AMERICAN EAGLE OUTFITTERS INC, 10-Q filed on 5/26/2011
Quarterly Report
Document and Entity Information (USD $)
3 Months Ended
Apr. 30, 2011
May 23, 2011
Jul. 31, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Apr. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q1 
 
 
Current Fiscal Year End Date
--01-28 
 
 
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
 
194,871,695 
 
Consolidated Balance Sheets (USD $)
In Thousands
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
12 Months Ended
Jan. 29, 2011
Current assets:
 
 
 
Cash and cash equivalents
$ 474,668 
$ 535,239 
$ 667,593 
Short-term investments
130,513 
9,025 
67,102 
Merchandise inventory
331,588 
326,417 
301,208 
Accounts receivable
31,464 
39,637 
36,721 
Prepaid expenses and other
84,687 
90,247 
53,727 
Deferred income taxes
49,023 
45,439 
48,059 
Total current assets
1,101,943 
1,046,004 
1,174,410 
Property and equipment, at cost, net of accumulated depreciation
641,907 
677,880 
643,120 
Intangible assets, at cost, net of accumulated amortization
40,454 
5,327 
7,485 
Goodwill
11,710 
11,413 
11,472 
Long-term investments
5,915 
187,490 
5,915 
Non-current deferred income taxes
10,030 
30,135 
19,616 
Other assets
20,379 
16,941 
17,980 
Total assets
1,832,338 
1,975,190 
1,879,998 
Current liabilities:
 
 
 
Accounts payable
155,183 
143,477 
167,723 
Note payable
17,500 
Accrued compensation and payroll taxes
14,915 
22,150 
34,954 
Accrued rent
70,873 
66,907 
70,390 
Accrued income and other taxes
12,242 
12,437 
32,468 
Unredeemed gift cards and gift certificates
29,187 
26,866 
41,001 
Current portion of deferred lease credits
15,981 
17,365 
16,203 
Other liabilities and accrued expenses
24,566 
17,350 
25,098 
Total current liabilities
322,947 
324,052 
387,837 
Non-current liabilities:
 
 
 
Deferred lease credits
79,131 
89,504 
78,606 
Non-current accrued income taxes
40,310 
35,163 
38,671 
Other non-current liabilities
23,486 
20,114 
23,813 
Total non-current liabilities
142,927 
144,781 
141,090 
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, 249,566 and 249,561 shares issued; 194,871, 194,366 and 205,407 shares outstanding, respectively
2,496 
2,496 
2,496 
Contributed capital
543,393 
534,765 
546,597 
Accumulated other comprehensive income
33,573 
21,056 
28,072 
Retained earnings
1,716,173 
1,749,513 
1,711,929 
Treasury stock, 54,695, 55,200 and 44,152 shares, respectively
(929,171)
(801,473)
(938,023)
Total stockholders' equity
1,366,464 
1,506,357 
1,351,071 
Total liabilities and stockholders' equity
$ 1,832,338 
$ 1,975,190 
$ 1,879,998 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Apr. 30, 2011
Jan. 29, 2011
May 1, 2010
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 
249,566 
249,561 
Common stock, shares outstanding
194,871 
194,366 
205,407 
Treasury stock, shares
54,695 
55,200 
44,152 
Consolidated Statements of Operations and Retained Earnings (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Consolidated Statements of Operations and Retained Earnings [Abstract]
 
 
Net sales
$ 609,562 
$ 648,462 
Cost of sales, including certain buying, occupancy and warehousing expenses
377,801 
390,766 
Gross profit
231,761 
257,696 
Selling, general and administrative expenses
158,491 
168,645 
Depreciation and amortization expense
34,880 
35,525 
Operating income
38,390 
53,526 
Other income, net
4,512 
121 
Total other-than-temporary impairment losses
 
514 
Portion of loss recognized in other comprehensive income, before tax
 
(514)
Net impairment loss recognized in earnings
 
 
Income before income taxes
42,902 
53,647 
Provision for income taxes
14,577 
17,785 
Income from continuing operations
28,325 
35,862 
Loss from discontinued operations, net of tax
 
(24,940)
Net income
28,325 
10,922 
Basic income per common share:
 
 
Income from continuing operations
$ 0.15 
$ 0.17 
Loss from discontinued operations
$ 0 
$ (0.12)
Basic income per common share
$ 0.15 
$ 0.05 
Diluted income per common share:
 
 
Income from continuing operations
$ 0.14 
$ 0.17 
Loss from discontinued operations
$ 0 
$ (0.12)
Diluted income per common share
$ 0.14 
$ 0.05 
Cash dividends per common share
$ 0.11 
$ 0.10 
Weighted average common shares outstanding - basic
194,683 
207,718 
Weighted average common shares outstanding - diluted
196,633 
210,285 
Retained earnings, beginning
1,711,929 
1,764,049 
Net income
28,325 
10,922 
Cash dividends and dividend equivalents
(21,752)
(21,083)
Reissuance of treasury stock
(2,329)
(4,375)
Retained earnings, ending
$ 1,716,173 
$ 1,749,513 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Operating activities:
 
 
Net income
$ 28,325 
$ 10,922 
Loss from discontinued operations
 
24,940 
Income from continuing operations
28,325 
35,862 
Adjustments to reconcile net income to net cash used for operating activities:
 
 
Depreciation and amortization
35,534 
37,124 
Share-based compensation
2,506 
12,064 
Provision for deferred income taxes
8,708 
11,594 
Tax benefit from share-based payments
256 
13,942 
Excess tax benefit from share-based payments
(139)
(4,023)
Foreign currency transaction gain
(219)
(113)
Realized loss on sale of investment securities
 
225 
Changes in assets and liabilities:
 
 
Merchandise inventory
(28,674)
(2,922)
Accounts receivable
5,445 
(5,723)
Prepaid expenses and other
(30,327)
(43,487)
Other assets
(2,400)
(341)
Accounts payable
(7,301)
(14,132)
Unredeemed gift cards and gift certificates
(11,960)
(12,622)
Deferred lease credits
(174)
(1,785)
Accrued compensation and payroll taxes
(20,110)
(34,473)
Accrued income and other taxes
(18,749)
(11,874)
Accrued liabilities
90 
(6,580)
Total adjustments
(67,514)
(63,126)
Net cash used for operating activities from continuing operations
(39,189)
(27,264)
Investing activities:
 
 
Capital expenditures for property and equipment
(37,744)
(19,071)
Acquisition of intangible assets
(33,151)
(394)
Purchase of available-for-sale securities
(111,199)
 
Sale of available-for-sale securities
48,887 
6,850 
Net cash used for investing activities from continuing operations
(133,207)
(12,615)
Financing activities:
 
 
Payments on capital leases
(756)
(563)
Repayment of note payable
 
(12,500)
Repurchase of common stock as part of publicly announced programs
 
(71,809)
Repurchase of Common Stock From Employees
(2,181)
(17,946)
Net proceeds from stock options exercised
2,539 
3,610 
Excess tax benefit from share-based payments
139 
4,023 
Cash used to net settle equity awards
 
(6,434)
Cash dividends paid
(21,430)
(20,906)
Net cash used for financing activities from continuing operations
(21,689)
(122,525)
Effect of exchange rates changes on cash
1,160 
1,303 
Cash flows of discontinued operations
 
 
Net cash provided by operating activities
 
2,386 
Net cash used for investing activities
 
(6)
Net cash used for financing activities
Effect of exchange rates changes on cash
Net cash provided by discontinued operations
2,380 
Net decrease in cash and cash equivalents
(192,925)
(158,721)
Cash and cash equivalents - beginning of period
667,593 
693,960 
Cash and cash equivalents - end of period
474,668 
535,239 
Supplemental disclosure of cash flow information:
 
 
Cash paid during the period for income taxes
50,419 
28,276 
Cash paid during the period for interest
 
$ 161 
Interim Financial Statements
Interim Financial Statements
1. Interim Financial Statements
The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at April 30, 2011 and May 1, 2010 and for the 13 week periods ended April 30, 2011 and May 1, 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Fiscal 2010 Annual Report. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included.
As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AE” and the “AE Brand” refer to our U.S. and Canadian American Eagle Outfitters stores. “aerie” refers to our U.S. and Canadian aerie® by American Eagle® stores. “77kids” refers to our 77kids by american eagle® stores. “AEO Direct” refers to our e-commerce operations, ae.com, aerie.com and 77kids.com. “MARTIN+OSA” or “M+O” refers to the MARTIN+OSA stores and e-commerce operation which we operated until its closure during the second quarter of Fiscal 2010.
The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At April 30, 2011, the Company operated in one reportable segment.
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 completed the closure of the M+O stores and e-commerce operation during the second quarter of Fiscal 2010. These Consolidated Financial Statements reflect the results of M+O as a discontinued operation for all periods presented.
Fiscal Year
The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2012” and “Fiscal 2011” refer to the 53 and 52 week periods ending February 2, 2013 and January 28, 2012, respectively. “Fiscal 2010” and “Fiscal 2009” refer to the 52 week periods ended January 29, 2011 and January 30, 2010, respectively.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Accounting Standards Codification (“ASC”) 350, Intangibles — Goodwill and Other (“ASC 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 did 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 9 to the Consolidated Financial Statements).
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.
Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s gift card program, refer to the Gift Cards caption below.
The Company recognizes revenue generated from its franchise agreements based upon a percentage on sales of merchandise by the franchisee. This 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.
Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses
Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy, and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise margin is the difference between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
Other Income, Net
Other income, net consists primarily of interest income/expense, foreign currency transaction gain/loss and realized investment gain/loss.
Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320, Investments — Debt and Equity Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment’s cost and its fair value. Additionally, ASC 320 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 other-than-temporary impairment (“OTTI”) in the Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss impairment amount recognized in other comprehensive income (“OCI”). There was no net impairment loss recognized in earnings during either the 13 weeks ended April 30, 2011 or May 1, 2010.
Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
As of April 30, 2011, short-term investments included commercial paper, corporate bonds, treasury bills and 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.
As of April 30, 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 14 months and the ARS Call Option expires on October 29, 2013.
Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. The components of OTTI losses related to credit losses, as defined by ASC 320, are considered by the Company to be realized losses. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents, short-term investments and long-term investments.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact our effective tax rate.
The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
     
Buildings
  25 years
Leasehold improvements
  Lesser of 10 years or the term of the lease
Fixtures and equipment
  5 years
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open 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 recognized within selling, general and administrative expenses on the Consolidated Statements of Operations.
No asset impairment charges were recorded in the 13 weeks ended April 30, 2011. During the 13 weeks ended May 1, 2010, the Company recorded asset impairment charges of $18.0 million related to the impairment of M+O stores. Based on the Company’s decision to close all M+O stores in Fiscal 2010, the Company determined that the stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. The asset impairment charges for the 13 weeks ended May 1, 2010 are recorded within Loss from Discontinued Operations on the Consolidated Statements of Operations.
Refer to Note 13 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O.
Goodwill
As of April 30, 2011, the Company had approximately $11.7 million of goodwill compared to $11.5 million as of January 29, 2011. 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, 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. As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.
Intangible Assets
Intangible assets are recorded on the basis of cost with amortization computed utilizing the straight-line method over the assets’ estimated useful lives. The Company’s intangible assets, which primarily include trademark assets, are amortized over 15 to 25 years.
The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets the assets are impaired and are adjusted to their estimated fair value. No asset impairment charges were recorded in the 13 weeks ended April 30, 2011 or May 1, 2010.
Refer to Note 7 to the Consolidated Financial Statements for additional information regarding intangible assets.
Gift Cards
The value of a gift card is recorded as a current liability upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended April 30, 2011 and May 1, 2010, the Company recorded $1.1 million and $1.0 million, respectively, of revenue related to gift card breakage.
Deferred Lease Credits
Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period) and any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.
Co-branded Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the “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 the credit card 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.
The Company offers its customers the AEREWARD$sm loyalty program (the “Program”). Under the 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 of the reward. 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 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 its common stock for repurchase under its share repurchase program with expiration dates extending into Fiscal 2010. 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. Of the total Fiscal 2010 share repurchases, 4.0 million shares were repurchased in the 13 weeks ended May 1, 2010 for approximately $71.8 million, at a weighted average price of $17.95 per share.
There were no share repurchases as a part of the Company’s publicly announced repurchase programs during the 13 weeks ended April 30, 2011. As of April 30, 2011, the Company had 14.5 million shares remaining authorized for repurchase. These shares may be repurchased at the Company’s discretion. During Fiscal 2010, the Company’s Board extended the current remaining share repurchase authorization of 14.5 million shares through February 2, 2013.
During the 13 weeks ended April 30, 2011 and May 1, 2010, the Company repurchased approximately 0.1 million and 1.0 million shares, respectively, from certain employees at market prices totaling $2.2 million and $17.9 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 Award and Incentive Plan (the “2005 Plan”).
The aforementioned share repurchases have been recorded as treasury stock.
Segment Information
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified four operating segments (American Eagle Brand US and Canadian stores, aerie retail stores, 77kids retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.
Reclassification
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments
The following table summarizes the fair market values for the Company’s cash and marketable securities, which are recorded as cash and cash equivalents, short-term investments and long-term investments on the Consolidated Balance Sheets:
                         
    April 30,     January 29,     May 1,  
(In thousands)   2011     2011     2010  
Cash and cash equivalents:
                       
Cash
  $ 251,002     $ 122,578     $ 116,190  
Commercial paper
    43,830       40,884        
Corporate bonds
          3,695        
Treasury bills
    25,288       102,996       132,296  
Money-market
    154,548       397,440       286,753  
 
                 
Total cash and cash equivalents
  $ 474,668     $ 667,593     $ 535,239  
Short-term investments:
                       
Commercial paper
  $ 13,695     $     $  
Corporate bonds
    21,232              
Treasury bills
    73,143              
Term-deposits
    18,743       63,402        
State and local government ARS
    3,700       3,700       9,025  
 
                 
Total short-term investments
  $ 130,513     $ 67,102     $ 9,025  
Long-term investments:
                       
State and local government ARS
  $ 5,500     $ 5,500     $ 25,167  
Student-loan backed ARS
                148,874  
Auction rate preferred securities
                13,449  
ARS Call Option
    415       415        
 
                 
Total long-term investments
  $ 5,915     $ 5,915     $ 187,490  
 
                 
Total
  $ 611,096     $ 740,610     $ 731,754  
 
                 
Proceeds from the sale of investments were $48.9 million and $6.9 million for the 13 weeks ended April 30, 2011 and May 1, 2010, respectively. The purchase of investments for the 13 weeks ended April 30, 2011 was $111.2 million. There were no purchases of investments during the 13 weeks ended May 1, 2010.
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. As of April 30, 2011, the fair value of all ARS investments approximated par, with no gross unrealized holding losses.
                                 
                    Greater Than or
    Less Than 12 Months                 Equal to 12 Months
    Gross Unrealized           Gross Unrealized    
(In thousands)   Holding Losses   Fair Value   Holding Losses   Fair Value
     
May 1, 2010
                               
Student-loan backed ARS
  $ (985 )   $ 4,486     $ (7,341 )   $ 55,188  
State and local government ARS
    (108 )     5,381       (125 )     11,037  
Auction rate preferred securities
                (611 )     13,449  
         
Total (1)
  $ (1,093 )   $ 9,867     $ (8,077 )   $ 79,674  
         
 
(1)   Fair value excludes $107.0 million as of May 1, 2010 of securities whose fair value approximated par. Additionally, as of May 1, 2010, fair value shown above includes ($0.9) million of OTTI that has been previously recognized in earnings.
During Fiscal 2010, the Company liquidated $191.4 million carrying value of ARS investments for proceeds of $177.5 million and a realized loss of $24.4 million (of which $10.9 million was previously included in OCI on the Company’s Consolidated Balance Sheets). The ARS securities sold during 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 $24.4 million referenced above. As of April 30, 2011, the Company determined that the remaining value of the ARS Call Option, which is classified as a long-term investment on the Consolidated Balance Sheets, 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 a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
    Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
    Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
    Level 3 — Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
As of April 30, 2011 and May 1, 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 auction rate preferred securities.
In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of April 30, 2011 and May 1, 2010:
                                 
    Fair Value Measurements at April 30, 2011
            Quoted Market            
            Prices in Active           Significant
            Markets for   Significant Other   Unobservable
    Carrying   Identical Assets   Observable Inputs   Inputs
(In thousands)   Amount   (Level 1)   (Level 2)   (Level 3)
Cash and cash equivalents
                               
Cash
  $ 251,002     $ 251,002     $     $  
Commercial paper
    43,830       43,830              
Treasury bills
    25,288       25,288              
Money-market
    154,548       154,548              
     
Total cash and cash equivalents
  $ 474,668     $ 474,668     $     $  
Short-term investments
                               
Commercial paper
  $ 13,695     $ 13,695     $     $  
Corporate bonds
    21,232       21,232              
Treasury bills
    73,143       73,143              
Term-deposits
    18,743       18,743              
State and local government ARS
    3,700                   3,700  
     
Total short-term investments
  $ 130,513     $ 126,813     $     $ 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
  $ 611,096     $ 601,481     $     $ 9,615  
     
 
    Fair Value Measurements at May 1, 2010
            Quoted Market            
            Prices in Active           Significant
            Markets for   Significant Other   Unobservable
    Carrying   Identical Assets   Observable   Inputs
(In thousands)   Amount   (Level 1)   Inputs (Level 2)   (Level 3)
Cash and cash equivalents
                               
Cash
  $ 116,190     $ 116,190     $     $  
Treasury bills
    132,296       132,296              
Money-market
    286,753       286,753              
     
Total cash and cash equivalents
  $ 535,239     $ 535,239     $     $  
Short-term investments
                               
State and local government ARS
  $ 9,025     $     $     $ 9,025  
     
Total short-term investments
  $ 9,025     $     $     $ 9,025  
Long-term investments
                               
Student-loan backed ARS
  $ 148,874     $     $     $ 148,874  
State and local government ARS
    25,167                   25,167  
Auction rate preferred securities
    13,449                   13,449  
     
Total long-term investments
  $ 187,490     $     $     $ 187,490  
     
Total
  $ 731,754     $ 535,239     $     $ 196,515  
     
The Company uses a discounted cash flow model to value its Level 3 investments. For April 30, 2011, the assumptions in the Company’s model included different recovery periods, ranging from two to 14 months depending on the type of security, varying discount factors for yield, ranging from 0.22% to 1.99%, and illiquidity of 0.50%. For May 1, 2010, the assumptions in the Company’s model included different recovery periods, ranging from two months to 11 years depending on the type of security, varying discount factors for yield, ranging from 0.2% to 5.0%, and illiquidity, ranging from 0.3% to 4.0%. These assumptions are subjective. They are based on the Company’s current judgment and its view of current market conditions. The use of different assumptions would result in a different valuation and related charge.
As a result of the discounted cash flow analysis, no net impairment loss was recorded for the 13 weeks ended April 30, 2011. For the 13 weeks ended May 1, 2010, the Company recognized a net recovery of $1.1 million ($0.7 million, net of tax), which reduced the total cumulative impairment recognized in OCI as of May 1, 2010 to $9.2 million ($5.7 million, net of tax) from $10.3 million ($6.4 million, net of tax) at the end of Fiscal 2009. The reversal of temporary impairment was primarily driven by favorable changes in the discount rate. These amounts were recorded in OCI and resulted in an increase in the investments’ estimated fair values. No net impairment loss was recorded in earnings during the 13 weeks ended May 1, 2010.
The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
                                 
    Level 3 (Unobservable inputs)
                    Student    
                    Loan-    
            Auction-   Backed   Auction-
            Rate   Auction-   Rate
            Municipal   Rate   Preferred
(In thousands)   Total   Securities   Securities   Securities
     
Carrying value at January 30, 2010
  $ 202,448     $ 40,244     $ 149,431     $ 12,773  
Settlements
    (7,075 )     (6,275 )     (800 )      
Gains:
                               
Reported in OCI
    1,142       223       243       676  
     
Balance at May 1, 2010
  $ 196,515     $ 34,192     $ 148,874     $ 13,449  
     
As of April 30, 2011, the Company’s Level 3 (unobservable inputs) included $9.2 million and $0.4 million in auction rate municipal securities and the ARS Call Option, respectively. There was no change in the carrying value of these Level 3 assets during the 13 weeks ended April 30, 2011.
Non-Financial Assets
The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value. As a result of the Company’s annual goodwill impairment test performed as of January 29, 2011, the Company concluded that its goodwill was not impaired. During the 13 weeks ended April 30, 2011, there were no triggering events that prompted an asset impairment test of the Company’s goodwill.
Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. Based on the decision to close all M+O stores in Fiscal 2010, the Company determined that the M+O stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. Therefore, during the 13 weeks ended May 1, 2010, the M+O stores not previously impaired were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. The 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 13 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O
Earnings per Share
Earnings per Share
5. Earnings per Share
ASC 260-10-45, Participating Securities and the Two-Class Method (“ASC 260-10-45”), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method, as described in ASC 260, Earnings Per Share (“ASC 260”). Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees under the Company’s 2005 Plan are considered participating securities as these employees receive non-forfeitable dividends at the same rate as common stock. There were no participating securities outstanding during the 13 weeks ending April 30, 2011. During the 13 weeks ended May 1, 2010, the allocation of earnings to participating securities was not significant and amounted to $0.2 million. The application of ASC 260-10-45 resulted in no change to basic or diluted income from continuing operations per common share for the 13 weeks ended April 30, 2011 and May 1, 2010.
The following is a reconciliation between basic and diluted weighted average shares outstanding:
                 
    13 Weeks Ended
    April 30,   May 1,
(In thousands)   2011   2010
Weighted average common shares outstanding:
               
Basic number of common shares outstanding
    194,683       207,718  
Dilutive effect of stock options and non-vested restricted stock
    1,950       2,567  
 
               
Diluted number of common shares outstanding
    196,633       210,285  
 
               
Equity awards to purchase approximately 7.4 million and 7.2 million shares of common stock during the 13 weeks ended April 30, 2011 and May 1, 2010, 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.
For the 13 weeks ended April 30, 2011 and May 1, 2010, approximately 1.8 million and 0.5 million shares of performance-based restricted stock units, respectively, were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual performance goals. Additionally, for the 13 weeks ended April 30, 2011 and May 1, 2010, there were approximately 17,000 and 0.3 million shares, respectively, of time-based restricted stock units that were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.
Property and Equipment
Property and Equipment
6. Property and Equipment
Property and equipment consists of the following:
                         
    April 30,     January 29,     May 1,  
(In thousands)   2011     2011     2010  
Property and equipment, at cost
  $ 1,458,608     $ 1,432,802     $ 1,385,071  
Less: Accumulated depreciation and amortization
    (816,701 )     (789,682 )     (707,191 )
 
                 
Property and equipment, net
  $ 641,907     $ 643,120     $ 677,880  
 
                 
Intangible Assets
Intangible Assets
7. Intangible Assets
Intangible assets include costs to acquire and register the Company’s trademark assets. During the 13 weeks ended April 30, 2011, the Company purchased $33.2 million of trademark assets to support its international expansion strategy. The following table represents intangible assets as of April 30, 2011, January 29, 2011 and May 1, 2010.
                         
    April 30,     January 29,     May 1,  
(In thousands)   2011     2011     2010  
Trademarks, at cost
  $ 43,114     $ 9,967     $ 7,560  
Less: Accumulated amortization
    (2,660 )     (2,482 )     (2,233 )
 
                 
Intangible assets, net
  $ 40,454     $ 7,485     $ 5,327  
 
                 
Intangible assets are recorded on the basis of cost with amortization computed utilizing the straight-line method over the assets estimated useful life of 15 to 25 years. For both the 13 weeks ended April 30, 2011 and May 1, 2010, the Company recorded $0.3 million of amortization expense.
The table below summarizes the estimated future amortization expense for the next five fiscal years:
         
    Future
(In thousands)   Amortization
Remainder of 2011
  $ 1,448  
2012
    1,890  
2013
    1,888  
2014
    1,888  
2015
    1,885  
Other Credit Arrangements
Other Credit Arrangements
8. Other Credit Arrangements
The Company has borrowing agreements with four separate financial institutions under which it may borrow an aggregate of $310.0 million United States Dollars (“USD”) and $25.0 million Canadian Dollars (“CAD”). Of this amount, $200.0 million USD can be used for demand letter of credit 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 19, 2012 and December 13, 2011, respectively. The remaining $60.0 million USD facility expires on May 22, 2011.
As of April 30, 2011, the Company had outstanding demand letters of credit of $36.0 million USD and no demand line borrowings. The availability of any future borrowings is subject to acceptance by the respective financial institutions.
Refer to Note 14 to the Consolidated Financial Statements for subsequent events related to the Company’s credit facilities.
Comprehensive Income
Comprehensive Income
9. Comprehensive Income
Comprehensive income is comprised of the following:
                 
    13 Weeks Ended  
    April 30,     May 1,  
(In thousands)   2011     2010  
Net income
  $ 28,325     $ 10,922  
Other comprehensive income:
               
Temporary impairment reversal related to ARS, net of tax (1)
          695  
Foreign currency translation adjustment
    5,501       3,523  
 
           
Other comprehensive income:
    5,501       4,218  
 
           
Total comprehensive income
  $ 33,826     $ 15,140  
 
           
 
(1)   Amount is shown net of tax of ($0.4) million.
Share-Based Compensation
Share-Based Compensation
10. Share-Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 weeks ended April 30, 2011 and May 1, 2010 was $2.5 million ($1.5 million, net of tax) and $12.1 million ($7.4 million, net of tax), respectively.
Stock Option Grants
The Company grants both time-based and performance-based stock options under its 2005 Plan. Time-based stock option awards vest over the requisite service period of the award or to an employee’s eligible retirement date, if earlier. Performance-based stock option awards vest over three years and are earned if the Company meets pre-established performance goals during each year.
A summary of the Company’s stock option activity for the 13 weeks ended April 30, 2011 follows:
                                 
                    Weighted- Average        
                    Remaining        
            Weighted- Average     Contractual     Aggregate  
    Options     Exercise Price     Term (in years)     Intrinsic Value  
    (In thousands)                     (In thousands)  
Outstanding — January 29, 2011
    12,124     $ 15.25                  
Granted
    47     $ 15.02                  
Exercised (1)
    (241 )   $ 10.52                  
Cancelled
    (44 )   $ 21.58                  
 
                       
Outstanding — April 30, 2011
    11,886     $ 15.32       3.3     $ 38,701  
 
                       
Vested and expected to vest — April 30, 2011
    11,759     $ 15.34       3.3     $ 38,332  
 
                       
Exercisable — April 30, 2011
    4,043     $ 7.12       2.3     $ 34,110  
 
(1)   Options exercised during the 13 weeks ended April 30, 2011 had exercise prices ranging from $4.54 to $11.66.
The weighted-average grant date fair value of stock options granted during the 13 weeks ended April 30, 2011 and May 1, 2010 was $4.73 and $5.31, respectively. The aggregate intrinsic value of options exercised during the 13 weeks ended April 30, 2011 and May 1, 2010 was $1.2 million and $9.3 million, respectively.
Cash received from the exercise of stock options was $2.5 million for the 13 weeks ended April 30, 2011 and $3.6 million for the 13 weeks ended May 1, 2010. The actual tax benefit realized from stock option exercises totaled $0.3 million for the 13 weeks ended April 30, 2011 and $13.9 million for the 13 weeks ended May 1, 2010.
The fair value of stock options was estimated based on the closing market price of the Company’s common stock on the date of the grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
                 
    13 Weeks Ended
    April 30,   May 1,
Black-Scholes Option Valuation Assumptions   2011   2010
Risk-free interest rate (1)
    2.1 %     2.3 %
Dividend yield
    2.6 %     2.1 %
Volatility factor (2)
    42.7 %     40.2 %
Weighted-average expected term (3)
  5.0 years   4.5 years
Expected forfeiture rate (4)
    8.0 %     8.0 %
 
(1)   Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.
 
(2)   Based on a combination of historical volatility of the Company’s common stock and implied volatility.
 
(3)   Represents the period of time options are expected to be outstanding, based on historical experience.
 
(4)   Based upon historical experience.
As of April 30, 2011, there was $2.9 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.5 years.
Restricted Stock Grants
Time-based restricted stock awards are comprised of time-based restricted stock units. These awards 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 performance-based restricted stock units. These awards cliff vest at the end of a three year period based upon the Company’s achievement of pre-established goals throughout the term of the award. 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 and forfeiture provisions 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.
A summary of the Company’s restricted stock activity is presented in the following tables:
                                 
    Time-Based Restricted Stock Units   Performance-Based Restricted Stock Units
    13 Weeks Ended   13 Weeks Ended
    April 30, 2011   April 30, 2011
            Weighted-Average Grant           Weighted-Average Grant
(Shares in thousands)   Shares   Date Fair Value   Shares   Date Fair Value
Nonvested — January 29, 2011
    877     $ 17.45       630     $ 12.59  
Granted
    1,356       15.03       1,222       15.03  
Vested
    (372 )     17.45              
Cancelled
    (45 )     16.27       (97 )     12.07  
         
