Annual Reports

 
Quarterly Reports

  • 10-Q (Dec 5, 2014)
  • 10-Q (Aug 28, 2014)
  • 10-Q (May 29, 2014)
  • 10-Q (Dec 9, 2013)
  • 10-Q (Aug 29, 2013)
  • 10-Q (May 30, 2013)

 
8-K

 
Other

American Eagle Outfitters 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-15
  3. Ex-31
  4. Ex-31
  5. Ex-32
  6. Ex-32
  7. Ex-32
American Eagle Outfitters, Inc. Form 10-Q

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

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 30, 2005  

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

Commission File Number: 0-23760

American Eagle Outfitters, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

150 Thorn Hill Drive, Warrendale, PA
(Address of principal executive offices)

No. 13-2721761
(I.R.S. Employer Identification No.)

15086-7528
(Zip Code)

Registrant's telephone number, including area code: (724) 776-4857

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 the filing requirements for at least the past 90 days. YES [X] NO [   ]

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 155,393,243 Common Shares were outstanding at August 31, 2005. 


AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS

 

Page
Number

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements  
     Consolidated Balance Sheets  
          July 30, 2005, January 29, 2005 and July 31, 2004 3
     Consolidated Statements of Operations and Retained Earnings  
          Three and six months ended July 30, 2005 and July 31, 2004 4
     Consolidated Statements of Cash Flows  
          Six months ended July 30, 2005 and July 31, 2004 5
     Notes to Consolidated Financial Statements 6
     Report of Independent Registered Public Accounting Firm 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
 
PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings N/A
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds N/A

Item 3. Defaults Upon Senior Securities

N/A
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information N/A

Item 6. Exhibits

30
 

 


PART I

 

 ITEM 1. FINANCIAL STATEMENTS.

 

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)


 Assets

 July 30,
 2005
(Unaudited)

January 29,
2005
 

 July 31,
 2004
(Unaudited)

 Current assets:

       

(Restated)

     Cash and cash equivalents

$202,538

$275,061

       $148,549

     Short-term investments

422,636  

314,546

 

184,062

     Merchandise inventory

227,771

137,991

169,840

     Accounts and note receivable, including related party, net

22,151  

26,432

 

26,204

     Prepaid expenses and other

27,256

25,856

           30,085

     Deferred income taxes

48,239  

47,754

      34,978

 Total current assets

950,591  

827,640

       593,718

 Property and equipment, net of accumulated depreciation and amortization

351,331  

353,213

        363,459

 Goodwill

10,136

10,136

        10,136

 Long-term investments

125,568  

84,416

  26,151

 Other assets, net

26,314  

18,254

       26,952

 Total assets

$1,463,940

$1,293,659

      $1,020,416

 Liabilities and Stockholders' Equity

 Current liabilities:

         

     Accounts payable

$102,049

 

$76,344

          $70,732

     Current portion of note payable

-  

-

             4,832

     Accrued compensation and payroll taxes

30,991

36,008

       26,415

     Accrued rent

47,268  

45,089

          40,107

     Accrued income and other taxes

17,655

33,926

        18,640
     Unredeemed stored value cards and gift certificates 19,111   32,724   15,388

     Current portion of deferred lease credits

10,377 9,798 10,061

     Other liabilities and accrued expenses

12,673

16,152

           12,967

 Total current liabilities

240,124  

250,041

        199,142

 Non-current liabilities:

       

     Note payable

-

-

    11,469
     Deferred lease credits 58,337   57,758   56,068

     Other non-current liabilities

29,227  

22,374

           23,963

 Total non-current liabilities

87,564  

80,132

            91,500

 Commitments and contingencies

-  

-

                     -

 Stockholders' equity:

         

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

-

-

                   -

     Common stock, $0.01 par value; 250,000 shares authorized; 161,992, 155,817 and 152,591

         
          shares issued; 155,302, 149,489 and 145,393 shares outstanding, respectively 1,603   1,517   1,500

     Contributed capital

372,072

268,286

   198,327

     Accumulated other comprehensive income

13,598

 

13,748

 

   6,052

     Retained earnings

820,769

726,760

    576,786

     Deferred compensation

(16,286)

 

(1,807)

 

       (7,873)

     Treasury stock

(55,504)

(45,018)

     (45,018)

 Total stockholders' equity

1,136,252   963,486        729,774

 Total liabilities and stockholders' equity

$1,463,940

 

$1,293,659

        $1,020,416

See Notes to Consolidated Financial Statements

 

3


AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Unaudited) 
 

  

Three Months Ended

Six Months Ended

(In thousands, except per share amounts) 

July 30,
2005

July 31, 
2004

(Restated)

July 30,
2005

July 31, 
2004

(Restated)

Net sales

$513,320 $395,402 $967,339 $727,632

Cost of sales, including certain buying, occupancy and warehousing expenses

285,340 232,548 517,199 416,059

Gross profit

227,980 162,854 450,140 311,573

Selling, general and administrative expenses

123,362 94,951 239,898 184,801

Depreciation and amortization expense

18,581 16,886 36,683 32,624

Operating income

86,037 51,017 173,559 94,148

Other income, net

4,449 491 7,424 1,431

Income before income taxes

90,486 51,508 180,983 95,579

Provision for income taxes

32,452 19,926 67,765 36,996
Income from continuing operations, net of tax 58,034 31,582 113,218 58,583
Income (loss) from discontinued operations, net of tax (15) (2,328) 74 (4,055)

Net income

$58,019 $29,254 $113,292 $54,528
         

Basic per common share amounts:

       
Income from continuing operations $0.38 $0.22 $0.74 $0.41
Loss from discontinued operations - (0.02) - (0.03)
Net income per basic common share $0.38 $0.20 $0.74 $0.38
         

Diluted per common share amounts:

       
Income from continuing operations $0.37 $0.22 $0.72 $0.40
Loss from discontinued operations - (0.02) - (0.03)
Net income per diluted common share $0.37 $0.20 $0.72 $0.37
         
Cash dividends per common share $0.08 $    - $0.13 $    -
         

Weighted average common shares outstanding - basic

153,943 144,502 152,763 143,756

Weighted average common shares outstanding - diluted

157,806 148,328 156,961 147,384
         

Retained earnings, beginning

$774,371 $547,532 $726,760 $522,258

Net income

58,019 29,254 113,292 54,528
Cash dividends (11,621) - (19,283) -

Retained earnings, ending

$820,769 $576,786 $820,769 $576,786

 

See Notes to Consolidated Financial Statements

 

4


 

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 (Unaudited)

 

                                           

Six Months Ended

 

(In thousands)

July 30, 2005

July 31, 2004

(Restated)

 

Operating activities:

     

Net income

$113,292 $54,528
    (Income) loss from discontinued operations

         (74)

   4,055

 
Income from continuing operations   113,218  58,583

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

     

     Depreciation and amortization

   36,683  32,624

     Stock compensation

   11,425   9,717  

     Deferred income taxes

     4,284  (12,820)

     Tax benefit from exercise of stock options

   34,071    8,693  

     Other adjustments

     2,250      706

Changes in assets and liabilities:

   

     Merchandise inventory

   (89,757)  (46,547)

     Accounts and note receivable, including related party, net

    9,822    (6,255)  

     Prepaid expenses and other

    (1,394)    (2,501)

     Accounts payable

   25,679       (616)  

     Unredeemed stored value cards and gift certificates

   (13,620)   (10,193)

     Deferred lease credits

    1,222    1,932  

     Accrued liabilities

   (18,488)    9,336

          Total adjustments

    2,177   (15,924)  

Net cash provided by operating activities from continuing operations

 115,395   42,659

Investing activities:

     

     Capital expenditures

   (38,613)    (57,277)

     Purchase of investments

  (461,065)  (140,898)  

     Sale of investments

  311,823  155,767

     Other investing activities

         (91)     (2,742)  

Net cash used for investing activities from continuing operations

 (187,946)    (45,150)

Financing activities:

   

     Payments on note payable and capital leases

       (362)     (2,777)

     Repurchase of common stock from employees

   (10,487)           -  
     Cash dividends paid    (19,283)           -

     Net proceeds from stock options exercised

   43,899    17,095  

Net cash provided by financing activities from continuing operations

  13,767    14,318

Effect of exchange rates on cash

       77          22  
Net cash used for discontinued operations   (13,816)         (387)

Net increase (decrease) in cash and cash equivalents

  (72,523)     11,462  

Cash and cash equivalents - beginning of period

 275,061   137,087

Cash and cash equivalents - end of period

$202,538 $148,549  
     
Supplemental disclosure of cash flow information:      
Cash paid during the period for income taxes $48,593 $52,295

 

Supplemental disclosures of non-cash transactions:  During the six months ended July 30, 2005 and July 31, 2004, the Company recorded an increase to deferred compensation and contributed capital of $25.5 million and $16.5 million, respectively, related to the issuance of stock awards.

