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EX-32.2 - EX-32.2 - AMERICAN EAGLE OUTFITTERS INCaeo-ex322_9.htm
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EX-31.2 - EX-31.2 - AMERICAN EAGLE OUTFITTERS INCaeo-ex312_8.htm
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EX-15 - EX-15 - AMERICAN EAGLE OUTFITTERS INCaeo-ex15_10.htm
EX-10.1 - EX-10.1 - AMERICAN EAGLE OUTFITTERS INCaeo-ex101_489.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 October 28, 2017

OR

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

Commission File Number: 1-33338

 

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

No. 13-2721761

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

77 Hot Metal Street, Pittsburgh, PA

 

15203-2329

(Address of principal executive offices)

 

(Zip Code)

 

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

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

N/A

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      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

 

  (Do not check if a smaller reporting company)

  

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: 177,307,946 Common Shares were outstanding at December 4, 2017.

 

 

 


AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

Consolidated Balance Sheets: October 28, 2017, January 28, 2017 and October 29, 2016

 

3

 

 

Consolidated Statements of Operations and Retained Earnings: 13 weeks and 39 weeks ended October 28, 2017 and October 29, 2016

 

4

 

 

Consolidated Statements of Comprehensive Income: 13 weeks and 39 weeks ended October 28, 2017 and October 29, 2016

 

5

 

 

Consolidated Statements of Cash Flows: 39 weeks ended October 28, 2017 and October 29, 2016

 

6

 

 

Notes to Consolidated Financial Statements

 

7

 

 

Report of Independent Registered Public Accounting Firm

 

19

Item 2.

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

29

Item 4.

 

Controls and Procedures

 

30

 

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

N/A

Item 1A.    

 

Risk Factors

 

31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3.

 

Defaults Upon Senior Securities

 

N/A

Item 4.

 

Mine Safety Disclosures

 

N/A

Item 5.

 

Other Information

 

31

Item 6.

 

Exhibits

 

32

 

2


PART I - FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

(In thousands, except per share amounts)

 

2017

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

257,527

 

 

$

378,613

 

 

$

291,667

 

Merchandise inventory

 

 

534,019

 

 

 

358,446

 

 

 

492,602

 

Accounts receivable, net

 

 

77,113

 

 

 

86,634

 

 

 

74,812

 

Prepaid expenses and other

 

 

61,553

 

 

 

77,536

 

 

 

77,768

 

Total current assets

 

 

930,212

 

 

 

901,229

 

 

 

936,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, at cost, net of accumulated depreciation

 

 

726,168

 

 

 

707,797

 

 

 

708,488

 

Intangible assets, at cost, net of accumulated amortization

 

 

46,979

 

 

 

49,373

 

 

 

49,993

 

Goodwill

 

 

14,972

 

 

 

14,887

 

 

 

17,315

 

Non-current deferred income taxes

 

 

29,025

 

 

 

49,250

 

 

 

49,627

 

Other assets

 

 

54,424

 

 

 

60,124

 

 

 

60,268

 

Total assets

 

$

1,801,780

 

 

$

1,782,660

 

 

$

1,822,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

330,716

 

 

$

246,204

 

 

$

314,111

 

Accrued compensation and payroll taxes

 

 

43,561

 

 

 

54,184

 

 

 

56,939

 

Accrued rent

 

 

80,580

 

 

 

78,619

 

 

 

79,255

 

Accrued income and other taxes

 

 

17,262

 

 

 

12,220

 

 

 

29,373

 

Unredeemed gift cards and gift certificates

 

 

29,475

 

 

 

52,966

 

 

 

30,130

 

Current portion of deferred lease credits

 

 

12,887

 

 

 

12,780

 

 

 

12,783

 

Other liabilities and accrued expenses

 

 

38,359

 

 

 

36,810

 

 

 

40,288

 

Total current liabilities

 

 

552,840

 

 

 

493,783

 

 

 

562,879

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred lease credits

 

 

50,439

 

 

 

45,114

 

 

 

47,677

 

Non-current accrued income taxes

 

 

4,590

 

 

 

4,537

 

 

 

4,573

 

Other non-current liabilities

 

 

30,712

 

 

 

34,657

 

 

 

35,451

 

Total non-current liabilities

 

 

85,741

 

 

 

84,308

 

 

 

87,701

 

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; 177,084, 181,886  and 181,863 shares

   outstanding, respectively

 

 

2,496

 

 

 

2,496

 

 

 

2,496

 

Contributed capital

 

 

588,978

 

 

 

603,890

 

 

 

597,919

 

Accumulated other comprehensive loss

 

 

(34,798

)

 

 

(36,462

)

 

 

(31,160

)

Retained earnings

 

 

1,812,821

 

 

 

1,775,775

 

 

 

1,744,227

 

Treasury stock, 72,482, 67,680 and 67,703 shares, respectively

 

 

(1,206,298

)

 

 

(1,141,130

)

 

 

(1,141,522

)

Total stockholders’ equity

 

 

1,163,199

 

 

 

1,204,569

 

 

 

1,171,960

 

Total liabilities and stockholders’ equity

 

$

1,801,780

 

 

$

1,782,660

 

 

$

1,822,540

 

 

Refer to Notes to Consolidated Financial Statements

 

 

3


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

(In thousands, except per share amounts)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Total net revenue

 

$

960,433

 

 

$

940,609

 

 

$

2,566,826

 

 

$

2,512,619

 

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

585,520

 

 

 

562,793

 

 

 

1,621,441

 

 

 

1,534,194

 

Gross profit

 

 

374,913

 

 

 

377,816

 

 

 

945,385

 

 

 

978,425

 

Selling, general and administrative expenses

 

 

217,146

 

 

 

219,912

 

 

 

615,842

 

 

 

615,503

 

Restructuring charges

 

 

3,695

 

 

 

 

 

 

18,888

 

 

 

 

Depreciation and amortization expense

 

 

43,149

 

 

 

39,636

 

 

 

123,878

 

 

 

117,319

 

Operating income

 

 

110,923

 

 

 

118,268

 

 

 

186,777

 

 

 

245,603

 

Other (expense) income, net

 

 

(13,243

)

 

 

603

 

 

 

(19,574

)

 

 

2,403

 

Income before income taxes

 

 

97,680

 

 

 

118,871

 

 

 

167,203

 

 

 

248,006

 

Provision for income taxes

 

 

33,947

 

 

 

43,111

 

 

 

56,997

 

 

 

90,179

 

Net income

 

$

63,733

 

 

$

75,760

 

 

$

110,206

 

 

$

157,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per basic share

 

$

0.36

 

 

$

0.42

 

 

$

0.62

 

 

$

0.87

 

Net income per diluted share

 

$

0.36

 

 

$

0.41

 

 

$

0.61

 

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.125

 

 

$

0.125

 

 

$

0.375

 

 

$

0.375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

177,288

 

 

 

181,819

 

 

 

178,272

 

 

 

181,196

 

Weighted average common shares outstanding - diluted

 

 

179,132

 

 

 

184,615

 

 

 

180,260

 

 

 

183,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings, beginning

 

$

1,772,233

 

 

$

1,693,371

 

 

$

1,775,775

 

 

$

1,659,267

 

Net income

 

 

63,733

 

 

 

75,760

 

 

 

110,206

 

 

 

157,827

 

Cash dividends and dividend equivalents

 

 

(22,733

)

 

 

(23,349

)

 

 

(68,119

)

 

 

(69,754

)

Reissuance of treasury stock

 

 

(412

)

 

 

(1,555

)

 

 

(5,041

)

 

 

(3,113

)

Retained earnings, ending

 

$

1,812,821

 

 

$

1,744,227

 

 

$

1,812,821

 

 

$

1,744,227

 

 

Refer to Notes to Consolidated Financial Statements

 

 

4


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

63,733

 

 

$

75,760

 

 

$

110,206

 

 

$

157,827

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (expense) income

 

 

(4,677

)

 

 

(1,805

)

 

 

1,504

 

 

 

(1,287

)

Other comprehensive (expense) income:

 

 

(4,677

)

 

 

(1,805

)

 

 

1,504

 

 

 

(1,287

)

Comprehensive income

 

$

59,056

 

 

$

73,955

 

 

$

111,710

 

 

$

156,540

 

 

Refer to Notes to Consolidated Financial Statements

 

 

5


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

39 Weeks Ended

 

 

 

October 28,

 

 

October 29,

 

(In thousands)

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

110,206

 

 

$

157,827

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

125,370

 

 

 

118,173

 

Share-based compensation

 

 

12,056

 

 

 

23,024

 

Deferred income taxes

 

 

19,846

 

 

 

14,647

 

Foreign currency transaction gain

 

 

(5,002

)

 

 

(806

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventory

 

 

(173,020

)

 

 

(186,594

)

Accounts receivable

 

 

9,515

 

 

 

4,070

 

Prepaid expenses and other

 

 

16,220

 

 

 

(499

)

Other assets

 

 

2,872

 

 

 

(5,893

)

Accounts payable

 

 

80,844

 

 

 

117,967

 

Unredeemed gift cards and gift certificates

 

 

(23,581

)

 

 

(18,265

)

Deferred lease credits

 

 

5,287

 

 

 

(2,577

)

Accrued compensation and payroll taxes

 

 

(9,499

)

 

 

(22,002

)

Accrued income and other taxes

 

 

5,519

 

 

 

7,038

 

Accrued liabilities

 

 

11,467

 

 

 

(3,256

)

Total adjustments

 

 

77,894

 

 

 

45,027

 

Net cash provided by operating activities

 

 

188,100

 

 

 

202,854

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(134,920

)

 

 

(107,616

)

Acquisition of intangible assets

 

 

(645

)

 

 

(1,215

)

Net cash used for investing activities

 

 

(135,565

)

 

 

(108,831

)

Financing activities:

 

 

 

 

 

 

 

 

Payments on capital leases

 

 

(8,705

)

 

 

(5,604

)

Repurchase of common stock as part of publicly announced programs

 

 

(87,682

)

 

 

 

Repurchase of common stock from employees

 

 

(12,300

)

 

 

(6,898

)

Net proceeds from stock options exercised

 

 

225

 

 

 

16,177

 

Excess tax benefit from share-based payments

 

 

 

 

 

758

 

Cash dividends paid

 

 

(66,385

)

 

 

(67,945

)

Net cash used for financing activities

 

 

(174,847

)

 

 

(63,512

)

Effect of exchange rates changes on cash

 

 

1,226

 

 

 

1,089

 

Net change in cash and cash equivalents

 

 

(121,086

)

 

 

31,600

 

Cash and cash equivalents - beginning of period

 

 

378,613

 

 

 

260,067

 

Cash and cash equivalents - end of period

 

$

257,527

 

 

$

291,667

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

36,822

 

 

$

77,562

 

Cash paid during the period for interest

 

$

818

 

 

$

881

 

 

Refer to Notes to Consolidated Financial Statements

 

 

6


AMERICAN EAGLE OUTFITTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at October 28, 2017 and October 29, 2016 and for the 13 and 39 week periods ended October 28, 2017 and October 29, 2016 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 2016 Annual Report. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AEO” and the “AE Brand” refer to our American Eagle Outfitters stores. “Aerie” refers to our Aerie® by American Eagle® stores. “AEO Direct” refers to our e-commerce operations, 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 October 28, 2017, the Company operated in one reportable segment.

Fiscal Year

The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2017” refers to the 53 week period ending February 3, 2018. “Fiscal 2016” refers to the 52 week period ended January 28, 2017.

Estimates

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

7


Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016–02”) which replaces the existing guidance in Accounting Standard Certification (“ASC”) 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.   The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application. The Company will adopt in Fiscal 2019 and is currently evaluating the impact of ASU 2016-02 to its Consolidated Financial Statements, but expects that it will result in a significant increase to its long-term assets and liabilities on the Consolidated Balance Sheets.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718) (“ASU 2016-09”).  ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU 2016-09 prospectively on January 29, 2017 and it did not have a material impact to the Consolidated Financial Statements for the 13 or 39 weeks ended October 28, 2017.

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

Revenue Recognition

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

Revenue is recorded net of estimated and actual sales returns and 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.

8


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 (Expense) Income, Net

Other (expense) income, net consists primarily of allowances for uncollectible receivables, foreign currency transaction gain/loss, interest income/expense and realized investment gains/losses.

As of October 28, 2017, allowances for uncollectible receivables were $20.4 million.  There were no allowances for uncollectible receivables as of October 29, 2016.

Cash and Cash Equivalents and Investments

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

As of October 28, 2017 and October 29, 2016, the Company held no investments.

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

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when both title and risk of loss for the merchandise have transferred to the Company.

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

9


Income Taxes

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

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

The calculation of deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its estimates and assumptions are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.

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

Property and Equipment

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

 

Buildings

 

25 years

Leasehold improvements

 

Lesser of 10 years or the term of the lease

Fixtures and equipment

Information technology

 

5 years

3-5 years

As of October 28, 2017, the weighted average remaining useful life of our assets is approximately 8.3 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 or 39 weeks ended October 28, 2017 or October 29, 2016.

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

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business, Tailgate and Todd Snyder brands, and Hong Kong and China businesses.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 28, 2017.  During the fourth quarter of Fiscal 2016, the goodwill was fully impaired for the Hong Kong and China businesses.  All other goodwill for the Company was not impaired as a result of the annual impairment test.  

10


Intangible Assets

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

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows are less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 39 weeks ended October 28, 2017 or October 29, 2016.

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

Gift Cards

The value of a gift card is recorded as a current liability upon issuance, and revenue is recognized when the gift card is redeemed for merchandise.  The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $1.6 million and $1.5 million of revenue related to gift card breakage during the 13 weeks ended October 28, 2017 and October 29, 2016, respectively.  During the 39 weeks ended October 28, 2017 and October 29, 2016, the Company recorded $6.1 million and $5.3 million, respectively, of revenue related to gift card breakage.

Deferred Lease Credits

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

Co-branded Credit Card

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (“the Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured.  This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings.

Once a customer is approved to receive the AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in the customer loyalty program offered by the Company. 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, highly digitized loyalty program called AEO ConnectedTM (the “Program”).  This Program integrates the current credit card rewards program and the AEREWARDSÒ loyalty program into one combined customer offering.  Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds and when reached rewards are distributed.  Customers will earn discounts in the form of savings certificates, which are accounted for in accordance with ASC 605-25. Rewards earned are valid through the stated expiration date, which is approximately 45 days from the issuance date of the reward. Additional rewards are also given for key items such as jeans and bras.  Rewards not redeemed during the 45 days redemption period are forfeited. 

11


Points earned under the Program on purchases at AEO and Aerie are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”).  The Company believes that points earned under the Program represent deliverables in a multiple element arrangement rather than a rebate or refund of cash.  Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire.  Additionally, reward points earned on non-AEO or Aerie purchases are accounted for in accordance with ASC 605-25.  As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified two operating segments (American Eagle Outfitters Brand and Aerie by American Eagle Outfitters 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

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

 

(In thousands)

 

October 28,

2017

 

 

January 28,

2017

 

 

October 29,

2016

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

185,546

 

 

$

265,332

 

 

$

209,581

 

Interest bearing deposits

 

 

71,981

 

 

 

83,281

 

 

 

82,086

 

Commercial paper

 

 

 

 

 

30,000

 

 

 

 

Total cash and cash equivalents

 

$

257,527

 

 

$

378,613

 

 

$

291,667

 

 

There were no sales or purchases of investments for the 13 and 39 weeks ended October 28, 2017 and October 29, 2016.

 

 

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.

12


Financial Instruments

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

Level 1 — Quoted prices in active markets.

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

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

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents) measured at fair value on a recurring basis at October 28, 2017 and October 29, 2016:

 

 

 

Fair Value Measurements at October 28, 2017

 

(In thousands)

 

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

185,546

 

 

$

185,546

 

 

 

 

 

 

 

Interest bearing deposits

 

 

71,981

 

 

 

71,981

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

257,527

 

 

$

257,527

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at October 29, 2016

 

(In thousands)

 

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

209,581

 

 

$

209,581

 

 

 

 

 

 

 

Interest bearing deposits

 

 

82,086

 

 

 

82,086

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

291,667

 

 

$

291,667

 

 

$

 

 

$

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at October 28, 2017 or October 29, 2016.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis.  However, if certain triggering events occur, or if an annual impairment test is required, and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value.  During the 13 and 39 weeks ended for October 28, 2017, the Company did not impair any non-financial assets.

 

 

13


5.  Earnings per Share

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

 

 

 

13 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 28,

 

 

October 29,

 

 

October 28,

 

 

October 29,

 

(In thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

177,288

 

 

 

181,819

 

 

 

178,272

 

 

 

181,196

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

1,844

 

 

 

2,796

 

 

 

1,988

 

 

 

2,455

 

Diluted number of common shares outstanding

 

 

179,132

 

 

 

184,615

 

 

 

180,260

 

 

 

183,651

 

 

Equity awards to purchase approximately 2.5 million shares of common stock during both the 13 and 39 weeks ended October 28, 2017 and approximately 1.4 million shares of common stock during both the 13 and 39 weeks ended October 29, 2016 were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive.

Additionally, approximately 0.1 million and 0.9 million shares of restricted stock units for the 13 and 39 weeks ended October 28, 2017, respectively, were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive.   

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

 

 

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

(In thousands)

 

2017

 

 

2017

 

 

2016

 

Property and equipment, at cost

 

$

1,994,071

 

 

$

1,884,297

 

 

$

1,858,863

 

Less:  Accumulated depreciation and impairment

 

 

(1,267,903

)

 

 

(1,176,500

)

 

 

(1,150,375

)

Property and equipment, net

 

$

726,168

 

 

$

707,797

 

 

$

708,488

 

 

 

7.  Intangible Assets

Intangible assets consist of the following:

 

 

 

October 28,

 

 

January 28,

 

 

October 29,

 

(In thousands)

 

2017

 

 

2017

 

 

2016

 

Trademarks, at cost

 

$

69,623

 

 

$

68,978

 

 

$

68,611

 

Less:  Accumulated amortization

 

 

(22,644

)

 

 

(19,605

)

 

 

(18,618

)

Intangible assets, net

 

$

46,979

 

 

$

49,373

 

 

$

49,993

 

 

 

8.  Other Credit Arrangements

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

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

As of October 28, 2017, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of October 28, 2017.

14


Additionally, the Company has a borrowing agreement with one financial institution under which it may borrow an aggregate of $5.0 million USD for the purposes of trade letter of credit issuances. The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the financial institution.  As of October 28, 2017, the Company had no outstanding trade letters of credit.

  

 

9.  Share-Based Compensation

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

Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 weeks and 39 weeks ended October 28, 2017 was $2.3 million ($1.5 million, net of tax) and $12.1 million ($7.9 million, net of tax), respectively, and for the 13 weeks and 39 weeks ended October 29, 2016 was $6.3 million ($4.0 million, net of tax) and $23.0 million ($14.6 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 39 weeks ended October 28, 2017 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - January 28, 2017

 

 

2,314

 

 

$

15.33

 

 

 

 

 

 

 

 

 

Granted

 

 

1,055

 

 

$

14.59

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(29

)

 

$

11.51

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(852

)

 

$

14.82

 

 

 

 

 

 

 

 

 

Outstanding - October 28, 2017

 

 

2,488

 

 

$

15.24

 

 

 

5.3

 

 

$

0.3

 

Vested and expected to vest - October 28, 2017

 

 

2,341

 

 

$

15.25

 

 

 

5.3

 

 

$

0.3

 

Exercisable - October 28, 2017 (2)

 

 

5

 

 

$

13.70

 

 

 

1.3

 

 

$

0.3

 

 

(1)

Options exercised during the 39 weeks ended October 28, 2017 had an exercise price of $11.51.   

(2)

Options exercisable represent “in-the-money” vested options based upon the weighted-average exercise price of vested options compared to the Company’s stock price at October 28, 2017.

Cash received from the exercise of stock options was $0.2 million for the 39 weeks ended October 28, 2017 and $16.2 million for the 39 weeks ended October 29, 2016.  The actual tax benefit realized from stock option exercises totaled $0.7 million for the 39 weeks October 28, 2017 and $(0.2) million for the 39 weeks ended October 29, 2016.

As of October 28, 2017, there was $5.2 million of unrecognized compensation expense for stock option awards that is expected to be recognized over a weighted average period of 2.0 years.  

15


The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

39 Weeks Ended

 

 

 

October 28,

 

Black-Scholes Option Valuation Assumptions

 

2017

 

Risk-free interest rate (1)

 

 

2.1

%

Dividend yield

 

 

3.1

%

Volatility factor (2)

 

 

38.5

%

Weighted-average expected term (3)

 

4.5 years

 

 

(1)

Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.

(2)

Based on a combination of historical volatility of the Company’s common stock and implied volatility.

(3)

Represents the period of time options are expected to be outstanding. The weighted average expected option terms were determined based on historical experience.            

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units.  These awards vest over three years.  Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

Performance-based restricted stock awards include performance-based restricted stock units.  These awards cliff vest at the end of a three year period based upon the Company’s achievement of pre-established goals throughout the term of the award.  Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

The grant date fair value of all restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant.

A summary of the Company’s restricted stock activity is presented in the following tables:

 

 

 

Time-Based Restricted

Stock Units

 

 

Performance-Based Restricted

Stock Units

 

 

 

39 Weeks Ended

 

 

39 Weeks Ended

 

 

 

October 28, 2017

 

 

October 28, 2017

 

(Shares in thousands)

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

Nonvested - January 28, 2017

 

 

2,001

 

 

$

15.39

 

 

 

2,825

 

 

$

15.07

 

Granted

 

 

1,489

 

 

$

11.62

 

 

 

703

 

 

$

14.97

 

Vested

 

 

(986

)

 

$

14.91

 

 

 

(957

)

 

$

14.14

 

Cancelled

 

 

(194

)

 

$

14.13

 

 

 

(295

)

 

$

16.13

 

Nonvested - October 28, 2017

 

 

2,310

 

 

$

13.27