Nonvested — April 30, 2011
    1,816     $ 15.76       1,755     $ 14.24  
As of April 30, 2011, there was $26.8 million of unrecognized compensation expense related to non-vested time-based restricted stock unit awards that is expected to be recognized over a weighted average period of 2.7 years.
As of April 30, 2011, the Company had 24.9 million shares available for all equity grants.
Income Taxes
Income Taxes
11. Income Taxes
The provision for income taxes from continuing operations is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for quarterly events. The effective income tax rate from continuing operations based on actual operating results for the 13 weeks ended April 30, 2011 was 34.0% compared to 33.2% for the 13 weeks ended May 1, 2010. The lower effective income tax rate for the 13 weeks ended May 1, 2010 was primarily due to federal and state income tax settlements and other changes in income tax reserves.
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense.
The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as the result of the evaluation of new information not previously available. Unrecognized tax benefits did not change significantly during the 13 weeks ended April 30, 2011. Unrecognized tax benefits decreased by $2.9 million during the 13 weeks ended May 1, 2010, primarily due to federal and state income tax settlements and other changes in income tax reserves. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the balance sheet date within the next 12 months.
Legal Proceedings
Legal Proceedings
12. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), management records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position or results of operations of the Company.
Discontinued Operations
Discontinued Operations
13. Discontinued Operations
On March 5, 2010, the Company’s Board of Directors approved management’s recommendation to proceed with the closure of the M+O brand. The Company completed the closure of the M+O stores and e-commerce operation during the second quarter of Fiscal 2010. These Consolidated Financial Statements reflect the results of M+O as a discontinued operation for all periods presented.
Costs associated with exit or disposal activities are recorded when incurred. The Loss from Discontinued Operations for the 13 weeks ended May 1, 2010 included pre-tax closure charges of $25.8 million. For the 13 weeks ended May 1, 2010, pre-tax charges were comprised of $5.4 million for severance and other employee-related charges, $2.4 million in inventory charges and a non-cash asset impairment charge of $18.0 million. As of April 30, 2011, there were no accrued liabilities associated with the closure of M+O.
The table below presents the significant components of M+O’s results included in Loss from Discontinued Operations on the Consolidated Statement of Operations for the 13 weeks ended May 1, 2010.
         
    13 Weeks Ended  
(In thousands)   May 1, 2010  
Net sales
  $ 10,991  
 
     
 
       
Loss from discontinued operations, before income taxes
  $ (40,465 )
Income tax benefit
    15,525  
 
     
Loss from discontinued operations, net of tax
  $ (24,940 )
 
       
Loss per common share from discontinued operations:
       
Basic
  $ (0.12 )
Diluted
  $ (0.12 )
There were no assets or liabilities included in the Consolidated Balance Sheets for M+O as of April 30, 2011 and January 29, 2011. The major classes of assets and liabilities included in the Consolidated Balance Sheets for M+O as of May 1, 2010 are as follows:
         
(In thousands)   May 1, 2010  
Current assets
  $ 7,085  
Non-current assets
    7,500  
 
     
Total assets
  $ 14,585  
 
     
 
       
Total current liabilities
  $ 7,561  
Total non-current liabilities
    5,781  
 
     
Total liabilities
  $ 13,342  
 
     
Subsequent Events
Subsequent Events
14. Subsequent Events
Subsequent to the 13 weeks ended April 30, 2011, the Company renewed its $60.0 million USD credit facility that can be used for either letters of credit or demand line borrowings. This renewed credit facility expires on May 21, 2012, compared to the previous expiration date of May 22, 2011. No other terms of the agreement changed as a result of this renewal.
Additionally, subsequent to the 13 weeks ended April 30, 2011, the Company renewed its $50.0 million USD letter of credit facility. This renewed credit facility expires on May 31, 2012, compared to the previous expiration date of May 27, 2011, and the Company voluntarily reduced the facility from $50.0 million to $35.0 million USD.
The Company has evaluated the existence of subsequent events through the filing date of this Quarterly Report on Form 10-Q.