10-Q 1 aeo-10q_20190504.htm 10-Q aeo-10q_20190504.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 May 4, 2019

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

AEO

New York Stock Exchange

 

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: 172,224,129 Common Shares were outstanding at June 3, 2019.

 

 


AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Balance Sheets: May 4, 2019, February 2, 2019  and May 5, 2018

 

3

 

 

Consolidated Statements of Operations: 13 weeks ended May 4, 2019 and May 5, 2018

 

4

 

 

Consolidated Statements of Comprehensive Income: 13 weeks ended May 4, 2019 and May 5, 2018

 

5

 

 

Consolidated Statements of Stockholders’ Equity: 13 weeks ended May 4, 2019 and May 5, 2018

 

6

 

 

Consolidated Statements of Cash Flows: 13 weeks ended May 4, 2019 and May 5, 2018

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

28

Item 4.

 

Controls and Procedures

 

28

 

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

29

Item 1A.    

 

Risk Factors

 

29

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

29

Item 3.

 

Defaults Upon Senior Securities

 

N/A

Item 4.

 

Mine Safety Disclosures

 

N/A

Item 5.

 

Other Information

 

N/A

Item 6.

 

Exhibits

 

30

 

2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

May 4,

 

 

February 2,

 

 

May 5,

 

(In thousands, except per share amounts)

 

2019

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

304,671

 

 

$

333,330

 

 

$

289,700

 

Short-term investments

 

 

45,000

 

 

 

92,135

 

 

 

20,000

 

Merchandise inventory

 

 

456,160

 

 

 

424,404

 

 

 

404,264

 

Accounts receivable, net

 

 

73,836

 

 

 

93,477

 

 

 

72,800

 

Prepaid expenses and other

 

 

70,936

 

 

 

102,907

 

 

 

87,832

 

Total current assets

 

 

950,603

 

 

 

1,046,253

 

 

 

874,596

 

Property and equipment, at cost, net of accumulated depreciation

 

 

744,670

 

 

 

742,149

 

 

 

732,179

 

Operating lease right-of-use assets

 

 

1,444,225

 

 

 

 

 

 

 

Intangible assets net, including goodwill

 

 

57,221

 

 

 

58,167

 

 

 

60,928

 

Non-current deferred income taxes

 

 

20,951

 

 

 

14,062

 

 

 

9,105

 

Other Assets

 

 

37,683

 

 

 

42,747

 

 

 

54,106

 

Total assets

 

$

3,255,353

 

 

$

1,903,378

 

 

$

1,730,914

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

231,760

 

 

$

240,671

 

 

$

207,774

 

Current portion of operating lease liabilities

 

 

266,819

 

 

 

 

 

 

 

Accrued income and other taxes

 

 

25,146

 

 

 

20,064

 

 

 

22,048

 

Accrued compensation and payroll taxes

 

 

29,425

 

 

 

82,173

 

 

 

27,904

 

Unredeemed gift cards and gift certificates

 

 

42,025

 

 

 

53,997

 

 

 

39,918

 

Other current liabilities and accrued expenses

 

 

54,622

 

 

 

145,740

 

 

 

137,160

 

Total current liabilities

 

 

649,797

 

 

 

542,645

 

 

 

434,804

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-current operating lease liabilities

 

 

1,328,663

 

 

 

 

 

 

 

Other non-current liabilities

 

 

35,142

 

 

 

73,178

 

 

 

88,729

 

Total non-current liabilities

 

 

1,363,805

 

 

 

73,178

 

 

 

88,729

 

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; 171,870, 172,436 and 176,217 shares

   outstanding, respectively

 

 

2,496

 

 

 

2,496

 

 

 

2,496

 

Contributed capital

 

 

570,443

 

 

 

574,929

 

 

 

565,033

 

Accumulated other comprehensive loss

 

 

(35,354

)

 

 

(34,832

)

 

 

(34,936

)

Retained earnings

 

 

2,028,627

 

 

 

2,054,654

 

 

 

1,904,190

 

Treasury stock, 77,696, 77,130 and 73,349 shares, respectively

 

 

(1,324,461

)

 

 

(1,309,692

)

 

 

(1,229,402

)

Total stockholders’ equity

 

 

1,241,751

 

 

 

1,287,555

 

 

 

1,207,381

 

Total liabilities and stockholders’ equity

 

$

3,255,353

 

 

$

1,903,378

 

 

$

1,730,914

 

 

Refer to Notes to Consolidated Financial Statements

3


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 4,

 

 

May 5,

 

(In thousands, except per share amounts)

 

2019

 

 

2018

 

Total net revenue

 

$

886,290

 

 

$

822,961

 

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

561,369

 

 

 

518,518

 

Gross profit

 

 

324,921

 

 

 

304,443

 

Selling, general and administrative expenses

 

 

230,741

 

 

 

210,234

 

Restructuring charges

 

 

1,543

 

 

 

1,568

 

Depreciation and amortization expense

 

 

44,791

 

 

 

41,935

 

Operating income

 

 

47,846

 

 

 

50,706

 

Other income, net

 

 

4,182

 

 

 

502

 

Income before income taxes

 

 

52,028

 

 

 

51,208

 

Provision for income taxes

 

 

11,276

 

 

 

11,279

 

Net income

 

$

40,752

 

 

$

39,929

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$

0.24

 

 

$

0.23

 

Net income per diluted share

 

$

0.23

 

 

$

0.22

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.1375

 

 

$

0.1375

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

172,598

 

 

 

176,853

 

Weighted average common shares outstanding - diluted

 

 

174,073

 

 

 

178,273

 

 

 

 

 

 

 

 

 

 

 

Refer to Notes to Consolidated Financial Statements

4


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 4,

 

 

May 5,

 

(In thousands)

 

2019

 

 

2018

 

Net income

 

$

40,752

 

 

$

39,929

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation income

 

 

(522

)

 

 

4,141

 

Other comprehensive income:

 

 

(522

)

 

 

4,141

 

Comprehensive income

 

$

40,230

 

 

$

44,070

 

 

Refer to Notes to Consolidated Financial Statements

5


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(In thousands, except per share amounts)

 

Shares

Outstanding (1)

 

 

Common

Stock

 

 

Contributed

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock (2)

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Stockholders'

Equity

 

Balance at February 3, 2018

 

 

177,316

 

 

$

2,496

 

 

$

593,770

 

 

$

1,883,592

 

 

$

(1,202,272

)

 

$

(30,795

)

 

$

1,246,791

 

Stock awards

 

 

 

 

 

 

 

 

5,553

 

 

 

 

 

 

 

 

 

 

 

 

5,553

 

Repurchase of common stock as part of

   publicly announced programs

 

 

(2,300

)

 

 

 

 

 

 

 

 

 

 

 

(44,913

)

 

 

 

 

 

(44,913

)

Repurchase of common stock from employees

 

 

(723

)

 

 

 

 

 

 

 

 

 

 

 

(14,213

)

 

 

 

 

 

(14,213

)

Adoption of Accounting Standards Update

   2014-09

 

 

 

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

 

 

 

152

 

Reissuance of treasury stock

 

 

1,923

 

 

 

 

 

 

(34,726

)

 

 

5,178

 

 

 

31,996

 

 

 

 

 

 

2,448

 

Net income

 

 

 

 

 

 

 

 

 

 

 

39,929

 

 

 

 

 

 

 

 

 

 

39,929

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,141

)

 

 

(4,141

)

Cash dividends and dividend equivalents

   ($0.1375 per share)

 

 

 

 

 

 

 

 

436

 

 

 

(24,661

)

 

 

 

 

 

 

 

 

(24,225

)

Balance at May 5, 2018

 

 

176,216

 

 

$

2,496

 

 

$

565,033

 

 

$

1,904,190

 

 

$

(1,229,402

)

 

$

(34,936

)

 

$

1,207,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 2, 2019

 

 

172,436

 

 

$

2,496

 

 

$

574,929

 

 

$

2,054,654

 

 

$

(1,309,692

)

 

$

(34,832

)

 

$

1,287,555

 

Stock awards

 

 

 

 

 

 

 

 

4,958

 

 

 

 

 

 

 

 

 

 

 

 

4,958

 

Repurchase of common stock as part of

   publicly announced programs

 

 

(911

)

 

 

 

 

 

 

 

 

 

 

 

(20,000

)

 

 

 

 

 

(20,000

)

Repurchase of common stock from employees

 

 

(169

)

 

 

 

 

 

 

 

 

 

 

 

(3,499

)

 

 

 

 

 

(3,499

)

Adoption of Accounting Standards Codification

   842, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,435

)

 

 

 

 

 

 

 

 

 

 

(44,435

)

Reissuance of treasury stock

 

 

514

 

 

 

 

 

 

(9,874

)

 

 

1,718

 

 

 

8,730

 

 

 

 

 

 

574

 

Net income

 

 

 

 

 

 

 

 

 

 

 

40,752

 

 

 

 

 

 

 

 

 

40,752

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(522

)

 

 

(522

)

Cash dividends and dividend equivalents

   ($0.1375 per share)

 

 

 

 

 

 

 

 

430

 

 

 

(24,062

)

 

 

 

 

 

 

 

 

(23,632

)

Balance at May 4, 2019

 

 

171,870

 

 

$

2,496

 

 

$

570,443

 

 

$

2,028,627

 

 

$

(1,324,461

)

 

$

(35,354

)

 

$

1,241,751

 

 

Refer to Notes to Consolidated Financial Statements

6


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 4,

 

 

May 5,

 

(In thousands)

 

2019

 

 

2018

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

40,752

 

 

$

39,929

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

45,350

 

 

 

42,472

 

Share-based compensation

 

 

5,041

 

 

 

5,716

 

Deferred income taxes

 

 

7,704

 

 

 

(1,162

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventory

 

 

(32,075

)

 

 

(7,702

)

Other assets

 

 

42,529

 

 

 

(6,555

)

Accounts payable

 

 

(8,896

)

 

 

(33,024

)

Accrued compensation and payroll taxes

 

 

(52,736

)

 

 

(26,308

)

Accrued and other liabilities

 

 

(39,950

)

 

 

14,624

 

Net cash provided by operating activities

 

 

7,719

 

 

 

27,990

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(36,574

)

 

 

(46,903

)

Purchase of available-for-sale investments

 

 

(20,000

)

 

 

(20,000

)

Sale of available-for-sale investments

 

 

67,135

 

 

 

 

Other investing activities

 

 

(203

)

 

 

(314

)

Net cash provided by (used for) investing activities

 

 

10,358

 

 

 

(67,217

)

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock as part of publicly announced programs

 

 

(20,000

)

 

 

(44,913

)

Repurchase of common stock from employees

 

 

(3,498

)

 

 

(14,213

)

Net proceeds from stock options exercised

 

 

571

 

 

 

2,354

 

Cash dividends paid

 

 

(23,632

)

 

 

(24,225

)

Other financing activities

 

 

(80

)

 

 

(3,284

)

Net cash used for financing activities

 

 

(46,639

)

 

 

(84,281

)

Effect of exchange rates changes on cash

 

 

(97

)

 

 

(405

)

Net change in cash and cash equivalents

 

 

(28,659

)

 

 

(123,913

)

Cash and cash equivalents - beginning of period

 

 

333,330

 

 

 

413,613

 

Cash and cash equivalents - end of period

 

$

304,671

 

 

$

289,700

 

 

Refer to Notes to Consolidated Financial Statements

 

7


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 May 4, 2019 and May 5, 2018 and for the 13 week periods ended May 4, 2019 and May 5, 2018 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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2019 (the “Fiscal 2018 Form 10-K”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle,” “AE” and the “AE Brand” refer to our American Eagle 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 May 4, 2019, and all periods presented, the Company operated in one reportable segment.

Fiscal Year

Our fiscal year is a 52 or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2019” refers to the 52-week period that will end on February 1, 2020.  “Fiscal 2018” refers to the 52-week period ended February 2, 2019.

Estimates

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

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases-, (“ASC 842”) by issuing Accounting Standards Update (“ASU”) No. 2016-02. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

8


 

The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

The Company adopted ASU 2016-02 and its subsequent amendments effective February 3, 2019. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before February 3, 2019.  The Company elected the new standard’s package of practical expedients, which permits the Company to maintain prior conclusions about lease identification, lease classification, and initial direct costs. The company elected the go-forward practical expedient to not separate lease and non-lease components for all of our leases. The Company also elected the short-term lease recognition exemption for all leases that qualify.

 

Upon adoption, the Company:

 

Recognized lease liabilities and right-of-use assets of $1.6 billion, for the present value of the remaining minimum rental payments on existing operating leases (including consideration related to non-lease components due to the related practical expedient).

Recognized a transition adjustment of $44.4 million (net of tax effects of $15.0 million) to retained earnings related to the impairment of newly recognized right-of-use assets related to store assets that were impaired prior to the date of adoption.

Reclassified $82.9 million of straight-line deferred rent, $55.0 million of deferred lease credits, and $40.4 million of prepaid rent to the right-of-use asset. Combined with the impairment discussed above, these reclassifications reduced the net right-of-use asset to $1.4 billion. Corresponding amounts were not reclassified in prior periods as those prior periods are presented under ASC 840, Leases.

 

Refer to Note 9 to the Consolidated Financial Statements for information regarding leases.

 

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. The Company adopted ASU 2018-02 on February 3, 2019. The adoption did not have a material impact on our 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.  The Company adopted ASU 2017-04 on February 3, 2019. The adoption did not have an impact on our consolidated financial statements, as no goodwill was determined to be impaired during the 13 weeks ended May 4, 2019.

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.

Cash and Cash Equivalents and Short-term Investments

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

As of both May 4, 2019 and May 5, 2018, short-term investments classified as available-for-sale included certificates of deposit with a maturity of greater than three months, but less than one year.

9


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

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when 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.

Revenue Recognition

In May 2014, the FASB issued ASC 606, Revenue from contracts with customers (“ASC 606”), 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. ASC 606 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASC 606 on February 4, 2018.  Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, 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 versus 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 ASC 606. Refer to the Customer Loyalty Program 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.

10


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

 

 

 

May 4,

 

 

May 5,

 

 

 

2019

 

 

2018

 

Men’s apparel and accessories

 

 

28

%

 

 

30

%

Women’s apparel and accessories (excluding Aerie)

 

 

54

%

 

 

53

%

Aerie

 

 

18

%

 

 

17

%

Total

 

 

100

%

 

 

100

%

 

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

 

 

 

13 Weeks Ended

 

(In thousands)

 

May 4,

2019

 

 

May 5,

2018

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

768,480

 

 

$

707,387

 

Foreign (1)

 

 

117,810

 

 

 

115,574

 

Total Net Revenue

 

$

886,290

 

 

$

822,961

 

 

(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.

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, Net

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

  

11


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 May 4, 2019, 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 long-lived asset impairment charges were recorded during the 13 weeks ended May 4, 2019 or May 5, 2018.

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

Intangible Assets including 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 2, 2019.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.  

Definite-lived 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 definite-lived intangible assets, which consists primarily of trademark assets, are generally amortized over 15 to 25 years.

The Company evaluates definite-lived 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 definite-lived intangible asset impairment charges were recorded during the 13 weeks ended May 4, 2019 or May 5, 2018.

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 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 approximately $2 million of revenue related to gift card breakage during both the 13 weeks ended May 4, 2019 and May 5, 2018.   

 

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 an adjustment to the operating lease right-of-use asset at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized as part of the single lease cost 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.

12


 

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 AE 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 ASC 606 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.  Customers earn rewards in the form of discount savings certificates. Rewards earned are valid through the stated expiration date, which is 45 days from the issuance date of the reward. Rewards not redeemed during the 45-day redemption period are forfeited.  Additional rewards are also given for key items such as jeans and bras. 

Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASC 606.  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-AE or Aerie purchases are accounted for in accordance with ASC 606.  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.   

 

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 sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.  

The presentation on a gross basis consists of a separate right of return asset and liability.  These amounts are recorded within (i) prepaid expenses and other and (ii) other current liabilities and accrued expenses, respectively, on the Consolidated Balance Sheets.

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

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.

13


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 11 to the Consolidated Financial Statements for additional information regarding income taxes.

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 short-term investments, which are recorded on the Consolidated Balance Sheets:

 

(In thousands)

 

May 4,

2019

 

 

February 2,

2019

 

 

May 5,

2018

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

91,853

 

 

$

108,216

 

 

$

209,927

 

Interest bearing deposits

 

 

177,952

 

 

 

165,274

 

 

 

57,812

 

Commercial paper

 

 

34,866

 

 

 

59,840

 

 

 

21,961

 

Total cash and cash equivalents

 

$

304,671

 

 

$

333,330

 

 

$

289,700

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

45,000

 

 

 

70,000

 

 

 

20,000

 

Commercial paper

 

 

 

 

 

22,135

 

 

 

 

Total short-term investments

 

 

45,000

 

 

 

92,135

 

 

 

20,000

 

Total

 

$

349,671

 

 

$

425,465

 

 

$

309,700

 

 

 

4.  Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements.  Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.

Financial Instruments

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

Level 1 — Quoted prices in active markets.

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.

14


The Company’s cash equivalents and short-term investments are Level 1 financial assets and are measured at fair value on a recurring basis, for all periods presented.  Refer to Footnote 3 to the Consolidated Financial Statements for additional information regarding cash equivalents and short-term investments.

During the 13 weeks ended May 4, 2019 and May 5, 2018, we did not have any financial instruments that required other fair value measurements.  

 

 

5.  Earnings per Share

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

 

 

 

13 Weeks Ended

 

 

 

May 4,

 

 

May 5,

 

(In thousands)

 

2019

 

 

2018

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

172,598

 

 

 

176,853

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

1,475

 

 

 

1,420

 

Diluted number of common shares outstanding

 

 

174,073

 

 

 

178,273

 

Anti-Dilutive Shares

 

 

171

 

 

 

729

 

      

Dilutive and anti-dilutive shares relate to share based compensation.  Refer to Note 10 to the Consolidated Financial Statements for additional information regarding share-based compensation.

 

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

May 4,

 

 

February 2,

 

 

May 5,

 

(In thousands)

 

2019

 

 

2019

 

 

2018

 

Property and equipment, at cost

 

$

2,190,627

 

 

$

2,180,850

 

 

$

2,058,450

 

Less:  Accumulated depreciation and impairment

 

 

(1,445,957

)

 

 

(1,438,701

)

 

 

(1,326,271

)

Property and equipment, net

 

$

744,670

 

 

$

742,149

 

 

$

732,179

 

 

 

7.  Intangible Assets, including Goodwill

Intangible assets consist of the following:

 

 

 

May 4,

 

 

February 2,

 

 

May 5,

 

(In thousands)

 

2019

 

 

2019

 

 

2018

 

Goodwill

 

$

14,821

 

 

$

14,899

 

 

$

14,962

 

Trademarks, at cost

 

 

71,150

 

 

 

70,994

 

 

 

70,636

 

Less:  Accumulated amortization

 

 

(28,750

)

 

 

(27,726

)

 

 

(24,670

)

Intangible assets, net

 

$

57,221

 

 

$

58,167

 

 

$

60,928

 

 

 

8.  Other Credit Arrangements

In January 2019, the Company entered into an amended and restated 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.

 

15


9.  Leases

The Company leases all store premises, some of its office space and certain information technology and office equipment. These leases are generally classified as operating leases.

 

Store leases generally provide for a combination of base rentals and contingent rent based on store sales. Additionally, most leases include landlord incentives such as construction allowances and rent holidays. The Company is typically responsible for tenant occupancy costs including maintenance costs, common area charges, real estate taxes, and certain other expenses.

 

Most leases include one or more options to renew. The exercise of lease renewal options is at the Company’s discretion and is not reasonably certain at lease commencement. When measuring right-of-use assets and lease liabilities after the date of adoption of ASC 842, the Company only includes cash flows related to options to extend or terminate leases once those options are executed.

 

Some leases have variable payments. However, because they are not based on an index or rate, they are not included in the measurement of right-of-use assets and lease liabilities.

 

The Company uses its incremental borrowing rate as a basis for the discount rates used in the measurement of right-of-use assets and lease liabilities.

 

For leases that qualify for the short-term lease exemption, the Company does not record a lease liability or right-of-use asset. Short-term lease payments are recognized on a straight-line basis over the lease term of 12 months or less.

 

The table below summaries lease activity for the period.

 

 

 

13 Weeks Ended

 

 

 

May 4, 2019

 

(In thousands, except year and rate data)

 

 

 

 

Lease costs

 

 

 

 

Operating lease costs

 

 

82,562

 

Variable lease costs

 

 

23,556

 

Short-term leases and other lease costs

 

 

12,844

 

Total lease costs

 

$

118,962

 

 

 

 

 

 

Other information

 

 

 

 

Operating cash flows for operating leases

 

 

(73,006

)

New right-of-use asset for operating leases entered into

   during the period

 

 

56,097

 

Weighted-average remaining lease term - operating leases

 

6.5 years

 

Weighted-average discount rate - operating leases

 

 

5.0

%

 

The table below is a maturity analysis of the operating leases in effect as of the end of the period.  Undiscounted cash flows for finance leases and short-term leases are not material for the periods reported and are excluded from the below:

 

 

 

Undiscounted

Cash Flows

 

(In thousands)

 

 

 

 

Fiscal years:

 

 

 

 

2019 (remaining 39 weeks)

 

$

226,604

 

2020

 

 

341,426

 

2021

 

 

300,910

 

2022

 

 

250,665

 

2023

 

 

230,074

 

Thereafter

 

 

557,955

 

Total undiscounted cash flows

 

$

1,907,634

 

Less: discount on lease liability

 

 

(312,152

)

Total lease liability

 

$

1,595,482

 

16


 

10.  Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value.

Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 weeks ended May 4, 2019 and May 5, 2018 was $5.0 million ($3.9 million, net of tax) and $5.7 million ($4.5 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 May 4, 2019 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - February 2, 2019

 

 

1,912

 

 

$

16.75

 

 

 

 

 

 

 

 

 

Granted

 

 

776

 

 

$

21.41

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(34

)