| Leases
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
1. | Business Operations |
American Eagle Outfitters, Inc. (the “Company”), a Delaware corporation, operates under the American Eagle® (“AE”), aerie® by American Eagle® (“aerie”), and 77kids by american eagle® (“77kids”) brands. The Company operated the MARTIN+OSA® brand (“M+O”) until its closure during Fiscal 2010.
Founded in 1977, American Eagle Outfitters is a leading apparel and accessories retailer that operates more than 1,000 retail stores in the U.S. and Canada, and online at ae.com. Through its family of brands, the Company offers high quality, on-trend clothing, accessories and personal care products at affordable prices. The Company’s online business, AEO Direct, ships to 77 countries worldwide.
Merchandise Mix
The following table sets forth the approximate consolidated percentage of net sales attributable to each merchandise group for each of the periods indicated:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
Men’s apparel and accessories |
40 | % | 40 | % | 40 | % | ||||||
Women’s apparel and accessories (excluding aerie) |
51 | % | 51 | % | 51 | % | ||||||
aerie |
8 | % | 9 | % | 9 | % | ||||||
Kid’s apparel and accessories |
1 | % | — | % | — | % | ||||||
|
|
|
|
|
|
|||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
|
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 28, 2012, the Company operated in one reportable segment.
On March 5, 2010, the Company’s Board of Directors (the “Board”) approved management’s recommendation to proceed with the closure of the M+O brand. The Company completed the closure of the M+O stores and e-commerce operation during Fiscal 2010. These Consolidated Financial Statements reflect the results of M+O as a discontinued operation for all periods presented.
Fiscal Year
The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2012” refers to the 53 week period ending February 2, 2013. “Fiscal 2011”, “Fiscal 2010,” “Fiscal 2009,” “Fiscal 2008” and “Fiscal 2007” refer to the 52 week periods ended January 28, 2012, January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008, 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 June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“ASU 2011-12”). ASU 2011-12 defers the requirement to present reclassifications out of accumulated other comprehensive income as required by ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied retrospectively, with early adoption permitted. The Company is currently evaluating the impact of ASU 2011-05 and ASU 2011-12 on its financial statement presentation of comprehensive income and will adopt in Fiscal 2012.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt ASU 2011-08 in Fiscal 2012. As a result of the adoption, the Company does not expect an impact to its Consolidated Financial Statements.
Foreign Currency Translation
The Canadian dollar is the functional currency for the Canadian business. In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income (refer to Note 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 January 28, 2012, short-term investments include treasury bills purchased with a maturity of greater than three months, but less than one year. It also includes auction rate securities (“ARS”) classified as available for sale that the Company expects to be redeemed at par within 12 months.
As of January 28, 2012, long-term investments include the Company’s ARS Call Option related to investment sales during Fiscal 2010. Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. The ARS Call Option expires on October 29, 2013.
Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. The components of other-than-temporary impairment (“OTTI”) losses related to credit losses are considered by the Company to be realized and are recorded in earnings. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents, short-term investments and long-term investments.
Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320, Investments — Debt and Equity Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment’s cost and its fair value. 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 during Fiscal 2011. During Fiscal 2010, there was $1.2 million of net impairment loss recognized in earnings which consisted of gross other-than-temporary losses of $5.0 million, partially offset by $3.8 million of OTTI losses recognized in other comprehensive income. During Fiscal 2009, there was $0.9 million of net impairment loss recognized in earnings which consisted of gross other-than-temporary losses of $4.4 million, partially offset by $3.5 million of OTTI losses recognized in other comprehensive income.
Refer to Note 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
Buildings |
25 years | |
Leasehold improvements |
Lesser of 10 years or the term of the lease | |
Fixtures and equipment |
5 years |
In accordance with ASC 360, Property, Plant, and Equipment, the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time sufficient to reach maturity. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on impairment of assets.
During Fiscal 2011, the Company recorded asset impairment charges of $20.7 million consisting of 59 retail stores, largely related to the aerie brand, which is recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s review of the operating performance and projections of future performance of these stores, the Company determined that they would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them.
During Fiscal 2010, the Company recorded asset impairment charges of $18.0 million related to the impairment of 18 M+O stores. Additionally, during Fiscal 2009, the Company recorded asset impairment charges of $18.0 million related primarily to the impairment of 10 M+O stores. The asset impairment charges in Fiscal 2010 and Fiscal 2009 related to the 28 M+O stores are recorded within loss from discontinued operations, net of tax in the Consolidated Statements of Operations.
Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
When the Company closes, remodels or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets 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 and Canadian business. 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 28, 2012. 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 2011, Fiscal 2010 or Fiscal 2009.
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) and any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.
Self-Insurance Liability
The Company is self-insured for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.
Co-branded Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AE, aerie and 77kids brands. These credit cards are issued by a third-party bank (the “Bank”), and the Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. Once a customer is approved to receive the AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in the credit card rewards program. Customers who make purchases at AE, aerie and 77kids earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance.
Points earned under the credit card rewards program on purchases at AE, aerie and 77kids are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE, aerie or 77kids purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.
The Company offers its customers the AEREWARD$sm loyalty program (the “Program”). Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date of the reward. These rewards can be redeemed for a discount on a purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.
The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Beginning balance |
$ | 3,691 | $ | 4,690 | $ | 3,981 | ||||||
Returns |
(77,656 | ) | (70,789 | ) | (71,705 | ) | ||||||
Provisions |
76,896 | 69,790 | 72,414 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,931 | $ | 3,691 | $ | 4,690 | ||||||
|
|
|
|
|
|
Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s gift card program, refer to the Gift Cards caption below.
The Company recognizes royalty revenue generated from its franchise agreements based upon a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of net sales when earned.
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively.
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Proceeds from sell-offs |
$ | 17,556 | $ | 25,593 | $ | 29,347 | ||||||
Marked-down cost of merchandise disposed of via sell-offs |
$ | 17,441 | $ | 24,728 | $ | 29,023 |
Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses
Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise profit is the difference between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
Advertising Costs
Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed when the marketing campaign commences. As of January 28, 2012 and January 29, 2011, the Company had prepaid advertising expense of $7.7 million and $5.4 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $73.1 million, $64.9 million and $60.9 million in advertising expense during Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively.
Design Costs
The Company has certain design costs, including compensation, rent, depreciation, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold.
Store Pre-Opening Costs
Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are expensed as incurred.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income/expense, foreign currency transaction gain/loss and realized investment gains/losses other than those realized upon the sale of investment securities, which are recorded separately on the Consolidated Statements of Operations.
Gift Cards
The value of a gift card is recorded as a current liability upon purchase and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The company recorded gift card breakage of $6.5 million, $5.5 million and $6.8 million during Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively.
Legal Proceedings and Claims
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company.
Supplemental Disclosures of Cash Flow Information
The table below shows supplemental cash flow information for cash amounts paid during the respective periods:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Cash paid during the periods for: |
||||||||||||
Income taxes |
$ | 99,756 | $ | 45,737 | $ | 61,869 | ||||||
Interest |
$ | — | $ | 191 | $ | 1,879 |
Segment Information
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified four operating segments (American Eagle® Brand US and Canadian stores, aerie® by American Eagle® retail stores, 77kids by american eagle® retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.
The following tables present summarized geographical information:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Net sales: |
||||||||||||
United States |
$ | 2,849,248 | $ | 2,675,992 | $ | 2,665,655 | ||||||
Foreign(1) |
310,570 | 291,567 | 274,614 | |||||||||
|
|
|
|
|
|
|||||||
Total net sales |
$ | 3,159,818 | $ | 2,967,559 | $ | 2,940,269 | ||||||
|
|
|
|
|
|
(1) | Amounts represent sales from American Eagle and aerie Canadian retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue. |
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Long-lived assets, net: |
||||||||
United States |
$ | 580,161 | $ | 615,049 | ||||
Foreign |
53,302 | 47,028 | ||||||
|
|
|
|
|||||
Total long-lived assets, net |
$ | 633,463 | $ | 662,077 | ||||
|
|
|
|
Reclassifications
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.
|
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:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 548,728 | $ | 122,578 | ||||
Money-market |
131,785 | 397,440 | ||||||
Commercial Paper |
29,998 | 40,884 | ||||||
Treasury bills |
9,034 | 102,996 | ||||||
Corporate bonds |
— | 3,695 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 719,545 | $ | 667,593 | ||||
Short-term investments: |
||||||||
Treasury bills |
$ | 19,999 | $ | — | ||||
State and local government ARS |
5,500 | 3,700 | ||||||
Term-deposits |
— | 63,402 | ||||||
|
|
|
|
|||||
Total short-term investments |
$ | 25,499 | $ | 67,102 | ||||
Long-term investments: |
||||||||
ARS Call Option |
$ | 847 | $ | 415 | ||||
State and local government ARS |
— | 5,500 | ||||||
|
|
|
|
|||||
Total long-term investments |
$ | 847 | $ | 5,915 | ||||
|
|
|
|
|||||
Total |
$ | 745,891 | $ | 740,610 | ||||
|
|
|
|
Proceeds from the sale of available-for-sale securities were $240.8 million, $177.5 million and $80.4 million for Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. The purchases of available-for-sale securities for Fiscal 2011 and Fiscal 2010 were $193.9 million and $62.8 million, respectively. There were no purchases of available-for-sale securities during Fiscal 2009. At January 28, 2012 and January 29, 2011, the fair value of all available for sale securities approximated par, with no gross unrealized holding gains or losses.
During Fiscal 2010, the Company liquidated ARS investments with $191.4 million of carrying value for proceeds of $177.5 million and a realized loss of $24.4 million (of which $10.9 million had previously been included in OCI on the Company’s Consolidated Balance Sheets). The ARS securities sold during Fiscal 2010 included $119.7 million of par value ARS securities whereby the Company entered into a settlement agreement under which a financial institution (the “purchaser”) purchased the ARS at a discount to par, plus accrued interest. Additionally, under this agreement, the Company retained a right (the “ARS Call Option”), for a period ending October 29, 2013 to: (a) repurchase any or all of the ARS securities sold at the agreed upon purchase prices received from the purchaser plus accrued interest; and/or (b) receive additional proceeds from the purchaser upon certain redemptions of the ARS securities sold. The ARS Call Option is cancelable by the purchaser for additional cash consideration.
The Company is required to assess the value of the ARS Call Option at the end of each reporting period, with any changes in fair value recorded within the Consolidated Statement of Operations. Upon origination, the Company determined that the fair value was $0.4 million. The fair value of the ARS Call Option was included as an offsetting amount within the net loss on liquidation of $24.4 million referenced above. As of January 28, 2012, the Company determined that the fair value of the ARS Call Option, which is classified as a long-term investment, was $0.8 million.
|
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 28, 2012 and January 29, 2011, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including ARS.
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 28, 2012 and January 29, 2011:
Fair Value Measurements at January 28, 2012 | ||||||||||||||||
Carrying Amount |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents |
||||||||||||||||
Cash |
$ | 548,728 | $ | 548,728 | $ | — | $ | — | ||||||||
Money-market |
131,785 | 131,785 | — | — | ||||||||||||
Commercial paper |
29,998 | 29,998 | — | — | ||||||||||||
Treasury bills |
9,034 | 9,034 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cash and cash equivalents |
$ | 719,545 | $ | 719,545 | $ | — | $ | — | ||||||||
Short-term investments |
||||||||||||||||
Treasury bills |
$ | 19,999 | $ | 19,999 | $ | — | $ | — | ||||||||
State and local government ARS |
5,500 | — | — | 5,500 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total short-term investments |
$ | 25,499 | $ | 19,999 | $ | — | $ | 5,500 | ||||||||
Long-term investments |
||||||||||||||||
ARS Call Option |
$ | 847 | $ | — | $ | — | $ | 847 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term investments |
$ | 847 | $ | — | $ | — | $ | 847 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 745,891 | $ | 739,544 | $ | — | $ | 6,347 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at January 29, 2011 | ||||||||||||||||
Carrying Amount |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents |
||||||||||||||||
Cash |
$ | 122,578 | $ | 122,578 | $ | — | $ | — | ||||||||
Money-market |
397,440 | 397,440 | — | — | ||||||||||||
Treasury bills |
102,996 | 102,996 | — | — | ||||||||||||
Commercial paper |
40,884 | 40,884 | — | — | ||||||||||||
Corporate bonds |
3,695 | 3,695 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cash and cash equivalents |
$ | 667,593 | $ | 667,593 | $ | — | $ | — | ||||||||
Short-term investments |
||||||||||||||||
Term deposits |
$ | 63,402 | $ | 63,402 | $ | — | $ | — | ||||||||
State and local government ARS |
3,700 | — | — | 3,700 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total short-term investments |
$ | 67,102 | $ | 63,402 | $ | — | $ | 3,700 | ||||||||
Long-term investments |
||||||||||||||||
State and local government ARS |
$ | 5,500 | $ | — | $ | — | $ | 5,500 | ||||||||
ARS Call Option |
415 | — | — | 415 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term investments |
$ | 5,915 | $ | — | $ | — | $ | 5,915 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 740,610 | $ | 730,995 | $ | — | $ | 9,615 | ||||||||
|
|
|
|
|
|
|
|
The Company uses a discounted cash flow (“DCF”) model to value its Level 3 investments. For Fiscal 2011, the assumptions in the Company’s model for Level 3 investments, excluding the ARS Call Option, included a recovery period of five months, a discount factor for yield of 0.1% and illiquidity of 0.5%. For Fiscal 2010, the assumptions in the Company’s model included different recovery periods, ranging from five to 17 months depending on the type of security, and discount factors for yield of 0.2% and illiquidity of 0.5%. These assumptions are subjective and are based on the Company’s current judgment and view of current market conditions. The use of different assumptions would not result in a material change to the valuation.
As a result of the discounted cash flow analysis, no impairment loss on investment securities was recorded for Fiscal 2011. For Fiscal 2010, the Company recognized net impairment loss of $0.6 million, ($0.4 million, net of tax), which increased the total cumulative impairment recognized in OCI from $10.3 million ($6.4 million, net of tax) at the end of Fiscal 2009 to $10.9 million ($6.8 million, net of tax) prior to the Company’s liquidation of auction rate securities during the third quarter of Fiscal 2010. Additionally, during Fiscal 2010, as a result of a credit rating downgrade on student-load backed ARS, the Company recorded a net impairment loss in earnings of $1.2 million, which is recorded within Other Expense on the Consolidated Statements of Operations.
The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements was also estimated using a discounted cash flow model. The model considered potential changes in yields for securities with similar characteristics to the underlying ARS and evaluated possible future refinancing opportunities for the issuers of the ARS. The analysis then assessed the likelihood that the options would be exercisable as a result of the underlying ARS being redeemed or traded in a secondary market at an amount greater than the exercise price prior to the end of the option term. Future changes in the fair values of the ARS Call Option will be recorded within the Consolidated Statements of Operations.
The reconciliation of our assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
Level 3 (Unobservable inputs) | ||||||||||||||||||||
Total | Auction- Rate Municipal Securities |
Student Loan- Backed Auction- Rate Securities |
Auction-Rate Preferred Securities |
ARS Call Option |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance at January 30, 2010 |
$ | 202,448 | $ | 40,244 | $ | 149,431 | $ | 12,773 | $ | — | ||||||||||
Settlements |
(177,472 | ) | (29,101 | ) | (141,246 | ) | (7,125 | ) | — | |||||||||||
Gains and (losses): |
||||||||||||||||||||
Reported in earnings |
(25,674 | ) | (2,399 | ) | (16,755 | ) | (6,935 | ) | 415 | |||||||||||
Reported in OCI |
10,313 | 456 | 8,570 | 1,287 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 29, 2011 |
$ | 9,615 | $ | 9,200 | $ | — | $ | — | $ | 415 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Settlements |
(3,700 | ) | (3,700 | ) | — | — | — | |||||||||||||
Gains and (losses): |
||||||||||||||||||||
Reported in earnings |
432 | — | — | — | 432 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 28, 2012 |
$ | 6,347 | $ | 5,500 | $ | — | $ | — | $ | 847 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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 28, 2012, 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 2011, certain long-lived assets related to the Company’s retail stores were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss of $20.7 million, which is recorded as a loss on impairment of assets within the Consolidated Statements of Operations.
Additionally, based on the Company’s decision to close all M+O stores in Fiscal 2010, the Company determined that the M+O stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. Therefore, during Fiscal 2010, the M+O stores not previously impaired were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. During Fiscal 2009, certain long-lived assets primarily related to M+O stores were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. The loss on impairment of M+O assets for all periods presented is included within Loss from Discontinued Operations.
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.
Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
|
6. | Accounts Receivable |
Accounts receivable are comprised of the following:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Franchise receivable |
$ | 20,108 | $ | 5,183 | ||||
Marketing cost reimbursements |
4,182 | 3,553 | ||||||
Gift card receivable |
4,113 | 3,567 | ||||||
Landlord construction allowances |
3,672 | 11,739 | ||||||
Insurance claims receivable |
2,071 | 4,374 | ||||||
Merchandise sell-offs |
1,955 | 4,539 | ||||||
Taxes |
1,076 | 1,239 | ||||||
Other |
3,133 | 2,527 | ||||||
|
|
|
|
|||||
Total |
$ | 40,310 | $ | 36,721 | ||||
|
|
|
|
|
7. | Property and Equipment |
Property and equipment consists of the following:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Land |
$ | 6,364 | $ | 6,364 | ||||
Buildings |
153,538 | 152,984 | ||||||
Leasehold improvements |
638,496 | 624,479 | ||||||
Fixtures and equipment |
656,337 | 647,346 | ||||||
Construction in progress |
3,787 | 1,629 | ||||||
|
|
|
|
|||||
Property and equipment, at cost |
$ | 1,458,522 | $ | 1,432,802 | ||||
Less: Accumulated depreciation |
(876,360 | ) | (789,682 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 582,162 | $ | 643,120 | ||||
|
|
|
|
Depreciation expense is summarized as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Depreciation expense |
$ | 137,934 | $ | 139,169 | $ | 137,045 | ||||||
|
|
|
|
|
|
Additionally, during Fiscal 2011, Fiscal 2010 and Fiscal 2009, the Company recorded $3.4 million, $2.7 million and $2.3 million, respectively, related to asset write-offs within depreciation and amortization expense.
|
8. | Intangible Assets |
Intangible assets include costs to acquire and register the Company’s trademark assets. During the Fiscal 2011, the Company purchased $34.2 million of trademark assets primarily to support its international expansion strategy. The following table represents intangible assets as of January 28, 2012 and January 29, 2011:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Trademarks, at cost |
$ | 44,142 | $ | 9,967 | ||||
Less: Accumulated amortization |
(4,310 | ) | (2,482 | ) | ||||
|
|
|
|
|||||
Intangible assets, net |
$ | 39,832 | $ | 7,485 | ||||
|
|
|
|
Amortization expense is summarized as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Amortization expense |
$ | 1,828 | $ | 625 | $ | 509 | ||||||
|
|
|
|
|
|
The table below summarizes the estimated future amortization expense for intangible assets existing as of January 28, 2012 for the next five Fiscal Years:
Future Amortization |
||||
(In thousands) | ||||
2012 |
$ | 1,961 | ||
2013 |
1,956 | |||
2014 |
1,956 | |||
2015 |
1,956 | |||
2016 |
1,911 |
|
9. | Other Credit Arrangements |
The Company has borrowing agreements with four separate financial institutions under which it may borrow an aggregate of $245.0 million United States dollars (“USD”) and $25.0 million Canadian dollars (“CAD”). Of this amount, $135.0 million USD can be used for letter of credit issuances, $50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the remaining $60.0 million USD can be used for either letters of credit or demand line borrowings at the Company’s discretion. These lines are provided at the discretion of the respective financial institutions and are subject to their periodic review.
As of January 28, 2012, the Company had outstanding letters of credit of $25.2 million USD and no demand line borrowings.
The availability of any future borrowings is subject to acceptance by the respective financial institutions.
Refer to Note 17 to the Consolidated Financial Statements for a subsequent event footnote related to the Company’s credit facilities.
|
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 | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Store rent: |
||||||||||||
Fixed minimum |
$ | 251,504 | $ | 230,277 | $ | 218,785 | ||||||
Contingent |
7,618 | 8,182 | 7,873 | |||||||||
|
|
|
|
|
|
|||||||
Total store rent, excluding common area maintenance charges, real estate taxes and certain other expenses |
$ | 259,122 | $ | 238,459 | $ | 226,658 | ||||||
Offices, distribution facilities, equipment and other |
17,405 | 16,722 | 17,391 | |||||||||
|
|
|
|
|
|
|||||||
Total rent expense |
$ | 276,527 | $ | 255,181 | $ | 244,049 | ||||||
|
|
|
|
|
|
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 28, 2012:
Fiscal years: |
Future Minimum Lease Obligations |
|||
(In thousands) | ||||
2012 |
$ | 255,576 | ||
2013 |
241,878 | |||
2014 |
222,931 | |||
2015 |
207,248 | |||
2016 |
183,881 | |||
Thereafter |
612,557 | |||
|
|
|||
Total |
$ | 1,724,071 | ||
|
|
|
11. | Other Comprehensive Income (Loss) |
The accumulated balances of other comprehensive (loss) income included as part of the Consolidated Statements of Stockholders’ Equity follow:
Before Tax Amount |
Tax Benefit (Expense) |
Accumulated Other Comprehensive (Loss) Income |
||||||||||
(In thousands) | ||||||||||||
Balance at January 31, 2009 |
$ | (27,835 | ) | $ | 13,446 | $ | (14,389 | ) | ||||
|
|
|
|
|
|
|||||||
Temporary reversal of impairment related to ARS |
24,041 | (9,535 | ) | 14,506 | ||||||||
Reclassification adjustment for realized losses in net income related to investment securities |
940 | — | 940 | |||||||||
Foreign currency translation gain |
15,781 | — | 15,781 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 30, 2010 |
$ | 12,927 | $ | 3,911 | $ | 16,838 | ||||||
|
|
|
|
|
|
|||||||
Temporary impairment related to ARS |
(1,830 | ) | 690 | (1,140 | ) | |||||||
Reclassification adjustment for realized losses in net income related to investment securities |
12,142 | (4,601 | ) | 7,541 | ||||||||
Foreign currency translation gain |
4,833 | — | 4,833 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 29, 2011 |
$ | 28,072 | $ | — | $ | 28,072 | ||||||
|
|
|
|
|
|
|||||||
Foreign currency translation gain |
587 | — | 587 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 28, 2012 |
$ | 28,659 | $ | — | $ | 28,659 | ||||||
|
|
|
|
|
|
Accumulated other comprehensive income consists only of foreign currency translation adjustment as of January 28, 2012 and January 29, 2011.
|
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 $9.1 million, $11.7 million and $5.9 million in expense during Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively, in connection with the Retirement Plan.
The Employee Stock Purchase Plan is a non-qualified plan that covers all full-time employees and part-time employees who are at least 18 years old and have completed 60 days of service. Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market.
|
14. | Income Taxes |
The components of income before income taxes from continuing operations were:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
U.S. |
$ | 218,153 | $ | 258,408 | $ | 269,932 | ||||||
Foreign |
18,857 | 36,676 | 34,443 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 237,010 | $ | 295,084 | $ | 304,375 | ||||||
|
|
|
|
|
|
The significant components of the Company’s deferred tax assets and liabilities were as follows:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Deferred compensation |
$ | 31,379 | $ | 30,801 | ||||
Rent |
27,642 | 25,145 | ||||||
Foreign tax credits |
22,302 | 25,498 | ||||||
Capital loss carryforward |
18,440 | 20,381 | ||||||
Inventories |
11,734 | 10,432 | ||||||
Foreign and state income taxes |
6,723 | 7,575 | ||||||
Employee compensation and benefits |
6,345 | 4,942 | ||||||
State tax credits |
6,105 | 5,866 | ||||||
Other |
9,650 | 8,547 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
140,320 | 139,187 | ||||||
Valuation allowance |
(18,440 | ) | (20,381 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
$ | 121,880 | $ | 118,806 | ||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Property and equipment |
$ | (55,503 | ) | $ | (47,852 | ) | ||
Prepaid expenses |
(4,149 | ) | (3,279 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
$ | (59,652 | ) | $ | (51,131 | ) | ||
|
|
|
|
|||||
Total deferred tax assets, net |
$ | 62,228 | $ | 67,675 | ||||
|
|
|
|
|||||
Classification in the Consolidated Balance Sheet: |
||||||||
Current deferred tax assets |
$ | 48,761 | $ | 48,059 | ||||
Noncurrent deferred tax assets |
13,467 | 19,616 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
$ | 62,228 | $ | 67,675 | ||||
|
|
|
|
The net decrease in deferred tax assets and liabilities was primarily due to an increase in the deferred tax liability for property and equipment basis differences.
Significant components of the provision for income taxes from continuing operations were as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 63,631 | $ | 89,110 | $ | 92,074 | ||||||
Foreign taxes |
6,621 | 13,429 | 14,526 | |||||||||
State |
10,841 | 9,610 | 13,575 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
81,093 | 112,149 | 120,175 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
$ | 7,158 | $ | (310 | ) | $ | (32,361 | ) | ||||
Foreign taxes |
(1,120 | ) | (991 | ) | 6,513 | |||||||
State |
(1,826 | ) | 2,302 | (3,350 | ) | |||||||
|
|
|
|
|
|
|||||||
Total deferred |
4,212 | 1,001 | (29,198 | ) | ||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 85,305 | $ | 113,150 | $ | 90,977 | ||||||
|
|
|
|
|
|
As a result of additional tax deductions related to share-based payments, tax benefits have been recognized as contributed capital for Fiscal 2011, Fiscal 2010 and Fiscal 2009 in the amounts of $0.4 million, $15.6 million and $8.0 million, respectively.
During Fiscal 2009, the Company approved and repatriated $91.7 million from its Canadian subsidiaries. The proceeds from the repatriation were used for general corporate purposes. The Company plans to indefinitely reinvest accumulated earnings of our Canadian subsidiaries outside of the United States to the extent not repatriated in Fiscal 2009. Accordingly, no provision for U.S. income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to income and withholding taxes offset by foreign tax credits. As of January 28, 2012 and January 29, 2011, the unremitted earnings of our Canadian subsidiaries were $72.0 million (USD) and $57.1 million (USD), respectively.
As of January 28, 2012, the gross amount of unrecognized tax benfits was $31.6 million, of which $22.8 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of January 29, 2011 was $31.1 million, of which $22.7 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 | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Unrecognized tax benefits, beginning of the year balance |
$ | 31,108 | $ | 31,649 | $ | 41,080 | ||||||
Increases in tax positions of prior periods |
932 | 1,069 | 1,679 | |||||||||
Decreases in tax positions of prior periods |
(2,106 | ) | (3,801 | ) | (13,457 | ) | ||||||
Increases in current period tax positions |
2,782 | 2,707 | 14,842 | |||||||||
Settlements |
(1,073 | ) | (6 | ) | (6,204 | ) | ||||||
Lapse of statute of limitations |
(65 | ) | (510 | ) | (6,291 | ) | ||||||
|
|
|
|
|
|
|||||||
Unrecognized tax benefits, end of the year balance |
$ | 31,578 | $ | 31,108 | $ | 31,649 | ||||||
|
|
|
|
|
|
Unrecognized tax benefits increased by $0.5 million during Fiscal 2011 and decreased by $0.5 million during Fiscal 2010. Over the next twelve months the Company believes that it is reasonably possible that unrecognized tax benefits may decrease by approximately $2.9 million due to settlements, expiration of statute of limitations or other changes in unrecognized tax benefits.
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties related to unrecognized tax benefits included in the Consolidated Balance Sheet were $7.9 million and $7.6 million as of January 28, 2012 and January 29, 2011, respectively. During Fiscal 2009, the Company recognized a net benefit of $3.3 million in the provision for income taxes related to the reversal of accrued interest and penalties primarily due to federal and state income tax settlements. An immaterial amount of interest and penalties were recognized in the provision for income taxes during Fiscal 2011 and Fiscal 2010.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (“IRS”) examination of the Company’s U.S. federal income tax returns for the tax years ended July 2008 and January 2009 was completed in April of 2011. Accordingly, all years prior to January 2010 are no longer subject to U.S. federal income tax examinations by tax authorities. An IRS examination of the January 2010 federal income tax return is scheduled to be completed in Fiscal 2012. 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 2005. 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 $22.3 million and $25.5 million as of January 28, 2012 and January 29, 2011, respectively. The foreign tax credit carryovers expire in Fiscal 2019 to the extent not utilized. No valuation allowance has been recorded on the foreign tax credit carryovers as the Company believes it is more likely than not the foreign tax credits will be utilized prior to expiration.
The Company has been certified to qualify for nonrefundable incentive tax credits in Kansas for additional expenditures related to the Ottawa, Kansas distribution center. As a result, the Company has a deferred tax asset related to Kansas tax credit carryforwards of $6.1 million (net of federal income taxes) as of January 28, 2012. These tax credits can be utilized to offset future Kansas income taxes and have a carryforward period of 10-16 years. They will begin to expire in Fiscal 2018. Due to a favorable incentive agreement with the Kansas Department of Commerce in Fiscal 2010, the Company released a $5.0 million valuation allowance that had been previously recorded related to the Company’s Kansas tax credit carryforward.
During Fiscal 2010 and 2009, the Company recorded a valuation allowance against deferred tax assets arising from the disposition or other than temporary impairment of certain investment securities. The disposition of the investment securities results in a capital loss that can only be utilized to the extent of capital gains. These capital losses are subject to a three year carryback period and a five year carryforward period for tax purposes. The capital losses generally will expire in Fiscal 2014 through Fiscal 2015. Due to the contingencies related to the future use of these capital losses, we believe it is more likely than not that the full benefit of this asset will not be realized within the carryforward period. Thus, the Company has recorded a valuation allowance against the deferred tax assets arising from the other than temporary impairment or disposition of these investment securities. The valuation allowance related to these investment securities was $18.4 million and $20.4 million as of January 28, 2012 and January 29, 2011, respectively.
A reconciliation between the statutory federal income tax rate and the effective income tax rate from continuing operations follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
Federal income tax rate |
35 | % | 35 | % | 35 | % | ||||||
State income taxes, net of federal income tax effect |
3 | 3 | 3 | |||||||||
Valuation allowance changes, net |
(1 | ) | 1 | 1 | ||||||||
Tax settlements |
(1 | ) | (1 | ) | (4 | ) | ||||||
Canadian earnings repatriation |
— | — | (5 | ) | ||||||||
|
|
|
|
|
|
|||||||
36 | % | 38 | % | 30 | % | |||||||
|
|
|
|
|
|
|
15. | Discontinued Operations |
On March 5, 2010, the Company’s Board approved management’s recommendation to proceed with the closure of the M+O brand. The Company completed the closure of the M+O stores and e-commerce operation during the second quarter of Fiscal 2010. These Consolidated Financial Statements reflect the results of M+O as discontinued operations for all periods presented.
Costs associated with exit or disposal activities are recorded when incurred. A summary of the exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for Fiscal 2010 are included in the table as follows. There were no exit or disposal costs recognized in Fiscal 2011 or Fiscal 2009. The Loss from Discontinued Operations for Fiscal 2010 and Fiscal 2009 includes pre-tax asset impairment charges of $18.0 million in both years.
For the Year Ended | ||||
January
29, 2011 |
||||
(In thousands) | ||||
Non-cash charges |
||||
Asset impairments |
$ | 17,980 | ||
Cash charges |
||||
Lease-related charges(1) |
15,377 | |||
Inventory charges |
2,422 | |||
Severence charges |
7,660 | |||
|
|
|||
Total charges |
$ | 43,439 | ||
|
|
(1) | Presented net of the reversal of non-cash lease credits. |
The table below presents the significant components of M+O’s results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for the years ended January 29, 2011 and January 30, 2010, respectively. There was no loss from discontinued operations for the year ended January 28, 2012.
For the Years Ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(In thousands) | ||||||||
Net sales |
$ | 21,881 | $ | 50,251 | ||||
|
|
|
|
|||||
Loss from discontinued operations, before income taxes |
$ | (66,959 | ) | $ | (71,984 | ) | ||
Income tax benefit |
25,672 | 27,608 | ||||||
|
|
|
|
|||||
Loss from discontinued operations, net of tax |
$ | (41,287 | ) | $ | (44,376 | ) | ||
|
|
|
|
|||||
Loss per common share from discontinued operations: |
||||||||
Basic |
$ | (0.21 | ) | $ | (0.22 | ) | ||
Diluted |
$ | (0.20 | ) | $ | (0.21 | ) |
There were no assets or liabilities included in the Consolidated Balance Sheets for M+O as of January 28, 2012 or January 29, 2011.
|
16. | 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
2011 Quarters Ended |
||||||||||||||||
April
30, 2011 |
July
30, 2011 |
October 29, 2011 |
January
28, 2012 |
|||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 609,562 | $ | 675,703 | $ | 831,826 | $ | 1,042,727 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
$ | 231,761 | $ | 232,061 | $ | 308,967 | $ | 355,552 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
28,325 | 19,669 | 52,427 | 51,284 | ||||||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 28,325 | $ | 19,669 | $ | 52,427 | $ | 51,284 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.15 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income per common share |
$ | 0.15 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.14 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 0.14 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Fiscal
2010 Quarters Ended |
||||||||||||||||
May 1, 2010 |
July
31, 2010 |
October 30, 2010 |
January 29, 2011 |
|||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 648,462 | $ | 651,502 | $ | 751,507 | $ | 916,088 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
$ | 257,696 | $ | 239,708 | $ | 312,309 | $ | 361,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
35,862 | 25,843 | 33,191 | 87,038 | ||||||||||||
Loss from discontinued operations |
(24,940 | ) | (16,180 | ) | (167 | ) | — | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 10,922 | $ | 9,663 | $ | 33,024 | $ | 87,038 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.45 | ||||||||
Loss from discontinued operations |
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income per common share |
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.45 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.44 | ||||||||
Loss from discontinued operations |
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.44 | ||||||||
|
|
|
|
|
|
|
|
|
17. | Subsequent Events |
On March 2, 2012, the Company entered into a five-year, $150.0 million syndicated, unsecured, revolving credit agreement (the “Credit Agreement”). The primary purpose of the Credit Agreement is to provide additional access to capital for general corporate purposes and the issuance of letters of credit. The Credit Agreement replaced the uncommitted demand lines in the aggregate amount of $110.0 million USD and $25.0 million CAD.
The Credit Agreement will mature on March 2, 2017. Stand-by letters of credit totaling approximately $8.5 million were outstanding under the Credit Agreement on March 15, 2012. No borrowings were outstanding under the Credit Agreement on March 15, 2012.
Refer to Note 9 to the Consolidated Financial Statements for additional information regarding other credit arrangements.
|
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 28, 2012, the Company operated in one reportable segment.
On March 5, 2010, the Company’s Board of Directors (the “Board”) approved management’s recommendation to proceed with the closure of the M+O brand. The Company completed the closure of the M+O stores and e-commerce operation during Fiscal 2010. These Consolidated Financial Statements reflect the results of M+O as a discontinued operation for all periods presented.
Fiscal Year
The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2012” refers to the 53 week period ending February 2, 2013. “Fiscal 2011”, “Fiscal 2010,” “Fiscal 2009,” “Fiscal 2008” and “Fiscal 2007” refer to the 52 week periods ended January 28, 2012, January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008, 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 June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income (“ASU 2011-12”). ASU 2011-12 defers the requirement to present reclassifications out of accumulated other comprehensive income as required by ASU 2011-05. For public entities, the amendments in ASU 2011-05 and ASU 2011-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and are to be applied retrospectively, with early adoption permitted. The Company is currently evaluating the impact of ASU 2011-05 and ASU 2011-12 on its financial statement presentation of comprehensive income and will adopt in Fiscal 2012.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 applies to all companies that have goodwill reported in their financial statements. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will adopt ASU 2011-08 in Fiscal 2012. As a result of the adoption, the Company does not expect an impact to its Consolidated Financial Statements.
Foreign Currency Translation
The Canadian dollar is the functional currency for the Canadian business. In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income (refer to Note 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 January 28, 2012, short-term investments include treasury bills purchased with a maturity of greater than three months, but less than one year. It also includes auction rate securities (“ARS”) classified as available for sale that the Company expects to be redeemed at par within 12 months.
As of January 28, 2012, long-term investments include the Company’s ARS Call Option related to investment sales during Fiscal 2010. Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. The ARS Call Option expires on October 29, 2013.
Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. The components of other-than-temporary impairment (“OTTI”) losses related to credit losses are considered by the Company to be realized and are recorded in earnings. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents, short-term investments and long-term investments.
Other-than-Temporary Impairment
The Company evaluates its investments for impairment in accordance with ASC 320, Investments — Debt and Equity Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment’s cost and its fair value. 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 during Fiscal 2011. During Fiscal 2010, there was $1.2 million of net impairment loss recognized in earnings which consisted of gross other-than-temporary losses of $5.0 million, partially offset by $3.8 million of OTTI losses recognized in other comprehensive income. During Fiscal 2009, there was $0.9 million of net impairment loss recognized in earnings which consisted of gross other-than-temporary losses of $4.4 million, partially offset by $3.5 million of OTTI losses recognized in other comprehensive income.
Refer to Note 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
Buildings |
25 years | |
Leasehold improvements |
Lesser of 10 years or the term of the lease | |
Fixtures and equipment |
5 years |
In accordance with ASC 360, Property, Plant, and Equipment, the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time sufficient to reach maturity. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on impairment of assets.
During Fiscal 2011, the Company recorded asset impairment charges of $20.7 million consisting of 59 retail stores, largely related to the aerie brand, which is recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s review of the operating performance and projections of future performance of these stores, the Company determined that they would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them.
During Fiscal 2010, the Company recorded asset impairment charges of $18.0 million related to the impairment of 18 M+O stores. Additionally, during Fiscal 2009, the Company recorded asset impairment charges of $18.0 million related primarily to the impairment of 10 M+O stores. The asset impairment charges in Fiscal 2010 and Fiscal 2009 related to the 28 M+O stores are recorded within loss from discontinued operations, net of tax in the Consolidated Statements of Operations.
Refer to Note 15 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.
When the Company closes, remodels or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets 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 and Canadian business. 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 28, 2012. 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 2011, Fiscal 2010 or Fiscal 2009.
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) and any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.
Self-Insurance Liability
The Company is self-insured for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.
