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock is traded on the NYSE under the symbol
“AEO”. As of March 7, 2011, there were 628
stockholders of record. However, when including associates who
own shares through our employee stock purchase plan, and others
holding shares in broker accounts under street name, we estimate
the stockholder base at approximately 50,000. The following
table sets forth the range of high and low closing prices of the
common stock as reported on the NYSE during the periods
indicated.
| Market Price |
Cash Dividends per
|
|||||||||||
| For the Quarters Ended | High | Low | Common Share | |||||||||
|
January 29, 2011
|
$ | 17.16 | $ | 14.02 | $ | 0.61 | ||||||
|
October 30, 2010
|
$ | 17.36 | $ | 12.04 | $ | 0.11 | ||||||
|
July 31, 2010
|
$ | 17.13 | $ | 11.60 | $ | 0.11 | ||||||
|
May 1, 2010
|
$ | 19.34 | $ | 15.73 | $ | 0.10 | ||||||
|
January 30, 2010
|
$ | 18.06 | $ | 14.54 | $ | 0.10 | ||||||
|
October 31, 2009
|
$ | 19.62 | $ | 13.37 | $ | 0.10 | ||||||
|
August 1, 2009
|
$ | 15.53 | $ | 12.80 | $ | 0.10 | ||||||
|
May 2, 2009
|
$ | 15.60 | $ | 8.44 | $ | 0.10 | ||||||
During Fiscal 2010 and Fiscal 2009, we paid quarterly dividends
as shown in the table above. Cash dividends per common share for
the quarter ended January 29, 2011 consisted of a regular
quarterly dividend of $0.11 per common share and a special cash
dividend of $0.50 per common share. The payment of future
dividends is at the discretion of our Board and is based on
future earnings, cash flow, financial condition, capital
requirements, changes in U.S. taxation and other relevant
factors. It is anticipated that any future dividends paid will
be declared on a quarterly basis.
13
Table of Contents
Performance
Graph
The following Performance Graph and related information shall
not be deemed “soliciting material” or to be filed
with the SEC, nor shall such information be incorporated by
reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except
to the extent that we specifically incorporate it by reference
into such filing.
The following graph compares the changes in the cumulative total
return to holders of our common stock with that of the S&P
Midcap 400 and the Dynamic Retail Intellidex. The comparison of
the cumulative total returns for each investment assumes that
$100 was invested in our common stock and the respective index
on January 28, 2006 and includes reinvestment of all
dividends. The plotted points are based on the closing price on
the last trading day of the fiscal year indicated.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Among American Eagle Outfitters, Inc., The S&P Midcap 400 Index
And A Peer Group
Among American Eagle Outfitters, Inc., The S&P Midcap 400 Index
And A Peer Group
| 1/28/06 | 2/3/07 | 2/2/08 | 1/31/09 | 1/30/10 | 1/29/11 | |||||||||||||||||||||||||
|
American Eagle Outfitters, Inc.
|
100.00 | 187.99 | 139.04 | 54.88 | 99.42 | 96.79 | ||||||||||||||||||||||||
|
S&P Midcap 400
|
100.00 | 107.97 | 105.56 | 66.53 | 95.38 | 127.30 | ||||||||||||||||||||||||
|
Dynamic Retail Intellidex
|
100.00 | 105.85 | 92.90 | 65.75 | 94.22 | 121.79 | ||||||||||||||||||||||||
14
Table of Contents
The following table provides information regarding our
repurchases of common stock during the three months ended
January 29, 2011.
Issuer
Purchases of Equity Securities
|
Total Number of
|
Maximum Number of
|
|||||||||||||||
|
Total
|
Average
|
Shares Purchased as
|
Shares that May
|
|||||||||||||
|
Number of
|
Price Paid
|
Part of Publicly
|
Yet be Purchased
|
|||||||||||||
|
Shares Purchased
|
Per Share
|
Announced Programs
|
Under the Program
|
|||||||||||||
| Period | (1) | (2) | (1)(3) | (3) | ||||||||||||
|
Month #1 (October 31, 2010 through November 27, 2010)
|
— | — | — | 16,000,000 | ||||||||||||
|
Month #2 (November 28, 2010 through January 1, 2011)
|
1,501,197 | $ | 15.85 | 1,500,000 | 14,500,000 | |||||||||||
|
Month #3 (January 2, 2011 through January 29, 2011)
|
— | — | — | 14,500,000 | ||||||||||||
|
Total
|
1,501,197 | $ | 15.85 | 1,500,000 | 14,500,000 | |||||||||||
| (1) | Shares purchased during Month #2 included 1.5 million shares repurchased as part of our publically announced share repurchase program and 1,197 shares repurchased for the payment of taxes in connection with the vesting of share-based payments. | |
| (2) | Average price paid per share excludes any broker commissions paid. | |
| (3) | In January 2008, our Board authorized the repurchase of 30.0 million shares of our common stock, originally expiring at the end of Fiscal 2010. In November 2010, our Board extended the authorization for the remaining 16.0 million shares through Fiscal 2012. Accordingly, the authorization of the remaining 14.5 million shares that may be repurchased under the program expires at the end of Fiscal 2012. |
The following table sets forth additional information as of the
end of Fiscal 2010, about shares of our common stock that may be
issued upon the exercise of options and other rights under our
existing equity compensation plans and arrangements, divided
between plans approved by our stockholders and plans or
arrangements not submitted to the Company’s stockholders
for approval. The information includes the number of shares
covered by and the weighted average exercise price of,
outstanding options and other rights and the number of shares
remaining available for future grants excluding the shares to be
issued upon exercise of outstanding options, warrants and other
rights.
Equity
Compensation Plan Table
| Column (a) | Column (b) | Column(c) | ||||||||||
|
Number of Securities
|
||||||||||||
|
Remaining Available
|
||||||||||||
|
Number of Securities
|
Weighted-Average
|
for Issuance Under
|
||||||||||
|
to be Issued Upon
|
Exercise Price of
|
Equity Compensation
|
||||||||||
|
Exercise of Outstanding
|
Outstanding Options,
|
Plans (Excluding
|
||||||||||
|
Options,
|
Warrants and
|
Securities Reflected
|
||||||||||
| Warrants and Rights(1) | Rights(1) | in Column (a))(1) | ||||||||||
|
Equity compensation plans approved by stockholders
|
12,124,456 | $ | 15.25 | 25,697,047 | ||||||||
|
Equity compensation plans not approved by stockholders
|
— | — | — | |||||||||
|
Total
|
12,124,456 | $ | 15.25 | 25,697,047 | ||||||||
| (1) | Equity compensation plans approved by stockholders include the 1994 Stock Option Plan, the 1999 Stock Incentive Plan and the 2005 Stock Award and Incentive Plan, as amended (the “2005 Plan”). |
15
Table of Contents
| ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA. |
The following Selected Consolidated Financial Data should be
read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
included under Item 7 below and the Consolidated Financial
Statements and Notes thereto, included in Item 8 below.
Most of the selected data presented below is derived from our
Consolidated Financial Statements, if applicable, which are
filed in response to Item 8 below. The selected
Consolidated Statement of Operations data for the years ended
February 2, 2008 and February 3, 2007 and the selected
Consolidated Balance Sheet data as of January 31, 2009,
February 2, 2008 and February 3, 2007 are derived from
audited Consolidated Financial Statements not included herein.
| For the Years Ended(1) | ||||||||||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
February 2,
|
February 3,
|
||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In thousands, except per share amounts, ratios and other financial information) | ||||||||||||||||||||
|
Summary of Operations
(2)
|
||||||||||||||||||||
|
Net sales
|
$ | 2,967,559 | $ | 2,940,269 | $ | 2,948,679 | $ | 3,041,158 | $ | 2,790,976 | ||||||||||
|
Comparable store sales (decrease) increase(3)
|
(1 | )% | (4 | )% | (10 | )% | 1 | % | 12 | % | ||||||||||
|
Gross profit
|
$ | 1,170,959 | $ | 1,173,430 | $ | 1,197,186 | $ | 1,438,236 | $ | 1,353,703 | ||||||||||
|
Gross profit as a percentage of net sales
|
39.5 | % | 39.9 | % | 40.6 | % | 47.3 | % | 48.5 | % | ||||||||||
|
Operating income(4)
|
$ | 317,261 | $ | 310,392 | $ | 382,797 | $ | 652,201 | $ | 629,240 | ||||||||||
|
Operating income as a percentage of net sales
|
10.7 | % | 10.6 | % | 13.0 | % | 21.4 | % | 22.5 | % | ||||||||||
|
Income from continuing operations
|
$ | 181,934 | $ | 213,398 | $ | 229,984 | $ | 433,507 | $ | 413,583 | ||||||||||
|
Income from continuing operations as a percentage of net sales
|
6.1 | % | 7.3 | % | 7.8 | % | 14.3 | % | 14.8 | % | ||||||||||
|
Per Share Results
(5)
|
||||||||||||||||||||
|
Income from continuing operations per common share-basic
|
$ | 0.91 | $ | 1.04 | $ | 1.12 | $ | 2.01 | $ | 1.86 | ||||||||||
|
Income from continuing operations per common share-diluted
|
$ | 0.90 | $ | 1.02 | $ | 1.11 | $ | 1.97 | $ | 1.81 | ||||||||||
|
Weighted average common shares outstanding — basic
|
199,979 | 206,171 | 205,169 | 216,119 | 222,662 | |||||||||||||||
|
Weighted average common shares outstanding — diluted
|
201,818 | 209,512 | 207,582 | 220,280 | 228,384 | |||||||||||||||
|
Cash dividends per common share
|
$ | 0.93 | $ | 0.40 | $ | 0.40 | $ | 0.38 | $ | 0.28 | ||||||||||
|
Balance Sheet Information
|
||||||||||||||||||||
|
Total cash and short-term investments
|
$ | 734,695 | $ | 698,635 | $ | 483,853 | $ | 619,939 | $ | 813,813 | ||||||||||
|
Long-term investments
|
$ | 5,915 | $ | 197,773 | $ | 251,007 | $ | 165,810 | $ | 264,944 | ||||||||||
|
Total assets
|
$ | 1,879,998 | $ | 2,138,148 | $ | 1,963,676 | $ | 1,867,680 | $ | 1,979,558 | ||||||||||
|
Short-term debt
|
$ | — | $ | 30,000 | $ | 75,000 | $ | — | $ | — | ||||||||||
|
Long-term debt
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Stockholders’ equity
|
$ | 1,351,071 | $ | 1,578,517 | $ | 1,409,031 | $ | 1,340,464 | $ | 1,417,312 | ||||||||||
|
Working capital
|
$ | 786,573 | $ | 758,075 | $ | 523,596 | $ | 644,656 | $ | 724,490 | ||||||||||
|
Current ratio
|
3.03 | 2.85 | 2.30 | 2.71 | 2.56 | |||||||||||||||
|
Average return on stockholders’ equity
|
9.6 | % | 11.3 | % | 13.0 | % | 29.0 | % | 30.1 | % | ||||||||||
16
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| For the Years Ended(1) | ||||||||||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
February 2,
|
February 3,
|
||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (In thousands, except per share amounts, ratios and other financial information) | ||||||||||||||||||||
|
Other Financial Information
(2)
|
||||||||||||||||||||
|
Total stores at year-end
|
1,086 | 1,075 | 1,070 | 968 | 906 | |||||||||||||||
|
Capital expenditures
|
$ | 84,259 | $ | 127,080 | $ | 243,564 | $ | 249,640 | $ | 210,082 | ||||||||||
|
Net sales per average selling square foot(6)
|
$ | 524 | $ | 526 | $ | 563 | $ | 644 | $ | 644 | ||||||||||
|
Total selling square feet at end of period
|
5,067,489 | 4,981,595 | 4,920,285 | 4,492,198 | 4,191,973 | |||||||||||||||
|
Net sales per average gross square foot(6)
|
$ | 420 | $ | 422 | $ | 452 | $ | 522 | $ | 525 | ||||||||||
|
Total gross square feet at end of period
|
6,339,469 | 6,215,355 | 6,139,663 | 5,581,769 | 5,136,962 | |||||||||||||||
|
Number of employees at end of period
|
39,900 | 38,800 | 36,900 | 38,400 | 27,400 | |||||||||||||||
| (1) | Except for the fiscal year ended February 3, 2007, which includes 53 weeks, all fiscal years presented include 52 weeks. | |
| (2) | All amounts presented are from continuing operations and exclude MARTIN+OSA’s results of operations for all periods. Refer to Note 14 to the accompanying Consolidated Financial Statements for additional information regarding the discontinued operations of MARTIN+OSA. | |
| (3) | The comparable store sales increase for the period ended February 2, 2008 is compared to the corresponding 52 week period in Fiscal 2006. The comparable store sales increase for the period ended February 3, 2007 is compared to the corresponding 53 week period in the preceding fiscal year. | |
| (4) | All amounts presented exclude gift card service fee income, which was reclassified to other income, net during Fiscal 2006. Refer to Note 2 to the accompanying Consolidated Financial Statements for additional information regarding gift cards. | |
| (5) | Per share results for all periods presented reflect the three-for-two stock split distributed on December 18, 2006. | |
| (6) | Net sales per average square foot is calculated using retail store sales for the year divided by the straight average of the beginning and ending square footage for the year. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of financial condition
and results of operations are based upon our Consolidated
Financial Statements and should be read in conjunction with
those statements and notes thereto.
This report contains various “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent our
expectations or beliefs concerning future events, including the
following:
| • | the planned opening of 14 new American Eagle stores, 10 new aerie stores and 12 new 77kids stores in the United States and Canada during Fiscal 2011; | |
| • | the selection of approximately 55 to 75 American Eagle stores in the United States and Canada for remodeling during Fiscal 2011; | |
| • | the planned closure of 15 to 25 American Eagle stores in the United States and Canada during Fiscal 2011; | |
| • | the planned opening of 20 new franchised American Eagle stores during Fiscal 2011; | |
| • | the success of aerie by American Eagle and aerie.com; |
17
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| • | the success of 77kids by american eagle and 77kids.com; | |
| • | the expected payment of a dividend in future periods; | |
| • | the possibility of engaging in future franchise agreements, growth through acquisitions, and/or internally developing additional new brands; | |
| • | the possibility that our credit facilities may not be available for future borrowings; | |
| • | the possibility that rising prices of raw materials, labor, energy and other inputs to our manufacturing process, if unmitigated, will have a significant impact to our profitability; and | |
| • | the possibility that we may be required to take store impairment charges related to underperforming stores. |
We caution that these forward-looking statements, and those
described elsewhere in this report, involve material risks and
uncertainties and are subject to change based on factors beyond
our control, as discussed within Part I, Item 1A of
this
Form 10-K.
Accordingly, our future performance and financial results may
differ materially from those expressed or implied in any such
forward-looking statement.
Critical
Accounting Policies
Our Consolidated Financial Statements are prepared in accordance
with accounting principles generally accepted in the United
States (“GAAP”), which require us to make estimates
and assumptions that may affect the reported financial condition
and results of operations should actual results differ from
these estimates. We base our estimates and assumptions on the
best available information and believe them to be reasonable for
the circumstances. We believe that of our significant accounting
policies, the following involve a higher degree of judgment and
complexity. Refer to Note 2 to the Consolidated Financial
Statements for a complete discussion of our significant
accounting policies. Management has reviewed these critical
accounting policies and estimates with the Audit Committee of
our Board.
Revenue Recognition.
We record revenue for
store sales upon the purchase of merchandise by customers. Our
e-commerce
operation records revenue upon the estimated customer receipt
date of the merchandise. Revenue is not recorded on the purchase
of gift cards. A current liability is recorded upon purchase,
and revenue is recognized when the gift card is redeemed for
merchandise.
Revenue is recorded net of estimated and actual sales returns
and deductions for coupon redemptions and other promotions. The
estimated sales return reserve is based on projected merchandise
returns determined through the use of historical average return
percentages. We do not believe there is a reasonable likelihood
that there will be a material change in the future estimates or
assumptions we use to calculate our sales return reserve.
However, if the actual rate of sales returns increases
significantly, our operating results could be adversely affected.
We estimate gift card breakage and recognize revenue in
proportion to actual gift card redemptions as a component of net
sales. We determine an estimated gift card breakage rate by
continuously evaluating historical redemption data and the time
when there is a remote likelihood that a gift card will be
redeemed.
Merchandise Inventory.
Merchandise inventory
is valued at the lower of average cost or market, utilizing the
retail method. Average cost includes merchandise design and
sourcing costs and related expenses. The Company records
merchandise receipts at the time merchandise is delivered to the
foreign shipping port by the manufacturer (FOB port). This is
the point at which title and risk of loss transfer to the
Company.
We review our inventory in order to identify slow-moving
merchandise and generally use markdowns to clear merchandise.
Additionally, we estimate a markdown reserve for future planned
markdowns related to current inventory. If inventory exceeds
customer demand for reasons of style, seasonal adaptation,
changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the
inventory in stock will not sell at its currently ticketed
price, additional markdowns may be necessary. These markdowns
may have a material adverse impact on earnings, depending on the
extent and amount of inventory affected.
We estimate an inventory shrinkage reserve for anticipated
losses for the period between the last physical count and the
balance sheet date. The estimate for the shrinkage reserve is
calculated based on historical percentages and
18
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can be affected by changes in merchandise mix and changes in
actual shrinkage trends. We do not believe there is a reasonable
likelihood that there will be a material change in the future
estimates or assumptions we use to calculate our inventory
shrinkage reserve. However, if actual physical inventory losses
differ significantly from our estimate, our operating results
could be adversely affected.
Asset Impairment.
In accordance with Financial
Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) 360,
Property, Plant,
and Equipment
, we evaluate long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of an asset might not be recoverable. Assets are
evaluated for impairment by comparing the projected undiscounted
future cash flows of the asset, over its remaining useful life,
to the carrying value. If the future undiscounted cash flows are
projected to be less than the carrying value of the asset, we
adjust the asset value to its estimated fair value and an
impairment loss is recorded as a component of operating income
within selling, general and administrative expense.
Our impairment loss calculations require management to make
assumptions and to apply judgment to estimate future cash flows
and asset fair values, including forecasting useful lives of the
assets and selecting the discount rate that reflects the risk
inherent in future cash flows. We do not believe there is a
reasonable likelihood that there will be a material change in
the estimates or assumptions we use to calculate long-lived
asset impairment losses. However, if actual results are not
consistent with our estimates and assumptions, our operating
results could be adversely affected.
Investment Securities.
In accordance with
ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”), we measure our investment securities
using Level 1, Level 2 and Level 3 inputs.
Level 1 and Level 2 inputs are valued using quoted
market prices while we use a discounted cash flow
(“DCF”) model to determine the fair value of our
Level 3 investments. The assumptions in our DCF model
include different recovery periods depending on the type of
security and varying discount factors for yield and illiquidity.
These assumptions are subjective and they are based on our
current judgment and our view of current market conditions. The
use of different assumptions would result in a different
valuation and related charge. Future adverse changes in market
conditions, continued poor operating results of underlying
investments or other factors could result in further losses that
may not be reflected in an investment’s current carrying
value, possibly requiring an additional net impairment loss
recognized in earnings in the future.
We evaluate our investments for impairment in accordance with
ASC 320,
Investments — Debt and Equity
Securities
(“ASC 320”). ASC 320 provides
guidance for determining when an investment is considered
impaired, whether impairment is
other-than-temporary,
and measurement of an impairment loss. An investment is
considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence
to evaluate the realizable value of its investment, impairment
is determined to be
other-than-temporary,
then an impairment loss is recognized in the Consolidated
Statement of Operations equal to the difference between the
investment’s cost and its fair value. As of May 3,
2009, we adopted
ASC 320-10-65,
Transition Related to FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary-Impairments
(“ASC
320-10-65”),
which modifies the requirements for recognizing
other-than-temporary
impairment (“OTTI”) and changes the impairment model
for debt securities. In addition,
ASC 320-10-65
requires additional disclosures relating to debt and equity
securities both in the interim and annual periods as well as
requires the Company to present total OTTI in the Consolidated
Statements of Operations, with an offsetting reduction for any
non-credit loss impairment amount recognized in other
comprehensive income (“OCI”).
Share-Based Payments.
We account for
share-based payments in accordance with the provisions of
ASC 718,
Compensation — Stock Compensation
(“ASC 718”). To determine the fair value of our
stock option awards, we use the Black-Scholes option pricing
model, which requires management to apply judgment and make
assumptions to determine the fair value of our awards. These
assumptions include estimating the length of time employees will
retain their vested stock options before exercising them (the
“expected term”) and the estimated volatility of the
price of our common stock over the expected term.
We calculate a weighted-average expected term based on
historical experience. Expected stock price volatility is based
on a combination of historical volatility of our common stock
and implied volatility. We chose to use a combination of
historical and implied volatility as we believe that this
combination is more representative of future stock price trends
than historical volatility alone. Changes in these assumptions
can materially affect the estimate of
19
Table of Contents
the fair value of our share-based payments and the related
amount recognized in our Consolidated Financial Statements.
Income Taxes.
