10-Q 1 aeo-10q_20151031.htm 10-Q aeo-10q_20151031.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2015

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

 

No. 13-2721761

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

77 Hot Metal Street, Pittsburgh, PA

 

15203-2329

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (412) 432-3300

Former name, former address and former fiscal year, if changed since last report:

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    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 x    NO  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.

 

Large accelerated filer

 

x

  

Accelerated filer

 

o

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  o    NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 194,635,687 Common Shares were outstanding at November 30, 2015.

 

 

 


AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets: October 31, 2015, January 31, 2015 and November 1, 2014

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations and Retained Earnings: 13 weeks and 39 weeks ended October 31, 2015 and November 1, 2014

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income: 13 weeks and 39 weeks ended October 31, 2015 and November 1, 2014

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows: 39 weeks ended October 31, 2015 and November 1, 2014

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

18

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

N/A

 

 

 

 

 

Item 1A.    

 

Risk Factors

 

28

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

N/A

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

N/A

 

 

 

 

 

Item 5.

 

Other Information

 

N/A

 

 

 

 

 

Item 6.

 

Exhibits

 

30

 

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

October 31,

 

 

January 31,

 

 

November 1,

 

(In thousands, except per share amount)

 

2015

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

363,116

 

 

$

410,697

 

 

$

280,445

 

Merchandise inventory

 

 

479,729

 

 

 

278,972

 

 

 

468,628

 

Accounts receivable

 

 

63,775

 

 

 

67,894

 

 

 

55,875

 

Prepaid expenses and other

 

 

78,091

 

 

 

70,477

 

 

 

69,724

 

Deferred income taxes

 

 

65,636

 

 

 

59,102

 

 

 

53,445

 

Total current assets

 

 

1,050,347

 

 

 

887,142

 

 

 

928,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost, net of accumulated depreciation

 

 

709,261

 

 

 

698,227

 

 

 

717,537

 

Intangible assets, at cost, net of accumulated amortization

 

 

46,756

 

 

 

47,206

 

 

 

47,864

 

Goodwill

 

 

12,978

 

 

 

13,096

 

 

 

13,512

 

Non-current deferred income taxes

 

 

17,052

 

 

 

14,035

 

 

 

26,598

 

Other assets

 

 

51,442

 

 

 

37,202

 

 

 

38,444

 

Total assets

 

$

1,887,836

 

 

$

1,696,908

 

 

$

1,772,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

304,989

 

 

$

191,146

 

 

$

309,348

 

Accrued compensation and payroll taxes

 

 

66,466

 

 

 

44,884

 

 

 

49,562

 

Accrued rent

 

 

77,892

 

 

 

78,567

 

 

 

77,102

 

Accrued income and other taxes

 

 

43,721

 

 

 

33,110

 

 

 

27,472

 

Unredeemed gift cards and gift certificates

 

 

28,259

 

 

 

47,888

 

 

 

27,712

 

Current portion of deferred lease credits

 

 

13,055

 

 

 

12,969

 

 

 

13,392

 

Other liabilities and accrued expenses

 

 

43,761

 

 

 

50,529

 

 

 

41,893

 

Total current liabilities

 

 

578,143

 

 

 

459,093

 

 

 

546,481

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred lease credits

 

 

53,877

 

 

 

54,516

 

 

 

58,988

 

Non-current accrued income taxes

 

 

4,876

 

 

 

10,456

 

 

 

11,312

 

Other non-current liabilities

 

 

41,667

 

 

 

33,097

 

 

 

35,044

 

Total non-current liabilities

 

 

100,420

 

 

 

98,069

 

 

 

105,344

 

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 shares issued; 194,438, 194,516  and 194,491 shares

   outstanding, respectively

 

 

2,496

 

 

 

2,496

 

 

 

2,496

 

Contributed capital

 

 

588,293

 

 

 

569,675

 

 

 

566,449

 

Accumulated other comprehensive (loss) income

 

 

(19,797

)

 

 

(9,944

)

 

 

10,876

 

Retained earnings

 

 

1,602,550

 

 

 

1,543,085

 

 

 

1,506,519

 

Treasury stock, 55,128, 55,050 and 55,075 shares, respectively

 

 

(964,269

)

 

 

(965,566

)

 

 

(966,093

)

Total stockholders’ equity

 

 

1,209,273

 

 

 

1,139,746

 

 

 

1,120,247

 

Total liabilities and stockholders’ equity

 

$

1,887,836

 

 

$

1,696,908

 

 

$

1,772,072

 

 

Refer to Notes to Consolidated Financial Statements

 

 

3


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

(In thousands, except per share amounts)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Total net revenue

 

$

919,072

 

 

$

854,290

 

 

$

2,416,020

 

 

$

2,211,014

 

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

551,540

 

 

 

538,818

 

 

 

1,501,237

 

 

 

1,432,150

 

Gross profit

 

 

367,532

 

 

 

315,472

 

 

 

914,783

 

 

 

778,864

 

Selling, general and administrative expenses

 

 

220,798

 

 

 

204,641

 

 

 

601,680

 

 

 

579,777

 

Loss on impairment of assets

 

 

 

 

 

33,468

 

 

 

 

 

 

33,468

 

Restructuring charges

 

 

 

 

 

17,752

 

 

 

 

 

 

17,752

 

Depreciation and amortization expense

 

 

37,623

 

 

 

36,528

 

 

 

108,861

 

 

 

104,312

 

Operating income

 

 

109,111

 

 

 

23,083

 

 

 

204,242

 

 

 

43,555

 

Other income, net

 

 

521

 

 

 

649

 

 

 

4,254

 

 

 

2,185

 

Income before income taxes

 

 

109,632

 

 

 

23,732

 

 

 

208,496

 

 

 

45,740

 

Provision for income taxes

 

 

40,367

 

 

 

14,697

 

 

 

76,915

 

 

 

27,027

 

Income from continuing operations

 

 

69,265

 

 

 

9,035

 

 

 

131,581

 

 

 

18,713

 

Gain from discontinued operations, net of tax

 

 

4,847

 

 

 

 

 

 

4,847

 

 

 

 

Net income

 

$

74,112

 

 

$

9,035

 

 

$

136,428

 

 

$

18,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.35

 

 

$

0.05

 

 

$

0.67

 

 

$

0.10

 

Gain from discontinued operations

 

 

0.03

 

 

 

 

 

 

0.02

 

 

 

 

Net income per basic share

 

$

0.38

 

 

$

0.05

 

 

$

0.69

 

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.35

 

 

$

0.05

 

 

$

0.67

 

 

$

0.10

 

Gain from discontinued operations

 

 

0.03

 

 

 

 

 

 

0.02

 

 

 

 

Net income per diluted share

 

$

0.38

 

 

$

0.05

 

 

$

0.69

 

 

$

0.10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.125

 

 

$

0.125

 

 

$

0.375

 

 

$

0.375

 

Weighted average common shares outstanding - basic

 

 

195,215

 

 

 

194,573

 

 

 

195,308

 

 

 

194,381

 

Weighted average common shares outstanding - diluted

 

 

197,478

 

 

 

195,221

 

 

 

197,017

 

 

 

194,934

 

Retained earnings, beginning

 

$

1,553,380

 

 

$

1,522,856

 

 

$

1,543,085

 

 

$

1,569,851

 

Net income

 

 

74,112

 

 

 

9,035

 

 

 

136,428

 

 

 

18,713

 

Cash dividends and dividend equivalents

 

 

(24,925

)

 

 

(24,882

)

 

 

(74,991

)

 

 

(74,713

)

Reissuance of treasury stock

 

 

(17

)

 

 

(490

)

 

 

(1,972

)

 

 

(7,332

)

Retained earnings, ending

 

$

1,602,550

 

 

$

1,506,519

 

 

$

1,602,550

 

 

$

1,506,519

 

 

Refer to Notes to Consolidated Financial Statements

 

 

4


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

(In thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

74,112

 

 

$

9,035

 

 

$

136,428

 

 

$

18,713

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(1,419

)

 

 

(5,074

)

 

 

(9,853

)

 

 

(1,281

)

Other comprehensive loss:

 

 

(1,419

)

 

 

(5,074

)

 

 

(9,853

)

 

 

(1,281

)

Comprehensive income

 

$

72,693

 

 

$

3,961

 

 

$

126,575

 

 

$

17,432

 

 

Refer to Notes to Consolidated Financial Statements

 

 

5


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

October 31,

 

 

November 1,

 

(In thousands)

 

2015

 

 

2014

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

136,428

 

 

$

18,713

 

Gain from discontinued operations, net of tax

 

 

4,847

 

 

 

 

Income from continuing operations

 

 

131,581

 

 

 

18,713

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

109,382

 

 

 

105,294

 

Share-based compensation

 

 

32,531

 

 

 

12,952

 

Deferred income taxes

 

 

(12,914

)

 

 

(18,580

)

Foreign currency transaction loss

 

 

(564

)

 

 

75

 

Loss on impairment of assets

 

 

 

 

 

33,468

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventory

 

 

(203,759

)

 

 

(176,182

)

Accounts receivable

 

 

2,528

 

 

 

16,687

 

Prepaid expenses and other

 

 

(4,515

)

 

 

11,155

 

Other assets

 

 

(16,156

)

 

 

6,980

 

Accounts payable

 

 

111,198

 

 

 

100,441

 

Unredeemed gift cards and gift certificates

 

 

(19,512

)

 

 

(19,464

)

Deferred lease credits

 

 

(328

)

 

 

(389

)

Accrued compensation and payroll taxes

 

 

21,975

 

 

 

24,925

 

Accrued income and other taxes

 

 

4,419

 

 

 

19,898

 

Accrued liabilities

 

 

7,016

 

 

 

(1,147

)

Total adjustments

 

 

31,301

 

 

 

116,113

 

Net cash provided by operating activities from continuing operations

 

 

162,882

 

 

 

134,826

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(108,680

)

 

 

(210,534

)

Acquisition of intangible assets

 

 

(2,158

)

 

 

(1,084

)

Sale of available-for-sale securities

 

 

 

 

 

10,002

 

Net cash used for investing activities from continuing operations

 

 

(110,838

)

 

 

(201,616

)

Financing activities:

 

 

 

 

 

 

 

 

Payments on capital leases

 

 

(5,306

)

 

 

(3,762

)

Repurchase of common stock as part of publicly announced programs

 

 

(15,459

)

 

 

 

Repurchase of common stock from employees

 

 

(5,164

)

 

 

(7,464

)

Net proceeds from stock options exercised

 

 

6,347

 

 

 

7,086

 

Excess tax benefit from share-based payments

 

 

653

 

 

 

742

 

Cash dividends paid

 

 

(73,113

)

 

 

(72,912

)

Net cash used for financing activities from continuing operations

 

 

(92,042

)

 

 

(76,310

)

Effect of exchange rates changes on cash

 

 

(777

)

 

 

4,612

 

Cash flows of discontinued operations

 

 

 

 

 

 

 

 

Net cash used for operating activities

 

 

(6,805

)

 

 

 

Net cash used for investing activities

 

 

 

 

 

 

Net cash used for financing activities

 

 

 

 

 

 

Effect of exchange rates changes on cash

 

 

 

 

 

 

Net cash used for discontinued operations

 

 

(6,805

)

 

 

 

Net decrease in cash and cash equivalents

 

 

(47,580

)

 

 

(138,488

)

Cash and cash equivalents - beginning of period

 

 

410,696

 

 

 

418,933

 

Cash and cash equivalents - end of period

 

$

363,116

 

 

$

280,445

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

81,797

 

 

$

7,623

 

Cash paid during the period for interest

 

$

892

 

 

$

448

 

 

Refer to Notes to Consolidated Financial Statements

 

 

6


AMERICAN EAGLE OUTFITTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at October 31, 2015 and November 1, 2014 and for the 13 and 39 week periods ended October 31, 2015 and November 1, 2014 have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Fiscal 2014 Annual Report. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AEO” and the “AE Brand” refer to our American Eagle Outfitters stores. “aerie” refers to our aerie® by American Eagle® stores. “AEO Direct” refers to our e-commerce operations, ae.com and aerie.com.

The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.

 

 

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 October 31, 2015, the Company operated in one reportable segment.

Fiscal Year

The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2015” refers to the 52 week period ending January 30, 2016. “Fiscal 2014” refers to the 52 week period ended January 31, 2015.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our 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 the Company’s estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Originally, ASU 2014-09 was effective for annual reporting periods beginning after December 15, 2016. In July 2015, the FASB voted to approve amendments deferring the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt ASU 2014-09 on February 4, 2018. The Company does not expect a material impact of the adoption of this guidance on the Company’s consolidated financial condition, results of operations or cash flows.

7


Foreign Currency Translation

In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (the reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive 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 total net revenue. 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 total net revenue 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.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, 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 total net revenue. 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 license agreements based on a percentage of merchandise sales by the licensee.  This revenue is recorded as a component of total net revenue when earned.

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.

Design costs are related to the Company's Design Center operations and include compensation, travel, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold.

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. Gross profit is the difference between total net revenue 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.

Other Income, Net

Other income, net consists primarily of foreign currency transaction gain/loss and interest income/expense.

8


Other-than-Temporary Impairment

The Company evaluates its investments for impairment in accordance with ASC 320, InvestmentsDebt 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. There was no net impairment loss for investment securities recognized in earnings during the 13 and 39 weeks ended October 31, 2015 or November 1, 2014.

Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

As of October 31, 2015 and November 1, 2014, the Company held no short-term investments.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and short-term investments.

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 when both title and risk of loss for the merchandise have transferred 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.

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.

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.

Refer to Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.

9


Property and Equipment

Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, 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 (“ASC 360”), 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, for stores that have been open for a period of time sufficient to reach maturity.  Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded.

During the 13 weeks ended November 1, 2014, the Company recorded pre-tax asset impairment charges of $33.5 million that includes $25.1 million for the impairment of 79 retail stores recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s evaluation of current and future projected performance, it was determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores’ assets. Additionally, the Company recorded $8.4 million of impairment charges related to corporate assets. Refer to Note 13 to the Consolidated Financial Statements for additional information regarding Restructuring Charges.

Refer to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment.

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canadian business and businesses in Hong Kong and China.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 31, 2015.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.

Intangible Assets

Intangible assets are recorded on the basis of cost with amortization computed utilizing the straight-line method over the assets’ estimated useful lives.  The Company’s intangible assets, which primarily include trademark assets, are generally amortized over 15 to 25 years.

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows are less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 39 weeks ended October 31, 2015 or November 1, 2014.

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding intangible assets.

Gift Cards

The value of a gift card is recorded as a current liability upon issuance, 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 total net revenue. 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 $1.4 million and $1.1 million of revenue related to gift card breakage during both the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. During the 39 weeks ended October 31, 2015 and November 1, 2014, the Company recorded $4.6 million and $4.1 million, respectively, of revenue related to gift card breakage.

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

10


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). The receivable is reduced as amounts are received from the landlord.

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”). 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 the credit card rewards program. Customers who make purchases 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 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 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 or aerie 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.

The Company offers its customers the AEREWARD$sm loyalty program (the “Program”).  Under the 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 of the reward. 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 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.   

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Brand retail stores, aerie 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.  

 

 

3. Cash and Cash Equivalents and Short-term Investments

The following table summarizes the fair market values for the Company’s cash and marketable securities, which are recorded on the Consolidated Balance Sheets:

 

(In thousands)

 

October 31,

2015

 

 

January 31,

2015

 

 

November 1,

2014

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

283,035

 

 

$

370,692

 

 

$

185,212

 

Money-market

 

 

80,081

 

 

 

40,005

 

 

 

72,896

 

Treasury bills

 

 

 

 

 

 

 

 

22,337

 

Total cash and cash equivalents

 

$

363,116

 

 

$

410,697

 

 

$

280,445

 

Total

 

$

363,116

 

 

$

410,697

 

 

$

280,445

 

 

Proceeds from the sale of investments were $10.0 million for the 39 weeks November 1, 2014.  There were no sales or purchases of investments for the 39 weeks ended October 31, 2015.

There were no unrecognized gains or losses for the Company’s available-for-sale securities for the 13 or 39 weeks ended October 31, 2015 or November 1, 2014.

 

 

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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 a 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 October 31, 2015 and November 1, 2014, the Company held certain assets that are required to be measured at fair value on a recurring basis.  These include cash and cash equivalents.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents) measured at fair value on a recurring basis at October 31, 2015 and November 1, 2014:

 

 

 

Fair Value Measurements at October 31, 2015

 

(In thousands)

 

Carrying

Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

283,035

 

 

 

283,035

 

 

 

 

 

 

 

Money-market

 

 

80,081

 

 

 

80,081

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

363,116

 

 

$

363,116

 

 

 

 

 

 

 

Total

 

$

363,116

 

 

$

363,116

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at November 1, 2014

 

(In thousands)

 

Carrying

Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

185,212

 

 

$

185,212

 

 

 

 

 

 

 

Money-market

 

 

72,896

 

 

 

72,896

 

 

 

 

 

 

 

Treasury bills

 

 

22,337

 

 

 

22,337

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

280,445

 

 

$

280,445

 

 

 

 

 

 

 

Total

 

$

280,445

 

 

$

280,445

 

 

 

 

 

 

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at October 31, 2015 or November 1, 2014.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets 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.

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Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. During the 39 weeks ended November 1, 2014, certain long-lived assets related to the Company’s retail stores were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in the loss on impairment of assets charge within the Consolidated Statements of Operations.

The fair value of these assets 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.

 

 

5. Earnings per Share

The following is a reconciliation between basic and diluted weighted average shares outstanding:

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 31,

 

 

November 1,

 

 

October 31,

 

 

November 1,

 

(In thousands)

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

195,215

 

 

 

194,573

 

 

 

195,308

 

 

 

194,381

 

Dilutive effect of stock options and non-vested restricted

   stock

 

 

2,263

 

 

 

648

 

 

 

1,709

 

 

 

553

 

Diluted number of common shares outstanding

 

 

197,478

 

 

 

195,221

 

 

 

197,017

 

 

 

194,934

 

 

Equity awards to purchase approximately 13,000 shares of common stock during the 13 and 39 weeks ended October 31, 2015, respectively, and approximately 2.4 million shares of common stock during both the 13 weeks and 39 weeks ended November 1, 2014, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive.

There were no shares for either the 13 and 39 weeks ended October 31, 2015, and no shares and 0.5 million shares for the 13 and 39 weeks ended November 1, 2014, respectively, of restricted stock units that were outstanding but not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive. Additionally, approximately 0.6 million shares of restricted stock units for both the 13 and 39 weeks ended October 31, 2015 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 annual performance goals.

Refer to Note 9 to the Consolidated Financial Statements for additional information regarding share-based compensation.

 

 

6. Property and Equipment

Property and equipment consists of the following:

 

 

 

October 31,

 

 

January 31,

 

 

November 1,

 

(In thousands)

 

2015

 

 

2015

 

 

2014

 

Property and equipment, at cost

 

$

1,784,862

 

 

$

1,690,175

 

 

$

1,700,269

 

Less:  Accumulated depreciation

 

 

(1,075,601

)

 

 

(991,948

)

 

 

(982,732

)

Property and equipment, net

 

$

709,261

 

 

$

698,227

 

 

$

717,537

 

 

 

7. Intangible Assets

Intangible assets consist of the following:

 

 

 

October 31,

 

 

January 31,

 

 

November 1,

 

(In thousands)

 

2015

 

 

2015

 

 

2014

 

Trademarks and other intangibles, at cost

 

$

61,543

 

 

$

59,385

 

 

$

59,205

 

Less:  Accumulated amortization

 

 

(14,787

)

 

 

(12,179

)

 

 

(11,341

)

Intangible assets, net

 

$

46,756

 

 

$

47,206

 

 

$

47,864

 

 

 

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8. Other Credit Arrangements

In Fiscal 2014, the Company entered into a Credit Agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment.

All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by a first-priority security interest in certain working capital assets of the borrowers and guarantors, consisting primarily of cash, receivables, inventory and certain other assets and have been further secured by first-priority mortgages on certain real property.

As of October 31, 2015, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of October 31, 2015.

Additionally, the Company has borrowing agreements with two separate financial institutions under which it may borrow an aggregate of $155 million USD for the purposes of trade letter of credit issuances. The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the respective financial institutions.

As of October 31, 2015, the Company had outstanding trade letters of credit of $27.7 million

 

 

9. Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies 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 the 13 and 39 weeks ended October 31, 2015 was $10.5 million ($6.5 million, net of tax) and $32.5 million ($20.0 million, net of tax), respectively, and for the 13 and 39 weeks ended November 1, 2014 was $6.5 million ($4.0 million, net of tax) and $13.0 million ($8.0 million, net of tax), respectively.

Stock Option Grants

The Company grants both time-based and performance-based stock options.  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 one year and are earned if the Company meets pre-established performance goals.

A summary of the Company’s stock option activity for the 39 weeks ended October 31, 2015 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual