0001564590-18-030845.txt : 20181212 0001564590-18-030845.hdr.sgml : 20181212 20181212161641 ACCESSION NUMBER: 0001564590-18-030845 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 69 CONFORMED PERIOD OF REPORT: 20181103 FILED AS OF DATE: 20181212 DATE AS OF CHANGE: 20181212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EAGLE OUTFITTERS INC CENTRAL INDEX KEY: 0000919012 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 132721761 STATE OF INCORPORATION: DE FISCAL YEAR END: 0128 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33338 FILM NUMBER: 181231061 BUSINESS ADDRESS: STREET 1: 77 HOT METAL STREET CITY: PITTSBURGH STATE: PA ZIP: 15203 BUSINESS PHONE: 4124323300 MAIL ADDRESS: STREET 1: 77 HOT METAL STREET CITY: PITTSBURGH STATE: PA ZIP: 15203 10-Q 1 aeo-10q_20181103.htm 10-Q aeo-10q_20181103.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended November 3, 2018

OR

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

Commission File Number: 1-33338

 

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

No. 13-2721761

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

77 Hot Metal Street, Pittsburgh, PA

 

15203-2329

(Address of principal executive offices)

 

(Zip Code)

 

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

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

N/A

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 176,432,192 Common Shares were outstanding at December 11, 2018.

 

 

 


AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Balance Sheets: November 3, 2018; February 3, 2018 and October 28, 2017

 

3

 

 

Consolidated Statements of Operations and Retained Earnings: 13 weeks and 39 weeks ended November 3, 2018 and October 28, 2017

 

4

 

 

Consolidated Statements of Comprehensive Income: 13 weeks and 39 weeks ended November 3, 2018 and October 28, 2017

 

5

 

 

Consolidated Statements of Cash Flows: 39 weeks ended November 3, 2018 and October 28, 2017

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

31

Item 1A.    

 

Risk Factors

 

31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3.

 

Defaults Upon Senior Securities

 

N/A

Item 4.

 

Mine Safety Disclosures

 

N/A

Item 5.

 

Other Information

 

N/A

Item 6.

 

Exhibits

 

32

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

(In thousands, except per share amounts)

 

2018

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

279,872

 

 

$

413,613

 

 

$

257,527

 

Short-term investments

 

 

79,856

 

 

 

-

 

 

 

-

 

Merchandise inventory

 

 

591,671

 

 

 

398,213

 

 

 

534,019

 

Accounts receivable, net

 

 

84,074

 

 

 

78,304

 

 

 

77,113

 

Prepaid expenses and other

 

 

87,995

 

 

 

78,400

 

 

 

61,553

 

Total current assets

 

 

1,123,468

 

 

 

968,530

 

 

 

930,212

 

Property and equipment, at cost, net of accumulated depreciation

 

 

735,714

 

 

 

724,239

 

 

 

726,168

 

Intangible assets, at cost, net of accumulated amortization

 

 

44,164

 

 

 

46,666

 

 

 

46,979

 

Goodwill

 

 

14,898

 

 

 

15,070

 

 

 

14,972

 

Non-current deferred income taxes

 

 

12,796

 

 

 

9,344

 

 

 

29,025

 

Other assets

 

 

50,442

 

 

 

52,464

 

 

 

54,424

 

Total assets

 

$

1,981,482

 

 

$

1,816,313

 

 

$

1,801,780

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

343,360

 

 

$

236,703

 

 

$

330,716

 

Accrued compensation and payroll taxes

 

 

56,991

 

 

 

54,324

 

 

 

43,561

 

Accrued rent

 

 

87,410

 

 

 

83,312

 

 

 

80,580

 

Accrued income and other taxes

 

 

29,340

 

 

 

12,781

 

 

 

17,262

 

Unredeemed gift cards and gift certificates

 

 

30,392

 

 

 

52,347

 

 

 

29,475

 

Current portion of deferred lease credits

 

 

11,337

 

 

 

11,203

 