We calculate income taxes in
accordance with ASC 740,
Income Taxes
(“ASC
740”), which requires the use of the asset and liability
method. Under this method, deferred tax assets and liabilities
are recognized based on the difference between the Consolidated
Financial Statement carrying amounts of existing assets and
liabilities and their respective tax bases as computed pursuant
to ASC 740. Deferred tax assets and liabilities are
measured using the tax rates, based on certain judgments
regarding enacted tax laws and published guidance, in effect in
the years when those temporary differences are expected to
reverse. A valuation allowance is established against the
deferred tax assets when it is more likely than not that some
portion or all of the deferred taxes may not be realized.
Changes in our level and composition of earnings, tax laws or
the deferred tax valuation allowance, as well as the results of
tax audits, may materially impact the effective income tax rate.
We evaluate our income tax positions in accordance with
ASC 740 which prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken
on a tax return, including a decision whether to file or not to
file in a particular jurisdiction. Under ASC 740, a tax
benefit from an uncertain position may be recognized only if it
is “more likely than not” that the position is
sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. We believe
that our assumptions and estimates are reasonable, although
actual results may have a positive or negative material impact
on the balances of deferred tax assets and liabilities,
valuation allowances or net income.
Key
Performance Indicators
Our management evaluates the following items, which are
considered key performance indicators, in assessing our
performance:
Comparable store sales
— Comparable store sales
provide a measure of sales growth for stores open at least one
year over the comparable prior year period. In fiscal years
following those with 53 weeks, including Fiscal 2007, the
prior year period is shifted by one week to compare similar
calendar weeks. A store is included in comparable store sales in
the thirteenth month of operation. However, stores that have a
gross square footage increase of 25% or greater due to a remodel
are removed from the comparable store sales base, but are
included in total sales. These stores are returned to the
comparable store sales base in the thirteenth month following
the remodel. Sales from American Eagle and aerie stores are
included in comparable store sales. Sales from AEO Direct are
not included in comparable store sales. Sales from 77kids stores
will be included in comparable store sales upon achieving
13 months of operations.
Our management considers comparable store sales to be an
important indicator of our current performance. Comparable store
sales results are important to achieve leveraging of our costs,
including store payroll, store supplies, rent, etc. Comparable
store sales also have a direct impact on our total net sales,
cash and working capital.
Gross profit
— Gross profit measures whether we
are optimizing the price and inventory levels of our merchandise
and achieving an optimal level of sales. Gross profit is the
difference between net sales and cost of sales. Cost of sales
consists of: merchandise costs, including design, sourcing,
importing and inbound freight costs, as well as markdowns,
shrinkage, certain promotional costs and buying, occupancy and
warehousing costs. Buying, occupancy and warehousing costs
consist of: compensation, employee benefit expenses and travel
for our buyers and certain senior merchandising executives; rent
and utilities related to our stores, corporate headquarters,
distribution centers and other office space; freight from our
distribution centers to the stores; compensation and supplies
for our distribution centers, including purchasing, receiving
and inspection costs; and shipping and handling costs related to
our
e-commerce
operation. The inability to obtain acceptable levels of sales,
initial markups or any significant increase in our use of
markdowns could have an adverse effect on our gross profit and
results of operations.
20
Table of Contents
Operating income
— Our management views
operating income as a key indicator of our success. The key
drivers of operating income are comparable store sales, gross
profit, our ability to control selling, general and
administrative expenses and our level of capital expenditures.
Store productivity
— Store productivity,
including net sales per average square foot, sales per
productive hour, average unit retail price, conversion rate, the
number of transactions per store, the number of units sold per
store and the number of units per transaction, is evaluated by
our management in assessing our operational performance.
Inventory turnover
— Our management evaluates
inventory turnover as a measure of how productively inventory is
bought and sold. Inventory turnover is important as it can
signal slow moving inventory. This can be critical in
determining the need to take markdowns on merchandise.
Cash flow and liquidity
— Our management
evaluates cash flow from operations, investing and financing in
determining the sufficiency of our cash position. Cash flow from
operations has historically been sufficient to cover our uses of
cash. Our management believes that cash flow from operations
will be sufficient to fund anticipated capital expenditures and
working capital requirements.
Results
of Operations
Overview
In Fiscal 2010, we took action to strategically manage our
business in what continued to be a challenging retail
environment. During the second quarter, we commenced our
corporate profit initiative, aimed at reducing costs, creating
efficiencies and improving inventory turns. Additionally, we
have strengthened our assortments and realigned talent. We
continue to make progress implementing our corporate profit
initiatives, and are driving positive changes across the
Company, including supply chain and production operations.
Fiscal 2010 net sales of $2.968 billion increased 1%
compared to $2.940 billion in Fiscal 2009. Annual
comparable store sales decreased 1%, compared to a 4% decline
last year. A higher merchandise margin reflected lower
markdowns. However, buying, occupancy and warehousing expenses
increased as a rate to sales as a result of negative comparable
store sales and the impact of new store openings. Total selling,
general and administrative expenses decreased 2% due to a
combination of lower incentive compensation expense recorded in
the year and savings resulting from our corporate profit
initiative.
Operating income increased as a percent to net sales to 10.7%
for Fiscal 2010 compared to 10.6% for Fiscal 2009.
For Fiscal 2010, income from continuing operations was
$181.9 million and includes $24.4 million of realized
losses from the sale of investment securities. As a percent to
net sales, income from continuing operations was 6.1% during
Fiscal 2010 and 7.3% during Fiscal 2009. Fiscal 2010 income from
continuing operations per diluted share was $0.90, which
includes a $0.12 per diluted share loss from sale of investment
securities. Fiscal 2009 income from continuing operations per
diluted share was $1.02, which includes $0.11 per diluted share
of tax benefits, partially offset by a $0.01 per diluted share
loss on sale of investment securities.
We ended Fiscal 2010 with $740.6 million in cash,
short-term and long-term investments, a decrease of
$155.8 million from last year. During the year, we
generated approximately $402.6 million of cash from
operations. The cash from operations was offset by
$84.3 million of capital expenditures, a $30.0 million
repayment of our outstanding notes payable balance, and value
returned to shareholders through share repurchases of
$216.1 million and dividend payments of $183.2 million.
21
Table of Contents
The following table shows, for the periods indicated, the
percentage relationship to net sales of the listed items
included in our Consolidated Statements of Operations.
| For the Fiscal Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Net sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of sales, including certain buying, occupancy and
warehousing expenses
|
60.5 | 60.1 | 59.4 | |||||||||
|
Gross profit
|
39.5 | 39.9 | 40.6 | |||||||||
|
Selling, general and administrative expenses
|
24.0 | 24.6 | 23.4 | |||||||||
|
Depreciation and amortization expense
|
4.8 | 4.7 | 4.2 | |||||||||
|
Operating income
|
10.7 | 10.6 | 13.0 | |||||||||
|
Realized loss on sale of investment securities
|
(0.8 | ) | (0.1 | ) | — | |||||||
|
Other income (expense), net
|
0.1 | (0.1 | ) | 0.6 | ||||||||
|
Net impairment loss recognized in earnings
|
(0.1 | ) | — | (0.8 | ) | |||||||
|
Income before income taxes
|
9.9 | 10.4 | 12.8 | |||||||||
|
Provision for income taxes
|
3.8 | 3.1 | 5.0 | |||||||||
|
Income from continuing operations
|
6.1 | 7.3 | 7.8 | |||||||||
|
Loss from discontinued operations, net of tax
|
(1.4 | ) | (1.5 | ) | (1.7 | ) | ||||||
|
Net income
|
4.7 | % | 5.8 | % | 6.1 | % | ||||||
Our operations are conducted in one reportable segment, which
includes our 929 U.S. and Canadian AE retail stores, 148
aerie by American Eagle retail stores, nine 77kids by american
eagle retail stores and AEO Direct, as of January 29, 2011.
Comparison
of Fiscal 2010 to Fiscal 2009
Net
Sales
Total sales increased 1% to $2.968 billion compared to
$2.940 billion last year. For Fiscal 2010, comparable
stores sales decreased 1% compared to a 4% decrease last year.
AE men’s and women’s comps both declined in the
low-single digits compared to Fiscal 2009. A decrease in the
number of transactions was driven by lower traffic, partially
offset by a slight increase in customer conversion.
Gross
Profit
Gross profit decreased slightly to $1.171 billion from
$1.173 billion in Fiscal 2009. Gross profit as a percent to
net sales decreased by 40 basis points to 39.5% from 39.9%
last year. The percentage decrease was attributed to a
50 basis point increase in buying, occupancy and
warehousing costs as a percent to net sales, partially offset by
a 10 basis point improvement in merchandise margin as a
rate to sales.
Buying, occupancy and warehousing expenses increased as a rate
to sales as a result of negative comparable store sales and the
impact of new store openings. Share-based payment expense
included in gross profit decreased to approximately
$8.4 million compared to $11.6 million last year.
Our gross profit may not be comparable to that of other
retailers, as some retailers include all costs related to their
distribution network, as well as design costs in cost of sales.
Other retailers may exclude a portion of these costs from cost
of sales, including them in a line item such as selling, general
and administrative expenses. Refer to Note 2 to the
Consolidated Financial Statements for a description of our
accounting policy regarding cost of sales, including certain
buying, occupancy and warehousing expenses.
22
Table of Contents
Selling,
General and Administrative Expenses
Selling, general and administrative expense decreased 2% to
$713.2 million compared to $725.3 million last year.
The decrease was due to a combination of reduced incentive
compensation expense recorded in the year, as well as the net
savings resulting from our corporate profit initiative.
Share-based payment expense included in selling, general and
administrative expense decreased to approximately
$17.1 million compared to $23.0 million late year.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased 2% to
$140.5 million from $137.8 million last year. This
increase is primarily due to a greater property and equipment
base driven by our level of capital expenditures. As a percent
to net sales, depreciation and amortization expense increased to
4.8% from 4.7% due to the increased expense as well as the
impact of the comparable store sales decline.
Other
Income (Expense), Net
Other income (expense), net increased to $3.5 million from
$(2.3) million last year, due primarily to a non-cash,
non-operating foreign currency loss related to holding
U.S. dollars in our Canadian subsidiary in anticipation of
repatriation recorded last year.
Realized
Loss on Sale of Investment Securities
The realized loss on sale of investment securities was
$24.4 million, or approximately $0.12 per diluted share,
for Fiscal 2010. This compares to a loss of $2.7 million,
or $0.01 per diluted share, last year.
The loss in Fiscal 2010 was primarily due to the liquidation of
95% of our Auction Rate Security (“ARS”) investment
portfolio. Our ARS investment portfolio was originally purchased
as highly liquid short-term instruments. Due to the
deterioration of the ARS market and ARS investments experiencing
failed auctions or long-term auction resets, our ARS investment
portfolio was subsequently classified as long-term, with a
weighted average contractual maturity of approximately
26 years. This liquidation allowed us to convert
substantially our entire ARS investment portfolio to short-term
liquid assets, with total cash proceeds of $149.6 million
plus accrued interest and a net realized loss of
$24.2 million for the liquidation.
Additionally, in the first half of Fiscal 2010, we liquidated
$28.1 million of ARS investments for proceeds of
$27.9 million and a total realized loss of
$0.2 million.
Net
Impairment Loss Recognized in Earnings
Net impairment loss recognized in earnings relating to our
investment securities was $1.2 million for Fiscal 2010,
compared to $0.9 million for Fiscal 2009.
Provision
for Income Taxes
The effective income tax rate from continuing operations
increased to approximately 38.3% in Fiscal 2010 from 29.9% in
Fiscal 2009. The lower effective income tax rate in Fiscal 2009
was primarily the result of the tax benefit associated with the
repatriation of foreign earnings from Canada as well as federal
and state income tax settlements and other changes in income tax
reserves. Additionally, the Fiscal 2010 effective income tax
rate was higher due to losses on the sale of certain ARS
investments in which no income tax benefit was recognized. The
repatriation of foreign earnings from Canada in Fiscal 2009 was
a discrete event and has not changed the Company’s
intention to indefinitely reinvest the earnings of our Canadian
subsidiaries to the extent not repatriated.
Refer to Note 13 to the Consolidated Financial Statements
for additional information regarding our accounting for income
taxes.
23
Table of Contents
Income
From Continuing Operations
Income from continuing operations for Fiscal 2010 was
$181.9 million, or $0.90 per diluted share, and includes a
$0.12 per diluted share loss from the sale of investment
securities related to our ARS liquidation as discussed above.
Income from continuing operations for Fiscal 2009 was
$213.4 million, or $1.02 per diluted share, and includes
$0.11 per diluted share of tax benefits and a $0.01 per diluted
share realized loss on the sale of investment securities.
Loss
from Discontinued Operations
We completed the closure of M+O stores and its related
e-commerce
operations during Fiscal 2010. Accordingly, the after-tax
operating results and closure charges appear in Loss from
Discontinued Operations on the Consolidated Statements of
Operations for all periods presented. Loss from Discontinued
Operations, net of tax, was $41.3 million and
$44.4 million for Fiscal 2010 and Fiscal 2009,
respectively. The Loss from Discontinued Operations for Fiscal
2010 includes pre-tax closure charges of $43.4 million.
Included in the pre-tax charges were $15.4 million of
lease-related items, $7.6 million for severance and other
employee-related charges, $2.4 million in inventory charges
and a non-cash asset impairment charge of $18.0 million.
Refer to Note 14 to the Consolidated Financial Statements
for additional information regarding the discontinued operations
of M+O.
Net
Income
Net income decreased to $140.6 million in Fiscal 2010 from
$169.0 million in Fiscal 2009. As a percent to net sales,
net income was 4.7% and 5.8% for Fiscal 2010 and Fiscal 2009,
respectively. Net income per diluted share was $0.70 compared to
$0.81 last year. The decrease in net income was attributable to
the factors noted above.
Comparison
of Fiscal 2009 to Fiscal 2008
Net
Sales
Fiscal 2009 net sales were $2.940 billion compared to
$2.949 billion in Fiscal 2008. Fiscal 2009 results included
an increase in our conversion rate driven primarily by strong
holiday sales. For Fiscal 2009, comparable store sales declined
in the mid-single digits for both the AE Brand women’s and
men’s business compared to Fiscal 2008.
Gross
Profit
Gross profit decreased 2% to $1.173 billion from
$1.197 billion in Fiscal 2008. Gross profit as a percent to
net sales decreased by 70 basis points to 39.9% from 40.6%
in Fiscal 2008. The percentage decrease was attributed to a
140 basis point increase in buying, occupancy and
warehousing costs as a percent to net sales, partially offset by
a 70 basis point increase in the merchandise margin rate as
a percent to net sales. Merchandise margin increased for Fiscal
2009 due primarily to decreased markdowns.
Buying, occupancy and warehousing expenses increased
140 basis points as a percent to net sales. This was
primarily due to a 120 basis point increase in rent as a
percent to net sales, driven by new store openings. Share-based
payment expense included in gross profit increased to
approximately $11.6 million in Fiscal 2009 compared to
$5.7 million in Fiscal 2008.
Our gross profit may not be comparable to that of other
retailers, as some retailers include all costs related to their
distribution network, as well as design costs in cost of sales.
Other retailers may exclude a portion of these costs from cost
of sales, including them in a line item such as selling, general
and administrative expenses. Refer to Note 2 to the
Consolidated Financial Statements for a description of our
accounting policy regarding cost of sales, including certain
buying, occupancy and warehousing expenses.
24
Table of Contents
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased 5% to
$725.3 million from $690.8 million. As a percent to
net sales, selling, general and administrative expenses
increased by 120 basis points to 24.6% from 23.4% in Fiscal
2008.
The higher rate in Fiscal 2009 is primarily due to an increase
in incentive compensation of 100 basis points partially
offset by improvement in advertising and travel expenses.
Share-based payment expense included in selling, general and
administrative expenses increased to approximately
$23.0 million in Fiscal 2009 compared to $13.0 million
in Fiscal 2008.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased 11% to
$137.8 million from $123.6 million in Fiscal 2008.
This increase is primarily due to a greater property and
equipment base driven by our level of capital expenditures. As a
percent to net sales, depreciation and amortization expense
increased to 4.7% from 4.2% due to the increased expense as well
as the impact of the comparable store sales decline.
Other
(Expense) Income, Net
Other (expense) income, net decreased to $(2.3) million
from $18.9 million, due primarily to lower interest income,
driven by decreased interest rates and a lower investment
balance. Additionally, a non-cash, non-operating foreign
currency loss related to holding U.S. dollars in our
Canadian subsidiary in anticipation of repatriation was recorded
in Fiscal 2009.
Realized
Loss on Sale of Investment Securities
The realized loss on sale of investment securities was
$2.7 million for Fiscal 2009. This compares to a loss of
$1.1 million for Fiscal 2008.
Net
Impairment Loss Recognized in Earnings
Net impairment loss recognized in earnings relating to our
investment securities was $0.9 million for Fiscal 2009,
compared to $22.9 million for Fiscal 2008.
Provision
for Income Taxes
The effective income tax rate from continuing operations
decreased to approximately 29.9% in Fiscal 2009 from 39.1% in
Fiscal 2008. The decrease in the effective income tax rate was
primarily the result of the tax benefit associated with the
repatriation of foreign earnings from Canada as well as federal
and state income tax settlements and other changes in income tax
reserves. Additionally, the effective income tax rate was higher
in Fiscal 2008 primarily as a result of the impairment charge
recorded in connection with the valuation of certain ARS and
auction rate preferred securities (“ARPS”) in which no
income tax benefit was recognized. The repatriation of foreign
earnings from Canada in Fiscal 2009 was a discrete event and has
not changed the Company’s intention to indefinitely
reinvest the earnings of our Canadian subsidiaries to the extent
not repatriated.
Refer to Note 13 to the Consolidated Financial Statements
for additional information regarding our accounting for income
taxes.
Income
from Continuing Operations
Income from continuing operations for Fiscal 2009 was
$213.4 million, or $1.02 per diluted share, and includes
$0.11 per diluted share of tax benefits partially offset by a
$0.01 per diluted share realized loss on the sale of investment
securities. Income from continuing operations for Fiscal 2008
was $230.0 million, or $1.11 per diluted share, and
includes $0.11 per diluted share net investment impairment loss
recognized in earnings.
25
Table of Contents
Loss
on Discontinued Operations
We completed the closure of M+O stores and related
e-commerce
operations during Fiscal 2010. Accordingly, the after-tax
operating results and closure charges appear in Loss from
Discontinued Operations on the Consolidated Statements of
Operations for all periods presented. Loss from Discontinued
Operations, net of tax, was $44.4 million and
$50.9 million for Fiscal 2009 and Fiscal 2008,
respectively. The Loss from Discontinued Operations included
asset impairment charges of $18.0 million and
$6.7 million for Fiscal 2009 and Fiscal 2008, respectively.
Refer to Note 14 to the Consolidated Financial Statements
for additional information regarding the discontinued operations
of M+O.
Net
Income
Net income decreased to $169.0 million in Fiscal 2009 from
$179.1 million in Fiscal 2008. As a percent to net sales,
net income was 5.8% and 6.1% for Fiscal 2009 and Fiscal 2008,
respectively. Net income per diluted share was $0.81 compared to
$0.86 last year. The decrease in net income was attributable to
the factors noted above.
Fiscal
2011 Outlook
Looking ahead to Fiscal 2011, we have numerous opportunities and
are enthusiastic about our long-term growth plans. We are
continuing to strengthen assortments, achieve expense
efficiencies and challenge all areas of the business to produce
additional savings. However, we face numerous headwinds, which
include rising product costs primarily in the second half of the
year. Our strategies to mitigate rising product costs include a
targeted reduction in markdowns, selective price increases and
on-going expense savings. We believe that our current cash
holdings and cash generated from operations in Fiscal 2011 will
be sufficient to fund anticipated capital expenditures and
working capital requirements.
Fair
Value Measurements
ASC 820 defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. Fair value is defined
under ASC 820 as the exit price associated with the sale of
an asset or transfer of a liability in an orderly transaction
between market participants at the measurement date.
Financial
Instruments
Valuation techniques used to measure fair value under
ASC 820 must maximize the use of observable inputs and
minimize the use of unobservable inputs. In addition,
ASC 820 establishes this three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These
tiers include:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. | |
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| • | Level 3 — Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
As of January 29, 2011, we held certain assets that are
required to be measured at fair value on a recurring basis.
These include cash equivalents and short and long-term
investments, including ARS.