Co-branded Credit Card and Customer Loyalty Program
The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AE, aerie and 77kids brands. These credit cards are issued by a third-party bank (the “Bank”), and the Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. Once a customer is approved to receive the AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in the credit card rewards program. Customers who make purchases at AE, aerie and 77kids earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance.
Points earned under the credit card rewards program on purchases at AE, aerie and 77kids are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE, aerie or 77kids purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.
The Company offers its customers the AEREWARD$sm loyalty program (the “Program”). Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date of the reward. These rewards can be redeemed for a discount on a purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.
The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Beginning balance |
$ | 3,691 | $ | 4,690 | $ | 3,981 | ||||||
Returns |
(77,656 | ) | (70,789 | ) | (71,705 | ) | ||||||
Provisions |
76,896 | 69,790 | 72,414 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,931 | $ | 3,691 | $ | 4,690 | ||||||
|
|
|
|
|
|
Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s gift card program, refer to the Gift Cards caption below.
The Company recognizes royalty revenue generated from its franchise agreements based upon a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of net sales when earned.
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively.
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Proceeds from sell-offs |
$ | 17,556 | $ | 25,593 | $ | 29,347 | ||||||
Marked-down cost of merchandise disposed of via sell-offs |
$ | 17,441 | $ | 24,728 | $ | 29,023 |
Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses
Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise profit is the difference between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
Advertising Costs
Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed when the marketing campaign commences. As of January 28, 2012 and January 29, 2011, the Company had prepaid advertising expense of $7.7 million and $5.4 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $73.1 million, $64.9 million and $60.9 million in advertising expense during Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively.
Design Costs
The Company has certain design costs, including compensation, rent, depreciation, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold.
Store Pre-Opening Costs
Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are expensed as incurred.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income/expense, foreign currency transaction gain/loss and realized investment gains/losses other than those realized upon the sale of investment securities, which are recorded separately on the Consolidated Statements of Operations.
Gift Cards
The value of a gift card is recorded as a current liability upon purchase and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The company recorded gift card breakage of $6.5 million, $5.5 million and $6.8 million during Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively.
Legal Proceedings and Claims
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company.
Supplemental Disclosures of Cash Flow Information
The table below shows supplemental cash flow information for cash amounts paid during the respective periods:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Cash paid during the periods for: |
||||||||||||
Income taxes |
$ | 99,756 | $ | 45,737 | $ | 61,869 | ||||||
Interest |
$ | — | $ | 191 | $ | 1,879 |
Segment Information
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified four operating segments (American Eagle® Brand US and Canadian stores, aerie® by American Eagle® retail stores, 77kids by american eagle® retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.
The following tables present summarized geographical information:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Net sales: |
||||||||||||
United States |
$ | 2,849,248 | $ | 2,675,992 | $ | 2,665,655 | ||||||
Foreign(1) |
310,570 | 291,567 | 274,614 | |||||||||
|
|
|
|
|
|
|||||||
Total net sales |
$ | 3,159,818 | $ | 2,967,559 | $ | 2,940,269 | ||||||
|
|
|
|
|
|
(1) | Amounts represent sales from American Eagle and aerie Canadian retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue. |
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Long-lived assets, net: |
||||||||
United States |
$ | 580,161 | $ | 615,049 | ||||
Foreign |
53,302 | 47,028 | ||||||
|
|
|
|
|||||
Total long-lived assets, net |
$ | 633,463 | $ | 662,077 | ||||
|
|
|
|
Reclassifications
Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.
|
The following table sets forth the approximate consolidated percentage of net sales attributable to each merchandise group for each of the periods indicated:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
Men’s apparel and accessories |
40 | % | 40 | % | 40 | % | ||||||
Women’s apparel and accessories (excluding aerie) |
51 | % | 51 | % | 51 | % | ||||||
aerie |
8 | % | 9 | % | 9 | % | ||||||
Kid’s apparel and accessories |
1 | % | — | % | — | % | ||||||
|
|
|
|
|
|
|||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
|
|
|
|
|
|
|
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 | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Beginning balance |
$ | 3,691 | $ | 4,690 | $ | 3,981 | ||||||
Returns |
(77,656 | ) | (70,789 | ) | (71,705 | ) | ||||||
Provisions |
76,896 | 69,790 | 72,414 | |||||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 2,931 | $ | 3,691 | $ | 4,690 | ||||||
|
|
|
|
|
|
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively.
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Proceeds from sell-offs |
$ | 17,556 | $ | 25,593 | $ | 29,347 | ||||||
Marked-down cost of merchandise disposed of via sell-offs |
$ | 17,441 | $ | 24,728 | $ | 29,023 |
The table below shows supplemental cash flow information for cash amounts paid during the respective periods:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Cash paid during the periods for: |
||||||||||||
Income taxes |
$ | 99,756 | $ | 45,737 | $ | 61,869 | ||||||
Interest |
$ | — | $ | 191 | $ | 1,879 |
The following tables present summarized geographical information:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Net sales: |
||||||||||||
United States |
$ | 2,849,248 | $ | 2,675,992 | $ | 2,665,655 | ||||||
Foreign(1) |
310,570 | 291,567 | 274,614 | |||||||||
|
|
|
|
|
|
|||||||
Total net sales |
$ | 3,159,818 | $ | 2,967,559 | $ | 2,940,269 | ||||||
|
|
|
|
|
|
(1) | Amounts represent sales from American Eagle and aerie Canadian retail stores, AEO Direct sales that are billed to and/or shipped to foreign countries and international franchise revenue. |
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Long-lived assets, net: |
||||||||
United States |
$ | 580,161 | $ | 615,049 | ||||
Foreign |
53,302 | 47,028 | ||||||
|
|
|
|
|||||
Total long-lived assets, net |
$ | 633,463 | $ | 662,077 | ||||
|
|
|
|
|
The following table summarizes the fair market value of our cash and marketable securities, which are recorded on the Consolidated Balance Sheets:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Cash and cash equivalents: |
||||||||
Cash |
$ | 548,728 | $ | 122,578 | ||||
Money-market |
131,785 | 397,440 | ||||||
Commercial Paper |
29,998 | 40,884 | ||||||
Treasury bills |
9,034 | 102,996 | ||||||
Corporate bonds |
— | 3,695 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
$ | 719,545 | $ | 667,593 | ||||
Short-term investments: |
||||||||
Treasury bills |
$ | 19,999 | $ | — | ||||
State and local government ARS |
5,500 | 3,700 | ||||||
Term-deposits |
— | 63,402 | ||||||
|
|
|
|
|||||
Total short-term investments |
$ | 25,499 | $ | 67,102 | ||||
Long-term investments: |
||||||||
ARS Call Option |
$ | 847 | $ | 415 | ||||
State and local government ARS |
— | 5,500 | ||||||
|
|
|
|
|||||
Total long-term investments |
$ | 847 | $ | 5,915 | ||||
|
|
|
|
|||||
Total |
$ | 745,891 | $ | 740,610 | ||||
|
|
|
|
|
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 28, 2012 and January 29, 2011:
Fair Value Measurements at January 28, 2012 | ||||||||||||||||
Carrying Amount |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents |
||||||||||||||||
Cash |
$ | 548,728 | $ | 548,728 | $ | — | $ | — | ||||||||
Money-market |
131,785 | 131,785 | — | — | ||||||||||||
Commercial paper |
29,998 | 29,998 | — | — | ||||||||||||
Treasury bills |
9,034 | 9,034 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cash and cash equivalents |
$ | 719,545 | $ | 719,545 | $ | — | $ | — | ||||||||
Short-term investments |
||||||||||||||||
Treasury bills |
$ | 19,999 | $ | 19,999 | $ | — | $ | — | ||||||||
State and local government ARS |
5,500 | — | — | 5,500 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total short-term investments |
$ | 25,499 | $ | 19,999 | $ | — | $ | 5,500 | ||||||||
Long-term investments |
||||||||||||||||
ARS Call Option |
$ | 847 | $ | — | $ | — | $ | 847 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term investments |
$ | 847 | $ | — | $ | — | $ | 847 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 745,891 | $ | 739,544 | $ | — | $ | 6,347 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at January 29, 2011 | ||||||||||||||||
Carrying Amount |
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Cash and cash equivalents |
||||||||||||||||
Cash |
$ | 122,578 | $ | 122,578 | $ | — | $ | — | ||||||||
Money-market |
397,440 | 397,440 | — | — | ||||||||||||
Treasury bills |
102,996 | 102,996 | — | — | ||||||||||||
Commercial paper |
40,884 | 40,884 | — | — | ||||||||||||
Corporate bonds |
3,695 | 3,695 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cash and cash equivalents |
$ | 667,593 | $ | 667,593 | $ | — | $ | — | ||||||||
Short-term investments |
||||||||||||||||
Term deposits |
$ | 63,402 | $ | 63,402 | $ | — | $ | — | ||||||||
State and local government ARS |
3,700 | — | — | 3,700 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total short-term investments |
$ | 67,102 | $ | 63,402 | $ | — | $ | 3,700 | ||||||||
Long-term investments |
||||||||||||||||
State and local government ARS |
$ | 5,500 | $ | — | $ | — | $ | 5,500 | ||||||||
ARS Call Option |
415 | — | — | 415 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total long-term investments |
$ | 5,915 | $ | — | $ | — | $ | 5,915 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 740,610 | $ | 730,995 | $ | — | $ | 9,615 | ||||||||
|
|
|
|
|
|
|
|
The reconciliation of our assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:
Level 3 (Unobservable inputs) | ||||||||||||||||||||
Total | Auction- Rate Municipal Securities |
Student Loan- Backed Auction- Rate Securities |
Auction-Rate Preferred Securities |
ARS Call Option |
||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance at January 30, 2010 |
$ | 202,448 | $ | 40,244 | $ | 149,431 | $ | 12,773 | $ | — | ||||||||||
Settlements |
(177,472 | ) | (29,101 | ) | (141,246 | ) | (7,125 | ) | — | |||||||||||
Gains and (losses): |
||||||||||||||||||||
Reported in earnings |
(25,674 | ) | (2,399 | ) | (16,755 | ) | (6,935 | ) | 415 | |||||||||||
Reported in OCI |
10,313 | 456 | 8,570 | 1,287 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 29, 2011 |
$ | 9,615 | $ | 9,200 | $ | — | $ | — | $ | 415 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Settlements |
(3,700 | ) | (3,700 | ) | — | — | — | |||||||||||||
Gains and (losses): |
||||||||||||||||||||
Reported in earnings |
432 | — | — | — | 432 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at January 28, 2012 |
$ | 6,347 | $ | 5,500 | $ | — | $ | — | $ | 847 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable are comprised of the following:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Franchise receivable |
$ | 20,108 | $ | 5,183 | ||||
Marketing cost reimbursements |
4,182 | 3,553 | ||||||
Gift card receivable |
4,113 | 3,567 | ||||||
Landlord construction allowances |
3,672 | 11,739 | ||||||
Insurance claims receivable |
2,071 | 4,374 | ||||||
Merchandise sell-offs |
1,955 | 4,539 | ||||||
Taxes |
1,076 | 1,239 | ||||||
Other |
3,133 | 2,527 | ||||||
|
|
|
|
|||||
Total |
$ | 40,310 | $ | 36,721 | ||||
|
|
|
|
|
Property and equipment consists of the following:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Land |
$ | 6,364 | $ | 6,364 | ||||
Buildings |
153,538 | 152,984 | ||||||
Leasehold improvements |
638,496 | 624,479 | ||||||
Fixtures and equipment |
656,337 | 647,346 | ||||||
Construction in progress |
3,787 | 1,629 | ||||||
|
|
|
|
|||||
Property and equipment, at cost |
$ | 1,458,522 | $ | 1,432,802 | ||||
Less: Accumulated depreciation |
(876,360 | ) | (789,682 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 582,162 | $ | 643,120 | ||||
|
|
|
|
Depreciation expense is summarized as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Depreciation expense |
$ | 137,934 | $ | 139,169 | $ | 137,045 | ||||||
|
|
|
|
|
|
|
The following table represents intangible assets as of January 28, 2012 and January 29, 2011:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Trademarks, at cost |
$ | 44,142 | $ | 9,967 | ||||
Less: Accumulated amortization |
(4,310 | ) | (2,482 | ) | ||||
|
|
|
|
|||||
Intangible assets, net |
$ | 39,832 | $ | 7,485 | ||||
|
|
|
|
Amortization expense is summarized as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Amortization expense |
$ | 1,828 | $ | 625 | $ | 509 | ||||||
|
|
|
|
|
|
The table below summarizes the estimated future amortization expense for intangible assets existing as of January 28, 2012 for the next five Fiscal Years:
Future Amortization |
||||
(In thousands) | ||||
2012 |
$ | 1,961 | ||
2013 |
1,956 | |||
2014 |
1,956 | |||
2015 |
1,956 | |||
2016 |
1,911 |
|
A summary of fixed minimum and contingent rent expense for all operating leases follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Store rent: |
||||||||||||
Fixed minimum |
$ | 251,504 | $ | 230,277 | $ | 218,785 | ||||||
Contingent |
7,618 | 8,182 | 7,873 | |||||||||
|
|
|
|
|
|
|||||||
Total store rent, excluding common area maintenance charges, real estate taxes and certain other expenses |
$ | 259,122 | $ | 238,459 | $ | 226,658 | ||||||
Offices, distribution facilities, equipment and other |
17,405 | 16,722 | 17,391 | |||||||||
|
|
|
|
|
|
|||||||
Total rent expense |
$ | 276,527 | $ | 255,181 | $ | 244,049 | ||||||
|
|
|
|
|
|
The table below summarizes future minimum lease obligations, consisting of fixed minimum rent, under operating leases in effect at January 28, 2012:
Fiscal years: |
Future Minimum Lease Obligations |
|||
(In thousands) | ||||
2012 |
$ | 255,576 | ||
2013 |
241,878 | |||
2014 |
222,931 | |||
2015 |
207,248 | |||
2016 |
183,881 | |||
Thereafter |
612,557 | |||
|
|
|||
Total |
$ | 1,724,071 | ||
|
|
|
The accumulated balances of other comprehensive (loss) income included as part of the Consolidated Statements of Stockholders’ Equity follow:
Before Tax Amount |
Tax Benefit (Expense) |
Accumulated Other Comprehensive (Loss) Income |
||||||||||
(In thousands) | ||||||||||||
Balance at January 31, 2009 |
$ | (27,835 | ) | $ | 13,446 | $ | (14,389 | ) | ||||
|
|
|
|
|
|
|||||||
Temporary reversal of impairment related to ARS |
24,041 | (9,535 | ) | 14,506 | ||||||||
Reclassification adjustment for realized losses in net income related to investment securities |
940 | — | 940 | |||||||||
Foreign currency translation gain |
15,781 | — | 15,781 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 30, 2010 |
$ | 12,927 | $ | 3,911 | $ | 16,838 | ||||||
|
|
|
|
|
|
|||||||
Temporary impairment related to ARS |
(1,830 | ) | 690 | (1,140 | ) | |||||||
Reclassification adjustment for realized losses in net income related to investment securities |
12,142 | (4,601 | ) | 7,541 | ||||||||
Foreign currency translation gain |
4,833 | — | 4,833 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 29, 2011 |
$ | 28,072 | $ | — | $ | 28,072 | ||||||
|
|
|
|
|
|
|||||||
Foreign currency translation gain |
587 | — | 587 | |||||||||
|
|
|
|
|
|
|||||||
Balance at January 28, 2012 |
$ | 28,659 | $ | — | $ | 28,659 | ||||||
|
|
|
|
|
|
|
The components of income before income taxes from continuing operations were:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
U.S. |
$ | 218,153 | $ | 258,408 | $ | 269,932 | ||||||
Foreign |
18,857 | 36,676 | 34,443 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 237,010 | $ | 295,084 | $ | 304,375 | ||||||
|
|
|
|
|
|
The significant components of the Company’s deferred tax assets and liabilities were as follows:
January 28, 2012 |
January 29, 2011 |
|||||||
(In thousands) | ||||||||
Deferred tax assets: |
||||||||
Deferred compensation |
$ | 31,379 | $ | 30,801 | ||||
Rent |
27,642 | 25,145 | ||||||
Foreign tax credits |
22,302 | 25,498 | ||||||
Capital loss carryforward |
18,440 | 20,381 | ||||||
Inventories |
11,734 | 10,432 | ||||||
Foreign and state income taxes |
6,723 | 7,575 | ||||||
Employee compensation and benefits |
6,345 | 4,942 | ||||||
State tax credits |
6,105 | 5,866 | ||||||
Other |
9,650 | 8,547 | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
140,320 | 139,187 | ||||||
Valuation allowance |
(18,440 | ) | (20,381 | ) | ||||
|
|
|
|
|||||
Total deferred tax assets |
$ | 121,880 | $ | 118,806 | ||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Property and equipment |
$ | (55,503 | ) | $ | (47,852 | ) | ||
Prepaid expenses |
(4,149 | ) | (3,279 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
$ | (59,652 | ) | $ | (51,131 | ) | ||
|
|
|
|
|||||
Total deferred tax assets, net |
$ | 62,228 | $ | 67,675 | ||||
|
|
|
|
|||||
Classification in the Consolidated Balance Sheet: |
||||||||
Current deferred tax assets |
$ | 48,761 | $ | 48,059 | ||||
Noncurrent deferred tax assets |
13,467 | 19,616 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
$ | 62,228 | $ | 67,675 | ||||
|
|
|
|
Significant components of the provision for income taxes from continuing operations were as follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 63,631 | $ | 89,110 | $ | 92,074 | ||||||
Foreign taxes |
6,621 | 13,429 | 14,526 | |||||||||
State |
10,841 | 9,610 | 13,575 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
81,093 | 112,149 | 120,175 | |||||||||
|
|
|
|
|
|
|||||||
Deferred: |
||||||||||||
Federal |
$ | 7,158 | $ | (310 | ) | $ | (32,361 | ) | ||||
Foreign taxes |
(1,120 | ) | (991 | ) | 6,513 | |||||||
State |
(1,826 | ) | 2,302 | (3,350 | ) | |||||||
|
|
|
|
|
|
|||||||
Total deferred |
4,212 | 1,001 | (29,198 | ) | ||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 85,305 | $ | 113,150 | $ | 90,977 | ||||||
|
|
|
|
|
|
The following table summarizes the activity related to our unrecognized tax benefits:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
(In thousands) | ||||||||||||
Unrecognized tax benefits, beginning of the year balance |
$ | 31,108 | $ | 31,649 | $ | 41,080 | ||||||
Increases in tax positions of prior periods |
932 | 1,069 | 1,679 | |||||||||
Decreases in tax positions of prior periods |
(2,106 | ) | (3,801 | ) | (13,457 | ) | ||||||
Increases in current period tax positions |
2,782 | 2,707 | 14,842 | |||||||||
Settlements |
(1,073 | ) | (6 | ) | (6,204 | ) | ||||||
Lapse of statute of limitations |
(65 | ) | (510 | ) | (6,291 | ) | ||||||
|
|
|
|
|
|
|||||||
Unrecognized tax benefits, end of the year balance |
$ | 31,578 | $ | 31,108 | $ | 31,649 | ||||||
|
|
|
|
|
|
A reconciliation between the statutory federal income tax rate and the effective income tax rate from continuing operations follows:
For the Years Ended | ||||||||||||
January 28, 2012 |
January 29, 2011 |
January 30, 2010 |
||||||||||
Federal income tax rate |
35 | % | 35 | % | 35 | % | ||||||
State income taxes, net of federal income tax effect |
3 | 3 | 3 | |||||||||
Valuation allowance changes, net |
(1 | ) | 1 | 1 | ||||||||
Tax settlements |
(1 | ) | (1 | ) | (4 | ) | ||||||
Canadian earnings repatriation |
— | — | (5 | ) | ||||||||
|
|
|
|
|
|
|||||||
36 | % | 38 | % | 30 | % | |||||||
|
|
|
|
|
|
|
A summary of the exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for Fiscal 2010 are included in the table as follows. There were no exit or disposal costs recognized in Fiscal 2011 or Fiscal 2009. The Loss from Discontinued Operations for Fiscal 2010 and Fiscal 2009 includes pre-tax asset impairment charges of $18.0 million in both years.
For the Year Ended | ||||
January
29, 2011 |
||||
(In thousands) | ||||
Non-cash charges |
||||
Asset impairments |
$ | 17,980 | ||
Cash charges |
||||
Lease-related charges(1) |
15,377 | |||
Inventory charges |
2,422 | |||
Severence charges |
7,660 | |||
|
|
|||
Total charges |
$ | 43,439 | ||
|
|
(1) | Presented net of the reversal of non-cash lease credits. |
The table below presents the significant components of M+O’s results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for the years ended January 29, 2011 and January 30, 2010, respectively. There was no loss from discontinued operations for the year ended January 28, 2012.
For the Years Ended | ||||||||
January 29, 2011 |
January 30, 2010 |
|||||||
(In thousands) | ||||||||
Net sales |
$ | 21,881 | $ | 50,251 | ||||
|
|
|
|
|||||
Loss from discontinued operations, before income taxes |
$ | (66,959 | ) | $ | (71,984 | ) | ||
Income tax benefit |
25,672 | 27,608 | ||||||
|
|
|
|
|||||
Loss from discontinued operations, net of tax |
$ | (41,287 | ) | $ | (44,376 | ) | ||
|
|
|
|
|||||
Loss per common share from discontinued operations: |
||||||||
Basic |
$ | (0.21 | ) | $ | (0.22 | ) | ||
Diluted |
$ | (0.20 | ) | $ | (0.21 | ) |
|
Fiscal
2011 Quarters Ended |
||||||||||||||||
April
30, 2011 |
July
30, 2011 |
October 29, 2011 |
January
28, 2012 |
|||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 609,562 | $ | 675,703 | $ | 831,826 | $ | 1,042,727 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
$ | 231,761 | $ | 232,061 | $ | 308,967 | $ | 355,552 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
28,325 | 19,669 | 52,427 | 51,284 | ||||||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 28,325 | $ | 19,669 | $ | 52,427 | $ | 51,284 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.15 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income per common share |
$ | 0.15 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.14 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
Loss from discontinued operations |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 0.14 | $ | 0.10 | $ | 0.27 | $ | 0.26 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Fiscal
2010 Quarters Ended |
||||||||||||||||
May 1, 2010 |
July
31, 2010 |
October 30, 2010 |
January 29, 2011 |
|||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Net sales |
$ | 648,462 | $ | 651,502 | $ | 751,507 | $ | 916,088 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
$ | 257,696 | $ | 239,708 | $ | 312,309 | $ | 361,246 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
35,862 | 25,843 | 33,191 | 87,038 | ||||||||||||
Loss from discontinued operations |
(24,940 | ) | (16,180 | ) | (167 | ) | — | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 10,922 | $ | 9,663 | $ | 33,024 | $ | 87,038 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.45 | ||||||||
Loss from discontinued operations |
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic net income per common share |
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.45 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted per common share amounts: |
||||||||||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.13 | $ | 0.17 | $ | 0.44 | ||||||||
Loss from discontinued operations |
(0.12 | ) | (0.08 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 0.05 | $ | 0.05 | $ | 0.17 | $ | 0.44 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||
|
|
|
|