AMERICAN EAGLE OUTFITTERS INC, 10-K filed on 3/11/2011
Annual Report
Document and Entity Information
Year Ended
Jan. 29, 2011
Mar. 07, 2011
Jul. 31, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Document Type
10-K 
 
 
Document Period End Date
2011-01-29 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
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
 
 
2,196,680,330 
Entity Common Stock, Shares Outstanding
 
194,690,703 
 
Consolidated Balance Sheets (USD $)
In Thousands
Year Ended
Jan. 29, 2011
Year Ended
Jan. 30, 2010
Current assets:
 
 
Cash and cash equivalents
$ 667,593 
$ 693,960 
Short-term investments
67,102 
4,675 
Merchandise inventory
301,208 
326,454 
Accounts receivable
36,721 
34,746 
Prepaid expenses and other
53,727 
47,039 
Deferred income taxes
48,059 
60,156 
Total current assets
1,174,410 
1,167,030 
Property and equipment, at cost, net of accumulated depreciation and amortization
643,120 
713,142 
Goodwill
11,472 
11,210 
Long-term investments
5,915 
197,773 
Non-current deferred income taxes
19,616 
27,305 
Other assets, net
25,465 
21,688 
Total assets
1,879,998 
2,138,148 
Current liabilities:
 
 
Accounts payable
167,723 
158,526 
Note payable
30,000 
Accrued compensation and payroll taxes
34,954 
55,144 
Accrued rent
70,390 
68,866 
Accrued income and other taxes
32,468 
20,585 
Unredeemed gift cards and gift certificates
41,001 
39,389 
Current portion of deferred lease credits
16,203 
17,388 
Other liabilities and accrued expenses
25,098 
19,057 
Total current liabilities
387,837 
408,955 
Non-current liabilities:
 
 
Deferred lease credits
78,606 
89,591 
Non-current accrued income taxes
38,671 
38,618 
Other non-current liabilities
23,813 
22,467 
Total non-current liabilities
141,090 
150,676 
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 and 249,561 shares issued; 194,366 and 206,832 shares outstanding, respectively
2,496 
2,486 
Contributed capital
546,597 
554,399 
Accumulated other comprehensive income
28,072 
16,838 
Retained earnings
1,711,929 
1,764,049 
Treasury stock, 55,200 and 41,737 shares, respectively, at cost
(938,023)
(759,255)
Total stockholders' equity
1,351,071 
1,578,517 
Total liabilities and stockholders' equity
$ 1,879,998 
$ 2,138,148 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Jan. 29, 2011
Jan. 30, 2010
Jan. 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
249,566 
249,561 
249,328 
Common stock, shares outstanding
194,366 
206,832 
205,281 
Treasury stock, shares
55,200 
41,737 
43,248 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data
Year Ended
Jan. 29, 2011
Year Ended
Jan. 30, 2010
Year Ended
Jan. 31, 2009
Consolidated Statements of Operations [Abstract]
 
 
 
Net sales
$ 2,967,559 
$ 2,940,269 
$ 2,948,679 
Cost of sales, including certain buying, occupancy and warehousing expenses
1,796,600 
1,766,839 
1,751,493 
Gross profit
1,170,959 
1,173,430 
1,197,186 
Selling, general and administrative expenses
713,197 
725,278 
690,787 
Depreciation and amortization expense
140,501 
137,760 
123,602 
Operating income
317,261 
310,392 
382,797 
Realized loss on sale of investment securities
(24,426)
(2,749)
(1,117)
Other income (expense), net
3,497 
(2,328)
18,908 
Total other-than-temporary impairment losses
(5,089)
(4,413)
(22,889)
Portion of loss recognized in other comprehensive income, before tax
3,841 
3,473 
 
Net impairment loss recognized in earnings
(1,248)
(940)
(22,889)
Income before income taxes
295,084 
304,375 
377,699 
Provision for income taxes
113,150 
90,977 
147,715 
Income from continuing operations
181,934 
213,398 
229,984 
Loss from discontinued operations, net of tax
(41,287)
(44,376)
(50,923)
Net income
140,647 
169,022 
179,061 
Basic income per common share:
 
 
 
Income from continuing operations
0.91 
1.04 
1.12 
Loss from discontinued operations
(0.21)
(0.22)
(0.25)
Basic income per common share
0.70 
0.82 
0.87 
Diluted income per common share:
 
 
 
Income from continuing operations
0.90 
1.02 
1.11 
Loss from discontinued operations
(0.20)
(0.21)
(0.25)
Diluted income per common share
$ 0.70 
$ 0.81 
$ 0.86 
Weighted average common shares outstanding - basic
199,979 
206,171 
205,169 
Weighted average common shares outstanding - diluted
201,818 
209,512 
207,582 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands
Year Ended
Jan. 29, 2011
Year Ended
Jan. 30, 2010
Year Ended
Jan. 31, 2009
Consolidated Statements of Comprehensive Income [Abstract]
 
 
 
Net income
$ 140,647 
$ 169,022 
$ 179,061 
Other comprehensive income (loss):
 
 
 
Temporary (impairment) recovery related to investment securities, net of tax
(1,140)
14,506 
(23,173)
Reclassification adjustment for realized losses in net income related to investment securities, net of tax
7,541 
940 
948 
Foreign currency translation gain (loss)
4,833 
15,781 
(27,649)
Other comprehensive income (loss)
11,234 
31,227 
(49,874)
Comprehensive income
$ 151,881 
$ 200,249 
$ 129,187 
Consolidated Statements of Stockholder's Equity (USD $)
In Thousands
Common Stock
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Total
Beginning Balance at Feb. 02, 2008
$ 2,481 
$ 493,395 
$ 1,601,784 
$ (792,681)1
$ 35,485 
$ 1,340,464 
Beginning Balance, shares at Feb. 02, 2008
204,480 2
 
 
 
 
 
Stock awards
20,179 
420 
 
 
20,603 
Stock awards, shares
453 2
 
 
 
 
 
Repurchase of common stock from employees
 
 
 
(3,432)1
 
(3,432)
Repurchase of common stock from employees, shares
(164)2
 
 
 
 
 
Reissuance of treasury stock
 
 
(4,710)
9,313 1
 
4,603 
Reissuance of treasury stock, shares
512 2
 
 
 
 
 
Net income
 
 
179,061 
 
 
179,061 
Other comprehensive income (loss), net of tax
 
 
 
 
(49,874)
(49,874)
Cash dividends and dividend equivalents ($0.93,0.40 & 0.40 per share for 2011, 2010 & 2009 respectively)
 
 
(82,394)
 
 
(82,394)
Ending Balance at Jan. 31, 2009
2,485 
513,574 
1,694,161 
(786,800)1
(14,389)
1,409,031 
Ending Balance, shares at Jan. 31, 2009
205,281 2
 
 
 
 
 
Stock awards
39,903 
 
 
 
39,904 
Stock awards, shares
41 2
 
 
 
 
 
Repurchase of common stock from employees
 
 
 
(247)1
 
(247)
Repurchase of common stock from employees, shares
(18)2
 
 
 
 
 
Reissuance of treasury stock
 
 
(15,228)
27,792 1
 
12,564 
Reissuance of treasury stock, shares
1,528 2
 
 
 
 
 
Net income
 
 
169,022 
 
 
169,022 
Other comprehensive income (loss), net of tax
 
 
 
 
31,227 
31,227 
Cash dividends and dividend equivalents ($0.93,0.40 & 0.40 per share for 2011, 2010 & 2009 respectively)
 
922 
(83,906)
 
 
(82,984)
Ending Balance at Jan. 30, 2010
2,486 
554,399 
1,764,049 
(759,255)1
16,838 
1,578,517 
Ending Balance, shares at Jan. 30, 2010
206,832 2
 