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Table of Contents
In accordance with ASC 820, the following table represents
the fair value hierarchy for our financial assets (cash
equivalents and investments) measured at fair value on a
recurring basis as of January 29, 2011:
| Fair Value Measurements at January 29, 2011 | ||||||||||||||||
|
Quoted Market
|
||||||||||||||||
|
Prices in Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||
|
Identical Assets
|
Observable Inputs
|
Inputs
|
||||||||||||||
| Carrying Amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash and cash equivalents
|
||||||||||||||||
|
Cash
|
$ | 122,578 | $ | 122,578 | $ | — | $ | — | ||||||||
|
Commercial paper
|
40,884 | 40,884 | — | — | ||||||||||||
|
Corporate bonds
|
3,695 | 3,695 | — | — | ||||||||||||
|
Treasury bills
|
102,996 | 102,996 | — | — | ||||||||||||
|
Money-market
|
397,440 | 397,440 | — | — | ||||||||||||
|
Total cash and cash equivalents
|
$ | 667,593 | $ | 667,593 | $ | — | $ | — | ||||||||
|
Short-term investments
|
||||||||||||||||
|
Term deposits
|
$ | 63,402 | $ | 63,402 | $ | — | $ | — | ||||||||
|
State and local government ARS
|
3,700 | — | — | 3,700 | ||||||||||||
|
Total short-term investments
|
$ | 67,102 | $ | 63,402 | $ | — | $ | 3,700 | ||||||||
|
Long-term investments
|
||||||||||||||||
|
State and local government ARS
|
$ | 5,500 | $ | — | $ | — | $ | 5,500 | ||||||||
|
ARS Call Option
|
415 | — | — | 415 | ||||||||||||
|
Total long-term investments
|
$ | 5,915 | $ | — | $ | — | $ | 5,915 | ||||||||
|
Total
|
$ | 740,610 | $ | 730,995 | $ | — | $ | 9,615 | ||||||||
|
Percent to total
|
100.0 | % | 98.7 | % | — | % | 1.3 | % | ||||||||
We used a discounted cash flow (“DCF”) model to value
our Level 3 investments. For Fiscal 2010, the assumptions
in our model included different recovery periods, ranging from
five to 17 months, depending on the type of security, and
discount factors for yield of 0.2% and illiquidity of 0.5%.
These assumptions are subjective. They are based on our current
judgment and our view of current market conditions. The use of
different assumptions would result in a different valuation. For
example, an increase in the recovery period by one year would
reduce the fair value of our investment in ARS by approximately
$0.2 million. An increase to the discount rate and
illiquidity premium of 100 basis points would reduce the
estimated fair value of our investment in auction rate
securities by approximately $0.2 million.
The fair value of the ARS Call Option described in Note 3
to the Consolidated Financial Statements was also estimated
using a discounted cash flow model. The model considered
potential changes in yields for securities with similar
characteristics to the underlying ARS and evaluated possible
future refinancing opportunities of the issuers of the ARS. The
analysis then assessed the likelihood that the options would be
exercisable as a result of the underlying ARS being redeemed or
traded in a secondary market at an amount greater than the
exercise price prior to the end of the option term. Future
changes in the fair values of the ARS Call Option will be
recorded within the Consolidated Statements of Operations.
Refer to Notes 3 and 4 to the Consolidated Financial
Statements for additional information on our investment
securities, including a description of the securities and a
discussion of the uncertainties relating to their liquidity.
Liquidity
and Capital Resources
Our uses of cash are generally for working capital, the
construction of new stores and remodeling of existing stores,
information technology upgrades, distribution center
improvements and expansion, the purchase of both short and
long-term investments, the repurchase of common stock and the
payment of dividends. Historically, these
27
Table of Contents
uses of cash have been funded with cash flow from operations and
existing cash on hand. Additionally, our uses of cash include
the development of aerie by American Eagle and 77kids by
american eagle. We expect to be able to fund our future cash
requirements through current cash holdings as well as cash
generated from operations. In the future, we expect that our
uses of cash will also include further development of aerie by
American Eagle and 77kids by american eagle.
Our growth strategy includes internally developing new brands
and the possibility of further international expansion or
acquisitions. We periodically consider and evaluate these
options to support future growth. In the event we do pursue such
options, we could require additional equity or debt financing.
There can be no assurance that we would be successful in closing
any potential transaction, or that any endeavor we undertake
would increase our profitability.
The following sets forth certain measures of our liquidity:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
|
Working Capital (in 000’s)
|
$ | 786,573 | $ | 758,075 | ||||
|
Current Ratio
|
3.03 | 2.85 | ||||||
The increase in our working capital and current ratio as of
January 29, 2011, compared to January 30, 2010, is
primarily related to the combined increase in cash and cash
equivalents and short-term investments as a result of cash
generated from operations as well as the liquidation of
long-term investments, partially offset by share repurchases,
cash dividends paid and capital expenditures. Additionally,
current liabilities are lower due to the repayment of our
outstanding notes payable balance in Fiscal 2010 and a lower
accrued compensation balance this year.
Cash
Flows from Operating Activities of Continuing
Operations
Net cash provided by operating activities totaled
$402.6 million during Fiscal 2010 compared to
$400.3 million during Fiscal 2009 and $345.1 million
during Fiscal 2008. Our major source of cash from operations was
merchandise sales. Our primary outflows of cash from operations
were for operational costs.
The increase in net cash provided by operating activities of
$2.3 million in Fiscal 2010 was driven by an increase in
income from continuing operations adjusted for non-cash items
and a reduction in inventory levels. This was partially offset
by a decrease in accrued compensation due to the payment of
incentive compensation accrued during Fiscal 2009, as well as an
increase in prepaid expenses due to the timing of payments.
Cash
Flows from Investing Activities of Continuing
Operations
Investing activities for Fiscal 2010 included
$177.5 million of proceeds from the sale of investments
classified as available for sale, partially offset by
$84.3 million used for capital expenditures and
$62.8 million for the purchase of short-term investments.
Investing activities for Fiscal 2009 included
$127.1 million for capital expenditures, partially offset
by $80.4 million from the sale of investments classified as
available-for-sale.
Investing activities for Fiscal 2008 primarily included
$393.6 million from the net sale of investments classified
as
available-for-sale,
partially offset by $243.6 million for capital expenditures.
Cash
Flows from Financing Activities of Continuing
Operations
During Fiscal 2010, cash used for financing activities resulted
primarily from $216.1 million for the repurchase of
15.5 million shares as part of our publicly announced
repurchase program, $183.2 million for the payment of
dividends, $30.0 million for the full repayment of our
demand line borrowings and $18.0 million for the repurchase
of common stock from employees for the payment of taxes in
connection with the vesting of share-based payments. During
Fiscal 2009, cash used for financing activities resulted
primarily from $83.0 million used for the payment of
dividends and the partial repayment of $45.0 million in
borrowings against our demand line of credit. During Fiscal
2008, cash used for financing activities resulted primarily from
$82.4 million used for the payment of dividends partially
offset by $75.0 million in borrowings against our demand
line of credit.
ASC 718 requires that cash flows resulting from the benefits of
tax deductions in excess of recognized compensation cost for
share-based payments be classified as financing cash flows.
Accordingly, for Fiscal 2010,
28
Table of Contents
Fiscal 2009 and 2008, the excess tax benefit from share-based
payments of $12.5 million, $2.8 million and
$0.7 million, respectively, are classified as financing
cash flows.
Capital
Expenditures
Fiscal 2010 capital expenditures were $84.3 million,
compared to $127.1 million in Fiscal 2009. Fiscal 2010
expenditures included $56.2 million related to investments
in our AE stores, including 34 new AE, aerie and 77kids stores
in the United States and Canada, 18 remodeled stores, and
fixtures and visual investments. Additionally, we continued to
support our infrastructure growth by investing in home office
projects including the construction of our corporate
headquarters in Pittsburgh, Pennsylvania ($2.9 million),
the expansion and improvement of our distribution centers
($14.0 million) and information technology
($11.2 million).
For Fiscal 2011, we will continue with our reduced spending
plan. We expect capital expenditures to be in the range of
$90.0 million to $100.0 million with approximately
half of the amount relating to store growth and renovation.
Credit
Facilities
The Company has borrowing agreements with four separate
financial institutions under which it may borrow an aggregate of
$310.0 million United States dollars (“USD”) and
$25.0 million Canadian dollars (“CAD”). Of this
amount, $200.0 million USD can be used for letters of
credit issuances, $50.0 million USD and $25.0 million
CAD can be used for demand line borrowings and the remaining
$60.0 million USD can be used for either letters of credit
or demand line borrowings at the Company’s discretion.
The letters of credit facilities of $150.0 million USD and
$50.0 million USD expire November 1, 2011 and
May 27, 2011, respectively. The $50.0 million USD and
$25.0 million CAD demand lines expire on April 20,
2011 and December 13, 2011, respectively. The remaining
$60.0 million USD facility expires on May 22, 2011.
As of January 29, 2011, we had outstanding letters of
credit of $30.0 million USD and no demand line borrowings.
The availability of any future borrowings is subject to
acceptance by the respective financial institutions. The average
borrowing rate on the demand line for outstanding borrowings
during Fiscal 2010 was 2.1%.
Stock
Repurchases
During Fiscal 2007, our Board authorized a total of
60.0 million shares of our common stock for repurchase
under our share repurchase program with expiration dates
extending into Fiscal 2010. We repurchased 18.7 million
shares during Fiscal 2007 and the authorization related to
11.3 million shares expired in Fiscal 2009. At the
beginning of Fiscal 2010, the Company had 30.0 million
shares remaining authorized for repurchase.
During Fiscal 2010, we repurchased 15.5 million shares as
part of our publicly announced repurchase programs for
approximately $216.1 million, at a weighted average price
of $13.94 per share. As of January 29, 2011, we had
14.5 million shares remaining authorized for repurchase.
These shares may be repurchased at our discretion. Our Board
extended the current remaining share repurchase authorization
through February 2, 2013. We did not repurchase any common
stock as part of our publicly announced repurchase program
during Fiscal 2009 or Fiscal 2008.
During Fiscal 2010 and Fiscal 2009, we repurchased approximately
1.0 million and 18,000 shares, respectively, from
certain employees at market prices totaling $18.0 million
and $0.2 million, respectively. These shares were
repurchased for the payment of taxes, not in excess of the
minimum statutory withholding requirements, in connection with
the vesting of share-based payments, as permitted under the 2005
Stock Award and Incentive Plan, as amended.
The aforementioned share repurchases have been recorded as
treasury stock.
Dividends
During the fourth quarter of Fiscal 2010, our Board declared and
paid a $0.50 per share special cash dividend along with a
regular quarterly cash dividend of $0.11 per share. An $0.11 per
share dividend was paid during both
29
Table of Contents
the second and third quarters of Fiscal 2010. A $0.10 per share
dividend was paid during the first quarter of Fiscal 2010 and
each quarter of Fiscal 2009. Subsequent to the fourth quarter of
Fiscal 2010, our Board declared a quarterly cash dividend of
$0.11 per share, payable on April 8, 2011, to stockholders
of record at the close of business on March 28, 2011. The
payment of future dividends is at the discretion of our Board
and is based on future earnings, cash flow, financial condition,
capital requirements, changes in U.S. taxation and other
relevant factors. It is anticipated that any future dividends
paid will be declared on a quarterly basis.
Obligations
and Commitments
Disclosure
about Contractual Obligations
The following table summarizes our significant contractual
obligations as of January 29, 2011:
| Payments Due by Period | ||||||||||||||||||||
|
Less than
|
1-3
|
3-5
|
More than
|
|||||||||||||||||
| Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Operating Leases(1)
|
$ | 1,773,240 | $ | 243,798 | $ | 453,360 | $ | 388,995 | $ | 687,087 | ||||||||||
|
Unrecognized tax benefits(2)
|
38,671 | — | — | — | 38,671 | |||||||||||||||
|
Purchase Obligations(3)
|
457,398 | 436,103 | 12,340 | 3,547 | 5,408 | |||||||||||||||
|
Total Contractual Obligations
|
$ | 2,269,309 | $ | 679,901 | $ | 465,700 | $ | 392,542 | $ | 731,166 | ||||||||||
| (1) | Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases (Refer to Note 9 to the Consolidated Financial Statements). Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated. | |
| (2) | The amount of unrecognized tax benefits as of January 29, 2011 was $38.7 million, including approximately $7.6 million of accrued interest and penalties. Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. The Company does not anticipate that any significant unrecognized tax benefits will be realized within one year. Accordingly, the balance of the unrecognized tax benefits are included in the “More than 5 Years” column as we are not able to reasonably estimate the timing of the potential future payments. | |
| (3) | Purchase obligations primarily include binding commitments to purchase merchandise inventory, as well as other legally binding commitments, made in the normal course of business that are enforceable and specify all significant terms. Included in the above purchase obligations are inventory commitments guaranteed by outstanding letters of credit, as shown in the table below. |
Disclosure
about Commercial Commitments
The following table summarizes our significant commercial
commitments as of January 29, 2011:
| Amount of Commitment Expiration Per Period | ||||||||||||||||||||
|
Total
|
More
|
|||||||||||||||||||
|
Amount
|
Less than
|
1-3
|
3-5
|
than
|
||||||||||||||||
| Committed | 1 Year | Years | Years | 5 Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Letters of Credit(1)
|
$ | 29,981 | $ | 29,981 | — | — | — | |||||||||||||
|
Total Commercial Commitments
|
$ | 29,981 | $ | 29,981 | — | — | — | |||||||||||||
| (1) | Letters of credit represent commitments, guaranteed by a bank, to pay vendors for merchandise, as well as other commitments, upon presentation of documents demonstrating that the merchandise has shipped. |
Off-Balance
Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
30
Table of Contents
Recent
Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 of
the Consolidated Financial Statements.
Certain
Relationships and Related Party Transactions
Refer to Part III, Item 13 of this
Form 10-K
for information regarding related party transactions.
Impact of
Inflation/Deflation
We do not believe that inflation has had a significant effect on
our net sales or our profitability. However, substantial
increases in costs, including the price of raw materials, labor,
energy and other inputs to the manufacture of our merchandise,
could have a significant impact on our business and the industry
in the future. Additionally, while deflation could positively
impact our merchandise costs, it could have an adverse effect on
our average unit retail price, resulting in lower sales and
profitability.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We have market risk exposure related to interest rates and
foreign currency exchange rates. Market risk is measured as the
potential negative impact on earnings, cash flows or fair values
resulting from a hypothetical change in interest rates or
foreign currency exchange rates over the next year.
Interest
Rate Risk
Our earnings are affected by changes in market interest rates as
a result of our short and long-term investments. If our Fiscal
2010 average yield rate decreases by 10% in Fiscal 2011, our
income before taxes will decrease by approximately
$0.2 million. Comparatively, if our Fiscal 2009 average
yield rate had decreased by 10% in Fiscal 2010, our income
before taxes would have decreased by approximately
$0.2 million. These amounts are determined by considering
the impact of the hypothetical yield rates on our cash,
short-term and long-term investment balances and assumes no
change in our investment structure.
Foreign
Exchange Rate Risk
We are exposed to the impact of foreign exchange rate risk
primarily through our Canadian operations where the functional
currency is the Canadian dollar. We do not utilize hedging
instruments to mitigate foreign currency exchange risks. We
believe our foreign currency translation risk is minimal as a
hypothetical 10% change in the Canadian foreign exchange rate
would not materially affect our results of operations or cash
flows.
31
Table of Contents
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
Index to
Consolidated Financial Statements
| 33 | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 |
32
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
American Eagle Outfitters, Inc.
We have audited the accompanying consolidated balance sheets of
American Eagle Outfitters, Inc. (the Company) as of
January 29, 2011 and January 30, 2010, and the related
consolidated statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the three
years in the period ended January 29, 2011. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of American Eagle Outfitters, Inc. at
January 29, 2011 and January 30, 2010, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended January 29,
2011, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
American Eagle Outfitters, Inc.’s internal control over
financial reporting as of January 29, 2011, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 11, 2011
expressed an unqualified opinion.