 

 

12,887

 

Other liabilities and accrued expenses

 

 

48,317

 

 

 

34,551

 

 

 

38,359

 

Total current liabilities

 

 

607,147

 

 

 

485,221

 

 

 

552,840

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred lease credits

 

 

48,220

 

 

 

47,977

 

 

 

50,439

 

Non-current accrued income taxes

 

 

7,229

 

 

 

7,269

 

 

 

4,590

 

Other non-current liabilities

 

 

23,474

 

 

 

29,055

 

 

 

30,712

 

Total non-current liabilities

 

 

78,923

 

 

 

84,301

 

 

 

85,741

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 5,000 shares authorized; none

   issued and outstanding

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 600,000 shares authorized;

   249,566 shares issued; 176,407, 177,316  and 177,084 shares

   outstanding, respectively

 

 

2,496

 

 

 

2,496

 

 

 

2,496

 

Contributed capital

 

 

565,316

 

 

 

593,770

 

 

 

588,978

 

Accumulated other comprehensive loss

 

 

(39,138

)

 

 

(30,795

)

 

 

(34,798

)

Retained earnings

 

 

2,002,687

 

 

 

1,883,592

 

 

 

1,812,821

 

Treasury stock, at cost, 73,159, 72,250 and 72,482 shares, respectively

 

 

(1,235,949

)

 

 

(1,202,272

)

 

 

(1,206,298

)

Total stockholders’ equity

 

 

1,295,412

 

 

 

1,246,791

 

 

 

1,163,199

 

Total liabilities and stockholders’ equity

 

$

1,981,482

 

 

$

1,816,313

 

 

$

1,801,780

 

 

Refer to Notes to Consolidated Financial Statements

 

 

3


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

November 3,

 

 

October 28,

 

 

November 3,

 

 

October 28,

 

(In thousands, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Total net revenue

 

$

1,003,707

 

 

$

960,433

 

 

$

2,791,522

 

 

$

2,566,826

 

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

604,220

 

 

 

585,520

 

 

 

1,734,491

 

 

 

1,621,441

 

Gross profit

 

 

399,487

 

 

 

374,913

 

 

 

1,057,031

 

 

 

945,385

 

Selling, general and administrative expenses

 

 

248,438

 

 

 

217,146

 

 

 

692,644

 

 

 

615,842

 

Restructuring charges

 

 

 

 

 

3,695

 

 

 

1,568

 

 

 

18,888

 

Depreciation and amortization expense

 

 

42,416

 

 

 

43,149

 

 

 

127,090

 

 

 

123,878

 

Operating income

 

 

108,633

 

 

 

110,923

 

 

 

235,729

 

 

 

186,777

 

Other income (expense), net

 

 

4,330

 

 

 

(13,243

)

 

 

5,692

 

 

 

(19,574

)

Income before income taxes

 

 

112,963

 

 

 

97,680

 

 

 

241,421

 

 

 

167,203

 

Provision for income taxes

 

 

27,491

 

 

 

33,947

 

 

 

55,687

 

 

 

56,997

 

Net income

 

$

85,472

 

 

$

63,733

 

 

$

185,734

 

 

$

110,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$

0.48

 

 

$

0.36

 

 

$

1.05

 

 

$

0.62

 

Net income per diluted share

 

$

0.48

 

 

$

0.36

 

 

$

1.04

 

 

$

0.61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.1375

 

 

$

0.125

 

 

$

0.4125

 

 

$

0.375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

176,938

 

 

 

177,288

 

 

 

177,033

 

 

 

178,272

 

Weighted average common shares outstanding - diluted

 

 

178,122

 

 

 

179,132

 

 

 

178,278

 

 

 

180,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings, beginning

 

$

1,941,536

 

 

$

1,772,233

 

 

$

1,883,592

 

 

$

1,775,775

 

Adoption of Accounting Standards Update 2014-09 (see Note 2)

 

 

-

 

 

 

-

 

 

 

152

 

 

 

-

 

Net income

 

 

85,472

 

 

 

63,733

 

 

 

185,734

 

 

 

110,206

 

Cash dividends and dividend equivalents

 

 

(24,251

)

 

 

(22,733

)

 

 

(73,831

)

 

 

(68,119

)

Reissuance of treasury stock

 

 

(70

)

 

 

(412

)

 

 

7,040

 

 

 

(5,041

)

Retained earnings, ending

 

$

2,002,687

 

 

$

1,812,821

 

 

$

2,002,687

 

 

$

1,812,821

 

 

Refer to Notes to Consolidated Financial Statements

 

 

4


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

39 Weeks Ended

 

 

 

November 3,

 

 

October 28,

 

 

 

November 3,

 

 

October 28,

 

(In thousands)

 

2018

 

 

2017

 

 

 

2018

 

 

2017

 

Net income

 

$

85,472

 

 

$

63,733

 

 

 

$

185,734

 

 

$

110,206

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation income (expense)

 

 

6,492

 

 

 

(4,677

)

 

 

 

8,343

 

 

 

1,504

 

Other comprehensive income:

 

 

6,492

 

 

 

(4,677

)

 

 

 

8,343

 

 

 

1,504

 

Comprehensive income

 

$

91,964

 

 

$

59,056

 

 

 

$

194,077

 

 

$

111,710

 

 

Refer to Notes to Consolidated Financial Statements

 

 

5


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

 

November 3,

 

 

October 28,

 

 

(In thousands)

 

2018

 

 

2017

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net income

 

$

185,734

 

 

$

110,206

 

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

131,704

 

 

 

125,370

 

 

Share-based compensation

 

 

17,833

 

 

 

12,056

 

 

Deferred income taxes

 

 

(3,955

)

 

 

19,846

 

 

Foreign currency transaction loss (gain)

 

 

(1,426

)

 

 

(5,002

)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Merchandise inventory

 

 

(197,120

)

 

 

(173,020

)

 

Accounts receivable

 

 

(5,705

)

 

 

9,515

 

 

Prepaid expenses and other

 

 

(5,604

)

 

 

16,220

 

 

Other assets

 

 

(1,697

)

 

 

2,872

 

 

Accounts payable

 

 

108,334

 

 

 

80,844

 

 

Unredeemed gift cards and gift certificates

 

 

(21,724

)

 

 

(23,581

)

 

Deferred lease credits

 

 

374

 

 

 

5,287

 

 

Accrued compensation and payroll taxes

 

 

2,929

 

 

 

(9,499

)

 

Accrued income and other taxes

 

 

16,468

 

 

 

5,519

 

 

Accrued liabilities

 

 

17,444

 

 

 

11,467

 

 

Total adjustments

 

 

57,855

 

 

 

77,894

 

 

Net cash provided by operating activities

 

 

243,589

 

 

 

188,100

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(143,940

)

 

 

(134,920

)

 

Purchase of available-for-sale investments

 

 

(124,829

)

 

 

-

 

 

Sale of available-for-sale investments

 

 

44,973

 

 

 

-

 

 

Acquisition of intangible assets

 

 

(547

)

 

 

(645

)

 

Net cash used for investing activities

 

 

(224,343

)

 

 

(135,565

)

 

Financing activities:

 

 

 

 

 

 

 

 

 

Payments on capital leases

 

 

(4,927

)

 

 

(8,705

)

 

Repurchase of common stock as part of publicly announced programs

 

 

(70,332

)

 

 

(87,682

)

 

Repurchase of common stock from employees

 

 

(19,060

)

 

 

(12,300

)

 

Net proceeds from stock options exercised

 

 

15,496

 

 

 

225

 

 

Cash dividends paid

 

 

(71,312

)

 

 

(66,385

)

 

Net cash used for financing activities

 

 

(150,135

)

 

 

(174,847

)

 

Effect of exchange rates changes on cash

 

 

(2,852

)

 

 

1,226

 

 

Net change in cash and cash equivalents

 

 

(133,741

)

 

 

(121,086

)

 

Cash and cash equivalents - beginning of period

 

 

413,613

 

 

 

378,613

 

 

Cash and cash equivalents - end of period

 

$

279,872

 

 

$

257,527

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

46,604

 

 

$

36,822

 

 

Cash paid during the period for interest

 

$

832

 

 

$

818

 

 

 

Refer to Notes to Consolidated Financial Statements

 

 

6


AMERICAN EAGLE OUTFITTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at November 3, 2018 and October 28, 2017 and for the 13 and 39 week periods ended November 3, 2018 and October 28, 2017 have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Fiscal 2017 Annual Report on Form 10-K filed on March 16, 2018 (the “Fiscal 2017 Form 10-K”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) that are considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AEO” and the “AE Brand” refer to our American Eagle Outfitters stores. “Aerie” refers to our Aerie® by American Eagle® stores. “AEO Direct” refers to our e-commerce operations, www.ae.com and www.aerie.com.  “Tailgate” refers to our Tailgate brand of vintage, sports- inspired apparel.  “Todd Snyder” refers to our Todd Snyder New York premium menswear brand.

Our business is affected by the pattern of seasonality common to most retail apparel businesses.  Historically, a large portion of total net revenue and operating income occurs in the third and fourth fiscal quarters, reflecting the increased demand during the back-to-school and year-end holiday selling seasons, respectively.  The results for the current and prior periods are not necessarily indicative of future financial results.

 

 

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.  At November 3, 2018, the Company operated in one reportable segment.

Fiscal Year

The Company’s financial year is a 52 or 53-week year that ends on the Saturday nearest to January 31 (each such period, a “Fiscal Year”). As used herein, “Fiscal 2018” refers to the 52-week period ending February 2, 2019. “Fiscal 2017” refers to the 53-week period ended February 3, 2018.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews the Company’s estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

7


Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016–02”) which replaces the existing guidance in Accounting Standard Certification (“ASC”) 840, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations.   The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The guidance in ASU 2016-02 permits a Company to adopt using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients that the Company plans to elect.  The Company will adopt the new standard in Fiscal 2019 and expects that it will result in a significant increase to its long-term assets and liabilities on the Consolidated Balance Sheets as the Company has a significant number of leases.  

Additionally, in July 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, Leases (“ASU 2018-11”) which provides an additional transition method to adopt ASU 2016-02.  We expect to use this new transition approach which allows the comparative periods presented in our financial statements to continue to be reported in accordance with ASC 840, Leases. We anticipate that we will elect the package of practical expedients allowed in the standard, which among other things, allows us to carry forward our historical lease classification. We also anticipate that we will make an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components when calculating the lease liability under ASU 2016-02.  

As of November 3, 2018, the Company had undiscounted future minimum lease commitments under non-cancellable operating leases totaling approximately $1.6 billion.  The Company has formed an implementation team, is substantially complete in identifying its lease population and has begun to input the required information into its existing software used to manage its leases in accordance with this new accounting standard.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU 2018-02 in Fiscal 2019 and does not expect a material impact from the adoption of this guidance to its Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized. Under this ASU, the impairment charge to be recognized should be the amount by which the reporting unit's carrying value exceeds the reporting unit's fair value as calculated under Step 1 provided that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective beginning in 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired.

Foreign Currency Translation

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

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017.

8


The Company adopted ASU 2014-09 on February 4, 2018 using the modified retrospective method applied to all contracts as of February 4, 2018. Results for reporting periods beginning on or after February 4, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.  The impact was the result of accounting for customer loyalty programs using a relative stand-alone selling price method vs. incremental cost method.  The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASU 2014-09. Refer to the Customer Loyalty Program caption below for additional information.

Additionally, ASU 2014-09 changes the balance sheet presentation of the Company’s sales return reserve.  Presentation on a gross basis is now required, consisting of a separate right of return asset and liability.  These amounts are recorded within (i) Prepaid Expenses and Other and (ii) Other Liabilities and Accrued Expenses, respectively, on the Consolidated Balance Sheets.  Historically, the Company presented the net sales return liability within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheets. Refer to the Sales Return Reserve caption below for additional information.

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

Revenue is recorded net of estimated and actual sales returns and promotional price reductions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company’s gift card program, refer to the Gift Cards caption below.

The Company recognizes royalty revenue generated from its license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee.  This revenue is recorded as a component of total net revenue when earned.

The following table sets forth the approximate consolidated percentage of Total Net Revenue attributable to each merchandise group for each of the periods indicated:

 

 

 

13 Weeks Ended

 

 

 

November 3,

 

 

October 28,

 

 

 

2018

 

 

2017

 

Men’s apparel and accessories

 

 

32

%

 

 

34

%

Women’s apparel and accessories (excluding Aerie)

 

 

53

%

 

 

54

%

Aerie

 

 

15

%

 

 

12

%

Total

 

 

100

%

 

 

100

%

 

The following table disaggregates the Company’s Total Net Revenue by geography:

 

 

 

13 Weeks Ended

 

(In thousands)

 

November 3,

2018

 

 

October 28,

2017

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

873,840

 

 

$

840,632

 

Foreign (1)

 

 

129,867

 

 

 

119,801

 

Total Net Revenue

 

$

1,003,707

 

 

$

960,433

 

(1)

Amounts represent sales from American Eagle and Aerie international retail stores, and e-commerce sales that are billed to and/or shipped to foreign countries and international franchise royalty revenue.

9


Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy and warehousing costs.

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

Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel and entertainment for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.  Additionally, selling, general and administrative expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations.

Other Income (Expense), Net

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

Cash and Cash Equivalents and Short-term Investments

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

As of November 3, 2018, short-term investments classified as available-for-sale included certificates of deposit, corporate bonds, and commercial paper with a maturity of greater than three months, but less than one year.

As of October 28, 2017, the Company held no short or long-term investments.

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

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company.

The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.

10


Income Taxes

The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact the Company’s effective income tax rate.

The Company evaluates its income tax positions in accordance with ASC 740, which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.

The calculation of 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 requires management to make estimates and assumptions. The Company believes that its estimates and assumptions are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.

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

Property and Equipment

Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, with depreciation computed utilizing the straight-line method over the asset’s estimated useful life. The useful lives of our major classes of assets are as follows:

 

Buildings

 

25 years

Leasehold improvements

 

Lesser of 10 years or the term of the lease

Fixtures and equipment

Information technology

 

5 years

3-5 years

 

As of November 3, 2018, the weighted average remaining useful life of our assets is approximately 8 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified, for stores that have been open for a period of time sufficient to reach maturity.  Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded. No significant long-lived asset impairment charges were recorded during the 13 or 39 weeks ended November 3, 2018 or October 28, 2017.

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

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate and Todd Snyder brands.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of February 3, 2018.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.  

11


Intangible Assets

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

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 39 weeks ended November 3, 2018 or October 28, 2017.

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

Gift Cards

Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance, and revenue is recognized when the gift card is redeemed for merchandise.  The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue. The adoption of ASU 2014-09 did not have an impact of the Company’s accounting for gift card breakage.

The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $1.6 million of revenue related to gift card breakage during both the 13 weeks ended November 3, 2018 and October 28, 2017. During the 39 weeks ended November 3, 2018 and October 28, 2017, the Company recorded $6.2 million and $6.1 million, respectively, of revenue related to gift card breakage.

Deferred Lease Credits

Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the landlord.

Co-branded Credit Card

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (the “Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured.  This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings. The adoption of ASU 2014-09 did not have an impact of the Company’s accounting for the co-branded credit card.

For further information on the Company’s loyalty program, refer to the Customer Loyalty Program caption below.

Customer Loyalty Program

The Company recently launched a new, digitized loyalty program called AEO ConnectedTM (the “Program”).  This Program integrates the credit card rewards program and the AEREWARDSÒ loyalty program into one combined customer offering.  Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds and, when reached, rewards are distributed.  Customers earn rewards in the form of discount savings certificates. Rewards earned are valid through the stated expiration date, which is approximately 45 days from the

12


issuance date of the reward. Additional rewards are also given for key items such as jeans and bras.  Rewards not redeemed during the 45-day redemption period are forfeited. 

Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASU 2014-09.  The portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire, using the relative stand-alone selling price method.  Additionally, reward points earned using the co-branded credit card on non-AEO or Aerie purchases are accounted for in accordance with ASU 2014-09.  As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.  The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.    

 

Sales Return Reserve

Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The net Sales Return Reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.  

As of November 3, 2018, the Company recorded a Right of Return Asset of $3.9 million within Prepaid Expenses and Other on the Consolidated Balance Sheet, offset by a Sales Return Reserve Liability of $11.1 million within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheet.  The net Sales Return Reserve Liability was $5.2 million, recorded within Other Liabilities and Accrued Expenses, at October 28, 2017.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified two operating segments (American Eagle Brand and Aerie Brand) that reflect the basis used internally to review performance and allocate resources. All operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.  

 

 

3.  Cash and Cash Equivalents and Short-term Investments

The following table summarizes the fair market values for the Company’s cash and available-for-sale short-term investments, which are recorded on the Consolidated Balance Sheets:

 

(In thousands)

 

November 3,

2018

 

 

February 3,

2018

 

 

October 28,

2017

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

156,250

 

 

$

184,107

 

 

$

185,546

 

Interest bearing deposits

 

 

93,733

 

 

 

174,577

 

 

 

71,981

 

Commercial paper

 

 

29,889

 

 

 

54,929

 

 

 

 

Total cash and cash equivalents

 

$

279,872

 

 

$

413,613

 

 

$

257,527

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

55,000

 

 

 

 

 

 

 

Corporate bonds

 

 

9,997

 

 

 

 

 

 

 

Commercial paper

 

 

14,859

 

 

 

 

 

 

 

Total short-term investments

 

 

79,856

 

 

 

 

 

 

 

Total cash and short-term investments

 

$

359,728

 

 

$

413,613

 

 

$

257,527

 

 

For the 39 weeks ended November 3, 2018, purchases of investments were $124.8 million, partially offset by sale of investments of $45.0 million.  There were no sales or purchases of investments for the 39 weeks ended October 28, 2017.

 

 

4.  Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.  Fair value is defined under

13


ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.

Financial Instruments

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.  In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:

Level 1 — Quoted prices in active markets.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis at November 3, 2018 and October 28, 2017:

 

 

 

Fair Value Measurements at November 3, 2018

(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

 

$

156,250

 

 

$

156,250

 

 

 

 

 

Interest bearing deposits

 

 

93,733

 

 

 

93,733

 

 

 

 

 

Commercial paper

 

 

29,889

 

 

 

29,889

 

 

 

 

 

Total cash and cash equivalents

 

 

279,872

 

 

 

279,872

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

55,000

 

 

 

55,000

 

 

 

 

 

Corporate bonds

 

 

9,997

 

 

 

9,997

 

 

 

 

 

Commercial paper

 

 

14,859

 

 

 

14,859

 

 

 

 

 

Total short-term investments

 

 

79,856

 

 

 

79,856

 

 

 

 

 

Total

 

$

359,728

 

 

$

359,728

 

 

 

 

 

 

 

 

Fair Value Measurements at October 28, 2017

(In thousands)

 

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

Significant

Unobservable

Inputs

(Level 3)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

185,546

 

 

$

185,546

 

 

 

 

 

Interest bearing deposits

 

 

71,981

 

 

 

71,981

 

 

 

 

 

Total cash and cash equivalents

 

$

257,527

 

 

$

257,527

 

 

 

 

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at November 3, 2018 or October 28, 2017.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis.  However, if certain triggering events occur, or if an annual impairment test is required, and the Company is required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value.  During the 13 and 39 weeks ended for November 3, 2018, no significant non-financial asset impairment charges were recorded.   

 

14


 

5.  Earnings per Share

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

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

November 3,

 

 

October 28,

 

 

November 3,

 

 

October 28,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

176,938

 

 

 

177,288

 

 

 

177,033

 

 

 

178,272

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

1,184

 

 

 

1,844

 

 

 

1,245

 

 

 

1,988

 

Diluted number of common shares outstanding

 

 

178,122

 

 

 

179,132

 

 

 

178,278

 

 

 

180,260

 

 

Equity awards to purchase approximately 0.7 million and no shares of common stock during the 13 and 39 weeks ended November 3, 2018, respectively and approximately 2.5 million shares of common stock during both the 13 and 39 weeks ended October 28, 2017, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive.

Additionally, approximately 0.4 million shares of restricted stock units for the 13 and 39 weeks ended November 3, 2018, and 0.1 and 0.9 million shares of restricted stock units for the 13 and 39 weeks ended October 28, 2017, respectively, were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive. Furthermore, approximately 1.0 million and 1.3 million shares of restricted stock units for the 13 and 39 weeks ended November 3, 2018, respectively, and  0.1 million and 0.9 million shares of restricted stock units for the 13 and 39 weeks ended October 28, 2017, respectively, were not included in the computation of weighted average diluted common shares amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual performance goals.  

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

 

 

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

(In thousands)

 

2018

 

 

2018

 

 

2017

 

Property and equipment, at cost

 

$

2,136,945

 

 

$

2,023,875

 

 

$

1,994,071

 

Less:  Accumulated depreciation and impairment

 

 

(1,401,231

)

 

 

(1,299,636

)

 

 

(1,267,903

)

Property and equipment, net

 

$

735,714

 

 

$

724,239

 

 

$

726,168

 

 

 

7.  Intangible Assets

Intangible assets consist of the following:

 

 

 

November 3,

 

 

February 3,

 

 

October 28,

 

(In thousands)

 

2018

 

 

2018

 

 

2017

 

Trademarks, at cost

 

$

70,869

 

 

$

70,322

 

 

$

69,623

 

Less:  Accumulated amortization

 

 

(26,705

)

 

 

(23,656

)

 

 

(22,644

)

Intangible assets, net

 

$

44,164

 

 

$

46,666

 

 

$

46,979

 

 

 

8.  Other Credit Arrangements

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

15


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 liens on certain real property.

As of November 3, 2018, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of November 3, 2018.  

 

9.  Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. The Company adopted ASU 2016-09, Compensation—Stock Compensation (“ASU 2016-09”) prospectively at the beginning of Fiscal 2017 and now records excess tax benefits and deficiencies as a discrete adjustment to income tax expense when stock awards vest or are exercised, rather than in contributed capital where they have been historically recorded.  ASU 2016-09 also requires cash flows related to excess tax benefits from share-based compensation to be presented in operating activities, rather than separately as a financing activity, in the Consolidated Statement of Cash Flows.

Total share-based compensation expense included in the Consolidated Statements of Operations and Retained Earnings for the 13 weeks and 39 weeks ended November 3, 2018 was $6.2 million ($4.7 million, net of tax) and $17.8 million ($13.7 million, net of tax), respectively, and for the 13 weeks and 39 weeks ended October 28, 2017 was $2.3 million ($1.5 million, net of tax) and $12.1 million ($7.9 million, net of tax), respectively.  

Stock Option Grants

The Company grants both time-based and performance-based stock options. A summary of the Company’s stock option activity for the 13 weeks ended November 3, 2018 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - February 3, 2018

 

 

2,190

 

 

$

14.59

 

 

 

 

 

 

 

 

 

Granted

 

 

715

 

 

$

19.60

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(993

)

 

$

15.60