AMERICAN EAGLE OUTFITTERS INC, 10-K filed on 3/15/2012
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 28, 2012
Mar. 12, 2012
Jul. 30, 2011
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 28, 2012 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
AEO 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Current Fiscal Year End Date
--01-28 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
194,539,858 
 
Entity Public Float
 
 
$ 2,334,798,008 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jan. 28, 2012
Jan. 29, 2011
Current assets:
 
 
Cash and cash equivalents
$ 719,545 
$ 667,593 
Short-term investments
25,499 
67,102 
Merchandise inventory
378,426 
301,208 
Accounts receivable
40,310 
36,721 
Prepaid expenses and other
74,947 
53,727 
Deferred income taxes
48,761 
48,059 
Total current assets
1,287,488 
1,174,410 
Property and equipment, at cost, net of accumulated depreciation
582,162 
643,120 
Intangible assets, at cost, net of accumulated amortization
39,832 
7,485 
Goodwill
11,469 
11,472 
Non-current deferred income taxes
13,467 
19,616 
Other assets
16,384 
23,895 
Total assets
1,950,802 
1,879,998 
Current liabilities:
 
 
Accounts payable
183,783 
167,723 
Accrued compensation and payroll taxes
42,625 
34,954 
Accrued rent
76,921 
70,390 
Accrued income and other taxes
20,135 
32,468 
Unredeemed gift cards and gift certificates
44,970 
41,001 
Current portion of deferred lease credits
15,066 
16,203 
Other liabilities and accrued expenses
21,901 
25,098 
Total current liabilities
405,401 
387,837 
Non-current liabilities:
 
 
Deferred lease credits
71,880 
78,606 
Non-current accrued income taxes
35,471 
38,671 
Other non-current liabilities
21,199 
23,813 
Total non-current liabilities
128,550 
141,090 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding
   
   
Common stock, $0.01 par value; 600,000 shares authorized; 249,566 and 249,566 shares issued; 193,848 and 194,366 shares outstanding, respectively
2,496 
2,496 
Contributed capital
552,797 
546,597 
Accumulated other comprehensive income
28,659 
28,072 
Retained earnings
1,771,464 
1,711,929 
Treasury stock, 55,718 and 55,200 shares, respectively, at cost
(938,565)
(938,023)
Total stockholders' equity
1,416,851 
1,351,071 
Total liabilities and stockholders' equity
$ 1,950,802 
$ 1,879,998 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Jan. 28, 2012
Jan. 29, 2011
Jan. 30, 2010
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000 
5,000 
5,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Common stock, shares authorized
600,000 
600,000 
600,000 
Common stock, shares issued
249,566 
249,566 
249,561 
Common stock, shares outstanding
193,848 
194,366 
206,832 
Treasury stock, shares
55,718 
55,200 
41,737 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 28, 2012
Jan. 29, 2011
Jan. 30, 2010
Net sales
$ 3,159,818 
$ 2,967,559 
$ 2,940,269 
Cost of sales, including certain buying, occupancy and warehousing expenses
2,031,477 
1,796,600 
1,766,839 
Gross profit
1,128,341 
1,170,959 
1,173,430 
Selling, general and administrative expenses
735,828 
713,197 
725,278 
Loss on impairment of assets
20,730 
17,980 
18,000 
Depreciation and amortization expense
140,647 
140,501 
137,760 
Operating income
231,136 
317,261 
310,392 
Realized loss on sale of investment securities
 
(24,426)
(2,749)
Other income (expense), net
5,874 
2,249 
(3,268)
Income before income taxes
237,010 
295,084 
304,375 
Provision for income taxes
85,305 
113,150 
90,977 
Income from continuing operations
151,705 
181,934 
213,398 
Loss from discontinued operations, net of tax
 
(41,287)
(44,376)
Net income
$ 151,705 
$ 140,647 
$ 169,022 
Basic income per common share:
 
 
 
Income from continuing operations
$ 0.78 
$ 0.91 
$ 1.04 
Loss from discontinued operations
 
$ (0.21)
$ (0.22)
Basic net income per common share
$ 0.78 
$ 0.70 
$ 0.82 
Diluted income per common share:
 
 
 
Income from continuing operations
$ 0.77 
$ 0.90 
$ 1.02 
Loss from discontinued operations
 
$ (0.20)
$ (0.21)
Diluted net income per common share
$ 0.77 
$ 0.70 
$ 0.81 
Weighted average common shares outstanding - basic
194,445 
199,979 
206,171 
Weighted average common shares outstanding - diluted
196,314 
201,818 
209,512 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 28, 2012
Jan. 29, 2011
Jan. 30, 2010
Net income
$ 151,705 
$ 140,647 
$ 169,022 
Other comprehensive income:
 
 
 
Temporary (impairment) recovery related to investment securities, net of tax
 
(1,140)
14,506 
Reclassification adjustment for realized losses in net income related to investment securities, net of tax
 
7,541 
940 
Foreign currency translation gain
587 
4,833 
15,781 
Other comprehensive income
587 
11,234 
31,227 
Comprehensive income
$ 152,292 
$ 151,881 
$ 200,249 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands
Total
Common Stock
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Jan. 31, 2009
$ 1,409,031 
$ 2,485 
$ 513,574 
$ 1,694,161 
$ (786,800)1
$ (14,389)
Beginning Balance (in shares) at Jan. 31, 20092
 
205,281 
 
 
 
 
Stock awards (in shares)2
 
41 
 
 
 
 
Stock awards
39,904 
39,903 
 
 
 
Repurchase of common stock from employees (in shares)2
 
(18)
 
 
 
 
Repurchase of common stock from employees
(247)
 
 
 
(247)1
 
Reissuance of treasury stock (in shares)
1,528 
1,528 2
 
 
 
 
Reissuance of treasury stock
12,564 
 
 
(15,228)
27,792 1
 
Net income
169,022 
 
 
169,022 
 
 
Other comprehensive income, net of tax
31,227 
 
 
 
 
31,227 
Cash dividends and dividend equivalents ($0.44 in 2012, $0.93 in 2011 and $0.40 in 2010 per share)
(82,984)
 
922 
(83,906)
 
 
Ending Balance at Jan. 30, 2010
1,578,517 
2,486 
554,399 
1,764,049 
(759,255)1
16,838 
Ending Balance (in shares) at Jan. 30, 20102
 
206,832 
 
 
 
 
Stock awards (in shares)2
 
997 
 
 
 
 
Stock awards
36,239 
10 
36,229 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(15,500)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(216,070)
 
 
 
(216,070)1
 
Repurchase of common stock from employees (in shares)2
 
(1,035)
 
 
 
 
Repurchase of common stock from employees
(18,041)
 
 
 
(18,041)1
 
Reissuance of treasury stock (in shares)
3,072 
3,072 2
 
 
 
 
Reissuance of treasury stock
1,711 
 
(45,841)
(7,791)
55,343 1
 
Net income
140,647 
 
 
140,647 
 
 
Other comprehensive income, net of tax
11,234 
 
 
 
 
11,234 
Cash dividends and dividend equivalents ($0.44 in 2012, $0.93 in 2011 and $0.40 in 2010 per share)
(183,166)
 
1,810 
(184,976)
 
 
Ending Balance at Jan. 29, 2011
1,351,071 
2,496 
546,597 
1,711,929 
(938,023)1
28,072 
Ending Balance (in shares) at Jan. 29, 20112
 
194,366 
 
 
 
 
Stock awards
10,532 
 
10,532 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(1,365)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(15,160)
 
 
 
(15,160)1
 
Repurchase of common stock from employees (in shares)2
 
(145)
 
 
 
 
Repurchase of common stock from employees
(2,189)
 
 
 
(2,189)1
 
Reissuance of treasury stock (in shares)
992 
992 2
 
 
 
 
Reissuance of treasury stock
6,549 
 
(5,997)
(4,261)
16,807 1
 
Net income
151,705 
 
 
151,705 
 
 
Other comprehensive income, net of tax
587 
 
 
 
 
587 
Cash dividends and dividend equivalents ($0.44 in 2012, $0.93 in 2011 and $0.40 in 2010 per share)
(86,244)
 
1,665 
(87,909)
 
 
Ending Balance at Jan. 28, 2012
$ 1,416,851 
$ 2,496 
$ 552,797 
$ 1,771,464 
$ (938,565)1
$ 28,659 
Ending Balance (in shares) at Jan. 28, 20122
 
193,848 
 
 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 28, 2012
Jan. 29, 2011
Jan. 30, 2010
Cash dividends and dividend equivalents, per share
$ 0.44 
$ 0.93 
$ 0.40 
Common stock, shares authorized
600,000 
600,000 
600,000 
Common stock, shares issued
249,566 
249,566 
249,561 
Common stock, shares outstanding
193,848 
194,366 
206,832 
Non-vested restricted stock excluded
 
 
992 
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000 
5,000 
5,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Treasury stock, shares
55,718 
55,200 
41,737 
Reissuance of treasury stock, shares
992 
3,072 
1,528 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 28, 2012
Jan. 29, 2011
Jan. 30, 2010
Operating activities:
 
 
 
Net income
$ 151,705 
$ 140,647 
$ 169,022 
Loss from discontinued operations, net of tax
 
41,287 
44,376 
Income from continuing operations
151,705 
181,934 
213,398 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
143,156 
145,548 
139,832 
Share-based compensation
12,341 
25,457 
34,615 
Provision for deferred income taxes
4,207 
11,885 
(36,027)
Tax benefit from share-based payments
356 
15,648 
7,995 
Excess tax benefit from share-based payments
(373)
(12,499)
(2,812)
Foreign currency transaction (gain) loss
(325)
117 
6,477 
Loss on impairment of assets
20,730 
17,980 
18,000 
Realized investment losses
 
25,674 
3,689 
Changes in assets and liabilities:
 
 
 
Merchandise inventory
(77,311)
18,713 
(33,699)
Accounts receivable
(3,589)
(3,790)
6,656 
Prepaid expenses and other
(21,261)
(9,045)
12,916 
Other assets
2,444 
(1,380)
1,146 
Accounts payable
17,934 
5,232 
8,358 
Unredeemed gift cards and gift certificates
3,979 
1,713 
(3,591)
Deferred lease credits
(7,837)
(7,451)
4,667 
Accrued compensation and payroll taxes
7,677 
(19,618)
25,841 
Accrued income and other taxes
(15,515)
11,999 
12,858 
Accrued liabilities
938 
12,457 
(1,993)
Total adjustments
87,551 
220,660 
186,928 
Net cash provided by operating activities from continuing operations
239,256 
402,594 
400,326 
Investing activities:
 
 
 
Capital expenditures for property and equipment
(100,135)
(84,259)
(127,080)
Acquisition of intangible assets
(34,187)
(2,801)
(2,003)
Purchase of available-for-sale securities
(193,851)
(62,797)
Sale of available-for-sale securities
240,797 
177,472 
80,353 
Net cash (used for) provided by investing activities from continuing operations
(87,376)
27,615 
(48,730)
Financing activities:
 
 
 
Payments on capital leases
(3,256)
(2,590)
(2,015)
Repayment of note payable
 
(30,000)
(45,000)
Repurchase of common stock as part of publicly announced programs
(15,160)
(216,070)
 
Repurchase of common stock from employees
(2,189)
(18,041)
(247)
Net proceeds from stock options exercised
5,098 
7,272 
9,044 
Excess tax benefit from share-based payments
373 
12,499 
2,812 
Cash used to net settle equity awards
 
(6,434)
(1,414)
Cash dividends paid
(85,592)
(183,166)
(82,985)
Net cash used for financing activities from continuing operations
(100,726)
(436,530)
(119,805)
Effect of exchange rates on cash
798 
1,394 
3,030 
Cash flows of discontinued operations
 
 
 
Net cash used for operating activities
 
(21,434)
(13,864)
Net cash used for investing activities
 
(6)
(339)
Net cash used for financing activities
   
   
   
Effect of exchange rates on cash
   
   
   
Net cash used for discontinued operations
 
(21,440)
(14,203)
Net increase (decrease) in cash and cash equivalents
51,952 
(26,367)
220,618 
Cash and cash equivalents - beginning of period
667,593 
693,960 
473,342 
Cash and cash equivalents - end of period
$ 719,545 
$ 667,593 
$ 693,960 
Business Operations
Business Operations
1. Business Operations

American Eagle Outfitters, Inc. (the “Company”), a Delaware corporation, operates under the American Eagle® (“AE”), aerie® by American Eagle® (“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
  

 

 

   

 

 

   

 

 

 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At January 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, InvestmentsDebt 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.

Cash and Cash Equivalents, Short-term Investments and Long-term Investments
Cash and Cash Equivalents, Short-term Investments and Long-term Investments
3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments

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

 

      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.

Fair Value Measurements
Fair Value Measurements
4. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.

Financial Instruments

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes this three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

   

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 — Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of January 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.

Earnings per Share
Earnings per Share
5. Earnings per Share

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

 

     For the Years Ended  
      January 28,
2012
     January 29,
2011
     January 30,
2010
 
     (In thousands, except per share amounts)  

Weighted average common shares outstanding:

        

Basic number of common shares outstanding

     194,445         199,979         206,171   

Dilutive effect of stock options and non-vested restricted stock

     1,869         1,839         3,341   
  

 

 

    

 

 

    

 

 

 

Dilutive number of common shares outstanding

     196,314         201,818         209,512   
  

 

 

    

 

 

    

 

 

 

Equity awards to purchase approximately 7.2 million, 7.9 million and 6.6 million shares of common stock during the Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

Additionally, for Fiscal 2011, Fiscal 2010 and Fiscal 2009, approximately 1.9 million, 0.7 million and 0.4 million shares, respectively, of performance-based restricted stock awards were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established performance goals.

ASC 260-10-45, Participating Securities and the Two-Class Method (“ASC 260-10-45”), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method, as described in ASC 260, Earnings Per Share. Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees under the Company’s 2005 Plan are considered participating securities as these employees receive non-forfeitable dividends at the same rate as common stock. There were no participating securities outstanding during Fiscal 2011. During Fiscal 2010 and Fiscal 2009, the allocation of earnings to participating securities was not significant. For Fiscal 2011, Fiscal 2010 and Fiscal 2009, the application of ASC 260-10-45 resulted in no material change to basic or diluted income from continuing operations per common share.

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

Accounts Receivable
Accounts Receivable
6. Accounts Receivable

Accounts receivable are comprised of the following:

 

      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
Property and Equipment
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.

Intangible Assets
Intangible Assets
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
Other Credit Arrangements
Other Credit Arrangements
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.

Leases
Leases
10. Leases

The Company leases all store premises, some of its office space and certain information technology and office equipment. The store leases generally have initial terms of 10 years and are classified as operating leases. Most of these store leases provide for base rentals and the payment of a percentage of sales as additional contingent rent when sales exceed specified levels. Additionally, most leases contain construction allowances and/or rent holidays. In recognizing landlord incentives and minimum rent expense, the Company amortizes the items on a straight-line basis over the lease term (including the pre-opening build-out period).

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

 

     For the Years Ended  
     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   
  

 

 

 
Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss)
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.

Share-Based Payments
Share-Based Payments
12. Share-Based Payments

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation — Stock Compensation (“ASC 718”), which requires the Company to measure and recognize compensation expense for all share-based payments at fair value. Total share-based compensation expense included in the Consolidated Statements of Operations for Fiscal 2011, Fiscal 2010 and Fiscal 2009 was $12.3 million ($7.6 million, net of tax), $25.5 million ($15.7 million, net of tax) and $34.6 million ($21.4 million, net of tax), respectively.

ASC 718 requires recognition of compensation cost under a non-substantive vesting period approach for awards containing provisions that accelerate or continue vesting upon retirement. Accordingly, for awards with such provisions, the Company recognizes compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant.

At January 28, 2012, the Company had awards outstanding under three share-based compensation plans, which are described below.

Share-based compensation plans

1994 Stock Option Plan

On February 10, 1994, the Company’s Board adopted the American Eagle Outfitters, Inc. 1994 Stock Option Plan (the “1994 Plan”). The 1994 Plan provided for the grant of 12.2 million incentive or non-qualified options to purchase common stock. The 1994 Plan was subsequently amended to increase the shares available for grant to 24.3 million shares. Additionally, the amendment provided that the maximum number of options that may be granted to any individual may not exceed 8.1 million shares. The options granted under the 1994 Plan were approved by the Compensation Committee of the Board, primarily vest over five years, and expire 10 years from the date of grant. The 1994 Plan terminated on January 2, 2004 with all rights of the optionees and all unexpired options continuing in force and operation after the termination.

1999 Stock Incentive Plan

The 1999 Stock Option Plan (the “1999 Plan”) was approved by the stockholders on June 8, 1999. The 1999 Plan authorized 18.0 million shares for issuance in the form of stock options, stock appreciation rights (“SAR”), restricted stock awards, performance units or performance shares. The 1999 Plan was subsequently amended to increase the shares available for grant to 33.0 million. Additionally, the 1999 Plan provided that the maximum number of shares awarded to any individual may not exceed 9.0 million shares. The 1999 Plan allowed the Compensation Committee to determine which employees and consultants received awards and the terms and conditions of these awards. The 1999 Plan provided for a grant of 1,875 stock options quarterly (not to be adjusted for stock splits) to each director who is not an officer or employee of the Company starting in August 2003. The Company ceased making these quarterly stock option grants in June 2005. Under this plan, 33.2 million non-qualified stock options and 6.7 million shares of restricted stock were granted to employees and certain non-employees (without considering cancellations to date of awards for 9.7 million shares). Approximately 33% of the options granted were to vest over eight years after the date of grant but were accelerated as the Company met annual performance goals. Approximately 34% of the options granted under the 1999 Plan vest over three years, 23% vest over five years and the remaining grants vest over one year. All options expire after 10 years. Performance-based restricted stock was earned if the Company met established performance goals. The 1999 Plan terminated on June 15, 2005 with all rights of the awardees and all unexpired awards continuing in force and operation after the termination.

2005 Stock Award and Incentive Plan

The 2005 Plan was approved by the stockholders on June 15, 2005. The 2005 Plan authorized 18.4 million shares for issuance, of which 6.4 million shares are available for full value awards in the form of restricted stock awards, restricted stock units or other full value stock awards and 12.0 million shares are available for stock options, SAR, dividend equivalents, performance awards or other non-full value stock awards. The 2005 Plan was subsequently amended in Fiscal 2009 to increase the shares available for grant to 31.9 million without taking into consideration 9.1 million non-qualified stock options, 2.9 million shares of restricted stock and 0.2 million shares of common stock that had been previously granted under the 2005 plan to employees and directors (without considering cancellations as of January 31, 2009 of awards for 2.9 million shares). The 2005 Plan provides that the maximum number of shares awarded to any individual may not exceed 6.0 million shares per year for options and SAR and no more than 4.0 million shares may be granted with respect to each of restricted shares of stock and restricted stock units plus any unused carryover limit from the previous year. The 2005 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards that are mandatory under the 2005 Plan. The 2005 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed 20,000 shares per year (not to be adjusted for stock splits). Through January 28, 2012, 14.4 million non-qualified stock options, 8.0 million shares of restricted stock and 0.5 million shares of common stock had been granted under the 2005 Plan to employees and directors (without considering cancellations to date of awards for 7.5 million shares). Approximately 99% of the options granted under the 2005 Plan vest over three years and 1% vest over five years. Options were granted for ten and seven year terms. Approximately 62% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals. The remaining 38% of the restricted stock awards are time-based and vest over three years.

 

Stock Option Grants

The Company grants both time-based and performance-based stock options under the 2005 Plan. Time-based stock option awards vest over the requisite service period of the award or to an employee’s eligible retirement date, if earlier. Performance-based stock option awards vest over three years and are earned if the Company meets pre-established performance goals during each year.

A summary of the Company’s stock option activity under all plans for Fiscal 2011 follows:

 

     For the Year Ended January 28, 2012  
     Options     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 
     (In thousands)            (In years)      (In thousands)  

Outstanding — January 29, 2011

     12,124      $ 15.25         

Granted

     47      $ 15.02         

Exercised(1)

     (544   $ 9.38         

Cancelled

     (430   $ 21.18         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding — January 28, 2012

     11,197      $ 15.31         2.2       $ 29,567   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest — January 28, 2012

     11,077      $ 15.33         2.2       $ 29,303   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable — January 28, 2012(2)

     3,691      $ 6.87         1.5       $ 26,264   

 

(1) Options exercised during Fiscal 2011 ranged in price from $4.54 to $12.30.

 

(2) Options exercisable represent “in-the-money” vested options based upon the weighted average exercise price of vested options compared to the Company’s stock price at January 28, 2012.

The weighted-average grant date fair value of stock options granted during Fiscal 2011, Fiscal 2010 and Fiscal 2009 was $4.73, $5.19 and $3.86, respectively. The aggregate intrinsic value of options exercised during Fiscal 2011, Fiscal 2010 and Fiscal 2009 was $2.8 million, $11.7 million and $11.7 million, respectively. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $5.1 million and $0.4 million, respectively, for Fiscal 2011. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $7.3 million and $15.6 million, respectively, for Fiscal 2010. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $9.0 million and $8.0 million, respectively, for Fiscal 2009.

The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

     For the Years Ended  

Black-Scholes Option Valuation Assumptions

   January 28,
2012
    January 29,
2011
    January 30,
2010
 

Risk-free interest rates(1)

     2.1     2.3     1.7

Dividend yield

     2.6     2.1     3.4

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

     42.7     40.2     56.9

Weighted-average expected term(3)

     5.0  years      4.5  years      4.1  years 

Expected forfeiture rate(4)

     8.0     8.0     8.0

 

(1) Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.

 

(2) Based on a combination of historical volatility of the Company’s common stock and implied volatility.

 

(3) Represents the period of time options are expected to be outstanding. The weighted average expected option term for the years ended January 28, 2012, January 29, 2011 and January 30, 2010 were determined based on historical experience.

 

(4) Based on historical experience.

As of January 28, 2012, there was $1.3 million of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average period of 11 months.

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units. These awards vest over three years; however, they may be accelerated to vest over one year if the Company meets pre-established performance goals in the year of grant. Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

Performance-based restricted stock awards include performance-based restricted stock units. These awards cliff vest at the end of a three year period based upon the Company’s achievement of pre-established goals throughout the term of the award. Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

The grant date fair value of all restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant.

A summary of the activity of the Company’s restricted stock is presented in the following tables:

 

    Time-Based Restricted
Stock  Units
    Performance-Based  Restricted
Stock Units
 
    For the year ended
January 28, 2012
    For the year ended
January 28, 2012
 
    Shares     Weighted-Average
Grant  Date
Fair Value
    Shares     Weighted-Average
Grant  Date
Fair Value
 
    (Shares in thousands)  

Nonvested — January 29, 2011

    877      $ 17.45        630      $ 12.59   

Granted

    1,406        15.03        1,240        15.03   

Vested

    (372     17.45                 

Cancelled/Forfeited

    (127     16.04        (108     12.64   
 

 

 

   

 

 

   

 

 

   

 

 

 

Nonvested — January 28, 2012

    1,784      $ 15.73        1,762      $ 14.23   

As of January 28, 2012, there was $17.3 million of unrecognized compensation expense related to nonvested time-based restricted stock unit awards that is expected to be recognized over a weighted average period of 1.8 years. The total fair value of restricted stock awards vested during Fiscal 2011, Fiscal 2010 and Fiscal 2009 was $5.6 million, $46.2 million and $0.6 million, respectively.

As of January 28, 2012, the Company had 25.3 million shares available for all equity grants.

Retirement Plan and Employee Stock Purchase Plan
Retirement Plan and Employee Stock Purchase Plan
13. Retirement Plan and Employee Stock Purchase Plan

The Company maintains a profit sharing and 401(k) plan (the “Retirement Plan”). Under the provisions of the Retirement Plan, full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 20 1/2 years of age. In addition, full-time employees need to have completed 60 days of service and part-time employees must complete 1,000 hours worked to be eligible. Individuals can decline enrollment or can contribute up to 50% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the Company will match 100% of the first 3% of pay plus an additional 50% of the next 3% of pay that is contributed to the plan. Contributions to the profit sharing plan, as determined by the Board, are discretionary. The Company recognized $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.

Income Taxes
Income Taxes
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
  

 

 

   

 

 

   

 

 

 
Discontinued Operations
Discontinued Operations
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.

Quarterly Financial Information - Unaudited
Quarterly Financial Information - Unaudited
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   
  

 

 

   

 

 

   

 

 

   

 

 

 
Subsequent Events
Subsequent Events
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.

Summary of Significant Accounting Policies (Policies)

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At January 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, InvestmentsDebt 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.

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

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
  

 

 

   

 

 

   

 

 

 
Summary of Significant Accounting Policies (Tables)

The useful lives of our major classes of assets are as follows:

 

Buildings

   25 years

Leasehold improvements

   Lesser of 10 years or the term of the lease

Fixtures and equipment

   5 years

The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.

 

     For the Years Ended  
      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   
  

 

 

    

 

 

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

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

 

      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   
  

 

 

    

 

 

 
Fair Value Measurements (Tables)

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