/s/ Ernst &
Young LLP
Pittsburgh, Pennsylvania
March 11, 2011
33
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands, except per share amounts) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 667,593 | $ | 693,960 | ||||
|
Short-term investments
|
67,102 | 4,675 | ||||||
|
Merchandise inventory
|
301,208 | 326,454 | ||||||
|
Accounts receivable
|
36,721 | 34,746 | ||||||
|
Prepaid expenses and other
|
53,727 | 47,039 | ||||||
|
Deferred income taxes
|
48,059 | 60,156 | ||||||
|
Total current assets
|
1,174,410 | 1,167,030 | ||||||
|
Property and equipment, at cost, net of accumulated depreciation
and amortization
|
643,120 | 713,142 | ||||||
|
Goodwill
|
11,472 | 11,210 | ||||||
|
Long-term investments
|
5,915 | 197,773 | ||||||
|
Non-current deferred income taxes
|
19,616 | 27,305 | ||||||
|
Other assets, net
|
25,465 | 21,688 | ||||||
|
Total assets
|
$ | 1,879,998 | $ | 2,138,148 | ||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 167,723 | $ | 158,526 | ||||
|
Note payable
|
— | 30,000 | ||||||
|
Accrued compensation and payroll taxes
|
34,954 | 55,144 | ||||||
|
Accrued rent
|
70,390 | 68,866 | ||||||
|
Accrued income and other taxes
|
32,468 | 20,585 | ||||||
|
Unredeemed gift cards and gift certificates
|
41,001 | 39,389 | ||||||
|
Current portion of deferred lease credits
|
16,203 | 17,388 | ||||||
|
Other liabilities and accrued expenses
|
25,098 | 19,057 | ||||||
|
Total current liabilities
|
387,837 | 408,955 | ||||||
|
Non-current liabilities:
|
||||||||
|
Deferred lease credits
|
78,606 | 89,591 | ||||||
|
Non-current accrued income taxes
|
38,671 | 38,618 | ||||||
|
Other non-current liabilities
|
23,813 | 22,467 | ||||||
|
Total non-current liabilities
|
141,090 | 150,676 | ||||||
|
Commitments and contingencies
|
— | — | ||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $0.01 par value; 5,000 shares
authorized; none issued and outstanding
|
— | — | ||||||
|
Common stock, $0.01 par value; 600,000 shares
authorized; 249,566 and 249,561 shares issued; 194,366 and
206,832 shares outstanding, respectively
|
2,496 | 2,486 | ||||||
|
Contributed capital
|
546,597 | 554,399 | ||||||
|
Accumulated other comprehensive income
|
28,072 | 16,838 | ||||||
|
Retained earnings
|
1,711,929 | 1,764,049 | ||||||
|
Treasury stock, 55,200 and 41,737 shares, respectively, at
cost
|
(938,023 | ) | (759,255 | ) | ||||
|
Total stockholders’ equity
|
1,351,071 | 1,578,517 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,879,998 | $ | 2,138,148 | ||||
Refer to Notes to Consolidated Financial Statements
34
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Net sales
|
$ | 2,967,559 | $ | 2,940,269 | $ | 2,948,679 | ||||||
|
Cost of sales, including certain buying, occupancy and
warehousing expenses
|
1,796,600 | 1,766,839 | 1,751,493 | |||||||||
|
Gross profit
|
1,170,959 | 1,173,430 | 1,197,186 | |||||||||
|
Selling, general and administrative expenses
|
713,197 | 725,278 | 690,787 | |||||||||
|
Depreciation and amortization expense
|
140,501 | 137,760 | 123,602 | |||||||||
|
Operating income
|
317,261 | 310,392 | 382,797 | |||||||||
|
Realized loss on sale of investment securities
|
(24,426 | ) | (2,749 | ) | (1,117 | ) | ||||||
|
Other income (expense), net
|
3,497 | (2,328 | ) | 18,908 | ||||||||
|
Total
other-than-temporary
impairment losses
|
(5,089 | ) | (4,413 | ) | (22,889 | ) | ||||||
|
Portion of loss recognized in other comprehensive income, before
tax
|
3,841 | 3,473 | — | |||||||||
|
Net impairment loss recognized in earnings
|
(1,248 | ) | (940 | ) | (22,889 | ) | ||||||
|
Income before income taxes
|
295,084 | 304,375 | 377,699 | |||||||||
|
Provision for income taxes
|
113,150 | 90,977 | 147,715 | |||||||||
|
Income from continuing operations
|
181,934 | 213,398 | 229,984 | |||||||||
|
Loss from discontinued operations, net of tax
|
(41,287 | ) | (44,376 | ) | (50,923 | ) | ||||||
|
Net income
|
$ | 140,647 | $ | 169,022 | $ | 179,061 | ||||||
|
Basic income per common share:
|
||||||||||||
|
Income from continuing operations
|
$ | 0.91 | $ | 1.04 | $ | 1.12 | ||||||
|
Loss from discontinued operations
|
$ | (0.21 | ) | $ | (0.22 | ) | $ | (0.25 | ) | |||
|
Basic income per common share
|
$ | 0.70 | $ | 0.82 | $ | 0.87 | ||||||
|
Diluted income per common share:
|
||||||||||||
|
Income from continuing operations
|
$ | 0.90 | $ | 1.02 | $ | 1.11 | ||||||
|
Loss from discontinued operations
|
(0.20 | ) | (0.21 | ) | (0.25 | ) | ||||||
|
Diluted income per common share
|
$ | 0.70 | $ | 0.81 | $ | 0.86 | ||||||
|
Weighted average common shares outstanding — basic
|
199,979 | 206,171 | 205,169 | |||||||||
|
Weighted average common shares outstanding — diluted
|
201,818 | 209,512 | 207,582 | |||||||||
Refer to Notes to Consolidated Financial Statements
35
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Net income
|
$ | 140,647 | $ | 169,022 | $ | 179,061 | ||||||
|
Other comprehensive income (loss):
|
||||||||||||
|
Temporary (impairment) recovery related to investment
securities, net of tax
|
(1,140 | ) | 14,506 | (23,173 | ) | |||||||
|
Reclassification adjustment for realized losses in net income
related to investment securities, net of tax
|
7,541 | 940 | 948 | |||||||||
|
Foreign currency translation gain (loss)
|
4,833 | 15,781 | (27,649 | ) | ||||||||
|
Other comprehensive income (loss)
|
11,234 | 31,227 | (49,874 | ) | ||||||||
|
Comprehensive income
|
$ | 151,881 | $ | 200,249 | $ | 129,187 | ||||||
Refer to Notes to Consolidated Financial Statements
36
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Shares
|
Comprehensive
|
|||||||||||||||||||||||||||||||
|
Outstanding
|
Common
|
Contributed
|
Retained
|
Treasury
|
Income
|
Stockholders’
|
||||||||||||||||||||||||||
| (1) | Stock | Capital | Earnings | Stock(2) | (Loss) | Equity | ||||||||||||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
|
Balance at February 2, 2008
|
204,480 | $ | 2,481 | $ | 493,395 | $ | 1,601,784 | $ | (792,681 | ) | $ | 35,485 | $ | 1,340,464 | ||||||||||||||||||
|
Stock awards
|
453 | 4 | 20,179 | 420 | — | — | 20,603 | |||||||||||||||||||||||||
|
Repurchase of common stock from employees
|
(164 | ) | — | — | — | (3,432 | ) | — | (3,432 | ) | ||||||||||||||||||||||
|
Reissuance of treasury stock
|
512 | — | — | (4,710 | ) | 9,313 | — | 4,603 | ||||||||||||||||||||||||
|
Net income
|
— | — | — | 179,061 | — | — | 179,061 | |||||||||||||||||||||||||
|
Other comprehensive loss, net of tax
|
— | — | — | — | — | (49,874 | ) | (49,874 | ) | |||||||||||||||||||||||
|
Cash dividends ($0.40 per share)
|
— | — | — | (82,394 | ) | — | — | (82,394 | ) | |||||||||||||||||||||||
|
Balance at January 31, 2009
|
205,281 | $ | 2,485 | $ | 513,574 | $ | 1,694,161 | $ | (786,800 | ) | $ | (14,389 | ) | $ | 1,409,031 | |||||||||||||||||
|
Stock awards
|
41 | 1 | 39,903 | — | — | — | 39,904 | |||||||||||||||||||||||||
|
Repurchase of common stock from employees
|
(18 | ) | — | — | — | (247 | ) | — | (247 | ) | ||||||||||||||||||||||
|
Reissuance of treasury stock
|
1,528 | — | — | (15,228 | ) | 27,792 | — | 12,564 | ||||||||||||||||||||||||
|
Net income
|
— | — | — | 169,022 | — | — | 169,022 | |||||||||||||||||||||||||
|
Other comprehensive income, net of tax
|
— | — | — | — | — | 31,227 | 31,227 | |||||||||||||||||||||||||
|
Cash dividends and dividend equivalents ($0.40 per share)
|
— | — | 922 | (83,906 | ) | — | — | (82,984 | ) | |||||||||||||||||||||||
|
Balance at January 30, 2010
|
206,832 | $ | 2,486 | $ | 554,399 | $ | 1,764,049 | $ | (759,255 | ) | $ | 16,838 | $ | 1,578,517 | ||||||||||||||||||
|
Stock awards
|
997 | 10 | 36,229 | — | — | — | 36,239 | |||||||||||||||||||||||||
|
Repurchase of common stock as part of publicly announced programs
|
(15,500 | ) | — | — | — | (216,070 | ) | — | (216,070 | ) | ||||||||||||||||||||||
|
Repurchase of common stock from employees
|
(1,035 | ) | — | — | — | (18,041 | ) | — | (18,041 | ) | ||||||||||||||||||||||
|
Reissuance of treasury stock
|
3,072 | — | (45,841 | ) | (7,791 | ) | 55,343 | — | 1,711 | |||||||||||||||||||||||
|
Net income
|
— | — | — | 140,647 | — | — | 140,647 | |||||||||||||||||||||||||
|
Other comprehensive income, net of tax
|
— | — | — | — | — | 11,234 | 11,234 | |||||||||||||||||||||||||
|
Cash dividends and dividend equivalents ($0.93 per share)
|
— | — | 1,810 | (184,976 | ) | — | — | (183,166 | ) | |||||||||||||||||||||||
|
Balance at January 29, 2011
|
194,366 | $ | 2,496 | $ | 546,597 | $ | 1,711,929 | $ | (938,023 | ) | $ | 28,072 | $ | 1,351,071 | ||||||||||||||||||
| (1) | 600,000 authorized, 249,566 issued and 194,366 outstanding, $0.01 par value common stock at January 29, 2011; 600,000 authorized, 249,561 issued and 206,832 outstanding (excluding 992 shares of non-vested restricted stock), $0.01 par value common stock at January 30, 2010; 600,000 authorized, 249,328 issued and 205,281 outstanding (excluding 799 shares of non-vested restricted stock), $0.01 par value common stock at January 31, 2009; The Company has 5,000 authorized, with none issued or outstanding, $0.01 par value preferred stock at January 29, 2011, January 30, 2010 and January 31, 2009. | |
| (2) | 55,200 shares, 41,737 shares, and 43,248 shares at January 29, 2011, January 30, 2010, and January 31, 2009, respectively. During Fiscal 2010, Fiscal 2009, and Fiscal 2008, 3,072 shares, 1,528 shares and 512 shares, respectively, were reissued from treasury stock for the issuance of share-based payments. |
Refer to Notes to Consolidated Financial Statements
37
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Operating activities:
|
||||||||||||
|
Net income
|
$ | 140,647 | $ | 169,022 | $ | 179,061 | ||||||
|
Loss from discontinued operations
|
41,287 | 44,376 | 50,923 | |||||||||
|
Income from continuing operations
|
$ | 181,934 | $ | 213,398 | $ | 229,984 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
||||||||||||
|
Depreciation and amortization
|
145,548 | 139,832 | 126,362 | |||||||||
|
Share-based compensation
|
25,457 | 34,615 | 18,731 | |||||||||
|
Provision for deferred income taxes
|
11,885 | (36,027 | ) | 24,473 | ||||||||
|
Tax benefit from share-based payments
|
15,648 | 7,995 | 1,121 | |||||||||
|
Excess tax benefit from share-based payments
|
(12,499 | ) | (2,812 | ) | (693 | ) | ||||||
|
Foreign currency transaction loss (gain)
|
117 | 6,477 | (1,141 | ) | ||||||||
|
Net impairment loss recognized in earnings
|
1,248 | 940 | 22,889 | |||||||||
|
Realized loss on sale of investment securities
|
24,426 | 2,749 | 1,117 | |||||||||
|
Changes in assets and liabilities:
|
||||||||||||
|
Merchandise inventory
|
18,713 | (33,699 | ) | (5,634 | ) | |||||||
|
Accounts receivable
|
(3,790 | ) | 6,656 | (10,019 | ) | |||||||
|
Prepaid expenses and other
|
(9,045 | ) | 12,916 | (23,184 | ) | |||||||
|
Other assets, net
|
(1,380 | ) | 1,146 | 390 | ||||||||
|
Accounts payable
|
5,232 | 8,358 | (3,467 | ) | ||||||||
|
Unredeemed gift cards and gift certificates
|
1,713 | (3,591 | ) | (11,495 | ) | |||||||
|
Deferred lease credits
|
(7,451 | ) | 4,667 | 16,622 | ||||||||
|
Accrued compensation and payroll taxes
|
(19,618 | ) | 25,841 | (18,223 | ) | |||||||
|
Accrued income and other taxes
|
11,999 | 12,858 | (20,791 | ) | ||||||||
|
Accrued liabilities
|
12,457 | (1,993 | ) | (1,930 | ) | |||||||
|
Total adjustments
|
220,660 | 186,928 | 115,128 | |||||||||
|
Net cash provided by operating activities from continuing
operations
|
402,594 | 400,326 | 345,112 | |||||||||
|
Investing activities:
|
||||||||||||
|
Capital expenditures
|
(84,259 | ) | (127,080 | ) | (243,564 | ) | ||||||
|
Purchase of
available-for-sale
securities
|
(62,797 | ) | — | (48,655 | ) | |||||||
|
Sale of
available-for-sale
securities
|
177,472 | 80,353 | 393,559 | |||||||||
|
Other investing activities
|
(2,801 | ) | (2,003 | ) | (2,297 | ) | ||||||
|
Net cash provided by (used for) investing activities from
continuing operations
|
27,615 | (48,730 | ) | 99,043 | ||||||||
|
Financing activities:
|
||||||||||||
|
Payments on capital leases
|
(2,590 | ) | (2,015 | ) | (2,177 | ) | ||||||
|
Proceeds from issuance of note payable
|
— | — | 75,000 | |||||||||
|
Repayment of note payable
|
(30,000 | ) | (45,000 | ) | — | |||||||
|
Repurchase of common stock as part of publicly announced programs
|
(216,070 | ) | — | — | ||||||||
|
Repurchase of common stock from employees
|
(18,041 | ) | (247 | ) | (3,432 | ) | ||||||
|
Net proceeds from stock options exercised
|
7,272 | 9,044 | 3,799 | |||||||||
|
Excess tax benefit from share-based payments
|
12,499 | 2,812 | 693 | |||||||||
|
Cash used to net settle equity awards
|
(6,434 | ) | (1,414 | ) | — | |||||||
|
Cash dividends paid
|
(183,166 | ) | (82,985 | ) | (82,394 | ) | ||||||
|
Net cash used for financing activities from continuing
operations
|
(436,530 | ) | (119,805 | ) | (8,511 | ) | ||||||
|
Effect of exchange rates on cash
|
1,394 | 3,030 | (14,790 | ) | ||||||||
|
Cash flows of discontinued operations
|
||||||||||||
|
Net cash used for operating activities
|
(21,434 | ) | (13,864 | ) | (41,802 | ) | ||||||
|
Net cash used for investing activities
|
(6 | ) | (339 | ) | (21,771 | ) | ||||||
|
Net cash used for financing activities
|
— | — | — | |||||||||
|
Effect of exchange rates on cash
|
— | — | — | |||||||||
|
Net cash used for discontinued operations
|
(21,440 | ) | (14,203 | ) | (63,573 | ) | ||||||
|
Net (decrease) increase in cash and cash equivalents
|
(26,367 | ) | 220,618 | 357,281 | ||||||||
|
Cash and cash equivalents — beginning of period
|
693,960 | 473,342 | 116,061 | |||||||||
|
Cash and cash equivalents — end of period
|
$ | 667,593 | $ | 693,960 | $ | 473,342 | ||||||
Refer to Notes to Consolidated Financial Statements
38
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
FOR THE YEAR ENDED JANUARY 29, 2011
| 1. | Business Operations |
American Eagle Outfitters, Inc. (the “Company”), a
Delaware corporation, operates under the American
Eagle
®
(“AE”),
aerie
®
by American
Eagle
®
,
and 77kids by american
eagle
®
brands. The Company operated the
MARTIN+OSA
®
brand (“M+O”) until its closure during Fiscal 2010.
Founded in 1977, American Eagle Outfitters is a leading apparel
and accessories retailer that operates more than 1,000 retail
stores in the U.S. and Canada, and online at
ae.com
®
.
Through its family of brands, the Company offers high quality,
on-trend clothing, accessories and personal care products at
affordable prices. The Company’s online business, AEO
Direct, ships to 76 countries worldwide.
Merchandise
Mix
The following table sets forth the approximate consolidated
percentage of net sales attributable to each merchandise group
for each of the periods indicated:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Men’s apparel and accessories
|
40 | % | 40 | % | 42 | % | ||||||
|
Women’s apparel and accessories (excluding aerie)
|
51 | % | 51 | % | 50 | % | ||||||
|
aerie
|
9 | % | 9 | % | 8 | % | ||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
| 2. | Summary of Significant Accounting Policies |
Principles
of Consolidation
The Consolidated Financial Statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
At January 29, 2011, the Company operated in one reportable
segment.
Fiscal
Year
Our financial year is a 52/53 week year that ends on the
Saturday nearest to January 31. As used herein,
“Fiscal 2011” refers to the 52 week period ending
January 28, 2012. “Fiscal 2010,” “Fiscal
2009,” “Fiscal 2008” and “Fiscal 2007”
refer to the 52 week periods ended January 29, 2011,
January 30, 2010, January 31, 2009 and
February 2, 2008, respectively. “Fiscal 2006”
refers to the 53 week period ended February 3, 2007.
Discontinued
Operations
On March 5, 2010, the Company’s Board of Directors
(the “Board”) approved management’s
recommendation to proceed with the closure of the M+O brand. The
Company notified employees and issued a press release announcing
this decision on March 9, 2010. The decision to take this
action resulted from an extensive evaluation of the brand and
review of strategic alternatives, which revealed that it was not
achieving performance levels that warranted further investment.
The Company completed the closure of the M+O stores and
e-commerce
operation during the second quarter of Fiscal 2010 and these
Consolidated Financial Statements reflect the results of M+O as
a discontinued operation for all periods presented.
39
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires the Company’s
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. On an ongoing basis, our management reviews its
estimates based on currently available information. Changes in
facts and circumstances may result in revised estimates.
Recent
Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board
(“FASB”) approved the consensus on Emerging Issues
Task Force (“EITF”)
08-1,
Revenue Arrangements with Multiple Deliverables,
primarily codified under Accounting Standards Codification
(“ASC”) 605,
Revenue Recognition,
as Accounting
Standards Update (“ASU”)
2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements
(“ASU
2009-13”).
ASU
2009-13
requires entities to allocate revenue in an arrangement using
estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the
residual method of revenue allocation and require revenue to be
allocated among the various deliverables in a multi-element
transaction using the relative selling price method. This
guidance is effective for revenue arrangements entered into or
materially modified in fiscal years beginning after
June 15, 2010. The Company will adopt ASU
2009-13
in
Fiscal 2011 and does not expect an impact to its Consolidated
Financial Statements.
In January 2010, the FASB issued ASU
2010-06,
Fair Value Measurements and Disclosures Topic 820: Improving
Disclosures about Fair Value Measurements
(“ASU
2010-06”).
ASU
2010-06
requires new disclosures regarding transfers in and out of the
Level 1 and 2 and activity within Level 3 fair value
measurements and clarifies existing disclosures of inputs and
valuation techniques for Level 2 and 3 fair value
measurements. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting
periods beginning after December 15, 2009, except for the
disclosure of activity within Level 3 fair value
measurements, which is effective for fiscal years beginning
after December 15, 2010, and for interim reporting periods
within those years. The Company adopted the new disclosures
effective January 31, 2010, except for the disclosure of
activity within Level 3 fair value measurements. The
Level 3 disclosures are effective for the Company at the
beginning of Fiscal 2011. The adoption of ASU
2010-06
did
not have a material impact on the disclosures within the
Company’s Consolidated Financial Statements.
In December 2010, the FASB issued ASU
2010-28,
Intangibles — Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting
Units with Zero or Negative Carrying Amounts
(“ASU
2010-28”).
ASU
2010-28
provides amendments to Topic 350 to modify Step 1 of the
goodwill impairment test for reporting units with zero or
negative carrying amounts to clarify that, for those reporting
units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating
that an impairment may exist. For public entities, the
amendments in this ASU are effective for fiscal years, and
interim periods within those years, beginning after
December 15, 2010. Early adoption is not permitted. The
adoption of ASU
2010-28
will
not have an impact on the Company’s Fiscal 2011
Consolidated Financial Statements.
Foreign
Currency Translation
The Canadian dollar is the functional currency for the Canadian
business. In accordance with ASC 830,
Foreign Currency
Matters
, assets and liabilities denominated in foreign
currencies were translated into U.S. dollars (the reporting
currency) at the exchange rate prevailing at the balance sheet
date. Revenues and expenses denominated in foreign currencies
were translated into U.S. dollars at the monthly average
exchange rate for the period. Gains or losses resulting from
foreign currency transactions are included in the results of
operations,
40
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
whereas, related translation adjustments are reported as an
element of other comprehensive income in accordance with ASC
220,
Comprehensive Income
(refer to Note 10 to the
Consolidated Financial Statements).
Cash
and Cash Equivalents, Short-term Investments and Long-term
Investments
Cash includes cash equivalents. The Company considers
all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
As of January 29, 2011, short-term investments included
short-term deposits purchased with a maturity of greater than
three months but less than one year and auction rate securities
(“ARS”) classified as available for sale that the
Company expects to be redeemed at par within 12 months,
based on notice from the issuer.
As of January 29, 2011, long-term investments included
investments with remaining maturities of greater than
12 months and consisted of ARS classified as
available-for-sale.
It also includes the Company’s ARS Call Option related to
investment sales during Fiscal 2010. The remaining contractual
maturities of our long-term ARS investments are approximately
17 months and the ARS Call Option expires on
October 29, 2013.
Unrealized gains and losses on the Company’s
available-for-sale
securities are excluded from earnings and are reported as a
separate component of stockholders’ equity, within
accumulated other comprehensive income, until realized. The
components of
other-than-temporary
impairment (“OTTI”) losses related to credit losses,
as defined by ASC 320
Investments — Debt and
Equity Securities
(“ASC 320”), are considered by
the Company to be a net impairment loss recognized in earnings.
When
available-for-sale
securities are sold, the cost of the securities is specifically
identified and is used to determine any realized gain or loss.
Realized gains or losses are recognized separately on the
Company’s Consolidated Statements of Operations as a
realized gain or loss on sale of investment securities.
Refer to Note 3 to the Consolidated Financial Statements
for information regarding cash and cash equivalents, short-term
investments and long-term investments.
Other-than-Temporary
Impairment
The Company evaluates its investments for impairment in
accordance with ASC 320,
Investments — Debt
and Equity Securities
(“ASC 320”). ASC 320
provides guidance for determining when an investment is
considered impaired, whether impairment is
other-than-temporary,
and measurement of an impairment loss. An investment is
considered impaired if the fair value of the investment is less
than its cost. If, after consideration of all available evidence
to evaluate the realizable value of its investment, impairment
is determined to be
other-than-temporary,
then an impairment loss is recognized in the Consolidated
Statement of Operations equal to the difference between the
investment’s cost and its fair value. As of May 3,
2009, the Company adopted
ASC 320-10-65,
Transition Related to FSP
FAS 115-2
and
FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary-Impairments
(“ASC
320-10-65”),
which modifies the requirements for recognizing OTTI and changes
the impairment model for debt securities. In addition,
ASC 320-10-65
requires additional disclosures relating to debt and equity
securities both in the interim and annual periods as well as
requires the Company to present total OTTI in the Consolidated
Statements of Operations, with an offsetting reduction for any
non-credit loss impairment amount recognized in other
comprehensive income (“OCI”). During Fiscal 2010, the
Company recorded a net impairment loss recognized in earnings
related to credit losses on its investment securities of
$1.2 million. During Fiscal 2009, the Company recorded a
net impairment loss recognized in earnings related to credit
losses on its investment securities of $0.9 million. During
Fiscal 2008, the Company recorded a net impairment loss of
$22.9 million in earnings related to certain investment
securities.
Refer to Notes 3 and 4 to the Consolidated Financial
Statements for additional information regarding net impairment
losses recognized in earnings.
41
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Merchandise
Inventory
Merchandise inventory is valued at the lower of average cost or
market, utilizing the retail method. Average cost includes
merchandise design and sourcing costs and related expenses. The
Company records merchandise receipts at the time merchandise is
delivered to the foreign shipping port by the manufacturer (FOB
port). This is the point at which title and risk of loss
transfer to the Company.
The Company reviews its inventory levels to identify slow-moving
merchandise and generally uses markdowns to clear merchandise.
Additionally, the Company estimates a markdown reserve for
future planned permanent markdowns related to current inventory.
Markdowns may occur when inventory exceeds customer demand for
reasons of style, seasonal adaptation, changes in customer
preference, lack of consumer acceptance of fashion items,
competition, or if it is determined that the inventory in stock
will not sell at its currently ticketed price. Such markdowns
may have a material adverse impact on earnings, depending on the
extent and amount of inventory affected. The Company also
estimates a shrinkage reserve for the period between the last
physical count and the balance sheet date. The estimate for the
shrinkage reserve, based on historical results, can be affected
by changes in merchandise mix and changes in actual shrinkage
trends.
Property
and Equipment
Property and equipment is recorded on the basis of cost with
depreciation computed utilizing the straight-line method over
the assets’ estimated useful lives. The useful lives of our
major classes of assets are as follows:
|
Buildings
|
25 years | |
|
Leasehold improvements
|
Lesser of 10 years or the term of the lease | |
|
Fixtures and equipment
|
5 years |
In accordance with ASC 360,
Property, Plant, and
Equipment
, the Company’s management evaluates the value
of leasehold improvements and store fixtures associated with
retail stores, which have been open for a period of time
sufficient to reach maturity. The Company evaluates long-lived
assets for impairment at the individual store level, which is
the lowest level at which individual cash flows can be
identified. Impairment losses are recorded on long-lived assets
used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of the assets. When events such as these occur,
the impaired assets are adjusted to their estimated fair value
and an impairment loss is recorded as a component of operating
income within selling, general and administrative expense.
During Fiscal 2010, the Company recorded asset impairment
charges of $18.0 million related to the impairment of M+O
stores. Based on the Company’s decision to close all M+O
stores in Fiscal 2010, the Company determined that stores not
previously impaired would not be able to generate sufficient
cash flow over the life of the related leases to recover the
Company’s initial investment in them. During Fiscal 2009,
the Company recorded asset impairment charges of
$18.0 million related primarily to the impairment of 10 M+O
stores. During Fiscal 2008, the Company recorded asset
impairment charges of $6.7 million related primarily to the
impairment of five M+O stores.