 

See Notes to Consolidated Financial Statements

 

5


AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

1. Interim Financial Statements 

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at July 30, 2005 and July 31, 2004 and for the three and six month periods ended July 30, 2005 (the "current period") and July 31, 2004 (the "prior period") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company's Fiscal 2004 Annual Report.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at January 29, 2005 was derived from the audited financial statements.

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

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.

Fiscal Year

The Company's financial year is a 52/53 week year that ends on the Saturday nearest to January 31.  As used herein, "Fiscal 2006" and "Fiscal 2005" refer to the fifty-three and fifty-two week periods ending February 3, 2007 and January 28, 2006, respectively. "Fiscal 2004" refers to the fifty-two week period ended January 29, 2005.   

Estimates

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

Restatement of Prior Financial Information

On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles ("GAAP"). In light of this letter, the Company's management initiated a review of its lease-related accounting and determined that its historical method of accounting for rent holidays and tenant allowances, as more fully described below, was not in accordance with GAAP. As a result, the Company restated its Consolidated Financial Statements for the year ended January 31, 2004 in its 2004 Annual Report on Form 10-K. The Company also restated its quarterly financial information for Fiscal 2004, as described in Note 16 of the Consolidated Financial Statements included in its 2004 Annual Report on Form 10-K. The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement. Accordingly, the financial statements and related financial information contained in such reports should no longer be relied upon. All referenced amounts for prior quarterly periods in this Quarterly Report on Form 10-Q are presented on a restated basis.

6


Historically, the Company had recognized straight line rent expense for leases beginning on the store opening date. This had the effect of excluding the build-out period of its stores from the calculation of the period over which it expenses rent and recognizes construction allowances. In accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases, the Company changed this practice to include the build-out period in the calculations of rent expense and construction allowance amortization.

Additionally, in accordance with Financial Accounting Standards Board Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, the Company changed its classification of construction allowances on its Consolidated Financial Statements to record them as deferred credits, which are amortized as a reduction to rent expense. Furthermore, construction allowances are now presented within operating activities on its Consolidated Statements of Cash Flows. Historically, construction allowances had been classified on the Company's Consolidated Balance Sheets as a reduction of property and equipment and the related amortization had been classified as a reduction to depreciation and amortization expense (over the lesser of the useful life or the life of the lease) on the Consolidated Statements of Operations. The Company's Consolidated Statements of Cash Flows had historically reflected construction allowances as a reduction of capital expenditures within investing activities.

The following is a summary of the effects of the restatement adjustments on our Consolidated Financial Statements.

 

     Consolidated Statements of Operations

(In thousands, except per share amounts)

 

  

As Previously

Reported (1)

  

Adjustments

    As Restated

Three months ended July 31, 2004

                     

Cost of sales

     $234,273      $(1,725 )     $232,548

Gross profit

     161,129      1,725       162,854

Selling, general and administrative expenses

     94,965      (14     94,951

Depreciation and amortization expense

     14,544      2,342       16,886

Operating income

     51,620      (603     51,017

Income before income taxes

     52,111      (603     51,508

Provision for income taxes

     20,159      (233     19,926

Income from continuing operations, net of tax

     31,952      (370     31,582

Net income

     29,624      (370     29,254

Basic income from continuing operations per common share

     0.22      -       0.22

Diluted income from continuing operations per common share

     0.22      -       0.22

Basic income per common share

     0.20      -       0.20

Diluted income per common share

     0.20      -       0.20
   

(In thousands, except per share amounts)

 

  

As Previously

Reported (1)

  

Adjustments

    As Restated

Six months ended July 31, 2004

                     

Cost of sales

     $420,451      $(4,392 )     $416,059

Gross profit

     307,181      4,392       311,573

Selling, general and administrative expenses

     184,690      111       184,801

Depreciation and amortization expense

     28,005      4,619       32,624

Operating income

     94,486      (338     94,148

Income before income taxes

     95,917      (338     95,579

Provision for income taxes

     37,131      (135     36,996

Income from continuing operations, net of tax

     58,786      (203     58,583

Net income

     54,731      (203     54,528

Basic income from continuing operations per common share

     0.41      -       0.41

Diluted income from continuing operations per common share

     0.40      -       0.40

Basic income per common share

     0.38      -       0.38

Diluted income per common share

     0.37      -       0.37
(1) Amounts have been reclassified to reflect the Bluenotes' results of operations as discontinued operations. See Note 7 of the Consolidated Financial Statements for additional information.

 

7


     Consolidated Balance Sheets

(In thousands)

 

  

As Previously

Reported (1)

   Adjustments
    As Restated

As of July 31, 2004

                     

Accounts and note receivable, including related party, net

     $24,945      $1,259       $26,204

Deferred income taxes

     31,037      3,941       34,978

Total current assets

     588,518      5,200       593,718

Property and equipment, net of accumulated depreciation and amortization

     299,115      64,344       363,459

Total assets

     950,872      69,544       1,020,416

Accrued rent

     29,984      10,123       40,107

Current portion of deferred lease credits

     -      10,061       10,061

Total current liabilities

     178,958      20,184       199,142

Deferred lease credits

     -      56,068       56,068

Other non-current liabilities

     24,169      (206 )     23,963

Total non-current liabilities

     35,638      55,862       91,500
Accumulated other comprehensive income     6,087   (35 )     6,052
Retained earnings      583,253     (6,467 )     576,786

Total stockholders' equity

     736,276      (6,502 )     729,774

Total liabilities and stockholders' equity

     950,872      69,544       1,020,416
(1) Certain amounts have been reclassified in order to conform to the July 30, 2005 presentation.

 

Recent Financial Accounting Standards Board Pronouncements

 

SFAS No. 154, Accounting Changes and Error Corrections

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior periods' financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions and makes a distinction between retrospective application of an accounting principle and the restatement of financial statements to reflect the correction of an error. Additionally, SFAS No. 154 requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS No. 154 will have a material impact on its Consolidated Financial Statements.

FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004

In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2").  FSP No. 109-2 allows additional time for companies to determine how the American Jobs Creation Act of 2004 (the "Act") affects a company's accounting for the deferred tax liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. At this time, the Company has not established a provision for income taxes on unremitted earnings of the Canadian subsidiaries as it is the Company's intention to permanently invest these earnings in the Canadian Operations. The Company is currently evaluating the opportunity to take this deduction for the tax year ending July 29, 2006. Unremitted Canadian earnings that are considered reasonably possible for repatriation range from zero to $52 million. Repatriation of these earnings would require the Company to pay income taxes in the range of zero to $2.7 million. Additional unremitted Canadian earnings generated before the end of the tax year ending July 29, 2006 may also be repatriated.

8


 

SFAS No. 123 (revised 2004), Share-Based Payment

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), a revision of SFAS No. 123. SFAS No. 123(R) requires that companies recognize all share-based payments to employees, including grants of employee stock options, in the financial statements. The recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this cost will no longer be an alternative under SFAS No. 123(R).

In April 2005, the SEC adopted a rule that amended the effective dates of SFAS No. 123(R). Under this guidance, SFAS No. 123(R) is effective for public companies at the beginning of the first fiscal year that begins after June 15, 2005. Transition methods available to public companies include either the modified prospective or modified retrospective adoption. The modified prospective transition method requires that compensation cost be recognized beginning on the effective date, or date of adoption if earlier, for all share-based payments granted after the date of adoption and for all unvested awards existing on the date of adoption. The modified retrospective transition method, which includes the requirements of the modified prospective transition method, additionally requires the restatement of prior period financial information based on amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. The Company is currently in the process of determining the transition method that it will use to adopt the new standard, which will be adopted no later than the beginning of Fiscal 2006 as required.

The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using the intrinsic value method. As a result of using this method, the Company generally recognizes no compensation cost for employee stock options. The adoption of SFAS No. 123(R) and the use of the fair value method will have an impact on our results of operations. The impact of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the amounts in our pro forma disclosure within the Stock Option Plan disclosure on page 13 of this Form 10-Q. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. We cannot estimate what those amounts will be in the future because they are dependent on, among other things, when employees exercise stock options.

Historically, for pro forma reporting purposes the Company has followed the nominal vesting period approach for stock-based compensation awards with retirement eligibility provisions.  Under this approach, the Company recognizes compensation expense over the vesting period of the award. If an employee retires before the end of the vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement. SFAS No. 123(R) requires recognition of compensation cost under a non-substantive vesting period approach. This approach requires recognition of compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant. Refer to the Stock Option Plan disclosure on page 13 of this Form 10-Q for additional discussion of the non-substantive vesting period approach.

Staff Accounting Bulletin No. 107, Share-Based Payment

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment ("SAB No. 107"). SAB No. 107 provides guidance regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations, including guidance related to valuation methods; the classification of compensation expense; non-GAAP financial measures; the accounting for income tax effects of share-based payment arrangements; disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS No. 123(R); and modifications of options prior to the adoption of SFAS No. 123(R). The Company is currently assessing the guidance in SAB No. 107 as part of its evaluation of the adoption of SFAS No. 123(R).

9


Foreign Currency Translation

The Canadian dollar is the functional currency for the Canadian businesses. In accordance with SFAS No. 52, Foreign Currency Translation, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive Income (see Note 5 of the Consolidated Financial Statements).

Revenue Recognition

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

Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers. These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales. See Note 4 of the Consolidated Financial Statements for further discussion.

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 promotional costs. Buying, occupancy and warehousing costs consists of compensation 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; and compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs.

The gross profit impact of a sales returns reserve, which is recorded in cost of sales and other liabilities and accrued expenses, is based on projected merchandise returns determined through the use of historical average return percentages. The sales return reserve was $3.4 million as of July 30, 2005 and January 29, 2005 and $2.9 million as of July 31, 2004.

Selling, General and Administrative Expenses

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

Cash and Cash Equivalents

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

10


Short-term Investments

Cash in excess of operating requirements is invested in taxable or tax-exempt fixed income notes or bonds. As of July 30, 2005, short-term investments included investments with an original maturity of three to twelve months and averaging approximately ten months (excluding auction rate securities) and consisted primarily of tax-exempt municipal bonds, taxable agency bonds and corporate notes classified as available for sale. The Company had previously included auction rate securities as a component of cash and cash equivalents on its Consolidated Balance Sheets but has determined that classification as short-term investments is more appropriate. Accordingly, auction rate securities have been reclassified from cash and cash equivalents to short-term investments for all periods presented. This reclassification also resulted in changes in the Company's Consolidated Statements of Cash Flows. The purchase and sale of auction rate securities previously presented as cash and cash equivalents have been reclassified to investing activities for all periods presented.

The following table summarizes the fair market value of our cash and marketable securities, which are recorded as cash and cash equivalents on the Consolidated Balance Sheets, and our short-term investments:

 

(In thousands)

 

 

July 30, 2005

 

  January 29, 2005

 

July 31, 2004

Cash and cash equivalents:

     

Cash and money market investments

 $85,698  $90,200   $43,971

Tax exempt investments

   46,000  148,685    57,495

Taxable investments

   70,840    36,176    47,083
     Total cash and cash equivalents  202,538   275,061  148,549

Short-term investments:

     

Tax exempt investments

 286,027   305,726  162,962

Taxable investments

 136,609       8,820    21,100
     Total short-term investments  422,636   314,546  184,062

Total

$625,174 $589,607 $332,611

Goodwill

As of July 30, 2005, the Company had approximately $10.1 million of goodwill, which is primarily related to the acquisition of our importing operations on January 31, 2000. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, Management evaluates goodwill for possible impairment on at least an annual basis.

Long-term Investments

As of July 30, 2005, long-term investments included investments with an original maturity of greater than twelve months, but not exceeding five years (averaging approximately twenty-four months) and consisted primarily of agency bonds and debt securities issued by states and local municipalities classified as available-for-sale.

Deferred Lease Credits

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

 

11


Income Taxes

The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates, 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.

Stock Repurchases

On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 7,500,000 shares of its stock. No repurchases were made during the six months ended July 30, 2005 or July 31, 2004 as part of this stock repurchase program. As of July 30, 2005, approximately 1,400,000 shares remain authorized for repurchase. See Note 10 of the Consolidated Financial Statements for information on a subsequent event related to our share repurchase program.

During the six months ended July 30, 2005, the Company purchased 361,000 shares from certain employees at market prices totaling $10.5 million for the payment of taxes in connection with the vesting of restricted stock as permitted under the 1999 Stock Incentive Plan. These repurchases have been recorded as treasury stock. 

Stock Split

On February 4, 2005, the Company's Board of Directors approved a two-for-one stock split that was distributed on March 7, 2005, to stockholders of record on February 14, 2005. All share amounts and per share data have been restated to reflect this stock split.

Earnings Per Share

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

Three Months Ended

Six Months Ended

(In thousands)

July 30,
2005

July 31,
2004

(Restated)

July 30,
2005

July 31,
2004

(Restated)

Net income

$58,019

$29,254

$113,292

$54,528

Weighted average common shares outstanding:

   Basic shares

153,943

144,502

152,763

143,756

   Dilutive effect of stock options and non-vested restricted stock

3,863

3,826

4,198

3,628

   Diluted shares

157,806

148,328

156,961

147,384

Options to purchase 30,000 shares of common stock during the six months ended July 30, 2005 and 1,227,000 shares during the six months ended July 31, 2004, were outstanding, but were not included in the computation of net income per diluted share because the options' exercise prices were greater than the average market price of the underlying shares.

12


Stock Option Plan

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

 

Three Months Ended

Six Months Ended

(In thousands, except per share amounts)

July 30,
2005

July 31,
2004

(Restated)

July 30,
2005

July 31,
2004

(Restated)

Net income, as reported

$58,019

$29,254

$113,292

$54,528

Add:  stock-based compensation expense included in 
           reported net income, net of tax

368 74 543 149
Less:  total stock-based compensation expense 
           determined under fair value method, net of tax
(2,114) (3,268) (4,544) (6,319)
Pro forma net income $56,273 $26,060 $109,291 $48,358
         
Basic income per common share:        
As reported $0.38 $0.20 $0.74 $0.38
Pro forma $0.37 $0.18 $0.72 $0.34
         
Diluted income per common share:        
As reported $0.37 $0.20 $0.72 $0.37
Pro forma $0.36 $0.18 $0.70 $0.33

Historically, for pro forma reporting purposes the Company has followed the nominal vesting period approach for stock-basked compensation awards with retirement eligibility provisions. Under this approach, the Company recognizes compensation expense over the vesting period of the award. If an employee retires before the end of the vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement. SFAS No. 123(R) requires recognition of compensation cost under a non-substantive vesting period approach. This approach requires recognition of compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant. 

The SEC recently clarified that companies following the nominal vesting period approach should continue to follow that approach until the adoption of SFAS No. 123(R). Accordingly, the Company will continue to follow the nominal vesting period approach for any new stock based compensation awards containing retirement eligibility provisions granted prior to the adoption of SFAS No. 123(R) and for the remaining portion of unvested outstanding awards containing retirement eligibility provisions after adopting SFAS No. 123(R). Upon adoption of SFAS No. 123(R), the Company will apply the non-substantive vesting period approach to new stock award grants that have retirement eligibility provisions. Had the Company applied the non-substantive vesting period approach for retirement eligible employees, there would not have been an impact to our reported pro forma income per common share for Fiscal 2005 or Fiscal 2004.

Segment Information

As a result of the Bluenotes' disposition during Fiscal 2004 (see Note 7 of the Consolidated Financial Statements), the Company's operations are now conducted in one reportable segment. Prior to its disposition, Bluenotes was presented as a separate reportable segment.

13


Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the July 30, 2005 presentation.

3. Property and Equipment

Property and equipment consists of the following:

(In thousands)

July 30, 2005

January 29, 2005

July 31, 2004

     

(Restated)

Property and equipment, at cost $641,715 

$611,281 

$615,088 

Less: Accumulated depreciation and amortization

 (290,384)

 (258,068)

 (251,629)

Net property and equipment

$351,331 

$353,213 

$363,459 

4. Related Party Transactions

The Company and its wholly-owned subsidiaries historically had various transactions with related parties. The nature of the Company's relationship with the related parties and a description of the respective transactions is stated below.

 

As of July 30, 2005, the Schottenstein-Deshe-Diamond families (the "families") owned 13.7% of the outstanding shares of Common Stock of the Company. The families also own a private company, Schottenstein Stores Corporation ("SSC"), which includes a publicly-traded subsidiary, Retail Ventures, Inc. ("RVI"), formerly Value City Department Stores, Inc., and also owned 99% of Linmar Realty Company II ("Linmar Realty") until June 4, 2004. During Fiscal 2004, the Company implemented a strategic plan to eliminate related party transactions with the families. As a result, we did not have any material transactions remaining with the families as of January 29, 2005. We believe that the terms of the prior transactions were as favorable to the Company as those that could have been obtained from unrelated third parties. The Company had the following transactions with these related parties during the six months ended July 31, 2004.

During Fiscal 2004, the Company, through a subsidiary, Linmar Realty Company II LLC, acquired for $20.0 million Linmar Realty Company II, a general partnership that owned the Company's corporate headquarters and distribution center. The acquisition price, less a straight-line rent accrual adjustment of $2.0 million, was recorded as land and building on the Consolidated Balance Sheet during the six months ended July 31, 2004 and is being depreciated over its anticipated useful life of twenty-five years. Prior to the acquisition, the Company had an operating lease with Linmar Realty for these properties. Rent expense was $0.2 million and $0.8 million during the three and six months ended July 31, 2004, respectively, under the lease.

 

The Company and its subsidiaries sell end-of-season, overstock and irregular merchandise to various parties, which has historically included RVI. These sell-offs, which are without recourse, are typically sold below cost and the proceeds are reflected in cost of sales.  During the three months ended May 1, 2004, $147,000 of merchandise, at cost, was sold to RVI. During April 2004, the Company entered into an agreement with an independent third-party vendor for the sale of merchandise sell-offs, thus reducing sell-offs to related parties. As a result, there have been no sell-offs of merchandise to related parties since the date of the agreement.

 

At July 30, 2005, the Company did not have a balance in accounts receivable that pertained to related parties. At July 31, 2004, approximately $15,000 was included in accounts receivable pertaining to related party transactions.

 

Prior to the implementation of the Company's plan to eliminate related party transactions, SSC and its affiliates charged the Company for various professional services provided, including certain legal, real estate and insurance services. For the three and six months ended July 31, 2004, the Company paid approximately $85,000 and $125,000, respectively, for these services.  

 14


During the three months ended May 1, 2004, the Company discontinued its cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft. The Company paid $0.1 million during the three months ended May 1, 2004, to cover its share of operating costs based on usage of the corporate aircraft under the cost sharing arrangement. No payments were made after the three months ended May 1, 2004, as a result of the discontinuation of this arrangement.

5. Comprehensive Income

Comprehensive income is comprised of the following:

 

Three Months Ended

Six Months Ended

  
(In thousands)

 

July 30,
2005

July 31,
2004
(Restated)

July 30,
2005

July 31,
2004
(Restated)

Net income

  $58,019

$29,254

$113,292

$54,528

Other comprehensive income:          

  Unrealized (loss) gain on investments, net of tax

        (133)            5         (304)         25

  Foreign currency translation adjustment

     1,274    1,956        154     2,298

  Unrealized derivative loss on cash flow hedge, net of tax

           -        131            -         54

  Other comprehensive (loss) income

      1,141     2,092         (150)     2,377

Total comprehensive income

  $59,160 $31,346 $113,142 $56,905 

6. Income Taxes

For the three and six months ended July 30, 2005, the effective tax rate used for the provision of income tax approximated 36% and 37%, respectively. For the three and six months ended  July 31, 2004, the effective tax rate used for the provision of income tax approximated 39%.  The lower effective tax rates during the current period are due primarily to state tax credits received during the three months ended July 30, 2005.

The effective tax rate is comprised of the following components:

 

Three Months Ended

Six Months Ended

 

 

July 30, 
2005

July 31, 
2004

  July 30, 
2005

July 31,
2004

Effective federal and state tax rate

  39% 39%   39% 39%

Impact of state tax credits received

  (3)      -      (2)       -    

Effective tax rate

  36% 39%   37% 39%

7. Discontinued Operations

During Fiscal 2004, the Company completed its disposition of Bluenotes to 6295215 Canada Inc (the "Purchaser"). The transaction had an effective date of December 5, 2004. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the accompanying Consolidated Statements of Operations reflect Bluenotes' results of operations as discontinued operations for all periods presented. Additionally, the accompanying Consolidated Statements of Cash Flows reflect Bluenotes' results of operations as discontinued operations (note that amounts in the Company's Consolidated Balance Sheets have not been reclassified to reflect Bluenotes as discontinued operations).

 

 15


The Company received approximately $23 million as consideration for the sale of certain of its Bluenotes assets, including inventory and property and equipment. As of July 30, 2005, the Company had received $22.8 million of the aforementioned consideration. In accordance with the terms of the sale, the remaining cash proceeds were received during August 2005 upon final settlement and reconciliation. The transaction resulted in an after-tax loss of $4.8 million, or $0.03 per diluted share, during Fiscal 2004 and was partially offset by net income from the disposition of $74,000 during the six months ended July 30, 2005. Additionally, during the six months ended July 30, 2005, the Company recorded a $6.0 million income tax benefit related to the completion of the Bluenotes' disposition.  At this time, the realization of the aforementioned income tax benefit is uncertain.  As a result, the Company has recorded a contingency reserve for the full amount.

The operating results of Bluenotes, which are being presented as discontinued operations, were as follows:

 

 

Three Months Ended

Six Months Ended

  
(In thousands)

July 30,
2005

July 31,
2004

July 30,
2005

July 31,
2004

Net sales

  $   - 

$18,375

$  - 

$36,170

Loss from operations, net of tax

$   -  $ (2,328)  $  -   $ (4,055)

Income (loss) from disposition, net of tax

       (15)             -      74           -  

Income (loss) from discontinued operations, net of tax (1)

 $(15)  $ (2,328)  $74  $ (4,055)

 

(1) Three month amounts are net of tax of $(3) and $(1,400), respectively. Six month amounts are net of tax of $45 and $(2,400), respectively.

8. Contingencies

Guarantees

In connection with the disposition of Bluenotes during Fiscal 2004, the Company provided guarantees related to two store leases that were assigned to the Purchaser. These guarantees were provided to the applicable landlords and will remain in effect until the leases expire in 2007 and 2015, respectively. The lease guarantees require the Company to make all required payments under the lease agreements in the event of default by the Purchaser. The maximum potential amount of future payments (undiscounted) that the Company could be required to make under the guarantees is approximately $1.4 million as of July 30, 2005. In the event that the Company would be required to make any such payments, it would pursue full reimbursement from YM, Inc., a related party of the Purchaser, in accordance with the Bluenotes' Asset Purchase Agreement.

In accordance with FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34 ("FIN 45"), as the Company issued the guarantees at the time it became secondarily liable under a new lease, no amounts have been accrued in the Company's Consolidated Financial Statements related to these guarantees. Management believes that it is unlikely that the Company will be required to perform under the guarantees.

9. Legal Proceedings

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with SFAS No. 5, Accounting for Contingencies, 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, the Company records the accrual at the low end of the range, in accordance with FIN 14, an interpretation of SFAS No. 5. As the Company has provided adequate reserves, it believes that the ultimate outcome of any matter currently pending against the Company will not materially affect the financial position or results of operations of the Company.

10. Subsequent Event 

On September 2, 2005, the Company's Board of Directors authorized the repurchase of an additional 2,100,000 million shares of the Company's common stock. The repurchase of shares will occur at the discretion of the Company.

16


Review by Independent Registered Public Accounting Firm

Ernst & Young LLP, our independent registered public accounting firm, has performed a limited review of the Consolidated Financial Statements for the three and six month periods ended July 30, 2005 and July 31, 2004, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

American Eagle Outfitters, Inc.

 

We have reviewed the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of July 30, 2005 and July 31, 2004 and the related consolidated statements of operations and retained earnings and cash flows for the three and six-month periods ended July 30, 2005 and July 31, 2004. These financial statements are the responsibility of the Company's management. 

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 29, 2005, 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 April 8, 2005 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 29, 2005, 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
August 15, 2005

17


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations are based upon the Company's Consolidated Financial Statements and should be read in conjunction with these statements and notes thereto.

Key Performance Indicators

 

Management of the Company evaluates the following items, which are considered key performance indicators, in assessing the Company's performance:

 

Comparable store sales - Comparable store sales provide a measure of sales growth for stores open at least one year. A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to 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.

 

Management considers comparable store sales to be an important indicator of the Company's current performance. Comparable store sales results are important in achieving leveraging of our costs, including store payroll, store supplies, rent, etc. Positive comparable store sales contribute to greater leveraging of costs while negative comparable store sales contribute to deleveraging of costs. Comparable store sales also have a direct impact on the Company's total net sales, cash and working capital.

 

Gross profit - Gross profit measures whether the Company is appropriately optimizing the price of its merchandise. 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, promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company's use of markdowns could have an adverse effect on the Company's gross profit and results of operations.

 

Operating income - Management views operating income as a key indicator of the Company's success. The key drivers of operating income are comparable store sales, gross profit and the Company's ability to control operating costs.

 

Store productivity - Store productivity, including sales per square foot, 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 Management in assessing the operational performance of the Company.

 

Inventory turnover - 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 - Management evaluates cash flow from operations, investing and financing in determining the sufficiency of the Company's cash position. Cash flow from operations has historically been sufficient to cover the Company's uses of cash. Management believes that cash flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

Results of Operations

Overview

We achieved our sixth consecutive quarter of record sales and earnings during the three months ended July 30, 2005 (the "second quarter"). Our product assortments were well received by our target customers and we experienced improvements in our store traffic patterns. Strong top line sales growth and improved merchandise margins were driven by an increase in full-price selling as well as higher units sold per average store and transactions per average store. Also, we continued to reduce markdowns, which led to improved profitability during the quarter.

18


Net sales for the second quarter increased 29.8% to $513.3 million from $395.4 million and our comparable store sales increased 21.1%. Our gross profit margin increased by 320 basis points to a record second quarter rate of 44.4% this year from 41.2% last year, led by the reduction of rent expense and merchandise markdowns as a percent to net sales. We also achieved an improved markon within cost of sales. Selling, general and administrative expenses as a rate to net sales were flat for the second quarter, as compared to the prior period, at 24.0%. We achieved a record 16.8% operating margin for the second quarter. The second quarter effective tax rate decreased to approximately 36% from 39% for the corresponding period last year, reflecting state tax credits received during the current period. Second quarter net income increased 98.3% to $58.0 million, or 11.3% as a percent to net sales, compared to net income of $29.3 million, or 7.4% as a percent to net sales, for the corresponding period last year.

The following table shows the percentage relationship to net sales of the listed line items included in the Company's Consolidated Statements of Operations.

Three Months Ended

Six Months Ended

July 30,
2005

July 31
2004

(Restated)

July 30,
2005

July 31
2004

(Restated)

Net sales

  100.0%

100.0%

  100.0%

100.0%

Cost of sales, including certain buying, occupancy and warehousing expenses 55.6 58.8 53.5 57.2
Gross profit 44.4 41.2 46.5 42.8
Selling, general and administrative expenses 24.0 24.0 24.8 25.4
Depreciation and amortization expense   3.6  4.3   3.8   4.5
Operating income 16.8 12.9 17.9 12.9
Other income, net   0.8  0.1   0.8   0.2
Income before income taxes 17.6 13.0 18.7 13.1
Provision for income taxes   6.3   5.0   7.0   5.1
Income from continuing operations, net of tax 11.3   8.0 11.7   8.0
Income (loss) from discontinued operations, net of tax   0.0   (0.6)  0.0   (0.5)

Net income

   11.3%     7.4%    11.7%      7.5%

Store data for the six months ended July 30, 2005 and July 31, 2004

Six  Months Ended

 

July 30, 
2005

July 31, 
2004

Number of stores:

     

Beginning of period

 

846

805

Opened

 

  16

 25

Closed

    (8)

   (5)

End of period

854

825

       
Total gross square feet at end of period

4,631,461

4,390,790

As a result of the Bluenotes' disposition during Fiscal 2004, the Company's operations are now conducted in one reportable segment. Prior to the disposition, Bluenotes was presented as a separate reportable segment. The American Eagle segment includes the Company's 854 U.S. and Canadian retail stores and the Company's e-commerce operation, ae.com.

19


Restatement of Prior Financial Information  

On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles ("GAAP"). In light of this letter, the Company's management initiated a review of its lease-related accounting and determined that its historical method of accounting for rent holidays and tenant allowances, as more fully described below, was not in accordance with GAAP. As a result, the Company restated its Consolidated Financial Statements for the year ended January 31, 2004 in its 2004 Annual Report on Form 10-K. The Company also restated its quarterly financial information for Fiscal 2004, as described in Note 16 of the Consolidated Financial Statements included in its 2004 Annual Report on Form 10-K. The Company did not amend its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the restatement. Accordingly, the financial statements and related financial information contained in such reports should no longer be relied upon. All referenced amounts for prior quarterly periods in this Quarterly Report on Form 10-Q are presented on a restated basis.

Historically, the Company had recognized straight line rent expense for leases beginning on the store opening date. This had the effect of excluding the build-out period of its stores from the calculation of the period over which it expenses rent and recognizes construction allowances. In accordance with Financial Accounting Standards Board Technical Bulletin No. 85-3, Accounting for Operating Leases with Scheduled Rent Increases, the Company changed this practice to include the build-out period in the calculations of rent expense and construction allowance amortization.

Additionally, in accordance with Financial Accounting Standards Board Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases, the Company changed its classification of construction allowances on its Consolidated Financial Statements to record them as deferred credits, which are amortized as a reduction to rent expense. Furthermore, construction allowances are now presented within operating activities on its Consolidated Statements of Cash Flows. Historically, construction allowances had been classified on the Company's Consolidated Balance Sheets as a reduction of property and equipment and the related amortization had been classified as a reduction to depreciation and amortization expense (over the lesser of the useful life or the life of the lease) on the Consolidated Statements of Operations. The Company's Consolidated Statements of Cash flows had historically reflected construction allowances as a reduction of capital expenditures within investing activities.

Comparison of the three months ended July 30, 2005 to the three months ended July 31, 2004

Net Sales

Net sales increased 29.8% to $513.3 million from $395.4 million. The sales increase was due to a 21.1% comparable store sales increase as well as a 5.5% increase in gross square footage. The gross square footage increase consisted primarily of the net addition of 29 stores. The comparable store sales increase was driven by strong increases in the number of transactions per average store and the number of units sold per average store, which both increased in the mid-teens. Additionally, we achieved a higher average unit retail price, resulting primarily from fewer markdowns. Comparable store sales percentages increased in the low-twenties in both the men's and women's businesses over last year.  

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

Gross Profit

Gross profit as a percent to net sales increased by 320 basis points to 44.4% from 41.2%.  The percentage increase was primarily attributed to an improvement in merchandise margins and a reduction of buying, occupancy and warehousing costs as a percent to net sales. Merchandise margins increased for the period due primarily to lower markdowns as well as an improved markon. Buying, occupancy and warehousing costs declined as a percent to net sales due primarily to an improvement in rent expense as a percent to net sales.

20


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

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a rate to net sales were flat for the second quarter this year as compared to the prior period, at 24.0%. During the quarter, our incentive compensation and benefits improved as a rate to net sales. These improvements were offset by development costs for our new brand concept as well as an increase in store payroll as a percent to net sales.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales decreased to 3.6% from 4.3% due primarily to the comparable store sales increase.

Other Income, Net

Other income, net increased to $4.4 million from $0.5 million due primarily to increased investment income resulting from higher cash and investment balances this year compared to last year as well as improved investment rates.  The improvement in investment returns is partially attributable to an increase in long-term investments resulting from a change in the Company's investment policy.

Provision for Income Taxes

The effective tax rate decreased to approximately 36% from 39% last year, reflecting state tax credits received during the current period.

Net Income

Net income increased 98.3% to $58.0 million, or 11.3% as a percent to net sales, from $29.3 million, or 7.4% as a percent to net sales last year. Net income per diluted common share increased to $0.37 from $0.20 in the prior year (which included a $0.02 loss from discontinued operations related to Bluenotes). The increase in net income was attributable to the factors noted above.     

Comparison of the six months ended July 30, 2005 to the six months ended July 31, 2004

Net Sales

Net sales increased 32.9% to $967.3 million from $727.6 million. The sales increase was due to a 23.8% comparable store sales increase as well as a 5.5% increase in gross square footage. The gross square footage increase consisted primarily of the net addition of 29 stores. The comparable store sales increase was driven by strong increases in the number of transactions per average store, which increased in the high-teens and the number of units sold per average store, which increased in the mid-teens. Additionally, we achieved a higher average unit retail price, resulting primarily from fewer markdowns. Comparable store sales percentages increased in the mid-twenties in both the men's and women's businesses over last year.  

21


Gross Profit

Gross profit as a percent to net sales increased by 370 basis points to 46.5% from 42.8%. The percentage increase was primarily attributed to an improvement in merchandise margins and a reduction of buying, occupancy and warehousing costs as a percent to net sales. Merchandise margins increased for the period due primarily to lower markdowns as well as an improved markon. Buying, occupancy and warehousing costs declined as a percent to net sales due primarily to an improvement in rent expense as a percent to net sales.  

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percent to net sales decreased to 24.8% from 25.4% due to our strong comparable store sales growth. During the period, incentive compensation, direct compensation and leasing costs improved as a rate to net sales. These improvements were partially offset by development costs for our new brand concept.

Depreciation and Amortization Expense

Depreciation and amortization expense as a percent to net sales decreased to 3.8% from 4.5% due primarily to the comparable store sales increase.

Other Income, Net

Other income, net increased to $7.4 million from $1.4 million due primarily to increased investment income resulting from higher cash and investment balances this year compared to last year as well as improved investment rates.  The improvement in investment returns is partially attributable to an increase in long-term investments resulting from a change in the Company's investment policy.

Provision for Income Taxes

The effective tax rate decreased to approximately 37% from 39% last year, reflecting state tax credits received during the current period.

Net Income

Net income increased 108% to $113.3 million, or 11.7% as a percent to net sales, from $54.5 million, or 7.5% as a percent to net sales last year. Net income per diluted common share increased to $0.72 from $0.37 in the prior year (which included a $0.03 loss from discontinued operations related to Bluenotes). The increase in net income was attributable to the factors noted above.     

Liquidity and Capital Resources

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

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

 July 30, 2005

January 29, 2005

July 31, 2004

(Restated)

Working capital (in 000's) $710,467  $577,599 $394,576 
Current ratio       3.96            3.31          2.98  

 

22


Net cash provided by operating activities from continuing operations totaled $115.4 million for the six months ended July 30, 2005. The Company's major source of cash from operations was merchandise sales. Our primary outflows of cash for operations were for the purchase of inventory and the payment of operational costs. Additionally, during the six months ended July 30, 2005, the Company reduced its estimated income tax payments by $43.1 million due to accelerated tax deductions resulting from a change in the method for deducting stock option compensation expense.

Investing activities for the six months ended July 30, 2005 included $38.6 million for capital expenditures and $149.2 million for the net purchase of investments. Capital expenditures consisted primarily of $23.6 million related to investments in our stores, including 16 new and 19 remodeled stores in the United States and Canada. The remaining capital expenditures were primarily related to improvements at our distribution centers and information technology upgrades at our home office.

The Company invests primarily in tax-exempt municipal bonds, taxable agency bonds and corporate notes with an original maturity between three and twenty-four months and an expected rate of return of approximately a 4.0% taxable equivalent yield.  The Company places an emphasis on investing in tax-exempt and tax-advantaged asset classes and all investments must have a highly liquid secondary market.  During Fiscal 2004, the Company amended its investment policy to allow for investments with stated maturities of up to five years.  This represents a change from the Company's previous policy of allowing investments with maturities of up to two years. 

Cash provided by financing activities resulted primarily from $43.9 million in proceeds from stock option exercises during the period partially offset by $19.3 million used for the payment of dividends and $10.5 million used for the purchase of shares from certain employees for the payment of taxes in connection with the vesting of restricted stock.

The Company has a $78.6 million unsecured letter of credit facility for letters of credit and a $40.0 million unsecured demand line of credit (the "line") which can be used for letters of credit and/or direct borrowing, totaling $118.6 million (the "facility"). The interest rate is at the lender's prime lending rate (6.25% at July 30, 2005) or at LIBOR plus a negotiated margin rate.  No direct borrowings were required against the line for the current or prior periods.  At July 30, 2005, letters of credit in the amount of $89.1 million were outstanding on this facility, leaving a remaining available balance on the line of $29.5 million. The Company also has an uncommitted letter of credit facility for $75.0 million with a separate financial institution. At July 30, 2005, letters of credit in the amount of $41.1 million were outstanding on this facility, leaving a remaining available balance on the line of $33.9 million.

During the second quarter of Fiscal 2005, the Board of Directors (the "Board") voted to raise the Company's cash dividend to an annual rate of thirty cents per share from twenty cents per share. As a result, a quarterly dividend of $0.075 per share was paid on July 8, 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 7,500,000 shares of its stock. No repurchases were made during the six months ended July 30, 2005 or July 31, 2004 as part of this stock repurchase program. As of July 30, 2005, approximately 1,400,000 shares remain authorized for repurchase. On September 2, 2005, the Company's Board of Directors authorized the repurchase of an additional 2,100,000 million shares of the Company's common stock. The repurchase of shares will occur at the discretion of the Company.

We expect capital expenditures for Fiscal 2005 to be approximately $100 million, which will relate primarily to approximately 35 to 40 new stores in the United States and Canada and the remodeling of 45 to 50 stores in the United States. Remaining capital expenditures will relate to new fixtures and enhancements to existing stores, information technology upgrades, distribution center improvements and the construction of a new data center.

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

23


Recent Financial Accounting Standards Board Pronouncements

SFAS No. 154, Accounting Changes and Error Corrections

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior periods' financial statements for voluntary changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions and makes a distinction between retrospective application of an accounting principle and the restatement of financial statements to reflect the correction of an error. Additionally, SFAS No. 154 requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of SFAS No. 154 will have a material impact on its Consolidated Financial Statements.

FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004

In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2").  FSP No. 109-2 allows additional time for companies to determine how the American Jobs Creation Act of 2004 (the "Act") affects a company's accounting for the deferred tax liabilities on un-remitted foreign earnings. The Act provides for a special one-time deduction of 85% of certain foreign earnings that are repatriated and which meet certain requirements. At this time, the Company has not established a provision for income taxes on unremitted earnings of the Canadian subsidiaries as it is the Company's intention to permanently invest these earnings in the Canadian Operations. The Company is currently evaluating the opportunity to take this deduction for the tax year ending July 29, 2006. Unremitted Canadian earnings that are considered reasonably possible for repatriation range from zero to $52 million. Repatriation of these earnings would require the Company to pay income taxes in the range of zero to $2.7 million. Additional unremitted Canadian earnings generated before the end of the tax year ending July 29, 2006 may also be repatriated.

SFAS No. 123 (revised 2004), Share-Based Payment

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), a revision of SFAS No. 123. SFAS No. 123(R) requires that companies recognize all share-based payments to employees, including grants of employee stock options, in the financial statements. The recognized cost will be based on the fair value of the equity or liability instruments issued. Pro forma disclosure of this cost will no longer be an alternative under SFAS No. 123(R).

 

In April 2005, the SEC adopted a rule that amended the effective dates of SFAS No. 123(R). Under this guidance SFAS No. 123(R) is now effective for public companies at the beginning of the first fiscal year that begins after June 15, 2005. Transition methods available to public companies include either the modified prospective or modified retrospective adoption. The modified prospective transition method requires that compensation cost be recognized beginning on the effective date, or date of adoption if earlier, for all share-based payments granted after the date of adoption and for all unvested awards existing on the date of adoption. The modified retrospective transition method, which includes the requirements of the modified prospective transition method, additionally requires the restatement of prior period financial information based on amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. The Company is currently in the process of determining the transition method that it will use to adopt the new standard, which will be adopted no later than the beginning of Fiscal 2006 as required.

24


The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using the intrinsic value method. As a result of using this method, the Company generally recognizes no compensation cost for employee stock options. The adoption of SFAS No. 123(R) and the use of the fair value method will have an impact on our results of operations. The impact of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact would have approximated the amounts in our pro forma disclosure within the Stock Option Plan disclosure on page 13 of this Form 10-Q. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in the periods after adoption. We cannot estimate what those amounts will be in the future because they are dependent on, among other things, when employees exercise stock options.

Historically, for pro forma reporting purposes the Company has followed the nominal vesting period approach for stock-based compensation awards with retirement eligibility provisions. Under this approach, the Company recognizes compensation expense over the vesting period of the award. If an employee retires before the end of the vesting period, any remaining unrecognized compensation cost is recognized at the date of retirement. SFAS No. 123(R) requires recognition of compensation cost under a non-substantive vesting period approach. This approach requires recognition of compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant. Refer to the Stock Option Plan disclosure on page 13 of this Form 10-Q for additional discussion of the non-substantive vesting period approach.

Staff Accounting Bulletin No. 107, Share-Based Payment

 

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment ("SAB No. 107"). SAB No. 107 provides guidance regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations, including guidance related to valuation methods; the classification of compensation expense; non-GAAP financial measures; the accounting for income tax effects of share-based payment arrangements; disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS No. 123(R); and modifications of options prior to the adoption of SFAS No. 123(R). The Company is currently assessing the guidance in SAB No. 107 as part of its evaluation of the adoption of SFAS No. 123(R).

Critical Accounting Policies

The Company's critical accounting policies are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to the Company's Consolidated Financial Statements for the year ended January 29, 2005 contained in the Company's Fiscal 2004 Annual Report on Form 10-K.  Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to the Company's Consolidated Financial Statements for the period ended July 30, 2005.  The application of the Company's critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements.  Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

Income Taxes

As of July 30, 2005, we had deferred tax assets of $2.3 million associated with Canadian tax loss carryforwards, which expire in 2010 and 2011. We anticipate that future taxable income in Canada will be sufficient to utilize the full amount of the deferred tax assets. Assuming a 36% effective tax rate, we will need to recognize pretax net income of approximately $6.4 million in future periods to recover this deferred tax amount.

 

Income tax accruals of $6.6 million and $7.6 million were recorded at July 30, 2005 and July 31, 2004, respectively. As of July 30, 2005, the Company had recorded tax reserves of approximately $13.9 million.

 

For the three and six months ended July 30, 2005, the effective tax rate used for the provision of income tax approximated 36% and 37%, respectively. For the three and six months ended  July 31, 2004, the effective tax rate used for the provision of income tax approximated 39%.  The lower effective tax rates during the current period are due primarily to state tax credits received during the three months ended July 30, 2005.

25


Impact of Inflation/Deflation

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

Safe Harbor Statement, Seasonality and Risk Factors

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

  • the planned opening of approximately 35 to 40 American Eagle stores in the United States and Canada during Fiscal 2005;

  • the selection of approximately 45 to 50 stores in the United States for remodeling during Fiscal 2005;

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

  • the expected payment of a dividend in future periods.

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

Our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner

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

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

Our ability to continue the Company's current level of sales and earnings growth

During the past several quarters, the Company realized substantial growth in both sales and earnings. A number of factors have historically affected, and will continue to affect, the Company's rate of growth and performance. These factors include, among other things, customer trends and preferences, competition, economic conditions and new store openings. There can be no assurance that the Company will be able to continue the rates of growth or performance that it has been recently experiencing. Additionally, any decline in the Company's future growth or performance could have a material adverse effect on the market price of the Company's common stock.

The effect of competitive pressures from other retailers and other business factors

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

26


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

Our ability to grow through new store openings and existing store remodels and expansions

The Company's continued growth and success will depend in part on its ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2005, the Company plans to open approximately 35 to 40 new American Eagle stores in the U.S. and Canada. Additionally, the Company plans to remodel or expand approximately 45 to 50 existing stores during Fiscal 2005. Accomplishing the Company's new and existing store expansion goals will depend upon a number of  factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations and the expansion of the Company's buying and inventory capabilities. There can be no assurance that the Company will be able to achieve its store expansion goals, manage its growth effectively, successfully integrate the planned new stores into the Company's operations or operate its new and remodeled stores profitably.

Our ability to grow through the internal development of a new brand

During Fiscal 2004, the Company announced that it began development of a new brand concept. The ability to succeed in this new concept requires significant capital expenditures and management attention. Additionally, any new concept is subject to certain risks including customer acceptance, competition, product differentiation and the ability to attract and retain qualified personnel, including management and designers. There can be no assurance that the Company will be able to develop a new concept that will grow or become profitable. If we are unable to succeed in developing a profitable new brand, this could adversely impact the Company's continued growth and results of operations.

