AMERICAN EAGLE OUTFITTERS INC, 10-K filed on 3/12/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Feb. 2, 2013
Mar. 6, 2013
Jul. 28, 2012
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Feb. 02, 2013 
 
 
Document Fiscal Year Focus
2012 
 
 
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
--02-02 
 
 
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
 
194,100,506 
 
Entity Public Float
 
 
$ 3,761,633,735 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Feb. 2, 2013
Jan. 28, 2012
Current assets:
 
 
Cash and cash equivalents
$ 509,119 
$ 719,545 
Short-term investments
121,873 
25,499 
Merchandise inventory
332,452 
367,514 
Assets held for sale
 
10,912 
Accounts receivable
46,321 
40,310 
Prepaid expenses and other
73,805 
74,947 
Deferred income taxes
58,230 
48,761 
Total current assets
1,141,800 
1,287,488 
Property and equipment, at cost, net of accumulated depreciation
509,633 
582,162 
Intangible assets, at cost, net of accumulated amortization
38,136 
39,832 
Goodwill
11,484 
11,469 
Non-current deferred income taxes
31,282 
13,467 
Other assets
23,718 
16,384 
Total assets
1,756,053 
1,950,802 
Current liabilities:
 
 
Accounts payable
176,874 
183,783 
Accrued compensation and payroll taxes
65,533 
42,625 
Accrued rent
77,873 
76,921 
Accrued income and other taxes
29,155 
20,135 
Unredeemed gift cards and gift certificates
46,458 
44,970 
Current portion of deferred lease credits
13,381 
15,066 
Other liabilities and accrued expenses
26,628 
21,901 
Total current liabilities
435,902 
405,401 
Non-current liabilities:
 
 
Deferred lease credits
59,571 
71,880 
Non-current accrued income taxes
19,011 
35,471 
Other non-current liabilities
20,382 
21,199 
Total non-current liabilities
98,964 
128,550 
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; 192,604 and 193,848 shares outstanding, respectively
2,496 
2,496 
Contributed capital
627,065 
552,797 
Accumulated other comprehensive income
29,297 
28,659 
Retained earnings
1,553,058 
1,771,464 
Treasury stock, 56,962 and 55,718 shares, respectively, at cost
(990,729)
(938,565)
Total stockholders' equity
1,221,187 
1,416,851 
Total liabilities and stockholders' equity
$ 1,756,053 
$ 1,950,802 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Feb. 2, 2013
Jan. 28, 2012
Jan. 29, 2011
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000 
5,000 
5,000 
Preferred stock, issued
Preferred stock, 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 
249,566 
Common stock, shares outstanding
192,604 
193,848 
194,366 
Treasury stock, shares
56,962 
55,718 
55,200 
Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Feb. 2, 2013
Jan. 28, 2012
Jan. 29, 2011
Total net revenue
$ 3,475,802 
$ 3,120,065 
$ 2,945,294 
Cost of sales, including certain buying, occupancy and warehousing expenses
2,085,480 
1,975,471 
1,763,143 
Gross profit
1,390,322 
1,144,594 
1,182,151 
Selling, general and administrative expenses
834,601 
718,123 
702,924 
Loss on impairment of assets
34,869 
19,178 
 
Depreciation and amortization expense
126,246 
137,958 
139,675 
Operating income
394,606 
269,335 
339,552 
Realized loss on sale of investment securities
 
 
(24,426)
Other income, net
7,432 
5,874 
2,249 
Income before income taxes
402,038 
275,209 
317,375 
Provision for income taxes
137,940 
99,930 
121,644 
Income from continuing operations
264,098 
175,279 
195,731 
Loss from discontinued operations, net of tax
(31,990)
(23,574)
(55,084)
Net income
$ 232,108 
$ 151,705 
$ 140,647 
Basic income per common share:
 
 
 
Income from continuing operations
$ 1.35 
$ 0.90 
$ 0.98 
Loss from discontinued operations
$ (0.16)
$ (0.12)
$ (0.28)
Basic net income per common share
$ 1.19 
$ 0.78 
$ 0.70 
Diluted income per common share:
 
 
 
Income from continuing operations
$ 1.32 
$ 0.89 
$ 0.97 
Loss from discontinued operations
$ (0.16)
$ (0.12)
$ (0.27)
Diluted net income per common share
$ 1.16 
$ 0.77 
$ 0.70 
Weighted average common shares outstanding - basic
196,211 
194,445 
199,979 
Weighted average common shares outstanding - diluted
200,665 
196,314 
201,818 
Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Feb. 2, 2013
Jan. 28, 2012
Jan. 29, 2011
Net income
$ 232,108 
$ 151,705 
$ 140,647 
Other comprehensive income:
 
 
 
Temporary impairment related to investment securities, net of tax
 
 
(1,140)
Reclassification adjustment for realized losses in net income related to investment securities, net of tax
 
 
7,541 
Foreign currency translation gain
638 
587 
4,833 
Other comprehensive income
638 
587 
11,234 
Comprehensive income
$ 232,746 
$ 152,292 
$ 151,881 
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. 29, 2010
$ 1,578,517 
$ 2,486 
$ 554,399 
$ 1,764,049 
$ (759,255)1
$ 16,838 
Beginning Balance (in shares) at Jan. 29, 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 ($2.05 in 2013, $0.44 in 2012 and $0.93 in 2011 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 ($2.05 in 2013, $0.44 in 2012 and $0.93 in 2011 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 
 
 
 
 
Stock awards
76,108 
 
76,108 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(8,407)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(173,554)
 
 
 
(173,554)1
 
Repurchase of common stock from employees (in shares)2
 
(280)
 
 
 
 
Repurchase of common stock from employees
(4,125)
 
 
 
(4,125)1
 
Reissuance of treasury stock (in shares)
7,443 
7,443 2
 
 
 
 
Reissuance of treasury stock
78,248 
 
(11,054)
(36,213)
125,515 1
 
Net income
232,108 
 
 
232,108 
 
 
Other comprehensive income, net of tax
638 
 
 
 
 
638 
Cash dividends and dividend equivalents ($2.05 in 2013, $0.44 in 2012 and $0.93 in 2011 per share)
(405,087)
 
9,214 
(414,301)
 
 
Ending Balance at Feb. 02, 2013
$ 1,221,187 
$ 2,496 
$ 627,065 
$ 1,553,058 
$ (990,729)1
$ 29,297 
Ending Balance (in shares) at Feb. 02, 20132
 
192,604 
 
 
 
 
Consolidated Statements Of Stockholders' Equity (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Feb. 2, 2013
Jan. 28, 2012
Jan. 29, 2011
Cash dividends and dividend equivalents, Per share
$ 2.05 
$ 0.44 
$ 0.93 
Common stock, shares authorized
600,000 
600,000 
600,000 
Common stock, shares issued
249,566 
249,566 
249,566 
Common stock, shares outstanding
192,604 
193,848 
194,366 
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
56,962 
55,718 
55,200 
Reissuance of treasury stock, shares
7,443 
992 
3,072 
Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Feb. 2, 2013
Jan. 28, 2012
Jan. 29, 2011
Operating activities:
 
 
 
Net income
$ 232,108 
$ 151,705 
$ 140,647 
Loss from discontinued operations, net of tax
31,990 
23,574 
55,084 
Income from continuing operations
264,098 
175,279 
195,731 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
128,397 
140,502 
141,662 
Share-based compensation
66,349 
11,724 
24,909 
Provision for deferred income taxes
(31,418)
4,207 
11,885 
Tax benefit from share-based payments
14,050 
356 
15,648 
Excess tax benefit from share-based payments
(13,279)
(373)
(12,499)
Foreign currency transaction loss (gain)
100 
(325)
117 
Loss on impairment of assets
34,869 
19,178 
 
Realized investment losses
 
 
25,674 
Changes in assets and liabilities:
 
 
 
Merchandise inventory
35,202 
(73,850)
22,100 
Accounts receivable
(6,664)
(3,226)
(3,568)
Prepaid expenses and other
404 
(21,051)
(8,758)
Other assets
(8,165)
2,445 
(1,358)
Accounts payable
(10,468)
16,636 
3,969 
Unredeemed gift cards and gift certificates
1,473 
3,981 
1,713 
Deferred lease credits
(11,073)
(9,111)
(9,168)
Accrued compensation and payroll taxes
23,018 
7,576 
(19,633)
Accrued income and other taxes
(7,408)
(14,566)
11,537 
Accrued liabilities
20,186 
18,215 
10,202 
Total adjustments
235,573 
102,858 
214,685 
Net cash provided by operating activities from continuing operations
499,671 
278,137 
410,416 
Investing activities:
 
 
 
Capital expenditures for property and equipment
(93,939)
(89,466)
(75,904)
Acquisition of intangible assets
(1,125)
(34,181)
(2,801)
Purchase of available-for-sale securities
(111,086)
(193,851)
(62,797)
Sale of available-for-sale securities
15,500 
240,797 
177,472 
Net cash (used for) provided by investing activities from continuing operations
(190,650)
(76,701)
35,970 
Financing activities:
 
 
 
Payments on capital leases
(3,066)
(3,256)
(2,590)
Repayment of note payable
 
 
(30,000)
Repurchase of common stock as part of publicly announced programs
(173,554)
(15,160)
(216,070)
Repurchase of common stock from employees
(4,125)
(2,189)
(18,041)
Net proceeds from stock options exercised
76,401 
5,098 
7,272 
Excess tax benefit from share-based payments
13,279 
373 
12,499 
Cash used to net settle equity awards
 
 
(6,434)
Cash dividends paid
(403,490)
(85,592)
(183,166)
Net cash used for financing activities from continuing operations
(494,555)
(100,726)
(436,530)
Effect of exchange rates on cash
504 
798 
1,394 
Cash flows of discontinued operations
 
 
 
Net cash used for operating activities
(24,616)
(38,881)
(29,003)
Net cash used for investing activities
(780)
(10,675)
(8,361)
Net cash used for financing activities
   
   
   
Effect of exchange rates on cash
   
   
   
Net cash used for discontinued operations
(25,396)
(49,556)
(37,617)
Net (decrease) increase in cash and cash equivalents
(210,426)
51,952 
(26,367)
Cash and cash equivalents - beginning of period
719,545 
667,593 
693,960 
Cash and cash equivalents - end of period
$ 509,119 
$ 719,545 
$ 667,593 
Business Operations
Business Operations
1. Business Operations

American Eagle Outfitters, Inc. (the “Company”), a Delaware corporation, operates under the American Eagle Outfitters® (“AEO”) and aerie® by American Eagle Outfitters® (“aerie”) brands. The Company operated 77kids by American Eagle Outfitters® (“77kids”) until its exit in Fiscal 2012 and 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 81 countries worldwide.

Merchandise Mix

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

 

     For the Years Ended  
     February 2,
2013
    January 28,
2012
    January 29,
2011
 

Men’s apparel and accessories

     39     40     40

Women’s apparel and accessories (excluding aerie)

     52     51     51

aerie

     9     9     9
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

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

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At February 2, 2013, the Company operated in one reportable segment.

The Company exited its 77kids brand in Fiscal 2012 and its M+O brand in Fiscal 2010. These Consolidated Financial Statements reflect the results of 77kids and M+O as discontinued operations for all periods presented.

Fiscal Year

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2013” refers to the 52 week period ending February 1, 2014. “Fiscal 2012” refers to the 53 week period ended February 2, 2013. “Fiscal 2011”, “Fiscal 2010,” “Fiscal 2009” and “Fiscal 2008” refer to the 52 week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, 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. For public entities, the amendments in ASU 2011-05 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 adopted ASU 2011-05 on January 29, 2012 by presenting total other comprehensive income and its components as a separate statement following the Consolidated Statements of Operations and Retained Earnings.

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 adopted ASU 2011-08 on January 29, 2012 with no 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 February 2, 2013, short-term investments include treasury bills and term-deposits purchased with a maturity of greater than three months, but less than one year.

Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. As of February 2, 2013, the Company held no long-term investments.

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 and 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 2012 and Fiscal 2011.

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

During Fiscal 2011, the Company recorded asset impairment charges of $19.2 million consisting of the impairment of 57 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. Additionally, the Company recorded $1.6 million of store asset impairment charges related to two underperforming 77kids stores which is recorded in Discontinued Operations.

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

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

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

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations 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 February 2, 2013. 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 2012, Fiscal 2011 or Fiscal 2010.

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 AEO and aerie 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 AEO and aerie earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance.

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

The Company offers its customers the AEREWARDS® loyalty program (the “Program”). Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date of the reward. These rewards can be redeemed for a discount on a purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.

Income Taxes

The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.

The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.

The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.

Revenue Recognition

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
    January 28,
2012
    January 29,
2011
 

Beginning balance

   $ 2,929      $ 3,663      $ 4,703   

Returns

     (86,895     (76,423     (69,807

Provisions

     88,447        75,689        68,767   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,481      $ 2,929      $ 3,663   
  

 

 

   

 

 

   

 

 

 

 

Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company’s gift card program, refer to the Gift Cards caption below.

The Company recognizes royalty revenue generated from its franchise agreements based upon a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of total net revenue when earned.

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

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise margin is the difference between total net revenue and merchandise costs. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with 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 February 2, 2013 and January 28, 2012, the Company had prepaid advertising expense of $8.4 million and $7.7 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $90.0 million, $66.5 million and $60.7 million in advertising expense during Fiscal 2012, Fiscal 2011 and Fiscal 2010, 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, Net

Other income, 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 total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded gift card breakage of $8.9 million, $6.5 million and $5.5 million during Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.

Legal Proceedings and Claims

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company.

Supplemental Disclosures of Cash Flow Information

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Cash paid during the periods for:

        

Income taxes

   $ 142,009       $ 99,756       $ 45,737   

Interest

   $ 348       $       $ 191   

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Outfitters® Brand US and Canadian stores, aerie® by American Eagle Outfitters® retail stores and AEO Direct) that reflect the Company’s operational structure as well as the business’s internal view of analyzing results and allocating resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.

 

The following tables present summarized geographical information:

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Total net revenue:

        

United States

   $ 3,131,464       $ 2,810,560       $ 2,654,778   

Foreign (1)

     344,338         309,506         290,516   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,475,802       $ 3,120,065       $ 2,945,294   
  

 

 

    

 

 

    

 

 

 

 

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

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Long-lived assets, net:

     

United States

   $ 483,706       $ 580,161   

Foreign

     75,547         53,302   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 559,253       $ 633,463   
  

 

 

    

 

 

 

Reclassifications

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

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

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

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Cash and cash equivalents:

     

Cash

   $ 257,191       $ 548,728   

Money-market

     221,929         131,785   

Commercial paper

     29,999         29,998   

Treasury bills

             9,034   
  

 

 

    

 

 

 

Total cash and cash equivalents

   $ 509,119       $ 719,545   

Short-term investments:

     

Treasury bills

   $ 109,305       $ 19,999   

Term-deposits

     12,568           

State and local government ARS

             5,500   
  

 

 

    

 

 

 

Total short-term investments

   $ 121,873       $ 25,499   

Long-term investments:

     

ARS Call Option

   $       $ 847   
  

 

 

    

 

 

 

Total long-term investments

   $       $ 847   
  

 

 

    

 

 

 

Total

   $ 630,992       $ 745,891   
  

 

 

    

 

 

 

 

Proceeds from the sale of available-for-sale securities were $15.5 million, $240.8 million and $177.5 million for Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively. The purchases of available-for-sale securities for Fiscal 2012, Fiscal 2011 and Fiscal 2010 were $111.1 million, $193.9 million and $62.8 million, respectively. At February 2, 2013 and January 28, 2012, 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 right was fully utilized during Fiscal 2012, with no remaining value existing at the end of Fiscal 2012.

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 February 2, 2013 and January 28, 2012, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and investments, as well as Auction Rate Securities (“ARS”) last year.

 

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 February 2, 2013 and January 28, 2012:

 

     Fair Value Measurements at February 2, 2013  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 257,191       $ 257,191       $       $   

Money-market

     221,929         221,929                   

Commercial paper

     29,999         29,999                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 509,119       $ 509,119       $       $   

Short-term investments

           

Treasury bills

   $ 109,305       $ 109,305       $       $   

Term-deposits

     12,568         12,568                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 121,873       $ 121,873       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 630,992       $ 630,992       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at January 28, 2012  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company uses a discounted cash flow (“DCF”) model to value its Level 3 investments. For Fiscal 2012, there were no Level 3 investments that required the use of a DCF model. 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%.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 2012 or Fiscal 2011.

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. Changes in the fair values of the ARS Call Option were 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)  
(In thousands)    Total     Auction-
Rate
Municipal
Securities
    ARS Call
Option
 

Balance at January 29, 2011

   $ 9,615      $ 9,200      $ 415   

Settlements

     (3,700     (3,700  

Gains:

      

Reported in earnings

     432          432   
  

 

 

   

 

 

   

 

 

 

Balance at January 28, 2012

   $ 6,347      $ 5,500      $ 847   
  

 

 

   

 

 

   

 

 

 

Settlements

     (6,043     (5,500     (543

Losses:

      

Reported in earnings

     (304            (304
  

 

 

   

 

 

   

 

 

 

Balance at February 2, 2013

   $      $      $   
  

 

 

   

 

 

   

 

 

 

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 February 2, 2013, 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 2012 and 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 $34.9 million and $19.2 million, respectively, which is recorded as a loss on impairment of assets within the Consolidated Statements of Operations. The fair value of the impaired assets after the recorded loss is an immaterial amount.

The fair value of the Company’s stores were determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

Earnings per Share
Earnings per Share
5. Earnings per Share

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

 

     For the Years Ended  
(In thousands, except per share amounts)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Weighted average common shares outstanding:

        

Basic number of common shares outstanding

     196,211         194,445         199,979   

Dilutive effect of stock options and non-vested restricted stock

     4,454         1,869         1,839   
  

 

 

    

 

 

    

 

 

 

Dilutive number of common shares outstanding

     200,665         196,314         201,818   
  

 

 

    

 

 

    

 

 

 

Equity awards to purchase approximately 1.5 million, 7.2 million and 7.9 million shares of common stock during the Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

Additionally, for Fiscal 2011 and Fiscal 2010, approximately 1.9 million and 0.7 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. For Fiscal 2012, there were no performance-based restricted stock awards excluded in the computation of weighted average diluted common share amounts as they are probable of vesting.

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

Accounts Receivable
Accounts Receivable
6. Accounts Receivable

Accounts receivable are comprised of the following:

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Franchise receivable

   $ 24,521       $ 20,108   

Merchandise sell-offs

     6,880         1,955   

Marketing cost reimbursements

     6,172         4,182   

Gift card receivable

     1,084         4,113   

Other Items

     7,664         9,952   
  

 

 

    

 

 

 

Total

   $ 46,321       $ 40,310   
  

 

 

    

 

 

 
Property and Equipment
Property and Equipment
7. Property and Equipment

Property and equipment consists of the following:

 

(In thousands)    February 2,
2013
    January 28,
2012
 

Land

   $ 6,364      $ 6,364   

Buildings

     153,729        153,538   

Leasehold improvements

     591,736        638,496   

Fixtures and equipment

     671,075        656,337   

Construction in progress

     8,725        3,787   
  

 

 

   

 

 

 

Property and equipment, at cost

   $ 1,431,630      $ 1,458,522   

Less: Accumulated depreciation

     (921,997     (876,360
  

 

 

   

 

 

 

Property and equipment, net

   $ 509,633      $ 582,162   
  

 

 

   

 

 

 

Depreciation expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Depreciation expense

   $ 122,756       $ 135,244       $ 138,329   
  

 

 

    

 

 

    

 

 

 

Additionally, during Fiscal 2012, Fiscal 2011 and Fiscal 2010, the Company recorded $3.7 million, $3.4 million and $2.7 million, respectively, related to asset write-offs within depreciation and amortization expense.

Intangible Assets
Intangible Assets
8. Intangible Assets

Intangible assets include costs to acquire and register the Company’s trademark assets. During 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 February 2, 2013 and January 28, 2012:

 

(In thousands)    February 2,
2013
    January 28,
2012
 

Trademarks, at cost

   $ 44,272      $ 44,142   

Less: Accumulated amortization

     (6,136     (4,310
  

 

 

   

 

 

 

Intangible assets, net

   $ 38,136      $ 39,832   
  

 

 

   

 

 

 

Amortization expense is summarized as follows:

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Amortization expense

   $ 1,952       $ 1,828       $ 625   
  

 

 

    

 

 

    

 

 

 

 

The table below summarizes the estimated future amortization expense for intangible assets existing as of February 2, 2013 for the next five Fiscal Years:

 

(In thousands)    Future
Amortization
 

2013

   $ 1,965   

2014

     1,965   

2015

     1,961   

2016

     1,920   

2017

     1,920   
Other Credit Arrangements
Other Credit Arrangements
9. Other Credit Arrangements

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, growth initiatives and the issuance of letters of credit.

The Credit Agreement contains financial covenants that require the Company to maintain certain coverage and leverage ratios, and various customary affirmative and negative covenants such as the ability to incur additional debt not otherwise permitted under the Credit Agreement.

The Credit Agreement has various borrowing options, including rates of interest that are based on (i) an Adjusted London Interbank Offered Rate (“LIBOR” as defined in the Credit Agreement) plus a margin ranging from 1.00% to 1.75% based on a defined leverage ratio, payable at the end of the applicable interest period; and (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.00% to 0.75% based on a defined leverage ratio, payable quarterly.

Under the Credit Agreement, the Company is also required to pay a commitment fee ranging from 0.175% to 0.30%, based on the defined leverage ratio, on the unused portion of the total lender commitments.

As of February 2, 2013, the Company was in compliance with the terms of the Credit Agreement and had $7.7 million outstanding in letters of credit and no borrowings.

The Credit Agreement replaced uncommitted demand lines in the aggregate amount of $110.0 million United States dollars (“USD”) and $25.0 million Canadian dollars (“CAD”).

Additionally, the Company has borrowing agreements with two separate financial institutions under which it may borrow an aggregate of $135.0 million USD for the purposes of trade letter of credit issuances. The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the respective financial institutions. As of February 2, 2013, the Company had outstanding trade letters of credit of $25.6 million.

Leases
Leases
10. Leases

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

 

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Store rent:

        

Fixed minimum

   $ 250,844       $ 246,096       $ 229,187   

Contingent

     9,758         7,618         8,182   
  

 

 

    

 

 

    

 

 

 

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

   $ 260,602       $ 253,714       $ 237,369   

Offices, distribution facilities, equipment and other

     14,960         15,989         16,300   
  

 

 

    

 

 

    

 

 

 

Total rent expense

   $ 275,562       $ 269,704       $ 253,669   
  

 

 

    

 

 

    

 

 

 

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 February 2, 2013:

 

(In thousands)    Future Minimum
Lease Obligations
 
Fiscal years:   

2013

   $ 257,543   

2014

     240,578   

2015

     223,209   

2016

     199,590   

2017

     173,653   

Thereafter

     570,384   
  

 

 

 

Total

   $ 1,664,957   
  

 

 

 
Other Comprehensive Income
Other Comprehensive Income
11. Other Comprehensive Income

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

 

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

Balance at January 30, 2010

   $ 12,927      $ 3,911      $ 16,838   
  

 

 

   

 

 

   

 

 

 

Temporary reversal of 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   
  

 

 

   

 

 

   

 

 

 

Foreign currency translation gain

     638               638   
  

 

 

   

 

 

   

 

 

 

Balance at February 2, 2013

   $ 29,297      $      $ 29,297   
  

 

 

   

 

 

   

 

 

 

 

Accumulated other comprehensive income consists only of foreign currency translation adjustment as of February 2, 2013 and January 28, 2012.

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 2012, Fiscal 2011 and Fiscal 2010 was $66.3 million ($40.9 million, net of tax), $11.7 million ($7.2 million, net of tax) and $24.9 million ($15.4 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 February 2, 2013, the Company had awards outstanding under two share-based compensation plans, which are described below.

Share-based compensation plans

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 February 2, 2013, 16.6 million non-qualified stock options, 0.8 million shares of restricted stock and 0.2 million shares of common stock had been granted under the 2005 Plan to employees and directors (without considering cancellations to date of awards for 10.6 million shares). Approximately 97% of the options granted under the 2005 Plan vest over three years, 2% vest over one year and 1% vest over five years. Options were granted for ten and seven year terms. Approximately 56% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals. The remaining 44% 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 2012 follows:

 

     For the Year Ended February 2, 2013  
     Options     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 
     (In thousands)            (In years)      (In thousands)  

Outstanding — January 28, 2012

     11,197      $ 15.31         

Granted

     1,666      $ 14.35         

Exercised(1)

     (6,666   $ 11.42         

Cancelled

     (1,568   $ 22.34         
  

 

 

   

 

 

    

 

 

    

 

 

 

Outstanding — February 2, 2013

     4,629      $ 16.29         3.3       $ 23,102   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested and expected to vest — February 2, 2013

     4,552      $ 16.33         3.3       $ 22,618   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable — February 2, 2013(2)

     2,733      $ 14.92         2.9       $ 14,962   

 

(1) Options exercised during Fiscal 2012 ranged in price from $4.24 to $22.46.

 

(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 February 2, 2013.

The weighted-average grant date fair value of stock options granted during Fiscal 2012, Fiscal 2011 and Fiscal 2010 was $3.72, $4.73 and $5.19, respectively. The aggregate intrinsic value of options exercised during Fiscal 2012, Fiscal 2011 and Fiscal 2010 was $57.4 million, $2.8 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 $76.4 million and $14.1 million, respectively, for Fiscal 2012. 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.

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

   February 2,
2013
    January 28,
2012
    January 29,
2011
 

Risk-free interest rates(1)

     0.6     2.1     2.3

Dividend yield

     2.8     2.6     2.1

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

     41.2     42.7     40.2

Weighted-average expected term(3)

     4.0  years     5.0  years      4.5  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 February 2, 2013, January 28, 2012 and January 29, 2011 were determined based on historical experience.

 

(4) Based on historical experience.

As of February 2, 2013, there was $2.0 million of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average period of 22 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
February 2, 2013
     For the year ended
February 2, 2013
 
(Shares in thousands)    Shares     Weighted-Average
Grant Date
Fair Value
     Shares     Weighted-Average
Grant Date
Fair Value
 

Nonvested — January 28, 2012

     1,784      $ 15.73         1,762      $ 14.23   

Granted

     1,497        14.77         888        14.76   

Vested

     (1,074     16.65                  

Cancelled/Forfeited

     (821     15.83         (564     12.56   
  

 

 

   

 

 

    

 

 

   

 

 

 

Nonvested — February 2, 2013

     1,386      $ 13.91         2,086      $ 14.91   

As of February 2, 2013, there was $5.9 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 0.8 years. Additionally, there was $11.3 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement performance goals are probable over a one to three year period.

As of February 2, 2013, the Company had 22.9 million shares available for all equity grants.

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

The Company maintains a profit sharing and 401(k) plan (the “Retirement Plan”). Under the provisions of the Retirement Plan, full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 20 1/2 years of age. In addition, full-time employees need to have completed 60 days of service and part-time employees must complete 1,000 hours worked to be eligible. Individuals can decline enrollment or can contribute up to 50% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the Company will match 100% of the first 3% of pay plus an additional 50% of the next 3% of pay that is contributed to the plan. Contributions to the profit sharing plan, as determined by the Board, are discretionary. The Company recognized $15.8 million, $8.7 million and $11.4 million in expense during Fiscal 2012, Fiscal 2011 and Fiscal 2010, 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  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

U.S.

   $ 381,131       $ 256,352       $ 280,699   

Foreign

     20,907         18,857         36,676   
  

 

 

    

 

 

    

 

 

 

Total

   $ 402,038       $ 275,209       $ 317,375   
  

 

 

    

 

 

    

 

 

 

 

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

 

(In thousands)    February 2,
2013
    January 28,
2012
 

Deferred tax assets:

    

Deferred compensation

   $ 38,770      $ 31,379   

Rent

     27,208        27,642   

Employee compensation and benefits

     18,738        6,345   

Foreign tax credits

     16,874        22,302   

Capital loss carryforward

     15,986        18,440   

Inventories

     8,575        11,734   

State tax credits

     5,770        6,105   

Other

     14,196        16,373   
  

 

 

   

 

 

 

Gross deferred tax assets

     146,117        140,320   

Valuation allowance

     (15,986     (18,440
  

 

 

   

 

 

 

Total deferred tax assets

   $ 130,131      $ 121,880   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Property and equipment

   $ (35,130   $ (55,503

Prepaid expenses

     (5,489     (4,149
  

 

 

   

 

 

 

Total deferred tax liabilities

   $ (40,619   $ (59,652
  

 

 

   

 

 

 

Total deferred tax assets, net

   $ 89,512      $ 62,228   
  

 

 

   

 

 

 

Classification in the Consolidated Balance Sheet:

    

Current deferred tax assets

   $ 58,230      $ 48,761   

Noncurrent deferred tax assets

     31,282        13,467   
  

 

 

   

 

 

 

Total deferred tax assets

   $ 89,512      $ 62,228   
  

 

 

   

 

 

 

The net increase in deferred tax assets and liabilities was primarily due to an increase in the deferred tax assets for employee compensation and benefits and a decrease in the deferred income tax liability for property and equipment basis differences.

Significant components of the provision for income taxes from continuing operations were as follows:

 

     For the Years Ended  
(In thousands)    February 2,
2013
    January 28,
2012
    January 29,
2011
 

Current:

      

Federal

   $ 143,612      $ 76,389      $ 96,438   

Foreign taxes

     6,939        6,621        13,429   

State

     18,845        12,801        10,665   
  

 

 

   

 

 

   

 

 

 

Total current

     169,396        95,811        120,532   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal

   $ (26,063   $ 7,077      $ (213

Foreign taxes

     (1,486     (1,120     (991

State

     (3,907     (1,838     2,316   
  

 

 

   

 

 

   

 

 

 

Total deferred

     (31,456     4,119        1,112   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ 137,940      $ 99,930      $ 121,644   
  

 

 

   

 

 

   

 

 

 

 

As a result of additional tax deductions related to share-based payments, tax benefits have been recognized as contributed capital for Fiscal 2012, Fiscal 2011 and Fiscal 2010 in the amounts of $14.1 million, $0.4 million and $15.6 million, respectively.

The Company plans to indefinitely reinvest the accumulated earnings since Fiscal 2009 of our Canadian subsidiaries outside of the United States. Accordingly, no provision for U.S. income taxes has been provided thereon. Upon distribution of the 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 February 2, 2013 and January 28, 2012, the unremitted earnings of our Canadian subsidiaries were approximately $88 million (USD) and $72 million (USD), respectively.

As of February 2, 2013, the gross amount of unrecognized tax benefits was $17.3 million, of which $11.3 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of January 28, 2012 was $31.6 million, of which $22.8 million would affect the effective income tax rate if recognized.

The following table summarizes the activity related to our unrecognized tax benefits:

 

     For the Years Ended  
(In thousands)    February 2,
2013
    January 28,
2012
    January 29,
2011
 

Unrecognized tax benefits, beginning of the year balance

   $ 31,578      $ 31,108      $ 31,649   

Increases in tax positions of prior periods

            932        1,069   

Decreases in tax positions of prior periods

     (10,385     (2,106     (3,801

Increases in current period tax positions

     2,458        2,782        2,707   

Settlements

     (4,809     (1,073     (6

Lapse of statute of limitations

     (1,592     (65     (510
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits, end of the year balance

   $ 17,250      $ 31,578      $ 31,108   
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits decreased by $14.3 million during Fiscal 2012 and increased by $0.5 million during Fiscal 2011. The unrecognized tax benefit changes were primarily related to federal and state income tax settlements and other changes in income tax reserves. Over the next twelve months the Company does not anticipate any significant changes to 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 $1.8 million and $7.9 million as of February 2, 2013 and January 28, 2012, respectively. During Fiscal 2012, the Company recognized a net benefit of $4.8 million in the provision for income taxes related to the reversal of accrued interest and penalties primarily due to federal and state income tax settlements. An immaterial amount of interest and penalties were recognized in the provision for income taxes during Fiscal 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 year ended January 2010 was completed in December 2012. Accordingly, all years prior to January 2011 are no longer subject to U.S. federal income tax examinations by tax authorities. An IRS examination of the January 2012 federal income tax return began in February 2013. Additionally, the Company is participating in the IRS’s Compliance Assurance Process (CAP) for the year ended February 1, 2014. 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 2006. 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 $16.9 million and $22.3 million as of February 2, 2013 and January 28, 2012, 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 expenditures related to the Ottawa, Kansas distribution center. As a result, the Company has a deferred tax asset related to Kansas income tax credit carryforwards of $5.7 million (net of federal income taxes) as of February 2, 2013 and $6.1 million (net of federal income taxes) as of January 28, 2012. These income 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 income tax credit carryforward.

The Company has capital loss carryovers in the amount of $16.0 million and $18.4 million as of February 2, 2013 and January 28, 2012, respectively. 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 and 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 on the capital loss carryovers. Income tax benefits of $2.4 million and $2.0 million were recognized during Fiscal 2012 and Fiscal 2011, respectively, as a result of the reduction in the valuation allowance due to the receipt of proceeds related to the ARS Call Option.

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

 

     For the Years Ended  
     February 2,
2013
    January 28,
2012
    January 29,
2011
 

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

     (3     (1     (1
  

 

 

   

 

 

   

 

 

 
     34     36     38
  

 

 

   

 

 

   

 

 

 
Discontinued Operations
Discontinued Operations
15. Discontinued Operations

On May 18, 2012, the Company announced plans to exit the 77kids business, which included all 22 stores and related e-commerce operations. Effective August 3, 2012, the Company completed the sale of the 77kids business to a third party, which included store assets, the related on-line business, inventory and a temporary license to use the 77kids name through January 2013. These Consolidated Financial Statements reflect the results of 77kids as a discontinued operation for all periods presented.

 

Additionally, the third party purchaser has assumed certain liabilities associated with the 77kids business and paid the Company an amount equal to 65% of the cost of the acquired inventory. All prior year inventory balances for 77kids have been recorded as an asset held for sale on the Company’s Consolidated Balance Sheets. The Company is complete with the exit of 77kids and incurred total after-tax losses of $32.0 million in Fiscal 2012.

In connection with the exit of the 77kids business, the Company is secondarily liable for obligations under the lease agreements for 21 store leases assumed by the third party purchaser. These obligations will remain in effect until the leases expire through 2022, unless the Company otherwise is released by the applicable landlord. In the event that the third party purchaser does not fulfill its obligations under any of the leases and the Company is required to make any such payments, the Company would seek full reimbursement from the third party purchaser in accordance with the asset purchase agreement. The third party purchaser has provided a stand-by letter of credit to the Company in order to secure payment of obligations under the leases.

In accordance with ASC 460, Guarantees (“ASC 460”), as we became secondarily liable under the leases at the time that we transferred them to the third party, no amounts have been accrued in our Consolidated Financial Statements related to these guarantees.

Costs associated with exit or disposal activities are recorded when incurred. A summary of the pre-tax exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for 77kids are as follows. There were no exit or disposal costs recognized in Fiscal 2011 or Fiscal 2010 related to 77kids.

 

     For the Year Ended  
(In thousands)    February 2,
2013
 

Non-cash charges

  

Asset impairments

   $ 16,623   

Cash charges

  

Lease-related charges

     7,768   

Inventory charges

     10,237   

Severence charges

     3,439   
  

 

 

 

Total charges

   $ 38,067   
  

 

 

 

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

 

(In thousands)    February 2,
2013
 

Accrued liability as of January 28, 2012

   $   

Add: Costs incurred, excluding non-cash charges

     13,676   

Less: Cash payments

     (13,676
  

 

 

 

Accrued liability as of February 2, 2013

   $   
  

 

 

 

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.

 

The Company is also complete with the closure of the M+O brand and a summary of the pre-tax exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement during Fiscal 2010 are as follows. There were no exit or disposal costs recognized in Fiscal 2012 or Fiscal 2011 related to M+O.

 

     For the Year Ended  
(In thousands)    January 29,
2011
 

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 tables below present the significant components of 77kids’ and M+O’s results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for the years ended February 2, 2013, January 28, 2012 and January 29, 2011, respectively.

 

         For the Year Ended February 2, 2013       
     77kids     M+O      Total  

Total net revenue

   $ 20,117      $       $ 20,117   
  

 

 

   

 

 

    

 

 

 

Loss from discontinued operations, before income taxes (1)

   $ (51,839   $       $ (51,839

Income tax benefit

     19,849                19,849   
  

 

 

   

 

 

    

 

 

 

Loss from discontinued operations, net of tax

   $ (31,990   $       $ (31,990
  

 

 

   

 

 

    

 

 

 

Loss per common share from discontinued operations:

       

Basic

   $ (0.16   $       $ (0.16

Diluted

   $ (0.16   $  —       $ (0.16

 

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

 

         For the Year Ended January 28, 2012       
     77kids     M+O      Total  

Total net revenue

   $ 39,753      $  —       $ 39,753   
  

 

 

   

 

 

    

 

 

 

Loss from discontinued operations, before income taxes

   $ (38,199   $       $ (38,199

Income tax benefit

     14,625                14,625   
  

 

 

   

 

 

    

 

 

 

Loss from discontinued operations, net of tax

   $ (23,574   $       $ (23,574
  

 

 

   

 

 

    

 

 

 

Loss per common share from discontinued operations:

       

Basic

   $ (0.12   $       $ (0.12

Diluted

   $ (0.12   $       $ (0.12

 

     For the Year Ended January 29, 2011  
     77kids     M+O     Total  

Total net revenue

   $ 22,265      $ 21,881      $ 44,146   
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, before income taxes

   $ (22,291   $ (66,959   $ (89,250

Income tax benefit

     8,494        25,672        34,166   
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of tax

   $ (13,797   $ (41,287   $ (55,084
  

 

 

   

 

 

   

 

 

 

Loss per common share from discontinued operations:

      

Basic

   $ (0.07   $ (0.21   $ (0.28

Diluted

   $ (0.07   $ (0.20   $ (0.27

The major classes of assets and liabilities included in the Consolidated Balance Sheets for 77kids at January 28, 2012 are as follows. There were no assets or liabilities included in the Consolidated Balance Sheets for M+O as of February 2, 2013 or January 28, 2012. There were no assets or liabilities included in the Consolidated Balance Sheets for 77kids as of February 2, 2013.

 

(In thousands)    January 28,
2012
 

Current assets

   $ 10,912   

Non-current assets

     15,722   
  

 

 

 

Total assets(1)

   $ 26,634   
  

 

 

 

Total current liabilities

   $ 5,838   

Total non-current liabilities

     2,646   
  

 

 

 

Total liabilities

   $ 8,484   
  

 

 

 

 

(1) Current assets relate to merchandise inventory classified as an asset held for sale on the Company’s Consolidated Balance Sheets. Non-current assets relate primarily to property and equipment at cost, net of, accumulated depreciation.
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 2012
Quarters Ended
 
(In thousands, except per share amounts)    April 28,
2012
    July 28,
2012
    October 27,
2012
    February 2,
2013
 

Total net revenue

   $ 708,695      $ 739,680      $ 910,374      $ 1,117,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 274,913      $ 276,564      $ 379,090      $ 459,755   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     44,035        42,846        82,441        94,776   

Loss from discontinued operations

     (4,338     (23,819     (3,833       
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 39,697      $ 19,027      $ 78,608      $ 94,776   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share amounts:

        

Income from continuing operations

   $ 0.22      $ 0.22      $ 0.42      $ 0.48   

Loss from discontinued operations

     (0.02     (0.12     (0.02       
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 0.20      $ 0.10      $ 0.40      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share amounts:

        

Income from continuing operations

   $ 0.22      $ 0.21      $ 0.41      $ 0.47   

Loss from discontinued operations

     (0.02     (0.12     (0.02       
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 0.20      $ 0.09      $ 0.39      $ 0.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Fiscal 2011
Quarters Ended
 
(In thousands, except per share amounts)    April 30,
2011
    July 30,
2011
    October 29,
2011
    January 28,
2012
 

Total net revenue

   $ 603,084      $ 669,120      $ 819,419      $ 1,028,442   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 233,819      $ 236,178      $ 312,255      $ 362,342   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     31,871        25,092        57,951        60,365   

Loss from discontinued operations

     (3,546     (5,423     (5,524     (9,081
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28,325      $ 19,669      $ 52,427      $ 51,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share amounts:

        

Income from continuing operations

   $ 0.16      $ 0.13      $ 0.30      $ 0.31   

Loss from discontinued operations

     (0.02     (0.03     (0.03     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 0.14      $ 0.10      $ 0.27      $ 0.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share amounts:

        

Income from continuing operations

   $ 0.16      $ 0.13      $ 0.30      $ 0.31   

Loss from discontinued operations

     (0.02     (0.03     (0.03     (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 0.14      $ 0.10      $ 0.27      $ 0.26   
  

 

 

   

 

 

   

 

 

   

 

 

 
Subsequent Events
Subsequent Events
17. Subsequent Events

Subsequent to the end of Fiscal 2012, the Company mutually terminated its store license agreement (the “Agreement”) with Dickson Concepts (International) Limited (“Dickson”) for Hong Kong, Macau, China and other designated territories in Asia (the “Territory”).

Pursuant to an amendment to the Agreement, effective February 4, 2013, the Company paid to Dickson $10 million USD to terminate Dickson’s right to open additional stores in the Territory, beyond the six existing American Eagle Outfitters Stores in Hong Kong and China (“the Six Stores”).

A separate agreement, dated February 4, 2013 (the “Termination Agreement”), terminates all of Dickson’s remaining rights under the Agreement. Under the Termination Agreement, the Company will acquire the Six Stores and related assets operated by Dickson. It is anticipated that the Company will pay Dickson approximately $11 million USD under the Termination Agreement, subject to adjustments, and that this transaction will close, following completion of customary conditions, in the second or third quarter of 2013. The Company entered into the Termination Agreement in order to further support its long-term global expansion strategy.

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 February 2, 2013, the Company operated in one reportable segment.

The Company exited its 77kids brand in Fiscal 2012 and its M+O brand in Fiscal 2010. These Consolidated Financial Statements reflect the results of 77kids and M+O as discontinued operations for all periods presented.

Fiscal Year

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2013” refers to the 52 week period ending February 1, 2014. “Fiscal 2012” refers to the 53 week period ended February 2, 2013. “Fiscal 2011”, “Fiscal 2010,” “Fiscal 2009” and “Fiscal 2008” refer to the 52 week periods ended January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, 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. For public entities, the amendments in ASU 2011-05 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 adopted ASU 2011-05 on January 29, 2012 by presenting total other comprehensive income and its components as a separate statement following the Consolidated Statements of Operations and Retained Earnings.

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 adopted ASU 2011-08 on January 29, 2012 with no 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 February 2, 2013, short-term investments include treasury bills and term-deposits purchased with a maturity of greater than three months, but less than one year.

Long-term investments are included within other assets on the Company’s Consolidated Balance Sheets. As of February 2, 2013, the Company held no long-term investments.

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 and 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 2012 and Fiscal 2011.

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

During Fiscal 2011, the Company recorded asset impairment charges of $19.2 million consisting of the impairment of 57 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. Additionally, the Company recorded $1.6 million of store asset impairment charges related to two underperforming 77kids stores which is recorded in Discontinued Operations.

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

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

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

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations 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 February 2, 2013. 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 2012, Fiscal 2011 or Fiscal 2010.

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 AEO and aerie 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 AEO and aerie earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance.

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

The Company offers its customers the AEREWARDS® loyalty program (the “Program”). Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date of the reward. These rewards can be redeemed for a discount on a purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.

Income Taxes

The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.

The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.

The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income.

Revenue Recognition

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
    January 28,
2012
    January 29,
2011
 

Beginning balance

   $ 2,929      $ 3,663      $ 4,703   

Returns

     (86,895     (76,423     (69,807

Provisions

     88,447        75,689        68,767   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,481      $ 2,929      $ 3,663   
  

 

 

   

 

 

   

 

 

 

 

Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company’s gift card program, refer to the Gift Cards caption below.

The Company recognizes royalty revenue generated from its franchise agreements based upon a percentage of merchandise sales by the franchisee. This revenue is recorded as a component of total net revenue when earned.

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

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise margin is the difference between total net revenue and merchandise costs. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with 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 February 2, 2013 and January 28, 2012, the Company had prepaid advertising expense of $8.4 million and $7.7 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $90.0 million, $66.5 million and $60.7 million in advertising expense during Fiscal 2012, Fiscal 2011 and Fiscal 2010, 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, Net

Other income, 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 total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded gift card breakage of $8.9 million, $6.5 million and $5.5 million during Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.

Legal Proceedings and Claims

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Outfitters® Brand US and Canadian stores, aerie® by American Eagle Outfitters® retail stores and AEO Direct) that reflect the Company’s operational structure as well as the business’s internal view of analyzing results and allocating resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.

 

The following tables present summarized geographical information:

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Total net revenue:

        

United States

   $ 3,131,464       $ 2,810,560       $ 2,654,778   

Foreign (1)

     344,338         309,506         290,516   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,475,802       $ 3,120,065       $ 2,945,294   
  

 

 

    

 

 

    

 

 

 

 

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

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Long-lived assets, net:

     

United States

   $ 483,706       $ 580,161   

Foreign

     75,547         53,302   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 559,253       $ 633,463   
  

 

 

    

 

 

 

Reclassifications

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

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

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

 

     For the Years Ended  
     February 2,
2013
    January 28,
2012
    January 29,
2011
 

Men’s apparel and accessories

     39     40     40

Women’s apparel and accessories (excluding aerie)

     52     51     51

aerie

     9     9     9
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 
Summary of Significant Accounting Policies (Tables)

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

 

Buildings

   25 years

Leasehold improvements

   Lesser of 10 years or the term of the lease

Fixtures and equipment

   5 years

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
    January 28,
2012
    January 29,
2011
 

Beginning balance

   $ 2,929      $ 3,663      $ 4,703   

Returns

     (86,895     (76,423     (69,807

Provisions

     88,447        75,689        68,767   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,481      $ 2,929      $ 3,663   
  

 

 

   

 

 

   

 

 

 

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

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Cash paid during the periods for:

        

Income taxes

   $ 142,009       $ 99,756       $ 45,737   

Interest

   $ 348       $       $ 191   

The following tables present summarized geographical information:

 

     For the Years Ended  
(In thousands)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Total net revenue:

        

United States

   $ 3,131,464       $ 2,810,560       $ 2,654,778   

Foreign (1)

     344,338         309,506         290,516   
  

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 3,475,802       $ 3,120,065       $ 2,945,294   
  

 

 

    

 

 

    

 

 

 

 

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

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Long-lived assets, net:

     

United States

   $ 483,706       $ 580,161   

Foreign

     75,547         53,302   
  

 

 

    

 

 

 

Total long-lived assets, net

   $ 559,253       $ 633,463   
  

 

 

    

 

 

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

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

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Cash and cash equivalents:

     

Cash

   $ 257,191       $ 548,728   

Money-market

     221,929         131,785   

Commercial paper

     29,999         29,998   

Treasury bills

             9,034   
  

 

 

    

 

 

 

Total cash and cash equivalents

   $ 509,119       $ 719,545   

Short-term investments:

     

Treasury bills

   $ 109,305       $ 19,999   

Term-deposits

     12,568           

State and local government ARS

             5,500   
  

 

 

    

 

 

 

Total short-term investments

   $ 121,873       $ 25,499   

Long-term investments:

     

ARS Call Option

   $       $ 847   
  

 

 

    

 

 

 

Total long-term investments

   $       $ 847   
  

 

 

    

 

 

 

Total

   $ 630,992       $ 745,891   
  

 

 

    

 

 

 
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 February 2, 2013 and January 28, 2012:

 

     Fair Value Measurements at February 2, 2013  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 257,191       $ 257,191       $       $   

Money-market

     221,929         221,929                   

Commercial paper

     29,999         29,999                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and cash equivalents

   $ 509,119       $ 509,119       $       $   

Short-term investments

           

Treasury bills

   $ 109,305       $ 109,305       $       $   

Term-deposits

     12,568         12,568                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term investments

   $ 121,873       $ 121,873       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 630,992       $ 630,992       $       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Fair Value Measurements at January 28, 2012  
(In thousands)    Carrying
Amount
     Quoted Market
Prices in Active
Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Cash and cash equivalents

           

Cash

   $ 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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)  
(In thousands)    Total     Auction-
Rate
Municipal
Securities
    ARS Call
Option
 

Balance at January 29, 2011

   $ 9,615      $ 9,200      $ 415   

Settlements

     (3,700     (3,700  

Gains:

      

Reported in earnings

     432          432   
  

 

 

   

 

 

   

 

 

 

Balance at January 28, 2012

   $ 6,347      $ 5,500      $ 847   
  

 

 

   

 

 

   

 

 

 

Settlements

     (6,043     (5,500     (543

Losses:

      

Reported in earnings

     (304            (304
  

 

 

   

 

 

   

 

 

 

Balance at February 2, 2013

   $      $      $   
  

 

 

   

 

 

   

 

 

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

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

 

     For the Years Ended  
(In thousands, except per share amounts)    February 2,
2013
     January 28,
2012
     January 29,
2011
 

Weighted average common shares outstanding:

        

Basic number of common shares outstanding

     196,211         194,445         199,979   

Dilutive effect of stock options and non-vested restricted stock

     4,454         1,869         1,839   
  

 

 

    

 

 

    

 

 

 

Dilutive number of common shares outstanding

     200,665         196,314         201,818   
  

 

 

    

 

 

    

 

 

 
Accounts Receivable (Tables)
Accounts Receivable

Accounts receivable are comprised of the following:

 

(In thousands)    February 2,
2013
     January 28,
2012
 

Franchise receivable

   $ 24,521       $ 20,108   

Merchandise sell-offs

     6,880         1,955   

Marketing cost reimbursements

     6,172         4,182   

Gift card receivable

     1,084         4,113   

Other Items

     7,664         9,952   
  

 

 

    

 

 

 

Total

   $ 46,321       $ 40,310   
  

 

 

    

 

 

 
Property and Equipment (Tables)

Property and equipment consists of the following:

 

(In thousands)    February 2,
2013
    January 28,
2012
 

Land

   $ 6,364      $ 6,364