Refer to Note 14 to the Consolidated Financial Statements
for additional information regarding the discontinued operations
for M+O.
When the Company closes, remodels or relocates a store prior to
the end of its lease term, the remaining net book value of the
assets related to the store is recorded as a write-off of
assets. During Fiscal 2010, Fiscal 2009 and Fiscal 2008, the
Company recorded $2.7 million, $2.3 million and
$4.9 million related to asset write-offs within
depreciation and amortization expense.
42
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill
As of January 29, 2011, the Company had approximately
$11.5 million of goodwill compared to $11.2 million as
of January 30, 2010. The Company’s goodwill is
primarily related to the acquisition of its importing operations
on January 31, 2000, as well as the acquisition of its
Canadian business on November 29, 2000. The increase in
goodwill is due to the fluctuation in the foreign exchange spot
rate at which the Canadian goodwill is translated. In accordance
with ASC 350,
Intangibles- Goodwill and Other
, the
Company evaluates goodwill for possible impairment on at least
an annual basis and last performed an annual impairment test as
of January 29, 2011. Resulting from the Company’s
annual goodwill impairment test performed as of January 29,
2011, the Company concluded that its goodwill was not impaired.
Other
Assets, Net
Other assets, net consist primarily of assets related to our
deferred compensation plans and trademark costs, net of
accumulated amortization. Trademark costs are amortized over
five to 15 years.
Deferred
Lease Credits
Deferred lease credits represent the unamortized portion of
construction allowances received from landlords related to the
Company’s retail stores. Construction allowances are
generally comprised of cash amounts received by the Company from
its landlords as part of the negotiated lease terms. The Company
records a receivable and a deferred lease credit liability at
the lease commencement date (date of initial possession of the
store). The deferred lease credit is amortized on a
straight-line basis as a reduction of rent expense over the term
of the original lease (including the pre-opening build-out
period) and any subsequent renewal terms. The receivable is
reduced as amounts are received from the landlord.
Self-Insurance
Liability
The Company is self-insured for certain losses related to
employee medical benefits and worker’s compensation. Costs
for self-insurance claims filed and claims incurred but not
reported are accrued based on known claims and historical
experience. Management believes that it has adequately reserved
for its self-insurance liability, which is capped through the
use of stop loss contracts with insurance companies. However,
any significant variation of future claims from historical
trends could cause actual results to differ from the accrued
liability.
Co-branded
Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the “AEO Visa
Card”) and a private label credit card (the “AEO
Credit Card”) under the American Eagle, aerie, and 77kids
brands. These credit cards are issued by a third-party bank (the
“Bank”), and the Company has no liability to the Bank
for bad debt expense, provided that purchases are made in
accordance with the Bank’s procedures. Once a customer is
approved to receive the AEO Visa Card or the AEO Credit Card and
the card is activated, the customer is eligible to participate
in our credit card rewards program. Under the rewards program
that expired on December 31, 2009, points were earned on
purchases made with the AEO Visa Card at AE and aerie, and at
other retailers where the card is accepted. Points earned under
this credit card reward program resulted in the issuance of an
AE gift card when a certain point threshold was reached. The AE
gift card does not expire. On January 1, 2010, the Company
modified the benefits on the AEO Visa and AEO Credit Card
programs to make both credit cards a part of the rewards
program. Customers who make purchases at AE, aerie and 77kids
earn discounts in the form of savings certificates when certain
purchase levels are reached. Also, AEO Visa Card customers who
make purchases at other retailers where the card is accepted
earn additional discounts. Savings certificates are valid for
90 days from issuance.
Points earned under the credit card rewards program on purchases
at AE, aerie and 77kids are accounted for by analogy to
ASC 605-25,
Revenue Recognition, Multiple Element Arrangements
(“ASC
605-25”).
The Company believes that points earned under its point and
loyalty programs represent deliverables in a multiple element
43
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
arrangement rather than a rebate or refund of cash. Accordingly,
the portion of the sales revenue attributed to the award points
is deferred and recognized when the award is redeemed or when
the points expire. Additionally, credit card reward points
earned on non-AE, aerie or 77kids purchases are accounted for in
accordance with
ASC 605-25.
As the points are earned, a current liability is recorded for
the estimated cost of the award, and the impact of adjustments
is recorded in cost of sales.
Through December 31, 2009, the Company offered its
customers the AE All-Access
Pass
®
,
a customer loyalty program. On January 1, 2010, the Company
replaced the AE All-Access
Pass
®
with the
AEREWARD$
sm
loyalty program (the “Program”). Under either loyalty
program, customers accumulate points based on purchase activity
and earn rewards by reaching certain point thresholds during
three-month earning periods. Rewards earned during these periods
are valid through the stated expiration date, which is
approximately one month from the mailing date. These rewards can
be redeemed for a discount on a purchase of merchandise. Rewards
not redeemed during the one-month redemption period are
forfeited. The Company determined that rewards earned using the
AE All-Access
Pass
®
and the Program should be accounted for in accordance with
ASC 605-25.
Accordingly, the portion of the sales revenue attributed to the
award credits is deferred and recognized when the awards are
redeemed or expire.
Stock
Repurchases
During Fiscal 2007, the Company’s Board authorized a total
of 60.0 million shares of our common stock for repurchase
under its share repurchase program with expiration dates
extending into Fiscal 2010. The Company repurchased
18.7 million shares during Fiscal 2007 and the
authorization related to 11.3 million shares expired in
Fiscal 2009. At the beginning of Fiscal 2010, the Company had
30.0 million shares remaining authorized for repurchase.
During Fiscal 2010, the Company repurchased 15.5 million
shares as part of its publicly announced repurchase programs for
approximately $216.1 million, at a weighted average price
of $13.94 per share. As of January 29, 2011, the Company
had 14.5 million shares remaining authorized for
repurchase. These shares may be repurchased at the
Company’s discretion. The Company’s Board extended the
current remaining share repurchase authorization through
February 2, 2013. The Company did not repurchase any common
stock as part of its publicly announced repurchase program
during Fiscal 2009 or Fiscal 2008.
During Fiscal 2010 and Fiscal 2009, the Company repurchased
approximately 1.0 million and 18,000 shares,
respectively, from certain employees at market prices totaling
$18.0 million and $0.2 million, respectively. These
shares were repurchased for the payment of taxes, not in excess
of the minimum statutory withholding requirements, in connection
with the vesting of share-based payments, as permitted under the
2005 Stock Award and Incentive Plan, as amended (the “2005
Plan”).
The aforementioned share repurchases have been recorded as
treasury stock.
Income
Taxes
The Company calculates income taxes in accordance with
ASC 740,
Income Taxes
(“ASC 740”), which
requires the use of the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized based
on the difference between the Consolidated Financial Statement
carrying amounts of existing assets and liabilities and their
respective tax bases as computed pursuant to ASC 740.
Deferred tax assets and liabilities are measured using the tax
rates, based on certain judgments regarding enacted tax laws and
published guidance, in effect in the years when those temporary
differences are expected to reverse. A valuation allowance is
established against the deferred tax assets when it is more
likely than not that some portion or all of the deferred taxes
may not be realized. Changes in the Company’s level and
composition of earnings, tax laws or the deferred tax valuation
allowance, as well as the results of tax audits, may materially
impact the Company’s effective income tax rate.
44
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company evaluates its income tax positions in accordance
with ASC 740 which prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken
on a tax return, including a decision whether to file or not to
file in a particular jurisdiction. Under ASC 740, a tax
benefit from an uncertain position may be recognized only if it
is “more likely than not” that the position is
sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. The
Company believes that its assumptions and estimates are
reasonable, although actual results may have a positive or
negative material impact on the balances of deferred tax assets
and liabilities, valuation allowances or net income.
Revenue
Recognition
Revenue is recorded for store sales upon the purchase of
merchandise by customers. The Company’s
e-commerce
operation records revenue upon the estimated customer receipt
date of the merchandise. Shipping and handling revenues are
included in net sales. Sales tax collected from customers is
excluded from revenue and is included as part of accrued income
and other taxes on the Company’s Consolidated Balance
Sheets.
Revenue is recorded net of estimated and actual sales returns
and deductions for coupon redemptions and other promotions. The
Company records the impact of adjustments to its sales return
reserve quarterly within net sales and cost of sales. The sales
return reserve reflects an estimate of sales returns based on
projected merchandise returns determined through the use of
historical average return percentages.
| For the Years Ended | ||||||||
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Beginning balance
|
$ | 4,690 | $ | 3,981 | ||||
|
Returns
|
(70,789 | ) | (71,705 | ) | ||||
|
Provisions
|
69,790 | 72,414 | ||||||
|
Ending balance
|
$ | 3,691 | $ | 4,690 | ||||
Revenue is not recorded on the purchase of gift cards. A current
liability is recorded upon purchase, and revenue is recognized
when the gift card is redeemed for merchandise. Additionally,
the Company recognizes revenue on unredeemed gift cards based on
an estimate of the amounts that will not be redeemed (“gift
card breakage”), determined through historical redemption
trends. Gift card breakage revenue is recognized in proportion
to actual gift card redemptions as a component of net sales. For
further information on the Company’s gift card program,
refer to the Gift Cards caption below.
The Company recognizes royalty revenue generated from its
franchise agreements based upon royalty percentages on sales of
merchandise by the franchisee. Royalty revenue is recorded as a
component of net sales when earned.
The Company sells off
end-of-season,
overstock, and irregular merchandise to a third-party. The
proceeds from these sales are presented on a gross basis, with
proceeds and cost of sell-offs recorded in net sales and cost of
sales, respectively.
45
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds from sell-offs
|
$ | 25,593 | $ | 29,347 | $ | 36,086 | ||||||
|
Marked-down cost of merchandise disposed of via sell-offs
|
$ | 24,728 | $ | 29,023 | $ | 35,336 | ||||||
Cost
of Sales, Including Certain Buying, Occupancy and Warehousing
Expenses
Cost of sales consists of merchandise costs, including design,
sourcing, importing and inbound freight costs, as well as
markdowns, shrinkage and certain promotional costs (collectively
“merchandise costs”) and buying, occupancy and
warehousing costs. Buying, occupancy and warehousing costs
consist of compensation, employee benefit expenses and travel
for our buyers and certain senior merchandising executives; rent
and utilities related to our stores, corporate headquarters,
distribution centers and other office space; freight from our
distribution centers to the stores; compensation and supplies
for our distribution centers, including purchasing, receiving
and inspection costs; and shipping and handling costs related to
our
e-commerce
operation. Merchandise margin is the difference between net
sales and merchandise costs. Gross profit is the difference
between net sales and cost of sales.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist of
compensation and employee benefit expenses, including salaries,
incentives and related benefits associated with our stores and
corporate headquarters. Selling, general and administrative
expenses also include advertising costs, supplies for our stores
and home office, communication costs, travel and entertainment,
leasing costs and services purchased. Selling, general and
administrative expenses do not include compensation, employee
benefit expenses and travel for our design, sourcing and
importing teams, our buyers and our distribution centers as
these amounts are recorded in cost of sales.
Advertising
Costs
Certain advertising costs, including direct mail, in-store
photographs and other promotional costs are expensed when the
marketing campaign commences. As of January 29, 2011 and
January 30, 2010, the Company had prepaid advertising
expense of $5.4 million. All other advertising costs are
expensed as incurred. The Company recognized $64.9 million,
$60.9 million, and $70.9 million in advertising
expense during Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively.
Design
Costs
The Company has certain design costs, including compensation,
rent, depreciation, travel, supplies and samples, which are
included in cost of sales as the respective inventory is sold.
Store
Pre-Opening Costs
Store pre-opening costs consist primarily of rent, advertising,
supplies and payroll expenses. These costs are expensed as
incurred.
Other
Income (Expense), Net
Other income (expense), net consists primarily of interest
income/expense and foreign currency transaction gain/loss.
46
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Gift
Cards
The value of a gift card is recorded as a current liability upon
purchase and revenue is recognized when the gift card is
redeemed for merchandise. The Company estimates gift card
breakage and recognizes revenue in proportion to actual gift
card redemptions as a component of net sales. The Company
determines an estimated gift card breakage rate by continuously
evaluating historical redemption data and the time when there is
a remote likelihood that a gift card will be redeemed. The
company recorded gift card breakage of $5.5 million,
$6.8 million and $12.2 million during Fiscal 2010,
Fiscal 2009 and Fiscal 2008, respectively.
Legal
Proceedings and Claims
The Company is subject to certain legal proceedings and claims
arising out of the conduct of its business. In accordance with
ASC 450,
Contingencies
(“ASC 450”), the
Company records a reserve for estimated losses when the loss is
probable and the amount can be reasonably estimated. If a range
of possible loss exists and no anticipated loss within the range
is more likely than any other anticipated loss, the Company
records the accrual at the low end of the range, in accordance
with ASC 450. As the Company believes that it has provided
adequate reserves, it anticipates that the ultimate outcome of
any matter currently pending against the Company will not
materially affect the consolidated financial position, results
of operations or consolidated cash flows of the Company.
Supplemental
Disclosures of Cash Flow Information
The table below shows supplemental cash flow information for
cash amounts paid during the respective periods:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash paid during the periods for:
|
||||||||||||
|
Income taxes
|
$ | 45,737 | $ | 61,869 | $ | 132,234 | ||||||
|
Interest
|
$ | 191 | $ | 1,879 | $ | 1,947 | ||||||
Segment
Information
In accordance with ASC 280,
Segment Reporting
(“ASC 280”), the Company has identified four
operating segments (American Eagle Brand US and Canadian stores,
aerie by American Eagle retail stores, 77kids by american eagle
retail stores and AEO Direct) that reflect the basis used
internally to review performance and allocate resources. All of
the operating segments have been aggregated and are presented as
one reportable segment, as permitted by ASC 280.
The following tables present summarized geographical information:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Net sales:
|
||||||||||||
|
United States
|
$ | 2,675,992 | $ | 2,665,655 | $ | 2,667,074 | ||||||
|
Foreign(1)
|
291,567 | 274,614 | 281,605 | |||||||||
|
Total net sales
|
$ | 2,967,559 | $ | 2,940,269 | $ | 2,948,679 | ||||||
| (1) | Amounts represent sales from American Eagle and aerie Canadian retail stores, as well as AEO Direct sales, that are billed to and/or shipped to foreign countries. |
47
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Long-lived assets, net:
|
||||||||
|
United States
|
$ | 607,564 | $ | 678,385 | ||||
|
Foreign
|
47,028 | 45,967 | ||||||
|
Total long-lived assets, net
|
$ | 654,592 | $ | 724,352 | ||||
Reclassifications
Certain reclassifications have been made to the Consolidated
Financial Statements for prior periods in order to conform to
the current period presentation.
| 3. | Cash and Cash Equivalents, Short-term Investments and Long-term Investments |
The following table summarizes the fair market value of our cash
and marketable securities, which are recorded as cash and cash
equivalents, short-term investments and long-term investments on
the Consolidated Balance Sheets:
| January 29, 2011 | ||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||
| Balance | Holding Gains | Holding Losses | ||||||||||
| (In thousands) | ||||||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Cash
|
$ | 122,578 | $ | — | $ | — | ||||||
|
Commercial paper
|
40,884 | — | — | |||||||||
|
Corporate bonds
|
3,695 | — | — | |||||||||
|
Treasury bills
|
102,996 | — | — | |||||||||
|
Money-market
|
397,440 | — | — | |||||||||
|
Total cash and cash equivalents
|
$ | 667,593 | $ | — | $ | — | ||||||
|
Short-term investments:
|
||||||||||||
|
Term-deposits
|
$ | 63,402 | $ | — | $ | — | ||||||
|
State and local government ARS
|
3,700 | — | — | |||||||||
|
Total short-term investments
|
$ | 67,102 | $ | — | $ | — | ||||||
|
Long-term investments:
|
||||||||||||
|
State and local government ARS
|
$ | 5,500 | $ | — | $ | — | ||||||
|
ARS Call Option
|
415 | — | — | |||||||||
|
Total long-term investments
|
$ | 5,915 | $ | — | $ | — | ||||||
|
Total
|
$ | 740,610 | $ | — | $ | — | ||||||
48
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| January 30, 2010 | ||||||||||||
|
Unrealized
|
Unrealized
|
|||||||||||
| Balance | Holding Gains | Holding Losses | ||||||||||
| (In thousands)} | ||||||||||||
|
Cash and cash equivalents:
|
||||||||||||
|
Cash
|
$ | 144,391 | $ | — | $ | — | ||||||
|
Commercial paper
|
25,420 | — | — | |||||||||
|
Treasury bills
|
119,988 | — | — | |||||||||
|
Money-market
|
404,161 | — | — | |||||||||
|
Total cash and cash equivalents
|
$ | 693,960 | $ | — | $ | — | ||||||
|
Short-term investments:
|
||||||||||||
|
Student-loan backed ARS
|
$ | 400 | $ | — | $ | — | ||||||
|
State and local government ARS
|
4,275 | — | — | |||||||||
|
Total short-term investments
|
$ | 4,675 | $ | — | $ | — | ||||||
|
Long-term investments:
|
||||||||||||
|
Student-loan backed ARS
|
$ | 149,031 | $ | — | $ | (8,569 | ) | |||||
|
State and local government ARS
|
35,969 | — | (456 | ) | ||||||||
|
Auction rate preferred securities
|
12,773 | — | (1,287 | ) | ||||||||
|
Total long-term investments
|
$ | 197,773 | $ | — | $ | (10,312 | ) | |||||
|
Total
|
$ | 896,408 | $ | — | $ | (10,312 | ) | |||||
Proceeds from the sale of
available-for-sale
securities were $177.5 million, $80.4 million and
$393.6 million for Fiscal 2010, Fiscal 2009 and Fiscal
2008, respectively. The proceeds from the sale of
available-for-sale
securities for Fiscal 2010 and Fiscal 2008 are offset against
purchases of $62.8 million and $48.7 million,
respectively. There were no purchases of
available-for-sale
securities during Fiscal 2009.
The following table presents the length of time
available-for-sale
securities were in continuous unrealized loss positions but were
not deemed to be
other-than-temporarily
impaired. At January 29, 2011, the fair value of all
available-for-sale
securities approximated par, with no gross unrealized holding
losses.
| Less Than 12 Months | Greater Than or Equal to 12 Months | |||||||||||||||
|
Gross Unrealized
|
Gross Unrealized
|
|||||||||||||||
| Holding Losses | Fair Value | Holding Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
January 30, 2010
|
||||||||||||||||
|
Student-loan backed ARS
|
$ | (1,643 | ) | $ | 9,203 | $ | (6,926 | ) | $ | 50,228 | ||||||
|
State and local government ARS
|
(273 | ) | 8,096 | (183 | ) | 20,922 | ||||||||||
|
Auction rate preferred securities
|
— | — | (1,287 | ) | 12,773 | |||||||||||
|
Total(1)
|
$ | (1,916 | ) | $ | 17,299 | $ | (8,396 | ) | $ | 83,923 | ||||||
| (1) | Fair value excludes $101.2 million as of January 30, 2010 of investments whose fair value approximates par. |
As of January 29, 2011, we had a total of
$740.6 million in cash and cash equivalents, short-term and
long-term investments, which included $9.2 million of
investments in ARS. The carrying value of the investments in ARS
equals their par value with no impairment in OCI or previously
recognized in earnings.
In the first half of Fiscal 2010, the Company sold
$28.1 million of ARS investments for proceeds of
$27.9 million and a realized loss of $0.2 million.
During the third quarter of Fiscal 2010, the Company liquidated
49
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$176.4 million par value ($163.3 million carrying
value) of its
available-for-sale
securities. The Company received proceeds of $149.6 million
plus accrued interest and recognized a net loss in its
Consolidated Statements of Operation of $24.2 million, of
which $10.9 million was previously included in OCI on the
Company’s Consolidated Balance Sheet. The total realized
loss on the sale of investment securities in Fiscal 2010 was
$24.4 million.
The $176.4 million of par value ARS securities sold during
the third quarter of Fiscal 2010 included $119.7 million of
par value ARS securities whereby the Company entered into a
settlement agreement under which a financial institution (the
“purchaser”) purchased the ARS at a discount to par,
plus accrued interest. Additionally, under this agreement, the
Company retained a right (the “ARS Call Option”), for
a period ending October 29, 2013 to: (a) repurchase
any or all of the ARS securities sold at the agreed upon
purchase prices received from the purchaser plus accrued
interest;
and/or
(b) receive additional proceeds from the purchaser upon
certain redemptions of the ARS securities sold. The ARS Call
Option is cancelable by the purchaser for additional cash
consideration.
The Company is required to assess the value of the ARS Call
Option at the end of each reporting period, with any changes in
fair value recorded within the Consolidated Statement of
Operations. Upon origination, the Company determined that the
fair value was $0.4 million. The fair value of the ARS Call
Option was included as an offsetting amount within the net loss
on liquidation of $24.2 million referenced above and is
classified as a long-term investment on the Consolidated Balance
Sheet as of January 29, 2011. As of January 29, 2011,
the Company determined the value of the ARS Call Option was
$0.4 million.