 
 
 
 
Stock awards
10 
36,229 
 
 
 
36,239 
Stock awards, shares
997 2
 
 
 
 
 
Repurchase of common stock as part of publicly announced programs
 
 
 
(216,070)1
 
(216,070)
Repurchase of common stock as part of publicly announced programs, shares
(15,500)2
 
 
 
 
 
Repurchase of common stock from employees
 
 
 
(18,041)1
 
(18,041)
Repurchase of common stock from employees, shares
(1,035)2
 
 
 
 
 
Reissuance of treasury stock
 
(45,841)
(7,791)
55,343 1
 
1,711 
Reissuance of treasury stock, shares
3,072 2
 
 
 
 
 
Net income
 
 
140,647 
 
 
140,647 
Other comprehensive income (loss), net of tax
 
 
 
 
11,234 
11,234 
Cash dividends and dividend equivalents ($0.93,0.40 & 0.40 per share for 2011, 2010 & 2009 respectively)
 
1,810 
(184,976)
 
 
(183,166)
Ending Balance at Jan. 29, 2011
$ 2,496 
$ 546,597 
$ 1,711,929 
$ (938,023)1
$ 28,072 
$ 1,351,071 
Ending Balance, shares at Jan. 29, 2011
194,366 2
 
 
 
 
 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
In Thousands, except Per Share data
Year Ended
Jan. 29, 2011
Year Ended
Jan. 30, 2010
Year Ended
Jan. 31, 2009
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Common stock, shares authorized
600,000 
600,000 
600,000 
Common stock, shares issued
249,566 
249,561 
249,328 
Common stock, shares outstanding
194,366 
206,832 
205,281 
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
Non-vested restricted stock excluded
992 
799 
Treasury stock, shares
55,200 
41,737 
43,248 
Treasury stock, shares reissued
3,072 
1,528 
512 
Dividend per share
0.93 
0.40 
0.40 
Retained Earnings
 
 
 
Dividend per share
$ 0.93 
$ 0.40 
$ 0.40 
Consolidated Statements of Cash Flows (USD $)
In Thousands
Year Ended
Jan. 29, 2011
Year Ended
Jan. 30, 2010
Year Ended
Jan. 31, 2009
Operating activities:
 
 
 
Net income
$ 140,647 
$ 169,022 
$ 179,061 
Loss from discontinued operations
41,287 
44,376 
50,923 
Income from continuing operations
181,934 
213,398 
229,984 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
145,548 
139,832 
126,362 
Share-based compensation
25,457 
34,615 
18,731 
Provision for deferred income taxes
11,885 
(36,027)
24,473 
Tax benefit from share-based payments
15,648 
7,995 
1,121 
Excess tax benefit from share-based payments
(12,499)
(2,812)
(693)
Foreign currency transaction loss (gain)
117 
6,477 
(1,141)
Net impairment loss recognized in earnings
1,248 
940 
22,889 
Realized loss on sale of investment securities
24,426 
2,749 
1,117 
Changes in assets and liabilities:
 
 
 
Merchandise inventory
18,713 
(33,699)
(5,634)
Accounts receivable
(3,790)
6,656 
(10,019)
Prepaid expenses and other
(9,045)
12,916 
(23,184)
Other assets, net
(1,380)
1,146 
390 
Accounts payable
5,232 
8,358 
(3,467)
Unredeemed gift cards and gift certificates
1,713 
(3,591)
(11,495)
Deferred lease credits
(7,451)
4,667 
16,622 
Accrued compensation and payroll taxes
(19,618)
25,841 
(18,223)
Accrued income and other taxes
11,999 
12,858 
(20,791)
Accrued liabilities
12,457 
(1,993)
(1,930)
Total adjustments
220,660 
186,928 
115,128 
Net cash provided by operating activities from continuing operations
402,594 
400,326 
345,112 
Investing activities:
 
 
 
Capital expenditures
(84,259)
(127,080)
(243,564)
Purchase of available-for-sale securities
(62,797)
 
(48,655)
Sale of available-for-sale securities
177,472 
80,353 
393,559 
Other investing activities
(2,801)
(2,003)
(2,297)
Net cash provided by (used for) investing activities from continuing operations
27,615 
(48,730)
99,043 
Financing activities:
 
 
 
Payments on capital leases
(2,590)
(2,015)
(2,177)
Proceeds from issuance of note payable
 
 
75,000 
Repayment of note payable
(30,000)
(45,000)
 
Repurchase of common stock as part of publicly announced programs
(216,070)
 
 
Repurchase of common stock from employees
(18,041)
(247)
(3,432)
Net proceeds from stock options exercised
7,272 
9,044 
3,799 
Excess tax benefit from share-based payments
12,499 
2,812 
693 
Cash used to net settle equity awards
(6,434)
(1,414)
 
Cash dividends paid
(183,166)
(82,985)
(82,394)
Net cash used for financing activities from continuing operations
(436,530)
(119,805)
(8,511)
Effect of exchange rates on cash
1,394 
3,030 
(14,790)
Cash flows of discontinued operations
 
 
 
Net cash used for operating activities
(21,434)
(13,864)
(41,802)
Net cash used for investing activities
(6)
(339)
(21,771)
Net cash used for financing activities
Effect of exchange rates on cash
Net cash used for discontinued operations
(21,440)
(14,203)
(63,573)
Net (decrease) increase in cash and cash equivalents
(26,367)
220,618 
357,281 
Cash and cash equivalents - beginning of period
693,960 
473,342 
116,061 
Cash and cash equivalents - end of period
$ 667,593 
$ 693,960 
$ 473,342 
Business Operations
Business Operations
 
1.   Business Operations
 
American Eagle Outfitters, Inc. (the “Company”), a Delaware corporation, operates under the American Eagle® (“AE”), aerie® by American Eagle®, and 77kids by american eagle® brands. The Company operated the MARTIN+OSA® brand (“M+O”) until its closure during Fiscal 2010.
 
Founded in 1977, American Eagle Outfitters is a leading apparel and accessories retailer that operates more than 1,000 retail stores in the U.S. and Canada, and online at ae.com®. Through its family of brands, the Company offers high quality, on-trend clothing, accessories and personal care products at affordable prices. The Company’s online business, AEO Direct, ships to 76 countries worldwide.
 
Merchandise Mix
 
The following table sets forth the approximate consolidated percentage of net sales attributable to each merchandise group for each of the periods indicated:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
 
Men’s apparel and accessories
    40 %     40 %     42 %
Women’s apparel and accessories (excluding aerie)
    51 %     51 %     50 %
aerie
    9 %     9 %     8 %
                         
Total
    100 %     100 %     100 %
                         
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 January 29, 2011, the Company operated in one reportable segment.
 
Fiscal Year
 
Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2011” refers to the 52 week period ending January 28, 2012. “Fiscal 2010,” “Fiscal 2009,” “Fiscal 2008” and “Fiscal 2007” refer to the 52 week periods ended January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008, respectively. “Fiscal 2006” refers to the 53 week period ended February 3, 2007.
 
Discontinued Operations
 
On March 5, 2010, the Company’s Board of Directors (the “Board”) 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 second quarter of Fiscal 2010 and these Consolidated Financial Statements reflect the results of M+O as a discontinued operation for all periods presented.
 
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 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 will adopt ASU 2009-13 in Fiscal 2011 and does not expect an impact to 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.
 
In December 2010, the FASB issued ASU 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 provides amendments to Topic 350 to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts to clarify that, for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of ASU 2010-28 will not have an impact on the Company’s Fiscal 2011 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 10 to the Consolidated Financial Statements).
 
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 remaining maturity of three months or less to be cash equivalents.
 
As of January 29, 2011, short-term investments included short-term deposits purchased with a maturity of greater than three months but less than one year and 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 January 29, 2011, long-term investments included investments with remaining maturities of greater than 12 months and consisted of ARS classified as available-for-sale. It also includes the Company’s ARS Call Option related to investment sales during Fiscal 2010. The remaining contractual maturities of our long-term ARS investments are approximately 17 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 other-than-temporary impairment (“OTTI”) losses related to credit losses, as defined by ASC 320 Investments — Debt and Equity Securities (“ASC 320”), are considered by the Company to be a net impairment loss recognized in earnings. 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.
 
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 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 Fiscal 2010, the Company recorded a net impairment loss recognized in earnings related to credit losses on its investment securities of $1.2 million. During Fiscal 2009, the Company recorded a net impairment loss recognized in earnings related to credit losses on its investment securities of $0.9 million. During Fiscal 2008, the Company recorded a net impairment loss of $22.9 million in earnings related to certain investment securities.
 
Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.
 
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.
 
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, the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time 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 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 as a component of operating income within selling, general and administrative expense.
 
During Fiscal 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 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. During Fiscal 2009, the Company recorded asset impairment charges of $18.0 million related primarily to the impairment of 10 M+O stores. During Fiscal 2008, the Company recorded asset impairment charges of $6.7 million related primarily to the impairment of five M+O stores.
 
Refer to Note 14 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
 
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. During Fiscal 2010, Fiscal 2009 and Fiscal 2008, the Company recorded $2.7 million, $2.3 million and $4.9 million related to asset write-offs within depreciation and amortization expense.
 
Goodwill
 
As of January 29, 2011, the Company had approximately $11.5 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 29, 2011. Resulting from the Company’s annual goodwill impairment test performed as of January 29, 2011, the Company concluded that its goodwill was not impaired.
 
Other Assets, Net
 
Other assets, net consist primarily of assets related to our deferred compensation plans and trademark costs, net of accumulated amortization. Trademark costs are amortized over five to 15 years.
 
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.
 
Self-Insurance Liability
 
The Company is self-insured 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 through the use of 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.
 
Co-branded Credit Card and Customer Loyalty Program
 
The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the American Eagle, aerie, and 77kids brands. 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 AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in our credit card rewards program. Under the rewards program that expired on December 31, 2009, points were earned on purchases made with the AEO Visa Card at AE and aerie, and at other retailers where the card is accepted. Points earned under this credit card reward program resulted in the issuance of an AE gift card when a certain point threshold was reached. The AE gift card does not expire. On January 1, 2010, the Company modified the benefits on the AEO Visa and AEO 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, AEO 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, aerie and 77kids 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, aerie or 77kids 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®, a customer loyalty program. On January 1, 2010, the Company replaced the AE All-Access 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 AE All-Access 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 its 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.
 
During Fiscal 2010, the Company repurchased 15.5 million shares as part of its publicly announced repurchase programs for approximately $216.1 million, at a weighted average price of $13.94 per share. As of January 29, 2011, the Company had 14.5 million shares remaining authorized for repurchase. These shares may be repurchased at the Company’s discretion. The Company’s Board extended the current remaining share repurchase authorization through February 2, 2013. The Company did not repurchase any common stock as part of its publicly announced repurchase program during Fiscal 2009 or Fiscal 2008.
 
During Fiscal 2010 and Fiscal 2009, the Company repurchased approximately 1.0 million and 18,000 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, not in excess of the minimum statutory withholding requirements, in connection with the vesting of share-based payments, as permitted under the 2005 Stock Award and Incentive Plan, as amended (the “2005 Plan”).
 
The aforementioned share repurchases have been recorded as treasury stock.
 
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 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.
 
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.
 
                 
    For the Years Ended  
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Beginning balance
  $ 4,690     $ 3,981  
Returns
    (70,789 )     (71,705 )
Provisions
    69,790       72,414  
                 
Ending balance
  $ 3,691     $ 4,690  
                 
 
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 recognizes royalty revenue generated from its franchise agreements based upon royalty percentages on sales of merchandise by the franchisee. Royalty revenue is recorded as a component of net sales when earned.
 
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.
 
                         
    For the Years Ended
    January 29,
  January 30,
  January 31,
    2011   2010   2009
    (In thousands)
 
Proceeds from sell-offs
  $ 25,593     $ 29,347     $ 36,086  
Marked-down cost of merchandise disposed of via sell-offs
  $ 24,728     $ 29,023     $ 35,336  
 
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.
 
Advertising Costs
 
Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed when the marketing campaign commences. As of January 29, 2011 and January 30, 2010, the Company had prepaid advertising expense of $5.4 million. All other advertising costs are expensed as incurred. The Company recognized $64.9 million, $60.9 million, and $70.9 million in advertising expense during Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
 
Design Costs
 
The Company has certain design costs, including compensation, rent, depreciation, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold.
 
Store Pre-Opening Costs
 
Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are expensed as incurred.
 
Other Income (Expense), Net
 
Other income (expense), net consists primarily of interest income/expense and foreign currency transaction gain/loss.
 
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. The company recorded gift card breakage of $5.5 million, $6.8 million and $12.2 million during Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively.
 
Legal Proceedings and Claims
 
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”), the Company 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, results of operations or consolidated cash flows of the Company.
 
Supplemental Disclosures of Cash Flow Information
 
The table below shows supplemental cash flow information for cash amounts paid during the respective periods:
 
                         
    For the Years Ended
    January 29,
  January 30,
  January 31,
    2011   2010   2009
    (In thousands)
 
Cash paid during the periods for:
                       
Income taxes
  $ 45,737     $ 61,869     $ 132,234  
Interest
  $ 191     $ 1,879     $ 1,947  
 
Segment Information
 
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified four operating segments (American Eagle Brand US and Canadian stores, aerie by American Eagle retail stores, 77kids 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.
 
The following tables present summarized geographical information:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Net sales:
                       
United States
  $ 2,675,992     $ 2,665,655     $ 2,667,074  
Foreign(1)
    291,567       274,614       281,605  
                         
Total net sales
  $ 2,967,559     $ 2,940,269     $ 2,948,679  
                         
 
 
(1) Amounts represent sales from American Eagle and aerie Canadian retail stores, as well as AEO Direct sales, that are billed to and/or shipped to foreign countries.
 
                 
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Long-lived assets, net:
               
United States
  $ 607,564     $ 678,385  
Foreign
    47,028       45,967  
                 
Total long-lived assets, net
  $ 654,592     $ 724,352  
                 
 
Reclassifications
 
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 value of our cash and marketable securities, which are recorded as cash and cash equivalents, short-term investments and long-term investments on the Consolidated Balance Sheets:
 
                         
    January 29, 2011  
          Unrealized
    Unrealized
 
    Balance     Holding Gains     Holding Losses  
    (In thousands)  
 
Cash and cash equivalents:
                       
Cash
  $ 122,578     $     $  
Commercial paper
    40,884              
Corporate bonds
    3,695              
Treasury bills
    102,996              
Money-market
    397,440              
                         
Total cash and cash equivalents
  $ 667,593     $     $  
Short-term investments:
                       
Term-deposits
  $ 63,402     $     $  
State and local government ARS
    3,700              
                         
Total short-term investments
  $ 67,102     $     $  
Long-term investments:
                       
State and local government ARS
  $ 5,500     $     $  
ARS Call Option
    415              
                         
Total long-term investments
  $ 5,915     $     $  
                         
Total
  $ 740,610     $     $  
                         
 
                         
    January 30, 2010  
          Unrealized
    Unrealized
 
    Balance     Holding Gains     Holding Losses  
    (In thousands)}  
 
Cash and cash equivalents:
                       
Cash
  $ 144,391     $     $  
Commercial paper
    25,420              
Treasury bills
    119,988              
Money-market
    404,161              
                         
Total cash and cash equivalents
  $ 693,960     $     $  
Short-term investments:
                       
Student-loan backed ARS
  $ 400     $     $  
State and local government ARS
    4,275              
                         
Total short-term investments
  $ 4,675     $     $  
Long-term investments:
                       
Student-loan backed ARS
  $ 149,031     $     $ (8,569 )
State and local government ARS
    35,969             (456 )
Auction rate preferred securities
    12,773             (1,287 )
                         
Total long-term investments
  $ 197,773     $     $ (10,312 )
                         
Total
  $ 896,408     $     $ (10,312 )
                         
 
Proceeds from the sale of available-for-sale securities were $177.5 million, $80.4 million and $393.6 million for Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively. The proceeds from the sale of available-for-sale securities for Fiscal 2010 and Fiscal 2008 are offset against purchases of $62.8 million and $48.7 million, respectively. There were no purchases of available-for-sale securities during Fiscal 2009.
 
The following table presents the length of time available-for-sale securities were in continuous unrealized loss positions but were not deemed to be other-than-temporarily impaired. At January 29, 2011, the fair value of all available-for-sale securities approximated par, with no gross unrealized holding losses.
 
                                 
    Less Than 12 Months     Greater Than or Equal to 12 Months  
    Gross Unrealized
          Gross Unrealized
       
    Holding Losses     Fair Value     Holding Losses     Fair Value  
    (In thousands)  
 
January 30, 2010
                               
Student-loan backed ARS
  $ (1,643 )   $ 9,203     $ (6,926 )   $ 50,228  
State and local government ARS
    (273 )     8,096       (183 )     20,922  
Auction rate preferred securities
                (1,287 )     12,773  
                                 
Total(1)
  $ (1,916 )   $ 17,299     $ (8,396 )   $ 83,923  
                                 
 
 
(1) Fair value excludes $101.2 million as of January 30, 2010 of investments whose fair value approximates par.
 
As of January 29, 2011, we had a total of $740.6 million in cash and cash equivalents, short-term and long-term investments, which included $9.2 million of investments in ARS. The carrying value of the investments in ARS equals their par value with no impairment in OCI or previously recognized in earnings.
 
In the first half of Fiscal 2010, the Company sold $28.1 million of ARS investments for proceeds of $27.9 million and a realized loss of $0.2 million. During the third quarter of Fiscal 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 Operation of $24.2 million, of which $10.9 million was previously included in OCI on the Company’s Consolidated Balance Sheet. The total realized loss on the sale of investment securities in Fiscal 2010 was $24.4 million.
 
The $176.4 million of par value ARS securities sold during the third quarter of Fiscal 2010 included $119.7 million of par value ARS securities whereby 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. Upon origination, the Company determined that the fair value was $0.4 million. The fair value of the ARS Call Option was 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 January 29, 2011. As of January 29, 2011, the Company determined the value of the ARS Call Option was $0.4 million.
 
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.
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 this 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 January 29, 2011 and January 30, 2010, 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 and ARPS.
 
In accordance with ASC 820, the following tables represent the fair value hierarchy for the Company’s financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of January 29, 2011 and January 30, 2010:
 
                                 
    Fair Value Measurements at January 29, 2011  
          Quoted Market
             
          Prices in Active
          Significant
 
          Markets for
    Significant Other
    Unobservable
 
    Carrying
    Identical Assets
    Observable
    Inputs
 
    Amount     (Level 1)     Inputs (Level 2)     (Level 3)  
    (In thousands)  
 
Cash and cash equivalents
                               
Cash
  $ 122,578     $ 122,578     $     $  
Commercial paper
    40,884       40,884              
Corporate bonds
    3,695       3,695              
Treasury bills
    102,996       102,996              
Money-market
    397,440       397,440              
                                 
Total cash and cash equivalents
  $ 667,593     $ 667,593     $     $  
Short-term investments
                               
Term deposits
  $ 63,402     $ 63,402     $     $  
State and local government ARS
    3,700                   3,700  
                                 
Total short-term investments
  $ 67,102     $ 63,402     $     $ 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
  $ 740,610     $ 730,995     $     $ 9,615  
                                 
 
                                 
    Fair Value Measurements at January 30, 2010  
          Quoted Market
             
          Prices in Active
          Significant
 
          Markets for
    Significant Other
    Unobservable
 
    Carrying
    Identical Assets
    Observable
    Inputs
 
    Amount     (Level 1)     Inputs (Level 2)     (Level 3)  
    (In thousands)  
 
Cash and cash equivalents
                               
Cash
  $ 144,391     $ 144,391     $     $  
Commercial paper
    25,420       25,420              
Treasury bills
    119,988       119,988              
Money-market
    404,161       404,161              
                                 
Total cash and cash equivalents
  $ 693,960     $ 693,960     $     $  
Short-term investments
                               
Student-loan backed ARS
  $ 400     $     $     $ 400  
State and local government ARS
    4,275                   4,275  
                                 
Total short-term investments
  $ 4,675     $     $     $ 4,675  
Long-term investments
                               
Student-loan backed ARS
  $ 149,031     $     $     $ 149,031  
State and local government ARS
    35,969                   35,969  
Auction rate preferred securities
    12,773                   12,773  
                                 
Total long-term investments
  $ 197,773     $     $     $ 197,773  
                                 
Total
  $ 896,408     $ 693,960     $     $ 202,448  
                                 
 
The Company used a discounted cash flow (“DCF”) model to value its Level 3 investments. For Fiscal 2010, the assumptions in the Company’s model included different recovery periods, ranging from five to 17 months depending on the type of security, and discount factors for yield of 0.2% and illiquidity of 0.5%. For Fiscal 2009, the assumptions in the Company’s model included different recovery periods, ranging from 0.5 year to 11 years, depending on the type of security and varying discount factors for yield, ranging from 0.3% to 6.6%, and illiquidity, ranging from 0.3% to 4.0%. These assumptions are subjective. They are based on the Company’s current judgment and 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 for Fiscal 2010, the Company recognized net impairment of $0.6 million in OCI. 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 third quarter of Fiscal 2010 was $10.9 million ($6.8 million, net of tax). Total cumulative impairment recognized in OCI as of January 30, 2010 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’ fair values. As a result of a credit rating downgrade on student-loan backed ARS, the Company also recorded a net impairment loss in earnings of $1.2 million during Fiscal 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 in the third quarter of Fiscal 2010. Through the liquidation, the Company received proceeds of $149.6 million plus accrued interest and recognized a loss in its Consolidated Statements of Operation 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 net impairment loss recognized in earnings related to credit losses:
 
         
    For the Year Ended
 
    January 29, 2011  
    (In thousands)  
 
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 our 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
             
          Rate
    Auction-
    Auction-Rate
       
          Municipal
    Rate
    Preferred
    ARS Call
 
    Total     Securities     Securities     Securities     Option  
    (In thousands)  
 
Carrying value at January 31, 2009
  $ 251,007     $ 69,970     $ 169,254     $ 11,783     $  
Settlements
    (72,600 )     (29,900 )     (42,700 )            
Gains and (losses):
                                       
Reported in earnings
    (940 )                 (940 )      
Reported in OCI
    24,981       174       22,877       1,930        
                                         
Balance 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 January 29, 2011
  $ 9,615     $ 9,200     $     $     $ 415  
                                         
 
Non-Financial Assets
 
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. Resulting from the Company’s annual goodwill impairment test performed as of January 29, 2011, the Company concluded that its goodwill was not impaired.
 
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 Company’s 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 Fiscal 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. Additionally, during Fiscal 2009 and Fiscal 2008, certain long-lived assets primarily related to M+O stores were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million and $6.7 million, respectively. The loss on impairment of M+O assets for all periods presented is included within Loss from Discontinued Operations. 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 14 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. 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. ASC 260-10-45 was adopted and retrospectively applied at the beginning of Fiscal 2009. For Fiscal 2010, Fiscal 2009 and Fiscal 2008, the application of ASC 260-10-45 resulted in no material change to basic or diluted income from continuing operations per common share.
 
The following is a reconciliation between basic and diluted weighted average shares outstanding:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands, except per share amounts)  
 
Weighted average common shares outstanding:
                       
Basic number of common shares outstanding
    199,979       206,171       205,169  
Dilutive effect of stock options and non-vested restricted stock
    1,839       3,341       2,413  
                         
Dilutive number of common shares outstanding
    201,818       209,512       207,582  
                         
Basic income from continuing operations per common share
                       
Income from continuing operations
  $ 181,934     $ 213,398     $ 229,984  
Less: Income allocated to participating securities
    74       365       364  
                         
Income from continuing operations available to common shareholders
  $ 181,860     $ 213,033     $ 229,620  
                         
Basic income from continuing operations per common share
  $ 0.91     $ 1.03     $ 1.12  
                         
Dilutive income from continuing operations per common share
                       
Income from continuing operations
  $ 181,934     $ 213,398     $ 229,984  
Less: Income allocated to participating securities
    74       360       360  
                         
Income from continuing operations available to common shareholders
  $ 181,860     $ 213,038     $ 229,624  
                         
Dilutive income from continuing operations per common share
  $ 0.90     $ 1.02     $ 1.11  
                         
 
Equity awards to purchase approximately 7.9 million, 6.6 million and 7.6 million shares of common stock during the Fiscal 2010, Fiscal 2009 and Fiscal 2008, 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.
 
Additionally, for Fiscal 2010, Fiscal 2009 and Fiscal 2008, approximately 0.7 million, 0.4 million and 0.8 million shares, respectively, of performance-based restricted stock awards 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 performance goals.
Accounts Receivable
Accounts Receivable
6.   Accounts Receivable
 
Accounts receivable are comprised of the following:
 
                 
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Landlord construction allowances
  $ 11,739     $ 11,132  
Merchandise sell-offs
    4,539       8,063  
Marketing cost reimbursements
    3,553       2,556  
Credit card receivable
          7,832  
Gift card receivable
    3,567       1,413  
Franchise receivable
    5,183       1,419  
Insurance claims receivable
    4,374        
Other
    3,766       2,331  
                 
Total
  $ 36,721     $ 34,746  
                 
Property and Equipment
Property and Equipment
 
7.   Property and Equipment
 
Property and equipment consists of the following:
 
                 
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Land
  $ 6,364     $ 6,364  
Buildings
    152,984       151,484  
Leasehold improvements
    624,479       645,794  
Fixtures and equipment
    647,346       590,610  
Construction in progress
    1,629       554  
                 
Property and equipment at cost
  $ 1,432,802     $ 1,394,806  
Less: Accumulated depreciation and amortization
    (789,682 )     (681,664 )
                 
Net property and equipment
  $ 643,120     $ 713,142  
                 
 
Depreciation expense is summarized as follows:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Depreciation expense
  $ 139,169     $ 137,045     $ 123,218  
                         
Note Payable and Other Credit Arrangements
Note Payable and Other Credit Arrangements
 
8.   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 letters of credit issuances, $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 letters of credit facilities of $150.0 million USD and $50.0 million USD expire November 1, 2011 and May 27, 2011, respectively. The $50.0 million USD and $25.0 million CAD demand lines expire on April 20, 2011 and December 13, 2011, respectively. The remaining $60.0 million USD facility expires on May 22, 2011.
 
As of January 29, 2011, the Company had outstanding demand letters of credit of $30.0 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%.
Leases
Leases
 
9.   Leases
 
The Company leases all store premises, some of its office space and certain information technology and office equipment. The store leases generally have initial terms of 10 years. Most of these store leases provide for base rentals and the payment of a percentage of sales as additional contingent rent when sales exceed specified levels. Additionally, most leases contain construction allowances and/or rent holidays. In recognizing landlord incentives and minimum rent expense, the Company amortizes the charges on a straight-line basis over the lease term (including the pre-opening build-out period). These leases are classified as operating leases.
 
A summary of fixed minimum and contingent rent expense for all operating leases follows:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Store rent:
                       
Fixed minimum
  $ 230,277     $ 218,785     $ 188,112  
Contingent
    8,182       7,873       11,765  
                         
Total store rent, excluding common area maintenance charges, real estate taxes and certain other expenses
  $ 238,459     $ 226,658     $ 199,877  
Offices, distribution facilities, equipment and other
    16,722       17,391       16,902  
                         
Total rent expense
  $ 255,181     $ 244,049     $ 216,779  
                         
 
In addition, the Company is typically responsible under its store, office and distribution center leases for tenant occupancy costs, including maintenance costs, common area charges, real estate taxes and certain other expenses.
 
The table below summarizes future minimum lease obligations, consisting of fixed minimum rent, under operating leases in effect at January 29, 2011:
 
         
    Future Minimum
 
Fiscal years:   Lease Obligations  
    (In thousands)  
 
2011
  $ 243,798  
2012
    233,279  
2013
    220,081  
2014
    201,761  
2015
    187,234  
Thereafter
    687,087  
         
Total
  $ 1,773,240  
         
Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss)
10.   Other Comprehensive Income (Loss)
 
The accumulated balances of other comprehensive income (loss) included as part of the Consolidated Statements of Stockholders’ Equity follow:
 
                         
                Accumulated
 
    Before
    Tax
    Other
 
    Tax
    (Expense)
    Comprehensive
 
    Amount     Benefit     Income (Loss)  
    (In thousands)  
 
Balance at February 2, 2008
  $ 35,714     $ (229 )   $ 35,485  
                         
Temporary impairment related to ARS
    (37,432 )     14,259       (23,173 )
Reclassification adjustment for realized losses in net income related to investment securities
    1,532       (584 )     948  
Foreign currency translation loss
    (27,649 )           (27,649 )
                         
Balance at January 31, 2009
  $ (27,835 )   $ 13,446     $ (14,389 )
                         
Temporary reversal of impairment related to ARS
    24,041       (9,535 )     14,506  
Reclassification adjustment for realized losses in net income related to investment securities
    940             940  
Foreign currency translation gain
    15,781             15,781  
                         
Balance at January 30, 2010
  $ 12,927     $ 3,911     $ 16,838  
                         
Temporary impairment related to ARS
    (1,830 )     690       (1,140 )
Reclassification adjustment for realized losses in net income related to investment securities
    12,142       (4,601 )     7,541  
Foreign currency translation gain
    4,833             4,833  
                         
Balance at January 29, 2011
  $ 28,072     $     $ 28,072  
                         
 
The components of accumulated other comprehensive income (loss) were as follows:
 
                 
    For the Years Ended  
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Net unrealized loss on available-for-sale securities, net of tax(1)
  $     $ (6,401 )
Foreign currency translation adjustment
    28,072       23,239  
                 
Accumulated other comprehensive income
  $ 28,072     $ 16,838  
                 
 
 
(1) Amount is shown net of tax of $3.9 million for Fiscal 2009.
Share-Based Payments
Share-Based Payments
 
11.   Share-Based Payments
 
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires the Company to measure and recognize compensation expense for all share-based payments at fair value. Total share-based compensation expense included in the Consolidated Statements of Operations for Fiscal 2010, Fiscal 2009 and Fiscal 2008 was $25.5 million ($15.7 million, net of tax), $34.6 million ($21.4 million, net of tax) and $18.7 million ($11.5 million, net of tax), respectively.
 
ASC 718 requires recognition of compensation cost under a non-substantive vesting period approach for awards containing provisions that accelerate or continue vesting upon retirement. Accordingly, for awards with such provisions, the Company recognizes compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant.
 
At January 29, 2011, the Company had awards outstanding under three share-based compensation plans, which are described below.
 
Share-based compensation plans
 
1994 Stock Option Plan
 
On February 10, 1994, the Company’s Board adopted the American Eagle Outfitters, Inc. 1994 Stock Option Plan (the “1994 Plan”). The 1994 Plan provided for the grant of 12.2 million incentive or non-qualified options to purchase common stock. The 1994 Plan was subsequently amended to increase the shares available for grant to 24.3 million shares. Additionally, the amendment provided that the maximum number of options that may be granted to any individual may not exceed 8.1 million shares. The options granted under the 1994 Plan were approved by the Compensation Committee of the Board, primarily vest over five years, and expire 10 years from the date of grant. The 1994 Plan terminated on January 2, 2004 with all rights of the optionees and all unexpired options continuing in force and operation after the termination.
 
1999 Stock Incentive Plan
 
The 1999 Stock Option Plan (the “1999 Plan”) was approved by the stockholders on June 8, 1999. The 1999 Plan authorized 18.0 million shares for issuance in the form of stock options, stock appreciation rights (“SAR”), restricted stock awards, performance units or performance shares. The 1999 Plan was subsequently amended to increase the shares available for grant to 33.0 million. Additionally, the 1999 Plan provided that the maximum number of shares awarded to any individual may not exceed 9.0 million shares. The 1999 Plan allowed the Compensation Committee to determine which employees and consultants received awards and the terms and conditions of these awards. The 1999 Plan provided for a grant of 1,875 stock options quarterly (not to be adjusted for stock splits) to each director who is not an officer or employee of the Company starting in August 2003. The Company ceased making these quarterly stock option grants in June 2005. Under this plan, 33.2 million non-qualified stock options and 6.7 million shares of restricted stock were granted to employees and certain non-employees (without considering cancellations to date of awards for 7.9 million shares). Approximately 33% of the options granted were to vest over eight years after the date of grant but were accelerated as the Company met annual performance goals. Approximately 34% of the options granted under the 1999 Plan vest over three years, 23% vest over five years and the remaining grants vest over one year. All options expire after 10 years. Performance-based restricted stock was earned if the Company met established performance goals. The 1999 Plan terminated on June 15, 2005 with all rights of the awardees and all unexpired awards continuing in force and operation after the termination.
 
2005 Stock Award and Incentive Plan
 
The 2005 Plan was approved by the stockholders on June 15, 2005. The 2005 Plan authorized 18.4 million shares for issuance, of which 6.4 million shares are available for full value awards in the form of restricted stock awards, restricted stock units or other full value stock awards and 12.0 million shares are available for stock options, SAR, dividend equivalents, performance awards or other non-full value stock awards. The 2005 Plan was subsequently amended in Fiscal 2009 to increase the shares available for grant to 31.9 million without taking into consideration 9.1 million non-qualified stock options, 2.9 million shares of restricted stock and 0.2 million shares of common stock that had been previously granted under the 2005 plan to employees and directors (without considering cancellations as of January 31, 2009 of awards for 2.9 million shares). The 2005 Plan provides that the maximum number of shares awarded to any individual may not exceed 6.0 million shares per year for options and SAR and no more than 4.0 million shares may be granted with respect to each of restricted shares of stock and restricted stock units plus any unused carryover limit from the previous year. The 2005 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards that are mandatory under the 2005 Plan. The 2005 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed 20,000 shares per year (not to be adjusted for stock splits). Through January 29, 2011, 14.4 million non-qualified stock options, 7.2 million shares of restricted stock and 0.4 million shares of common stock had been granted under the 2005 Plan to employees and directors (without considering cancellations to date of awards for 7.0 million shares). Approximately 99% of the options granted under the 2005 Plan vest over three years and 1% vest over five years. Options were granted for ten and seven year terms. Approximately 65% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals. The remaining 35% of the restricted stock awards are time-based and vest over three years.
 
Stock Option Grants
 
The Company grants both time-based and performance-based stock options under the 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 under all plans for Fiscal 2010 follows:
 
                                 
    For the Year Ended January 29, 2011  
                Weighted-
       
          Weighted-
    Average
       
          Average
    Remaining
    Aggregate
 
          Exercise
    Contractual
    Intrinsic
 
    Options     Price     Life     Value  
                (In Years)     (In thousands)  
 
Outstanding — January 30, 2010
    14,904,942     $ 15.01                  
Granted
    1,763,562     $ 17.04                  
Exercised(1)
    1,307,881     $ 8.60                  
Cancelled/Forfeited
    3,236,167     $ 15.80                  
                                 
Outstanding — January 29, 2011
    12,124,456     $ 15.25       3.5     $ 34,921  
                                 
Vested and expected to vest — January 29, 2011
    11,877,942     $ 15.27       3.5     $ 34,336  
                                 
Exercisable — January 29, 2011
    3,612,641     $ 6.92       2.0     $ 27,607  
 
 
(1) Options exercised during Fiscal 2010 ranged in price from $4.54 to $17.51.
 
The weighted-average grant date fair value of stock options granted during Fiscal 2010, Fiscal 2009 and Fiscal 2008 was $5.19, $3.86 and $7.16, respectively. The aggregate intrinsic value of options exercised during Fiscal 2010, Fiscal 2009 and Fiscal 2008 was $11.7 million, $11.7 million and $3.9 million, respectively. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $7.3 million and $15.6 million, respectively, for Fiscal 2010. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $9.0 million and $8.0 million, respectively, for Fiscal 2009. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $3.8 million and $1.1 million, respectively, for Fiscal 2008.
 
The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
 
                         
    For the Years Ended
    January 29,
  January 30,
  January 31,
Black-Scholes Option Valuation Assumptions   2011   2010   2009
 
Risk-free interest rates(1)
    2.3 %     1.7 %     2.5 %
Dividend yield
    2.1 %     3.4 %     1.7 %
Volatility factors of the expected market price of the Company’s common stock(2)
    40.2 %     56.9 %     44.4 %
Weighted-average expected term(3)
    4.5  years     4.1  years     4.3  years
Expected forfeiture rate(4)
    8.0 %     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. The weighted average expected option term for the years ended January 29, 2011, January 30, 2010 and January 31, 2009 were determined based on historical experience.
 
(4) Based on historical experience.
 
As of January 29, 2011, there was $4.1 million of unrecognized compensation expense related to nonvested 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. Historically, the Company has granted only restricted stock awards that entitled the holders to receive nonforfeitable dividends prior to vesting. Beginning with Fiscal 2009 restricted stock awards, the Company began to also grant restricted stock unit awards to its employees. 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 activity of the Company’s restricted stock is presented in the following tables:
 
                                 
    Time-Based Restricted Stock     Performance-Based Restricted Stock  
    For the Year Ended
    For the Year Ended
 
    January 29, 2011     January 29, 2011  
          Weighted-Average
          Weighted-Average
 
          Grant Date
          Grant Date
 
    Shares     Fair Value     Shares     Fair Value  
 
Nonvested — January 30, 2010
    1,883     $ 13.28       989,664     $ 9.66  
Granted
                       
Vested
                (989,664 )     9.66  
Cancelled/Forfeited
    1,883       13.28              
                                 
Nonvested — January 29, 2011
        $           $  
 
                                 
          Performance-Based Restricted
 
    Time-Based Restricted Stock Units     Stock Units  
    For the Year Ended
    For the Year Ended
 
    January 29, 2011     January 29, 2011  
          Weighted-Average
          Weighted-Average
 
          Grant Date
          Grant Date
 
    Shares     Fair Value     Shares     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/Forfeited
    (239,839 )     16.60       (88,977 )     16.26  
                                 
Nonvested — January 29, 2011
    877,020     $ 17.45       629,617     $ 12.59  
 
As of January 29, 2011, there was $10.6 million of unrecognized compensation expense related to nonvested restricted stock awards that is expected to be recognized over a weighted average period of two years. The total fair value of restricted stock awards vested during Fiscal 2010, Fiscal 2009 and Fiscal 2008 was $9.6 million, $0.6 million and $9.6 million, respectively.
 
As of January 29, 2011, the Company had 25.7 million shares available for all equity grants.
Retirement Plan And Employee Stock Purchase Plan
Retirement Plan and Employee Stock Purchase Plan
 
12.   Retirement Plan and Employee Stock Purchase Plan
 
The Company maintains a profit sharing and 401(k) plan (the “Retirement Plan”). Under the provisions of the Retirement Plan, full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 201/2 years of age. In addition, full-time employees need to have completed 60 days of service and part-time employees must complete 1,000 hours worked to be eligible. Individuals can decline enrollment or can contribute up to 50% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the Company will match 100% of the first 3% of pay plus an additional 50% of the next 3% of pay that is contributed to the plan. Contributions to the profit sharing plan, as determined by the Board, are discretionary. The Company recognized $11.7 million, $5.9 million and $5.1 million in expense during Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively, in connection with the Retirement Plan.
 
The Employee Stock Purchase Plan is a non-qualified plan that covers all full-time employees and part-time employees who are at least 18 years old and have completed 60 days of service. Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market.
Income Taxes
Income Taxes
13.   Income Taxes
 
The components of income before income taxes from continuing operations were:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
U.S. 
  $ 258,408     $ 269,932     $ 325,287  
Foreign
    36,676       34,443       52,412  
                         
Total
  $ 295,084     $ 304,375     $ 377,699  
                         
 
The significant components of the Company’s deferred tax assets and liabilities were as follows:
 
                 
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Deferred tax assets:
               
Deferred compensation
  $ 30,801     $ 36,018  
Foreign tax credits
    25,498       26,745  
Rent
    25,145       24,498  
Investment securities
    20,381       10,677  
Inventories
    10,432       11,422  
Foreign and state income taxes
    7,575       7,484  
State tax credits
    5,866       5,011  
Employee compensation and benefits
    4,942       10,669  
Other
    8,547       12,295  
                 
Gross deferred tax assets
    139,187       144,819  
Valuation allowance
    (20,381 )     (15,688 )
                 
Total deferred tax assets
  $ 118,806     $ 129,131  
                 
Deferred tax liabilities:
               
Property and equipment
  $ (47,852 )   $ (37,896 )
Prepaid expenses
    (3,279 )     (3,774 )
                 
Total deferred tax liabilities
  $ (51,131 )   $ (41,670 )
                 
Total deferred tax assets, net
  $ 67,675     $ 87,461  
                 
Classification in the Consolidated Balance Sheet:
               
Current deferred tax assets
  $ 48,059     $ 60,156  
Noncurrent deferred tax assets
    19,616       27,305  
                 
Total deferred tax assets
  $ 67,675     $ 87,461  
                 
 
The net decrease in deferred tax assets and liabilities was primarily due to an increase in the deferred tax liability for property and equipment basis differences.
 
Significant components of the provision for income taxes from continuing operations were as follows:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Current:
                       
Federal
  $ 89,110     $ 92,074     $ 94,328  
Foreign taxes
    13,429       14,526       16,341  
State
    9,610       13,575       9,698  
                         
Total current
    112,149       120,175       120,367  
                         
Deferred:
                       
Federal
  $ (310 )   $ (32,361 )   $ 24,579  
Foreign taxes
    (991 )     6,513       (340 )
State
    2,302       (3,350 )     3,109  
                         
Total deferred
    1,001       (29,198 )     27,348  
                         
Provision for income taxes
  $ 113,150     $ 90,977     $ 147,715  
                         
 
As a result of additional tax deductions related to share-based payments, tax benefits have been recognized as contributed capital for Fiscal 2010, Fiscal 2009 and Fiscal 2008 in the amounts of $15.6 million, $8.0 million and $1.1 million, respectively.
 
During Fiscal 2009, the Company approved and repatriated $91.7 million from its Canadian subsidiaries. The proceeds from the repatriation were used for general corporate purposes. The Company plans to indefinitely reinvest accumulated earnings of our Canadian subsidiaries outside of the United States to the extent not repatriated in Fiscal 2009. Accordingly, no provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to income and withholding taxes offset by foreign tax credits. As of January 29, 2011 and January 30, 2010, the unremitted earnings of our Canadian subsidiaries were $57.1 million (USD) and $28.0 million (USD), respectively.
 
As of January 29, 2011, the gross amount of unrecognized tax benefits was $31.1 million, of which $22.7 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of January 30, 2010 was $31.6 million, of which $23.4 million would affect the effective income tax rate if recognized.
 
The following table summarizes the activity related to our unrecognized tax benefits:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Unrecognized tax benefits, beginning of the year balance
  $ 31,649     $ 41,080     $ 42,953  
Increases in tax positions of prior periods
    1,069       1,679       205  
Decreases in tax positions of prior periods
    (3,801 )     (13,471 )     (1,705 )
Increases in current period tax positions
    2,707       14,842       4,221  
Settlements
    (6 )     (6,204 )     (4,529 )
Lapse of statute of limitations
    (510 )     (6,291 )     (30 )
Translation adjustment
          14       (35 )
                         
Unrecognized tax benefits, end of the year balance
  $ 31,108     $ 31,649     $ 41,080  
                         
 
Unrecognized tax benefits decreased by $0.5 million and $9.5 million during Fiscal 2010 and 2009, respectively. The decrease in Fiscal 2009 was primarily due to federal and state income tax settlements and statute of limitation lapses. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the balance sheet date over the next twelve months.
 
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties related to unrecognized tax benefits included in the Consolidated Balance Sheet were $7.6 million and $7.0 million as of January 29, 2011 and January 30, 2010, respectively. During Fiscal 2009, the Company recognized a net benefit of $3.3 million in the provision for income taxes related to the reversal of accrued interest and penalties primarily due to federal and state income tax settlements. An immaterial amount of interest and penalties were recognized in the provision for income taxes during Fiscal 2010 and Fiscal 2008.
 
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (“IRS”) examination of the Company’s U.S. federal income tax returns for the tax years ended July 2006 and July 2007 were completed in November of 2009. Accordingly, all years prior to July 2008 are no longer subject to U.S. federal income tax examinations by tax authorities. During Fiscal 2008, the Company changed its tax year end to a 52/53 week year that ends on the Saturday nearest January 31 from the Saturday nearest July 31 to conform to its financial statement year end. This change was effective for the tax year ended January 31, 2009. An IRS examination of the July 2008 and January 2009 federal income tax returns is scheduled to be completed in Fiscal 2011. The Company does not anticipate that any adjustments will result in a material change to its financial position, results of operations or cash flow. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, generally, the Company and its subsidiaries are no longer subject to income tax audits for tax years before 2004. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that are expected to result from these years.
 
The Company has foreign tax credit carryovers in the amount of $25.5 million and $26.7 million as of January 29, 2011 and January 30, 2010, respectively. The foreign tax credit carryovers expire in Fiscal 2019 to the extent not utilized. No valuation allowance has been recorded on the foreign tax credit carryovers because we believe it is more likely than not the foreign tax credits will be utilized prior to expiration.
 
The Company has been certified to qualify for nonrefundable incentive tax credits in Kansas for additional expenditures related to the Ottawa, Kansas distribution center. As a result, the Company has a deferred tax asset related to Kansas tax credit carryforwards of $5.9 million (net of federal income taxes) as of January 29, 2011. These tax credits can be utilized to offset future Kansas income taxes and will generally expire in seven years. Due to a favorable incentive agreement with the Kansas Department of Commerce in Fiscal 2010, the Company released the valuation allowance that had been previously recorded related to the Company’s Kansas tax credit carryforward. A deferred tax asset of $5.0 million with an offsetting full valuation allowance was recorded as of January 30, 2010 related to the Kansas tax credit carryforward.
 
During Fiscal 2010 and 2009, the Company recorded a valuation allowance against deferred tax assets arising from the disposition or other than temporary impairment of certain investment securities. The disposition of the investment securities results in a capital loss that can only be utilized to the extent of capital gains. These capital losses are subject to a three year carryback period and a five year carryforward period for tax purposes. The capital losses generally will expire in Fiscal 2013 through Fiscal 2015. Due to the contingencies related to the future use of these capital losses, we believe it is more likely than not that the full benefit of this asset will not be realized within the carryforward period. Thus, the Company has recorded a valuation allowance against the deferred tax assets arising from the other than temporary impairment or disposition of these investment securities. The valuation allowance related to these investment securities was $20.4 million and $10.7 million as of January 29, 2011 and January 30, 2010, respectively.
 
During Fiscal 2009, the Company did not record a valuation allowance on the temporary impairment of the investment securities recorded in other comprehensive income. This treatment was consistent with the Company’s intent and ability to hold debt securities to recovery.
 
A reconciliation between the statutory federal income tax rate and the effective income tax rate from continuing operations follows:
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
 
Federal income tax rate
    35 %     35 %     35 %
State income taxes, net of federal income tax effect
    3       3       3  
Valuation allowance increase, net
    1       1       2  
Tax settlements
    (1 )     (4 )      
Canadian earnings repatriation
          (5 )      
Tax impact of tax exempt interest
                (1 )
                         
      38 %     30 %     39 %
                         
Discontinued Operations
Discontinued Operations
 
14.   Discontinued Operations
 
On March 5, 2010, the Company’s Board 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 second quarter of Fiscal 2010 and the Consolidated Financial Statements reflect the results of M+O as discontinued operations for all periods presented.
 
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 Fiscal 2010 are included in the table as follows. There were no exit or disposal costs recognized in Fiscal 2009 or Fiscal 2008. The Loss from Discontinued Operations for Fiscal 2009 and Fiscal 2008 includes pre-tax asset impairment charges of $18.0 million and $6.7 million, respectively.
 
         
    For the Year Ended
 
    January 29,
 
    2011  
    (In thousands)  
 
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:
 
         
    January 29,
 
    2011  
    (In thousands)  
 
Accrued liability as of January 30, 2010
  $  
Add: Costs incurred, excluding non-cash charges
    30,879  
Less: Cash payments
    (30,879 )
         
Accrued liability as of Janaury 29, 2011
  $  
         
 
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 the years ended January 29, 2011 and January 30, 2010 and January 31, 2009, respectively.
 
                         
    For the Years Ended  
    January 29,
    January 30,
    January 31,
 
    2011     2010     2009  
    (In thousands)  
 
Net sales
  $ 21,881     $ 50,251     $ 40,187  
                         
Loss from discontinued operations, before income taxes
  $ (66,959 )   $ (71,984 )   $ (80,658 )
Income tax benefit
    25,672       27,608       29,735  
                         
Loss from discontinued operations, net of tax
  $ (41,287 )   $ (44,376 )   $ (50,923 )
                         
Loss per common share from discontinued operations:
                       
Basic
  $ (0.21 )   $ (0.22 )   $ (0.25 )
Diluted
  $ (0.20 )   $ (0.21 )   $ (0.25 )
 
The major classes of assets and liabilities included in the Consolidated Balance Sheets for M+O as of January 29, 2011 and January 30, 2010 is as follows:
 
                 
    January 29,
    January 30,
 
    2011     2010  
    (In thousands)  
 
Current assets
  $     $ 13,378  
Non-current assets
          21,227  
                 
Total assets
  $     $ 34,605  
                 
Total current liabilities
  $     $ 6,110  
Total non-current liabilities
          4,604  
                 
Total liabilities
  $     $ 10,714  
                 
Quarterly Financial Information (Unaudited)
Quarterly Financial Information - Unaudited
15.   Quarterly Financial Information  — Unaudited
 
The sum of the quarterly EPS amounts may not equal the full year amount as the computations of the weighted average shares outstanding for each quarter and the full year are calculated independently.
 
                                 
    Fiscal 2010
 
    Quarters Ended  
    May 1,
    July 31,
    October 30,
    January 29,
 
    2010     2010     2010     2011  
    (In thousands, except per share amounts)  
 
Net sales
  $ 648,462     $ 651,502     $ 751,507     $ 916,088  
                                 
Gross profit
  $ 257,696     $ 239,708     $ 312,309     $ 361,246  
                                 
Income from continuing operations
    35,862       25,843       33,191       87,038  
Loss from discontinued operations
    (24,940 )     (16,180 )     (167 )      
                                 
Net income
  $ 10,922     $ 9,663     $ 33,024     $ 87,038  
                                 
Basic per common share amounts:
                               
Income from continuing operations
  $ 0.17     $ 0.13     $ 0.17     $ 0.45  
Loss from discontinued operations
    (0.12 )     (0.08 )            
                                 
Basic income per common share
  $ 0.05     $ 0.05     $ 0.17     $ 0.45  
                                 
Diluted per common share amounts:
                               
Income from continuing operations
  $ 0.17     $ 0.13     $ 0.17     $ 0.44  
Loss from discontinued operations
    (0.12 )     (0.08 )            
                                 
Diluted income per common share
  $ 0.05     $ 0.05     $ 0.17     $ 0.44  
                                 
 
                                 
    Fiscal 2009
 
    Quarters Ended  
    May 2,
    August 1,
    October 31,
    January 30,
 
    2009     2009     2009     2010  
    (In thousands, except per share amounts)  
 
Net sales
  $ 601,679     $ 646,798     $ 736,011     $ 955,781  
                                 
Gross profit
  $ 223,603     $ 253,898     $ 304,175     $ 391,754  
                                 
Income from continuing operations
    29,076       36,757       67,948       79,617  
Loss from discontinued operations
    (7,109 )     (8,185 )     (8,789 )     (20,293 )
                                 
Net income
  $ 21,967     $ 28,572     $ 59,159     $ 59,324  
                                 
Basic per common share amounts:
                               
Income from continuing operations
  $ 0.14     $ 0.18     $ 0.33     $ 0.39  
Loss from discontinued operations
    (0.03 )     (0.04 )     (0.04 )     (0.10 )
                                 
Basic income per common share
  $ 0.11     $ 0.14     $ 0.29     $ 0.29  
                                 
Diluted per common share amounts:
                               
Income from continuing operations
  $ 0.14     $ 0.18     $ 0.32     $ 0.38  
Loss from discontinued operations
    (0.03 )     (0.04 )     (0.04 )     (0.10 )
                                 
Diluted income per common share
  $ 0.11     $ 0.14     $ 0.28     $ 0.28  
                                 
Subsequent Event
Subsequent Event
 
16.   Subsequent Event
 
The Company has evaluated the existence of subsequent events through the filing date of this Annual Report on Form 10-K.