AMERICAN EAGLE OUTFITTERS INC, 10-Q filed on 11/19/2010
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 30, 2010
Nov. 12, 2010
Aug. 01, 2009
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Document Type
10-Q 
 
 
Document Period End Date
2010-10-30 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
Q3 
 
 
Current Fiscal Year End Date
01/30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
2,583,043,775 
Entity Common Stock, Shares Outstanding
 
195,687,722 
 
Consolidated Balance Sheets (USD $)
In Thousands
3 Months Ended
Jan. 30, 2010
9 Months Ended
Oct. 30, 2010
Year Ended
Oct. 31, 2009
Current assets:
 
 
 
Cash and cash equivalents
$ 693,960 
$ 630,775 
$ 512,603 
Short-term investments
4,675 
3,700 
3,300 
Merchandise inventory
326,454 
409,509 
425,415 
Accounts receivable
34,746 
40,346 
46,584 
Prepaid expenses and other
47,039 
52,757 
52,188 
Deferred income taxes
60,156 
50,910 
54,362 
Total current assets
1,167,030 
1,187,997 
1,094,452 
Property and equipment, at cost, net of accumulated depreciation and amortization
713,142 
652,361 
741,019 
Goodwill
11,210 
11,395 
11,165 
Long-term investments
197,773 
5,915 
203,152 
Non-current deferred income taxes
27,305 
27,475 
22,719 
Other assets, net
21,688 
23,981 
23,401 
Total assets
2,138,148 
1,909,124 
2,095,908 
Current liabilities:
 
 
 
Accounts payable
158,526 
196,504 
198,978 
Notes payable
30,000 
50,000 
Accrued compensation and payroll taxes
55,144 
30,289 
23,932 
Accrued rent
68,866 
71,133 
67,983 
Accrued income and other taxes
20,585 
11,620 
22,574 
Unredeemed gift cards and gift certificates
39,389 
20,266 
19,632 
Current portion of deferred lease credits
17,388 
16,465 
17,605 
Other liabilities and accrued expenses
19,057 
21,285 
20,293 
Total current liabilities
408,955 
367,562 
420,997 
Non-current liabilities:
 
 
 
Deferred lease credits
89,591 
81,730 
93,607 
Non-current accrued income taxes
38,618 
36,302 
36,265 
Other non-current liabilities
22,467 
22,246 
21,734 
Total non-current liabilities
150,676 
140,278 
151,606 
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; 249,559, 249,561 and 249,561 shares issued; 195,683, 206,832 and 206,781 shares outstanding, respectively
2,486 
2,496 
2,486 
Contributed capital
554,399 
543,265 
538,007 
Accumulated other comprehensive income
16,838 
26,751 
16,478 
Retained earnings
1,764,049 
1,745,912 
1,726,531 
Treasury stock, 53,876, 41,737 and 41,789 shares, respectively
(759,255)
(917,140)
(760,197)
Total stockholders' equity
1,578,517 
1,401,284 
1,523,305 
Total liabilities and stockholders' equity
$ 2,138,148 
$ 1,909,124 
$ 2,095,908 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Oct. 30, 2010
Jan. 30, 2010
Oct. 31, 2009
Stockholders' equity:
 
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000 
5,000 
5,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Common stock, shares authorized
600,000 
600,000 
600,000 
Common stock, shares issued
249,559 
249,561 
249,561 
Common stock, shares outstanding
195,683 
206,832 
206,781 
Treasury stock, shares
53,876 
41,737 
41,789 
Consolidated Statements of Operations and Retained Earnings (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Oct. 30, 2010
3 Months Ended
Oct. 31, 2009
9 Months Ended
Oct. 30, 2010
9 Months Ended
Oct. 31, 2009
Consolidated Statements of Operations and Retained Earnings [Abstract]
 
 
 
 
Net sales
$ 751,507 
$ 736,011 
$ 2,051,471 
$ 1,984,488 
Cost of sales, including certain buying, occupancy and warehousing expenses
439,198 
431,836 
1,241,758 
1,202,812 
Gross profit
312,309 
304,175 
809,713 
781,676 
Selling, general and administrative expenses
185,050 
184,948 
519,188 
497,594 
Depreciation and amortization expense
35,804 
34,653 
107,378 
101,072 
Operating income
91,455 
84,574 
183,147 
183,010 
Realized loss on sale of investment securities
(24,201)
 
(24,426)
(2,749)
Other income (expense), net
1,986 
(451)
2,470 
(3,939)
Total other-than-temporary impairment losses
 
(129)
(5,089)
(3,068)
Portion of loss recognized in other comprehensive income, before tax
 
129 
3,841 
2,843 
Net impairment loss recognized in earnings
 
 
(1,248)
(225)
Income before income taxes
69,240 
84,123 
159,943 
176,097 
Provision for income taxes
36,049 
16,175 
65,047 
42,316 
Income from continuing operations
33,191 
67,948 
94,896 
133,781 
Loss from discontinued operations, net of tax
(167)
(8,789)
(41,287)
(24,083)
Net income
33,024 
59,159 
53,609 
109,698 
Basic income per common share
 
 
 
 
Income from continuing operations
0.17 
0.33 
0.47 
0.65 
Loss from discontinued operations
(0.04)
(0.20)
(0.12)
Net income per basic share
0.17 
0.29 
0.27 
0.53 
Diluted income per common share
 
 
 