The Company continues to monitor the market for ARS and consider
the impact, if any, on the fair value of its investments. If
current market conditions deteriorate further, or the
anticipated recovery in market values does not occur, the
Company may be required to record impairment charges on its
remaining ARS investments.
| 4. | Fair Value Measurements |
ASC 820,
Fair Value Measurement Disclosures
(“ASC
820”), defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. Fair value is defined
under ASC 820 as the exit price associated with the sale of
an asset or transfer of a liability in an orderly transaction
between market participants at the measurement date.
Financial
Instruments
Valuation techniques used to measure fair value under
ASC 820 must maximize the use of observable inputs and
minimize the use of unobservable inputs. In addition,
ASC 820 establishes this three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These
tiers include:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. | |
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| • | Level 3 — Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
As of January 29, 2011 and January 30, 2010, the
Company held certain assets that are required to be measured at
fair value on a recurring basis. These include cash equivalents
and short and long-term investments, including ARS and ARPS.
50
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In accordance with ASC 820, the following tables represent
the fair value hierarchy for the Company’s financial assets
(cash equivalents and investments) measured at fair value on a
recurring basis as of January 29, 2011 and January 30,
2010:
| Fair Value Measurements at January 29, 2011 | ||||||||||||||||
|
Quoted Market
|
||||||||||||||||
|
Prices in Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||
|
Carrying
|
Identical Assets
|
Observable
|
Inputs
|
|||||||||||||
| Amount | (Level 1) | Inputs (Level 2) | (Level 3) | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash and cash equivalents
|
||||||||||||||||
|
Cash
|
$ | 122,578 | $ | 122,578 | $ | — | $ | — | ||||||||
|
Commercial paper
|
40,884 | 40,884 | — | — | ||||||||||||
|
Corporate bonds
|
3,695 | 3,695 | — | — | ||||||||||||
|
Treasury bills
|
102,996 | 102,996 | — | — | ||||||||||||
|
Money-market
|
397,440 | 397,440 | — | — | ||||||||||||
|
Total cash and cash equivalents
|
$ | 667,593 | $ | 667,593 | $ | — | $ | — | ||||||||
|
Short-term investments
|
||||||||||||||||
|
Term deposits
|
$ | 63,402 | $ | 63,402 | $ | — | $ | — | ||||||||
|
State and local government ARS
|
3,700 | — | — | 3,700 | ||||||||||||
|
Total short-term investments
|
$ | 67,102 | $ | 63,402 | $ | — | $ | 3,700 | ||||||||
|
Long-term investments
|
||||||||||||||||
|
State and local government ARS
|
$ | 5,500 | $ | — | $ | — | $ | 5,500 | ||||||||
|
ARS Call Option
|
415 | — | — | 415 | ||||||||||||
|
Total long-term investments
|
$ | 5,915 | $ | — | $ | — | $ | 5,915 | ||||||||
|
Total
|
$ | 740,610 | $ | 730,995 | $ | — | $ | 9,615 | ||||||||
51
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Fair Value Measurements at January 30, 2010 | ||||||||||||||||
|
Quoted Market
|
||||||||||||||||
|
Prices in Active
|
Significant
|
|||||||||||||||
|
Markets for
|
Significant Other
|
Unobservable
|
||||||||||||||
|
Carrying
|
Identical Assets
|
Observable
|
Inputs
|
|||||||||||||
| Amount | (Level 1) | Inputs (Level 2) | (Level 3) | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Cash and cash equivalents
|
||||||||||||||||
|
Cash
|
$ | 144,391 | $ | 144,391 | $ | — | $ | — | ||||||||
|
Commercial paper
|
25,420 | 25,420 | — | — | ||||||||||||
|
Treasury bills
|
119,988 | 119,988 | — | — | ||||||||||||
|
Money-market
|
404,161 | 404,161 | — | — | ||||||||||||
|
Total cash and cash equivalents
|
$ | 693,960 | $ | 693,960 | $ | — | $ | — | ||||||||
|
Short-term investments
|
||||||||||||||||
|
Student-loan backed ARS
|
$ | 400 | $ | — | $ | — | $ | 400 | ||||||||
|
State and local government ARS
|
4,275 | — | — | 4,275 | ||||||||||||
|
Total short-term investments
|
$ | 4,675 | $ | — | $ | — | $ | 4,675 | ||||||||
|
Long-term investments
|
||||||||||||||||
|
Student-loan backed ARS
|
$ | 149,031 | $ | — | $ | — | $ | 149,031 | ||||||||
|
State and local government ARS
|
35,969 | — | — | 35,969 | ||||||||||||
|
Auction rate preferred securities
|
12,773 | — | — | 12,773 | ||||||||||||
|
Total long-term investments
|
$ | 197,773 | $ | — | $ | — | $ | 197,773 | ||||||||
|
Total
|
$ | 896,408 | $ | 693,960 | $ | — | $ | 202,448 | ||||||||
The Company used a discounted cash flow (“DCF”) model
to value its Level 3 investments. For Fiscal 2010, the
assumptions in the Company’s model included different
recovery periods, ranging from five to 17 months depending
on the type of security, and discount factors for yield of 0.2%
and illiquidity of 0.5%. For Fiscal 2009, the assumptions in the
Company’s model included different recovery periods,
ranging from 0.5 year to 11 years, depending on the
type of security and varying discount factors for yield, ranging
from 0.3% to 6.6%, and illiquidity, ranging from 0.3% to 4.0%.
These assumptions are subjective. They are based on the
Company’s current judgment and view of current market
conditions. The use of different assumptions would result in a
different valuation and related charge.
As a result of the discounted cash flow analysis for Fiscal
2010, the Company recognized net impairment of $0.6 million
in OCI. The total cumulative impairment recognized in OCI prior
to the Company’s liquidation of $176.4 million par
value ($163.3 million carrying value)
available-for-sale
securities during the third quarter of Fiscal 2010 was
$10.9 million ($6.8 million, net of tax). Total
cumulative impairment recognized in OCI as of January 30,
2010 was $10.3 million ($6.4 million, net of tax). The
increase in temporary impairment was primarily driven by
unfavorable changes in the discount rate. These amounts were
previously recorded in OCI and resulted in a decrease in the
investments’ fair values. As a result of a credit rating
downgrade on student-loan backed ARS, the Company also recorded
a net impairment loss in earnings of $1.2 million during
Fiscal 2010.
As previously described in Note 3 to the Consolidated
Financial Statements, the Company liquidated $176.4 million
par value ($163.3 million carrying value) of its
available-for-sale
securities in the third quarter of Fiscal 2010. Through the
liquidation, the Company received proceeds of
$149.6 million plus accrued interest and recognized a loss
in its Consolidated Statements of Operation of
$24.2 million, net of the ARS Call Option gain of
$0.4 million. The recognized loss included all
$10.9 million of cumulative impairment which was previously
included in OCI on the Consolidated Balance Sheet.
52
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of the ARS Call Option described in Note 3
to the Consolidated Financial Statements was also estimated
using a discounted cash flow model. The model considered
potential changes in yields for securities with similar
characteristics to the underlying ARS and evaluated possible
future refinancing opportunities for the issuers of the ARS. The
analysis then assessed the likelihood that the options would be
exercisable as a result of the underlying ARS being redeemed or
traded in a secondary market at an amount greater than the
exercise price prior to the end of the option term. Future
changes in the fair values of the ARS Call Option will be
recorded within the Consolidated Statements of Operations.
The following table presents a rollforward of the amount of net
impairment loss recognized in earnings related to credit losses:
|
For the Year Ended
|
||||
| January 29, 2011 | ||||
| (In thousands) | ||||
|
Beginning balance of credit losses previously recognized in
earnings
|
$ | 940 | ||
|
Year-to-date
OTTI credit losses recognized in earnings
|
1,248 | |||
|
Ending balance of cumulative credit losses recognized in earnings
|
$ | 2,188 | ||
The reconciliation of our assets measured at fair value on a
recurring basis using unobservable inputs (Level 3) is
as follows:
| Level 3 (Unobservable inputs) | ||||||||||||||||||||
|
Student
|
||||||||||||||||||||
|
Loan-
|
||||||||||||||||||||
|
Auction-
|
Backed
|
|||||||||||||||||||
|
Rate
|
Auction-
|
Auction-Rate
|
||||||||||||||||||
|
Municipal
|
Rate
|
Preferred
|
ARS Call
|
|||||||||||||||||
| Total | Securities | Securities | Securities | Option | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Carrying value at January 31, 2009
|
$ | 251,007 | $ | 69,970 | $ | 169,254 | $ | 11,783 | $ | — | ||||||||||
|
Settlements
|
(72,600 | ) | (29,900 | ) | (42,700 | ) | — | — | ||||||||||||
|
Gains and (losses):
|
||||||||||||||||||||
|
Reported in earnings
|
(940 | ) | — | — | (940 | ) | — | |||||||||||||
|
Reported in OCI
|
24,981 | 174 | 22,877 | 1,930 | — | |||||||||||||||
|
Balance at January 30, 2010
|
$ | 202,448 | $ | 40,244 | $ | 149,431 | $ | 12,773 | $ | — | ||||||||||
|
Settlements
|
(177,472 | ) | (29,101 | ) | (141,246 | ) | (7,125 | ) | — | |||||||||||
|
Gains and (losses):
|
||||||||||||||||||||
|
Reported in earnings
|
(25,674 | ) | (2,399 | ) | (16,755 | ) | (6,935 | ) | 415 | |||||||||||
|
Reported in OCI
|
10,313 | 456 | 8,570 | 1,287 | — | |||||||||||||||
|
Balance at January 29, 2011
|
$ | 9,615 | $ | 9,200 | $ | — | $ | — | $ | 415 | ||||||||||
Non-Financial
Assets
The Company’s non-financial assets, which include goodwill
and property and equipment, are not required to be measured at
fair value on a recurring basis. However, if certain triggering
events occur, or if an annual impairment test is required and
the Company is required to evaluate the non-financial instrument
for impairment, a resulting asset impairment would require that
the non-financial asset be recorded at the estimated fair value.
Resulting from the Company’s annual goodwill impairment
test performed as of January 29, 2011, the Company
concluded that its goodwill was not impaired.
53
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain long-lived assets were measured at fair value on a
nonrecurring basis using Level 3 inputs as defined in
ASC 820. Based on the Company’s decision to close all
M+O stores in Fiscal 2010, the Company determined that the M+O
stores not previously impaired would not be able to generate
sufficient cash flow over the life of the related leases to
recover the Company’s initial investment in them.
Therefore, during Fiscal 2010, the M+O stores not previously
impaired were written down to their fair value, resulting in a
loss on impairment of assets of $18.0 million.
Additionally, during Fiscal 2009 and Fiscal 2008, certain
long-lived assets primarily related to M+O stores were
determined to be unable to recover their respective carrying
values and were written down to their fair value, resulting in a
loss on impairment of assets of $18.0 million and
$6.7 million, respectively. The loss on impairment of M+O
assets for all periods presented is included within Loss from
Discontinued Operations. The fair value of those stores were
determined by estimating the amount and timing of net future
cash flows and discounting them using a risk-adjusted rate of
interest. The Company estimates future cash flows based on its
experience and knowledge of the market in which the store is
located.
Refer to Note 14 to the Consolidated Financial Statements
for additional information regarding the discontinued operations
for M+O.
| 5. | Earnings per Share |
ASC
260-10-45,
Participating Securities and the Two-Class Method
(“ASC
260-10-45”),
addresses whether awards granted in unvested share-based payment
transactions that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating
securities and therefore are included in computing earnings per
share under the two-class method, as described in ASC 260,
Earnings Per Share
. Participating securities are
securities that may participate in dividends with common stock
and the two-class method is an earnings allocation formula that
treats a participating security as having rights to earnings
that would otherwise have been available to common shareholders.
Under the two-class method, earnings for the period are
allocated between common shareholders and other shareholders,
based on their respective rights to receive dividends.
Restricted stock awards granted to certain employees under the
Company’s 2005 Plan are considered participating securities
as these employees receive non-forfeitable dividends at the same
rate as common stock.
ASC 260-10-45
was adopted and retrospectively applied at the beginning of
Fiscal 2009. For Fiscal 2010, Fiscal 2009 and Fiscal 2008, the
application of
ASC 260-10-45
resulted in no material change to basic or diluted income from
continuing operations per common share.
54
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a reconciliation between basic and diluted
weighted average shares outstanding:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
|
Weighted average common shares outstanding:
|
||||||||||||
|
Basic number of common shares outstanding
|
199,979 | 206,171 | 205,169 | |||||||||
|
Dilutive effect of stock options and non-vested restricted stock
|
1,839 | 3,341 | 2,413 | |||||||||
|
Dilutive number of common shares outstanding
|
201,818 | 209,512 | 207,582 | |||||||||
|
Basic income from continuing operations per common share
|
||||||||||||
|
Income from continuing operations
|
$ | 181,934 | $ | 213,398 | $ | 229,984 | ||||||
|
Less: Income allocated to participating securities
|
74 | 365 | 364 | |||||||||
|
Income from continuing operations available to common
shareholders
|
$ | 181,860 | $ | 213,033 | $ | 229,620 | ||||||
|
Basic income from continuing operations per common share
|
$ | 0.91 | $ | 1.03 | $ | 1.12 | ||||||
|
Dilutive income from continuing operations per common share
|
||||||||||||
|
Income from continuing operations
|
$ | 181,934 | $ | 213,398 | $ | 229,984 | ||||||
|
Less: Income allocated to participating securities
|
74 | 360 | 360 | |||||||||
|
Income from continuing operations available to common
shareholders
|
$ | 181,860 | $ | 213,038 | $ | 229,624 | ||||||
|
Dilutive income from continuing operations per common share
|
$ | 0.90 | $ | 1.02 | $ | 1.11 | ||||||
Equity awards to purchase approximately 7.9 million,
6.6 million and 7.6 million shares of common stock
during the Fiscal 2010, Fiscal 2009 and Fiscal 2008,
respectively, were outstanding, but were not included in the
computation of weighted average diluted common share amounts as
the effect of doing so would have been anti-dilutive.
Additionally, for Fiscal 2010, Fiscal 2009 and Fiscal 2008,
approximately 0.7 million, 0.4 million and
0.8 million shares, respectively, of performance-based
restricted stock awards were not included in the computation of
weighted average diluted common share amounts because the number
of shares ultimately issued is contingent on the Company’s
performance compared to pre-established performance goals.
55
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Accounts Receivable |
Accounts receivable are comprised of the following:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Landlord construction allowances
|
$ | 11,739 | $ | 11,132 | ||||
|
Merchandise sell-offs
|
4,539 | 8,063 | ||||||
|
Marketing cost reimbursements
|
3,553 | 2,556 | ||||||
|
Credit card receivable
|
— | 7,832 | ||||||
|
Gift card receivable
|
3,567 | 1,413 | ||||||
|
Franchise receivable
|
5,183 | 1,419 | ||||||
|
Insurance claims receivable
|
4,374 | — | ||||||
|
Other
|
3,766 | 2,331 | ||||||
|
Total
|
$ | 36,721 | $ | 34,746 | ||||
| 7. | Property and Equipment |
Property and equipment consists of the following:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Land
|
$ | 6,364 | $ | 6,364 | ||||
|
Buildings
|
152,984 | 151,484 | ||||||
|
Leasehold improvements
|
624,479 | 645,794 | ||||||
|
Fixtures and equipment
|
647,346 | 590,610 | ||||||
|
Construction in progress
|
1,629 | 554 | ||||||
|
Property and equipment at cost
|
$ | 1,432,802 | $ | 1,394,806 | ||||
|
Less: Accumulated depreciation and amortization
|
(789,682 | ) | (681,664 | ) | ||||
|
Net property and equipment
|
$ | 643,120 | $ | 713,142 | ||||
Depreciation expense is summarized as follows:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Depreciation expense
|
$ | 139,169 | $ | 137,045 | $ | 123,218 | ||||||
| 8. | Note Payable and Other Credit Arrangements |
The Company has borrowing agreements with four separate
financial institutions under which it may borrow an aggregate of
$310.0 million United States dollars (“USD”) and
$25.0 million Canadian dollars (“CAD”). Of this
amount, $200.0 million USD can be used for letters of
credit issuances, $50.0 million USD and $25.0 million
CAD can be used for demand line borrowings and the remaining
$60.0 million USD can be used for either letters of credit
or demand line borrowings at the Company’s discretion.
56
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The letters of credit facilities of $150.0 million USD and
$50.0 million USD expire November 1, 2011 and
May 27, 2011, respectively. The $50.0 million USD and
$25.0 million CAD demand lines expire on April 20,
2011 and December 13, 2011, respectively. The remaining
$60.0 million USD facility expires on May 22, 2011.
As of January 29, 2011, the Company had outstanding demand
letters of credit of $30.0 million USD and no demand line
borrowings.
The availability of any future borrowings is subject to
acceptance by the respective financial institutions. The average
borrowing rate on the demand line for outstanding borrowings
during Fiscal 2010 was 2.1%.
| 9. | Leases |
The Company leases all store premises, some of its office space
and certain information technology and office equipment. The
store leases generally have initial terms of 10 years. Most
of these store leases provide for base rentals and the payment
of a percentage of sales as additional contingent rent when
sales exceed specified levels. Additionally, most leases contain
construction allowances
and/or
rent
holidays. In recognizing landlord incentives and minimum rent
expense, the Company amortizes the charges on a straight-line
basis over the lease term (including the pre-opening build-out
period). These leases are classified as operating leases.
A summary of fixed minimum and contingent rent expense for all
operating leases follows:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Store rent:
|
||||||||||||
|
Fixed minimum
|
$ | 230,277 | $ | 218,785 | $ | 188,112 | ||||||
|
Contingent
|
8,182 | 7,873 | 11,765 | |||||||||
|
Total store rent, excluding common area maintenance charges,
real estate taxes and certain other expenses
|
$ | 238,459 | $ | 226,658 | $ | 199,877 | ||||||
|
Offices, distribution facilities, equipment and other
|
16,722 | 17,391 | 16,902 | |||||||||
|
Total rent expense
|
$ | 255,181 | $ | 244,049 | $ | 216,779 | ||||||
In addition, the Company is typically responsible under its
store, office and distribution center leases for tenant
occupancy costs, including maintenance costs, common area
charges, real estate taxes and certain other expenses.
The table below summarizes future minimum lease obligations,
consisting of fixed minimum rent, under operating leases in
effect at January 29, 2011:
|
Future Minimum
|
||||
| Fiscal years: | Lease Obligations | |||
| (In thousands) | ||||
|
2011
|
$ | 243,798 | ||
|
2012
|
233,279 | |||
|
2013
|
220,081 | |||
|
2014
|
201,761 | |||
|
2015
|
187,234 | |||
|
Thereafter
|
687,087 | |||
|
Total
|
$ | 1,773,240 | ||
57
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Other Comprehensive Income (Loss) |
The accumulated balances of other comprehensive income (loss)
included as part of the Consolidated Statements of
Stockholders’ Equity follow:
|
Accumulated
|
||||||||||||
|
Before
|
Tax
|
Other
|
||||||||||
|
Tax
|
(Expense)
|
Comprehensive
|
||||||||||
| Amount | Benefit | Income (Loss) | ||||||||||
| (In thousands) | ||||||||||||
|
Balance at February 2, 2008
|
$ | 35,714 | $ | (229 | ) | $ | 35,485 | |||||
|
Temporary impairment related to ARS
|
(37,432 | ) | 14,259 | (23,173 | ) | |||||||
|
Reclassification adjustment for realized losses in net income
related to investment securities
|
1,532 | (584 | ) | 948 | ||||||||
|
Foreign currency translation loss
|
(27,649 | ) | — | (27,649 | ) | |||||||
|
Balance at January 31, 2009
|
$ | (27,835 | ) | $ | 13,446 | $ | (14,389 | ) | ||||
|
Temporary reversal of impairment related to ARS
|
24,041 | (9,535 | ) | 14,506 | ||||||||
|
Reclassification adjustment for realized losses in net income
related to investment securities
|
940 | — | 940 | |||||||||
|
Foreign currency translation gain
|
15,781 | — | 15,781 | |||||||||
|
Balance at January 30, 2010
|
$ | 12,927 | $ | 3,911 | $ | 16,838 | ||||||
|
Temporary impairment related to ARS
|
(1,830 | ) | 690 | (1,140 | ) | |||||||
|
Reclassification adjustment for realized losses in net income
related to investment securities
|
12,142 | (4,601 | ) | 7,541 | ||||||||
|
Foreign currency translation gain
|
4,833 | — | 4,833 | |||||||||
|
Balance at January 29, 2011
|
$ | 28,072 | $ | — | $ | 28,072 | ||||||
The components of accumulated other comprehensive income (loss)
were as follows:
| For the Years Ended | ||||||||
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Net unrealized loss on
available-for-sale
securities, net of tax(1)
|
$ | — | $ | (6,401 | ) | |||
|
Foreign currency translation adjustment
|
28,072 | 23,239 | ||||||
|
Accumulated other comprehensive income
|
$ | 28,072 | $ | 16,838 | ||||
| (1) | Amount is shown net of tax of $3.9 million for Fiscal 2009. |
| 11. | Share-Based Payments |
The Company accounts for share-based compensation under the
provisions of ASC 718,
Compensation — Stock
Compensation
(“ASC 718”), which requires the
Company to measure and recognize compensation expense for all
share-based payments at fair value. Total share-based
compensation expense included in the Consolidated Statements of
Operations for Fiscal 2010, Fiscal 2009 and Fiscal 2008 was
$25.5 million ($15.7 million, net of tax),
$34.6 million ($21.4 million, net of tax) and
$18.7 million ($11.5 million, net of tax),
respectively.
58
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ASC 718 requires recognition of compensation cost under a
non-substantive vesting period approach for awards containing
provisions that accelerate or continue vesting upon retirement.
Accordingly, for awards with such provisions, the Company
recognizes compensation expense over the period from the grant
date to the date retirement eligibility is achieved, if that is
expected to occur during the nominal vesting period.
Additionally, for awards granted to retirement eligible
employees, the full compensation cost of an award must be
recognized immediately upon grant.
At January 29, 2011, the Company had awards outstanding
under three share-based compensation plans, which are described
below.
Share-based
compensation plans
1994
Stock Option Plan
On February 10, 1994, the Company’s Board adopted the
American Eagle Outfitters, Inc. 1994 Stock Option Plan (the
“1994 Plan”). The 1994 Plan provided for the grant of
12.2 million incentive or non-qualified options to purchase
common stock. The 1994 Plan was subsequently amended to increase
the shares available for grant to 24.3 million shares.
Additionally, the amendment provided that the maximum number of
options that may be granted to any individual may not exceed
8.1 million shares. The options granted under the 1994 Plan
were approved by the Compensation Committee of the Board,
primarily vest over five years, and expire 10 years from
the date of grant. The 1994 Plan terminated on January 2,
2004 with all rights of the optionees and all unexpired options
continuing in force and operation after the termination.
1999
Stock Incentive Plan
The 1999 Stock Option Plan (the “1999 Plan”) was
approved by the stockholders on June 8, 1999. The 1999 Plan
authorized 18.0 million shares for issuance in the form of
stock options, stock appreciation rights (“SAR”),
restricted stock awards, performance units or performance
shares. The 1999 Plan was subsequently amended to increase the
shares available for grant to 33.0 million. Additionally,
the 1999 Plan provided that the maximum number of shares awarded
to any individual may not exceed 9.0 million shares. The
1999 Plan allowed the Compensation Committee to determine which
employees and consultants received awards and the terms and
conditions of these awards. The 1999 Plan provided for a grant
of 1,875 stock options quarterly (not to be adjusted for stock
splits) to each director who is not an officer or employee of
the Company starting in August 2003. The Company ceased making
these quarterly stock option grants in June 2005. Under this
plan, 33.2 million non-qualified stock options and
6.7 million shares of restricted stock were granted to
employees and certain non-employees (without considering
cancellations to date of awards for 7.9 million shares).
Approximately 33% of the options granted were to vest over eight
years after the date of grant but were accelerated as the
Company met annual performance goals. Approximately 34% of the
options granted under the 1999 Plan vest over three years, 23%
vest over five years and the remaining grants vest over one
year. All options expire after 10 years. Performance-based
restricted stock was earned if the Company met established
performance goals. The 1999 Plan terminated on June 15,
2005 with all rights of the awardees and all unexpired awards
continuing in force and operation after the termination.
2005
Stock Award and Incentive Plan
The 2005 Plan was approved by the stockholders on June 15,
2005. The 2005 Plan authorized 18.4 million shares for
issuance, of which 6.4 million shares are available for
full value awards in the form of restricted stock awards,
restricted stock units or other full value stock awards and
12.0 million shares are available for stock options, SAR,
dividend equivalents, performance awards or other non-full value
stock awards. The 2005 Plan was subsequently amended in Fiscal
2009 to increase the shares available for grant to
31.9 million without taking into consideration
9.1 million non-qualified stock options, 2.9 million
shares of restricted stock and 0.2 million shares of common
stock that had been previously granted under the 2005 plan to
employees and
59
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
directors (without considering cancellations as of
January 31, 2009 of awards for 2.9 million shares).
The 2005 Plan provides that the maximum number of shares awarded
to any individual may not exceed 6.0 million shares per
year for options and SAR and no more than 4.0 million
shares may be granted with respect to each of restricted shares
of stock and restricted stock units plus any unused carryover
limit from the previous year. The 2005 Plan allows the
Compensation Committee of the Board to determine which employees
receive awards and the terms and conditions of the awards that
are mandatory under the 2005 Plan. The 2005 Plan provides for
grants to directors who are not officers or employees of the
Company, which are not to exceed 20,000 shares per year
(not to be adjusted for stock splits). Through January 29,
2011, 14.4 million non-qualified stock options,
7.2 million shares of restricted stock and 0.4 million
shares of common stock had been granted under the 2005 Plan to
employees and directors (without considering cancellations to
date of awards for 7.0 million shares). Approximately 99%
of the options granted under the 2005 Plan vest over three years
and 1% vest over five years. Options were granted for ten and
seven year terms. Approximately 65% of the restricted stock
awards are performance-based and are earned if the Company meets
established performance goals. The remaining 35% of the
restricted stock awards are time-based and vest over three years.
Stock
Option Grants
The Company grants both time-based and performance-based stock
options under the 2005 Plan. Time-based stock option awards vest
over the requisite service period of the award or to an
employee’s eligible retirement date, if earlier.
Performance-based stock option awards vest over three years and
are earned if the Company meets pre-established performance
goals during each year.
A summary of the Company’s stock option activity under all
plans for Fiscal 2010 follows:
| For the Year Ended January 29, 2011 | ||||||||||||||||
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||
| Options | Price | Life | Value | |||||||||||||
| (In Years) | (In thousands) | |||||||||||||||
|
Outstanding — January 30, 2010
|
14,904,942 | $ | 15.01 | |||||||||||||
|
Granted
|
1,763,562 | $ | 17.04 | |||||||||||||
|
Exercised(1)
|
1,307,881 | $ | 8.60 | |||||||||||||
|
Cancelled/Forfeited
|
3,236,167 | $ | 15.80 | |||||||||||||
|
Outstanding — January 29, 2011
|
12,124,456 | $ | 15.25 | 3.5 | $ | 34,921 | ||||||||||
|
Vested and expected to vest — January 29, 2011
|
11,877,942 | $ | 15.27 | 3.5 | $ | 34,336 | ||||||||||
|
Exercisable — January 29, 2011
|
3,612,641 | $ | 6.92 | 2.0 | $ | 27,607 | ||||||||||
| (1) | Options exercised during Fiscal 2010 ranged in price from $4.54 to $17.51. |
The weighted-average grant date fair value of stock options
granted during Fiscal 2010, Fiscal 2009 and Fiscal 2008 was
$5.19, $3.86 and $7.16, respectively. The aggregate intrinsic
value of options exercised during Fiscal 2010, Fiscal 2009 and
Fiscal 2008 was $11.7 million, $11.7 million and
$3.9 million, respectively. Cash received from the exercise
of stock options and the actual tax benefit realized from
share-based payments was $7.3 million and
$15.6 million, respectively, for Fiscal 2010. Cash received
from the exercise of stock options and the actual tax benefit
realized from share-based payments was $9.0 million and
$8.0 million, respectively, for Fiscal 2009. Cash received
from the exercise of stock options and the actual tax benefit
realized from share-based payments was $3.8 million and
$1.1 million, respectively, for Fiscal 2008.
60
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| Black-Scholes Option Valuation Assumptions | 2011 | 2010 | 2009 | |||||||||
|
Risk-free interest rates(1)
|
2.3 | % | 1.7 | % | 2.5 | % | ||||||
|
Dividend yield
|
2.1 | % | 3.4 | % | 1.7 | % | ||||||
|
Volatility factors of the expected market price of the
Company’s common stock(2)
|
40.2 | % | 56.9 | % | 44.4 | % | ||||||
|
Weighted-average expected term(3)
|
4.5 | years | 4.1 | years | 4.3 | years | ||||||
|
Expected forfeiture rate(4)
|
8.0 | % | 8.0 | % | 8.0 | % | ||||||
| (1) | Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options. | |
| (2) | Based on a combination of historical volatility of the Company’s common stock and implied volatility. | |
| (3) | Represents the period of time options are expected to be outstanding. The weighted average expected option term for the years ended January 29, 2011, January 30, 2010 and January 31, 2009 were determined based on historical experience. | |
| (4) | Based on historical experience. |
As of January 29, 2011, there was $4.1 million of
unrecognized compensation expense related to nonvested stock
option awards that is expected to be recognized over a weighted
average period of 1.5 years.
Restricted
Stock Grants
Time-based restricted stock awards include two types of awards;
time-based restricted stock and time-based restricted stock
units. Time-based restricted stock awards vest over three years
and participate in nonforfeitable dividends. Time-based
restricted stock units vest over three years, however, they may
be accelerated to vest over one year if the Company meets
pre-established performance goals in the year of grant.
Time-based restricted stock units receive dividend equivalents
in the form of additional time-based restricted stock units,
which are subject to the same restrictions and forfeiture
provisions as the original award.
Performance-based restricted stock awards include two types of
awards; performance-based restricted stock and performance-based
restricted stock units. Performance-based restricted stock
awards vest over one year based upon the Company’s
achievement of pre-established goals and participate in
nonforfeitable dividends. Performance-based restricted stock
units cliff vest at the end of a three year period based upon
the Company’s achievement of pre-established goals.
Performance-based restricted stock units receive dividend
equivalents in the form of additional performance-based
restricted stock units, which are subject to the same
restrictions as the original award.
The grant date fair value of restricted stock awards is based on
the closing market price of the Company’s common stock on
the date of grant. Historically, the Company has granted only
restricted stock awards that entitled the holders to receive
nonforfeitable dividends prior to vesting. Beginning with Fiscal
2009 restricted stock awards, the Company began to also grant
restricted stock unit awards to its employees. The restricted
stock unit awards differ from the restricted stock awards in
that they do not contain nonforfeitable rights to dividends and
are therefore not considered participating securities in
accordance with
ASC 260-10-45.
61
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the activity of the Company’s restricted stock
is presented in the following tables:
| Time-Based Restricted Stock | Performance-Based Restricted Stock | |||||||||||||||
|
For the Year Ended
|
For the Year Ended
|
|||||||||||||||
| January 29, 2011 | January 29, 2011 | |||||||||||||||
|
Weighted-Average
|
Weighted-Average
|
|||||||||||||||
|
Grant Date
|
Grant Date
|
|||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
|
Nonvested — January 30, 2010
|
1,883 | $ | 13.28 | 989,664 | $ | 9.66 | ||||||||||
|
Granted
|
— | — | — | — | ||||||||||||
|
Vested
|
— | — | (989,664 | ) | 9.66 | |||||||||||
|
Cancelled/Forfeited
|
1,883 | 13.28 | — | — | ||||||||||||
|
Nonvested — January 29, 2011
|
— | $ | — | — | $ | — | ||||||||||
|
Performance-Based Restricted
|
||||||||||||||||
| Time-Based Restricted Stock Units | Stock Units | |||||||||||||||
|
For the Year Ended
|
For the Year Ended
|
|||||||||||||||
| January 29, 2011 | January 29, 2011 | |||||||||||||||
|
Weighted-Average
|
Weighted-Average
|
|||||||||||||||
|
Grant Date
|
Grant Date
|
|||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
|
Nonvested — January 30, 2010
|
1,668,092 | $ | 9.79 | 406,231 | $ | 9.82 | ||||||||||
|
Granted
|
1,098,844 | 17.39 | 312,363 | 17.24 | ||||||||||||
|
Vested
|
(1,650,077 | ) | 9.79 | — | — | |||||||||||
|
Cancelled/Forfeited
|
(239,839 | ) | 16.60 | (88,977 | ) | 16.26 | ||||||||||
|
Nonvested — January 29, 2011
|
877,020 | $ | 17.45 | 629,617 | $ | 12.59 | ||||||||||
As of January 29, 2011, there was $10.6 million of
unrecognized compensation expense related to nonvested
restricted stock awards that is expected to be recognized over a
weighted average period of two years. The total fair value of
restricted stock awards vested during Fiscal 2010, Fiscal 2009
and Fiscal 2008 was $9.6 million, $0.6 million and
$9.6 million, respectively.
As of January 29, 2011, the Company had 25.7 million
shares available for all equity grants.
| 12. | Retirement Plan and Employee Stock Purchase Plan |
The Company maintains a profit sharing and 401(k) plan (the
“Retirement Plan”). Under the provisions of the
Retirement Plan, full-time employees and part-time employees are
automatically enrolled to contribute 3% of their salary if they
have attained
20
1
/
2
years of age. In addition, full-time employees need to have
completed 60 days of service and part-time employees must
complete 1,000 hours worked to be eligible. Individuals can
decline enrollment or can contribute up to 50% of their salary
to the 401(k) plan on a pretax basis, subject to IRS
limitations. After one year of service, the Company will match
100% of the first 3% of pay plus an additional 50% of the next
3% of pay that is contributed to the plan. Contributions to the
profit sharing plan, as determined by the Board, are
discretionary. The Company recognized $11.7 million,
$5.9 million and $5.1 million in expense during Fiscal
2010, Fiscal 2009 and Fiscal 2008, respectively, in connection
with the Retirement Plan.
The Employee Stock Purchase Plan is a non-qualified plan that
covers all full-time employees and part-time employees who are
at least 18 years old and have completed 60 days of
service. Contributions are determined by the employee, with the
Company matching 15% of the investment up to a maximum
investment of $100 per pay period. These contributions are used
to purchase shares of Company stock in the open market.
62
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 13. | Income Taxes |
The components of income before income taxes from continuing
operations were:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
U.S.
|
$ | 258,408 | $ | 269,932 | $ | 325,287 | ||||||
|
Foreign
|
36,676 | 34,443 | 52,412 | |||||||||
|
Total
|
$ | 295,084 | $ | 304,375 | $ | 377,699 | ||||||
The significant components of the Company’s deferred tax
assets and liabilities were as follows:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Deferred compensation
|
$ | 30,801 | $ | 36,018 | ||||
|
Foreign tax credits
|
25,498 | 26,745 | ||||||
|
Rent
|
25,145 | 24,498 | ||||||
|
Investment securities
|
20,381 | 10,677 | ||||||
|
Inventories
|
10,432 | 11,422 | ||||||
|
Foreign and state income taxes
|
7,575 | 7,484 | ||||||
|
State tax credits
|
5,866 | 5,011 | ||||||
|
Employee compensation and benefits
|
4,942 | 10,669 | ||||||
|
Other
|
8,547 | 12,295 | ||||||
|
Gross deferred tax assets
|
139,187 | 144,819 | ||||||
|
Valuation allowance
|
(20,381 | ) | (15,688 | ) | ||||
|
Total deferred tax assets
|
$ | 118,806 | $ | 129,131 | ||||
|
Deferred tax liabilities:
|
||||||||
|
Property and equipment
|
$ | (47,852 | ) | $ | (37,896 | ) | ||
|
Prepaid expenses
|
(3,279 | ) | (3,774 | ) | ||||
|
Total deferred tax liabilities
|
$ | (51,131 | ) | $ | (41,670 | ) | ||
|
Total deferred tax assets, net
|
$ | 67,675 | $ | 87,461 | ||||
|
Classification in the Consolidated Balance Sheet:
|
||||||||
|
Current deferred tax assets
|
$ | 48,059 | $ | 60,156 | ||||
|
Noncurrent deferred tax assets
|
19,616 | 27,305 | ||||||
|
Total deferred tax assets
|
$ | 67,675 | $ | 87,461 | ||||
The net decrease in deferred tax assets and liabilities was
primarily due to an increase in the deferred tax liability for
property and equipment basis differences.
63
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant components of the provision for income taxes from
continuing operations were as follows:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 89,110 | $ | 92,074 | $ | 94,328 | ||||||
|
Foreign taxes
|
13,429 | 14,526 | 16,341 | |||||||||
|
State
|
9,610 | 13,575 | 9,698 | |||||||||
|
Total current
|
112,149 | 120,175 | 120,367 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
$ | (310 | ) | $ | (32,361 | ) | $ | 24,579 | ||||
|
Foreign taxes
|
(991 | ) | 6,513 | (340 | ) | |||||||
|
State
|
2,302 | (3,350 | ) | 3,109 | ||||||||
|
Total deferred
|
1,001 | (29,198 | ) | 27,348 | ||||||||
|
Provision for income taxes
|
$ | 113,150 | $ | 90,977 | $ | 147,715 | ||||||
As a result of additional tax deductions related to share-based
payments, tax benefits have been recognized as contributed
capital for Fiscal 2010, Fiscal 2009 and Fiscal 2008 in the
amounts of $15.6 million, $8.0 million and
$1.1 million, respectively.
During Fiscal 2009, the Company approved and repatriated
$91.7 million from its Canadian subsidiaries. The proceeds
from the repatriation were used for general corporate purposes.
The Company plans to indefinitely reinvest accumulated earnings
of our Canadian subsidiaries outside of the United States to the
extent not repatriated in Fiscal 2009. Accordingly, no provision
for U.S. income taxes has been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to income and
withholding taxes offset by foreign tax credits. As of
January 29, 2011 and January 30, 2010, the unremitted
earnings of our Canadian subsidiaries were $57.1 million
(USD) and $28.0 million (USD), respectively.
As of January 29, 2011, the gross amount of unrecognized
tax benefits was $31.1 million, of which $22.7 million
would affect the effective income tax rate if recognized. The
gross amount of unrecognized tax benefits as of January 30,
2010 was $31.6 million, of which $23.4 million would
affect the effective income tax rate if recognized.
The following table summarizes the activity related to our
unrecognized tax benefits:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Unrecognized tax benefits, beginning of the year balance
|
$ | 31,649 | $ | 41,080 | $ | 42,953 | ||||||
|
Increases in tax positions of prior periods
|
1,069 | 1,679 | 205 | |||||||||
|
Decreases in tax positions of prior periods
|
(3,801 | ) | (13,471 | ) | (1,705 | ) | ||||||
|
Increases in current period tax positions
|
2,707 | 14,842 | 4,221 | |||||||||
|
Settlements
|
(6 | ) | (6,204 | ) | (4,529 | ) | ||||||
|
Lapse of statute of limitations
|
(510 | ) | (6,291 | ) | (30 | ) | ||||||
|
Translation adjustment
|
— | 14 | (35 | ) | ||||||||
|
Unrecognized tax benefits, end of the year balance
|
$ | 31,108 | $ | 31,649 | $ | 41,080 | ||||||
64
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Unrecognized tax benefits decreased by $0.5 million and
$9.5 million during Fiscal 2010 and 2009, respectively. The
decrease in Fiscal 2009 was primarily due to federal and state
income tax settlements and statute of limitation lapses. The
Company does not anticipate any significant changes to the
unrecognized tax benefits recorded at the balance sheet date
over the next twelve months.
The Company records accrued interest and penalties related to
unrecognized tax benefits in income tax expense. Accrued
interest and penalties related to unrecognized tax benefits
included in the Consolidated Balance Sheet were
$7.6 million and $7.0 million as of January 29,
2011 and January 30, 2010, respectively. During Fiscal
2009, the Company recognized a net benefit of $3.3 million
in the provision for income taxes related to the reversal of
accrued interest and penalties primarily due to federal and
state income tax settlements. An immaterial amount of interest
and penalties were recognized in the provision for income taxes
during Fiscal 2010 and Fiscal 2008.
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction and various state and foreign
jurisdictions. The Internal Revenue Service (“IRS”)
examination of the Company’s U.S. federal income tax
returns for the tax years ended July 2006 and July 2007 were
completed in November of 2009. Accordingly, all years prior to
July 2008 are no longer subject to U.S. federal income tax
examinations by tax authorities. During Fiscal 2008, the Company
changed its tax year end to a 52/53 week year that ends on
the Saturday nearest January 31 from the Saturday nearest July
31 to conform to its financial statement year end. This change
was effective for the tax year ended January 31, 2009. An
IRS examination of the July 2008 and January 2009 federal income
tax returns is scheduled to be completed in Fiscal 2011. The
Company does not anticipate that any adjustments will result in
a material change to its financial position, results of
operations or cash flow. With respect to state and local
jurisdictions and countries outside of the United States, with
limited exceptions, generally, the Company and its subsidiaries
are no longer subject to income tax audits for tax years before
2004. Although the outcome of tax audits is always uncertain,
the Company believes that adequate amounts of tax, interest and
penalties have been provided for any adjustments that are
expected to result from these years.
The Company has foreign tax credit carryovers in the amount of
$25.5 million and $26.7 million as of January 29,
2011 and January 30, 2010, respectively. The foreign tax
credit carryovers expire in Fiscal 2019 to the extent not
utilized. No valuation allowance has been recorded on the
foreign tax credit carryovers because we believe it is more
likely than not the foreign tax credits will be utilized prior
to expiration.
The Company has been certified to qualify for nonrefundable
incentive tax credits in Kansas for additional expenditures
related to the Ottawa, Kansas distribution center. As a result,
the Company has a deferred tax asset related to Kansas tax
credit carryforwards of $5.9 million (net of federal income
taxes) as of January 29, 2011. These tax credits can be
utilized to offset future Kansas income taxes and will generally
expire in seven years. Due to a favorable incentive agreement
with the Kansas Department of Commerce in Fiscal 2010, the
Company released the valuation allowance that had been
previously recorded related to the Company’s Kansas tax
credit carryforward. A deferred tax asset of $5.0 million
with an offsetting full valuation allowance was recorded as of
January 30, 2010 related to the Kansas tax credit
carryforward.
During Fiscal 2010 and 2009, the Company recorded a valuation
allowance against deferred tax assets arising from the
disposition or other than temporary impairment of certain
investment securities. The disposition of the investment
securities results in a capital loss that can only be utilized
to the extent of capital gains. These capital losses are subject
to a three year carryback period and a five year carryforward
period for tax purposes. The capital losses generally will
expire in Fiscal 2013 through Fiscal 2015. Due to the
contingencies related to the future use of these capital losses,
we believe it is more likely than not that the full benefit of
this asset will not be realized within the carryforward period.
Thus, the Company has recorded a valuation allowance against the
deferred tax assets arising from the other than temporary
impairment or disposition of these investment securities. The
valuation allowance related to these investment securities was
$20.4 million and $10.7 million as of January 29,
2011 and January 30, 2010, respectively.
65
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During Fiscal 2009, the Company did not record a valuation
allowance on the temporary impairment of the investment
securities recorded in other comprehensive income. This
treatment was consistent with the Company’s intent and
ability to hold debt securities to recovery.
A reconciliation between the statutory federal income tax rate
and the effective income tax rate from continuing operations
follows:
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Federal income tax rate
|
35 | % | 35 | % | 35 | % | ||||||
|
State income taxes, net of federal income tax effect
|
3 | 3 | 3 | |||||||||
|
Valuation allowance increase, net
|
1 | 1 | 2 | |||||||||
|
Tax settlements
|
(1 | ) | (4 | ) | — | |||||||
|
Canadian earnings repatriation
|
— | (5 | ) | — | ||||||||
|
Tax impact of tax exempt interest
|
— | — | (1 | ) | ||||||||
| 38 | % | 30 | % | 39 | % | |||||||
| 14. | Discontinued Operations |
On March 5, 2010, the Company’s Board approved
management’s recommendation to proceed with the closure of
the M+O brand. The Company notified employees and issued a press
release announcing this decision on March 9, 2010. The
decision to take this action resulted from an extensive
evaluation of the brand and review of strategic alternatives,
which revealed that it was not achieving performance levels that
warranted further investment. The Company completed the closure
of the M+O stores and
e-commerce
operation during the second quarter of Fiscal 2010 and the
Consolidated Financial Statements reflect the results of M+O as
discontinued operations for all periods presented.
Costs associated with exit or disposal activities are recorded
when incurred. A summary of the exit and disposal costs
recognized within Loss from Discontinued Operations on the
Consolidated Income Statement for Fiscal 2010 are included in
the table as follows. There were no exit or disposal costs
recognized in Fiscal 2009 or Fiscal 2008. The Loss from
Discontinued Operations for Fiscal 2009 and Fiscal 2008 includes
pre-tax asset impairment charges of $18.0 million and
$6.7 million, respectively.
|
For the Year Ended
|
||||
|
January 29,
|
||||
| 2011 | ||||
| (In thousands) | ||||
|
Non-cash charges
|
||||
|
Asset impairments
|
$ | 17,980 | ||
|
Cash charges
|
||||
|
Lease-related charges(1)
|
15,377 | |||
|
Inventory charges
|
2,422 | |||
|
Severence charges
|
7,660 | |||
|
Total charges
|
$ | 43,439 | ||
| (1) | Presented net of the reversal of non-cash lease credits. |
66
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A rollforward of the liabilities recognized in the Consolidated
Balance Sheet is as follows:
|
January 29,
|
||||
| 2011 | ||||
| (In thousands) | ||||
|
Accrued liability as of January 30, 2010
|
$ | — | ||
|
Add: Costs incurred, excluding non-cash charges
|
30,879 | |||
|
Less: Cash payments
|
(30,879 | ) | ||
|
Accrued liability as of Janaury 29, 2011
|
$ | — | ||
The table below presents the significant components of
M+O’s results included in Loss from Discontinued Operations
on the Consolidated Statements of Operations for the years ended
January 29, 2011 and January 30, 2010 and
January 31, 2009, respectively.
| For the Years Ended | ||||||||||||
|
January 29,
|
January 30,
|
January 31,
|
||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (In thousands) | ||||||||||||
|
Net sales
|
$ | 21,881 | $ | 50,251 | $ | 40,187 | ||||||
|
Loss from discontinued operations, before income taxes
|
$ | (66,959 | ) | $ | (71,984 | ) | $ | (80,658 | ) | |||
|
Income tax benefit
|
25,672 | 27,608 | 29,735 | |||||||||
|
Loss from discontinued operations, net of tax
|
$ | (41,287 | ) | $ | (44,376 | ) | $ | (50,923 | ) | |||
|
Loss per common share from discontinued operations:
|
||||||||||||
|
Basic
|
$ | (0.21 | ) | $ | (0.22 | ) | $ | (0.25 | ) | |||
|
Diluted
|
$ | (0.20 | ) | $ | (0.21 | ) | $ | (0.25 | ) | |||
The major classes of assets and liabilities included in the
Consolidated Balance Sheets for M+O as of January 29, 2011
and January 30, 2010 is as follows:
|
January 29,
|
January 30,
|
|||||||
| 2011 | 2010 | |||||||
| (In thousands) | ||||||||
|
Current assets
|
$ | — | $ | 13,378 | ||||
|
Non-current assets
|
— | 21,227 | ||||||
|
Total assets
|
$ | — | $ | 34,605 | ||||
|
Total current liabilities
|
$ | — | $ | 6,110 | ||||
|
Total non-current liabilities
|
— | 4,604 | ||||||
|
Total liabilities
|
$ | — | $ | 10,714 | ||||
67
Table of Contents
AMERICAN
EAGLE OUTFITTERS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 15. | Quarterly Financial Information — Unaudited |
The sum of the quarterly EPS amounts may not equal the full year
amount as the computations of the weighted average shares
outstanding for each quarter and the full year are calculated
independently.
|
Fiscal 2010
|
||||||||||||||||
| Quarters Ended | ||||||||||||||||
|
May 1,
|
July 31,
|
October 30,
|
January 29,
|
|||||||||||||
| 2010 | 2010 | 2010 | 2011 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Net sales
|
$ | 648,462 | $ | 651,502 | $ | 751,507 | $ | 916,088 | ||||||||
|
Gross profit
|
$ | 257,696 | $ | 239,708 | $ | 312,309 | $ | 361,246 | ||||||||
|
Income from continuing operations
|
35,862 | 25,843 | 33,191 | 87,038 | ||||||||||||
|
Loss from discontinued operations
|
(24,940 | ) | (16,180 | ) | (167 | ) | — | |||||||||
|
Net income
|
$ | 10,922 | $ | 9,663 | $ | 33,024 | $ | 87,038 | ||||||||
|
Basic per common share amounts:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.45 | ||||||||
|
Loss from discontinued operations
|
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
Basic income per common share
|
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.45 | ||||||||
|
Diluted per common share amounts:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.44 | ||||||||
|
Loss from discontinued operations
|
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
Diluted income per common share
|
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.44 | ||||||||
|
Fiscal 2009
|
||||||||||||||||
| Quarters Ended | ||||||||||||||||
|
May 2,
|
August 1,
|
October 31,
|
January 30,
|
|||||||||||||
| 2009 | 2009 | 2009 | 2010 | |||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||
|
Net sales
|
$ | 601,679 | $ | 646,798 | $ | 736,011 | $ | 955,781 | ||||||||
|
Gross profit
|
$ | 223,603 | $ | 253,898 | $ | 304,175 | $ | 391,754 | ||||||||
|
Income from continuing operations
|
29,076 | 36,757 | 67,948 | 79,617 | ||||||||||||
|
Loss from discontinued operations
|
(7,109 | ) | (8,185 | ) | (8,789 | ) | (20,293 | ) | ||||||||
|
Net income
|
$ | 21,967 | $ | 28,572 | $ | 59,159 | $ | 59,324 | ||||||||
|
Basic per common share amounts:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.14 | $ | 0.18 | $ | 0.33 | $ | 0.39 | ||||||||
|
Loss from discontinued operations
|
(0.03 | ) | (0.04 | ) | (0.04 | ) | (0.10 | ) | ||||||||
|
Basic income per common share
|
$ | 0.11 | $ | 0.14 | $ | 0.29 | $ | 0.29 | ||||||||
|
Diluted per common share amounts:
|
||||||||||||||||
|
Income from continuing operations
|
$ | 0.14 | $ | 0.18 | $ | 0.32 | $ | 0.38 | ||||||||
|
Loss from discontinued operations
|
(0.03 | ) | (0.04 | ) | (0.04 | ) | (0.10 | ) | ||||||||
|
Diluted income per common share
|
$ | 0.11 | $ | 0.14 | $ | 0.28 | $ | 0.28 | ||||||||
| 16. | Subsequent Event |
The Company has evaluated the existence of subsequent events
through the filing date of this Annual Report on
Form 10-K.
68
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be
disclosed in our reports under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), is recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to the management of
American Eagle Outfitters, Inc. (the “Management”),
including our Principal Executive Officer and our Principal
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, Management recognized that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives.
In connection with the preparation of this Annual Report on
Form 10-K
as of January 29, 2011, an evaluation was performed under
the supervision and with the participation of our Management,
including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and
procedures (as defined in
Rule 13a-15(e)
under the Exchange Act). Based upon that evaluation, our
Principal Executive Officer and our Principal Financial Officer
have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of the end of the
period covered by this Annual Report on
Form 10-K.
Management’s
Annual Report on Internal Control Over Financial
Reporting
Our Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our internal control over financial
reporting is designed to provide a reasonable assurance to our
Management and our Board regarding the preparation and fair
presentation of published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Our Management assessed the effectiveness of our internal
control over financial reporting as of January 29, 2011. In
making this assessment, our Management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control —
Integrated Framework. Based on this assessment, our Management
concluded that we maintained effective internal control over
financial reporting as of January 29, 2011.
The Company’s independent registered public accounting firm
that audited the financial statements included in this Annual
Report issued an attestation report on the Company’s
internal control over financial reporting.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting during the three months ended January 29, 2011
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
69
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
American Eagle Outfitters, Inc.
We have audited American Eagle Outfitters, Inc.’s internal
control over financial reporting as of January 29, 2011,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
American Eagle Outfitters, Inc.’s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, American Eagle Outfitters, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of January 29, 2011, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of American Eagle Outfitters, Inc.
as of January 29, 2011 and January 30, 2010 and the
related consolidated statements of operations, comprehensive
income, stockholders’ equity, and cash flows for each of
the three years in the period ended January 29, 2011 of
American Eagle Outfitters, Inc. and our report dated March 11,
2011 expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
Pittsburgh, Pennsylvania
March 11, 2011
70
Table of Contents
| ITEM 9B. | OTHER INFORMATION. |
Not applicable.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information appearing under the captions
“Proposal One: Election of Directors,”
“Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Corporate
Governance Information,” and “Board Committees”
in our Proxy Statement relating to our 2011 Annual Meeting of
Stockholders is incorporated herein by reference.
| ITEM 11. | EXECUTIVE COMPENSATION. |
The information appearing under the caption “Compensation
Discussion and Analysis,” “Executive Officer
Compensation,” “Director Compensation,” and
“Compensation Committee Interlocks and Insider
Participation” in our Proxy Statement relating to our 2011
Annual Meeting of Stockholders is incorporated herein by
reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The information appearing under the captions “Security
Ownership of Principal Stockholders and Management” in our
Proxy Statement relating to our 2011 Annual Meeting of
Stockholders is incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
The information appearing under the caption “Certain
Relationships and Related Transactions” and “Board
Committees” in our Proxy Statement relating to our 2011
Annual Meeting of Stockholders is incorporated herein by
reference.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The information appearing under the caption “Independent
Registered Public Accounting Firm Fees and Services” in our
Proxy Statement relating to our 2011 Annual Meeting of
Stockholders is incorporated herein by reference.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a)(1) The following consolidated financial statements are
included in Item 8:
|
Consolidated Balance Sheets as of January 29, 2011 and
January 30, 2010
|
|
Consolidated Statements of Operations for the fiscal years ended
January 29, 2011, January 30, 2010, and
January 31, 2009
|
|
Consolidated Statements of Comprehensive Income for the fiscal
years ended January 29, 2011, January 30, 2010, and
January 31, 2009
|
|
Consolidated Statements of Stockholders’ Equity for the
fiscal years ended January 29, 2011, January 30, 2010,
and January 31, 2009
|
|
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2011, January 30, 2010, and
January 31, 2009
|
|
Notes to Consolidated Financial Statements
|
(a)(2) Financial statement schedules have been omitted
because either they are not required or are not applicable or
because the information required to be set forth therein is not
material.
71
Table of Contents
(a)(3) Exhibits
|
Exhibit
|
||||
| Number | Description | |||
|
3.1
|
Amended and Restated Certificate of Incorporation, as amended(1) | |||
|
3.2
|
Amended and Restated Bylaws(2) | |||
|
4.1
|
See Amended and Restated Articles of Incorporation, as amended, in Exhibit 3.1 hereof | |||
|
4.2
|
See Amended and Restated Bylaws in Exhibit 3.2 hereof | |||
|
10.1ˆ
|
Form of the Registrant’s 1994 Stock Option Plan(3) | |||
|
10.2ˆ
|
Form of Restricted Stock Agreement(4) | |||
|
10.3
|
Form of Indemnification Agreement(5) | |||
|
10.4ˆ
|
Employee Stock Purchase Plan(6) | |||
|
10.5ˆ
|
Form of the Registrant’s 1999 Stock Incentive Plan, as amended(7) | |||
|
10.6ˆ
|
Management Incentive Plan(8) | |||
|
10.7ˆ
|
Employment Agreement between the Registrant and LeAnn Nealz dated March 31, 2004(9) | |||
|
10.8ˆ
|
Profit Sharing and 401(k) Plan(10) | |||
|
10.9ˆ
|
Deferred Compensation Plan, as amended(11) | |||
|
10.10ˆ
|
Employment Agreement between the Registrant and Thomas DiDonato, dated June 29, 2005(12) | |||
|
10.11ˆ
|
Form of Director Deferred Compensation Agreement(13) | |||
|
10.12ˆ
|
Restricted Stock Exchange and Deferral Agreement, dated July 12, 2006(14) | |||
|
10.13ˆ
|
Form of 409A Addendum(15) | |||
|
10.14ˆ
|
Form of Long Term Incentive Compensation Plan Confidentiality, non-solicitation, non-competition and Intellectual Property Agreement(16) | |||
|
10.15ˆ
|
Employment Agreement between the Registrant and Dennis Parodi, dated February 18, 2003(17) | |||
|
10.16ˆ
|
Amendment to the Employment Agreement between the Registrant and Dennis Parodi, dated February 6, 2006(18) | |||
|
10.17ˆ
|
Employment Agreement between the Registrant and Joan Hilson, dated July 18, 2005(19) | |||
|
10.18ˆ
|
Separation Agreement Release — Susan P. McGalla, dated August 27, 2008(20) | |||
|
10.19ˆ
|
Employment Agreement between the Registrant and Roger S. Markfield, dated January 13, 2009(21) | |||
|
10.20ˆ
|
Separation Agreement and Release between the Registrant and Kathy J. Savitt, dated January 20, 2009(22) | |||
|
10.21ˆ
|
2005 Stock Award and Incentive Plan, as amended(23) | |||
|
10.22ˆ
|
Employment Agreement between the Registrant and James V. O’Donnell, as amended, dated January 11, 2010(24) | |||
|
10.23ˆ
|
Form of Change in Control Agreement between the Registrant and the Officers dated April 21, 2010(25) | |||
|
10.24ˆ*
|
Retirement Agreement between the Registrant and Joseph Kerin, dated November 24, 2010 | |||
|
10.25ˆ*
|
Form of RSU Confidentiality, Non-Solicitation, Non-Competition and Intellectual Property Agreement | |||
|
21*
|
Subsidiaries | |||
|
23*
|
Consent of Independent Registered Public Accounting Firm | |||
|
24*
|
Power of Attorney | |||
|
31.1*
|
Certification by James V. O’Donnell pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |||
|
31.2*
|
Certification by Joan Holstein Hilson pursuant to Rule 13a-14(a) or Rule 15d-14(a) | |||
|
32.1**
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
|
32.2**
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
|
101**
|
Interactive Data File | |||
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| (1) | Previously filed as Exhibit 3.1 to the Form 10-Q dated August 4, 2007, filed September 6, 2007 and incorporated herein by reference. | |
| (2) | Previously filed as Exhibit 3.1 to the Form 8-K dated November 20, 2007, filed November 26, 2007 and incorporated herein by reference. | |
| (3) | Previously filed as Exhibit 4(a) to Registration Statement on Form S-8 (file no. 33-79358), filed May 25, 1994, as amended on Form S-8 (file no. 333-12643), filed September 25, 1996 and Form S-8 (file no. 333-44759), filed January 22, 1998 and incorporated herein by reference. | |
| (4) | Previously filed as Exhibit 4(a) to Registration Statement on Form S-8 (file no. 33-79358), filed May 25, 1994 and incorporated herein by reference. | |
| (5) | Previously filed as Exhibit 10.7 to Registration Statement on Form S-1 (file no. 33-75294), filed February 14, 1994, as amended, and incorporated herein by reference. | |
| (6) | Previously filed as Exhibit 4(a) to Registration Statement on Form S-8 (file no. 33-33278), filed April 5, 1996 and incorporated herein by reference. | |
| (7) | Previously files as Exhibit 10.5 to the Form 10-K dated February 3, 2007, filed April 4, 2007 and incorporated herein by reference. | |
| (8) | Previously filed as Appendix A to the Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders held on May 27, 2003, filed April 14, 2003 and incorporated herein by reference. | |
| (9) | Previously filed as Exhibit 10.12 to the Form 10-Q for the period ended July 31, 2004, filed September 3, 2004 and incorporated herein by reference. | |
| (10) | Previously filed as Exhibit 4(a) to Registration Statement on Form S-8 (file no. 333-121641), filed December 23, 2004, as amended and incorporated herein by reference. | |
| (11) | Previously filed as Exhibit 10.2 to the Form 8-K dated December 17, 2008, filed December 23, 2008 and incorporated herein by reference. | |
| (12) | Previously filed as Exhibit 10.1 to the Form 10-Q for the period ended October 29, 2005, filed December 5, 2005 and incorporated herein by reference. | |
| (13) | Previously filed as Exhibit 10.1 to the Form 8-K dated December 30, 2005, filed January 5, 2006 and incorporated herein by reference. | |
| (14) | Previously filed as Exhibit 10.1 to the Form 8-K dated July 12, 2006, filed July 18, 2006 and incorporated herein by reference. | |
| (15) | Previously filed as Exhibit 10.3 to the Form 8-K dated December 17, 2008, filed December 23, 2008 and incorporated herein by reference. | |
| (16) | Previously filed as Exhibit 10.1 to the Form 8-K dated May 20, 2008, filed May 23, 2008 and incorporated herein by reference. | |
| (17) | Previously filed as Exhibit 10.1 to the Form 8-K dated February 28, 2006, filed March 7, 2006 and incorporated herein by reference. | |
| (18) | Previously filed as Exhibit 10.2 to the Form 8-K dated February 28, 2006, filed March 7, 2006 and incorporated herein by reference. | |
| (19) | Previously filed as Exhibit 10.1 to the Form 8-K dated April 18, 2006, filed April 24, 2006 and incorporated herein by reference. |
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| (20) | Previously filed as Exhibit 10.1 to the Form 8-K dated August 27, 2008, filed August 29, 2008 and incorporated herein by reference. | |
| (21) | Previously filed as Exhibit 10.1 to the Form 8-K dated January 13, 2009, filed January 15, 2009 and incorporated herein by reference. | |
| (22) | Previously filed as Exhibit 10.1 to the Form 8-K dated January 20, 2009, filed January 23, 2009 and incorporated herein by reference. | |
| (23) | Previously filed as Appendix A to the Definitive Proxy Statement for the 2009 Annual Meeting of Stockholders held on June 16, 2009 held on June 16, 2009, filed May 4, 2009 and incorporated herein by reference. | |
| (24) | Previously filed as Exhibit 10.1 to the Form 8-K dated January 11, 2010, filed January 12, 2010 and incorporated herein by reference. | |
| (25) | Previously filed as Exhibit 10.1 to the Form 8-K dated April 21, 2010, filed April 26, 2010 and incorporated herein by reference. |
| ˆ | Management contract or compensatory plan or arrangement. | |
| * | Filed herewith. | |
| ** | Furnished herewith. |
(b) Exhibits
The exhibits to this report have been filed herewith.
(c) Financial Statement Schedules
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN EAGLE OUTFITTERS, INC.
| By: |
/s/ James
V. O’Donnell
|
James V. O’Donnell
Chief Executive Officer
Dated March 11, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities indicated on March 11, 2011.
| Signature | Title | |||
|
/s/ James
V. O’Donnell
|
Chief Executive Officer and Director
(Principal Executive Officer) |
|||
|
/s/ Joan
Holstein Hilson
|
Executive Vice President and
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|||
|
*
|
Chairman of the Board and Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
|
*
|
Director | |||
| *By: |
/s/ Joan
Holstein Hilson
Attorney-in-Fact |
|||
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Consolidated Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules