10-K 1 aeo-10k_20160130.htm 10-K aeo-10k_20160130.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

x

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

For the Fiscal Year Ended January 30, 2016

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

15203-2329

(Address of principal executive offices)

(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  x    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  x

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 the filing requirements for at 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 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

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 Act).    YES  o    NO  x

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of August 1, 2015 was $3,211,142,684.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 180,659,762 Common Shares were outstanding at March 7, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

Part III — Proxy Statement for 2016 Annual Meeting of Stockholders, in part, as indicated.

 

 

 

 


 

AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

Page

Number

PART I

 

Item 1. Business

3

Item 1A. Risk Factors

7

Item 1B. Unresolved Staff Comments

11

Item 2. Properties

11

Item 3. Legal Proceedings

12

Item 4. Mine Safety Disclosures

12

 

 

PART II

 

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

12

Item 6. Selected Consolidated Financial Data

15

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

29

Item 8. Financial Statements and Supplementary Data

30

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

57

Item 9A. Controls and Procedures

57

Item 9B. Other Information

60

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

60

Item 11. Executive Compensation

60

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

60

Item 13. Certain Relationships and Related Transactions, and Director Independence

60

Item 14. Principal Accounting Fees and Services

60

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

60

 

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PART I

Item 1. Business.

General

American Eagle Outfitters, Inc., (“AEO Inc.,” the “Company,” “we,” “our”) a Delaware corporation, was founded in 1977.  We are a leading specialty retailer, operating over 1,000 retail stores and online at ae.com and aerie.com in the U.S. and internationally.  We offer a broad assortment of apparel and accessories for men and women under the American Eagle Outfitters brand, and intimates, apparel and personal care products for women under the Aerie brand.  AEO Inc. operates stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom. We also have license agreements with third parties to operate American Eagle Outfitters and Aerie stores throughout Asia, Europe, Latin America and the Middle East.  As of January 30, 2016, we operated 949 American Eagle Outfitters stores and 97 Aerie stand-alone stores.  Our licensed store base has grown to 141 locations in 22 countries and our online business ships to 81 countries worldwide.

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. Additionally, a five-year summary of certain financial and operating information can be found in Part II, Item 6, Selected Consolidated Financial Data, of this Form 10-K.  See also Part II, Item 8, Financial Statements and Supplementary Data.

Brands

American Eagle Outfitters Brand (“AEO Brand”)

The AEO Brand is an optimistic, authentic, energetic American brand. Our passion for denim is at the heart of everything we do, and our bottoms collection is complemented by a rich assortment of other apparel categories, as well as footwear and accessories. We work to craft high-quality, on-trend clothing that represents a terrific value in every style. Each season, it is our goal to create an aspirational collection and campaign that encourages our customers to take what we make, and LIVE YOUR LIFE.

As of January 30, 2016, the AEO Brand operated 949 stores and online at ae.com.

Aerie

Aerie is an intimates brand, offering bras, undies, swim and so much more for every girl. Aerie embodies a youthful spirit, which is fun, relaxed, sexy, natural, strong and real. We are committed to not retouching our images and our brand DNA is deeply rooted in our Aerie REAL campaign, which focuses on body positivity and inspiring confidence in our customers. We believe beauty comes from the inside out.

As of January 30, 2016, the Aerie brand operates 97 stand-alone stores and 67 side-by-side stores connected to AEO brand stores.  In addition, the Aerie brand is sold in AEO brand stores and online at aerie.com.

Other brands

On November 2, 2015, AEO Inc. acquired Tailgate Clothing Company, which owns and operates Tailgate, a vintage, sports-inspired apparel brand with a college town store concept, and Todd Snyder New York, a premium menswear brand. As of January 30, 2016, we operated one Tailgate store in Iowa City, Iowa. Tailgate and Todd Snyder product is also sold online at TailgateClothing.com and ToddSnyder.com, respectively.

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Business Priorities & Strategy

We are focused on delivering revenue growth and improved profitability as we execute on our key priorities.  Our current priorities include:

·

Capitalize on the strength of our brands to achieve growth through continued product innovation and product-focused marketing across both stores and digital channels to drive customer acquisition.

·

Grow the Aerie brand through digital expansion, new customer acquisition and new store growth.

·

Grow the digital business through our continued focus on advancing mobile, investing in digital marketing, expanding our product offerings and improving the desktop experience.

·

Pursue international expansion by advancing our digital capabilities and through our blended approach of licensed and Company-owned store growth.

Real Estate

We ended Fiscal 2015 with 1,188 Company-owned and licensed store locations. Our AEO brand stores average approximately 6,500 gross square feet and approximately 5,200 on a selling square foot basis. Our Aerie brand stores average approximately 3,900 gross square feet and approximately 3,000 on a selling square foot basis. The gross square footage of our Company-owned stores remained flat during Fiscal 2015.

Company-Owned Stores

Our Company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the U.S., Canada, Mexico, China, Hong Kong and the United Kingdom. Stores are located in high-traffic locations in most retail centers in which we operate.

The following table provides the number of our Company-owned stores in operation as of January 30, 2016 and January 31, 2015.

 

 

 

January 30,

 

 

January 31,

 

 

 

2016

 

 

2015

 

AEO Brand:

 

 

 

 

 

 

 

 

United States

 

 

822

 

 

 

834

 

Canada

 

 

86

 

 

 

86

 

Mexico

 

 

23

 

 

 

18

 

China

 

 

9

 

 

 

9

 

Hong Kong

 

 

6

 

 

 

5

 

United Kingdom

 

 

3

 

 

 

3

 

Total AEO Brand

 

 

949

 

 

 

955

 

Aerie Brand:

 

 

 

 

 

 

 

 

United States

 

 

82

 

 

 

86

 

Canada

 

 

15

 

 

 

15

 

Mexico

 

 

 

 

Total Aerie Brand

 

 

97

 

 

 

101

 

Tailgate

 

 

1

 

 

 

 

Total Consolidated

 

 

1,047

 

 

 

1,056

 

 

The following table provides the changes in the number of our Company-owned stores for the past five fiscal years:

 

Fiscal Year

 

Beginning of Year

 

 

Opened

 

 

Closed

 

 

End of Year

 

2015

 

 

1,056

 

 

 

23

 

 

 

(32

)

 

 

1,047

 

2014

 

 

1,066

 

 

 

60

 

 

 

(70

)

 

 

1,056

 

2013

 

 

1,044

 

 

 

64

 

 

 

(42

)

 

 

1,066

 

2012

 

 

1,069

 

 

 

16

 

 

 

(41

)

 

 

1,044

 

2011

 

 

1,077

 

 

 

21

 

 

 

(29

)

 

 

1,069

 

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Licensed Stores

In addition to our Company-owned stores, our merchandise is sold at stores operated by licensees. Under these agreements, our merchandise is sold at American Eagle Outfitters and Aerie stores owned and operated by third party operators.  Revenue recognized under license agreements generally consists of royalties earned and recognized upon sale of merchandise by franchise and license partners to retail customers.

As of January 30, 2016, our products are sold at 141 locations operated by licensees in 22 countries. We continue to increase the number of locations under these types of arrangements as part of our balanced approach to global expansion.

AEO Direct

We sell merchandise through our websites, ae.com and aerie.com, both domestically and internationally. The websites reinforce each particular brand’s lifestyle, and are designed to complement the in-store experience.

