AMERICAN EAGLE OUTFITTERS INC, 10-K filed on 3/11/2015
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 31, 2015
Mar. 9, 2015
Aug. 2, 2014
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 31, 2015 
 
 
Document Fiscal Year Focus
2014 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
AEO 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Current Fiscal Year End Date
--01-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
195,022,073 
 
Entity Public Float
 
 
$ 1,874,117,608 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 31, 2015
Feb. 1, 2014
Current assets:
 
 
Cash and cash equivalents
$ 410,697 
$ 418,933 
Short-term investments
 
10,002 
Merchandise inventory
278,972 
291,541 
Accounts receivable
67,894 
73,882 
Prepaid expenses and other
73,848 
88,155 
Deferred income taxes
59,102 
45,478 
Total current assets
890,513 
927,991 
Property and equipment, at cost, net of accumulated depreciation
694,856 
632,986 
Intangible assets, at cost, net of accumulated amortization
47,206 
49,271 
Goodwill
13,096 
13,530 
Non-current deferred income taxes
14,035 
24,835 
Other assets
37,202 
45,551 
Total assets
1,696,908 
1,694,164 
Current liabilities:
 
 
Accounts payable
191,146 
203,872 
Accrued compensation and payroll taxes
44,884 
23,560 
Accrued rent
78,567 
76,397 
Accrued income and other taxes
33,110 
5,778 
Unredeemed gift cards and gift certificates
47,888 
47,194 
Current portion of deferred lease credits
12,969 
13,293 
Other liabilities and accrued expenses
50,529 
45,384 
Total current liabilities
459,093 
415,478 
Non-current liabilities:
 
 
Deferred lease credits
54,516 
59,510 
Non-current accrued income taxes
10,456 
16,543 
Other non-current liabilities
33,097 
36,455 
Total non-current liabilities
98,069 
112,508 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding
   
   
Common stock, $0.01 par value; 600,000 shares authorized; 249,566 shares issued; 194,516 and 193,149 shares outstanding, respectively
2,496 
2,496 
Contributed capital
569,675 
573,008 
Accumulated other comprehensive income
(9,944)
12,157 
Retained earnings
1,543,085 
1,569,851 
Treasury stock, 55,050 and 56,417 shares, respectively, at cost
(965,566)
(991,334)
Total stockholders' equity
1,139,746 
1,166,178 
Total liabilities and stockholders' equity
$ 1,696,908 
$ 1,694,164 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jan. 31, 2015
Feb. 1, 2014
Feb. 2, 2013
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
5,000,000 
Preferred stock, issued
Preferred stock, outstanding
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Common stock, shares authorized
600,000,000 
600,000,000 
600,000,000 
Common stock, shares issued
249,566,000 
249,566,000 
249,566,000 
Common stock, shares outstanding
194,516,000 
193,149,000 
192,604,000 
Treasury stock, shares
55,050,000 
56,417,000 
56,962,000 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2015
Feb. 1, 2014
Feb. 2, 2013
Total net revenue
$ 3,282,867 
$ 3,305,802 
$ 3,475,802 
Cost of sales, including certain buying, occupancy and warehousing expenses
2,128,193 
2,191,803 
2,085,480 
Gross profit
1,154,674 
1,113,999 
1,390,322 
Selling, general and administrative expenses
806,498 
796,505 
834,601 
Restructuring charges
17,752 
 
 
Loss on impairment of assets
33,468 
44,465 
34,869 
Depreciation and amortization expense
141,191 
131,974 
126,246 
Operating income
155,765 
141,055 
394,606 
Other income, net
3,737 
1,022 
7,432 
Income before income taxes
159,502 
142,077 
402,038 
Provision for income taxes
70,715 
59,094 
137,940 
Income from continuing operations
88,787 
82,983 
264,098 
Loss from discontinued operations, net of tax
(8,465)
 
(31,990)
Net income
$ 80,322 
$ 82,983 
$ 232,108 
Basic income per common share:
 
 
 
Income from continuing operations
$ 0.46 
$ 0.43 
$ 1.35 
Loss from discontinued operations
$ (0.04)
 
$ (0.16)
Basic net income per common share
$ 0.42 
$ 0.43 
$ 1.19 
Diluted income per common share:
 
 
 
Income from continuing operations
$ 0.46 
$ 0.43 
$ 1.32 
Loss from discontinued operations
$ (0.04)
 
$ (0.16)
Diluted net income per common share
$ 0.42 
$ 0.43 
$ 1.16 
Weighted average common shares outstanding - basic
194,437 
192,802 
196,211 
Weighted average common shares outstanding - diluted
195,135 
194,475 
200,665 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 31, 2015
Feb. 1, 2014
Feb. 2, 2013
Net income
$ 80,322 
$ 82,983 
$ 232,108 
Other comprehensive (loss) income:
 
 
 
Foreign currency translation (loss) gain
(22,101)
(17,140)
638 
Other comprehensive (loss) income
(22,101)
(17,140)
638 
Comprehensive income
$ 58,221 
$ 65,843 
$ 232,746 
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Common Stock
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Jan. 28, 2012
$ 1,416,851 
$ 2,496 
$ 552,797 
$ 1,771,464 
$ (938,565)1
$ 28,659 
Beginning Balance (in shares) at Jan. 28, 20122
 
193,848,000 
 
 
 
 
Stock awards
76,108 
 
76,108 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(8,407,000)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(173,554)
 
 
 
(173,554)1
 
Repurchase of common stock from employees (in shares)2
 
(280,000)
 
 
 
 
Repurchase of common stock from employees
(4,125)
 
 
 
(4,125)1
 
Reissuance of treasury stock (in shares)
7,443,000 
7,443,000 2
 
 
 
 
Reissuance of treasury stock
78,248 
 
(11,054)
(36,213)
125,515 1
 
Net income
232,108 
 
 
232,108 
 
 
Other comprehensive income
638 
 
 
 
 
638 
Cash dividends and dividend equivalents ($2.05, $0.375, and $0.50 per share in 2012, 2013, and 2014 respectively)
(405,087)
 
9,214 
(414,301)
 
 
Ending Balance at Feb. 02, 2013
1,221,187 
2,496 
627,065 
1,553,058 
(990,729)1
29,297 
Ending Balance (in shares) at Feb. 02, 2013
192,604,000 
192,604,000 2
 
 
 
 
Stock awards
1,184 
 
1,184 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(1,600,000)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(33,051)
 
 
 
(33,051)1
 
Repurchase of common stock from employees (in shares)2
 
(1,059,000)
 
 
 
 
Repurchase of common stock from employees
(23,385)
 
 
 
(23,385)1
 
Reissuance of treasury stock (in shares)
3,204,000 
3,204,000 2
 
 
 
 
Reissuance of treasury stock
5,215 
 
(56,706)
6,090 
55,831 1
 
Net income
82,983 
 
 
82,983 
 
 
Other comprehensive income
(17,140)
 
 
 
 
(17,140)
Cash dividends and dividend equivalents ($2.05, $0.375, and $0.50 per share in 2012, 2013, and 2014 respectively)
(70,815)
 
1,465 
(72,280)
 
 
Ending Balance at Feb. 01, 2014
1,166,178 
2,496 
573,008 
1,569,851 
(991,334)1
12,157 
Ending Balance (in shares) at Feb. 01, 2014
193,149,000 
193,149,000 2
 
 
 
 
Stock awards
12,372 
 
12,372 
 
 
 
Repurchase of common stock from employees (in shares)2
 
(517,000)
 
 
 
 
Repurchase of common stock from employees
(7,464)
 
 
 
(7,464)1
 
Reissuance of treasury stock (in shares)
1,884,000 
1,884,000 2
 
 
 
 
Reissuance of treasury stock
7,741 
 
(17,988)
(7,503)
33,232 1
 
Net income
80,322 
 
 
80,322 
 
 
Other comprehensive income
(22,101)
 
 
 
 
(22,101)
Cash dividends and dividend equivalents ($2.05, $0.375, and $0.50 per share in 2012, 2013, and 2014 respectively)
(97,302)
 
2,283 
(99,585)
 
 
Ending Balance at Jan. 31, 2015
$ 1,139,746 
$ 2,496 
$ 569,675 
$ 1,543,085 
$ (965,566)1
$ (9,944)
Ending Balance (in shares) at Jan. 31, 2015
194,516,000 
194,516,000 2
 
 
 
 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
12 Months Ended
Jan. 31, 2015
Feb. 1, 2014
Feb. 2, 2013
Cash dividends and dividend equivalents, Per share
$ 0.50 
$ 0.375 
$ 2.05 
Common stock, shares authorized
600,000,000 
600,000,000 
600,000,000 
Common stock, shares issued
249,566,000 
249,566,000 
249,566,000 
Common stock, shares outstanding
194,516,000 
193,149,000 
192,604,000 
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Treasury stock, shares
55,050,000 
56,417,000 
56,962,000 
Reissuance of treasury stock, shares
1,884,000 
3,204,000 
7,443,000 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 31, 2015
Feb. 1, 2014
Feb. 2, 2013
Operating activities:
 
 
 
Net income
$ 80,322 
$ 82,983 
$ 232,108 
Loss from discontinued operations, net of tax
8,465 
 
31,990 
Income from continuing operations
88,787 
82,983 
264,098 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
142,351 
134,047 
128,397 
Share-based compensation
16,070 
(6,541)
66,349 
Deferred income taxes
(2,279)
20,100 
(30,647)
Foreign currency transaction loss (gain)
(495)
1,378 
100 
Loss on impairment of assets
33,468 
44,465 
34,869 
Changes in assets and liabilities:
 
 
 
Merchandise inventory
8,586 
40,148 
35,202 
Accounts receivable
3,084 
(29,511)
(6,664)
Prepaid expenses and other
14,282 
(10,844)
404 
Other assets
6,612 
(36,089)
(8,165)
Accounts payable
(5,280)
28,568 
(10,468)
Unredeemed gift cards and gift certificates
1,238 
1,269 
1,473 
Deferred lease credits
(4,528)
583 
(11,073)
Accrued compensation and payroll taxes
20,716 
(42,465)
23,018 
Accrued income and other taxes
24,826 
(25,840)
(7,408)
Accrued liabilities
(9,012)
27,605 
20,186 
Total adjustments
249,639 
146,873 
235,573 
Net cash provided by operating activities from continuing operations
338,426 
229,856 
499,671 
Investing activities:
 
 
 
Capital expenditures for property and equipment
(245,002)
(278,499)
(93,939)
Purchase of long-lived assets in a business combination
 
(20,751)
 
Acquisition of intangible assets
(1,264)
(6,835)
(1,125)
Purchase of available-for-sale securities
 
(52,065)
(111,086)
Sale of available-for-sale securities
10,002 
162,785 
15,500 
Net cash (used for) provided by investing activities from continuing operations
(236,264)
(195,365)
(190,650)
Financing activities:
 
 
 
Payments on capital leases and other
(7,143)
(2,839)
(3,066)
Repurchase of common stock as part of publicly announced programs
 
(33,051)
(173,554)
Repurchase of common stock from employees
(7,464)
(23,386)
(4,125)
Net proceeds from stock options exercised
7,305 
6,197 
76,401 
Excess tax benefit from share-based payments
742 
8,833 
13,279 
Cash used to net settle equity awards
Cash dividends paid
(97,224)
(72,280)
(403,490)
Net cash used for financing activities from continuing operations
(103,784)
(116,526)
(494,555)
Effect of exchange rates on cash
(7,578)
(8,151)
504 
Cash flows of discontinued operations
 
 
 
Net cash provided by (used for) operating activities
963 
 
(24,616)
Net cash used for investing activities
 
 
(780)
Net cash used for financing activities
Effect of exchange rates on cash
Net cash provided by (used for) discontinued operations
963 
 
(25,396)
Net decrease in cash and cash equivalents
(8,237)
(90,186)
(210,426)
Cash and cash equivalents - beginning of period
418,933 
509,119 
719,545 
Cash and cash equivalents - end of period
$ 410,697 
$ 418,933 
$ 509,119 
Business Operations
Business Operations
1. Business Operations

American Eagle Outfitters, Inc. (the “Company”), a Delaware corporation, operates under the American Eagle Outfitters® (“AEO”) and aerie® by American Eagle Outfitters® (“aerie”) brands. The Company operated 77kids by American Eagle Outfitters® (“77kids”) until its exit in Fiscal 2012.

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 internationally, online at ae.com and aerie.com and international store locations managed by third-party operators. Through its 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 81 countries worldwide.

Merchandise Mix

The following table sets forth the approximate consolidated percentage of total net revenue from continuing operations attributable to each merchandise group for each of the periods indicated:

 

     For the Years Ended  
     January 31,
2015
    February 1,
2014
    February 2,
2013
 

Men’s apparel and accessories

     39     40     39

Women’s apparel and accessories (excluding aerie)

     53     52     52

aerie

     8     8     9
  

 

 

   

 

 

   

 

 

 

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 31, 2015, the Company operated in one reportable segment.

The Company exited its 77kids brand in Fiscal 2012. These Consolidated Financial Statements reflect the results of 77kids as discontinued operations for all periods presented.

Fiscal Year

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2015” refers to the 52 week period ending January 30, 2016. “Fiscal 2014” and “Fiscal 2013” refer to the 52 week period ended January 31, 2015 and February 1, 2014, respectively. “Fiscal 2012” refers to the 53 week period ended February 2, 2013. “Fiscal 2011” and “Fiscal 2010” refer to the 52 week periods ended January 28, 2012 and January 29, 2011, respectively.

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 May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt ASU 2014-09 on January 29, 2017. The Company does not expect a material impact of the adoption of this guidance on the Company’s consolidated financial condition, results of operations and cash flows.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for financial statements issued for annual reporting periods beginning after December 15, 2013 and interim periods within those years. The Company adopted ASU 2013-11 on February 2, 2014 with no significant impact to its Consolidated Financial Statements.

Foreign Currency Translation

In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (the reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates 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 11 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 February 1, 2014, short-term investments include treasury bills and term-deposits purchased with a maturity of greater than three months, but less than one year.

 

Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. As of January 31, 2015 and February 1, 2014, the Company held no long-term investments.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and 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. 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 OTTI 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 for all years presented.

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 which both title and risk of loss for the merchandise transfers 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 separately as a component of operating income under loss on impairment of assets.

During Fiscal 2014, the Company recorded pre-tax asset impairment charges of $33.5 million that includes $25.1 million for the impairment of 79 retail stores recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s evaluation of current and future projected performance, it was determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores’ assets. Additionally, the Company recorded $8.4 million of impairment charges related to corporate assets.

During Fiscal 2013, the Company recorded asset impairment charges of $44.5 million consisting of $25.2 million for the impairment of 69 retail stores and $19.3 million for the Company’s Warrendale, Pennsylvania Distribution Center, recorded as a loss on impairment of assets in the Consolidated Statements of Operations. The retail store impairments were recorded based on the results of the Company’s evaluation of stores that considered performance during the holiday selling season and a significant portfolio review in the fourth quarter of Fiscal 2013 that considered current and future performance projections and strategic real estate initiatives. The Company determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores assets.

During Fiscal 2012, the Company recorded asset impairment charges of $34.9 million consisting of the impairment of 52 retail stores, which is recorded as a loss on impairment of assets in the Consolidated Statements of Operations. This impairment was recorded based on the results of the Company’s evaluation of stores that considered performance during the holiday selling season and strategic decisions made in the fourth quarter of Fiscal 2012 regarding the rebalancing of our store fleet. The Company determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores assets. Additionally, the Company recorded $16.6 million of store asset impairment charges related to 77kids stores, which is included in Discontinued Operations.

Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations for 77kids.

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

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding property and equipment.

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canadian business and recently acquired operations in Hong Kong and China. In accordance with ASC 350, Intangibles- Goodwill and Other (“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 31, 2015. 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 are less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during Fiscal 2014, Fiscal 2013 or Fiscal 2012.

Refer to Note 8 to the Consolidated Financial Statements for additional information regarding intangible assets.

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). 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 AEO and aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (“the Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive cash from the Bank in accordance with the Agreement and based on card activity. We recognize revenue for such cash receipts when the amounts are fixed or determinable and collectability is reasonably assured. The revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.

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 AEO and aerie 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 AEO and aerie are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AEO or aerie purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.

The Company offers its customers the AEREWARDS® 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.

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 total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

 

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

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Beginning balance

   $ 2,205       $ 4,481       $ 2,929   

Returns

     (79,813      (85,871      (86,895

Provisions

     80,857         83,595         88,447   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 3,249       $ 2,205       $ 4,481   
  

 

 

    

 

 

    

 

 

 

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 total net revenue. 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 a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of total net revenue when earned.

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

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

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

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with the Company’s 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 the Company’s design, sourcing and importing teams, the Company’s buyers and the Company’s 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 31, 2015 and February 1, 2014, the Company had prepaid advertising expense of $6.6 million and $9.0 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $94.2 million, $87.0 million and $90.0 million in advertising expense during Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

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, Net

Other income, net consists primarily of interest income/expense, foreign currency transaction gain/loss and realized investment gains/losses.

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 total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded gift card breakage of $7.0 million, $7.3 million and $8.9 million during Fiscal 2014, Fiscal 2013 and Fiscal 2012, 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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Cash paid during the periods for:

        

Income taxes

   $ 38,501       $ 65,496       $ 142,009   

Interest

   $ 638       $ 387       $ 348   

 

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Outfitters® Brand retail stores, aerie® by American Eagle Outfitters® retail stores and AEO Direct) that reflect the Company’s operational structure as well as the business’s internal view of analyzing results and allocating 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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Total net revenue:

        

United States

   $ 2,895,310       $ 2,954,635       $ 3,131,233   

Foreign(1)

     387,557         351,167         344,569   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,282,867       $ 3,305,802       $ 3,475,802   
  

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent sales from American Eagle Outfitters and aerie international retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue.

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Long-lived assets, net:

     

United States

   $ 664,734       $ 614,284   

Foreign

     90,424         81,503   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 755,158       $ 695,787   
  

 

 

    

 

 

 

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 on the Consolidated Balance Sheets:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Cash and cash equivalents:

     

Cash

     370,692       $ 330,013   

Money-market

     40,005         25,696   

Treasury bills

             63,224   
  

 

 

    

 

 

 

Total cash and cash equivalents

     410,697       $ 418,933   

Short-term investments:

     

Treasury bills

           $ 10,002   
  

 

 

    

 

 

 

Total short-term investments

           $ 10,002   
  

 

 

    

 

 

 

Total

     410,697       $ 428,935   
  

 

 

    

 

 

 

Proceeds from the sale of available-for-sale securities were $10.0 million, $162.8 million and $15.5 million for Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. Purchases of available-for-sale securities for Fiscal 2013 and Fiscal 2012 were $52.1 million and $111.1 million, respectively. At January 31, 2015 and February 1, 2014, the fair value of all available for sale securities approximated par, with no gross unrealized holding gains or losses.

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 31, 2015 and February 1, 2014, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and investments.

 

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 31, 2015 and February 1, 2014:

 

     Fair Value Measurements at January 31, 2015  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 370,692       $ 370,692       $       $   

Money-market

     40,005         40,005                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 410,697       $ 410,697       $       $   

Total short-term investments

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 410,697       $ 410,697       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at February 1, 2014  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 330,013       $ 330,013       $       $   

Treasury bills

     63,224         63,224                   

Money-market

     25,696         25,696                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 418,933       $ 418,933       $       $   

Short-term investments

           

Treasury bills

   $ 10,002       $ 10,002       $       $   

Total short-term investments

   $ 10,002       $ 10,002       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 428,935       $ 428,935       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at January 31, 2015 or February 1, 2014.

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 31, 2015, 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. During Fiscal 2014 and Fiscal 2013, certain long-lived assets related to the Company’s retail stores and corporate assets were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss of $33.5 million and $44.5 million, respectively, which is recorded as a loss on impairment of assets within the Consolidated Statements of Operations. The fair value of the impaired assets after the recorded loss is an immaterial amount.

The fair value of the Company’s 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.

Earnings per Share
Earnings per Share
5. Earnings per Share

The following is a reconciliation between basic and diluted weighted average shares outstanding:

 

     For the Years Ended  
(In thousands, except per share amounts)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Weighted average common shares outstanding:

        

Basic number of common shares outstanding

     194,437         192,802         196,211   

Dilutive effect of stock options and non-vested restricted stock

     698         1,673         4,454   
  

 

 

    

 

 

    

 

 

 

Dilutive number of common shares outstanding

     195,135         194,475         200,665   
  

 

 

    

 

 

    

 

 

 

Equity awards to purchase approximately 2.3 million, 1.7 million and 1.5 million shares of common stock during the Fiscal 2014, Fiscal 2013 and Fiscal 2012, 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 2014, approximately 1.9 million 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. For Fiscal 2013, approximately 1.8 million 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.

Refer to Note 12 to the Consolidated Financial Statements for additional information regarding share-based compensation.

Accounts Receivable
Accounts Receivable
6. Accounts Receivable

Accounts receivable are comprised of the following:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Franchise and license receivable

   $ 24,945       $ 22,943   

Merchandise sell-offs and vendor receivables

     12,953         16,106   

Credit card program receivable

     9,637         15,000   

Marketing cost reimbursements

     4,640         6,063   

Gift card receivable

     4,453         986   

Landlord construction allowances

     3,354         11,626   

Other Items

     7,912         1,158   
  

 

 

    

 

 

 

Total

   $ 67,894       $ 73,882   
  

 

 

    

 

 

 

 

Property and Equipment
Property and Equipment
7. Property and Equipment

Property and equipment consists of the following:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Land

   $ 17,495       $ 17,986   

Buildings

     201,024         140,600   

Leasehold improvements

     571,312         600,572   

Fixtures and equipment

     852,408         732,228   

Construction in progress

     42,470         102,974   
  

 

 

    

 

 

 

Property and equipment, at cost

   $ 1,684,709       $ 1,594,360   

Less: Accumulated depreciation

     (989,853      (961,374
  

 

 

    

 

 

 

Property and equipment, net

   $ 694,856       $ 632,986   
  

 

 

    

 

 

 

Depreciation expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Depreciation expense

   $ 132,529       $ 116,761       $ 122,756   
  

 

 

    

 

 

    

 

 

 

Additionally, during Fiscal 2014, Fiscal 2013 and Fiscal 2012, the Company recorded $6.4 million, $14.6 million and $3.7 million, respectively, related to asset write-offs within depreciation and amortization expense.

 

Intangible Assets
Intangible Assets
8. Intangible Assets

Intangible assets include costs to acquire and register the Company’s trademark assets. The following table represents intangible assets as of January 31, 2015 and February 1, 2014:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Trademarks, at cost

   $ 59,385       $ 58,121   

Less: Accumulated amortization

     (12,179      (8,850
  

 

 

    

 

 

 

Intangible assets, net

   $ 47,206       $ 49,271   
  

 

 

    

 

 

 

Amortization expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Amortization expense

   $ 3,465       $ 2,714       $ 1,952   
  

 

 

    

 

 

    

 

 

 

 

The table below summarizes the estimated future amortization expense for intangible assets existing as of January 31, 2015 for the next five Fiscal Years:

 

(In thousands)    Future
Amortization
 

2015

     3,404   

2016

     3,473   

2017

     3,472   

2018

     3,452   

2019

     3,433   

Other Credit Arrangements
Other Credit Arrangements
9. Other Credit Arrangements

In December 2014, the Company entered into a new Credit Agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment.

All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by a first-priority security interest in certain working capital assets of the borrowers and guarantors, consisting primarily of cash, receivables, inventory and certain other assets, and will be further secured by first-priority mortgages on certain real property.

As of January 31, 2015, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement on January 31, 2015.

The Credit Facilities replace the Company’s syndicated, unsecured, revolving credit facility in the amount of $150.0 million.

Additionally, the Company has borrowing agreements with two separate financial institutions under which it may borrow an aggregate of $155.0 million USD for the purposes of trade letter of credit issuances. The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the respective financial institutions.

As of January 31, 2015, the Company had outstanding trade letters of credit of $13.7 million.

Leases
Leases
10. 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 and are classified as operating leases. 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 items on a straight-line basis over the lease term (including the pre-opening build-out period).

 

A summary of fixed minimum and contingent rent expense for all operating leases follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Store rent:

        

Fixed minimum

   $ 279,640       $ 260,668       $ 250,844   

Contingent

     6,733         6,576         9,758   
  

 

 

    

 

 

    

 

 

 

Total store rent, excluding common area maintenance charges, real estate taxes and certain other expenses

   $ 286,373       $ 267,244       $ 260,602   

Offices, distribution facilities, equipment and other

     15,449         17,153         14,960   
  

 

 

    

 

 

    

 

 

 

Total rent expense

   $ 301,822       $ 284,397       $ 275,562   
  

 

 

    

 

 

    

 

 

 

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 31, 2015:

 

(In thousands)    Future Minimum
Lease Obligations
 
Fiscal years:   

2015

     287,091   

2016

     259,106   

2017

     229,489   

2018

     199,208   

2019

     173,388   

Thereafter

     549,046   
  

 

 

 

Total

     1,697,328   
  

 

 

 
Other Comprehensive Income
Other Comprehensive Income
11. Other Comprehensive Income

The accumulated balances of other comprehensive income included as part of the Consolidated Statements of Stockholders’ Equity follow:

 

(In thousands)    Before
Tax
Amount
     Tax
Benefit
(Expense)
     Accumulated
Other
Comprehensive
Income
 

Balance at January 28, 2012

   $ 28,659               $ 28,659   
  

 

 

    

 

 

    

 

 

 

Foreign currency translation gain

     638                 638   
  

 

 

    

 

 

    

 

 

 

Balance at February 2, 2013

   $ 29,297               $ 29,297   
  

 

 

    

 

 

    

 

 

 

Foreign currency translation loss

     (17,140              (17,140
  

 

 

    

 

 

    

 

 

 

Balance at February 1, 2014

   $ 12,157               $ 12,157   
  

 

 

    

 

 

    

 

 

 

Foreign currency translation loss

     (22,101              (22,101
  

 

 

    

 

 

    

 

 

 

Balance at January 31, 2015

   $ (9,944            $ (9,944
  

 

 

    

 

 

    

 

 

 
Share-Based Payments
Share-Based Payments

12. 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 2014 and Fiscal 2012 was $16.1 million ($9.9 million, net of tax) and $66.3 million ($40.9 million, net of tax), respectively. Total share-based compensation expense included in the Consolidated Statements of Operations for Fiscal 2013 was a net benefit of $6.5 million ($4.1 million, net of tax).

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 31, 2015, the Company had awards outstanding under three share-based compensation plans, which are described below.

Share-based compensation plans

2014 Stock Award and Incentive Plan

The 2014 Plan was approved by the stockholders on May 29, 2014. The 2014 Plan authorized 11.5 million shares for issuance, in the form of options, stock appreciation rights (“SARS”), restricted stock, restricted stock units, bonus stock and awards, performance awards, dividend equivalents and other stock based awards. The 2014 Plan provides that the maximum number of shares awarded to any individual may not exceed 4.0 million shares per year for options and SARS and no more than 1.5 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 2014 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 2014 Plan. The 2014 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed in value $300,000 in any single calendar year ($500,000 in the first year a person becomes a non-employee director). Through January 31, 2015, approximately 46,700 shares of restricted stock and approximately 23,400 shares of common stock had been granted under the 2014 Plan to employees and directors. Approximately 62% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals. The remaining 38% of the restricted stock awards are time-based and vest over three years.

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 31, 2015, 17.1 million non-qualified stock options, 10.4 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 13.1 million shares). Approximately 95% of the options granted under the 2005 Plan vest over three years, 4% vest over one year and 1% vest over five years. Options were granted for ten and seven year terms. Approximately 62% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals. The remaining 38% of the restricted stock awards are time-based and vest over three years. The 2005 Plan terminated on May 29, 2014 with all rights of the awardees and all unexpired awards 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 9.7 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.

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 2014 follows:

 

     For the Year Ended January 31, 2015  
     Options      Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 
     (In thousands)             (In years)      (In thousands)  

Outstanding — February 1, 2014

     3,925       $ 17.65         

Granted

     126       $ 14.50         

Exercised(1)

     (613    $ 12.07         

Cancelled

     (1,048    $ 23.66         
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding — January 31, 2015

     2,390       $ 16.28         1.8       $ 514   
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested and expected to vest — January 31, 2015

     2,380       $ 16.29         1.8       $ 514   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable — January 31, 2015(2)

     509       $ 13.03         3.5       $ 513   

 

(1) Options exercised during Fiscal 2014 ranged in price from $8.09 to $14.05.

 

(2) Options exercisable represent “in-the-money” vested options based upon the weighted average exercise price of vested options compared to the Company’s stock price at January 31, 2015.

The weighted-average grant date fair value of stock options granted during Fiscal 2014, Fiscal 2013 and Fiscal 2012 was $3.99, $4.17 and $3.72, respectively. The aggregate intrinsic value of options exercised during Fiscal 2014, Fiscal 2013 and Fiscal 2012 was $1.3 million, $3.9 million and $57.4 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 ($0.5) million, respectively, for Fiscal 2014. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $6.2 million and $8.7 million, respectively, for Fiscal 2013. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $76.4 million and $14.1 million, respectively, for Fiscal 2012.

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  

Black-Scholes Option Valuation Assumptions

   January 31,
2015
    February 1,
2014
    February 2,
2013
 

Risk-free interest rates(1)

     1.5     0.3     0.6

Dividend yield

     3.1     2.0     2.8

Volatility factors of the expected market price of the Company’s common stock(2)

     41.2     34.4     41.2

Weighted-average expected term(3)

     4.5  years      2.5  years      4.0  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 terms were determined based on historical experience.

 

(4) Based on historical experience.

As of January 31, 2015, there was $0.4 million of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average period of 2.1 years.

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units. These awards vest over three years. 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 all 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 activity of the Company’s restricted stock is presented in the following tables:

 

     Time-Based Restricted Stock
Units
     Performance-Based
Restricted Stock Units
 
     For the year ended
January 31, 2015
     For the year ended
January 31, 2015
 
(Shares in thousands)    Shares      Weighted-Average
Grant Date
Fair Value
     Shares      Weighted-Average
Grant Date
Fair Value
 

Nonvested — February 1, 2014

     1,155       $ 20.13         2,395       $ 16.85   

Granted

     1,506         14.11         1,314         14.21   

Vested

     (648      18.08         (604      15.34   

Cancelled/Forfeited

     (417      17.56         (670      16.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonvested — January 31, 2015

     1,596         15.95         2,435         16.02   

As of January 31, 2015, there was $16.2 million of unrecognized compensation expense related to nonvested time-based restricted stock unit awards that is expected to be recognized over a weighted average period of 1.9 years. Additionally, there was $2.8 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement performance goals are probable over a one to three year period.

As of January 31, 2015, the Company had 8.9 million shares available for all equity grants.

 

Retirement Plan and Employee Stock Purchase Plan
Retirement Plan and Employee Stock Purchase Plan
13. 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 20 1/2 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 $10.5 million, $9.6 million and $15.8 million in expense during Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively, in connection with the Retirement Plan. In Fiscal 2014, the Company announced a change to the Retirement Plan effective January 1, 2015. The Company will match 100% of the first 3% of pay plus an additional 25% of the next 3% of pay that is contributed to the 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
14. Income Taxes

The components of income before income taxes from continuing operations were:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

U.S.

   $ 193,167       $ 157,669       $ 381,131   

Foreign

     (33,665      (15,592      20,907   
  

 

 

    

 

 

    

 

 

 

Total

   $ 159,502       $ 142,077       $ 402,038   
  

 

 

    

 

 

    

 

 

 

 

The significant components of the Company’s deferred tax assets and liabilities were as follows:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Deferred tax assets:

     

Rent

   $ 28,323       $ 27,458   

Deferred compensation

     16,109         22,654   

Foreign tax credits

     15,546         13,436   

Accruals not currently deductible

     9,899         9,059   

Employee compensation and benefits

     9,609         2,799   

Net Operating Loss

     9,179         4,226   

State tax credits

     7,595         6,215   

Inventories

     6,939         11,234   

Deferred Revenue

     5,150         124   

Foreign and state income taxes

     3,774         3,255   

Loyalty Reserve

     2,908         3,196   

Capital loss carryforward

             16,207   

Other

     3,871         844   
  

 

 

    

 

 

 

Gross deferred tax assets

     118,902         120,707   

Valuation allowance

     (10,563      (20,601
  

 

 

    

 

 

 

Total deferred tax assets

   $ 108,339       $ 100,106   
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Property and equipment

   $ (30,054    $ (23,595

Prepaid expenses

     (3,227      (4,544

Other

     (1,921      (1,654
  

 

 

    

 

 

 

Total deferred tax liabilities

   $ (35,202    $ (29,793
  

 

 

    

 

 

 

Total deferred tax assets, net

   $ 73,137       $ 70,313   
  

 

 

    

 

 

 

Classification in the Consolidated Balance Sheet:

     

Current deferred tax assets

   $ 59,102       $ 45,478   

Noncurrent deferred tax assets

     14,035         24,835   
  

 

 

    

 

 

 

Total deferred tax assets

   $ 73,137       $ 70,313   
  

 

 

    

 

 

 

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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Current:

        

Federal

   $ 66,229       $ 29,794       $ 143,612   

Foreign taxes

     (792      (50      6,939   

State

     9,447         9,162         18,845   
  

 

 

    

 

 

    

 

 

 

Total current

     74,884         38,906         169,396   
  

 

 

    

 

 

    

 

 

 

Deferred:

        

Federal

   $ (1,178    $ 20,611       $ (26,063

Foreign taxes

     (85      695         (1,486

State

     (2,906      (1,118      (3,907
  

 

 

    

 

 

    

 

 

 

Total deferred

     (4,169      20,188         (31,456
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 70,715       $ 59,094       $ 137,940   
  

 

 

    

 

 

    

 

 

 

At February 1, 2014, the Company had a valuation allowance of $16.2 million related to capital loss carryforwards. During the fiscal year ended January 31, 2015, the Company utilized all of its capital loss carryforwards and released the $16.2 million valuation allowance associated with the capital loss carryforward.

As a result of additional tax deductions related to share-based payments, tax benefits have been recognized as contributed capital for Fiscal 2014, Fiscal 2013 and Fiscal 2012 in the amounts of ($0.5 million), $8.7 million and $14.1 million, respectively.

The Company repatriated the earnings of its Canadian subsidiaries as of January 31, 2015. Upon distribution of the earnings, the Company was subject to income and withholding taxes offset by U.S. foreign tax credits resulting in no material impact on tax expense. It is Management’s position to indefinitely reinvest accumulated earnings of our Canadian subsidiaries outside of the United States to the extent not repatriated in Fiscal 2014.

As of January 31, 2015, the Company had state and foreign net operating loss carryovers that could be utilized to reduce future years’ tax liabilities, totaling $10.3 million. A portion of these net operating loss carryovers begin expiring in the year 2018 and some have an indefinite carryforward period. Management believes it is more likely than not that the foreign net operating loss carryovers will not reduce future years’ tax liabilities in certain foreign jurisdictions. As such a valuation allowance of $7.2 million has been recorded on the deferred tax assets related to the cumulative foreign net operating loss carryovers.

As of January 31, 2015, the gross amount of unrecognized tax benefits was $12.6 million, of which $9.1 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of February 1, 2014 was $14.6 million, of which $9.7 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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Unrecognized tax benefits, beginning of the year balance

   $ 14,601       $ 17,250       $ 31,578   

Increases in current period tax positions

     2,166         2,294         2,458   

Increases in tax positions of prior periods

             440           

Settlements

     (73              (4,809

Lapse of statute of limitations

     (471      (453      (1,592

Decreases in tax positions of prior periods

     (3,614      (4,930      (10,385
  

 

 

    

 

 

    

 

 

 

Unrecognized tax benefits, end of the year balance

   $ 12,609       $ 14,601       $ 17,250   
  

 

 

    

 

 

    

 

 

 

Unrecognized tax benefits decreased by $2.0 million during Fiscal 2014, decreased $2.6 million during Fiscal 2013 and decreased by $14.3 million during Fiscal 2012. The unrecognized tax benefit changes were primarily related to federal and state income tax settlements and other changes in income tax reserves. Over the next twelve months the Company believes it is reasonably possible the unrecognized tax benefits could decrease by as much as $5.6 million as the result of federal and state tax settlements, statute of limitations lapses, and other changes to the reserves.

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 $1.6 million and $1.9 million as of January 31, 2015 and February 1, 2014, respectively. During Fiscal 2012, the Company recognized a net benefit of $4.8 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 2014 and Fiscal 2013.

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 return for the tax year ended January 2012 was completed in February 2014. Accordingly, all years prior to the tax year ended January 2013 are no longer subject to U.S. federal income tax examinations by tax authorities. Additionally, the Company is participating in the IRS’s Compliance Assurance Process (CAP) for the years ended February 1, 2014 and January 31, 2015. 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 2008. 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 $19.3 million and $13.4 million as of January 31, 2015 and February 1, 2014, respectively. The foreign tax credit carryovers begin to expire in Fiscal 2019 to the extent not utilized. No valuation allowance has been recorded on the foreign tax credit carryovers as the Company believes it is more likely than not that the foreign tax credits will be utilized prior to expiration.

The Company has state income tax credit carryforwards of $11.7 million and $10.7 million as of January 31, 2015 and February 1, 2014, respectively. These income tax credits can be utilized to offset future state income taxes and have a carryforward period of 10 to16 years. They will begin to expire in Fiscal 2018.

 

A reconciliation between the statutory federal income tax rate and the effective income tax rate from continuing operations follows:

 

     For the Years Ended  
     January 31,
2015
    February 1,
2014
    February 2,
2013
 

Federal income tax rate

     35     35     35

State income taxes, net of federal income tax effect

     4        4        3   

Valuation allowance changes, net

     6        4        (1

Tax settlements

     (1     (2     (3

Other

            1          
  

 

 

   

 

 

   

 

 

 
     44     42     34
  

 

 

   

 

 

   

 

 

 
Discontinued Operations
Discontinued Operations
15. Discontinued Operations

In Fiscal 2012, the Company exited the 77kids business. These Consolidated Financial Statements reflect the results of 77kids as a discontinued operation for all periods presented.

In connection with the exit of the 77kids business, the Company became secondarily liable for obligations under lease agreements for 21 store leases assumed by the third party purchaser. In Fiscal 2014, the third party purchaser did not fulfill its obligations under the leases, resulting in the Company becoming primarily liable. The Company was required to make rental and lease termination payments and received reimbursement from the $11.5 million stand-by letter of credit provided by the third party purchaser. The Company has incurred $13.7 million in expense above the letter of credit proceeds to terminate store leases. The cash outflow for termination costs are expected to be paid in the first quarter of Fiscal 2015.

In accordance with ASC 460, Guarantees (“ASC 460”), as the Company became primarily liable under the leases upon the third party purchaser’s default, the remaining amounts to exit the lease agreements have been accrued in our Consolidated Financial Statements related to these guarantees.

Costs associated with exit or disposal activities are recorded when incurred. A summary of the pre-tax exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for 77kids are as follows. There were no exit or disposal costs recognized in Fiscal 2013 related to 77kids.

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Non-cash charges

        

Asset impairments

   $       $       $ 16,623   

Cash charges

        

Lease-related charges

   $ 13,673       $       $ 7,768   

Inventory charges

                     10,237   

Severence charges

                     3,439   
  

 

 

    

 

 

    

 

 

 

Total charges

   $ 13,673       $       $ 38,067   
  

 

 

    

 

 

    

 

 

 

 

A rollforward of the liabilities for the exit of the 77kids brand recognized in the Consolidated Balance Sheets is as follows:

 

(In thousands)    January 31,
2015
 

Accrued liability as of February 1, 2014

   $   

Add: Costs incurred

     25,173   

Less: Cash payments

     (10,537
  

 

 

 

Accrued liability as of January 31, 2015

   $ 14,636   
  

 

 

 

The tables below present the significant components of 77kids’ results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for the years ended January 31, 2015, February 1, 2014 and February 2, 2013.

 

     For the Years Ended  
     January 31,
2015
     February 1,
2014
     February 2,
2013
 

Total net revenue

   $       $       $ 20,117   
  

 

 

    

 

 

    

 

 

 

Loss from discontinued operations, before income taxes(1)

   $ (13,673    $       $ (51,839

Income tax benefit

     5,208                 19,849   
  

 

 

    

 

 

    

 

 

 

Loss from discontinued operations, net of tax

   $ (8,465    $       $ (31,990
  

 

 

    

 

 

    

 

 

 

Loss per common share from discontinued operations:

        

Basic

   $ (0.04    $       $ (0.16

Diluted

   $ (0.04    $       $ (0.16

 

(1) Loss from discontinued operations is presented net of the reversal of non-cash lease credits for Fiscal 2012

 

Restructuring Charges
Restructuring Charges
16. Restructuring Charges

During the 13 weeks ended November 1, 2014, the Company undertook restructuring aimed at strengthening the store portfolio and reducing corporate overhead, including severance and office space consolidation. These changes are aimed at driving efficiencies and aligning investments in areas that help fuel the business.

Costs associated with restructuring activities are recorded when incurred. A summary of costs recognized within Restructuring Charges on the Consolidated Income Statement for Fiscal 2014 are included in the table as follows.

 

(In thousands)    For the year ended  
   January  31,
2015
 

Cash restructuring charges

  

Office space consolidation charges

   $ 8,571   

Severance and related employee costs

     7,816   

Other corporate items

     1,365   
  

 

 

 

Total restructuring charges

   $ 17,752   
  

 

 

 

 

The Company also incurred non-cash corporate office and other asset impairment charges of $8.4 million. This charge is included within Loss on Impairment of Assets on the Consolidated Income Statement. Also included in Loss on Impairment of Assets is $25.1 million of store asset impairments resulting from evaluation of current and future projected performance.

A rollforward of the liabilities recognized in the Consolidated Balance Sheet is as follows:

 

(In thousands)    January 31,
2015
 

Accrued liability as of February 1, 2014

   $   

Add: Costs incurred, excluding non-cash charges

     17,752   

Less: Cash payments

     (5,296
  

 

 

 

Accrued liability as of January 31, 2015

   $ 12,456   
  

 

 

 
Quarterly Financial Information - Unaudited
Quarterly Financial Information - Unaudited
17. 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 2014
Quarters Ended
 
(In thousands, except per share amounts)    May 3,
2014
     August 2,
2014
     November 1,
2014
     January 31,
2015
 

Total net revenue

   $ 646,129       $ 710,595       $ 854,290       $ 1,071,853   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 225,845       $ 237,547       $ 315,472       $ 375,810   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     3,866         5,813         9,035         70,073   

Loss from discontinued operations, net of tax

                             (8,465
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 3,866       $ 5,813       $ 9,035       $ 61,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic per common share amounts:

           

Income from continuing operations

   $ 0.02       $ 0.03       $ 0.05       $ 0.36   

Loss from discontinued operations, net of tax

                             (0.04
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

   $ 0.02       $ 0.03       $ 0.05       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted per common share amounts:

           

Income from continuing operations

   $ 0.02       $ 0.03       $ 0.05       $ 0.36   

Loss from discontinued operations, net of tax

                             (0.04
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share

   $ 0.02       $ 0.03       $ 0.05       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fiscal 2013
Quarters Ended
 
(In thousands, except per share amounts)    May 4,
2013
     August 3,
2013
     November 2,
2013
     February 1,
2014
 

Total net revenue

   $ 679,477       $ 727,313       $ 857,305       $ 1,041,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 263,609       $ 245,495       $ 298,875       $ 306,020   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     27,976         19,594         24,903         10,510   

Loss from discontinued operations, net of tax

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 27,976       $ 19,594       $ 24,903       $ 10,510   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic per common share amounts:

           

Income from continuing operations

   $ 0.14       $ 0.10       $ 0.13       $ 0.05   

Loss from discontinued operations, net of tax

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

   $ 0.14       $ 0.10       $ 0.13       $ 0.05   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted per common share amounts:

           

Income from continuing operations

   $ 0.14       $ 0.10       $ 0.13       $ 0.05   

Loss from discontinued operations, net of tax

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share

   $ 0.14       $ 0.10       $ 0.13       $ 0.05   
  

 

 

    

 

 

    

 

 

    

 

 

 
Summary of Significant Accounting Policies (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 31, 2015, the Company operated in one reportable segment.

The Company exited its 77kids brand in Fiscal 2012. These Consolidated Financial Statements reflect the results of 77kids as discontinued operations for all periods presented.

Fiscal Year

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2015” refers to the 52 week period ending January 30, 2016. “Fiscal 2014” and “Fiscal 2013” refer to the 52 week period ended January 31, 2015 and February 1, 2014, respectively. “Fiscal 2012” refers to the 53 week period ended February 2, 2013. “Fiscal 2011” and “Fiscal 2010” refer to the 52 week periods ended January 28, 2012 and January 29, 2011, respectively.

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 May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt ASU 2014-09 on January 29, 2017. The Company does not expect a material impact of the adoption of this guidance on the Company’s consolidated financial condition, results of operations and cash flows.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU No. 2013-11 is effective for financial statements issued for annual reporting periods beginning after December 15, 2013 and interim periods within those years. The Company adopted ASU 2013-11 on February 2, 2014 with no significant impact to its Consolidated Financial Statements.

Foreign Currency Translation

In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (the reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates 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 11 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 February 1, 2014, short-term investments include treasury bills and term-deposits purchased with a maturity of greater than three months, but less than one year.

 

Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. As of January 31, 2015 and February 1, 2014, the Company held no long-term investments.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and 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. 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 OTTI 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 for all years presented.

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 which both title and risk of loss for the merchandise transfers 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 separately as a component of operating income under loss on impairment of assets.

During Fiscal 2014, the Company recorded pre-tax asset impairment charges of $33.5 million that includes $25.1 million for the impairment of 79 retail stores recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s evaluation of current and future projected performance, it was determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores’ assets. Additionally, the Company recorded $8.4 million of impairment charges related to corporate assets.

During Fiscal 2013, the Company recorded asset impairment charges of $44.5 million consisting of $25.2 million for the impairment of 69 retail stores and $19.3 million for the Company’s Warrendale, Pennsylvania Distribution Center, recorded as a loss on impairment of assets in the Consolidated Statements of Operations. The retail store impairments were recorded based on the results of the Company’s evaluation of stores that considered performance during the holiday selling season and a significant portfolio review in the fourth quarter of Fiscal 2013 that considered current and future performance projections and strategic real estate initiatives. The Company determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores assets.

During Fiscal 2012, the Company recorded asset impairment charges of $34.9 million consisting of the impairment of 52 retail stores, which is recorded as a loss on impairment of assets in the Consolidated Statements of Operations. This impairment was recorded based on the results of the Company’s evaluation of stores that considered performance during the holiday selling season and strategic decisions made in the fourth quarter of Fiscal 2012 regarding the rebalancing of our store fleet. The Company determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores assets. Additionally, the Company recorded $16.6 million of store asset impairment charges related to 77kids stores, which is included in Discontinued Operations.

Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations for 77kids.

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

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding property and equipment.

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canadian business and recently acquired operations in Hong Kong and China. In accordance with ASC 350, Intangibles- Goodwill and Other (“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 31, 2015. 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 are less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during Fiscal 2014, Fiscal 2013 or Fiscal 2012.

Refer to Note 8 to the Consolidated Financial Statements for additional information regarding intangible assets.

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). 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 AEO and aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (“the Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive cash from the Bank in accordance with the Agreement and based on card activity. We recognize revenue for such cash receipts when the amounts are fixed or determinable and collectability is reasonably assured. The revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.

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 AEO and aerie 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 AEO and aerie are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AEO or aerie purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.

The Company offers its customers the AEREWARDS® 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.

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 total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

 

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

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Beginning balance

   $ 2,205       $ 4,481       $ 2,929   

Returns

     (79,813      (85,871      (86,895

Provisions

     80,857         83,595         88,447   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 3,249       $ 2,205       $ 4,481   
  

 

 

    

 

 

    

 

 

 

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 total net revenue. 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 a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of total net revenue when earned.

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

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

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

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with the Company’s 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 the Company’s design, sourcing and importing teams, the Company’s buyers and the Company’s 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 31, 2015 and February 1, 2014, the Company had prepaid advertising expense of $6.6 million and $9.0 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $94.2 million, $87.0 million and $90.0 million in advertising expense during Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively.

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, Net

Other income, net consists primarily of interest income/expense, foreign currency transaction gain/loss and realized investment gains/losses.

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 total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded gift card breakage of $7.0 million, $7.3 million and $8.9 million during Fiscal 2014, Fiscal 2013 and Fiscal 2012, 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.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Outfitters® Brand retail stores, aerie® by American Eagle Outfitters® retail stores and AEO Direct) that reflect the Company’s operational structure as well as the business’s internal view of analyzing results and allocating 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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Total net revenue:

        

United States

   $ 2,895,310       $ 2,954,636       $ 3,131,233   

Foreign(1)

     387,557         351,167         344,569   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,282,867       $ 3,305,802       $ 3,475,802   
  

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent sales from American Eagle Outfitters and aerie international retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue.

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Long-lived assets, net:

     

United States

   $ 664,734       $ 618,715   

Foreign

     90,424         81,503   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 755,158       $ 700,218   
  

 

 

    

 

 

 

Reclassifications

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.

Business Operations (Tables)
Consolidated Percentage of Net Sales from Continuing Operations Attributable to Each Merchandise Group

The following table sets forth the approximate consolidated percentage of total net revenue from continuing operations attributable to each merchandise group for each of the periods indicated:

 

     For the Years Ended  
     January 31,
2015
    February 1,
2014
    February 2,
2013
 

Men’s apparel and accessories

     39     40     39

Women’s apparel and accessories (excluding aerie)

     53     52     52

aerie

     8     8     9
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 
Summary of Significant Accounting Policies (Tables)

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

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  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Beginning balance

   $ 2,205       $ 4,481       $ 2,929   

Returns

     (79,813      (85,871      (86,895

Provisions

     80,857         83,595         88,447   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 3,249       $ 2,205       $ 4,481   
  

 

 

    

 

 

    

 

 

 

The table below shows supplemental cash flow information for cash amounts paid during the respective periods:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Cash paid during the periods for:

        

Income taxes

   $ 38,501       $ 65,496       $ 142,009   

Interest

   $ 638       $ 387       $ 348   

The following tables present summarized geographical information:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Total net revenue:

        

United States

   $ 2,895,310       $ 2,954,635       $ 3,131,233   

Foreign(1)

     387,557         351,167         344,569   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,282,867       $ 3,305,802       $ 3,475,802   
  

 

 

    

 

 

    

 

 

 

 

(1) Amounts represent sales from American Eagle Outfitters and aerie international retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue.

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Long-lived assets, net:

     

United States

   $ 664,734       $ 614,284   

Foreign

     90,424         81,503   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 755,158       $ 695,787   
  

 

 

    

 

 

 
Cash and Cash Equivalents, Short-term Investments and Long-term Investments (Tables)
Fair Market Values for Cash and Marketable Securities

The following table summarizes the fair market value of our cash and marketable securities, which are recorded on the Consolidated Balance Sheets:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Cash and cash equivalents:

     

Cash

     370,692       $ 330,013   

Money-market

     40,005         25,696   

Treasury bills

             63,224   
  

 

 

    

 

 

 

Total cash and cash equivalents

     410,697       $ 418,933   

Short-term investments:

     

Treasury bills

           $ 10,002   
  

 

 

    

 

 

 

Total short-term investments

           $ 10,002   
  

 

 

    

 

 

 

Total

     410,697       $ 428,935   
  

 

 

    

 

 

 
Fair Value Measurements (Tables)
Fair Value Hierarchy for Financial Assets (Cash Equivalents and Investments) Measured at Fair Value on Recurring Basis

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 31, 2015 and February 1, 2014:

 

     Fair Value Measurements at January 31, 2015  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 370,692       $ 370,692       $       $   

Money-market

     40,005         40,005                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 410,697       $ 410,697       $       $   

Total short-term investments

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 410,697       $ 410,697       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at February 1, 2014  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 330,013       $ 330,013       $       $   

Treasury bills

     63,224         63,224                   

Money-market

     25,696         25,696                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 418,933       $ 418,933       $       $   

Short-term investments

           

Treasury bills

   $ 10,002       $ 10,002       $       $   

Total short-term investments

   $ 10,002       $ 10,002       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 428,935       $ 428,935       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 
Earnings per Share (Tables)
Reconciliation Between Basic and Diluted Weighted Average Shares Outstanding

The following is a reconciliation between basic and diluted weighted average shares outstanding:

 

     For the Years Ended  
(In thousands, except per share amounts)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Weighted average common shares outstanding:

        

Basic number of common shares outstanding

     194,437         192,802         196,211   

Dilutive effect of stock options and non-vested restricted stock

     698         1,673         4,454   
  

 

 

    

 

 

    

 

 

 

Dilutive number of common shares outstanding

     195,135         194,475         200,665   
  

 

 

    

 

 

    

 

 

 
Accounts Receivable (Tables)
Accounts receivable

Accounts receivable are comprised of the following:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Franchise and license receivable

   $ 24,945       $ 22,943   

Merchandise sell-offs and vendor receivables

     12,953         16,106   

Credit card program receivable

     9,637         15,000   

Marketing cost reimbursements

     4,640         6,063   

Gift card receivable

     4,453         986   

Landlord construction allowances

     3,354         11,626   

Other Items

     7,912         1,158   
  

 

 

    

 

 

 

Total

   $ 67,894       $ 73,882   
  

 

 

    

 

 

 

 

Property and Equipment (Tables)

Property and equipment consists of the following:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Land

   $ 17,495       $ 17,986   

Buildings

     201,024         140,600   

Leasehold improvements

     571,312         600,572   

Fixtures and equipment

     852,408         732,228   

Construction in progress

     42,470         102,974   
  

 

 

    

 

 

 

Property and equipment, at cost

   $ 1,684,709       $ 1,594,360   

Less: Accumulated depreciation

     (989,853      (961,374
  

 

 

    

 

 

 

Property and equipment, net

   $ 694,856       $ 632,986   
  

 

 

    

 

 

 

Depreciation expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Depreciation expense

   $ 132,529       $ 116,761       $ 122,756   
  

 

 

    

 

 

    

 

 

 

Intangible Assets (Tables)

The following table represents intangible assets as of January 31, 2015 and February 1, 2014:

 

(In thousands)    January 31,
2015
     February 1,
2014
 

Trademarks, at cost

   $ 59,385       $ 58,121   

Less: Accumulated amortization

     (12,179      (8,850
  

 

 

    

 

 

 

Intangible assets, net

   $ 47,206       $ 49,271   
  

 

 

    

 

 

 

Amortization expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Amortization expense

   $ 3,465       $ 2,714       $ 1,952   
  

 

 

    

 

 

    

 

 

 

The table below summarizes the estimated future amortization expense for intangible assets existing as of January 31, 2015 for the next five Fiscal Years:

 

(In thousands)    Future
Amortization
 

2015

     3,404   

2016

     3,473   

2017

     3,472   

2018

     3,452   

2019

     3,433   
Leases (Tables)

A summary of fixed minimum and contingent rent expense for all operating leases follows:

 

     For the Years Ended  
(In thousands)    January 31,
2015
     February 1,
2014
     February 2,
2013
 

Store rent:

        

Fixed minimum

   $ 279,640       $ 260,668       $ 250,844   

Contingent

     6,733         6,576         9,758   
  

 

 

    

 

 

    

 

 

 

Total store rent, excluding common area maintenance charges, real estate taxes and certain other expenses

   $ 286,373       $ 267,244       $ 260,602   

Offices, distribution facilities, equipment and other

     15,449         17,153         14,960   
  

 

 

    

 

 

    

 

 

 

Total rent expense

   $ 301,822       $ 284,397       $ 275,562   
  

 

 

    

 

 

    

 

 

 

The table below summarizes future minimum lease obligations, consisting of fixed minimum rent, under operating leases in effect at January 31, 2015:

 

(In thousands)    Future Minimum
Lease Obligations
 
Fiscal years:   

2015

     287,091   

2016

     259,106   

2017

     229,489   

2018

     199,208   

2019

     173,388   

Thereafter

     549,046   
  

 

 

 

Total

     1,697,328   
  

 

 

 

Other Comprehensive Income (Tables)
Accumulated Balances of Other Comprehensive Income

The accumulated balances of other comprehensive income included as part of the Consolidated Statements of Stockholders’ Equity follow:

 

(In thousands)    Before
Tax
Amount
     Tax
Benefit
(Expense)
     Accumulated
Other
Comprehensive
Income
 

Balance at January 28, 2012

   $ 28,659               $ 28,659