e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 30, 2010
OR
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o |
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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)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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No. 13-2721761
(I.R.S. Employer
Identification No.) |
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77 Hot Metal Street, Pittsburgh, PA
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15203-2329 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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þ Large accelerated filer |
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o Accelerated filer |
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o Non-accelerated filer |
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o Smaller reporting company |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: 195,687,722 Common Shares were outstanding at November 12, 2010.
AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS
2
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
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October 30, |
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January 30, |
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October 31, |
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(In thousands, except per share amounts) |
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2010 |
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2010 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
630,775 |
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$ |
693,960 |
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$ |
512,603 |
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Short-term investments |
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3,700 |
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4,675 |
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3,300 |
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Merchandise inventory |
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409,509 |
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326,454 |
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425,415 |
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Accounts receivable |
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40,346 |
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34,746 |
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46,584 |
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Prepaid expenses and other |
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52,757 |
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47,039 |
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52,188 |
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Deferred income taxes |
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50,910 |
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60,156 |
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54,362 |
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Total current assets |
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1,187,997 |
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1,167,030 |
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1,094,452 |
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Property and equipment, at cost, net of accumulated depreciation
and amortization |
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652,361 |
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713,142 |
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741,019 |
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Goodwill |
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11,395 |
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11,210 |
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11,165 |
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Long-term investments |
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5,915 |
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197,773 |
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203,152 |
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Non-current deferred income taxes |
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27,475 |
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27,305 |
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22,719 |
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Other assets, net |
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23,981 |
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21,688 |
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23,401 |
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Total assets |
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$ |
1,909,124 |
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$ |
2,138,148 |
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$ |
2,095,908 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
196,504 |
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$ |
158,526 |
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$ |
198,978 |
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Notes payable |
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30,000 |
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50,000 |
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Accrued compensation and payroll taxes |
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30,289 |
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55,144 |
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23,932 |
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Accrued rent |
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71,133 |
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68,866 |
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67,983 |
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Accrued income and other taxes |
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11,620 |
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20,585 |
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22,574 |
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Unredeemed gift cards and gift certificates |
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20,266 |
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39,389 |
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19,632 |
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Current portion of deferred lease credits |
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16,465 |
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17,388 |
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17,605 |
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Other liabilities and accrued expenses |
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21,285 |
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19,057 |
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20,293 |
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Total current liabilities |
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367,562 |
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408,955 |
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420,997 |
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Non-current liabilities: |
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Deferred lease credits |
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81,730 |
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89,591 |
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93,607 |
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Non-current accrued income taxes |
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36,302 |
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38,618 |
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36,265 |
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Other non-current liabilities |
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22,246 |
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22,467 |
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21,734 |
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Total non-current liabilities |
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140,278 |
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150,676 |
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151,606 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 5,000 shares authorized;
none issued and outstanding |
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Common stock, $0.01 par value; 600,000 shares authorized;
249,559, 249,561 and 249,561 shares issued; 195,683, 206,832
and 206,781 shares outstanding, respectively |
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2,496 |
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2,486 |
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2,486 |
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Contributed capital |
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543,265 |
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554,399 |
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538,007 |
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Accumulated other comprehensive income |
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26,751 |
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16,838 |
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16,478 |
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Retained earnings |
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1,745,912 |
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1,764,049 |
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1,726,531 |
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Treasury stock, 53,876, 41,737 and 41,789 shares, respectively |
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(917,140 |
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(759,255 |
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(760,197 |
) |
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Total stockholders equity |
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1,401,284 |
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1,578,517 |
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1,523,305 |
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Total liabilities and stockholders equity |
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$ |
1,909,124 |
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$ |
2,138,148 |
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$ |
2,095,908 |
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Refer to Notes to Consolidated Financial Statements
3
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
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13 Weeks Ended |
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39 Weeks Ended |
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October 30, |
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October 31, |
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October 30, |
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October 31, |
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(In thousands, except per share amounts) |
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2010 |
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2009 |
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2010 |
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2009 |
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Net sales |
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$ |
751,507 |
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$ |
736,011 |
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$ |
2,051,471 |
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$ |
1,984,488 |
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Cost of sales, including certain buying,
occupancy and warehousing expenses |
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439,198 |
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431,836 |
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1,241,758 |
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1,202,812 |
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Gross profit |
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312,309 |
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304,175 |
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809,713 |
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781,676 |
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Selling, general and administrative expenses |
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185,050 |
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184,948 |
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519,188 |
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497,594 |
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Depreciation and amortization expense |
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35,804 |
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34,653 |
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107,378 |
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101,072 |
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Operating income |
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91,455 |
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84,574 |
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183,147 |
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183,010 |
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Realized loss on sale of investment securities |
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(24,201 |
) |
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(24,426 |
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(2,749 |
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Other income (expense), net |
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1,986 |
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(451 |
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2,470 |
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(3,939 |
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Total other-than-temporary impairment losses |
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(129 |
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(5,089 |
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(3,068 |
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Portion of loss recognized in other
comprehensive income, before tax |
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129 |
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3,841 |
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2,843 |
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Net impairment loss recognized in earnings |
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(1,248 |
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(225 |
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Income before income taxes |
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69,240 |
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84,123 |
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159,943 |
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176,097 |
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Provision for income taxes |
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36,049 |
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16,175 |
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65,047 |
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42,316 |
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Income from continuing operations |
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33,191 |
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67,948 |
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94,896 |
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133,781 |
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Loss from discontinued operations, net of tax |
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(167 |
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(8,789 |
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(41,287 |
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(24,083 |
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Net income |
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$ |
33,024 |
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$ |
59,159 |
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$ |
53,609 |
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$ |
109,698 |
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Basic income per common share |
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Income from continuing operations |
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$ |
0.17 |
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$ |
0.33 |
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$ |
0.47 |
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$ |
0.65 |
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Loss from discontinued operations |
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(0.00 |
) |
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(0.04 |
) |
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(0.20 |
) |
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(0.12 |
) |
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Net income per basic share |
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$ |
0.17 |
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$ |
0.29 |
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$ |
0.27 |
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$ |
0.53 |
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Diluted income per common share |
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Income from continuing operations |
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$ |
0.17 |
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$ |
0.32 |
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$ |
0.46 |
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$ |
0.64 |
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Loss from discontinued operations |
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(0.00 |
) |
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(0.04 |
) |
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(0.20 |
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(0.11 |
) |
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Net income per diluted share |
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$ |
0.17 |
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$ |
0.28 |
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$ |
0.26 |
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$ |
0.53 |
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Cash dividends per common share |
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$ |
0.11 |
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$ |
0.10 |
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$ |
0.32 |
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$ |
0.30 |
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Weighted average common shares outstanding -
basic |
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195,590 |
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|
206,517 |
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|
201,678 |
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|
206,169 |
|
Weighted average common shares outstanding -
diluted |
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|
197,323 |
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|
209,393 |
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|
203,539 |
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|
208,663 |
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Retained earnings, beginning |
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$ |
1,735,503 |
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$ |
1,692,990 |
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$ |
1,764,049 |
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$ |
1,694,161 |
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Net income |
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33,024 |
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|
59,159 |
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|
53,609 |
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|
109,698 |
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Cash dividends and dividend equivalents |
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(21,697 |
) |
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|
(20,875 |
) |
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(65,214 |
) |
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(62,526 |
) |
Reissuance of treasury stock |
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(918 |
) |
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(4,743 |
) |
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(6,532 |
) |
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(14,802 |
) |
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Retained earnings, ending |
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$ |
1,745,912 |
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$ |
1,726,531 |
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$ |
1,745,912 |
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$ |
1,726,531 |
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Refer to Notes to Consolidated Financial Statements
4
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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|
39 Weeks Ended |
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|
|
October 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
53,609 |
|
|
$ |
109,698 |
|
Loss from discontinued operations |
|
|
41,287 |
|
|
|
24,083 |
|
|
|
|
|
|
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Income from continuing operations |
|
$ |
94,896 |
|
|
$ |
133,781 |
|
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities: |
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Depreciation and amortization |
|
|
110,247 |
|
|
|
102,616 |
|
Share-based compensation |
|
|
21,929 |
|
|
|
18,985 |
|
Provision for deferred income taxes |
|
|
5,222 |
|
|
|
(24,765 |
) |
Tax benefit from share-based payments |
|
|
12,848 |
|
|
|
8,880 |
|
Excess tax benefit from share-based payments |
|
|
(4,265 |
) |
|
|
(2,729 |
) |
Foreign currency transaction loss |
|
|
44 |
|
|
|
6,537 |
|
Net impairment loss recognized in earnings |
|
|
1,248 |
|
|
|
225 |
|
Realized loss on sale of investment securities |
|
|
24,426 |
|
|
|
2,749 |
|
Changes in assets and liabilities: |
|
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|
|
|
Merchandise inventory |
|
|
(89,988 |
) |
|
|
(128,156 |
) |
Accounts receivable |
|
|
(7,454 |
) |
|
|
(5,080 |
) |
Prepaid expenses and other |
|
|
(4,879 |
) |
|
|
8,580 |
|
Other assets, net |
|
|
(677 |
) |
|
|
(1,317 |
) |
Accounts payable |
|
|
40,326 |
|
|
|
50,025 |
|
Unredeemed gift cards and gift certificates |
|
|
(18,916 |
) |
|
|
(23,028 |
) |
Deferred lease credits |
|
|
(2,868 |
) |
|
|
8,748 |
|
Accrued compensation and payroll taxes |
|
|
(24,379 |
) |
|
|
(5,161 |
) |
Accrued income and other taxes |
|
|
(13,647 |
) |
|
|
12,342 |
|
Accrued liabilities |
|
|
2,336 |
|
|
|
1,622 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
51,553 |
|
|
|
31,073 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
146,449 |
|
|
|
164,854 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(65,363 |
) |
|
|
(105,955 |
) |
Sale of available-for-sale securities |
|
|
177,472 |
|
|
|
77,014 |
|
Other investing activities |
|
|
(1,849 |
) |
|
|
(1,108 |
) |
|
|
|
|
|
|
|
Net cash provided by (used for) by investing activities from
continuing operations |
|
|
110,260 |
|
|
|
(30,049 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Payments on capital leases |
|
|
(1,774 |
) |
|
|
(1,337 |
) |
Repayment of notes payable |
|
|
(30,000 |
) |
|
|
(25,000 |
) |
Repurchase of common stock as part of publicly announced programs |
|
|
(192,268 |
) |
|
|
|
|
Repurchase of common stock from employees |
|
|
(18,024 |
) |
|
|
(230 |
) |
Net proceeds from stock options exercised |
|
|
5,762 |
|
|
|
8,736 |
|
Excess tax benefit from share-based payments |
|
|
4,265 |
|
|
|
2,729 |
|
Cash used to net settle equity awards |
|
|
(6,434 |
) |
|
|
(1,414 |
) |
Cash dividends paid |
|
|
(64,659 |
) |
|
|
(62,117 |
) |
|
|
|
|
|
|
|
Net cash used for financing activities from continuing operations |
|
|
(303,132 |
) |
|
|
(78,633 |
) |
|
|
|
|
|
|
|
Effect of exchange rates changes on cash |
|
|
1,553 |
|
|
|
2,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations |
|
|
|
|
|
|
|
|
Net cash used for operating activities |
|
|
(18,309 |
) |
|
|
(19,458 |
) |
Net cash used for investing activities |
|
|
(6 |
) |
|
|
(299 |
) |
Net cash used for financing activities |
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for discontinued operations |
|
|
(18,315 |
) |
|
|
(19,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(63,185 |
) |
|
|
39,261 |
|
Cash and cash equivalents beginning of period |
|
|
693,960 |
|
|
|
473,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
630,775 |
|
|
$ |
512,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for income taxes |
|
$ |
36,262 |
|
|
$ |
17,246 |
|
Cash paid during the period for interest |
|
$ |
191 |
|
|
$ |
1,778 |
|
Refer to Notes to Consolidated Financial Statements
5
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 30, 2010 and October 31, 2009 and for the 13 and 39 week periods ended
October 30, 2010 and October 31, 2009 have been prepared in accordance with accounting principles
generally accepted 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 Companys Fiscal 2009 Annual Report. In
the opinion of the Companys management, all adjustments (consisting of normal recurring
adjustments and those further described in the footnotes that follow) considered necessary for a
fair presentation have been included.
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,
AE, and the AE Brand refer to our U.S. and Canadian American Eagle Outfitters stores. AEO
Direct refers to our e-commerce operations, ae.com, aerie.com and 77kids.com. MARTIN+OSA or
M+O refers to the MARTIN+OSA stores and e-commerce operation which we operated until its closure
during the 13 weeks ended July 31, 2010.
The Companys 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.
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 30, 2010, the Company operated in one reportable segment.
On March 5, 2010, the Companys Board of Directors approved managements recommendation to proceed
with the closure of the M+O brand. The Company notified employees and issued a press release
announcing this decision on March 9, 2010. The decision to take this action resulted from an
extensive evaluation of the brand and review of strategic alternatives, which revealed that it was
not achieving performance levels that warranted further investment. The Company completed the
closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the
Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the
discontinued operations for M+O.
Fiscal Year
The Companys financial year is a 52/53 week year that ends on the Saturday nearest to January 31.
As used herein, Fiscal 2011 and Fiscal 2010 refer to the 52 week periods ending January 28,
2012 and January 29, 2011, respectively. Fiscal 2009 and Fiscal 2008 refer to the 52 week
periods ended January 30, 2010 and January 31, 2009, respectively.
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 its estimates based on currently
available information. Changes in facts and circumstances may result in revised estimates.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (FASB) approved the consensus on
Emerging Issues Task Force (EITF) 08-1, Revenue Arrangements with Multiple Deliverables,
primarily codified under Accounting Standards
6
Codification (ASC) 605, Revenue Recognition, as Accounting Standards Update (ASU) 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU
2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of
the delivered goods and services based on a selling price hierarchy. The amendments eliminate the
residual method of revenue allocation and require revenue to be allocated among the various
deliverables in a multi-element transaction using the relative selling price method. This guidance
is effective for revenue arrangements entered into or materially modified in fiscal years beginning
after June 15, 2010. The Company is currently evaluating the impact that the adoption of ASU
2009-13 will have on its Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Topic 820:
Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires new
disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair
value measurements and clarifies existing disclosures of inputs and valuation techniques for Level
2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures
are effective for interim and annual reporting periods beginning after December 15, 2009, except
for the disclosure of activity within Level 3 fair value measurements, which is effective for
fiscal years beginning after December 15, 2010, and for interim reporting periods within those
years. The Company adopted the new disclosures effective January 31, 2010, except for the
disclosure of activity within Level 3 fair value measurements. The Level 3 disclosures are
effective for the Company at the beginning of Fiscal 2011. The adoption of ASU 2010-06 did not have
a material impact on the disclosures within the Companys Consolidated Financial Statements.
Foreign Currency Translation
The Canadian dollar is the functional currency for the Canadian business. In accordance with ASC
830, Foreign Currency Matters, 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 in accordance with
ASC 220, Comprehensive Income (refer to Note 8 to the Consolidated Financial Statements).
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Companys
e-commerce operation records revenue upon the estimated customer receipt date of the merchandise.
Shipping and handling revenues are included in net sales. Sales tax collected from customers is
excluded from revenue and is included as part of accrued income and other taxes on the Companys
Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon
redemptions and other promotions. The Company records the impact of adjustments to its sales return
reserve quarterly within net sales 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 purchase of gift cards. A current liability is recorded upon
purchase, 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
net sales. For further information on the Companys gift card program, refer to the Gift Cards
caption below.
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The
proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs
recorded in net sales and cost of sales, respectively.
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. Buying, occupancy and
warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and
certain senior merchandising executives; rent and utilities related to our stores, corporate
headquarters, distribution centers and other office space; freight from our distribution centers to
the stores; compensation and supplies for our distribution centers, including purchasing, receiving
and inspection costs; and shipping and handling costs related to our e-commerce operation.
Merchandise margin is the difference between net sales and merchandise costs. Gross profit is the
difference between net sales and cost of sales.
7
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.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income/expense and foreign currency
transaction gain/loss.
Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320, Investments
Debt and Equity Securities (ASC 320). ASC 320 provides guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary, and measurement of
an impairment loss. An investment is considered impaired if the fair value of the investment is
less than its cost. If, after consideration of all available evidence to evaluate the realizable
value of its investment, impairment is determined to be other-than-temporary, then an impairment
loss is recognized in the Consolidated Statement of Operations equal to the difference between the
investments cost and its fair value. As of May 3, 2009, the Company adopted ASC 320-10-65,
Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary-Impairments (ASC 320-10-65), which modifies the requirements for recognizing
other-than-temporary impairment (OTTI) and changes the impairment model for debt securities. In
addition, ASC 320-10-65 requires additional disclosures relating to debt and equity securities both
in the interim and annual periods as well as requires the Company to present total OTTI in the
Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss
impairment amount recognized in other comprehensive income (OCI). During the 39 weeks ended
October 30, 2010, the Company recorded OTTI charges in earnings related to credit losses on its
investment securities of $1.2 million. There was $0.2 million of net impairment loss recognized in
earnings during the 39 weeks ended October 31, 2009.
Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information
regarding net impairment losses recognized in earnings.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash includes cash equivalents. The Company considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
As of October 30, 2010, short-term investments included auction rate securities (ARS) classified
as available for sale that the Company expects to be redeemed at par within 12 months, based on
notice from the issuer.
As of October 30, 2010, long-term investments included investments with remaining maturities of
greater than 12 months and consisted of ARS classified as available-for-sale that have experienced
failed auctions or have long-term auction resets and the Companys ARS Call Option related to
investment sales during the 13 weeks ended October 30, 2010. The remaining contractual maturities
of our long-term ARS investments are approximately 20 months and the ARS Call Option expires on
October 29, 2013.
Unrealized gains and losses on the Companys available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholders equity, within accumulated other
comprehensive income, until realized. The components of OTTI losses related to credit losses, as
defined by ASC 320, are considered by the Company to be realized losses. When available-for-sale
securities are sold, the cost of the securities is specifically identified and is used to determine
any realized gain or loss. Realized gains or losses are recognized separately on the Companys
Consolidated Statements of Operations as a realized gain or loss on sale of investment securities.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash
equivalents, short-term investments and long-term investments.
8
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 at the time merchandise is delivered to the foreign shipping
port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer 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.
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 Companys level and composition of earnings, tax laws or
the deferred tax valuation allowance, as well as the results of tax audits may materially impact
our effective 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 the deferred tax assets and liabilities, as well as the decision to recognize a
tax benefit from an uncertain position and to establish a valuation allowance require management to
make estimates and assumptions. The Company believes that its assumptions and estimates are
reasonable, although actual results may have a positive or negative material impact on the balances
of deferred tax assets and liabilities, valuation allowances, or net income.
Property and Equipment
Property and equipment is recorded on the basis of cost 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
|
|
5 years |
In accordance with ASC 360, Property, Plant, and Equipment (ASC 360), the Companys management
evaluates the value of leasehold improvements and store fixtures associated with retail stores,
which have been open longer than one year. 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. Impairment losses are recorded on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amounts of the assets. When events such
as these occur, the impaired assets are adjusted to their estimated fair value and an impairment
loss is recorded separately as a component of operating income under loss on impairment of assets.
During the 26 weeks ended July 31, 2010, the Company recorded asset impairment charges of $18.0
million related to the impairment of M+O stores. Based on the Companys decision to close all M+O
stores in Fiscal 2010, the Company determined that the stores not previously impaired would not be
able to generate sufficient cash flow
9
over the life of the related leases to recover the Companys initial investment in them. No asset
impairment charges were recorded in the 13 weeks ended October 30, 2010.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the
discontinued operations for M+O.
Goodwill
As of October 30, 2010, the Company had approximately $11.4 million of goodwill compared to $11.2
million as of January 30, 2010. The Companys goodwill is primarily related to the acquisition of
its importing operations on January 31, 2000, as well as the acquisition of its Canadian business
on November 29, 2000. The increase in goodwill is due to the fluctuation in the foreign exchange
spot rate at which the Canadian goodwill is translated. In accordance with ASC 350, Intangibles-
Goodwill and Other, the Company evaluates goodwill for possible impairment on at least an annual
basis and last performed an annual impairment test as of January 30, 2010. As a result of the
Companys annual goodwill impairment test, the Company concluded that its goodwill was not
impaired.
Gift Cards
The value of a gift card is recorded as a current liability upon purchase, 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 net
sales. 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. During the 13 weeks ended October 30, 2010 and October 31, 2009, the Company recorded
$0.7 million and $1.0 million, respectively, of revenue related to gift card breakage. During the
39 weeks ended October 30, 2010 and October 31, 2009, the Company recorded $2.5 million and $4.2
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 Companys 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) and any subsequent renewal terms. The receivable is reduced as
amounts are received from the landlord.
Co-branded Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the AE Visa Card) and a private label credit card
(the AE Credit Card) under both the American Eagle and aerie brands. Both of these credit cards
are issued by a third-party bank (the Bank), and the Company has no liability to the Bank for bad
debt expense, provided that purchases are made in accordance with the Banks procedures. Once a
customer is approved to receive the AE Visa Card and the card is activated, the customer is
eligible to participate in the Companys credit card rewards program. On January 1, 2010, the
Company modified the benefits of the AE Visa and AE Credit Card programs to make both credit cards
a part of the rewards program. Customers who make purchases at AE, aerie and 77kids earn discounts
in the form of savings certificates when certain purchase levels are reached. Also, AE Visa Card
customers, who make purchases at other retailers where the card is accepted, earn additional
discounts. Savings certificates are valid for 90 days from issuance.
Points earned under the credit card rewards program on purchases at AE 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 its point and loyalty programs 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, credit card reward points earned on non-AE 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.
Through December 31, 2009, the Company offered its customers the AE All-Access Pass (the Pass), a
customer loyalty program. On January 1, 2010, the Company replaced the Pass, with the
AEREWARD$sm Loyalty Program (the Program). Under either loyalty program, customers
accumulate points based on purchase activity and earn rewards by reaching certain point thresholds
during three-month earning periods. Rewards earned during these periods are valid through the
stated expiration date, which is approximately one month from the mailing date. These rewards can
be redeemed for a discount on a
10
purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited.
The Company determined that rewards earned using the Pass and the Program should be accounted for
in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the
award credits is deferred and recognized when the awards are redeemed or expire.
Stock Repurchases
During Fiscal 2007, the Companys Board authorized a total of 60.0 million shares of our common
stock for repurchase under our share repurchase program with expiration dates extending into Fiscal
2010. The Company repurchased 18.7 million shares during Fiscal 2007 and the authorization related
to 11.3 million shares expired in Fiscal 2009. At the beginning of Fiscal 2010, the Company had
30.0 million shares remaining authorized for repurchase.
The Company repurchased 14.0 million shares as part of its publicly announced repurchase programs
during the 39 weeks ended October 30, 2010 for approximately $192.3 million, at a weighted average
price of $13.73 per share. As of October 30, 2010, the Company had 16.0 million shares remaining
authorized for repurchase. These shares may be repurchased at the Companys discretion. The
authorization relating to the 16.0 million shares remaining under the program expires at the end of
Fiscal 2010.
During the 39 weeks ended October 30, 2010 and October 31, 2009, the Company repurchased
approximately 1.0 million and 16,000 shares, respectively, from certain employees at market prices
totaling $18.0 million and $0.2 million, respectively. These shares were repurchased for the
payment of taxes in connection with the vesting of share-based payments, as permitted under the
2005 Stock Award and Incentive Plan (the 2005 Plan).
The aforementioned share repurchases have been recorded as treasury stock.
Segment Information
In accordance with ASC 280, Segment Reporting (ASC 280), the Company has identified three
operating segments (American Eagle Brand US and Canadian stores, aerie by American Eagle retail
stores and AEO Direct) that reflect the basis used internally to review performance and allocate
resources. All of the operating segments have been aggregated and are presented as one reportable
segment, as permitted by ASC 280.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods
in order to conform to the current period presentation.
11
3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments
The following table summarizes the fair market values for the Companys cash and marketable
securities, which are recorded as cash and cash equivalents, short-term investments and long-term
investments on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
|
January 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2010 |
|
|
2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
157,921 |
|
|
$ |
144,391 |
|
|
$ |
82,942 |
|
Commercial paper |
|
|
61,697 |
|
|
|
25,420 |
|
|
|
|
|
Treasury bills |
|
|
100,393 |
|
|
|
119,988 |
|
|
|
100,000 |
|
Money-market |
|
|
310,764 |
|
|
|
404,161 |
|
|
|
329,661 |
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
630,775 |
|
|
$ |
693,960 |
|
|
$ |
512,603 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Student-loan backed ARS |
|
$ |
|
|
|
$ |
400 |
|
|
$ |
|
|
State and local government ARS |
|
|
3,700 |
|
|
|
4,275 |
|
|
|
3,300 |
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
$ |
3,700 |
|
|
$ |
4,675 |
|
|
$ |
3,300 |
|
Long-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Student-loan backed ARS |
|
$ |
|
|
|
$ |
149,031 |
|
|
$ |
151,048 |
|
State and local government ARS |
|
|
5,500 |
|
|
|
35,969 |
|
|
|
38,724 |
|
Auction rate preferred securities |
|
|
|
|
|
|
12,773 |
|
|
|
13,380 |
|
ARS call option |
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term investments |
|
$ |
5,915 |
|
|
$ |
197,773 |
|
|
$ |
203,152 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
640,390 |
|
|
$ |
896,408 |
|
|
$ |
719,055 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of available-for-sale securities were $177.5 million and $77.0 million
for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively. There were no
purchases of available-for-sale securities during the 39 weeks ended October 30, 2010 or October
31, 2009.
The following table presents the unrealized losses and fair value of available-for-sale securities
for which OTTI has not been recognized in earnings and the length of time that the securities were
in a continuous unrealized loss position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater Than or |
|
|
Less Than 12 Months |
|
Equal to 12 Months |
|
|
Gross Unrealized |
|
|
|
|
|
Gross Unrealized |
|
|
(In thousands) |
|
Holding Losses |
|
Fair Value |
|
Holding Losses |
|
Fair Value |
|
|
|
October 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government ARS |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Total (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student-loan backed ARS |
|
$ |
(4,841 |
) |
|
$ |
28,275 |
|
|
$ |
(3,711 |
) |
|
$ |
31,173 |
|
State and local government ARS |
|
|
(220 |
) |
|
|
9,230 |
|
|
|
(206 |
) |
|
|
11,494 |
|
Auction rate preferred securities |
|
|
|
|
|
|
|
|
|
|
(1,395 |
) |
|
|
13,380 |
|
|
|
|
|
|
Total (1) |
|
$ |
(5,061 |
) |
|
$ |
37,505 |
|
|
$ |
(5,312 |
) |
|
$ |
56,047 |
|
|
|
|
|
|
|
|
|
(1) |
|
Fair value excludes $9.2 million as of October 30, 2010 and $112.9 million as of October
31, 2009 of securities whose fair value approximates par. |
As of October 30, 2010, the Company had a total of $640.4 million in cash and cash equivalents,
short-term and long-term investments, including $9.2 million of investments in ARS whose fair value
approximates par.
During the 13 weeks ended October 30, 2010, the Company liquidated $176.4 million par value ($163.3
million carrying value) of its available-for-sale securities. The Company received proceeds of
$149.6 million plus accrued interest and
recognized a net loss in its Consolidated Statements of Operations for the 13 weeks ended October
30, 2010 of $24.2 million, of which $10.9 million was previously included in OCI on the Companys
Consolidated Balance Sheet.
12
Relating to $119.7 million of the ARS securities sold during the 13 weeks ended October 30, 2010,
the Company entered into a settlement agreement under which a financial institution (the
purchaser) purchased the ARS at a discount to par, plus accrued interest. Additionally, under
this agreement, the Company retained a right (the ARS Call Option), for a period ending October
29, 2013 to: (a) repurchase any or all of the ARS securities sold at the agreed upon purchase
prices received from the purchaser plus accrued interest; and/or (b) receive additional proceeds
from the purchaser upon certain redemptions of the ARS securities sold. The ARS Call Option is
cancelable by the purchaser for additional cash consideration.
The Company is required to assess the value of the ARS Call Option at the end of each reporting
period, with any changes in fair value recorded within the Consolidated Statement of Operations.
As of October 30, 2010, the Company determined that the fair value was $0.4 million. The fair
value of the ARS Call Option is included as an offsetting amount within the net loss on liquidation
of $24.2 million referenced above and is classified as a long-term investment on the Consolidated
Balance Sheet as of October 30, 2010.
The Company continues to monitor the market for ARS and consider the impact, if any, on the fair
value of its investments. If current market conditions deteriorate further, or the anticipated
recovery in market values does not occur, the Company may be required to record impairment charges
on its remaining ARS investments.
Refer to Note 4 to the Consolidated Financial Statements for additional information regarding the
fair value measurement of our investment securities.
4. Fair Value Measurements
ASC 820, Fair Value Measurement Disclosures (ASC 820), defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and expands disclosures about fair
value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale
of an asset or transfer of a liability in an orderly transaction between market participants at the
measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier
fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers
include:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities. |
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. |
|
|
|
|
Level 3 Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that
are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities. |
As of October 30, 2010 and October 31, 2009, the Company held certain assets that are required to
be measured at fair value on a recurring basis. These include cash equivalents and short and
long-term investments, including ARS, ARPS and the ARS Call Option as described in Note 3 to the
Consolidated Financial Statements.
In accordance with ASC 820, the following table represents the Companys fair value hierarchy for
its financial assets (cash equivalents and investments) measured at fair value on a recurring basis
as of October 30, 2010 and October 31, 2009:
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 30, 2010 |
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
(In thousands) |
|
Carrying Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
157,921 |
|
|
$ |
157,921 |
|
|
$ |
|
|
|
$ |
|
|
Commercial Paper |
|
|
61,697 |
|
|
|
61,697 |
|
|
|
|
|
|
|
|
|
Treasury bills |
|
|
100,393 |
|
|
|
100,393 |
|
|
|
|
|
|
|
|
|
Money-market |
|
|
310,764 |
|
|
|
310,764 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
630,775 |
|
|
$ |
630,775 |
|
|
$ |
|
|
|
$ |
|
|
Short-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government ARS |
|
$ |
3,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,700 |
|
|
|
|
Total Short-term Investments |
|
$ |
3,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,700 |
|
Long-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government ARS |
|
$ |
5,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,500 |
|
ARS call option |
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
415 |
|
|
|
|
Total Long-term Investments |
|
$ |
5,915 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,915 |
|
|
|
|
Total |
|
$ |
640,390 |
|
|
$ |
630,775 |
|
|
$ |
|
|
|
$ |
9,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 31, 2009 |
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
(In thousands) |
|
Carrying Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
82,942 |
|
|
$ |
82,942 |
|
|
$ |
|
|
|
$ |
|
|
Treasury bills |
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
Money-market |
|
|
329,661 |
|
|
|
329,661 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
512,603 |
|
|
$ |
512,603 |
|
|
$ |
|
|
|
$ |
|
|
Short-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government
ARS |
|
$ |
3,300 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,300 |
|
|
|
|
Total Short-term Investments |
|
$ |
3,300 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,300 |
|
Long-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student-loan backed ARS |
|
$ |
151,048 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
151,048 |
|
State and local government
ARS |
|
|
38,724 |
|
|
|
|
|
|
|
|
|
|
|
38,724 |
|
Auction rate preferred
securities |
|
|
13,380 |
|
|
|
|
|
|
|
|
|
|
|
13,380 |
|
|
|
|
Total Long-term Investments |
|
$ |
203,152 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
203,152 |
|
|
|
|
Total |
|
$ |
719,055 |
|
|
$ |
512,603 |
|
|
$ |
|
|
|
$ |
206,452 |
|
|
|
|
The Company uses a discounted cash flow model to value its Level 3 investments. At October 30,
2010, the assumptions in the Companys model included different recovery periods, ranging from 8 to
20 months, depending on the type of security and varying discount factors for yield, ranging from
0.3% to 0.4%, and illiquidity of 0.5%. At October 31, 2009, the assumptions in the Companys model
included different recovery periods, ranging from 12 months to 11 years, depending on the type of
security and varying discount factors for yield, ranging from 0.3% to 7.5%, and illiquidity,
ranging from 0.3% to 1.0%. These assumptions are subjective. They are based on the Companys
current judgment and its view of current market conditions. The use of different assumptions would
result in a different valuation and related charge.
As a result of the discounted cash flow analysis, during the 39 weeks ended October 30, 2010, the
Company recognized a net impairment of $0.6 million. The total cumulative impairment recognized in
OCI prior to the Companys liquidation of $176.4 million par value ($163.3 million carrying value)
available-for-sale securities during the 13 weeks ended October 30,
14
2010 was $10.9 million ($6.8
million, net of tax). Total cumulative impairment recognized in OCI at the end of Fiscal 2009 was
$10.3 million ($6.4 million, net of tax). The increase in temporary impairment was primarily
driven by unfavorable changes in the discount rate. These amounts were previously recorded in OCI
and resulted in a decrease in the investments estimated fair values. As a result of a credit
rating downgrade on a student-loan backed ARS, the Company also recorded a net impairment loss in
earnings of $1.2 million during the 39 weeks ended October 30, 2010.
As previously described in Note 3 to the Consolidated Financial Statements, the Company liquidated
$176.4 million par value ($163.3 million carrying value) of its available-for-sale securities.
Through the liquidation, the Company received proceeds of $149.6 million plus accrued interest and
recognized a loss in its consolidated financial statements of operations for the 13 weeks ended
October 30, 2010 of $24.2 million, net of the ARS Call Option gain of $0.4 million. The recognized
loss included all $10.9 million of cumulative impairment which was previously included in OCI on
the Consolidated Balance Sheet.
The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements
was also estimated using a discounted cash flow model. The model considered potential changes in
yields for securities with similar characteristics to the underlying ARS and evaluated possible
future refinancing opportunities for the issuers of the ARS. The analysis then assessed the
likelihood that the options would be exercisable as a result of the underlying ARS being redeemed
or traded in a secondary market at an amount greater than the exercise price prior to the end of
the option term. Future changes in the fair values of the ARS Call Option will be recorded within
the Consolidated Statements of Operations.
The following table presents a rollforward of the amount of OTTI related to credit losses that has
been recognized in earnings:
|
|
|
|
|
|
|
39 Weeks Ended |
|
(In thousands) |
|
October 30, 2010 |
|
Beginning balance of credit losses previously recognized in earnings |
|
$ |
940 |
|
Year-to-date OTTI credit losses recognized in earnings |
|
|
1,248 |
|
|
|
|
|
Ending balance of cumulative credit losses recognized in earnings |
|
$ |
2,188 |
|
|
|
|
|
The reconciliation of the Companys assets measured at fair value on a recurring basis using
unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 (Unobservable inputs) |
|
|
|
|
|
|
|
|
|
|
Student |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan- |
|
|
|
|
|
|
|
|
|
|
Auction- |
|
Backed |
|
Auction- |
|
|
|
|
|
|
|
|
Rate |
|
Auction- |
|
Rate |
|
|
|
|
|
|
|
|
Municipal |
|
Rate |
|
Preferred |
|
ARS Call |
(In thousands) |
|
Total |
|
Securities |
|
Securities |
|
Securities |
|
Option |
|
|
|
Carrying Value at January 30, 2010 |
|
$ |
202,448 |
|
|
$ |
40,244 |
|
|
$ |
149,431 |
|
|
$ |
12,773 |
|
|
$ |
|
|
Settlements |
|
|
(177,472 |
) |
|
|
(29,101 |
) |
|
|
(141,246 |
) |
|
|
(7,125 |
) |
|
|
|
|
Gains and (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings |
|
|
(25,674 |
) |
|
|
(2,399 |
) |
|
|
(16,755 |
) |
|
|
(6,935 |
) |
|
|
415 |
|
Reported in OCI |
|
|
10,313 |
|
|
|
456 |
|
|
|
8,570 |
|
|
|
1,287 |
|
|
|
|
|
|
|
|
Balance at October 30, 2010 |
|
$ |
9,615 |
|
|
$ |
9,200 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at January 31, 2009 |
|
$ |
251,007 |
|
|
$ |
69,970 |
|
|
$ |
169,254 |
|
|
$ |
11,783 |
|
|
$ |
|
|
Settlements |
|
|
(69,250 |
) |
|
|
(28,150 |
) |
|
|
(41,100 |
) |
|
|
|
|
|
|
|
|
Gains and (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported in earnings |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
(225 |
) |
|
|
|
|
Reported in OCI |
|
|
24,920 |
|
|
|
204 |
|
|
|
22,894 |
|
|
|
1,822 |
|
|
|
|
|
|
|
|
Balance at October 31, 2009 |
|
$ |
206,452 |
|
|
$ |
42,024 |
|
|
$ |
151,048 |
|
|
$ |
13,380 |
|
|
$ |
|
|
|
|
|
Non-Financial Assets and Liabilities
The Companys non-financial assets, which include goodwill 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. As a result of the Companys annual
goodwill impairment test
15
performed as of January 30, 2010, the Company concluded that its goodwill
was not impaired. During the 13 and 39 weeks ended October 30, 2010, there were no triggering
events that prompted an asset impairment test of the Companys goodwill.
Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs
as defined in ASC 820. Based on the decision to close all M+O stores in Fiscal 2010, the Company
determined that the M+O stores not previously impaired would not be able to generate sufficient
cash flow over the life of the related leases to recover the Companys initial investment in them.
Therefore, during the 26 weeks ended July 31, 2010, the M+O stores not previously impaired were
written down to their fair value, resulting in a loss on impairment of assets of $18.0 million.
The loss on impairment of assets was recorded within Loss from Discontinued Operations for the 39
weeks ended October 30, 2010. The fair value of those stores were determined by estimating the
amount and timing of net future cash flows and discounting them using a risk-adjusted rate of
interest. The Company estimates future cash flows based on its experience and knowledge of the
market in which the store is located.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the
discontinued operations for M+O.
5. Earnings per Share
ASC 260-10-45, Participating Securities and the Two-Class Method (ASC 260-10-45), addresses
whether awards granted in unvested share-based payment transactions that contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and therefore are included in computing earnings per share under the two-class method, as described
in ASC 260, Earnings Per Share (ASC 260). Participating securities are securities that may
participate in dividends with common stock and the two-class method is an earnings allocation
formula that treats a participating security as having rights to earnings that would otherwise have
been available to common shareholders. Under the two-class method, earnings for the period are
allocated between common shareholders and other shareholders, based on their respective rights to
receive dividends. Restricted stock awards granted to certain employees under the Companys 2005
Plan are considered participating securities as these employees receive non-forfeitable dividends
at the same rate as common stock. For the 13 and 39 weeks ended October 30, 2010 and October 31,
2009, the application of ASC 260-10-45 resulted in no change to basic EPS or diluted EPS.
The following is a reconciliation between basic and diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of common shares outstanding |
|
|
195,590 |
|
|
|
206,517 |
|
|
|
201,678 |
|
|
|
206,169 |
|
Dilutive effect of stock options and non-vested restricted stock |
|
|
1,733 |
|
|
|
2,876 |
|
|
|
1,861 |
|
|
|
2,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive number of common shares outstanding |
|
|
197,323 |
|
|
|
209,393 |
|
|
|
203,539 |
|
|
|
208,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,024 |
|
|
$ |
59,159 |
|
|
$ |
53,609 |
|
|
$ |
109,698 |
|
Less: Income allocated to participating securities |
|
|
|
|
|
|
194 |
|
|
|
93 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
33,024 |
|
|
$ |
58,965 |
|
|
$ |
53,516 |
|
|
$ |
109,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.17 |
|
|
$ |
0.29 |
|
|
$ |
0.27 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive net income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,024 |
|
|
$ |
59,159 |
|
|
$ |
53,609 |
|
|
$ |
109,698 |
|
Less: Income allocated to participating securities |
|
|
|
|
|
|
191 |
|
|
|
93 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
33,024 |
|
|
$ |
58,968 |
|
|
$ |
53,516 |
|
|
$ |
109,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive net income per common share |
|
$ |
0.17 |
|
|
$ |
0.28 |
|
|
$ |
0.26 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards to purchase approximately 6.9 million and 7.9 million shares of common stock during
the 13 and 39 weeks ended October 30, 2010, respectively, and approximately 6.6 million and 6.7
million shares of common stock during the 13
16
and 39 weeks ended October 31, 2009, respectively,
were outstanding, but were not included in the computation of weighted average diluted common share
amounts as the effect of doing so would have been anti-dilutive.
Approximately 0.8 million shares of restricted stock units for both the 13 and 39 weeks ended
October 30, 2010 and approximately 1.4 million shares of restricted stock for both the 13 and
39 weeks ended October 31, 2009 were not included in the computation of weighted average diluted
common share amounts because the number of shares ultimately issued is contingent on the Companys
performance compared to pre-established annual performance goals. Additionally, there were
approximately 27,000 shares for the 39 weeks ended October 30, 2010 of time-based restricted stock
units that were outstanding, but not included in the computation of weighted average diluted common
share amounts as the effect of doing so would have been anti-dilutive.
6. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
|
January 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2010 |
|
|
2009 |
|
Property and equipment, at cost |
|
$ |
1,414,453 |
|
|
$ |
1,394,806 |
|
|
$ |
1,397,961 |
|
Less: Accumulated depreciation and amortization |
|
|
(762,092 |
) |
|
|
(681,664 |
) |
|
|
(656,942 |
) |
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
652,361 |
|
|
$ |
713,142 |
|
|
$ |
741,019 |
|
|
|
|
|
|
|
|
|
|
|
7. Note Payable and Other Credit Arrangements
The Company has borrowing agreements with four separate financial institutions under which it may
borrow an aggregate of $310.0 million United States Dollars (USD) and $25.0 million Canadian
Dollars (CAD). Of this amount, $200.0 million USD can be used for demand letter of credit
facilities, $50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the
remaining $60.0 million USD can be used for either letters of credit or demand line borrowings at
the Companys discretion. The expiration dates of the USD demand line facilities are April 20,
2011 and May 22, 2011 and the $25.0 million CAD demand line has an expiration date of November 20,
2010.
As of October 30, 2010, the Company had outstanding demand letters of credit of $42.1 million USD
and no demand line borrowings.
The availability of any future borrowings is subject to acceptance by the respective financial
institutions. The average borrowing rate on the demand line for outstanding borrowings during
Fiscal 2010 was 2.1%.
17
8. Comprehensive Income
Comprehensive income is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, |
|
October 31, |
|
October 30, |
|
October 31, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net income |
|
|
$33,024 |
|
|
|
$59,159 |
|
|
|
$53,609 |
|
|
|
$109,698 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary impairment reversal (loss)
related to auction-rate securities,
net of tax (1) |
|
|
|
|
|
|
3,369 |
|
|
|
(1,180 |
) |
|
|
15,318 |
|
Reclassification adjustment for
realized losses in net income related
to ARS, net of tax (2) |
|
|
6,722 |
|
|
|
|
|
|
|
6,722 |
|
|
|
|
|
Reclassification adjustment for OTTI
charges realized in net income related
to ARS, net of tax (3) |
|
|
|
|
|
|
|
|
|
|
819 |
|
|
|
139 |
|
Foreign currency translation adjustment |
|
|
779 |
|
|
|
(2,458 |
) |
|
|
3,552 |
|
|
|
15,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
7,501 |
|
|
|
911 |
|
|
|
9,913 |
|
|
|
30,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
$40,525 |
|
|
|
$60,070 |
|
|
|
$63,522 |
|
|
|
$140,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts are shown net of tax of ($2.1) million for the
13 weeks ended October 31, 2009. Amounts are shown net of
tax of $0.6 million and ($9.5) million for the 39 weeks
ended October 30, 2010 and October 31, 2009, respectively. |
|
(2) |
|
Amounts are shown net of tax of ($4.2) million for both the 13 and 39 weeks ended October 30, 2010. |
|
(3) |
|
Amounts are shown net of tax of ($0.4) million and ($0.1)
million for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively. |
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.
Total share-based compensation expense from continuing operations included in the Consolidated
Statements of Operations for the 13 and 39 weeks ended October 30, 2010 was $3.5 million ($2.2
million, net of tax) and $21.9 million ($13.5 million, net of tax) and for the 13 and 39 weeks
ended October 31, 2009 was $9.8 million ($6.0 million, net of tax) and $19.0 million ($11.7 million,
net of tax), respectively.
Stock Option Grants
The Company grants both time-based and performance-based stock options under its 2005 Plan.
Time-based stock option awards vest over the requisite service period of the award or to an
employees eligible retirement date, if earlier. Performance-based stock option awards vest over
three years and are earned if the Company meets pre-established performance goals during each year.
18
A summary of the Companys stock option activity for the 39 weeks ended October 30, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Options |
|
|
Exercise Price |
|
|
Term (in years) |
|
|
(in thousands) |
|
Outstanding January 30, 2010 |
|
|
14,904,942 |
|
|
$ |
15.01 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,381,246 |
|
|
$ |
17.04 |
|
|
|
|
|
|
|
|
|
Exercised (1) |
|
|
1,149,208 |
|
|
$ |
8.46 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
3,011,303 |
|
|
$ |
15.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding October 30, 2010 |
|
|
12,125,677 |
|
|
$ |
15.79 |
|
|
|
3.9 |
|
|
$ |
40,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest October 30, 2010 |
|
|
11,873,169 |
|
|
$ |
15.82 |
|
|
|
3.8 |
|
|
$ |
39,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable October 30, 2010 |
|
|
3,619,178 |
|
|
$ |
7.37 |
|
|
|
2.4 |
|
|
$ |
31,304 |
|
|
|
|
(1) |
|
Options exercised during the 39 weeks ended October 30, 2010 had exercise prices ranging
from $4.68 to $17.51. |
The weighted-average grant date fair value of stock options granted during the 39 weeks ended
October 30, 2010 and October 31, 2009 was $5.19 and $3.55, respectively. The aggregate intrinsic
value of options exercised during the 39 weeks ended October 30, 2010 and October 31, 2009 was
$10.7 million and $11.4 million, respectively.
Cash received from the exercise of stock options was $5.8 million for the 39 weeks ended October
30, 2010 and $8.7 million for the 39 weeks ended October 31, 2009. The actual tax benefit realized
from stock option exercises totaled $12.8 million for the 39 weeks ended October 30, 2010 and $8.9
million for the 39 weeks ended October 31, 2009.
The fair value of stock options was estimated based on the closing market price of the Companys
common stock on the date of the grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
October 30 |
|
October 31, |
Black-Scholes Option Valuation Assumptions |
|
2010 |
|
2009 |
Risk-free interest rate (1) |
|
|
2.3 |
% |
|
|
1.7 |
% |
Dividend yield |
|
|
2.1 |
% |
|
|
3.9 |
% |
Volatility factor (2) |
|
|
40.2 |
% |
|
|
62.1 |
% |
Weighted-average expected term (3) |
|
4.5 years |
|
4.5 years |
Expected forfeiture rate (4) |
|
|
8.0 |
% |
|
|
8.0 |
% |
|
|
|
(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 Companys common stock and implied
volatility. |
|
(3) |
|
Represents the period of time options are expected to be outstanding, based on historical
experience. |
|
(4) |
|
Based upon historical experience. |
As of October 30, 2010, there was $5.4 million of unrecognized compensation expense related to
non-vested stock option awards that is expected to be recognized over a weighted average period of
1.5 years.
Restricted Stock Grants
Time-based restricted stock awards include two types of awards; time-based restricted stock and
time-based restricted stock units. Time-based restricted stock awards vest over three years and
participate in nonforfeitable dividends. Time-based restricted stock units vest over three years;
however, they may be accelerated to vest over one year if the Company meets pre-established
performance goals in the year of grant. 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.
19
Performance-based restricted stock awards include two types of awards; performance-based restricted
stock and performance-based restricted stock units. Performance-based restricted stock awards vest
over one year based upon the Companys achievement of pre-established goals and participate in
nonforfeitable dividends. Performance-based restricted stock units cliff vest at the end of a
three year period based upon the Companys achievement of pre-established goals.
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 as the
original award.
The grant date fair value of restricted stock awards is based on the closing market price of the
Companys common stock on the date of grant. The Company grants to its employees both restricted
stock awards, which entitles the holders to receive nonforfeitable dividends prior to vesting, and
restricted stock unit awards. The restricted stock unit awards differ from the restricted stock
awards in that they do not contain nonforfeitable rights to dividends and are therefore not
considered participating securities in accordance with ASC 260-10-45.
A summary of the Companys restricted stock activity is presented in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Restricted Stock |
|
Performance-Based Restricted Stock |
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, 2010 |
|
October 30, 2010 |
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
|
|
Weighted-Average Grant |
|
|
Shares |
|
Date Fair Value |
|
Shares |
|
Date Fair Value |
Nonvested January 30, 2010 |
|
|
1,883 |
|
|
$ |
13.28 |
|
|
|
989,664 |
|
|
$ |
9.66 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
(989,664 |
) |
|
|
9.66 |
|
Cancelled |
|
|
1,883 |
|
|
|
13.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested October 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Based Restricted Stock Units |
|
Performance-Based Restricted Stock Units |
|
|
39 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, 2010 |
|
October 30, 2010 |
|
|
|
|
|
|
Weighted-Average Grant |
|
|
|
|
|
Weighted-Average Grant |
|
|
Shares |
|
Date Fair Value |
|
Shares |
|
Date Fair Value |
Nonvested January 30, 2010 |
|
|
1,668,092 |
|
|
$ |
9.79 |
|
|
|
406,231 |
|
|
$ |
9.82 |
|
Granted |
|
|
1,098,844 |
|
|
|
17.39 |
|
|
|
312,363 |
|
|
|
17.24 |
|
Vested |
|
|
(1,650,077 |
) |
|
|
9.79 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(92,487 |
) |
|
|
17.46 |
|
|
|
(77,465 |
) |
|
|
15.45 |
|
|
|
|
|
|
Nonvested October 30, 2010 |
|
|
1,024,372 |
|
|
$ |
17.25 |
|
|
|
641,129 |
|
|
$ |
12.75 |
|
As of October 30, 2010, there was $15.3 million of unrecognized compensation expense related
to non-vested restricted stock awards that is expected to be recognized over a weighted average
period of 2.4 years.
As of October 30, 2010, the Company had 25.9 million shares available for all equity grants.
10. Income Taxes
The provision for income taxes from continuing operations is based on the current estimate of the
annual effective income tax rate and is adjusted as necessary for quarterly events. The effective
income tax rate from continuing operations based on actual operating results for the 13 weeks ended
October 30, 2010 was 52.1% compared to 19.2% for the 13 weeks ended October 31, 2009. The effective
income tax rate from continuing operations based on actual operating results for the 39 weeks ended
October 30, 2010 was 40.7% compared to 24.0% for the 39 weeks ended October 31, 2009. The increase
in the effective income tax rate for Fiscal 2010 was primarily due to losses on the sale of certain
ARS investments in which no income tax benefit was recognized. Additionally, the effective income
tax rate was lower in Fiscal 2009 due to the tax benefit associated with the repatriation of
foreign earnings as well as federal and state income tax settlements and other changes in income
tax reserves.
The Company records accrued interest and penalties related to unrecognized tax benefits in income
tax expense.
20
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance
with ASC 740 and adjusts these liabilities when its judgment changes as the result of the
evaluation of new information not previously available. There were no significant changes in
unrecognized tax benefits during the 39 weeks ended October 30, 2010. Unrecognized tax benefits
decreased by $7.3 million during the 39 weeks ended October 31, 2009, primarily due to federal and
state income tax settlements and other changes in income tax reserves. The Company does not
anticipate any significant changes to the unrecognized tax benefits recorded at the balance sheet
date within the next 12 months.
11. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising out of the conduct of its
business. In accordance with ASC 450, Contingencies (ASC 450), management records a reserve for
estimated losses when the loss is probable and the amount can be reasonably estimated. If a range
of possible loss exists and no anticipated loss within the range is more likely than any other
anticipated loss, the Company records the accrual at the low end of the range, in accordance with
ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the
ultimate outcome of any matter currently pending against the Company will not materially affect the
consolidated financial position or results of operations of the Company.
12. Discontinued Operations
On March 5, 2010, the Companys Board of Directors approved managements recommendation to proceed
with the closure of the M+O brand. The Company notified employees and issued a press release
announcing this decision on March 9, 2010. The decision to take this action resulted from an
extensive evaluation of the brand and review of strategic alternatives, which revealed that it was
not achieving performance levels that warranted further investment. The Company completed the
closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the
Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.
Costs associated with exit or disposal activities are recorded when incurred. A summary of the exit
and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income
Statement for the 39 weeks ended October 30, 2010 are included in the table as follows. Results
from discontinued operations were nominal for the 13 weeks ended October 30, 2010.
|
|
|
|
|
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
(In thousands) |
|
2010 |
|
Non-cash charges |
|
|
|
|
Asset impairments |
|
$ |
17,980 |
|
Cash charges |
|
|
|
|
Lease-related charges (1) |
|
|
15,377 |
|
Inventory charges |
|
|
2,422 |
|
Severence charges |
|
|
7,660 |
|
|
|
|
|
Total charges |
|
$ |
43,439 |
|
|
|
|
|
|
|
|
(1) |
|
Presented net of the reversal of non-cash lease credits. |
A rollforward of the liabilities recognized in the Consolidated Balance Sheet is as follows:
|
|
|
|
|
|
|
October 30, |
|
(In thousands) |
|
2010 |
|
Accrued liability as of January 30, 2010 |
|
$ |
|
|
Add: Costs incurred, excluding non-cash charges |
|
|
30,879 |
|
Less: Cash payments |
|
|
(28,398 |
) |
|
|
|
|
Accrued liability as of October 30, 2010 (1) |
|
$ |
2,481 |
|
|
|
|
|
21
|
|
|
(1) |
|
Accrued liability at October 30, 2010 consists of $0.1 million of severance and employee
related charges recorded as a current liability within Accrued Compensation and Payroll Taxes and
$2.4 million of lease-related charges recorded as a current liability within Accrued Rent. These
amounts are expected to be paid during Fiscal 2010. |
The table below presents the significant components of M+Os results included in Loss from
Discontinued Operations on the Consolidated Statements of Operations for 13 and 39 weeks ended
October 30, 2010 and October 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
|
|
|
$ |
12,951 |
|
|
$ |
21,881 |
|
|
$ |
34,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes |
|
|
(271 |
) |
|
|
(14,268 |
) |
|
|
(66,959 |
) |
|
|
(39,041 |
) |
Income tax benefit |
|
|
104 |
|
|
|
5,479 |
|
|
|
25,672 |
|
|
|
14,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
(167 |
) |
|
$ |
(8,789 |
) |
|
$ |
(41,287 |
) |
|
$ |
(24,083 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share from discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
Diluted |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.11 |
) |
The major classes of assets and liabilities included in the Consolidated Balance Sheets for M+O as
of October 30, 2010, January 30, 2010 and October 31, 2009 is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
|
January 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2010 |
|
|
2009 |
|
Current assets |
|
$ |
226 |
|
|
$ |
13,378 |
|
|
$ |
18,051 |
|
Non-current assets |
|
|
|
|
|
|
21,227 |
|
|
|
41,095 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
226 |
|
|
$ |
34,605 |
|
|
$ |
59,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
2,793 |
|
|
$ |
6,110 |
|
|
$ |
7,436 |
|
Total non-current liabilities |
|
|
|
|
|
|
4,604 |
|
|
|
4,728 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
2,793 |
|
|
$ |
10,714 |
|
|
$ |
12,164 |
|
|
|
|
|
|
|
|
|
|
|
13. Subsequent Events
The Company has evaluated the existence of subsequent events through the filing date of this
Quarterly Report on Form 10-Q.
22
Review by Independent Registered Public Accounting Firm
Ernst & Young LLP, our independent registered public accounting firm, has performed a limited
review of the unaudited Consolidated Financial Statements as of and for the 13 and 39 week periods
ended October 30, 2010 and October 31, 2009, as indicated in their report on the limited review
included below. Since they did not perform an audit, they express no opinion on the unaudited
Consolidated Financial Statements referred to above.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
American Eagle Outfitters, Inc.
We have reviewed the consolidated balance sheets of American Eagle Outfitters, Inc. (the Company)
as of October 30, 2010 and October 31, 2009, and the related consolidated statements of operations
and retained earnings for the thirteen and thirty-nine week periods ended October 30, 2010 and
October 31, 2009 and the consolidated statements of cash flows for the thirty-nine week periods
ended October 30, 2010 and October 31, 2009. These financial statements are the responsibility of
the Companys 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 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 the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of American Eagle Outfitters, Inc.
as of January 30, 2010, and the related consolidated statements of operations, comprehensive
income, stockholders equity, and cash flows for the year then ended not presented herein, and in
our report dated March 26, 2010, 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 30, 2010, 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 19, 2010
23
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion and analysis of financial condition and results of operations should be
read in conjunction with our Fiscal 2009 Managements Discussion and Analysis of Financial
Condition and Results of Operations which can be found in our Fiscal 2009 Annual Report on Form
10-K.
In addition, the following discussion and analysis of financial condition and results of operations
are based upon our Consolidated Financial Statements and should be read in conjunction with these
statements and notes thereto.
This report contains various forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent our expectations or beliefs concerning future events, including the
following:
|
|
|
the planned opening of 14 new American Eagle stores, 11 new aerie stores, and nine
new 77kids stores in the United States and Canada during Fiscal 2010; |
|
|
|
|
the selection of approximately 25 to 35 American Eagle stores in the United States
and Canada for remodeling during Fiscal 2010; |
|
|
|
|
the planned closure of 15 to 25 American Eagle stores in the United States and
Canada during Fiscal 2010; |
|
|
|
|
the success of aerie by American Eagle and aerie.com; |
|
|
|
|
the success of 77kids by american eagle stores and 77kids.com; |
|
|
|
|
the expected payment of a dividend in future periods; |
|
|
|
|
the possibility of growth through acquisitions, internally developing additional new
brands, and/or engaging in future franchise agreements; |
|
|
|
|
the possibility that we may be required to take temporary or other-than-temporary
impairment charges relating to our investment securities; |
|
|
|
|
the possibility that our credit facilities may not be available for future
borrowings; and |
|
|
|
|
the possibility that we may be required to take store impairment charges related to
underperforming stores. |
We caution that these forward-looking statements, and those described elsewhere in this report,
involve material risks and uncertainties and are subject to change based on factors beyond our
control as discussed within Item 1A of this Quarterly Report on Form 10-Q and Item 1A of our Fiscal
2009 Annual Report on Form 10-K. Accordingly, our future performance and financial results may
differ materially from those expressed or implied in any such forward-looking statements.
Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in
assessing our performance:
Comparable store sales Comparable store sales provide a measure of sales growth for stores open
at least one year over the comparable prior year period. In fiscal years following those with 53
weeks, the prior year period is shifted by one week to compare similar calendar weeks. 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 a remodel 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 remodel. Sales from American Eagle and
aerie stores are included in comparable store sales. Sales from AEO Direct are not included in
comparable store sales.
Our management considers comparable store sales to be an important indicator of our current
performance. Comparable store sales results are important to achieve leveraging of our costs,
including store payroll, store supplies, rent, etc. Comparable store sales also have a direct
impact on our total net sales, cash and working capital.
Gross profit Gross profit measures whether we are optimizing the price and inventory levels of
our merchandise and achieving an optimal level of sales. Gross profit is the difference between net
sales and cost of sales. Cost of sales consists of: merchandise costs, including design, sourcing,
importing and inbound freight costs, as well as markdowns, shrinkage, certain promotional costs and
buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of:
compensation, employee benefit expenses 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; compensation and supplies for our distribution centers,
including purchasing, receiving and inspection costs; and shipping and handling costs related to
our e-commerce operation. The inability to obtain acceptable levels of sales, initial markups or
any significant increase in our use of markdowns could have an adverse effect on our gross profit
and results of operations.
24
Operating income Our management views operating income as a key indicator of our success. The key
drivers of operating income are comparable store sales, gross profit, our ability to control
selling, general and administrative expenses, and our level of capital expenditures.
Store productivity Store productivity, including net sales per average square
foot, sales per productive hour, average unit retail price, conversion rate, the number of
transactions per store, the number of units sold per store and the number of units per transaction,
is evaluated by our management in assessing our operational performance.
Inventory turnover Our management evaluates inventory turnover as a measure of how productively
inventory is bought and sold. Inventory turnover is important as it can signal slow moving
inventory. This can be critical in determining the need to take markdowns on merchandise.
Cash flow and liquidity Our management evaluates cash flow from operations, investing and
financing in determining the sufficiency of our cash position. Cash flow from operations has
historically been sufficient to cover our uses of cash. Our management believes that cash flow from
operations will be sufficient to fund anticipated capital expenditures and working capital
requirements.
Results of Operations
Overview
The third quarter demonstrated progress toward driving our brands forward, while enhancing overall
profitability. The increase in operating income reflects the initial positive impact of recent
activities including improved merchandising, efficient inventory management, organizational
streamlining and expense reductions.
We experienced growth in both sales and gross margin during the quarter. Strong sales performance
during the peak back-to-school selling period resulted in a 1% increase in comparable store sales.
Merchandise margin was improved over last year resulting from lower markdown activity.
Operating income for the 13 weeks ended October 30, 2010 was $91.5 million compared to $84.6
million last year. As a rate to sales, operating income was 12.2% for the 13 weeks ended October
30, 2010 compared to 11.5% for the 13 weeks ended October 31, 2009. The 70 basis point increase
in operating margin is due to our positive comparable store sales for the 13 weeks ended October
30, 2010, our improved gross margin and the positive impact of our expense reduction initiatives.
Income from continuing operations for the 13 weeks ended October 30, 2010 was $33.2 million, or
$0.17 per diluted share, and includes a $0.12 per diluted share realized loss from the sale of
investment securities related to our ARS liquidation. This compares to income from continuing
operations for the 13 weeks ended October 31, 2009 of $67.9 million, or $0.32 per diluted share,
and includes a $0.07 per diluted share tax benefit related to the repatriation of earnings from
Canada.
Net income for the 13 weeks ended October 30, 2010 was $33.0 million compared to $59.2 million for
the 13 weeks ended October 31, 2009. Net income for the 13 weeks ended October 30, 2010 and October
31, 2009 includes the Loss from Discontinued Operations related to MARTIN+OSA (M+O) of $0.2
million and $8.8 million, respectively.
We had $640.4 million in cash and cash equivalents, short-term and long-term investments as of
October 30, 2010. This includes $9.2 million of investments in auction rate securities (ARS).
Our 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 following table shows the percentage relationship to net sales of the listed line items
included in our Consolidated Statements of Operations.
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, |
|
October 31, |
|
October 30, |
|
October 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales, including certain buying,
occupancy and
warehousing expenses |
|
|
58.4 |
|
|
|
58.7 |
|
|
|
60.5 |
|
|
|
60.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
41.6 |
|
|
|
41.3 |
|
|
|
39.5 |
|
|
|
39.4 |
|
Selling, general and administrative expenses |
|
|
24.6 |
|
|
|
25.1 |
|
|
|
25.3 |
|
|
|
25.1 |
|
Depreciation and amortization expense |
|
|
4.8 |
|
|
|
4.7 |
|
|
|
5.3 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
12.2 |
|
|
|
11.5 |
|
|
|
8.9 |
|
|
|
9.2 |
|
Realized loss on sale of investment securities |
|
|
(3.2 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
(0.1 |
) |
Other income (expense), net |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
Net impairment loss recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9.2 |
|
|
|
11.4 |
|
|
|
7.8 |
|
|
|
8.9 |
|
Provision for income taxes |
|
|
4.8 |
|
|
|
2.2 |
|
|
|
3.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4.4 |
|
|
|
9.2 |
|
|
|
4.6 |
|
|
|
6.7 |
|
Loss from discontinued operations, net of tax |
|
|
|
|
|
|
(1.2 |
) |
|
|
(2.0 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.4 |
% |
|
|
8.0 |
% |
|
|
2.6 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows our consolidated store data for the 39 weeks ended October 30, 2010 and
October 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
39 Weeks Ended |
|
|
October 30, |
|
October 31, |
|
October 30, |
|
October 31, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Number of stores: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
1,083 |
|
|
|
1,114 |
|
|
|
1,103 |
|
|
|
1,098 |
|
Opened |
|
|
10 |
|
|
|
5 |
|
|
|
28 |
|
|
|
28 |
|
Closed (1) |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(42 |
) |
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period |
|
|
1,089 |
|
|
|
1,117 |
|
|
|
1,089 |
|
|
|
1,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross square feet at end of period |
|
|
6,323,099 |
|
|
|
6,462,921 |
|
|
|
6,323,099 |
|
|
|
6,462,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Closed stores during the 39 weeks ended October 30, 2010 include all 28 M+O stores. |
Our operations are conducted in one reportable segment, which includes 935 U.S. and Canadian AE
retail stores, 147 aerie stand-alone retail stores, seven 77kids retail stores and AEO Direct.
Comparison of the 13 weeks ended October 30, 2010 to the 13 weeks ended October 31, 2009
Net Sales
Net sales for the 13 weeks ended October 30, 2010 increased 2% to $751.5 million compared to $736.0
million for the 13 weeks ended October 31, 2009.
Our comparable store sales increased 1% for the 13 weeks ended October 30, 2010. The increase in
comparable store sales was primarily a result of strong performance during the peak back-to-school
selling period. For the AE brand, improved assortments translated to an increase in the number of
transactions and average transaction value. This was driven by both average unit retail price and
unit sales increases. AE womens comparable store sales increased in the low single-digits while
AE mens comparable store sales declined in the low single-digits.
Gross Profit
Gross profit for the 13 weeks ended October 30, 2010 increased to $312.3 million, or 41.6% as a
rate to net sales, compared to $304.2 million, or 41.3% as a rate to net sales last year.
Merchandise margin improved by 90 basis points, driven by lower
26
markdowns.
Buying occupancy and warehousing expense increased 60 basis points, primarily due to new
stores, which included our newest flagship store in the SoHo district
of Manhattan.
There was $1.1 million of share-based payment expense for the 13 weeks ended
October 30, 2010 included in gross profit
compared to $2.3 million for the 13 weeks ended October 31, 2009.
Our gross profit may not be comparable to that of other retailers, as some retailers include all
costs related to their distribution network as well as design costs in cost of sales 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. Refer to Note 2 to the Consolidated Financial Statements for
a description of our accounting policy regarding cost of sales, including certain buying, occupancy
and warehousing expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expense for the 13 weeks ended October 30, 2010, was $185.1
million compared to $184.9 million last year and improved by 50 basis points to 24.6% as a percent
to net sales from 25.1% last year. The lower rate is due to the positive impact of expense
reductions, partially offset by severance and related charges, as well as our investment
in mall and outdoor advertising to support the strength of our AE denim assortment during the fall
and holiday seasons.
There was $2.4 million of share-based payment expense included in selling, general and administrative expenses compared to $7.5
million last year.
Depreciation and Amortization Expense
Depreciation and amortization expense as a percent to net sales was 4.8% for the 13 weeks ended
October 30, 2010, compared to 4.7% for the corresponding period last year. Depreciation and
amortization expense increased to $35.8 million compared to $34.7 million last year. The increase
in expense is primarily due to a greater property and equipment base driven by our level of capital
expenditures related to new stores, as well as the completion of information technology,
distribution centers and other home office projects. As a rate to net sales, the increase is
attributed to the factors noted above, partially offset by the impact of positive comparable store
sales.
Other Income (Expense), Net
Other income, net was $2.0 million for the 13 weeks ended October 30, 2010 compared to net expense
of $0.5 million for the 13 weeks ended October 31, 2009. The change is primarily due to
fluctuations in foreign currency transactions.
Realized Loss on Sale of Investment Securities
The realized loss on the sale of investment securities was $24.2 million, or $0.12 per diluted
share, for the 13 weeks ended October 30, 2010.
During the 13 weeks ended October 30, 2010, we liquidated 95% of our ARS investment portfolio. Our
ARS investment portfolio was originally purchased as highly liquid short-term instruments. Due to
the deterioration of the ARS market and ARS investments experiencing failed auctions or long-term
auction resets, our ARS investment portfolio was subsequently classified as long-term, with a
weighted average contractual maturity of approximately 26 years. This liquidation allowed us to
convert substantially our entire ARS investment portfolio to short-term liquid assets, with total
cash proceeds of $149.6 million plus accrued interest and a net realized loss of $24.2 million for
the liquidation.
Provision for Income Taxes
The provision for income taxes from continuing operations is based on the current estimate of the
annual effective income tax rate and is adjusted as necessary for quarterly events. The effective
income tax rate based on actual operating results for the 13 weeks ended October 30, 2010 was 52.1%
compared to 19.2% for the 13 weeks ended October 31, 2009. The increase in the effective income
tax rate for the 13 weeks ended October 30, 2010 was primarily due to losses on the sale of certain
ARS investments in which no income tax benefit was recognized. Additionally, the effective income
tax rate was lower in the 13 weeks ended October 31, 2009 due to the tax benefit associated with the
repatriation of foreign earnings as well as federal and state income tax settlements and other
changes in income tax reserves.
27
Income from Continuing Operations
Income from continuing operations for the 13 weeks ended October 30, 2010 was $33.2
million, or $0.17 per diluted share, and includes a $0.12 per diluted share realized loss from the
sale of investment securities related to our ARS liquidation as noted previously. Income from
continuing operations for the 13 weeks ended October 31, 2009 was $67.9 million, or $0.32 per
diluted share, which includes a $0.07 per diluted share tax benefit related to the repatriation of
earnings from Canada last year.
Loss from Discontinued Operations
We completed the closure of M+O stores and related e-commerce operations during the 13 weeks
ended July 31, 2010. Accordingly, the after-tax operating results and closure charges appear in
Loss from Discontinued Operations on the Consolidated Statements of Operations for all periods
presented. Loss from Discontinued Operations, net of tax, was $0.2 million and $8.8 million for
the 13 weeks ended October 30, 2010 and October 31, 2009, respectively.
Refer to the Closure of MARTIN+OSA caption below for additional information regarding the
discontinued operations for M+O.
Net Income
Net income decreased to $33.0 million, or 4.4% as a percent to net sales, from $59.2 million, or
8.0% as a percent to net sales last year. Net income per diluted share decreased to $0.17 from
$0.28 in the prior year. The decreases are attributable to the factors noted above.
Comparison of the 39 weeks ended October 30, 2010 to the 39 weeks ended October 31, 2009
Net Sales
Net sales for the 39 weeks ended October 30, 2010 increased 3% to $2.051 billion compared to $1.984
billion for the 39 weeks ended October 31, 2009. The increase in net sales resulted primarily from
a 1% increase in comparable store sales during the 13 weeks ended October 30, 2010 as a result of
strong sales performance during the peak back-to-school shopping period and the 2% increase in
comparable store sales in the first half of Fiscal 2010.
Gross Profit
Gross profit for the 39 weeks ended October 30, 2010 increased 4% to $809.7 million, or 39.5% as a
rate to net sales, compared to $781.7 million, or 39.4% as a rate to net sales last year.
Merchandise margin increased 50 basis points due to a decrease in merchandise markdowns. Buying,
occupancy and warehousing expense increased 40 basis points primarily due to new stores.
There was $6.3 million of share-based payment expense for the 39 weeks ended October 30, 2010 included in gross profit
compared to $6.1 million for the 39 weeks ended October 31, 2009.
Our gross profit may not be comparable to that of other retailers, as some retailers include all
costs related to their distribution network as well as design costs in cost of sales 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. Refer to Note 2 to the Consolidated Financial Statements for
a description of our accounting policy regarding cost of sales, including certain buying, occupancy
and warehousing expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the 39 weeks ended October 30, 2010, increased to
$519.2 million from $497.6 million and increased 20 basis points to 25.3% as a percent to net sales
from 25.1% last year. The higher rate is primarily due to the impact of the timing of
contract-based equity grants incurred in the first half of Fiscal
2010 as well as severance and
related charges incurred.
There was $15.6 million of share-based payment expense included in selling, general and administrative expenses compared to $12.9
million last year.
28
Depreciation and Amortization Expense
Depreciation and amortization expense as a percent to net sales was 5.3% for the 39 weeks ended
October 30, 2010 compared to 5.1% for the corresponding period last year. Depreciation and
amortization expense increased to $107.4 million compared to $101.1 million last year. The increase
is primarily due to a greater property and equipment base driven by our level of capital
expenditures related to new stores, as well as the completion of information technology,
distribution centers and other home office projects. As a rate to net sales, the increase is
attributed to the factors noted above, partially offset by the impact of positive comparable store
sales.
Other Income (Expense), Net
Other income, net was $2.5 million for the 39 weeks ended October 30, 2010 compared to net expense
of $3.9 million for the 39 weeks ended October 31, 2009, primarily due to the impact of a non-cash,
non-operating foreign currency loss related to holding U.S. dollars in our Canadian subsidiary in
anticipation of repatriation last year.
Realized Loss on Sale of Investment Securities
Realized loss on sale of investment securities was $24.4 million for the 39 weeks ended October 30,
2010, compared to $2.7 million for the 39 weeks ended October 31, 2009.
During the 13 and 39 weeks ended October 30, 2010, we liquidated 95% of our ARS investment
portfolio. Our ARS investment portfolio was originally purchased as highly liquid short-term
instruments. Due to the deterioration of the ARS market and ARS investments experiencing failed
auctions or long-term auction resets, our ARS investment portfolio was subsequently classified as
long-term, with a weighted average contractual maturity of approximately 26 years. This liquidation
allowed us to convert substantially our entire ARS investment portfolio to short-term liquid
assets, with total cash proceeds of $149.6 million plus accrued interest and a net realized loss of
$24.2 million for the liquidation.
Additionally, in the first half of Fiscal 2010 we liquidated $28.1 million of ARS investments for
proceeds of $27.9 million and a total realized loss of $0.2 million.
Net Impairment Loss Recognized in Earnings
Net impairment loss recognized in earnings relating to our investment securities was $1.2 million
for the 39 weeks ended October 30, 2010, compared to $0.2 million for the 39 weeks ended October
31, 2009.
Refer to the Fair Value Measurements caption below for additional information.
Provision for Income Taxes
The provision for income taxes from continuing operations is based on the current estimate of the
annual effective income tax rate and is adjusted as necessary for quarterly events. The effective
income tax rate based on actual operating results for the 39 weeks ended October 30, 2010 was 40.7%
compared to 24.0% for the 39 weeks ended October 31, 2009. The increase in the effective income
tax rate for the 39 weeks ended October 30, 2010 was primarily due to losses on the sale of certain
ARS investments in which no income tax benefit was recognized. Additionally, the effective income
tax rate was lower in the 39 weeks ended October 31, 2009 due to the tax benefit associated with
the repatriation of foreign earnings as well as federal and state income tax settlements and other
changes in income tax reserves.
Income from Continuing Operations
Income from continuing operations for the 39 weeks ended October 30, 2010 was $94.9
million, or $0.46 per diluted share, and includes a $0.12 per diluted share loss from the sale of
investment securities related to our ARS liquidation as discussed above. Income from continuing
operations for the 39 weeks ended October 31, 2009 was $133.8 million, or $0.64 per diluted share,
and includes $0.11 per diluted share of tax benefits and a $0.01 per diluted share realized loss on
the sale of investment securities last year.
Loss from Discontinued Operations
We completed the closure of M+O stores and related e-commerce operation during the 13 weeks ended
July 31, 2010. Accordingly, the after-tax operating results appear in Loss from Discontinued
Operations on the Consolidated Statements of
29
Operations for all periods presented. Loss from Discontinued Operations, net of tax, was
$41.3 million and $24.1 million for the 39 weeks ended October 30, 2010 and October 31, 2009,
respectively. Loss from Discontinued Operations for the 39 weeks ended October 30, 2010 includes
pre-tax closure charges of $43.4 million. Included in the pre-tax charges were lease-related items
of $15.4 million and $7.6 million for severance and other employee-related charges, $2.4 million in
inventory charges and a non-cash asset impairment charge of $18.0 million.
Refer to the Closure of MARTIN+OSA caption below for additional information regarding the
discontinued operations for M+O.
Net Income
Net income decreased to $53.6 million from $109.7 million. Net income per diluted share decreased
to $0.26 from $0.53 in the prior year. The decreases are attributable to the factors noted above.
Closure of MARTIN+OSA
On March 5, 2010, our Board of Directors approved managements recommendation to proceed with the
closure of the M+O brand. We notified employees and issued a press release announcing this decision
on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the
brand and review of strategic alternatives, which revealed that it was not achieving performance
levels that warranted further investment. We completed the closure of the M+O stores and
e-commerce operation during the 13 weeks ended July 31, 2010 and the Consolidated Financial
Statements reflect the presentation of M+O as a discontinued operation.
The table below presents the significant components of M+Os results included in Loss from
Discontinued Operations on the Consolidated Statements of Operations for 13 and 39 weeks ended
October 30, 2010 and October 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended |
|
|
39 Weeks Ended |
|
|
|
October 30, |
|
|
October 31, |
|
|
October 30, |
|
|
October 31, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
|
|
|
$ |
12,951 |
|
|
$ |
21,881 |
|
|
$ |
34,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued
operations, before
income taxes |
|
|
(271 |
) |
|
|
(14,268 |
) |
|
|
(66,959 |
) |
|
|
(39,041 |
) |
Income tax benefit |
|
|
104 |
|
|
|
5,479 |
|
|
|
25,672 |
|
|
|
14,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued
operations, net of
tax |
|
$ |
(167 |
) |
|
$ |
(8,789 |
) |
|
$ |
(41,287 |
) |
|
$ |
(24,083 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common
share from
discontinued
operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.12 |
) |
Diluted |
|
$ |
|
|
|
$ |
(0.04 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.11 |
) |
International Expansion
In Fiscal 2009, we entered into an international franchise agreement with Alshaya Trading Co., to
open a series of American Eagle stores in the Middle East, Northern Africa and Eastern Europe over
the next several years. The first two franchised stores opened during the 13 weeks ended May 1,
2010 in Dubai and Kuwait City.
During the first half of Fiscal 2010, we entered a franchise arrangement with Dickson Concepts
(International) Limited to open a series of American Eagle stores in Hong Kong, China and Macau.
Also in Fiscal 2010, we entered into a separate franchise arrangement with Fox-Wizel, Ltd. to open
a series of stores in Israel. These franchise arrangements do not involve a capital investment
from AEO and require minimal operational involvement.
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.
30
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 for identical assets or liabilities. |
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in markets that are
not active; or other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. |
|
|
|
|
Level 3 Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that
are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities. |
As of October 30, 2010, we held certain assets that are required to be measured at fair value on a
recurring basis. These include cash equivalents and short and long-term investments, including
ARS, auction rate preferred securities and the ARS Call Option as described in Note 3 to the
Consolidated Financial Statements.
In
accordance with ASC 820, the following table represents our fair
value hierarchy for our
financial assets (cash equivalents and investments) measured at fair value on a recurring basis as
of October 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 30, 2010 |
|
|
|
|
|
|
Quoted Market |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
(In thousands) |
|
Carrying Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
157,921 |
|
|
$ |
157,921 |
|
|
$ |
|
|
|
$ |
|
|
Commercial Paper |
|
|
61,697 |
|
|
|
61,697 |
|
|
|
|
|
|
|
|
|
Treasury bills |
|
|
100,393 |
|
|
|
100,393 |
|
|
|
|
|
|
|
|
|
Money-market |
|
|
310,764 |
|
|
|
310,764 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
630,775 |
|
|
$ |
630,775 |
|
|
$ |
|
|
|
$ |
|
|
Short-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government ARS |
|
$ |
3,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,700 |
|
|
|
|
Total Short-term Investments |
|
$ |
3,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,700 |
|
Long-term Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local government ARS |
|
$ |
5,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,500 |
|
ARS call option |
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
415 |
|
|
|
|
Total Long-term Investments |
|
$ |
5,915 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,915 |
|
|
|
|
Total |
|
$ |
640,390 |
|
|
$ |
630,775 |
|
|
$ |
|
|
|
$ |
9,615 |
|
|
|
|
We use a
discounted cash flow model to value our Level 3 investments. At October 30, 2010, the
assumptions in our model included different recovery periods, ranging from 8 months to 20 months,
depending on the type of security and varying discount factors for yield, ranging from 0.3% to
0.4%, and illiquidity of 0.5%. These assumptions are subjective. They are based on our current
judgment and our view of current market conditions. The use of different assumptions would result
in a different valuation and related charge. For example, an increase in the recovery period by
one year would reduce the fair value of our investment in ARS by approximately $0.6 million. An
increase to the discount rate and illiquidity premium of 100 basis points would reduce the
estimated fair value of our investment in ARS by approximately $0.4 million.
The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements
was also estimated using a discounted cash flow model. The model considered potential changes in
yields for securities with similar characteristics to the underlying ARS and evaluated possible
future refinancing opportunities for the issuers of the ARS. The analysis then assessed the
likelihood that the options would be exercisable as a result of the underlying ARS being redeemed
or traded in a secondary market at an amount greater than the exercise price prior to the end of
the option term. Future changes in the fair values of the ARS Call Option will be recorded within
the Consolidated Statements of Operations.
31
Liquidity and Capital Resources
Our uses of cash are generally for working capital, the construction of new stores and remodeling
of existing stores, information technology upgrades, distribution center improvements and
expansion, the repurchase of common stock and the payment of dividends. Historically, these uses of
cash have been funded with cash flow from operations and existing cash on hand. Additionally, our
uses of cash include the development of aerie by American Eagle and 77kids by american eagle. We
expect to be able to fund our future cash requirements through current cash holdings as well as
cash generated from operations. In the future, we expect that our uses of cash will also include
new brand concept development, including the further development of 77kids by american eagle.
Our growth strategy includes internally developing new brands and the possibility of further
franchising arrangements or acquisitions. We periodically consider and evaluate these options to
support future growth. In the event we do pursue such options, we could require additional equity
or debt financing. There can be no assurance that we would be successful in closing any potential
transaction, or that any endeavor we undertake would increase our profitability.
The following sets forth certain measures of our liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, |
|
January 30, |
|
October 31, |
|
|
2010 |
|
2010 |
|
2009 |
Working Capital (in 000s) |
|
$ |
820,435 |
|
|
$ |
758,075 |
|
|
$ |
673,455 |
|
Current Ratio |
|
|
3.23 |
|
|
|
2.85 |
|
|
|
2.60 |
|
The increase in working capital as of October 30, 2010, compared to January 30, 2010, resulted
primarily from the cash provided from operations for the 39 weeks ended October 30, 2010 and the
proceeds from the sale of our available-for-sale securities of $177.5 million. This was partially
offset by the use of cash for the repurchase of common stock as part of our publicly announced
programs, capital expenditures and dividends, as well as the use of cash for the elimination of
our notes payable balance due to the voluntary repayment of $30.0 million on our demand line
borrowings.
Cash Flows from Operating Activities of Continuing Operations
Net cash provided by operating activities totaled $146.4 million and $164.9 million for the 39
weeks ended October 30, 2010 and October 31, 2009, respectively. For both periods, our major source
of cash from operations was merchandise sales and our primary outflows of cash for operations were
for the payment of operational costs.
Cash Flows from Investing Activities of Continuing Operations
Cash provided by investing activities for the 39 weeks ended October 30, 2010 included $177.5 million of proceeds
from the sale of investments classified as available for sale, partially offset by $65.4 million
used for capital expenditures. Cash used for investing activities for the 39 weeks ended October 31, 2009
included $106.0 million used for capital expenditures, partially offset by $77.0 million of
proceeds from the sale of investments classified as available-for-sale.
Cash Flows from Financing Activities of Continuing Operations
Cash used for financing activities for the 39 weeks ended October 30, 2010 consisted primarily of
$192.3 million for the repurchase of 14.0 million shares as part of our publicly announced
repurchase program, $64.7 million for the payment of dividends, $30.0 million for the full
repayment of our demand line borrowings and $18.0 million for the repurchase of common stock from
employees for the payment of taxes in connection with the vesting of share-based payments. Cash
used for financing activities for the 39 weeks ended October 31, 2009 primarily included $62.1
million used for the payment of dividends and $25.0 million for the partial repayment of our $75.0
million demand line borrowings.
Credit Facilities
We have borrowing agreements with four separate financial institutions under which we may borrow an
aggregate of $310.0 million United States Dollars (USD) and $25.0 million Canadian Dollars
(CAD). Of this amount, $200.0 million USD can be used for demand letter of credit facilities,
$50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the remaining
$60.0 million USD can be used for either letters of credit or demand line borrowings at the
Companys discretion. The expiration dates of the USD demand line facilities are April 20, 2011
and May 22, 2011 and the $25.0 million CAD demand line has an expiration date of November 20, 2010.
As of October 30, 2010, we had outstanding demand letters of credit of $42.1 million USD and no
demand line borrowings.
32
The availability of any future borrowings is subject to acceptance by the respective financial
institutions. The average borrowing rate on the demand line for outstanding borrowings during
Fiscal 2010 was 2.1%.
Capital Expenditures
Capital expenditures for the 39 weeks ended October 30, 2010 were $65.4 million and included $42.3
million related to investments in our stores, including 21 new AE and aerie stores in the United
States and Canada, seven new 77kids stores in the United States and 20 remodeled stores in the
United States and Canada. Additionally, we continued to support our infrastructure growth by
investing in the improvement and expansion of our distribution centers ($13.1 million), information
technology initiatives ($7.3 million) and other home office projects ($2.7 million).
For Fiscal 2010, we expect capital expenditures to be in the range of $90 million to $100 million,
with approximately half of the amount relating to investments in our stores.
Stock Repurchases
During Fiscal 2007, our Board authorized a total of 60.0 million shares of our common stock for
repurchase under our share repurchase program with expiration dates extending into Fiscal 2010. We
repurchased 18.7 million shares during Fiscal 2007 and the authorization related to 11.3 million
shares expired in Fiscal 2009. At the beginning of Fiscal 2010, the
Company had 30.0 million shares remaining authorized for
repurchase.
We repurchased 14.0 million shares as part of our publicly
announced repurchase programs during the 39 weeks ended October 30, 2010 for approximately $192.3
million, at a weighted average price of $13.73 per share. As of October 30, 2010, we had 16.0
million shares remaining authorized for repurchase. These shares may be repurchased at our
discretion. The authorization relating to the 16.0 million shares remaining under the program
expires at the end of Fiscal 2010.
During the 39 weeks ended October 30, 2010 and October 31, 2009, we repurchased approximately 1.0
million and 16,000 shares, respectively, from certain employees at market prices totaling $18.0
million and $0.2 million, respectively. These shares were repurchased for the payment of taxes in
connection with the vesting of share-based payments, as permitted under the 2005 Stock Award and
Incentive Plan.
The aforementioned share repurchases have been recorded as treasury stock.
Dividends
During the 13 weeks ended October 30, 2010, our Board declared a quarterly cash dividend of $0.11
per share, which was paid on October 8, 2010.
Critical Accounting Policies
Our critical accounting policies are described in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and in the notes to our Consolidated Financial
Statements for the year ended January 30, 2010 contained in our Fiscal 2009 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 our Consolidated Financial Statements
in this Quarterly Report on Form 10-Q. The application of our 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes in our exposure to market risk from January 30, 2010. Our market
risk profile as of January 30, 2010 is disclosed in Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, of our Fiscal 2009 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Securities Exchange Act of 1934,
as amended (the Exchange Act), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management including our Principal Executive
Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
33
In designing and evaluating the disclosure controls and procedures, management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
In connection with the preparation of this Quarterly Report on Form 10-Q, as of October 30, 2010,
an evaluation was performed under the supervision and with the participation of our management,
including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of
the design and operation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act). Based upon that evaluation, our Principal Executive Officer and
our Principal Financial Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level as of the end of the period covered by this Quarterly
Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the 13
weeks ended October 30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
34
PART II OTHER INFORMATION
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed within Item 1A of our
Fiscal 2009 Annual Report on Form 10-K. There have been no material changes to the disclosures
relating to this item from those set forth in our Fiscal 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table provides information regarding our repurchases of our common stock during the
13 weeks ended October 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
|
|
Number of |
|
|
Average |
|
|
Shares Purchased as |
|
|
Shares that May |
|
|
|
Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Announced Programs |
|
|
Under the Program |
|
|
|
(1) |
|
|
(2) |
|
|
(1) |
|
|
(1) (3) |
|
Month #1 (August 1, 2010 through August 28, 2010) |
|
|
1,190 |
|
|
$ |
17.45 |
|
|
|
|
|
|
|
16,000,000 |
|
Month #2 (August 29, 2010 through October 2, 2010) |
|
|
1,163 |
|
|
$ |
15.05 |
|
|
|
|
|
|
|
16,000,000 |
|
Month #3 (October 3, 2010 through October 30, 2010) |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
16,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,353 |
|
|
$ |
16.26 |
|
|
|
|
|
|
|
16,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares purchased during Months #1 and #2 were all repurchased from employees for the
payment of taxes in connection with the vesting of share-based payments. |
|
(2) |
|
Average price paid per share excludes any broker commissions paid. |
|
(3) |
|
In January 2008, our Board authorized the repurchase of 30.0
million shares of our common stock. The authorization of the remaining 16.0 million shares that may yet be purchased under the
program expires at the end of Fiscal 2010. |
35
|
|
|
ITEM 6.
|
|
EXHIBITS. |
|
* Exhibit 15
|
|
Acknowledgment of Independent Registered Public Accounting Firm |
|
|
|
* Exhibit 31.1
|
|
Certification by James V. ODonnell pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
|
|
* Exhibit 31.2
|
|
Certification by Joan Holstein Hilson pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
|
|
**Exhibit 32.1
|
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
**Exhibit 32.2
|
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
**Exhibit 101
|
|
Interactive Data File |
|
|
|
* |
|
Filed with this report. |
|
** |
|
Furnished with this report. |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 19, 2010
|
|
|
|
|
American Eagle Outfitters, Inc.
(Registrant) |
|
|
|
|
|
|
|
By:
|
|
/s/ James V. ODonnell
James V. ODonnell
|
|
|
|
|
Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
By:
|
|
/s/ Joan Holstein Hilson
Joan Holstein Hilson
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer and Principal Accounting Officer) |
|
|
37