Our international merchandise sourcing strategy

A majority of the Company's merchandise is purchased from foreign suppliers. Although we purchase a significant portion of our merchandise from a single foreign vendor, we do not maintain any exclusive commitments to purchase from any vendor. Since we rely on a small number of foreign sources for a significant portion of our purchases, any event causing the disruption of imports including the insolvency of a significant supplier or a significant labor dispute could have an adverse effect on our operations. Other events which could also cause a disruption of imports include the imposition of additional trade law provisions or import restrictions, such as increased duties, tariffs, anti-dumping provisions, increased Custom's enforcement actions, or political or economic disruptions.

We have a Vendor Code of Conduct that provides guidelines for all of our vendors regarding working conditions, employment practices and compliance with local laws.  A copy of the Vendor Code of Conduct is posted on our website, ae.com.  We have a factory compliance program to audit for compliance with the Code of Conduct.  However, there can be no assurance that our factory compliance program will be effective in discovering violations.  Publicity regarding violation of our Vendor Code of Conduct or other social responsibility standards by any of our vendor factories could adversely affect our sales and financial performance.

Since the time of the attack on the World Trade Centers in 2001, the Company believes that there has been an increased risk of terrorist activity on a global basis. Such activity might take the form of a physical act that impedes the flow of imported goods or the insertion of a harmful or injurious agent to an imported shipment. The Company has instituted policies and procedures designed to reduce the chance or impact of such actions including, but not limited to, a significant increase in the number of factory audits performed; the revision of our factory audit protocol to include all critical security issues; the review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and the cancellation of agreements with entities who fail to meet our security requirements. In addition, the Company has become a certified member of the Customs - Trade Partnership Against Terrorism program, a voluntary program in which an importer agrees to work with Customs to strengthen overall supply chain security. There can be no assurance that terrorist activity can be prevented and we cannot predict the likelihood of any such activities or the extent of their adverse impact on the Company's operations.

27


As a member of the World Trade Organization ("WTO"), the U.S. agreed to a world wide phase out of textile quotas on January 1, 2005, resulting in the removal of country specific restrictions on the quantity of goods being imported into the U.S. Notwithstanding these general phase outs, under the terms of the People's Republic of China's accession agreement to the WTO, the U.S. was empowered to impose "Temporary Safeguard" quotas on certain categories of textile merchandise manufactured in China if there was an affirmative determination by government agencies that imports of such products were disruptive to the U.S. market. During the second quarter of Fiscal 2005, the U.S. Government's Committee on the Implementation of Tariff Agreements ("CITA") invoked safeguards on several categories of textiles being imported from China. Representatives from CITA and the Chinese government are currently negotiating the re-establishment of quota limits on certain categories of textiles; however, the outcome of such negotiations cannot be determined at this time. In the event that these negotiations do not lead to an agreement, the Company believes that additional safeguard quotas will be invoked during the remainder of Fiscal 2005 and that further steps may be taken, such as the application for imposition of anti-dumping or countervailing duties, to impede the importation of textile goods from China. Any of the foregoing actions could have a significant impact on worldwide sourcing patterns in the future; however, the likelihood of such events, the timing and extent of their impact, if any, and any adverse effect on the Company's purchasing patterns and costs, cannot be determined at this time.

Seasonality

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2004, the third and fourth fiscal quarters accounted for approximately 61% of our sales and approximately 74% of our income from continuing operations. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.

The effect of expensing employee stock option grants

In December 2004, the FASB issued SFAS No. 123(R), a revision of SFAS No. 123. Under SFAS No. 123(R), all forms of share-based payments to employees, including grants of employee stock options, are treated the same as other forms of compensation by recognizing the related cost in the Statement of Operations.

Currently, the Company accounts for its stock-based compensation plans under APB No. 25 and provides the related pro forma information regarding net income and earnings per share, as required by SFAS No. 123, as amended by SFAS No. 148, in Note 2 of the Consolidated Financial Statements. The Company will adopt SFAS No. 123(R) no later than its first quarter of Fiscal 2006, beginning January 29, 2006, as required. The Company is currently in the process of determining the transition method that it will use to adopt the new standard. When we implement SFAS No. 123(R), the requirement to recognize the cost of share-based payments in our Consolidated Statement of Operations will have an impact on our results of operations.

Our reliance on key personnel

The Company's success depends to a significant extent upon the continued services of its key personnel, including senior management, as well as its ability to attract and retain qualified key personnel and skilled employees in the future. The Company's operations could be adversely affected if, for any reason, one or more key executive officers ceased to be active in the Company's management.

Our ability to successfully upgrade and maintain our information systems

The Company relies upon its various information systems to manage its operations and regularly makes investments to upgrade, enhance or replace these systems. Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with the Company's current systems, or any other disruptions affecting the Company's information systems, could have a material adverse impact on the Company's business.

28


Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002

In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in future periods, the Company must continuously document, test, monitor and enhance its internal control over financial reporting. There can be no assurance that the periodic evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies and/or material weaknesses or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting. Failure to maintain the effectiveness of our internal control over financial reporting or to comply with the requirements of this Act could have a material adverse effect on our reputation, financial condition and market price of our common stock.

Other risk factors

Additionally, other factors could adversely affect our financial performance, including factors such as: our ability to successfully acquire and integrate other businesses; any interruption of our key business systems; any disaster or casualty resulting in the interruption of service from our distribution centers or in a large number of our stores; any interruption of key services provided by third party vendors; changes in weather patterns; the effects of changes in current exchange rates and interest rates; and international and domestic acts of terror.

The impact of all of the previously discussed factors, some of which are beyond our control, may cause our actual results to differ materially from expected results in these statements and other forward-looking statements we may make from time-to-time.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There were no material changes in the Company's exposure to market risk from January 29, 2005.  Our market risk profile as of January 29, 2005 is disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company's Fiscal 2004 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES.
 

Disclosure Controls and Procedures 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's 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 SEC's rules and forms, and that such information is accumulated and communicated to the management of American Eagle Outfitters, Inc. (the "Management"), including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.  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 July 30, 2005, an evaluation was performed under the supervision and with the participation of the Company's Management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures were effective 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 the Company's internal control over financial reporting that occurred during the three months ended July 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

29


PART II

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) The Company held its 2005 Annual Meeting of Stockholders on June 15, 2005. Holders of 139,447,712 shares of the Company's common stock were present in person or by proxy representing approximately 91% of the Company's 153,303,496 shares outstanding on the record date. 

(b) and (c) The following persons continue to serve as Class II directors: Robert R. McMaster, Gerald E. Wedren and Larry M. Wolf; and the following persons continue to serve as Class III directors: Jon P. Diamond, James V. O'Donnell and Janice E. Page. The following persons were elected as Class I members of the Board of Directors to serve a three year term until the annual meeting in 2008 or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated below.
 

Name

Shares For

 

Shares Abstain

       
Michael G. Jesselson   128,502,016       10,945,696        
Roger S. Markfield   135,979,502       3,468,210        
Jay L. Schottenstein      128,369,697         11,078,015        

The proposal to approve the Company's 2005 Stock Award and Incentive Plan passed. It received 101,369,242 shares for, 23,853,047 shares against and 79,395 shares abstain. 

(d) Not applicable

ITEM 6. EXHIBITS.

*

*

*

**

Exhibit 15          Acknowledgement of Independent Registered Public Accounting Firm

Exhibit 31.1       Certification by James V. O'Donnell pursuant to Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 31.2       Certification by Laura A. Weil pursuant to Rule 13a-14(a) or Rule 15d-14(a)

Exhibit 32.1       Certification of Chief 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   
* Filed with this report.
** Furnished with this report.

 

30


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 September 7, 2005

American Eagle Outfitters, Inc.
(Registrant)

/s/ Laura A. Weil                    

Laura A. Weil
Executive Vice President and Chief Financial Officer

 /s/ Dale E. Clifton                   

Dale E. Clifton
Vice President, Controller and Chief Accounting Officer

31


 

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki