UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES [X] NO [   ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 73,713,366 Common Shares were outstanding at November 30, 2004. 

See Notes to Consolidated Financial Statements

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See Notes to Consolidated Financial Statements

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The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at October 30, 2004 and November 1, 2003 and for the three and nine month periods ended October 30, 2004 (the "current period") and November 1, 2003 (the "prior period") have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 2003 Annual Report.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at January 31, 2004 was derived from the audited financial statements.

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

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.

The Company's financial year is a 52/53 week year that ends on the Saturday nearest to January 31.  As used herein, "Fiscal 2005" and "Fiscal 2004" refer to the fifty-two week periods ending January 28, 2006 and January 29, 2005, respectively. "Fiscal 2003" refers to the fifty-two week period ended January 31, 2004.   

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

Recent Financial Accounting Standards Board Pronouncements

FASB Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95

On March 31, 2004, the FASB issued an exposure draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.  The proposed change in accounting would replace existing requirements under SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No. 25, Accounting for Stock Issued to Employees.  The exposure draft covers a wide range of equity-based compensation arrangements.  Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement.  The expense of the award would generally be measured at fair value at the grant date.  On October 13, 2004, the FASB delayed the effective date of the proposed standard.  The final standard, which is expected to be issued before December 31, 2004, would be applicable for annual and interim periods beginning after June 15, 2005.  The Company will evaluate the impact of and comply with any change in the accounting standards on the Company's financial position and results of operations when the final rules are issued.

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The Canadian dollar is the functional currency for the Canadian businesses. In accordance with SFAS No. 52, Foreign Currency Translation, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income, net of income taxes (where applicable under SFAS No. 109, Accounting for Income Taxes), in accordance with SFAS No. 130, Reporting Comprehensive Income (see Note 7 of the Consolidated Financial Statements).

The Company records revenue for store sales upon the purchase of merchandise by customers. The Company's e-commerce and catalog business records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase and revenue is recognized when the gift card is redeemed for merchandise. Revenue is recorded net of sales returns.

Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers. These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales. See Note 5 of the Consolidated Financial Statements for further discussion.

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and promotional costs. Buying, occupancy and warehousing costs consists of compensation and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, other than for our design, sourcing and importing teams, our buyers and our distribution centers. Such compensation and employee benefit expenses include salaries, incentives and related benefits associated with our stores and corporate headquarters, except as previously noted. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, freight related to inter-store transfers, communication costs, travel and entertainment, leasing costs and services purchased.

Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.  Cash in excess of operating requirements is invested in variable rate or auction rate fixed income notes or money market mutual funds. As of October 30, 2004, the Company's cash equivalents included investments with an average original maturity of approximately one month.

Short-term investments include investments with an original maturity of greater than three months, but not exceeding twelve months.  As of October 30, 2004, the Company's short-term investments consisted primarily of tax-exempt municipal bonds, taxable agency bonds and corporate notes classified as available-for-sale with an average original maturity of approximately six months.

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Long-term investments include investments with an original maturity of greater than twelve months, but not exceeding twenty-four months.  As of October 30, 2004, the Company's long-term investments consisted primarily of agency bonds and debt securities issued by states and municipalities classified as available-for-sale with an average original maturity of approximately eighteen months.

The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, 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. Deferred tax assets and liabilities are measured using the tax rates 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.

The Company has 250 million common shares authorized at $.01 par value, 77 million issued and 74 million outstanding at October 30, 2004 and 74 million issued and 71 million outstanding at January 31, 2004 and November 1, 2003, respectively.  The Company has 5 million preferred shares authorized at $.01 par value, with none issued or outstanding at October 30, 2004, January 31, 2004 or November 1, 2003.   

On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 3,750,000 shares of its stock.  No repurchases were made during the nine months ended October 30, 2004 as part of this stock repurchase program.  During the nine months ended November 1, 2003, the company purchased 40,000 shares of common stock for approximately $0.6 million on the open market.  As of October 30, 2004, approximately 700,000 shares remain authorized for repurchase. Additionally, during the nine months ended November 1, 2003, the Company purchased 8,000 shares from certain employees at market prices totaling $0.1 million for the payment of taxes in connection with the vesting of restricted stock as permitted under the 1999 Stock Incentive Plan. These repurchases have been recorded as treasury stock. 

The following table shows the amounts used in computing earnings per share and the effect on net income and the weighted average number of shares of potential dilutive common stock (stock options and restricted stock).

Options to purchase 615,000 and 692,000 shares of common stock during the three and nine months ended October 30, 2004, respectively, and 5,437,000 shares during the three and nine months ended November 1, 2003, were outstanding, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares.

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Stock Option Plan

The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.  The pro forma information below is based on provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"), issued in December 2002.  SFAS No. 148 requires that the pro forma information regarding net income and earnings per share be determined as if the Company had accounted for its employee stock options granted beginning in the fiscal year subsequent to December 31, 1994 under the fair value method of that Statement.  The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model.

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the October 30, 2004 presentation.

Accounts and note receivable is comprised of the following:

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The fabric receivable represents amounts due from a third party vendor for fabric purchased by the Company and sold to the respective vendor.  Upon receipt of the finished goods from the vendor, the Company records the full cost of the merchandise in inventory, and reduces the amount of payment due to the third party by the respective fabric receivable.

4. Property and Equipment

Property and equipment consists of the following:

5. Related Party Transactions

The Company and its wholly-owned subsidiaries have historically had various transactions with related parties.  During Fiscal 2004, as part of our strategic plan to eliminate the Company's related party transactions, we significantly reduced these arrangements as discussed below.  The Company believes that the terms of these transactions are as favorable to the Company as those that could have been obtained from unrelated third parties. The nature of the Company's relationship with the related parties and a description of the respective transactions is stated below. 

As of October 30, 2004, the Schottenstein-Deshe-Diamond families (the "families") owned 20% of the outstanding shares of Common Stock of the Company. The families also own a private company, Schottenstein Stores Corporation ("SSC"), which includes a publicly-traded subsidiary, Retail Ventures, Inc. ("RVI"), formerly Value City Department Stores, Inc., and also owned 99% of Linmar Realty Company until June 4, 2004.  The Company had the following transactions with these related parties during the three and nine months ended October 30, 2004 and November 1, 2003. 

The Company and its subsidiaries sell end-of-season, overstock and irregular merchandise to various parties, including RVI.  These sell-offs, which are without recourse, are typically sold below cost and the proceeds are reflected in cost of sales.  During April 2004, the Company entered into an agreement with an independent third-party vendor for the sale of such merchandise, thus reducing sell-offs to related parties.  Below is a summary of merchandise sell-offs for the three and nine months ended October 30, 2004 and November 1, 2003:

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The Company had approximately $11,000, $4,219,000 and $4,393,000 included in accounts receivable at October 30, 2004, January 31, 2004 and November 1, 2003, respectively, that pertained to related party merchandise sell-offs as well as a corporate aircraft arrangement, which is further discussed below. 

SSC and its affiliates charge the Company for various professional services provided to the Company, including certain legal, real estate and insurance services. For the three months ended October 30, 2004 and November 1, 2003, the Company paid approximately $62,000 and $43,000 respectively, for these services.  For the nine months ended October 30, 2004 and November 1, 2003, the Company paid approximately $187,000 and $820,000, respectively, for these services. 

During the nine months ended October 30, 2004, the Company discontinued its cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft.  The Company paid $0.1 million for the three months ended November 1, 2003 and $0.1 million and $0.7 million for the nine months ended October 30, 2004 and November 1, 2003, respectively, to cover its share of operating costs based on usage of the corporate aircraft under the cost sharing arrangement.  No payments were made during the three months ended October 30, 2004 as part of this arrangement.    

On June 4, 2004, the Company, through a subsidiary, Linmar Realty Company II LLC, purchased for $20.0 million Linmar Realty Company ("Linmar Realty"), a general partnership that owned the Company's corporate headquarters and distribution center.  The purchase price, less a straight-line rent accrual adjustment of $2.0 million, was recorded as land and building on the consolidated balance sheet during the three months ended July 31, 2004 and is being depreciated over its anticipated useful life of twenty-five years.  Prior to the purchase, the Company had an operating lease with Linmar Realty for the corporate headquarters and distribution center.  Rent expense was $0.6 million for the three months ended November 1, 2003 and $0.8 million and $1.8 million for the nine months ended October 30, 2004 and November 1, 2003, respectively, under the lease.  No rent expense was recorded during the three months ended October 30, 2004 due to the aforementioned purchase.

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6. Accounting for Derivative Instruments and Hedging Activities

On November 30, 2000, the Company entered into an interest rate swap agreement totaling $29.2 million in connection with the term facility. The swap amount decreased on a monthly basis beginning January 1, 2001 until the early termination of the agreement during the three months ended October 30, 2004.  The Company also retired its term facility for $16.2 million at that time. The interest rate swap was used by the Company to manage interest rate risk. The Company paid a fixed rate of 5.97% and received a variable rate based on the one-month Bankers' Acceptance Rate. This agreement effectively changed the interest rate on the borrowings under the term facility from a variable rate to a fixed rate of 5.97% plus 140 basis points.

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, the Company recognized its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that was designated and met all the required criteria for a cash flow hedge were recorded in accumulated other comprehensive income. Unrealized net losses on derivative instruments of approximately $0.4 million for the three months and nine months ended November 1, 2003, net of related tax effects, were recorded in other comprehensive income. On October 1, 2004, the interest rate swap was terminated at its fair value, which represented a net loss of $0.7 million, in conjunction with the payoff of the term facility. As a result, during the three months ended October 30, 2004, the Company reclassified approximately $0.4 million, net of tax, of unrealized net losses into earnings.

Other comprehensive income is comprised of the following:

The Company has segmented its operations in a manner that reflects how its chief operating decision-makers review the results of the operating segments that make up the consolidated entity.

The Company has two reportable segments, American Eagle and Bluenotes. The American Eagle segment includes the Company's 839 U.S. and Canadian retail stores, the Company's e-commerce business, ae.com, as well as the Company's catalog business. The Bluenotes segment includes the Company's 108 Bluenotes/Thriftys stores in Canada. Both segments derive their revenues from the sale of apparel. However, the segments are identified by a distinct brand name and target customer.  See Note 13 of the Consolidated Financial Statements for related subsequent event discussion regarding Bluenotes.

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Segment information as of and for the three and nine months ended October 30, 2004 and November 1, 2003 is as follows:

The decrease in Bluenotes total assets from November 1, 2003 to October 30, 2004 is due primarily to an impairment of the segment's total goodwill and a decrease in the segment's long-term deferred tax asset during the fourth quarter of Fiscal 2003.

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The Company is a party to litigation incidental to its business. At this time, management does not expect the results of the litigation to be material to the Company's financial position or results of operations.

13. Subsequent Event

On November 22, 2004, the Company entered into a definitive agreement to sell the assets of its Bluenotes business in a cash transaction. The transaction is scheduled to close on December 10, 2004, to be effective as of December 5, 2004, and is subject to customary conditions.

The Company expects to record a fourth quarter after-tax loss from discontinued operations of approximately $0.08 to $0.11 per diluted share related to Bluenotes.  Effective in the fourth quarter, the Company's financial statements will reflect Bluenotes' operations (including the transaction loss) as a discontinued operation for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. 

Ernst & Young LLP, our independent registered public accounting firm, has performed a limited review of the Consolidated Financial Statements for the three and nine month periods ended October 30, 2004 and November 1, 2003, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

American Eagle Outfitters, Inc.

We have reviewed the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of October 30, 2004 and November 1, 2003, the related consolidated statements of income for the three-month and nine-month periods ended October 30, 2004 and November 1, 2003, and the consolidated statements of cash flows for the nine-month periods ended October 30, 2004 and November 1, 2003. These financial statements are the responsibility of the Company's management. 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. 

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 31, 2004, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 25, 2004 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania
November 24, 2004

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Overview

We achieved record third quarter sales and earnings during the three months ended October 30, 2004 (the "third quarter"). Our back-to-school and fall season product assortments were well received by our target customers. Our top line sales growth was driven by strong full-price selling and efficient inventory management. We continued to significantly reduce markdowns and promotions, as well as uphold our on-going expense control initiatives, which led to improved profitability during the quarter.

Consolidated net sales for the third quarter increased 34.7% to $503.4 million from $373.8 million and our consolidated comparable store sales increased 24.9%. Our gross profit margin increased to a record rate of 47.1% for the third quarter this year from 38.1% last year led by strong merchandise sell-throughs and a significant reduction in markdowns.  We also achieved an improved markon and leveraged rent expense within cost of sales.  Selling, general and administrative expenses leveraged by 150 basis points as a result of our strong comparable store sales as well as ongoing expense control initiatives. We achieved a 19.0% operating margin for the third quarter, which was our highest rate to sales since the fourth quarter of Fiscal 1999. Third quarter net income increased 220% to $58.0 million, or 11.5% as a percent to net sales, compared to adjusted net income* of $18.1 million, or 4.9% as a percent to net sales, for the corresponding period last year. Adjusted net income* excludes the non-cash goodwill impairment charge recorded during the third quarter last year.

*A complete definition and discussion of the Company's use of non-GAAP measures, identified by an asterisk (*), is located below.

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The Company has two reportable segments, American Eagle and Bluenotes. The American Eagle segment includes the Company's 839 U.S. and Canadian retail stores, the Company's e-commerce business, ae.com, as well as the Company's catalog business. The Bluenotes segment includes the Company's 108 Bluenotes/Thriftys stores in Canada.

Net Sales

Consolidated net sales increased 34.7% to $503.4 million from $373.8 million. The sales increase was due to a 24.9% consolidated comparable store sales increase as well as a 7.3% increase in gross square feet, consisting primarily of the net addition of 38 stores. 

American Eagle net sales increased  36.6% to $479.6 million from $351.0 million. The sales increase was due to a 26.8% comparable store sales increase as well as an 8.0% increase in gross square footage. The gross square footage increase consisted primarily of the net addition of 41 stores. The comparable store sales increase was driven by a higher average unit retail price, resulting primarily from fewer markdowns, and an increase in the number of units sold per average store.  Additionally, both sales transactions per average store and the number of units sold per transaction increased during the quarter. Comparable store sales percentages increased in the mid-twenties in both the men's and women's businesses over last year.  

Bluenotes net sales increased 4.7% to $23.8 million from $22.8 million. The sales increase was due to a stronger Canadian dollar during the period compared to the same period last year partially offset by a comparable store sales decline of 0.9%.  Excluding the impact of foreign currency fluctuations, the comparable store sales decrease was due to a decline in the average unit retail price of merchandise sold.  Units sold per transaction, units sold per average store and sales transactions per average store all increased compared to the corresponding period last year. 

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A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. 

Gross profit as a percent to net sales increased to 47.1% from 38.1%.  The percentage increase was primarily attributed to an improvement in merchandise margins.  Merchandise margins increased significantly for the period due primarily to lower markdowns and an improved markon reflecting better sourcing and a continuation of our cost control initiatives, including reduced freight costs and lower sell-offs, at American Eagle.  Buying, occupancy and warehousing expenses declined as a percent to net sales due primarily to the leveraging of rent expense at American Eagle.  By segment, American Eagle was responsible for the increase in gross margin as a percent to net sales, while Bluenotes was flat for the period as a percent to net sales.

The Company's gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. See Note 2 of the Consolidated Financial Statements for a description of the Company's accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, general and administrative expenses as a percent to net sales decreased to 24.9% from 26.4% due to our strong comparable store sales as well as our cost control initiatives.  During the quarter we leveraged direct salaries, advertising, leasing costs, communications, delivery, insurance and travel.  These improvements were partially offset by the deleveraging of incentive compensation, which was not incurred in the prior year.  By segment, American Eagle leveraged selling, general and administrative expenses for the period while Bluenotes remained flat as a percent to net sales.

Depreciation and amortization expense as a percent to net sales decreased to 3.2% from 3.8% due primarily to the comparable store sales increase.

Goodwill Impairment Loss

During the third quarter of Fiscal 2003, the Company recorded an estimated $8.0 million impairment loss related to the Bluenotes division (see Note 9 of the Consolidated Financial Statements for further discussion).  There was no goodwill impairment loss recorded during the three months ended October 30, 2004. 

We incurred other expense of $0.6 million during the three months ended October 30, 2004 compared to other income of $0.5 million in the corresponding period last year. Other expense increased during the period due to $1.6 million incurred for the early termination of the Company's swap agreement and term loan facility.  This expense was partially offset by increased investment income resulting from a higher cash balance during the period compared to last year.

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Net income increased 220% to $58.0 million, or 11.5% as a percent to net sales, from adjusted net income* of $18.1 million, or 4.9% as a percent to net sales. Adjusted net income* excludes the non-cash goodwill impairment charge recorded during the three months ended November 1, 2003.  The increase in net income was attributable to the factors noted above.     

Diluted income per common share increased to $0.77 from adjusted diluted income per common share* of $0.25 in the prior year.  Adjusted diluted income per common share* excludes the non-cash goodwill impairment charge recorded during the three months ended November 1, 2003.  The increase in diluted income per common share was attributable to the factors noted above.

*A complete definition and discussion of the Company's use of non-GAAP measures, identified by an asterisk (*), is located below.

Comparison of nine months ended October 30, 2004 to the nine months ended November 1, 2003

Net Sales

Consolidated net sales increased 26.4% to $1.267 billion from $1.003 billion.  The sales increase was due to a 16.3% consolidated comparable store sales increase as well as a 7.3% increase in gross square feet, consisting primarily of the net addition of 38 stores. 

American Eagle net sales increased 27.8% to $1.207 billion from $944.9 million. The sales increase was due to a 17.5% comparable store sales increase as well as an 8.0% increase in gross square footage.  The gross square footage increase consisted primarily of the net addition of 41 stores. The comparable store sales increase was driven by a higher average unit retail price, resulting primarily from fewer markdowns.  Additionally, units sold per average store, the number of transactions per average store and the number of units sold per transaction all increased during the period.  Comparable store sales percentages increased in the high-teens in the women's business and the men's business increased in the mid-teens over last year.  

Bluenotes net sales increased 3.7% to $60.0 million from $57.9 million. The sales increase was due to a stronger Canadian dollar during the period compared to the same period last year partially offset by a comparable store sales decline of 1.0%.  Excluding the impact of foreign currency fluctuations, the comparable store sales decrease was due to a decline in the average unit retail price of merchandise sold.  The number of transactions per average store, units sold per transaction and units sold per average store all increased compared to the corresponding period last year. 

A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. 

Gross profit as a percent to net sales increased to 43.5% from 35.8%.  The percentage increase was primarily attributed to an improvement in merchandise margins.  Merchandise margins increased significantly for the period due primarily to lower markdowns and an improved markon reflecting better sourcing and a continuation of our cost control initiatives, including reduced freight costs and lower sell-offs, at American Eagle.  Buying, occupancy and warehousing expenses declined as a percent to sales due primarily to the leveraging of rent expense at American Eagle.  By segment, American Eagle as well as Bluenotes contributed to the increase in gross margin as a percent to sales.

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The Company's gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as selling, general and administrative expenses. See Note 2 of the Consolidated Financial Statements for a description of the Company's accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.

Selling, general and administrative expenses as a percent to net sales decreased to 25.3% from 26.6% due to our strong comparable store sales as well as our cost control initiatives.  During the period we leveraged direct salaries, advertising, leasing costs, communications, delivery, insurance, travel and services purchased.  These improvements were partially offset by the deleveraging of incentive compensation, which was not incurred in the prior year.  By segment, American Eagle leveraged selling, general and administrative expenses for the period while Bluenotes remained flat as a percent to net sales.

Depreciation and amortization expense as a percent to net sales decreased to 3.7% from 4.1% due primarily to the comparable store sales increase.

Goodwill Impairment Loss

During the nine months ended November 1, 2003, the Company recorded an estimated $8.0 million impairment loss related to the Bluenotes division (see Note 9 of the Consolidated Financial Statements for further discussion).  There was no goodwill impairment loss recorded during the nine months ended October 30, 2004. 

Other income decreased to $0.9 million from $1.6 million due primarily to $1.6 million of expense incurred for the early termination of the Company's swap agreement and term loan facility, which was not incurred in the prior year. This expense was partially offset by higher investment income resulting from a higher cash balance during the period compared to last year.

Net Income

Net income increased 245% to $112.8 million, or 8.9% as a percent to net sales from adjusted net income* of $32.6 million, or 3.3% as a percent to net sales.  Adjusted net income* excludes the non-cash goodwill impairment charge recorded during the nine months ended November 1, 2003.  The increase in net income was attributable to the factors noted above.     

Diluted income per common share increased to $1.51 from adjusted diluted income per common share* of $0.45 in the prior year.  Adjusted diluted income per common share* excludes the non-cash goodwill impairment charge recorded during the nine months ended November 1, 2003.  The increase in diluted income per common share was attributable to the factors noted above.

*A complete definition and discussion of the Company's use of non-GAAP measures, identified by an asterisk (*), is located below.

Non-GAAP Measure Disclosure 

The following definitions are provided for the non-GAAP (Generally Accepted Accounting Principles) measures used by the Company in this Form 10Q.  These measures are adjusted net income and adjusted diluted income per common share.  Each use is indicated by an asterisk*.  We do not intend for these non-GAAP measures to be considered in isolation or as a substitute for the related GAAP measures.  Other companies may define the measures differently. 

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Adjusted Financial Results 

Adjusted net income and adjusted diluted income per common share exclude the non-cash goodwill impairment charge of $8.0 million related to our Bluenotes operation, which was recorded during the three months ended November 1, 2003.  We believe that these adjusted measures provide investors with an important perspective on the current underlying operating performance of our businesses by isolating and excluding the impact of the non-cash goodwill impairment charge.

The Company defines "adjusted net income" as GAAP net income less a non-cash goodwill impairment charge.  The table below shows a reconciliation between GAAP net income and adjusted net income.

The Company defines "adjusted diluted income per common share" as GAAP diluted income per common share less a non-cash goodwill impairment charge.  The table below shows a reconciliation between GAAP diluted income per common share and adjusted diluted income per common share.

Non-GAAP Financial Measures:

Reconciliation of GAAP net income and diluted income per common share to adjusted net income and adjusted diluted income per common share

The Company's uses of cash are generally for working capital, the construction of new stores and the remodeling of existing stores, information technology upgrades, distribution center improvements, the purchase of both short and long-term investments and the payment of dividends. Historically, these uses of cash have been met through cash flow from operations.

The following sets forth certain measures of the Company's liquidity:

Net cash provided by operating activities totaled $129.4 million for the nine months ended October 30, 2004. Cash was provided primarily by net income earned for the period adjusted for certain non-cash items. The Company's use of cash during the period consisted primarily of merchandise inventory purchases.

Investing activities for the nine months ended October 30, 2004 included $77.9 million for capital expenditures and $34.2 million for the net purchase of investments.  Capital expenditures consisted primarily of $35.9 million related to our American Eagle stores in the United States and $20.0 million related to the purchase of our corporate headquarters and distribution center during June 2004. The remaining capital expenditures were primarily related to improvements at our distribution centers and information technology upgrades at our home office.

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The Company invests primarily in tax-exempt municipal bonds, taxable agency bonds and corporate notes with an original maturity between three and twenty-four months and an expected rate of return of approximately a 3% taxable equivalent yield.  The Company places an emphasis on investing in tax-exempt and tax-advantaged asset classes.  Additionally, all investments must have a highly liquid secondary market.

Cash provided by financing activities resulted primarily from $26.6 million in proceeds from stock option exercises during the period partially offset by $16.9 million used for the early retirement of debt and termination of the swap agreement as well as $4.4 million used for the payment of dividends. During the three months ended October 30, 2004, the Company retired its non-revolving term facility, that was entered into in conjunction with its Canadian acquisition, for $16.2 million. The term facility was originally scheduled to mature in December 2007.

On November 30, 2000, the Company entered into an interest rate swap agreement totaling $29.2 million in connection with the term facility. The interest rate swap was used by the Company to manage interest rate risk. The Company paid a fixed rate of 5.97% and received a variable rate based on the one-month Bankers' Acceptance Rate. This agreement effectively changed the interest rate on the borrowings under the term facility from a variable rate to a fixed rate of 5.97% plus 140 basis points. On October 1, 2004, the fair value of our interest rate swap, which was terminated on that date in connection with the retirement of the term facility, was a net loss of $0.7 million.

The Company has an unsecured demand lending arrangement (the "facility") with a bank to provide a $118.6 million line of credit at either the lender's prime lending rate (4.75% at October 30, 2004) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million to be used for direct borrowing. No borrowings were required against the line for the current or prior periods. At October 30, 2004, letters of credit in the amount of $60.1 million were outstanding on this facility, leaving a remaining available balance on the line of $58.5 million. The Company also has an uncommitted letter of credit facility for $50.0 million with a separate financial institution. At October 30, 2004, letters of credit in the amount of $43.5 million were outstanding on this facility, leaving a remaining available balance on the line of $6.5 million.

The payment of dividends is at the discretion of our Board of Directors and is based on future earnings, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. Any dividends paid will be declared on a quarterly basis. During the three months ended October 30, 2004, the Company's Board of Directors voted to initiate a cash dividend payment. A quarterly dividend of $0.06 per share was declared and paid during the third quarter. Additionally, on November 22, 2004, the Company's Board of Directors declared a quarterly dividend of $0.06 per share to be paid during the fourth quarter of Fiscal 2004.

We expect capital expenditures for Fiscal 2004 to be approximately $90 million, which will relate primarily to approximately 50 new American Eagle stores in the United States and Canada, the remodeling of 36 American Eagle stores in the United States and the purchase of the Company's corporate headquarters and distribution center.  Remaining capital expenditures will relate to new fixtures and enhancements to existing stores, information technology upgrades and distribution center improvements.

Our growth strategy includes the possibility of acquisitions and/or internally developing new brands. We periodically consider and evaluate these options to support future growth. In the event we do pursue such options, we could require additional equity or debt financing. There can be no assurance that we would be successful in closing any potential transaction, or that any endeavor we undertake would increase our profitability.

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Recent Financial Accounting Standards Board Pronouncements

FASB Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95

On March 31, 2004, the FASB issued an exposure draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.  The proposed change in accounting would replace existing requirements under SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No. 25, Accounting for Stock Issued to Employees.  The exposure draft covers a wide range of equity-based compensation arrangements.  Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement.  The expense of the award would generally be measured at fair value at the grant date.  On October 13, 2004, the FASB delayed the effective date of the proposed standard.  The final standard, which is expected to be issued before December 31, 2004, would be applicable for annual and interim periods beginning after June 15, 2005.  The Company will evaluate the impact of and comply with any change in the accounting standards on the Company's financial position and results of operations when the final rules are issued.

The Company's critical accounting policies are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to the Company's consolidated financial statements for the year ended January 31, 2004 contained in the Company's Fiscal 2003 Annual Report on Form 10-K.  Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to the Company's consolidated financial statements for the period ended October 30, 2004.  The application of the Company's critical accounting policies may require management to make judgments and estimates about the amounts reflected in the consolidated financial statements.  Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

As of October 30, 2004, we had deferred tax assets of $9.4 million associated with foreign tax loss carryforwards, which expire beginning in 2008. We anticipate that future taxable income in Canada will be sufficient to utilize the full amount of the deferred tax assets. Assuming a 36% effective tax rate, we will need to recognize pretax net income of approximately $26.1 million in future periods to recover this deferred tax amount.

We do not believe that inflation has had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and profitability.

Safe Harbor Statement, Seasonality and Risk Factors

This report contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:

• the planned opening of the remaining 10 American Eagle stores in the United States and Canada during Fiscal 2004,

• the planned opening of approximately 30 to 40 American Eagle stores in the United States and Canada in Fiscal 2005,

• the selection of the remaining 4 stores in the United States for remodeling during Fiscal 2004,

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• the selection of approximately 60 to 70 American Eagle stores in the United States for remodeling in Fiscal 2005,

• the possibility of growth through acquisitions and/or internally developing new brands,

• the payment of a dividend in future periods, and

• the expected closing of the Bluenotes sale transaction on December 10, 2004.

We caution that these statements are further qualified by factors that could cause our actual results to differ materially from those in the forward-looking statements, including without limitation, the following:

The Company's future success depends, in part, upon its ability to identify and respond to fashion trends in a timely manner. The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, dictated by fashion and season. These fluctuations especially affect the inventory owned by apparel retailers, since merchandise typically must be ordered well in advance of the selling season. While we endeavor to test many merchandise items before ordering large quantities, we are still susceptible to changing fashion trends and fluctuations in customer demands.

In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially during our peak selling seasons. We enter into agreements for the manufacture and purchase of our private label apparel well in advance of the applicable selling season. As a result, we are vulnerable to changes in consumer demand, pricing shifts, and the timing and selection of merchandise purchases. Changes in fashion trends, if unsuccessfully identified, forecasted or responded to by the Company, could, among other things, lead to lower sales, excess inventories and higher markdowns, which in turn could have a material adverse effect on the Company's results of operations and financial condition.

The specialty retail industry is highly competitive. The Company competes primarily on the basis of quality, fashion, service, selection and price. There can be no assurance that the Company will be able to successfully compete in the future.

The success of the Company's operations also depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates, rising gasoline prices and consumer confidence. There can be no assurance that consumer spending will not be negatively affected by general or local economic conditions, thereby adversely impacting the Company's continued growth and results of operations.

The Company's continued growth and success will depend in part on its ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2005, the Company plans to open approximately 30 to 40 new American Eagle stores in the United States and Canada.  Additionally, the Company plans to remodel or expand approximately 60 to 70 existing stores during Fiscal 2005. Accomplishing the Company's new and existing store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations, the expansion of the Company's buying and inventory capabilities and the availability of capital. There can be no assurance that the Company will be able to achieve its store expansion goals, manage its growth effectively, successfully integrate the planned new stores into the Company's operations or operate its new and remodeled stores profitably.

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The Company purchases merchandise from domestic and foreign suppliers. Historically, a majority of the Company's merchandise has been purchased from foreign suppliers. Since we rely on a small number of foreign sources for a significant portion of our purchases, any event causing the disruption of imports including the insolvency of a significant supplier or a significant labor dispute, such as a dock strike could have an adverse effect on our operations. Other events which could also cause a disruption of imports include the imposition of additional trade law provisions or import restrictions, such as increased duties, tariffs, anti-dumping provisions, increased Custom's enforcement actions, or political or economic disruptions.

Additionally, a majority of the merchandise imported by the Company has been subject to import quotas which restrict the quantity of textile or apparel products that can be exported annually from a given country. As a member of the World Trade Organization, the U.S. has agreed to a world wide phase out of these quotas as of January 1, 2005, resulting in the removal of country specific restrictions on the quantity of goods that can be imported into the U.S. At the current time, however, a number of pending applications have been made to U.S. government agencies to delay the elimination of certain quota categories at January 1, 2005. The outcome of these applications, plus other possible efforts to impede the elimination of quotas, could have a significant impact on worldwide sourcing patterns in 2005; however, the extent of this impact, if any, and the possible effect on the Company's purchasing patterns and costs, cannot be determined at this time.

We do not maintain any long-term or exclusive commitments or arrangements to purchase from any single supplier.

Seasonality

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2003, the third and fourth fiscal quarters accounted for approximately 58.6% of our sales. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.

In March 2004, the FASB issued an exposure draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95 ("the exposure draft").  The proposed change in accounting would replace existing requirements under SFAS 123, Accounting for Stock-Based Compensation, and APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25").  Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. 

Currently, the Company accounts for its stock-based compensation plans under APB No. 25 and provides the related pro forma information regarding net income and earnings per share, as required by SFAS No. 123, as amended by SFAS No. 148, in the notes to the consolidated financial statements.  When the FASB changes the accounting standards related to employee stock option grants and requires the related cost to be recognized in the income statement, it will have an adverse affect on our reported net income.