Over the past several years, we have invested in building its technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the desktop experience.  

Omni-Channel

In addition to our investments in technology, we have invested in building omni-channel capabilities to better serve customers and gain operational efficiencies. These upgraded technologies have provided a single view of inventory across channels, connecting physical stores directly to our digital business, providing our customers with a more convenient and improved shopping experience.  Our store-to-door tool enables store customers to seamlessly make purchases from online inventory.  Additionally, we fulfill online orders at stores through our buy online, ship from store tool, improving online order fulfillment rates.  We also offer a reserve online, pick up in store service to our customers.  We will continue to optimize these tools and services to build ongoing improvements to the customer shopping experience.

Merchandise Suppliers

We design our merchandise, which is manufactured by third-party factories. During Fiscal 2015, we purchased substantially all of our merchandise from non-North American suppliers. For the year, we sourced merchandise through approximately 300 vendors located throughout the world, primarily in Asia, and did not source more than 10% of our merchandise from any single factory or supplier during the year.

We maintain a quality control department at our distribution centers to inspect incoming merchandise shipments for overall quality of manufacturing. Periodic inspections are also made by our employees and agents at manufacturing facilities to identify quality issues prior to shipment of merchandise.

We uphold an extensive factory inspection program to monitor compliance with our Vendor Code of Conduct.  New garment factories must pass an initial inspection in order to do business with us and we continue to review their social compliance performance both through internal audits by our compliance team and through the use of third-party monitors.  We strive to partner with suppliers who respect local laws and share our dedication to utilize best practices in human rights, labor rights, environmental practices and workplace safety.

Inventory and Distribution

Merchandise is shipped directly from our vendors to our U.S. distribution centers in Hazelton, Pennsylvania and Ottawa, Kansas, or to our Canadian distribution center in Mississauga, Ontario.  Additionally, an increasing amount of product is shipped directly to stores, by-passing our distribution centers which reduces transit times and lowers operating costs. We contract with third-party distribution centers in the Netherlands, Mexico City, Hong Kong and Shanghai.

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We strive to maintain sufficient quantities of inventory in our retail stores and distribution centers to offer customers a full selection of current merchandise. We emphasize rapid turnover and take markdowns as required to keep merchandise fresh and current.

Regulation

We and our products are subject to regulation by various federal, state, local and foreign regulatory authorities. We are subject to a variety of customs regulations and international trade arrangements.

Competition

The retail apparel industry is highly competitive both in stores and on-line. 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®, AEO®, LIVE YOUR LIFE®, Aerie® and the Flying Eagle Design with the United States Patent and Trademark Office. We also have registered or have applied to register these trademarks with the registries 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®,  AMERICAN EAGLE®,  AEO®, LIVE YOUR LIFE®, Aerie® and the Flying Eagle Design with the Canadian Intellectual Property Office.  In addition, we have acquired rights in AETM for clothing products and registered AE® in connection with certain non-clothing products. 

In the U.S. and in other countries around the world, we also have registered, or have applied to register, a number of other marks used in our business, including our pocket stitch designs.

These registered 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 30, 2016, we had approximately 37,800 employees in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom of whom approximately 31,300 were part-time and seasonal hourly employees.

Executive Officers of the Registrant

Mary M. Boland, age 58, has served as our Executive Vice President, Chief Financial and Administrative Officer, and Principal Financial Officer since July 2012. Prior to joining us, Ms. Boland served Levi Strauss & Co. as Senior Vice President Finance of Global Levi’s from 2011 to 2012 and as Senior Vice President Finance of the Americas from 2006 to 2011. Prior to that time, Ms. Boland held a variety of finance positions with General Motors Corporation from 1979 to 2006 including Vice President and Chief Financial Officer, North America from 2003 to 2006.

Jennifer M. Foyle, age 49, has served as our Global Brand President – Aerie since January 2015.  Prior thereto, Ms. Foyle served as Executive Vice President, Chief Merchandising Officer – Aerie from February 2014 to January 2015 and Senior Vice President, Chief Merchandising Officer – Aerie from August 2010 to February 2014.  Prior to joining us, Ms. Foyle was President of Calypso St. Barth from 2009 to 2010.  In addition, she held various positions at J. Crew Group, Inc., including Chief Merchandising Officer, from 2003 to 2009.

Charles F. Kessler, age 43, has served as our Global Brand President – American Eagle Outfitters since January 2015.  Prior thereto, he served as our Executive Vice President, Chief Merchandising and Design Officer – American Eagle Outfitters from February 2014 to January 2015.  Prior to joining us, Mr. Kessler served as Chief Merchandising Officer at Urban Outfitters, Inc. from October 2011 to November 2013 and as Senior Vice President, Corporate

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Merchandising at Coach, Inc. from July 2010 to October 2011.  Prior to that time, Mr. Kessler held various positions with Abercrombie & Fitch Co. from 1994 to 2010, including Executive Vice President, Female Merchandising from 2008 to 2010.

Michael R. Rempell, age 42, has served as our Executive Vice President and Chief Operations Officer since June 2012. Prior thereto, he served as our Executive Vice President and Chief Operating Officer, New York Design Center, from April 2009 to June 2012, as Senior Vice President and Chief Supply Chain Officer from May 2006 to April 2009, and in various other positions since joining us in February 2000.

Jay L. Schottenstein, age 61, has served as our Executive Chairman, Chief Executive Officer since December 2015.  Prior thereto, Mr. Schottenstein served as our Executive Chairman, Interim Chief Executive Officer from January 2014 to December 2015. He has also served as our Chairman and its predecessors since March 1992. He served as our Chief Executive Officer from March 1992 until December 2002 and prior to that time, he served as a Vice President and Director of our predecessors since 1980. He has also served as Chairman of the Board and Chief Executive Officer of Schottenstein Stores Corporation (“SSC”) since March 1992 and as President since 2001. Prior thereto, Mr. Schottenstein served as Vice Chairman of SSC from 1986 to 1992. He has been a Director of SSC since 1982. Mr. Schottenstein also served as Chief Executive Officer from March 2005 to April 2009 and as Chairman of the Board since March 2005 of DSW Inc., a company traded on the New York Stock Exchange. He has also served as an officer and director of various other entities owned or controlled by members of his family since 1976.

Fiscal Year

Our fiscal year ends on the Saturday nearest to January 31. As used herein, “Fiscal 2016” refers to the 52 week period ending January 28, 2017. “Fiscal 2015”, “Fiscal 2014” and “Fiscal 2013” refer to the 52-week periods ended January 30, 2016, January 31, 2015 and February 1, 2014, respectively. “Fiscal 2012” refers to the 53-week period ended February 2, 2013.

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 under the “Investors” 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 “Investors.” 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 “Investors” section of our website at www.ae.com. These presentations are available as soon as reasonably practicable after they are presented at investor conferences.

Certifications

As required by the New York Stock Exchange (“NYSE”) Corporate Governance Standards Section 303A.12(a), on June 24, 2015, 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 inability to anticipate and respond to changing consumer preferences, fashion trends and a competitive environment 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

7


 

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 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 payroll taxes, 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, local or international economic conditions, thereby adversely impacting our business and results of operations.

Seasonality

Historically, our operations have been seasonal, with a large portion of total net revenue and operating income occurring in the third and fourth fiscal quarters, 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 inability to react to raw material cost, labor and energy cost increases

Increases in our costs, such as raw materials, labor and energy may reduce our overall profitability.  Specifically, fluctuations in the cost associated with the manufacture of merchandise we purchase from our suppliers impacts our cost of sales. We have strategies in place to help mitigate these costs; however, 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 inability 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 additional store asset impairment charges, which could adversely affect our results of operations and financial condition.

Our ability to rebalance our store fleet and drive improved performance through new store openings, selective closings and existing store remodels and expansions

Our inability to drive improved performance will depend in part on our ability to rebalance our store fleet and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2016, we plan to open approximately 15 to 20 new American Eagle Outfitters stores and approximately 10 new Aerie stores in North America and continue our international expansion. Additionally, we plan to remodel and refurbish 55 to 65 existing American Eagle Outfitters stores and close approximately 30 to 35 stores during Fiscal 2016. Accomplishing our store rebalancing and expansion goals will depend upon a number of factors, including the ability to obtain suitable sites 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 and rebalancing goals, manage our growth

8


 

effectively, migrate the business from closing stores to other stores or our direct business, successfully integrate the planned new stores into our operations or operate our new and remodeled stores profitably.

Our efforts to expand internationally

We are actively pursuing additional international expansion initiatives, which include wholly-owned stores and stores operated by third parties in select international markets. 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, licensee or other operator does not operate its stores in a manner consistent with our requirements regarding our brand and customer experience standards, our business results and the value of our brand could be negatively impacted.

A failure to properly implement our expansion initiatives, or the adverse impact of political or economic risks in these international markets, could have a material adverse effect on our results of operations and financial condition.  We have limited prior experience operating internationally, where we face established competitors.  In many of these locations, the real estate, labor and employment, transportation and logistics and other operating requirements differ dramatically from those in the locations where we have more experience. Consumer demand and behavior, as well as tastes and purchasing trends, may differ substantially, and as a result, sales of our products may not be successful, or the margins on those sales may not be in line with those we currently anticipate. Any differences that we encounter as we expand internationally may divert financial, operational and managerial resources from our existing operations, which could adversely impact our financial condition and results of operations.  In addition, we are increasingly exposed to foreign currency exchange rate risk with respect to our revenue, profits, assets, and liabilities denominated in currencies other than the U.S. dollar. We may in the future use instruments to hedge certain foreign currency risks; however, these measures may not succeed in offsetting all of the negative impact of foreign currency rate movements on our business and results of operations.

As we pursue our international expansion initiatives, we are subject to certain laws, including the Foreign Corrupt Practices Act, as well as the laws of the foreign countries in which we operate.  Violations of these laws could subject us to sanctions or other penalties that could have an adverse effect on our reputation, operating results and financial condition.

Our international merchandise sourcing strategy

Our merchandise is manufactured by suppliers worldwide. Although we purchase a significant portion of our merchandise through a single international buying agent, we do not maintain any exclusive commitments to purchase from any one vendor.  Because we have a global supply chain, any event causing the disruption of imports, including the insolvency of a significant supplier or a major labor slow-down, strike or dispute including any such actions involving ports, transloaders, consolidators or shippers, could have an adverse effect on our operations. 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. 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 United States Customs and Border Protection (CBP) enforcement actions, or political or economic disruptions. 

We have a Vendor Code of Conduct (the “Code”) that provides guidelines for 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 all violations can be eliminated in our supply chain.  Publicity regarding violation of our Code or other social responsibility standards by any of our vendor factories could adversely affect our reputation, sales and financial performance.

We believe that there is a risk of terrorist activity on a global basis. 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. Examples include, but are 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;

9


 

and the cancellation of agreements with entities who fail to meet our security requirements. In addition, CBP has recognized us as a validated participant 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.

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 operating, 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, staging implementation and in-sourcing certain processes, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement and redundancy technologies; however, there is a risk that information technology system disruptions and inaccurate system information, if not anticipated and/or promptly and appropriately mitigated, could have a material adverse effect on our results of operations.

Our inability to safeguard against security breaches with respect to our information technology systems

Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our business, customers and employees including credit card information. Security breaches could expose us to a risk of loss or misuse of this information and potential liability. We may not be able to anticipate or prevent rapidly evolving types of cyber-attacks. Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional personnel and protection technologies, train employees and engage third party experts and consultants. Advances in computer capabilities, new technological discoveries or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. Data and security breaches can also occur as a result of non-technical issues including intentional or inadvertent breach by employees or persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach could result in a violation of applicable privacy and other laws, significant financial exposure and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

Our reliance on key personnel

Our success depends to a significant extent upon our ability to attract and retain qualified key personnel, including senior management.   Collective or individual changes in our senior management and other key personnel could have an adverse effect on our ability to determine and execute our strategies, which could adversely affect our business and results of operations.  There is a high level of competition for senior management and other key personnel, and we cannot be assured we will be able to attract, retain and develop a sufficient number of qualified senior managers and other key personnel.

Failure to comply with regulatory requirements

As a public company, we are subject to numerous regulatory requirements, including those imposed by the Sarbanes-Oxley Act of 2002, the SEC and the NYSE.  In addition, we are subject to numerous domestic and foreign laws and regulations affecting our business, including those related to labor, employment, worker health and safety, competition, privacy, consumer protection, import/export and anti-corruption, including the Foreign Corrupt Practices Act.  Although we have put into place policies and procedures aimed at ensuring legal and regulatory compliance, our employees, subcontractors, vendors and suppliers could take actions that violate these requirements, which could have a material adverse effect on our reputation, financial condition and on the market price of our common stock.  In addition, recent regulatory developments regarding the use of “conflict minerals,” certain minerals originating from the Democratic Republic of Congo and adjoining countries, could affect the sourcing and availability of raw materials used by suppliers and subject us to costs associated with the regulations, including for the diligence pertaining to the presence of any conflict minerals used in our products, possible changes to products, processes or sources of our inputs, and reporting requirements.

10


 

Fluctuations in foreign currency exchange rates could adversely impact our financial condition and results of operations

We have foreign currency exchange rate risk with respect to revenues, expenses, assets and liabilities denominated in currencies other than the U.S. dollar. We currently do not utilize hedging instruments to mitigate foreign currency exchange risks.  Specifically, fluctuations in the value of the Canadian Dollar, Mexican Peso, Chinese Yuan, Hong Kong Dollar, British Pound and Euro against the U.S. Dollar could have a material adverse effect on our results of operations, financial condition and cash flows.

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, including exceeding capacity in our distribution centers; 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; extreme weather conditions or changes in climate conditions or 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 one location near our headquarters, which is used primarily for store and corporate support services, totaling approximately 51,000 square feet. This lease expires in 2022.

In suburban Pittsburgh, Pennsylvania, we own a 45,000 square foot building, which houses our data center and additional office space and lease an additional location of approximately 18,000 square feet, which is used for storage space. This lease expires in 2017.

We rent approximately 142,000 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 2026. We also lease an additional 35,000 square feet of office space in New York, New York, with various terms expiring through 2016.

We lease 9,200 square feet of office space in San Francisco, California that functions as a technology center for our engineers and digital marketing team focused on our omni-channel strategy. The lease for this space expires in 2019.

We also lease offices in international locations including 5,800 square feet in Mexico City expiring in 2020, 15,400 square feet in Hong Kong expiring in 2017 and 11,300 square feet in Shanghai, China expiring in 2017.

We own a distribution facility in Ottawa, Kansas consisting of approximately 1,220,000 total square feet. This facility is used to support new and existing growth initiatives, including AEO Direct and Aerie.

We opened a new distribution facility in 2014 in Hazleton, Pennsylvania consisting of approximately 1,000,000 total square feet. This is designed to enable faster, more efficient product deliveries and to support our long-term expansion goals.

We lease a building in Mississauga, Ontario with approximately 294,000 square feet, which houses our Canadian distribution center. The lease expires in 2018.

11


 

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.

All of our stores are leased and 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. Mine Safety Disclosures.

Not Applicable

 

 

PART II

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, 2016, there were 512 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 65,000. 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 30, 2016

 

$

16.64

 

 

$

13.24

 

 

$

0.125

 

October 31, 2015

 

$

18.35

 

 

$

14.68

 

 

$

0.125

 

August 1, 2015

 

$

18.31

 

 

$

15.74

 

 

$

0.125

 

May 2, 2015

 

$

17.90

 

 

$

13.96

 

 

$

0.125

 

January 31, 2015

 

$

14.63

 

 

$

11.91

 

 

$

0.125

 

November 1, 2014

 

$

14.81

 

 

$

10.42

 

 

$

0.125

 

August 2, 2014

 

$

11.97

 

 

$

10.28

 

 

$

0.125

 

May 3, 2014

 

$

14.85

 

 

$

10.95

 

 

$

0.125

 

 

During Fiscal 2015 and Fiscal 2014, we paid quarterly dividends as shown in the table above. The payment of future dividends is at the discretion of our Board of Directors (the “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.

12


 

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 29, 2011 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.

 

 

 

 

1/29/11

 

1/28/12

 

2/2/13

 

2/1/14

 

1/31/15

 

1/30/16

 

American Eagle Outfitters, Inc.

 

 

100.00

 

 

99.30

 

 

157.61

 

 

108.24

 

 

116.77

 

 

125.51

 

S&P Midcap 400

 

 

100.00

 

 

102.71

 

 

121.77

 

 

148.39

 

 

164.55

 

 

153.54

 

Dynamic Retail Intellidex

 

 

100.00

 

 

118.07

 

 

151.92

 

 

188.17

 

 

261.55

 

 

294.64

 

 

13


 

The following table provides information regarding our repurchases of common stock during the three months ended January 30, 2016.

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

 

Period

 

Shares Purchased

 

 

Per Share

 

 

Announced Programs

 

 

Under the Program

 

 

 

(1)

 

 

(2)

 

 

(1) (3)

 

 

(3)

 

Month #1 (November 1, 2015

   through November 28, 2015)

 

 

 

 

$

 

 

 

 

 

 

17,400,000

 

Month #2 (November 29, 2015

   through January 2, 2016)

 

 

1,649,352

 

 

$

15.69

 

 

 

1,649,116

 

 

 

15,750,884

 

Month #3 (January 3, 2016

   through January 30, 2016)

 

 

12,913,868

 

 

$

14.36

 

 

 

12,913,868

 

 

 

2,837,016

 

Total

 

 

14,563,220

 

 

$

14.51

 

 

 

14,562,984

 

 

 

2,837,016

 

 

(1)

There were 14.6 million shares repurchased as part of our publicly announced share repurchase program during the three months ended January 30, 2016 and there were 236 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 2013, our Board authorized the repurchase of 20.0 million shares of our common stock. The authorization of the remaining 2.8 million shares that may yet be purchased expires on January 28, 2017.

The following table sets forth additional information as of the end of Fiscal 2015, 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 our 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.

Unregistered Sale of Equity Securities and Use of Proceeds

On November 2, 2015, the Company issued 197,496 shares of common stock, with the approximate value of $3,087,000, to certain former stockholders of Tailgate Clothing Company, Corp. (“Tailgate”) in connection with the Company’s acquisition of Tailgate. These shares were issued in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions set forth in Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

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

 

 

1,212,930

 

 

$

14.83

 

 

 

6,009,946

 

Equity compensation plans not approved by stockholders

 

 

 

 

 

 

 

 

 

Total

 

 

1,212,930

 

 

$

14.83

 

 

 

6,009,946

 

 

(1)

Equity compensation plans approved by stockholders include the 1999 Stock Incentive Plan, the 2005 Stock Award and Incentive Plan, as amended (the “2005 Plan”), and the 2014 Stock Award and Incentive Plan (the “2014 Plan”).

14


 

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 Consolidated Financial Statements 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, 2013 and January 28, 2012 and the selected Consolidated Balance Sheet data as of February 1, 2014, February 2, 2013 and January 28, 2012 are derived from audited Consolidated Financial Statements not included herein.

 

 

 

For the Years Ended (1)

 

(In thousands, except per share amounts, ratios and other

 

January 30,

 

 

January 31,

 

 

February 1,

 

 

February 2,

 

 

January 28,

 

financial information)

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

Summary of Operations (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

3,521,848

 

 

$

3,282,867

 

 

$

3,305,802

 

 

$

3,475,802

 

 

$

3,120,065

 

Comparable sales increase (decrease) (3)

 

 

7

%

 

 

(5

)%

 

 

(6

)%

 

 

9

%

 

 

4

%

Gross profit

 

$

1,302,734

 

 

$

1,154,674

 

 

$

1,113,999

 

 

$

1,390,322

 

 

$

1,144,594

 

Gross profit as a percentage of net sales

 

 

37.0

%

 

 

35.2

%

 

 

33.7

%

 

 

40.0

%

 

 

36.7

%

Operating income

 

$

319,878

 

 

$

155,765

 

 

$

141,055

 

 

$

394,606

 

 

$

269,335

 

Operating income as a percentage of net sales

 

 

9.1

%

 

 

4.7

%

 

 

4.3

%

 

 

11.4

%

 

 

8.6

%

Income from continuing operations

 

$

213,291

 

 

$

88,787

 

 

$

82,983

 

 

$

264,098

 

 

$

175,279

 

Income from continuing operations as

   a percentage of net sales

 

 

6.1

%

 

 

2.6

%

 

 

2.5

%

 

 

7.6

%

 

 

5.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations per common

   share-basic

 

$

1.10

 

 

$

0.46

 

 

$

0.43

 

 

$

1.35

 

 

$

0.90

 

Income from continuing operations per common

   share-diluted

 

$

1.09

 

 

$

0.46

 

 

$

0.43

 

 

$

1.32

 

 

$

0.89

 

Weighted average common shares outstanding –

   basic

 

 

194,351

 

 

 

194,437

 

 

 

192,802

 

 

 

196,211

 

 

 

194,445

 

Weighted average common shares outstanding –

   diluted

 

 

196,237

 

 

 

195,135

 

 

 

194,475

 

 

 

200,665

 

 

 

196,314

 

Cash dividends per common share

 

$

0.50

 

 

$

0.50

 

 

$

0.38

 

 

$

2.05

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash and short-term investments

 

$

260,067

 

 

$

410,697

 

 

$

428,935

 

 

$

630,992

 

 

$

745,044

 

Long-term investments

 

$

 

 

$

 

 

$

 

 

$

 

 

$

847

 

Total assets

 

$

1,612,246

 

 

$

1,696,908

 

 

$

1,694,164

 

 

$

1,756,053

 

 

$

1,950,802

 

Short-term debt

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Long-term debt

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Stockholders’ equity

 

$

1,051,376

 

 

$

1,139,746

 

 

$

1,166,178

 

 

$

1,221,187

 

 

$

1,416,851

 

Working capital

 

$

259,693

 

 

$

368,947

 

 

$

462,604

 

 

$

647,668

 

 

$

833,326

 

Current ratio

 

 

1.56

 

 

 

1.80

 

 

 

2.11

 

 

 

2.49

 

 

 

3.06

 

Average return on stockholders’ equity

 

 

19.9

%

 

 

7.0

%

 

 

7.0

%

 

 

17.6

%

 

 

11.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Financial Information (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stores at year-end

 

 

1,047

 

 

 

1,056

 

 

 

1,066

 

 

 

1,044

 

 

 

1,069

 

Capital expenditures

 

$

153,256

 

 

$

245,002

 

 

$

278,499

 

 

$

93,939

 

 

$

89,466

 

Net sales per average selling square foot (4)

 

$

545

 

 

$

525

 

 

$

547

 

 

$

602

 

 

$

547

 

Total selling square feet at end of period

 

 

5,285,025

 

 

 

5,294,744

 

 

 

5,205,948

 

 

 

4,962,923

 

 

 

5,028,493

 

Net sales per average gross square foot (4)

 

$

436

 

 

$

420

 

 

$

444

 

 

$

489

 

 

$

438

 

Total gross square feet at end of period

 

 

6,601,112

 

 

 

6,613,100

 

 

 

6,503,486

 

 

 

6,023,278

 

 

 

6,290,284

 

Number of employees at end of period

 

 

37,800

 

 

 

38,000

 

 

 

40,400

 

 

 

40,100

 

 

 

39,600

 

15


 

 

(1)

Except for the fiscal year ended February 2, 2013, which includes 53 weeks, all fiscal years presented include 52 weeks.

(2)

All amounts presented are from continuing operations for all periods presented.  Refer to Note 15 to the accompanying Consolidated Financial Statements for additional information regarding the discontinued operations of 77kids.

(3)

The comparable sales increase for Fiscal 2012 ended February 2, 2013 is compared to the corresponding 53 week period in Fiscal 2011. Additionally, comparable sales for all periods include AEO Direct sales.

(4)

Total net revenue 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 approximately 15 to 20 AEO stores and 10 Aerie stores in North America and continued international expansion during Fiscal 2016;

·

the success of our efforts to expand internationally, engage in future franchise/license agreements, and/or growth through acquisitions or joint ventures;

·

the selection of approximately 55 to 65 American Eagle Outfitters stores in the United States and Canada for remodeling and refurbishing during Fiscal 2016;

·

the potential closure of approximately 30 to 35 American Eagle Outfitters and 15 Aerie stores in the United States and Canada during Fiscal 2016;

·

the planned opening of approximately 30 new international third party operated American Eagle Outfitters stores during Fiscal 2016;

·

the success of our core American Eagle Outfitters and Aerie brands through our omni-channel outlets within North America and internationally;

·

the expected payment of a dividend in future periods;

·

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 additional 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.

16


 

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.

We estimate gift card breakage and recognize revenue in proportion to actual gift card redemptions as a component of total net revenue. 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.

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 recognize royalty revenue generated from our license or franchise agreements based upon a percentage of merchandise sales by the licensee/franchisee.  This revenue is recorded as a component of total net revenue when earned.

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. We record merchandise receipts at the time which both title and risk of loss for the merchandise transfers to us.

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 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 (“ASC 360”), we evaluate 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 separately as a component of operating income under loss on impairment of assets.

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.

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.

17


 

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 choose 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 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 sales — Comparable sales provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including Fiscal 2013, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable 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 sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from American Eagle Outfitters and Aerie stores, as well as sales from AEO Direct, are included in total comparable sales. Sales from licensed or franchise stores are not included in comparable sales. Individual American Eagle Outfitters and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct.

AEO Direct sales are included in the individual American Eagle Outfitters and Aerie brand comparable sales metric for the following reasons:

·

Our approach to customer engagement is “omni-channel”, which provides a seamless customer experience through both traditional and non-traditional channels, including four wall store locations, web, mobile/tablet devices, social networks, email, in-store displays and kiosks; and

·

Shopping behavior has continued to evolve across multiple channels that work in tandem to meet customer needs. Management believes that presenting a brand level performance metric that includes all channels (i.e., stores and AEO Direct) to be the most appropriate, given customer behavior.

We no longer present AEO Direct separately due to the continued evolution of omni-channel engagement and the reasons discussed above.

Our management considers comparable sales to be an important indicator of our current performance. Comparable sales results are important to achieve leveraging of our costs, including store payroll, store supplies, rent, etc. Comparable sales also have a direct impact on our total net revenue, cash and working capital.

18


 

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 total net revenue and cost of sales. 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 consist of: compensation, rent, depreciation, travel, supplies and samples.

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.

Operating income – Our management views operating income as a key indicator of our performance. The key drivers of operating income are comparable sales, gross profit, our ability to control selling, general and administrative expenses, and our level of capital expenditures.  Management also uses earnings before interest and taxes as an indicator of operating results.

Return on invested capital - Our management uses return on invested capital as a key measure to assess our efficiency at allocating capital to profitable investments.  This measure is critical in determining which strategic alternatives to pursue.

Store productivity — Store productivity, including total net revenue per average square foot, sales per productive hour, average unit retail price (“AUR”), 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.

Our goals are to drive improvements to our gross profit performance, bring greater consistency to our results and deliver profitable growth over the long term.

Results of Operations

Overview

Our Fiscal 2015 performance was strong, in a challenging retail environment.   We executed on our key priorities aimed at achieving sales and earnings growth.  Specifically, we made improvements to the merchandise by refocusing on innovation, quality and more compelling styles.  Both American Eagle and Aerie delivered increases in sales and profitability.   We achieved higher average selling prices and fewer markdowns. AEO’s digital business was particularly strong and the business benefited from the utilization of advances in omni-channel tools.  Inventories and expenses were well managed throughout the year.  We ended the year with $260.1 million in cash and no long-term debt.  Cash flow from operations for the year was strong and allowed for the repurchase of 15.6 million shares for $227.1 million.

Total net revenue for the year increased 7% to $3.522 billion, compared to $3.283 billion last year. Total comparable sales increased 7%. By brand, American Eagle Outfitters’ comparable sales rose 7% and Aerie increased 20%. Consolidated gross margin increased 180 basis points to 37.0%, compared to 35.2% last year.

Income from continuing operations was $1.09 per diluted share this year, compared to $0.46 per diluted share last year. On an adjusted basis, income from continuing operations last year was $0.63 per diluted share, which excludes a ($0.17) per diluted share impact from impairment and restructuring charges.  

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The preceding paragraph contains non-GAAP financial measures (“non-GAAP” or “adjusted”), comprised of earnings per share information excluding non-GAAP items. This financial measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles (“GAAP”) and is not necessarily comparable to similar measures presented by other companies. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements. These amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating our business and operations.  The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.

 

 

 

Earnings per Share

 

 

 

For the Fiscal

Year Ended

 

 

 

January 31,

2015

 

Income from continuing operations per diluted share - GAAP Basis

 

$

0.46

 

 

 

 

 

 

Add: Asset Impairments (1)

 

 

0.11

 

Add: Restructuring Charges (2)

 

 

0.06

 

Income from continuing operations per diluted share - Non-GAAP Basis

 

$

0.63

 

 

(1)

Asset impairment costs of $0.11 per diluted share consist of $25.1 million for the impairment of 48 AEO and 31 Aerie stores.

(2)

Restructuring charges of $0.06 per diluted share include $17.8 million of severance and related employee costs and corporate charges.

We ended Fiscal 2015 with $260.1 million in cash and cash equivalents, a decrease of $150.6 million from last year. During the year, we generated $341.9 million of cash from operations. The cash from operations was offset by $227.1 million of share repurchases, $153.2 of capital expenditures and $97.2 million for payment of dividends. Merchandise inventory at the end of Fiscal 2015 was $305.2 million, an increase of 9% to last year.

The following table shows, for the periods indicated, the percentage relationship to total net revenue of the listed items included in our Consolidated Statements of Operations.

 

 

 

For the Fiscal Years Ended

 

 

 

 

January 30,

 

 

January 31,

 

 

February 1,

 

 

 

 

2016

 

 

2015

 

 

2014

 

 

Total net revenue

 

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

63.0

 

 

 

64.8

 

 

 

66.3

 

 

Gross profit

 

 

37.0

 

 

 

35.2

 

 

 

33.7

 

 

Selling, general and administrative expenses

 

 

23.7

 

 

 

24.6

 

 

 

24.1

 

 

Restructuring charges

 

 

 

 

 

0.6

 

 

 

 

 

Loss on impairment of assets

 

 

 

 

 

1.0

 

 

 

1.3

 

 

Depreciation and amortization expense

 

 

4.2

 

 

 

4.3

 

 

 

4.0

 

 

Operating income

 

 

9.1

 

 

 

4.7

 

 

 

4.3

 

 

Other income, net

 

 

0.1

 

 

 

0.1

 

 

 

 

 

Income before income taxes

 

 

9.2

 

 

 

4.8

 

 

 

4.3

 

 

Provision for income taxes

 

 

3.1

 

 

 

2.2

 

 

 

1.8

 

 

Income from continuing operations

 

 

6.1

 

 

 

2.6

 

 

 

2.5

 

 

Gain (Loss) from discontinued operations, net of tax

 

 

0.1

 

 

 

(0.2

)

 

 

 

 

Net income

 

 

6.2

 

%

 

2.4

 

%

 

2.5

 

%

 

Comparison of Fiscal 2015 to Fiscal 2014

Total Net Revenue

Total net revenue this year increased 7% to $3.522 billion compared to $3.283 billion.  For Fiscal 2015, total comparable sales increased 7% compared to a 5% decrease for Fiscal 2014.  By brand, including the respective AEO Direct revenue,

20


 

American Eagle Outfitters brand comparable sales increased 7%, or $189.8 million, and Aerie brand increased 20%, or $34.6 million. AEO Brand men’s comparable sales increased in the low-single digits and AEO Brand women’s comparable sales increased in the high-single digits.

For the year, store transactions decreased in the low single digits while units per transaction increased in the low single digits and AUR increased in the high single digits.

Gross Profit

Gross profit increased 13% to $1.303 billion from $1.155 billion last year.  On a consolidated basis, gross profit as a percent to total net revenue increased by 180 basis points to 37.0% from 35.2% last year.

The improvement in the gross margin was primarily due to 270 basis points of markdown improvement and 30 basis points of buying, occupancy and warehousing (“BOW”) cost leverage.  This was partially offset by 120 basis points of product cost deleverage as a result of higher incentive costs.

There was $21.0 million of share-based payment expense, consisting of both time and performance-based awards, included in gross profit this year. This is compared to $8.2 million of share-based payment expense included in gross profit 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.

Selling, General and Administrative Expenses

Selling, general and administrative expense increased 3% to $834.7 million, compared to $806.5 million last year. The increase in Fiscal 2015 was primarily due to higher incentive costs and investments in digital marketing, which were offset by a gain of $9.4 million on the sale of the previously closed Warrendale distribution center and savings from expense reduction initiatives. As a rate to total net revenue, selling, general and administrative expenses improved 90 basis points to 23.7%, compared to 24.6% last year.

There was $14.0 million of share-based payment expense, consisting of time and performance-based awards, included in selling, general and administrative expenses this year compared to $7.9 million last year.

Restructuring Charges

For Fiscal 2014, restructuring charges were $17.8 million, or 0.6% as a rate to total net revenue. This amount consists of corporate overhead reductions, including severance and related items, and office space consolidation. There were no restructuring charges in Fiscal 2015.

The restructuring charges were aimed at strengthening our corporate assets. Corporate overhead expenses eliminated redundancies at the home office. These changes are aimed at driving efficiencies and aligning investments in areas that help fuel the business.

Loss on Impairment of Assets

Loss on impairment of assets in Fiscal 2014 was the result of a store fleet and corporate location review and challenging performance last year, and consisted of $25.1 million for the impairment of 48 AEO Brand and 31 Aerie stores and $8.4 million for corporate items. There was no loss on impairment of assets recorded in Fiscal 2015.

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Depreciation and Amortization Expense

Depreciation and amortization expense increased to $148.2 million from $141.2 million last year, driven by omni-channel and IT investments, new factory and mainline AEO Brand stores, and the new fulfillment center. As a rate to total net revenue, depreciation and amortization decreased to 4.2% from 4.3% last year as a result of the higher total net revenue.

Other Income, Net

Other income was $2.0 million this year, compared to income of $3.7 million last year, primarily as a result of foreign currency fluctuations.

Provision for Income Taxes

The effective income tax rate from continuing operations decreased to 33.7% this year from 44.3% last year. The lower effective income tax rate in Fiscal 2015 was primarily due to an increase in world-wide earnings, income tax settlements, higher federal tax credits, and a decrease to the valuation allowance on foreign deferred tax assets.

Refer to Note 14 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.

Income from Continuing Operations

Income from continuing operations this year was $213.3 million, or $1.09 per diluted share. Income from continuing operations last year was $88.8 million, or $0.46 per diluted share. This includes $51.2 million, or $0.17 per diluted share, of after-tax impairment charges, asset write-offs, corporate charges and tax related items.

Gain from Discontinued Operations

In 2012, we exited the 77kids business and sold the stores and related e-commerce operations to a third party purchaser. In Fiscal 2014, we became primarily liable for 21 store leases as the third party purchaser did not fulfill its obligations and incurred $13.7 million in pre-tax expense ($8.5 million net of tax) to terminate store leases. During Fiscal 2015, we recorded a $7.8 million pre-tax gain ($4.8 million net of tax) as a result of favorably settling lease termination obligations.

Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations of 77kids.

Net Income

Net income increased to $218.1 million in this year from $80.3 million in last year. As a percent to total net revenue, net income was 6.2% and 2.4% for Fiscal 2015 and Fiscal 2014, respectively. Net income per diluted share was $1.11, compared to $0.42 last year. The change in net income was attributable to the factors noted above.

Comparison of Fiscal 2014 to Fiscal 2013

Total Net Revenue

Total net revenue for Fiscal 2014 decreased 1% to $3.283 billion compared to $3.306 billion for Fiscal 2013. For Fiscal 2014, total comparable sales decreased 5% compared to a 6% increase for the corresponding 52 week period in 2013. By brand, including the respective AEO Direct revenue, American Eagle Outfitters brand comparable sales decreased 6%, or $161.8 million, and Aerie brand increased 6%, or $10.1 million. AEO Brand men’s comparable sales decreased in the high single-digits and AEO Brand women’s comparable sales decreased in the low single-digits.

For the year, store transactions decreased in the mid-single-digits while units per transaction increased in the low-single digits and AUR remained flat.

22


 

Gross Profit

Gross profit increased 4% to $1.155 billion in Fiscal 2014 from $1.114 billion in Fiscal 2013. On a consolidated basis, gross profit as a percent to total net revenue increased by 150 basis points to 35.2% from 33.7% in Fiscal 2013. Included in gross profit in Fiscal 2013 were $24.1 million of pre-tax charges related to fabric and product liabilities and the discontinuation of the AE Performance line and $4.5 million of corporate and store asset write-offs.

Reduced markdowns and favorable product costs provided a combined 280 basis points of improvement in Fiscal 2014. BOW costs deleveraged 130 basis points from higher delivery costs and deleverage of rent on negative comparable sales.

There was $8.2 million of share-based payment expense, consisting of both time and performance-based awards, included in gross profit in Fiscal 2014. This is compared to a net benefit of $6.9 million of share-based payment expense included in gross profit in Fiscal 2013.

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.

Selling, General and Administrative Expenses

Selling, general and administrative expense increased 1% to $806.5 million in Fiscal 2014, compared to $796.5 million in Fiscal 2013. In Fiscal 2013, selling, general and administrative expense included $7.8 million of pre-tax employee related costs. As a rate to total net revenue, selling, general and administrative expenses increased 50 basis points to 24.6%, compared to 24.1% in Fiscal 2013. Higher incentive compensation and increased investment in advertising were partially offset by reduced overhead and variable expense.

There was $7.9 million of share-based payment expense, consisting of time and performance-based awards, included in selling, general and administrative expenses in Fiscal 2014 compared to $0.3 million in Fiscal 2013.

Restructuring Charges

Restructuring charges were $17.8 million, or 0.6% as a rate to total net revenue, for Fiscal 2014. This amount consists of corporate overhead reductions, including severance and related items, and office space consolidation. There were no restructuring charges in Fiscal 2013.

The restructuring charges are aimed at strengthening our corporate assets. Corporate overhead expenses eliminated redundancies at the home office. These changes are aimed at driving efficiencies and aligning investments in areas that help fuel the business.

Loss on Impairment of Assets

Loss on impairment of assets in Fiscal 2014 was the result of a store fleet and corporate location review and challenging performance in Fiscal 2014, and consisted of $25.1 million for the impairment of 48 AEO Brand and 31 Aerie stores and $8.4 million for corporate items. In Fiscal 2013, the loss on impairment of assets was $44.5 million relating to 69 retail stores and our Warrendale, Pennsylvania Distribution Center.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $141.2 million in Fiscal 2014 from $132.0 million in Fiscal 2013, driven by omni-channel and IT investments, new factory and international stores, and the new fulfillment center. As a rate to total net revenue, depreciation and amortization increased to 4.3% from 4.0% in Fiscal 2013 as a result of the lower total net revenue and an increase in depreciation and amortization expense in Fiscal 2014. Depreciation and amortization includes $11.7 million of asset write-offs in Fiscal 2013.

23


 

Other Income, Net

Other income was $3.7 million in Fiscal 2014, compared to income of $1.0 million in Fiscal 2013, primarily as a result of foreign currency fluctuations.

Provision for Income Taxes

The effective income tax rate from continuing operations increased 44.3% in Fiscal 2014 from 41.6% in Fiscal 2013. The higher effective income tax rate in Fiscal 2014 was primarily due to an increase to the valuation allowance on foreign deferred tax assets, offset by an overall increase in income levels.

Refer to Note 14 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.

Income from Continuing Operations

Income from continuing operations for Fiscal 2014 was $88.8 million, or $0.46 per diluted share. This includes $51.2 million, or ($0.17) per diluted share, diluted share impact from impairment charges and restructuring charges. Income from continuing operations for Fiscal 2013 was $83.0 million, or $0.43 per diluted share. This includes $60.9 million, or ($0.31) per diluted share, of after-tax impairment charges, asset write-offs, corporate charges and tax related items.

Loss from Discontinued Operations

We completed the sale of the 77kids stores and related e-commerce operations during 2012. Accordingly, the after-tax operating results appear in Loss from Discontinued Operations on the Consolidated Statements of Operations for all periods presented.

In Fiscal 2014, we became primarily liable for 21 store leases as the third party purchaser did not fulfill its obligations. We incurred $13.7 million in pre-tax expense to terminate store leases. Loss from Discontinued Operations, net of tax, was $8.5 million for Fiscal 2014.

Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations of 77kids.

Net Income

Net income decreased to $80.3 million in Fiscal 2014 from $83.0 million in Fiscal 2013. As a percent to total net revenue, net income was 2.4% and 2.5% for Fiscal 2014 and Fiscal 2013, respectively. Net income per diluted share was $0.42, compared to $0.43 in Fiscal 2013. The change in net income was attributable to the factors noted above.

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:

24


 

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 30, 2016 and January 31, 2015, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and investments.

In accordance with ASC 820, the following tables represent the fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of January 30, 2016:

 

 

Fair Value Measurements at January 30, 2016

 

(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

$

205,359

 

 

$

205,359

 

 

$

 

 

$

 

Money-market

 

54,708

 

 

 

54,708

 

 

 

 

 

 

 

Total cash and cash equivalents

$

260,067

 

 

$

260,067

 

 

$

 

 

$

 

Percent to total

 

100

%

 

 

100

%

 

 

 

 

 

 

 

In the event we hold Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at January 30, 2016.

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 and the return of value to shareholders through the repurchase of common stock and the payment of dividends. Historically, these uses of cash have been funded with cash flow from operations and existing cash on hand. Also, we hold a five-year asset-based revolving credit facility that allows us to borrow up to $400 million. Additionally, our uses of cash include the development of the Aerie brand and our international expansion efforts.  We expect to be able to fund our future cash requirements in North America 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 expansion of our brands internationally.

Our growth strategy includes fortifying our brands and 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 30,

 

 

January 31,

 

 

 

2016

 

 

2015

 

Working Capital (in 000's)

 

$

259,693

 

 

$

368,947

 

Current Ratio

 

 

1.56

 

 

 

1.80

 

 

25


 

The $109.3 million decrease in our working capital and corresponding decrease in the current ratio as of January 30, 2016 compared to January 31, 2015, related primarily to our use of cash for investing and financing activities, offset by net income, net of non-cash adjustments.  Investing and financing activities primarily include capital expenditures, share repurchases, and the payment of dividends.  In Fiscal 2015, we repurchased 15.6 million shares for $227.1 million and paid $0.50 per share of dividends for a total of $97.2 million.

Cash Flows from Operating Activities of Continuing Operations

Net cash provided by operating activities totaled $341.9 million during Fiscal 2015, compared to $338.4 million during Fiscal 2014 and $229.9 during Fiscal 2013. Our major source of cash from operations was merchandise sales. Our primary outflows of cash from operations were for the payment of operational costs. The year-over-year increase in cash flows from operations this year was primarily driven by the increase in income from continuing operations, net of non-cash adjustments.

Cash Flows from Investing Activities of Continuing Operations

Investing activities for Fiscal 2015 included $153.3 million in capital expenditures for property and equipment, cash paid for our acquisition of Tailgate Clothing Company of $10.4 million, and the purchase of intangible assets of $2.4 million, partially offset by $12.6 million of proceeds from the sale of the Warrendale Distribution Center. Investing activities for Fiscal 2014 included $245.0 million in capital expenditures for property and equipment, partially offset by $10.0 million of proceeds from the sale of investments classified as available-for-sale. Investing activities for Fiscal 2013 included $278.5 million in capital expenditures for property and equipment, $20.8 million for the purchase of assets related to our international expansion strategy and $52.1 million of investment purchases partially offset by $162.8 million of proceeds from the sale of investments classified as available-for-sale. For further information on capital expenditures, refer to the Capital Expenditures for Property and Equipment caption below.

Cash Flows from Financing Activities of Continuing Operations

During Fiscal 2015, cash used for financing activities resulted primarily from $227.1 million for the repurchase of shares as part of our publicly announced repurchase program, $97.2 million for the payment of dividends and $5.2 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 2014, cash used for financing activities resulted primarily from $97.2 million for the payment of dividends and $7.5 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 2013, cash used for financing activities resulted primarily from $72.3 million for the payment of dividends and $33.1 million for the repurchase of 1.6 million shares as part of our publicly announced repurchase program.

Cash returned to shareholders through dividends and share repurchases was $324.3 million and $97.2 million in Fiscal 2015 and Fiscal 2014, respectively.

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 2015, Fiscal 2014 and Fiscal 2013, the excess tax benefits from share-based payments of $0.7 million, $0.7 million and $8.8 million, respectively, are classified as financing cash flows.

Capital Expenditures for Property and Equipment

Fiscal 2015 capital expenditures were $153.3 million, compared to $245.0 million in Fiscal 2014.  Fiscal 2015 expenditures included $50.1 million related to investments in our AEO stores, including 22 new AEO stores, 28 remodeled and refurbished stores, and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology ($43.5 million), the improvement of our distribution centers and construction of a new distribution center ($15.9 million) and investments in e-commerce ($29.1 million) and other home office projects ($14.7 million).

For Fiscal 2016, we expect capital expenditures to be approximately $160 to $170 million related to the continued support of our expansion efforts, stores, information technology upgrades to support growth and investments in e-commerce.

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Credit Facilities

In Fiscal 2014, we 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 January 30, 2016, we were in compliance with the terms of the Credit Agreement and had $8.0 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of January 30, 2016.

Additionally, we have borrowing agreements with two separate financial institutions under which we may borrow an aggregate of $130 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 January 30, 2016, we had outstanding trade letters of credit of $0.4 million.

Stock Repurchases

During Fiscal 2015, as part of our publicly announced share repurchase program, we repurchased 15.6 million shares for approximately $227.1 million, at a weighted average price of $14.57 per share. During Fiscal 2014, there were no share repurchases as a part of our publicly announced repurchase programs. During Fiscal 2013, as part of our publicly announced share repurchase program, we repurchased 1.6 million shares for approximately $33.1 million, at a weighted average price of $20.66 per share. As of January 30, 2016, we had 2.8 million shares remaining authorized for repurchase under the program authorized by our Board in January 2013. The program authorized 20.0 million shares under a share repurchase program which expires on January 28, 2017. Subsequent to the fourth quarter of Fiscal 2015, our Board authorized 25.0 million shares under a new share repurchase program which expires on January 30, 2021.

During Fiscal 2015, Fiscal 2014 and Fiscal 2013, we repurchased approximately 0.3 million, 0.5 million and 1.1 million shares, respectively, from certain employees at market prices totaling $5.2 million, $7.5 million and $23.4 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

A $0.125 per share dividend was paid for each quarter of Fiscal 2015, resulting in a dividend yield of 3.4% for the trailing twelve months ended January 30, 2016. During Fiscal 2014, a $0.125 per share dividend was paid for each quarter, resulting in a dividend yield of 3.6% for the trailing twelve months ended January 31, 2015. Subsequent to the fourth quarter of Fiscal 2015, our Board declared a quarterly cash dividend of $0.125 per share, payable on April 22, 2016 to stockholders of record at the close of business on April 8, 2016. 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.

27


 

Obligations and Commitments

Disclosure about Contractual Obligations

The following table summarizes our significant contractual obligations as of January 30, 2016:

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less than

 

 

1-3

 

 

3-5

 

 

More than

 

(In thousands)

 

Total

 

 

1 Year

 

 

Years

 

 

Years

 

 

5 Years

 

Operating Leases (1)

 

$

1,637,379

 

 

$

285,100

 

 

$

479,683

 

 

$

370,449

 

 

$

502,147

 

Unrecognized Tax Benefits (2)

 

 

7,030

 

 

 

2,464

 

 

 

 

 

 

 

 

 

4,566

 

Purchase Obligations (3)

 

 

494,248

 

 

 

490,673

 

 

 

2,338

 

 

 

1,237

 

 

 

 

Total Contractual Obligations

 

$

2,138,657

 

 

$

778,237

 

 

$

482,021

 

 

$

371,686

 

 

$

506,713

 

 

(1)

Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases (Refer to Note 10 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 30, 2016 was $7.0 million, including approximately $1.3 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. We anticipate $2.5 million of unrecognized tax benefits will be realized within one year. The remaining balance of unrecognized tax benefits of $4.6 million is included in the “More than 5 Years” column as we are not able to reasonably estimate the timing of the potential future payouts.

(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 30, 2016:

 

 

 

Amount of Commitment Expiration Per Period

 

 

 

Total Amount

 

 

Less than

 

 

1-3

 

 

3-5

 

 

More than

 

(In thousands)

 

Committed

 

 

1 Year

 

 

Years

 

 

Years

 

 

5 Years

 

Trade Letters of Credit (1)

 

$

378

 

 

$

378

 

 

 

 

 

 

 

 

 

 

Standby Letters of Credit (2)

 

 

7,999

 

 

 

7,999

 

 

 

 

 

 

 

 

 

 

Total Commercial Commitments

 

$

8,377

 

 

$

8,377

 

 

 

 

 

 

 

 

 

 

 

(1)

Trade 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.

(2)

Standby letters of credit represent commitments, guaranteed by a bank, to pay landlords or vendors to the extent previously agreed criteria are not met.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Recent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 2 of the Consolidated Financial Statements.

Impact of Inflation

Historically, increases in the price of raw materials used in the manufacture of merchandise we purchase from suppliers has negatively impacted our cost of sales. Future increases in these costs, in addition to increases in the price of labor, energy and other inputs to the manufacture of our merchandise, could negatively impact our business and the industry in the future.

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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 not materially affected by changes in market interest rates. If our Fiscal 2015 average yield rate decreases by 10% in Fiscal 2016, our income before taxes will decrease by approximately $0.1 million.  Comparatively, if our Fiscal 2014 average yield rate had decreased by 10% in Fiscal 2015, our income before taxes would have decreased by approximately $0.1 million. These amounts are determined by considering the impact of the hypothetical yield rates on our cash and investment balances and assumes no change in our investment structure.

Foreign Exchange Rate Risk

We are primarily exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our financial results. We do not utilize hedging instruments to mitigate foreign currency exchange risks. A hypothetical 10% movement in the Canadian dollar and Mexican peso exchange rate could result in a $13.3 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive income within the consolidated balance sheets. An unrealized loss of $29.9 million is included in accumulated other comprehensive income as of January 30, 2016.