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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended May 1, 2021

OR

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

Commission File Number: 1-33338

 

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

No. 13-2721761

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

77 Hot Metal Street, Pittsburgh, PA

 

15203-2329

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (412432-3300

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

AEO

New York Stock Exchange

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

  

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 167,716,802 Common Shares were outstanding at May 28, 2021.

 


 

AMERICAN EAGLE OUTFITTERS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Number

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Forward Looking Statements

 

3

 

Item 1.

 

 

Financial Statements

 

7

 

 

Consolidated Balance Sheets: May 1, 2021, January 30, 2021  and May 2, 2020

 

7

 

 

Consolidated Statements of Operations: 13 weeks ended May 1, 2021 and May 2, 2020

 

8

 

 

Consolidated Statements of Comprehensive Income: 13 weeks ended May 1, 2021 and May 2, 2020

 

9

 

 

Consolidated Statements of Stockholders’ Equity: 13 weeks ended May 1, 2021 and May 2, 2020

 

10

 

 

Consolidated Statements of Cash Flows: 13 weeks ended May 1, 2021 and May 2, 2020

 

11

 

 

Notes to Consolidated Financial Statements

 

12

Item 2.

 

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

 

29

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

PART II - OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.    

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 3.

 

Defaults Upon Senior Securities

 

N/A

Item 4.

 

Mine Safety Disclosures

 

N/A

Item 5.

 

Other Information

 

N/A

Item 6.

 

Exhibits

 

40

 

2


 

FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “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 (the “Exchange Act”), that are based on the views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “potential,” and similar expressions may identify forward-looking statements. Our forward-looking statements include, but are not limited to, statements about:

 

the planned opening of approximately 20 to 25 American Eagle stores and approximately 60 Aerie locations and over 30 OFFLINETM stores, which will be a mix of stand-alone and Aerie side-by-side, during Fiscal 2021 (as defined below);

the anticipated selection of approximately 35 to 45 American Eagle and Aerie stores in the U.S. and Canada for remodeling during Fiscal 2021;

the potential closure of approximately 60 to 80 American Eagle and five to 10 Aerie stores at the expiration of their lease term, primarily in North America, during Fiscal 2021;

the success of our core American Eagle and Aerie brands through our omni-channel and licensed outlets within North America and internationally;

the success of our business priorities and strategies;

the continued validity of our trademarks;

our performance during the year-end holiday selling season;

the accuracy of the estimates and assumptions we make pursuant to our critical accounting policies and estimates;

the payment of a dividend in future periods;

the possibility that future access to the debt markets may not be available, or available at terms or interest rates that are attractive;

the availability of sufficient cash flow to fund anticipated capital expenditures, future dividends, and working capital requirements;

the possibility that product costs are adversely affected by foreign trade issues (including import tariffs and other trade restrictions with China and other countries), currency exchange rate fluctuations, increasing prices for raw materials, supply chain issues, political instability, or other reasons;

the possibility that changes in global economic and financial conditions, and resulting impacts on consumer confidence and consumer spending, as well as other changes in consumer discretionary spending habits; and

the possibility that we may be required to take additional impairment or other restructuring charges.

Our forward-looking statements surrounding the novel strain of coronavirus (COVID-19) include, but are not limited to, statements about:

the ongoing impact of the COVID-19 pandemic on global economic conditions, our customers’ discretionary income, and freedom of movement;

the currently unknown duration of the COVID-19 pandemic, including a potential resurgence in the second quarter of Fiscal 2021 or beyond;

the impact of governmental regulations that have been, and may in the future be, imposed in response to the COVID-19 pandemic, including regulations that could adversely affect our business or cause us to cease our digital business

3


if we are required to close our distribution and fulfillment centers or are otherwise unable to acquire or deliver merchandise, or to close our recently reopened retail stores;

the deterioration in economic conditions in the U.S., which could have an impact on discretionary consumer spending;

the ability of our distribution centers to maintain adequate staffing to meet increased customer demand;

the possibility of temporary furloughs of store, field, and corporate associates surrounded by store closures;

the reduction of operating expenses; and

the uncertainties surrounding whether currently open stores will remain open.

 

4


 

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:

 

the risk associated with our inability to anticipate and respond to changing consumer preferences;

the risk associated with pricing pressure from existing and new competitors;

the risk of economic pressures and other business factors on discretionary consumer spending and changes in consumer preferences;

the risk that seasonality could cause sales to fluctuate and negatively impact our results of operations;

the risk that the COVID-19 global pandemic could have a material adverse effect on our business and results of operations, the nature and extent of which are highly uncertain and unpredictable;

the risk that our results could be adversely affected by natural disaster, public health crises (including, without limitation, the recent COVID-19 pandemic coronavirus outbreak), political crises, negative global climate patterns, or other catastrophic events;

the risk that impairment to goodwill, intangible assets, and other long-lived assets could adversely impact our profitability;

the risk that our inability to grow our digital channels and leverage omni-channel capabilities could impact our business, particularly if our stores are closed or our customers have restricted freedom of movement;

the risk that failure to define, launch, and communicate a brand relevant customer experience could have a negative impact;

the risk that our efforts to execute on our key business priorities could have a negative impact;

the risk that our efforts to expand internationally expose us to risks inherent in operating in new countries;

the risk that failure to protect our reputation could have a material adverse effect;

the risk that we are unable to implement and sustain adequate information technology systems;

the risk that measures intended to prevent the spread of COVID-19 may negatively impact our operations;

the risk that our inability to safeguard against security breaches with respect to our information technology systems could damage our reputation and adversely impact our profitability;

the risk that we may be exposed to costs associated with the loss of customer information;

the risk that we may fail to manage growth in our omni-channel operations and the resulting impact on our distribution and fulfillment networks may have an adverse effect on our results of operations;

the risk that our international merchandise sourcing strategy subjects us to risks that could impact our business and results of operations;

the risk that our product costs may be adversely affect by foreign trade issues, currency exchange rate fluctuations, increasing prices for raw materials, political instability, or other reasons;

the risks associated with our inability to achieve planned store performance, gain market share in the face of declining shopping center traffic or attract customers to our stores;

the risks associated with leasing substantial amount of space, including increases in occupancy costs and the need to generate significant cash flow to meet our lease obligations;

the risk that we rely on key personnel, the loss of whom could have a material adverse effect on our business;

the risk from the Company’s (as defined blow) amended and restated bylaws (“Bylaws”) provides, to the fullest extent permitted by law, that the Court of Chancery of the State of Delaware will be the exclusive forum for certain legal actions between the Company and its stockholders, which could increase costs to bring a claim, discourage claims,

5


or limit the ability of the Company’s stockholders to bring a claim in a judicial forum viewed by the stockholders as more favorable for disputes with the Company or the Company’s directors, officers or other employees;

the risk that we may be unable to protect our trademarks and other intellectual property rights;

the risks associated with a complex regulatory, compliance, and legal environment;

the risk that fluctuations in our tax obligations and effective tax rate could adversely affect us; and

the risk that the impact of various legal proceedings, lawsuits, disputes, and claims could have an adverse impact on our business, financial condition, and results of operation.

6


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

May 1,

 

 

January 30,

 

 

May 2,

 

(In thousands, except per share amounts)

 

2021

 

 

2021

 

 

2020

 

 

 

(Unaudited)

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

716,679

 

 

$

850,477

 

 

$

855,769

 

Short-term investments

 

 

75,000

 

 

 

 

 

 

29,956

 

Merchandise inventory

 

 

466,698

 

 

 

405,445

 

 

 

421,729

 

Accounts receivable, net

 

 

149,056

 

 

 

146,102

 

 

 

106,751

 

Prepaid expenses and other

 

 

88,347

 

 

 

120,619

 

 

 

144,733

 

Total current assets

 

 

1,495,780

 

 

 

1,522,643

 

 

 

1,558,938

 

Property and equipment, at cost, net of accumulated depreciation

 

 

627,967

 

 

 

623,808

 

 

 

667,258

 

Operating lease right-of-use assets

 

 

1,130,743

 

 

 

1,155,965

 

 

 

1,292,769

 

Intangible assets net, including goodwill

 

 

69,696

 

 

 

70,332

 

 

 

51,973

 

Non-current deferred income taxes

 

 

45,995

 

 

 

33,045

 

 

 

25,612

 

Other Assets

 

 

30,485

 

 

 

29,013

 

 

 

33,561

 

Total assets

 

$

3,400,666

 

 

$

3,434,806

 

 

$

3,630,111

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

231,932

 

 

$

255,912

 

 

$

177,124

 

Current portion of operating lease liabilities

 

 

297,561

 

 

 

328,624

 

 

 

328,366

 

Accrued compensation and payroll taxes

 

 

87,488

 

 

 

142,272

 

 

 

21,622

 

Other current liabilities and accrued expenses

 

 

56,498

 

 

 

55,343

 

 

 

61,451

 

Unredeemed gift cards and gift certificates

 

 

50,754

 

 

 

62,181

 

 

 

48,503

 

Accrued income and other taxes

 

 

20,250

 

 

 

14,150

 

 

 

2,405

 

Dividends payable

 

 

-

 

 

 

-

 

 

 

22,756

 

Total current liabilities

 

 

744,483

 

 

 

858,482

 

 

 

662,227

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-current operating lease liabilities

 

 

1,126,165

 

 

 

1,148,742

 

 

 

1,303,296

 

Long-term debt, net

 

 

329,718

 

 

 

325,290

 

 

 

642,972

 

Other non-current liabilities

 

 

24,737

 

 

 

15,627

 

 

 

24,633

 

Total non-current liabilities

 

 

1,480,620

 

 

 

1,489,659

 

 

 

1,970,901

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

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

   issued and outstanding

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 600,000 shares authorized;

   249,566 shares issued; 167,671, 166,335, and 165,500 shares

   outstanding, respectively

 

 

2,496

 

 

 

2,496

 

 

 

2,496

 

Contributed capital

 

 

648,434

 

 

 

663,718

 

 

 

646,350

 

Accumulated other comprehensive loss

 

 

(37,810

)

 

 

(40,748

)

 

 

(55,050

)

Retained earnings

 

 

1,951,496

 

 

 

1,868,613

 

 

 

1,826,413

 

Treasury stock, 81,895, 83,231, and 84,066 shares, respectively

 

 

(1,389,053

)

 

 

(1,407,414

)

 

 

(1,423,226

)

Total stockholders’ equity

 

 

1,175,563

 

 

 

1,086,665

 

 

 

996,983

 

Total liabilities and stockholders’ equity

 

$

3,400,666

 

 

$

3,434,806

 

 

$

3,630,111

 

 

Refer to Notes to Consolidated Financial Statements

7


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 1,

 

 

May 2,

 

(In thousands, except per share amounts)

 

2021

 

 

2020

 

Total net revenue

 

$

1,034,614

 

 

$

551,692

 

Cost of sales, including certain buying, occupancy and

   warehousing expenses

 

 

598,424

 

 

 

523,386

 

Gross profit

 

 

436,190

 

 

 

28,306

 

Selling, general and administrative expenses

 

 

264,492

 

 

 

188,197

 

Impairment and restructuring charges

 

 

 

 

 

155,619

 

Depreciation and amortization expense

 

 

38,271

 

 

 

42,730

 

Operating income (loss)

 

 

133,427

 

 

 

(358,240

)

Interest expense, net

 

 

8,506

 

 

 

146

 

Other (income) expense, net

 

 

(1,860

)

 

 

2,983

 

Income (loss) before income taxes

 

 

126,781

 

 

 

(361,369

)

Provision (benefit) for income taxes

 

 

31,318

 

 

 

(104,207

)

Net income (loss)

 

 

95,463

 

 

 

(257,162

)

 

 

 

 

 

 

 

 

 

Net income (loss) per basic share

 

$

0.57

 

 

$

(1.54

)

Net income (loss) per diluted share

 

$

0.46

 

 

$

(1.54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

167,257

 

 

 

166,781

 

Weighted average common shares outstanding - diluted

 

 

206,562

 

 

 

166,781

 

 

 

 

 

 

 

 

 

 

 

Refer to Notes to Consolidated Financial Statements

8


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 1,

 

 

May 2,

 

(In thousands)

 

2021

 

 

2020

 

Net income (loss)

 

$

95,463

 

 

$

(257,162

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

2,938

 

 

 

(21,882

)

Other comprehensive income (loss):

 

 

2,938

 

 

 

(21,882

)

Comprehensive income (loss)

 

$

98,401

 

 

$

(279,044

)

 

Refer to Notes to Consolidated Financial Statements

9


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(In thousands, except per share amounts)

 

Shares

Outstanding

 

 

Common

Stock

 

 

Contributed

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Accumulated

Other

Comprehensive

(Loss)

 

 

Stockholders'

Equity

 

Balance at February 1, 2020

 

 

166,993

 

 

$

2,496

 

 

$

577,856

 

 

$

2,108,292

 

 

$

(1,407,623

)

 

$

(33,168

)

 

$

1,247,853

 

Stock awards

 

 

 

 

 

 

 

 

3,919

 

 

 

 

 

 

 

 

 

 

 

 

3,919

 

Repurchase of common stock as part of

   publicly announced programs

 

 

(1,720

)

 

 

 

 

 

 

 

 

 

 

 

(20,000

)

 

 

 

 

 

(20,000

)

Repurchase of common stock from employees

 

 

(115

)

 

 

 

 

 

 

 

 

 

 

 

(1,430

)

 

 

 

 

 

(1,430

)

Convertible Notes- Equity portion, net of tax

 

 

 

 

 

 

 

 

68,330

 

 

 

 

 

 

-

 

 

 

 

 

 

68,330

 

Reissuance of treasury stock

 

 

342

 

 

 

 

 

 

(4,165

)

 

 

(1,961

)

 

 

5,827

 

 

 

 

 

 

(299

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(257,162

)

 

 

 

 

 

 

 

 

(257,162

)

Other comprehensive (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,882

)

 

 

(21,882

)

Cash dividends declared and dividend

   equivalents ($0.1375 per share)

 

 

 

 

 

 

 

 

410

 

 

 

(22,756

)

 

 

 

 

 

 

 

 

(22,346

)

Balance at May 2, 2020

 

 

165,500

 

 

$

2,496

 

 

$

646,350

 

 

$

1,826,413

 

 

$

(1,423,226

)

 

$

(55,050

)

 

$

996,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 30, 2021

 

 

166,335

 

 

$

2,496

 

 

$

663,718

 

 

$

1,868,613

 

 

$

(1,407,414

)

 

$

(40,748

)

 

$

1,086,665

 

Stock awards

 

 

 

 

 

 

 

 

12,553

 

 

 

 

 

 

 

 

 

 

 

 

12,553

 

Repurchase of common stock from employees

 

 

(396

)

 

 

 

 

 

 

 

 

 

 

 

(10,944

)

 

 

 

 

 

(10,944

)

Reissuance of treasury stock

 

 

1,732

 

 

 

 

 

 

(28,515

)

 

 

11,020

 

 

 

29,305

 

 

 

 

 

 

11,810

 

Net income

 

 

 

 

 

 

 

 

 

 

 

95,463

 

 

 

 

 

 

 

 

 

95,463

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,938

 

 

 

2,938

 

Cash dividends declared and dividend

   equivalents ($0.1375 per share)

 

 

 

 

 

 

 

 

678

 

 

 

(23,600

)

 

 

 

 

 

 

 

 

(22,922

)

Balance at May 1, 2021

 

 

167,671

 

 

$

2,496

 

 

$

648,434

 

 

$

1,951,496

 

 

$

(1,389,053

)

 

$

(37,810

)

 

$

1,175,563

 

 

Refer to Notes to Consolidated Financial Statements

10


AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

13 Weeks Ended

 

 

 

May 1,

 

 

May 2,

 

(In thousands)

 

2021

 

 

2020

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

95,463

 

 

$

(257,162

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

39,297

 

 

 

43,419

 

Share-based compensation

 

 

12,618

 

 

 

4,101

 

Deferred income taxes

 

 

(16,434

)

 

 

(791

)

Loss on impairment of assets

 

 

 

 

 

153,617

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Merchandise inventory

 

 

(59,770

)

 

 

18,134

 

Operating lease assets

 

 

77,296

 

 

 

106,627

 

Operating lease liabilities

 

 

(106,319

)

 

 

(20,597

)

Other assets

 

 

24,657

 

 

 

(87,575

)

Accounts payable

 

 

(25,056

)

 

 

(109,482

)

Accrued compensation and payroll taxes

 

 

(54,810

)

 

 

(21,598

)

Accrued and other liabilities

 

 

13,485

 

 

 

(38,587

)

Net cash provided by (used for) operating activities

 

 

427

 

 

 

(209,894

)

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(36,806

)

 

 

(33,910

)

Purchase of available-for-sale investments

 

 

(75,000

)

 

 

(14,956

)

Sale of available-for-sale investments

 

 

 

 

 

40,000

 

Other investing activities

 

 

(381

)

 

 

(191

)

Net cash (used for) investing activities

 

 

(112,187

)

 

 

(9,057

)

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock as part of publicly announced programs

 

 

 

 

 

(20,000

)

Repurchase of common stock from employees

 

 

(10,944

)

 

 

(1,430

)

Proceeds from convertible senior notes, net

 

 

 

 

 

406,108

 

Proceeds from revolving credit facilities

 

 

 

 

 

330,000

 

Net proceeds from stock options exercised

 

 

12,086

 

 

 

 

Cash dividends paid

 

 

(22,922

)

 

 

 

Other financing activities

 

 

(345

)

 

 

(107

)

Net cash (used for) provided by financing activities

 

 

(22,125

)

 

 

714,571

 

Effect of exchange rates changes on cash

 

 

87

 

 

 

(1,781

)

Net change in cash and cash equivalents

 

 

(133,798

)

 

 

493,839

 

Cash and cash equivalents - beginning of period

 

 

850,477

 

 

 

361,930

 

Cash and cash equivalents - end of period

 

$

716,679

 

 

$

855,769

 

 

Refer to Notes to Consolidated Financial Statements

 

11


 

AMERICAN EAGLE OUTFITTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company, “we”, and “our”) at May 1, 2021 and May 2, 2020 and for the 13 week periods ended May 1, 2021 and May 2, 2020 have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2021 filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2021 (the “Fiscal 2020 Form 10-K”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

The Company is a leading global specialty retailer, operates under the American Eagle® (“AE or American Eagle”) and Aerie® (“Aerie”) brands  The Aerie brand includes OFFLINETM by Aerie, a new sub-brand offering a complete collection of active wear and accessories built for REAL movement and REAL comfort launched in Fiscal 2020 (as defined below).  We operate and license over 1,300 retail stores worldwide and are online at www.ae.com and www.aerie.com in the U.S. and internationally.

We also operate Todd Snyder New York, a premium menswear brand, and Unsubscribed (a new brand with a focus on consciously-made, slow fashion launched in Fiscal 2020).

We offer a broad assortment of high quality, on-trend apparel, accessories, and personal care products at affordable prices for men and women under the AE brand, and intimates, apparel, active wear, and swim collections under the Aerie brand. We sell directly to consumers through our retail channel, which includes our stores and concession-based shop-within-shops. We operate stores in the U.S., Canada, Mexico, and Hong Kong. We also have license agreements with third parties to operate American Eagle and Aerie stores throughout Asia, Europe, India, Latin America, and the Middle East.

  

Founded in 1977, the Company is a leading multi-brand specialty retailer that operates more than 1,000 retail stores in the U.S. and internationally, online at www.ae.com and www.aerie.com, and www.toddsnyder.com (which e-commerce operations we refer to as “AEO Direct”) and more than 200 international store locations managed by third-party operators.

Historically, our operations have been seasonal, with a large portion of total net revenue and operating income occurring in the third and fourth fiscal quarters, reflecting increased demand during the back-to-school and year-end holiday selling seasons, respectively. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the acceptability of seasonal merchandise offerings, the timing and level of markdowns, store closings and remodels, competitive factors, weather and general economic and political conditions.  During Fiscal 2020, historic seasonal trends were impacted by consumer behavior due to the novel coronavirus global pandemic (“COVID-19”).

COVID-19 Pandemic

Impacts related to the COVID-19 pandemic have been significantly negative for the retail industry, our Company, our customers, and our associates. We have experienced significant disruptions to our business due to the COVID-19 pandemic and related suggested and mandated social distancing and shelter-in-place orders, which initially resulted in the temporary closure of all of our stores and furlough of our associates. During Fiscal 2021 and Fiscal 2020, while stores were impacted by negative mall traffic, we focused on our omni-channel capabilities. As of the 13 weeks ended May 1, 2021, the vast majority of our stores had re-opened, although we continue to see residual impacts on foot traffic and in-store revenues.

The impacts of the COVID-19 pandemic on our business are discussed in further detail within these notes to the Consolidated Financial Statements and within Item 2 of this Quarterly Report on Form 10-Q, of which these notes form a part.

 

 

12


 

 

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.  At May 1, 2021, the Company operated in two reportable segments, American Eagle and Aerie.

Fiscal Year

Our fiscal year is a 52- or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2021” refers to the 52-week period that will end on January 29, 2022.  “Fiscal 2020” refers to the 52-week period ended January 30, 2021.  “Fiscal 2019” refers to the 52-week period ended February 1, 2020.

Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s 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, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements           

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU 2016-13”), Financial Instruments–Credit Losses (Topic 326) (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The Company adopted ASU 2016-13 on February 2, 2020.  The adoption did not have a material impact on the Company’s Consolidated Financial Statements.

 

In December 2019, the FASB amended Accounting Standards Codification ("ASC") 740, Income Taxes (issued under ASU- 2019-12, Simplifying the Accounting for Income Taxes). This amendment removes certain exceptions to the general principles of ASC 740, and clarifies and amends the existing guidance to improve consistent application. AEO adopted the guidance effective January 31, 2021. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.

 

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (“ASU 2020-06”), which simplifies accounting for convertible instruments. The new guidance eliminates two of the three models in ASC 470-20, Debt- Debt with Conversion and Other Options that require separating embedded conversion features from convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation. The guidance is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements, which may be material.

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, the Company translates assets and liabilities denominated in foreign currencies into United States dollars (“USD”) (the Company’s reporting currency) at the exchange rates prevailing at the balance sheet date. The Company translates revenues and expenses denominated in foreign currencies into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the consolidated results of operations, whereas related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income.

 

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized gain of $2.9 million is included in accumulated other comprehensive income for the period ended May 1, 2021, primarily related to the rise in the USD to Mexican peso and USD to Canadian dollar exchange rates.

13


Cash and Cash Equivalents and Short-Term Investments

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

Short-term investments classified as available-for-sale include certificates of deposit and commercial paper with a maturity greater than three months, but less than one year.

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

Receivables

The Company maintains an allowance for doubtful accounts for estimated losses from the failure of certain of our customers to make required payments for products or services delivered. The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical and expected future receivables and reserve trends, and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required. Historically, the Company’s reserves have approximated actual experience.

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company.

The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected.

The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Property and Equipment

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the asset’s estimated useful life. The useful lives of our major classes of assets are as follows:

 

Buildings

 

25 years

Leasehold improvements

 

Lesser of 10 years or the term of the lease

Fixtures and equipment

Information technology

 

Five years

Three - five years

 

As of May 1, 2021, the weighted average remaining useful life of our assets was approximately 7.1 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements, store fixtures, and operating lease right-of-use (“ROU”) assets associated with retail stores, which have been open for a period sufficient to reach maturity.  The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.  When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under impairment and restructuring charges.   

When the Company closes, remodels, or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets within depreciation and amortization expense.  Refer

14


to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment and to Note 13 to the Consolidated Financial Statements for additional information regarding impairment charges for the 13 weeks ended May 2, 2020.  

Intangible Assets, including Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate brand.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment at least annually or more frequently if an impairment indicator exists, by comparing the estimated fair value of each reporting unit to its carrying value. As a result of the Company’s annual goodwill impairment test as of January 30, 2021, the Company concluded that its goodwill was not impaired. No indicators of impairment were present during the 13 weeks ended May 1, 2021.

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

The Company evaluates definite-lived intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No definite-lived intangible asset impairment charges were recorded during the 13 weeks ended May 1, 2021 and May 2, 2020.

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

Gift Cards

Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance, and revenue is recognized when the gift card is redeemed for merchandise.  The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue.

The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended May 1, 2021 and May 2, 2020, the Company recorded approximately $2.5 million and $1.7 million, respectively, of revenue related to gift card breakage.   

Construction Allowances

As part of certain lease agreements for retail stores, the Company receives construction allowances from lessors, which are generally comprised of cash amounts. The Company records a receivable and an adjustment to the operating lease ROU asset at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized as part of the single lease cost over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the lessor.

Self-Insurance Liability

The Company uses a combination of insurance and self-insurance mechanisms for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped by stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Leases

The Company adopted ASC Topic 842, Leases (“ASC 842”), in Fiscal 2019.  The standard establishes a ROU model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months.  

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

15


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

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

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

When determining the present value of future payments for an operating lease that does not have a readily determinable implicit rate, the Company uses its incremental borrowing rate as of the date of initial possession of the leased asset.

Short-term lease payments are recognized on a straight-line basis over the lease term of 12 months or less.

 

16


 

No operating lease ROU asset impairment was recorded for the 13 weeks ended May 1, 2021. During the 13 weeks ended May 2, 2020, the Company recorded impairment of operating lease ROU assets of $84.1 million.  Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the impairment of these assets.

Leases Modifications and COVID-19

The FASB staff issued a Q&A document in April 2020 providing guidance on how to apply the lease modification guidance in ASC 842 to rent concessions arising from COVID-19, allowing companies to elect accounting for the concessions as if enforceable rights and obligations existed, regardless of whether they are explicitly stated in the lease contract.  Per the FASB staff Q&A guidance, entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (e.g., deferrals of lease payments, cash payments made to the lessee, reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee.

 

For concessions in the form of rent forgiveness, the Company invoked the accounting elections provided by the FASB staff; savings were recorded as a credit to variable rent in the period the amendments became fully executed.

 

For concessions in the form of deferred payments, the Company did not apply the FASB accounting elections; rent expense was recorded in accordance with ASC 842 and the unpaid amount remained accrued as part of the current operating lease liability.

 

All other forms of rent concessions followed our normal accounting policy for lease modifications, adhering to the guidance set forth in ASC 842.

Co-branded Credit Card

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

For further information on the Company’s loyalty program, refer to the Customer Loyalty caption below.

Customer Loyalty Program

In June 2020, the Company launched a highly-digitized loyalty program called Real Rewards by American Eagle and Aerie™ (the “Program”). This Program features both shared and unique benefits for loyalty members and credit card holders. Under the Program, members accumulate points based on purchase activity and earn rewards by reaching certain point thresholds. Members earn rewards in the form of discount savings certificates. Prior to this launch in June 2020, under our previous program, AEO Connected™, we also offered additional rewards for key items such as jeans and bras. Rewards earned are valid through the stated expiration date, which is 60 days from the issuance date of the reward. Rewards not redeemed during the 60-day redemption period are forfeited.  

Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”).  The portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire, using the relative stand-alone selling price method. Additionally, reward points earned using the co-branded credit card on non-AE or Aerie purchases are accounted for in accordance with ASC 606. As the points are earned, a current liability is recorded for the estimated cost of the reward, and the impact of adjustments is recorded in revenue.  

The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606.

Sales Return Reserve

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

17


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

Income Taxes

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

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

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

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

Revenue Recognition

The Company recognizes revenue pursuant to ASC 606. Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

Revenue is recorded net of estimated and actual sales returns and promotional price reductions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined using historical average return percentages.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company’s gift card program, refer to the Gift Cards caption above.

The Company recognizes royalty revenue generated from its license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee.  This revenue is recorded as a component of total net revenue when earned and collection is probable.

The Company defers a portion of the sales revenue attributed to loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606. Refer to the Customer Loyalty Program caption above for additional information. 

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Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses

Cost of sales consists of merchandise costs, including design, sourcing, importing, and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively, “merchandise costs”) and buying, occupancy and warehousing costs.

Design costs are related to the Company's Design Center operations and include compensation, travel and entertainment, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold.

Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses, and travel and entertainment for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers, and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, equipment leasing costs and services purchased.

Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing, and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.  Additionally, selling, general and administrative expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations, all of which are included in cost of sales.

Interest Expense, Net

Interest expense, net primarily consists of interest expense related to the Company’s senior convertible notes (the “Notes”) and borrowings under the revolving credit facility, as well as interest income from cash, cash equivalents, and short-term investments.

Other (Income) Expense, Net

Other (income) expense, net consists primarily of gains and losses resulting from foreign currency transactions.

Segment Information

We have two reportable segments: American Eagle and Aerie. For additional information regarding the Company’s segment and geographic information, refer to Note 12 to the Consolidated Financial Statements.   

 

 

3.  Cash and Cash Equivalents and Short-Term Investments

The following table summarizes the fair market values for the Company’s cash and short-term investments, which are recorded on the Consolidated Balance Sheets:

 

19


 

(In thousands)

 

May 1,

2021

 

 

January 30,

2021

 

 

May 2,

2020

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

466,014

 

 

$

524,970

 

 

$

149,205

 

Money market securities

 

 

 

 

 

 

 

 

350,054

 

Interest bearing deposits

 

 

225,665

 

 

 

275,507