 
Income from continuing operations
0.17 
0.32 
0.46 
0.64 
Loss from discontinued operations
(0.04)
(0.20)
(0.11)
Net income per diluted share
0.17 
0.28 
0.26 
0.53 
Cash dividends per common share
0.11 
0.10 
0.32 
0.30 
Weighted average common shares outstanding - basic
195,590 
206,517 
201,678 
206,169 
Weighted average common shares outstanding - diluted
197,323 
209,393 
203,539 
208,663 
Retained earnings, beginning
1,735,503 
1,692,990 
1,764,049 
1,694,161 
Net income
33,024 
59,159 
53,609 
109,698 
Cash dividends and dividend equivalents
(21,697)
(20,875)
(65,214)
(62,526)
Reissuance of treasury stock
(918)
(4,743)
(6,532)
(14,802)
Retained earnings, ending
$ 1,745,912 
$ 1,726,531 
$ 1,745,912 
$ 1,726,531 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
9 Months Ended
Oct. 30, 2010
9 Months Ended
Oct. 31, 2009
Operating activities:
 
 
Net income
$ 53,609 
$ 109,698 
Loss from discontinued operations
41,287 
24,083 
Income from continuing operations
94,896 
133,781 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
Depreciation and amortization
110,247 
102,616 
Share-based compensation
21,929 
18,985 
Provision for deferred income taxes
5,222 
(24,765)
Tax benefit from share-based payments
12,848 
8,880 
Excess tax benefit from share-based payments
(4,265)
(2,729)
Foreign currency transaction loss
44 
6,537 
Net impairment loss recognized in earnings
1,248 
225 
Realized loss on sale of investment securities
24,426 
2,749 
Changes in assets and liabilities:
 
 
Merchandise inventory
(89,988)
(128,156)
Accounts receivable
(7,454)
(5,080)
Prepaid expenses and other
(4,879)
8,580 
Other assets, net
(677)
(1,317)
Accounts payable
40,326 
50,025 
Unredeemed gift cards and gift certificates
(18,916)
(23,028)
Deferred lease credits
(2,868)
8,748 
Accrued compensation and payroll taxes
(24,379)
(5,161)
Accrued income and other taxes
(13,647)
12,342 
Accrued liabilities
2,336 
1,622 
Total adjustments
51,553 
31,073 
Net cash provided by operating activities from continuing operations
146,449 
164,854 
Investing activities:
 
 
Capital expenditures
(65,363)
(105,955)
Sale of available-for-sale securities
177,472 
77,014 
Other investing activities
(1,849)
(1,108)
Net cash provided by (used for) by investing activities from continuing operations
110,260 
(30,049)
Financing activities:
 
 
Payments on capital leases
(1,774)
(1,337)
Repayment of notes payable
(30,000)
(25,000)
Repurchase of common stock as part of publicly announced programs
(192,268)
 
Repurchase of common stock from employees
(18,024)
(230)
Net proceeds from stock options exercised
5,762 
8,736 
Excess tax benefit from share-based payments
4,265 
2,729 
Cash used to net settle equity awards
(6,434)
(1,414)
Cash dividends paid
(64,659)
(62,117)
Net cash used for financing activities from continuing operations
(303,132)
(78,633)
Effect of exchange rates changes on cash
1,553 
2,846 
Cash flows from discontinued operations
 
 
Net cash used for operating activities
(18,309)
(19,458)
Net cash used for investing activities
(6)
(299)
Net cash used for financing activities
Effect of exchange rate on cash
Net cash used for discontinued operations
(18,315)
(19,757)
Net (decrease) increase in cash and cash equivalents
(63,185)
39,261 
Cash and cash equivalents - beginning of period
693,960 
473,342 
Cash and cash equivalents - end of period
630,775 
512,603 
Supplemental disclosure of cash flow information:
 
 
Cash paid during the period for income taxes
36,262 
17,246 
Cash paid during the period for interest
$ 191 
$ 1,778 
Interim Financial Statements
Interim Financial Statements
1. Interim Financial Statements
The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at October 30, 2010 and October 31, 2009 and for the 13 and 39 week periods ended October 30, 2010 and October 31, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Fiscal 2009 Annual Report. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those further described in the footnotes that follow) considered necessary for a fair presentation have been included.
As used in this report, all references to “we,” “our,” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AE,” and the “AE Brand” refer to our U.S. and Canadian American Eagle Outfitters stores. “AEO Direct” refers to our e-commerce operations, ae.com, aerie.com and 77kids.com. “MARTIN+OSA” or “M+O” refers to the MARTIN+OSA stores and e-commerce operation which we operated until its closure during the 13 weeks ended July 31, 2010.
The 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.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At October 30, 2010, the Company operated in one reportable segment.
On March 5, 2010, the Company’s Board of Directors approved management’s recommendation to proceed with the closure of the M+O brand. The Company notified employees and issued a press release announcing this decision on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the brand and review of strategic alternatives, which revealed that it was not achieving performance levels that warranted further investment. The Company completed the closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
Fiscal Year
The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2011” and “Fiscal 2010” refer to the 52 week periods ending January 28, 2012 and January 29, 2011, respectively. “Fiscal 2009” and “Fiscal 2008” refer to the 52 week periods ended January 30, 2010 and January 31, 2009, respectively.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Recent Accounting Pronouncements
In September 2009, the Financial Accounting Standards Board (“FASB”) approved the consensus on Emerging Issues Task Force (“EITF”) 08-1, Revenue Arrangements with Multiple Deliverables, primarily codified under Accounting Standards Codification (“ASC”) 605, Revenue Recognition, as Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated among the various deliverables in a multi-element transaction using the relative selling price method. This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company is currently evaluating the impact that the adoption of ASU 2009-13 will have on its Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Topic 820: Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those years. The Company adopted the new disclosures effective January 31, 2010, except for the disclosure of activity within Level 3 fair value measurements. The Level 3 disclosures are effective for the Company at the beginning of Fiscal 2011. The adoption of ASU 2010-06 did not have a material impact on the disclosures within the Company’s Consolidated Financial Statements.
Foreign Currency Translation
The Canadian dollar is the functional currency for the Canadian business. In accordance with ASC 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income (refer to Note 8 to the Consolidated Financial Statements).
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.
Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s gift card program, refer to the Gift Cards caption below.
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively.
Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses
Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy, and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise margin is the difference between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income/expense and foreign currency transaction gain/loss.
Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320, Investments — Debt and Equity Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment’s cost and its fair value. As of May 3, 2009, the Company adopted ASC 320-10-65, Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments (“ASC 320-10-65”), which modifies the requirements for recognizing other-than-temporary impairment (“OTTI”) and changes the impairment model for debt securities. In addition, ASC 320-10-65 requires additional disclosures relating to debt and equity securities both in the interim and annual periods as well as requires the Company to present total OTTI in the Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss impairment amount recognized in other comprehensive income (“OCI”). During the 39 weeks ended October 30, 2010, the Company recorded OTTI charges in earnings related to credit losses on its investment securities of $1.2 million. There was $0.2 million of net impairment loss recognized in earnings during the 39 weeks ended October 31, 2009.
Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
As of October 30, 2010, short-term investments included auction rate securities (“ARS”) classified as available for sale that the Company expects to be redeemed at par within 12 months, based on notice from the issuer.
As of October 30, 2010, long-term investments included investments with remaining maturities of greater than 12 months and consisted of ARS classified as available-for-sale that have experienced failed auctions or have long-term auction resets and the Company’s ARS Call Option related to investment sales during the 13 weeks ended October 30, 2010. The remaining contractual maturities of our long-term ARS investments are approximately 20 months and the ARS Call Option expires on October 29, 2013.
Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. The components of OTTI losses related to credit losses, as defined by ASC 320, are considered by the Company to be realized losses. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss. Realized gains or losses are recognized separately on the Company’s Consolidated Statements of Operations as a realized gain or loss on sale of investment securities.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents, short-term investments and long-term investments.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the 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 our effective tax rate.
The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances, or net income.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
     
Buildings
  25 years
Leasehold Improvements
  Lesser of 10 years or the term of the lease
Fixtures and equipment
  5 years
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open longer than one year. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on impairment of assets. During the 26 weeks ended July 31, 2010, the Company recorded asset impairment charges of $18.0 million related to the impairment of M+O stores. Based on the Company’s decision to close all M+O stores in Fiscal 2010, the Company determined that the stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. No asset impairment charges were recorded in the 13 weeks ended October 30, 2010.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
Goodwill
As of October 30, 2010, the Company had approximately $11.4 million of goodwill compared to $11.2 million as of January 30, 2010. The Company’s goodwill is primarily related to the acquisition of its importing operations on January 31, 2000, as well as the acquisition of its Canadian business on November 29, 2000. The increase in goodwill is due to the fluctuation in the foreign exchange spot rate at which the Canadian goodwill is translated. In accordance with ASC 350, Intangibles- Goodwill and Other, the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 30, 2010. As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.
Gift Cards
The value of a gift card is recorded as a current liability upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended October 30, 2010 and October 31, 2009, the Company recorded $0.7 million and $1.0 million, respectively, of revenue related to gift card breakage. During the 39 weeks ended October 30, 2010 and October 31, 2009, the Company recorded $2.5 million and $4.2 million, respectively, of revenue related to gift card breakage.
Deferred Lease Credits
Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period) and any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.
Co-branded Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the “AE Visa Card”) and a private label credit card (the “AE Credit Card”) under both the American Eagle and aerie brands. Both of these credit cards are issued by a third-party bank (the “Bank”), and the Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. Once a customer is approved to receive the AE Visa Card and the card is activated, the customer is eligible to participate in the Company’s credit card rewards program. On January 1, 2010, the Company modified the benefits of the AE Visa and AE Credit Card programs to make both credit cards a part of the rewards program. Customers who make purchases at AE, aerie and 77kids earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AE Visa Card customers, who make purchases at other retailers where the card is accepted, earn additional discounts. Savings certificates are valid for 90 days from issuance.
Points earned under the credit card rewards program on purchases at AE and aerie are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE or aerie purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.
Through December 31, 2009, the Company offered its customers the AE All-Access Pass (the “Pass”), a customer loyalty program. On January 1, 2010, the Company replaced the Pass, with the AEREWARD$sm Loyalty Program (the “Program”). Under either loyalty program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date. These rewards can be redeemed for a discount on a purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Pass and the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.
Stock Repurchases
During Fiscal 2007, the Company’s Board authorized a total of 60.0 million shares of our common stock for repurchase under our share repurchase program with expiration dates extending into Fiscal 2010. The Company repurchased 18.7 million shares during Fiscal 2007 and the authorization related to 11.3 million shares expired in Fiscal 2009. At the beginning of Fiscal 2010, the Company had 30.0 million shares remaining authorized for repurchase.
The Company repurchased 14.0 million shares as part of its publicly announced repurchase programs during the 39 weeks ended October 30, 2010 for approximately $192.3 million, at a weighted average price of $13.73 per share. As of October 30, 2010, the Company had 16.0 million shares remaining authorized for repurchase. These shares may be repurchased at the Company’s discretion. The authorization relating to the 16.0 million shares remaining under the program expires at the end of Fiscal 2010.
During the 39 weeks ended October 30, 2010 and October 31, 2009, the Company repurchased approximately 1.0 million and 16,000 shares, respectively, from certain employees at market prices totaling $18.0 million and $0.2 million, respectively. These shares were repurchased for the payment of taxes in connection with the vesting of share-based payments, as permitted under the 2005 Stock Award and Incentive Plan (the “2005 Plan”).
The aforementioned share repurchases have been recorded as treasury stock.
Segment Information
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Brand US and Canadian stores, aerie by American Eagle retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments
The following table summarizes the fair market values for the Company’s cash and marketable securities, which are recorded as cash and cash equivalents, short-term investments and long-term investments on the Consolidated Balance Sheets:
                         
    October 30,     January 30,     October 31,  
(In thousands)   2010     2010     2009  
Cash and cash equivalents:
                       
Cash
  $ 157,921     $ 144,391     $ 82,942  
Commercial paper
    61,697       25,420        
Treasury bills
    100,393       119,988       100,000  
Money-market
    310,764       404,161       329,661  
 
                 
Total cash and cash equivalents
  $ 630,775     $ 693,960     $ 512,603  
Short-term investments:
                       
Student-loan backed ARS
  $     $ 400     $  
State and local government ARS
    3,700       4,275       3,300  
 
                 
Total short-term investments
  $ 3,700     $ 4,675     $ 3,300  
Long-term investments:
                       
Student-loan backed ARS
  $     $ 149,031     $ 151,048  
State and local government ARS
    5,500       35,969       38,724  
Auction rate preferred securities
          12,773       13,380  
ARS call option
    415              
 
                 
Total long-term investments
  $ 5,915     $ 197,773     $ 203,152  
 
                 
Total
  $ 640,390     $ 896,408     $ 719,055  
 
                 
Proceeds from the sale of available-for-sale securities were $177.5 million and $77.0 million for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively. There were no purchases of available-for-sale securities during the 39 weeks ended October 30, 2010 or October 31, 2009.
The following table presents the unrealized losses and fair value of available-for-sale securities for which OTTI has not been recognized in earnings and the length of time that the securities were in a continuous unrealized loss position.
                                 
                    Greater Than or
    Less Than 12 Months   Equal to 12 Months
    Gross Unrealized           Gross Unrealized    
(In thousands)   Holding Losses   Fair Value   Holding Losses   Fair Value
     
October 30, 2010
                               
State and local government ARS
  $     $     $     $  
         
Total (1)
  $     $     $     $  
         
October 31, 2009
                               
Student-loan backed ARS
  $ (4,841 )   $ 28,275     $ (3,711 )   $ 31,173  
State and local government ARS
    (220 )     9,230       (206 )     11,494  
Auction rate preferred securities
                (1,395 )     13,380  
         
Total (1)
  $ (5,061 )   $ 37,505     $ (5,312 )   $ 56,047  
         
 
(1)   Fair value excludes $9.2 million as of October 30, 2010 and $112.9 million as of October 31, 2009 of securities whose fair value approximates par.
As of October 30, 2010, the Company had a total of $640.4 million in cash and cash equivalents, short-term and long-term investments, including $9.2 million of investments in ARS whose fair value approximates par.
During the 13 weeks ended October 30, 2010, the Company liquidated $176.4 million par value ($163.3 million carrying value) of its available-for-sale securities. The Company received proceeds of $149.6 million plus accrued interest and recognized a net loss in its Consolidated Statements of Operations for the 13 weeks ended October 30, 2010 of $24.2 million, of which $10.9 million was previously included in OCI on the Company’s Consolidated Balance Sheet.
Relating to $119.7 million of the ARS securities sold during the 13 weeks ended October 30, 2010, the Company entered into a settlement agreement under which a financial institution (the “purchaser”) purchased the ARS at a discount to par, plus accrued interest. Additionally, under this agreement, the Company retained a right (the “ARS Call Option”), for a period ending October 29, 2013 to: (a) repurchase any or all of the ARS securities sold at the agreed upon purchase prices received from the purchaser plus accrued interest; and/or (b) receive additional proceeds from the purchaser upon certain redemptions of the ARS securities sold. The ARS Call Option is cancelable by the purchaser for additional cash consideration.
The Company is required to assess the value of the ARS Call Option at the end of each reporting period, with any changes in fair value recorded within the Consolidated Statement of Operations. As of October 30, 2010, the Company determined that the fair value was $0.4 million. The fair value of the ARS Call Option is included as an offsetting amount within the net loss on liquidation of $24.2 million referenced above and is classified as a long-term investment on the Consolidated Balance Sheet as of October 30, 2010.
The Company continues to monitor the market for ARS and consider the impact, if any, on the fair value of its investments. If current market conditions deteriorate further, or the anticipated recovery in market values does not occur, the Company may be required to record impairment charges on its remaining ARS investments.
Refer to Note 4 to the Consolidated Financial Statements for additional information regarding the fair value measurement of our investment securities.
Fair Value Measurements
Fair Value Measurements
4. Fair Value Measurements
ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
    Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
    Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
    Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of October 30, 2010 and October 31, 2009, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including ARS, ARPS and the ARS Call Option as described in Note 3 to the Consolidated Financial Statements.
In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of October 30, 2010 and October 31, 2009:
                                 
    Fair Value Measurements at October 30, 2010
            Quoted Market            
            Prices in Active           Significant
            Markets for   Significant Other   Unobservable
        Identical Assets   Observable Inputs   Inputs
(In thousands)   Carrying Amount   (Level 1)   (Level 2)   (Level 3)
Cash and Cash Equivalents
                               
Cash
  $ 157,921     $ 157,921     $     $  
Commercial Paper
    61,697       61,697              
Treasury bills
    100,393       100,393              
Money-market
    310,764       310,764              
     
Total cash and cash equivalents
  $ 630,775     $ 630,775     $     $  
Short-term Investments
                               
State and local government ARS
  $ 3,700     $     $     $ 3,700  
     
Total Short-term Investments
  $ 3,700     $     $     $ 3,700  
Long-term Investments
                               
State and local government ARS
  $ 5,500     $     $     $ 5,500  
ARS call option
    415                   415  
     
Total Long-term Investments
  $ 5,915     $     $     $ 5,915  
     
Total
  $ 640,390     $ 630,775     $     $ 9,615  
     
                                 
    Fair Value Measurements at October 31, 2009
            Quoted Market            
            Prices in Active           Significant
            Markets for   Significant Other   Unobservable
        Identical Assets   Observable Inputs   Inputs
(In thousands)   Carrying Amount   (Level 1)   (Level 2)   (Level 3)
Cash and Cash Equivalents
                               
Cash
  $ 82,942     $ 82,942     $     $  
Treasury bills
    100,000       100,000              
Money-market
    329,661       329,661              
     
Total cash and cash equivalents
  $ 512,603     $ 512,603     $     $  
Short-term Investments
                               
State and local government ARS
  $ 3,300     $     $     $ 3,300  
     
Total Short-term Investments
  $ 3,300     $     $     $ 3,300  
Long-term Investments
                               
Student-loan backed ARS
  $ 151,048     $     $     $ 151,048  
State and local government ARS
    38,724                   38,724  
Auction rate preferred securities
    13,380                   13,380  
     
Total Long-term Investments
  $ 203,152     $     $     $ 203,152  
     
Total
  $ 719,055     $ 512,603     $     $ 206,452  
     
The Company uses a discounted cash flow model to value its Level 3 investments. At October 30, 2010, the assumptions in the Company’s model included different recovery periods, ranging from 8 to 20 months, depending on the type of security and varying discount factors for yield, ranging from 0.3% to 0.4%, and illiquidity of 0.5%. At October 31, 2009, the assumptions in the Company’s model included different recovery periods, ranging from 12 months to 11 years, depending on the type of security and varying discount factors for yield, ranging from 0.3% to 7.5%, and illiquidity, ranging from 0.3% to 1.0%. These assumptions are subjective. They are based on the Company’s current judgment and its view of current market conditions. The use of different assumptions would result in a different valuation and related charge.
As a result of the discounted cash flow analysis, during the 39 weeks ended October 30, 2010, the Company recognized a net impairment of $0.6 million. The total cumulative impairment recognized in OCI prior to the Company’s liquidation of $176.4 million par value ($163.3 million carrying value) available-for-sale securities during the 13 weeks ended October 30, 2010 was $10.9 million ($6.8 million, net of tax). Total cumulative impairment recognized in OCI at the end of Fiscal 2009 was $10.3 million ($6.4 million, net of tax). The increase in temporary impairment was primarily driven by unfavorable changes in the discount rate. These amounts were previously recorded in OCI and resulted in a decrease in the investments’ estimated fair values. As a result of a credit rating downgrade on a student-loan backed ARS, the Company also recorded a net impairment loss in earnings of $1.2 million during the 39 weeks ended October 30, 2010.
As previously described in Note 3 to the Consolidated Financial Statements, the Company liquidated $176.4 million par value ($163.3 million carrying value) of its available-for-sale securities. Through the liquidation, the Company received proceeds of $149.6 million plus accrued interest and recognized a loss in its consolidated financial statements of operations for the 13 weeks ended October 30, 2010 of $24.2 million, net of the ARS Call Option gain of $0.4 million. The recognized loss included all $10.9 million of cumulative impairment which was previously included in OCI on the Consolidated Balance Sheet.
The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements was also estimated using a discounted cash flow model. The model considered potential changes in yields for securities with similar characteristics to the underlying ARS and evaluated possible future refinancing opportunities for the issuers of the ARS. The analysis then assessed the likelihood that the options would be exercisable as a result of the underlying ARS being redeemed or traded in a secondary market at an amount greater than the exercise price prior to the end of the option term. Future changes in the fair values of the ARS Call Option will be recorded within the Consolidated Statements of Operations.
The following table presents a rollforward of the amount of OTTI related to credit losses that has been recognized in earnings:
         
    39 Weeks Ended  
(In thousands)   October 30, 2010  
Beginning balance of credit losses previously recognized in earnings
  $ 940  
Year-to-date OTTI credit losses recognized in earnings
    1,248  
 
     
Ending balance of cumulative credit losses recognized in earnings
  $ 2,188  
 
     
The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
                                         
    Level 3 (Unobservable inputs)
                    Student        
                    Loan-        
            Auction-   Backed   Auction-    
            Rate   Auction-   Rate    
            Municipal   Rate   Preferred   ARS Call
(In thousands)   Total   Securities   Securities   Securities   Option
     
Carrying Value at January 30, 2010
  $ 202,448     $ 40,244     $ 149,431     $ 12,773     $  
Settlements
    (177,472 )     (29,101 )     (141,246 )     (7,125 )      
Gains and (losses):
                                       
Reported in earnings
    (25,674 )     (2,399 )     (16,755 )     (6,935 )     415  
Reported in OCI
    10,313       456       8,570       1,287        
     
Balance at October 30, 2010
  $ 9,615     $ 9,200     $     $     $ 415  
     
 
                                       
Carrying Value at January 31, 2009
  $ 251,007     $ 69,970     $ 169,254     $ 11,783     $  
Settlements
    (69,250 )     (28,150 )     (41,100 )            
Gains and (losses):
                                       
Reported in earnings
    (225 )                 (225 )      
Reported in OCI
    24,920       204       22,894       1,822        
     
Balance at October 31, 2009
  $ 206,452     $ 42,024     $ 151,048     $ 13,380     $  
     
Non-Financial Assets and Liabilities
The Company’s non-financial assets, which include goodwill and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value. As a result of the Company’s annual goodwill impairment test performed as of January 30, 2010, the Company concluded that its goodwill was not impaired. During the 13 and 39 weeks ended October 30, 2010, there were no triggering events that prompted an asset impairment test of the Company’s goodwill.
Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. Based on the decision to close all M+O stores in Fiscal 2010, the Company determined that the M+O stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. Therefore, during the 26 weeks ended July 31, 2010, the M+O stores not previously impaired were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. The loss on impairment of assets was recorded within Loss from Discontinued Operations for the 39 weeks ended October 30, 2010. The fair value of those stores were determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.
Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
Earnings per Share
Earnings per Share
5. Earnings per Share
ASC 260-10-45, Participating Securities and the Two-Class Method (“ASC 260-10-45”), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method, as described in ASC 260, Earnings Per Share (“ASC 260”). Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees under the Company’s 2005 Plan are considered participating securities as these employees receive non-forfeitable dividends at the same rate as common stock. For the 13 and 39 weeks ended October 30, 2010 and October 31, 2009, the application of ASC 260-10-45 resulted in no change to basic EPS or diluted EPS.
The following is a reconciliation between basic and diluted weighted average shares outstanding:
                                 
    13 Weeks Ended     39 Weeks Ended  
    October 30,     October 31,     October 30,     October 31,  
(In thousands, except per share amounts)   2010     2009     2010     2009  
Weighted average common shares outstanding:
                               
Basic number of common shares outstanding
    195,590       206,517       201,678       206,169  
Dilutive effect of stock options and non-vested restricted stock
    1,733       2,876       1,861       2,494  
 
                       
Dilutive number of common shares outstanding
    197,323       209,393       203,539       208,663  
 
                       
 
                               
Basic net income per common share
                               
Net income
  $ 33,024     $ 59,159     $ 53,609     $ 109,698  
Less: Income allocated to participating securities
          194       93       219  
 
                       
Net income available to common shareholders
  $ 33,024     $ 58,965     $ 53,516     $ 109,479  
 
                       
Basic net income per common share
  $ 0.17     $ 0.29     $ 0.27     $ 0.53  
 
                       
 
                               
Dilutive net income per common share
                               
Net income
  $ 33,024     $ 59,159     $ 53,609     $ 109,698  
Less: Income allocated to participating securities
          191       93       149  
 
                       
Net income available to common shareholders
  $ 33,024     $ 58,968     $ 53,516     $ 109,549  
 
                       
Dilutive net income per common share
  $ 0.17     $ 0.28     $ 0.26     $ 0.53  
 
                       
Equity awards to purchase approximately 6.9 million and 7.9 million shares of common stock during the 13 and 39 weeks ended October 30, 2010, respectively, and approximately 6.6 million and 6.7 million shares of common stock during the 13 and 39 weeks ended October 31, 2009, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.
Approximately 0.8 million shares of restricted stock units for both the 13 and 39 weeks ended October 30, 2010 and approximately 1.4 million shares of restricted stock for both the 13 and 39 weeks ended October 31, 2009 were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual performance goals. Additionally, there were approximately 27,000 shares for the 39 weeks ended October 30, 2010 of time-based restricted stock units that were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.
Property and Equipment
Property and Equipment
6. Property and Equipment
Property and equipment consists of the following:
                         
    October 30,     January 30,     October 31,  
(In thousands)   2010     2010     2009  
Property and equipment, at cost
  $ 1,414,453     $ 1,394,806     $ 1,397,961  
Less: Accumulated depreciation and amortization
    (762,092 )     (681,664 )     (656,942 )
 
                 
Net property and equipment
  $ 652,361     $ 713,142     $ 741,019  
 
                 
Note Payable and Other Credit Arrangements
Note Payable and Other Credit Arrangements
7. Note Payable and Other Credit Arrangements
The Company has borrowing agreements with four separate financial institutions under which it may borrow an aggregate of $310.0 million United States Dollars (“USD”) and $25.0 million Canadian Dollars (“CAD”). Of this amount, $200.0 million USD can be used for demand letter of credit facilities, $50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the remaining $60.0 million USD can be used for either letters of credit or demand line borrowings at the Company’s discretion. The expiration dates of the USD demand line facilities are April 20, 2011 and May 22, 2011 and the $25.0 million CAD demand line has an expiration date of November 20, 2010.
As of October 30, 2010, the Company had outstanding demand letters of credit of $42.1 million USD and no demand line borrowings.
The availability of any future borrowings is subject to acceptance by the respective financial institutions. The average borrowing rate on the demand line for outstanding borrowings during Fiscal 2010 was 2.1%.
Comprehensive Income
Comprehensive Income
8. Comprehensive Income
Comprehensive income is comprised of the following:
                                 
    13 Weeks Ended   39 Weeks Ended
    October 30,   October 31,   October 30,   October 31,
(In thousands)   2010   2009   2010   2009
Net income
    $33,024       $59,159       $53,609       $109,698  
Other comprehensive income:
                               
Temporary impairment reversal (loss) related to auction-rate securities, net of tax (1)
          3,369       (1,180 )     15,318  
Reclassification adjustment for realized losses in net income related to ARS, net of tax (2)
    6,722             6,722        
Reclassification adjustment for OTTI charges realized in net income related to ARS, net of tax (3)
                819       139  
Foreign currency translation adjustment
    779       (2,458 )     3,552       15,410  
 
                               
Other comprehensive income:
    7,501       911       9,913       30,867  
 
                               
Total comprehensive income
    $40,525       $60,070       $63,522       $140,565  
 
                               
 
(1)   Amounts are shown net of tax of ($2.1) million for the 13 weeks ended October 31, 2009. Amounts are shown net of tax of $0.6 million and ($9.5) million for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively.
 
(2)   Amounts are shown net of tax of ($4.2) million for both the 13 and 39 weeks ended October 30, 2010.
 
(3)   Amounts are shown net of tax of ($0.4) million and ($0.1) million for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively.
Share-Based Compensation
Share-Based Compensation
9. Share-Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value.
Total share-based compensation expense from continuing operations included in the Consolidated Statements of Operations for the 13 and 39 weeks ended October 30, 2010 was $3.5 million ($2.2 million, net of tax) and $21.9 million ($13.5 million, net of tax) and for the 13 and 39 weeks ended October 31, 2009 was $9.8 million ($6.0 million, net of tax) and $19.0 million ($11.7 million, net of tax), respectively.
Stock Option Grants
The Company grants both time-based and performance-based stock options under its 2005 Plan. Time-based stock option awards vest over the requisite service period of the award or to an employee’s eligible retirement date, if earlier. Performance-based stock option awards vest over three years and are earned if the Company meets pre-established performance goals during each year.
A summary of the Company’s stock option activity for the 39 weeks ended October 30, 2010 follows:
                                 
    39 Weeks Ended  
    October 30, 2010  
                    Weighted-Average        
                    Remaining     Aggregate  
            Weighted-Average     Contractual     Intrinsic Value  
    Options     Exercise Price     Term (in years)     (in thousands)  
Outstanding — January 30, 2010
    14,904,942     $ 15.01                  
Granted
    1,381,246     $ 17.04                  
Exercised (1)
    1,149,208     $ 8.46                  
Cancelled
    3,011,303     $ 15.28                  
 
                       
Outstanding — October 30, 2010
    12,125,677     $ 15.79       3.9     $ 40,703  
 
                       
Vested and expected to vest — October 30, 2010
    11,873,169     $ 15.82       3.8     $ 39,950  
 
                       
Exercisable — October 30, 2010
    3,619,178     $ 7.37       2.4     $ 31,304  
 
(1)   Options exercised during the 39 weeks ended October 30, 2010 had exercise prices ranging from $4.68 to $17.51.
The weighted-average grant date fair value of stock options granted during the 39 weeks ended October 30, 2010 and October 31, 2009 was $5.19 and $3.55, respectively. The aggregate intrinsic value of options exercised during the 39 weeks ended October 30, 2010 and October 31, 2009 was $10.7 million and $11.4 million, respectively.
Cash received from the exercise of stock options was $5.8 million for the 39 weeks ended October 30, 2010 and $8.7 million for the 39 weeks ended October 31, 2009. The actual tax benefit realized from stock option exercises totaled $12.8 million for the 39 weeks ended October 30, 2010 and $8.9 million for the 39 weeks ended October 31, 2009.
The fair value of stock options was estimated based on the closing market price of the Company’s common stock on the date of the grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
                 
    39 Weeks Ended
    October 30   October 31,
Black-Scholes Option Valuation Assumptions   2010   2009
Risk-free interest rate (1)
    2.3 %     1.7 %
Dividend yield
    2.1 %     3.9 %
Volatility factor (2)
    40.2 %     62.1 %
Weighted-average expected term (3)
  4.5 years   4.5 years
Expected forfeiture rate (4)
    8.0 %     8.0 %
 
(1)   Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.
 
(2)   Based on a combination of historical volatility of the Company’s common stock and implied volatility.
 
(3)   Represents the period of time options are expected to be outstanding, based on historical experience.
 
(4)   Based upon historical experience.
As of October 30, 2010, there was $5.4 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.5 years.
Restricted Stock Grants
Time-based restricted stock awards include two types of awards; time-based restricted stock and time-based restricted stock units. Time-based restricted stock awards vest over three years and participate in nonforfeitable dividends. Time-based restricted stock units vest over three years; however, they may be accelerated to vest over one year if the Company meets pre-established performance goals in the year of grant. Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.
Performance-based restricted stock awards include two types of awards; performance-based restricted stock and performance-based restricted stock units. Performance-based restricted stock awards vest over one year based upon the Company’s achievement of pre-established goals and participate in nonforfeitable dividends. Performance-based restricted stock units cliff vest at the end of a three year period based upon the Company’s achievement of pre-established goals. Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions as the original award.
The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. The Company grants to its employees both restricted stock awards, which entitles the holders to receive nonforfeitable dividends prior to vesting, and restricted stock unit awards. The restricted stock unit awards differ from the restricted stock awards in that they do not contain nonforfeitable rights to dividends and are therefore not considered participating securities in accordance with ASC 260-10-45.
A summary of the Company’s restricted stock activity is presented in the following tables:
                                 
    Time-Based Restricted Stock   Performance-Based Restricted Stock
    39 Weeks Ended   39 Weeks Ended
    October 30, 2010   October 30, 2010
            Weighted-Average Grant           Weighted-Average Grant
    Shares   Date Fair Value   Shares   Date Fair Value
Nonvested — January 30, 2010
    1,883     $ 13.28       989,664     $ 9.66  
Granted
                       
Vested
                (989,664 )     9.66  
Cancelled
    1,883       13.28              
         
Nonvested — October 30, 2010
                       
                                 
    Time-Based Restricted Stock Units   Performance-Based Restricted Stock Units
    39 Weeks Ended   39 Weeks Ended
    October 30, 2010   October 30, 2010
            Weighted-Average Grant           Weighted-Average Grant
    Shares   Date Fair Value   Shares   Date Fair Value
Nonvested — January 30, 2010
    1,668,092     $ 9.79       406,231     $ 9.82  
Granted
    1,098,844       17.39       312,363       17.24  
Vested
    (1,650,077 )     9.79              
Cancelled
    (92,487 )     17.46       (77,465 )     15.45  
         
Nonvested — October 30, 2010
    1,024,372     $ 17.25       641,129     $ 12.75  
As of October 30, 2010, there was $15.3 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 2.4 years.
As of October 30, 2010, the Company had 25.9 million shares available for all equity grants.
Income Taxes
Income Taxes
10. Income Taxes
The provision for income taxes from continuing operations is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for quarterly events. The effective income tax rate from continuing operations based on actual operating results for the 13 weeks ended October 30, 2010 was 52.1% compared to 19.2% for the 13 weeks ended October 31, 2009. The effective income tax rate from continuing operations based on actual operating results for the 39 weeks ended October 30, 2010 was 40.7% compared to 24.0% for the 39 weeks ended October 31, 2009. The increase in the effective income tax rate for Fiscal 2010 was primarily due to losses on the sale of certain ARS investments in which no income tax benefit was recognized. Additionally, the effective income tax rate was lower in Fiscal 2009 due to the tax benefit associated with the repatriation of foreign earnings as well as federal and state income tax settlements and other changes in income tax reserves.
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as the result of the evaluation of new information not previously available. There were no significant changes in unrecognized tax benefits during the 39 weeks ended October 30, 2010. Unrecognized tax benefits decreased by $7.3 million during the 39 weeks ended October 31, 2009, primarily due to federal and state income tax settlements and other changes in income tax reserves. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the balance sheet date within the next 12 months.
Legal Proceedings
Legal Proceedings
11. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), management records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position or results of operations of the Company.
Discontinued Operations
Discontinued Operations
12. Discontinued Operations
On March 5, 2010, the Company’s Board of Directors approved management’s recommendation to proceed with the closure of the M+O brand. The Company notified employees and issued a press release announcing this decision on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the brand and review of strategic alternatives, which revealed that it was not achieving performance levels that warranted further investment. The Company completed the closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.
Costs associated with exit or disposal activities are recorded when incurred. A summary of the exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for the 39 weeks ended October 30, 2010 are included in the table as follows. Results from discontinued operations were nominal for the 13 weeks ended October 30, 2010.
         
    39 Weeks Ended  
    October 30,  
(In thousands)   2010  
Non-cash charges
       
Asset impairments
  $ 17,980  
Cash charges
       
Lease-related charges (1)
    15,377  
Inventory charges
    2,422  
Severence charges
    7,660  
 
     
Total charges
  $ 43,439  
 
     
 
(1)   Presented net of the reversal of non-cash lease credits.
A rollforward of the liabilities recognized in the Consolidated Balance Sheet is as follows:
         
    October 30,  
(In thousands)   2010  
Accrued liability as of January 30, 2010
  $  
Add: Costs incurred, excluding non-cash charges
    30,879  
Less: Cash payments
    (28,398 )
 
     
Accrued liability as of October 30, 2010 (1)
  $ 2,481  
 
     
 
(1)   Accrued liability at October 30, 2010 consists of $0.1 million of severance and employee related charges recorded as a current liability within Accrued Compensation and Payroll Taxes and $2.4 million of lease-related charges recorded as a current liability within Accrued Rent. These amounts are expected to be paid during Fiscal 2010.
The table below presents the significant components of M+O’s results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for 13 and 39 weeks ended October 30, 2010 and October 31, 2009, respectively.
                                 
    13 Weeks Ended     39 Weeks Ended  
    October 30,     October 31,     October 30,     October 31,  
(In thousands)   2010     2009     2010     2009  
Net sales
  $     $ 12,951     $ 21,881     $ 34,056  
 
                               
Loss from discontinued operations, before income taxes
    (271 )     (14,268 )     (66,959 )     (39,041 )
Income tax benefit
    104       5,479       25,672       14,958  
 
                       
Loss from discontinued operations, net of tax
  $ (167 )   $ (8,789 )   $ (41,287 )   $ (24,083 )
 
                       
 
                               
Loss per common share from discontinued operations:
                               
Basic
  $     $ (0.04 )   $ (0.20 )   $ (0.12 )
Diluted
  $     $ (0.04 )   $ (0.20 )   $ (0.11 )
The major classes of assets and liabilities included in the Consolidated Balance Sheets for M+O as of October 30, 2010, January 30, 2010 and October 31, 2009 is as follows.
                         
    October 30,     January 30,     October 31,  
(In thousands)   2010     2010     2009  
Current assets
  $ 226     $ 13,378     $ 18,051  
Non-current assets
          21,227       41,095  
 
                 
Total assets
  $ 226     $ 34,605     $ 59,146  
 
                 
 
                       
Total current liabilities
  $ 2,793     $ 6,110     $ 7,436  
Total non-current liabilities
          4,604       4,728  
 
                 
Total liabilities
  $ 2,793     $ 10,714     $ 12,164  
 
                 
Subsequent Events
Subsequent Events
13. Subsequent Events
The Company has evaluated the existence of subsequent events through the filing date of this Quarterly Report on Form 10-Q.