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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES FORM 10-Q x QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 3, 2002 OR o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from ________________ to
__________________ Commission file number: 0-23760 American Eagle Outfitters, Inc. Delaware No. 13-2721761 150 Thorn Hill Drive, Warrendale, PA 15086-7528 (724) 776-4857 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X No ___ Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, $.01 par value, 71,783,225 shares outstanding as of September
10,
2002.
AMERICAN EAGLE OUTFITTERS, INC. PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements 3 3-4
Consolidated Statements of Operations (Unaudited) 5
Consolidated Statements of Cash Flows
(Unaudited) 6-7 8-13 14 14 Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-19 Item 3. Quantitative and Qualitative Disclosures about Market
Risk N/A Item 4. Controls and Procedures N/A PART II. OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Changes in Securities and Use of Proceeds N/A Item 3. Defaults Upon Senior Securities N/A 20 Item 5. Other Information N/A 20 21 22-23 Exhibit 15 Acknowledgement of Independent
Accountants 24 Exhibit 99 Officers' Certifications 25-26 2
PART 1. FINANCIAL INFORMATION AMERICAN EAGLE OUTFITTERS, INC. Assets Current assets: August 3, February 2, $ 109,246 $ 180,398
Short-term investments 67,756 45,085
Merchandise inventory 148,781 91,096
Accounts and note receivable 17,971 17,627
Prepaid expenses and other 28,998 23,503
Deferred income taxes 20,521 20,321 Total current assets 393,273 378,030 Fixed assets:
Land 2,355 2,355
Buildings 19,783 19,719
Fixtures and equipment 146,803 134,831
Leasehold improvements 207,248 192,331 376,189 349,236
Less: Accumulated depreciation and amortization 112,200 91,505 Net Fixed Assets 263,989 257,731 Goodwill, net of accumulated amortization 23,966 23,966 Other assets, net of accumulated amortization 20,512 12,994 Total assets $ 701,740 $ 672,721 3
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 80,063 $ 39,067
Current portion of notes payable 8,780 4,044
Accrued compensation and payroll taxes 16,452 27,545
Accrued rent 26,387 29,779
Accrued income and other taxes 1,557 24,451
Unredeemed stored value cards and gift certificates 10,238 17,577
Other liabilities and accrued expenses 9,821 7,479 Total current liabilities 153,298 149,942 Non-current liabilities:
Commitments and contingencies - -
Notes payable 17,400 19,361
Other non-current liabilities 7,021 1,366 Total non-current liabilities 24,421 20,727 Stockholders' equity:
Preferred stock - -
Common stock 721 718
Contributed capital 161,156 151,240
Accumulated other comprehensive loss (1,844) (1,895)
Retained Earnings 402,585 379,787
Deferred compensation (6,501) (2,946)
Treasury stock (32,096) (24,852) Total stockholders' equity 524,021 502,052 Total liabilities and stockholders' equity $ 701,740 $ 672,721 See Notes to Consolidated Financial Statements 4
AMERICAN EAGLE OUTFITTERS, INC. Three Months Ended Six Months Ended August 3, August 4, August 3, August 4, Net sales $ 319,223 $ 292,392 $ 597,116 $ 543,940 Cost of sales, including certain buying, occupancy and warehousing
expenses Gross profit 109,754 107,989 219,773 209,859 Selling, general and administrative expenses 81,154 75,284 159,293 144,899 Depreciation and amortization expense 12,487 9,851 24,445 17,949 Operating income 16,113 22,854 36,035 47,011 Other income, net 196 876 857 1,845 Income before income taxes 16,309 23,730 36,892 48,856 Provision for income taxes 6,229 8,424 14,094 18,005 Net income $ 10,080 $ 15,306 $ 22,798 $ 30,851 Basic income per common share $ 0.14 $ 0.21 $ 0.32 $ 0.43 Diluted income per common share $ 0.14 $ 0.21 $ 0.31 $ 0.42 Weighted average common shares outstanding - basic 72,119 71,537 72,075 71,187 Weighted average common shares outstanding - diluted 73,265 74,586 73,427 74,185 Retained earnings, beginning $ 392,505 $ 289,837 $ 379,787 $ 274,292 Net income 10,080 15,306 22,798 30,851 Retained earnings, ending $ 402,585 $ 305,143 $ 402,585 $ 305,143 See Notes to Consolidated Financial Statements 5
AMERICAN EAGLE OUTFITTERS, INC. Six Months Ended August 3, August 4, Operating activities: Net income $ 22,798 $ 30,851 Adjustments to reconcile net income to net cash used for operating
activities: Depreciation and amortization 24,445 17,949 Stock compensation 2,868 1,434 Deferred income taxes (110) (10,673) Other 1,279 1,706 Changes in assets and liabilities: Merchandise inventory (57,733) (61,181) Accounts and note receivable (412) 14,385 Prepaid expenses and other (5,507) (6,500) Accounts payable 42,680 6,589 Unredeemed stored value cards and gift
certificates (7,346) (6,007) Accrued liabilities (35,738) (11,407) Total adjustments (35,574) (53,705) Net cash used for operating activities (12,776) (22,854) Investing activities: Capital expenditures (32,125) (72,745) Purchase of short-term investments (35,480) (6,953) Sale of short-term investments 12,761 34,880 Other investing activities (1,940) (2,164) Net cash used for investing activities (56,784) (46,982) 6
Financing activities: Principal payments on note payable (2,670) (2,834) Proceeds from borrowings from line of credit 4,784 - Repurchase of common stock (5,646) - Net proceeds from stock options exercised 1,746 15,111 Net cash (used for) provided by financing activities (1,786) 12,277 Effect of exchange rates on cash 194 (390) Net decrease in cash and cash equivalents (71,152) (57,949) Cash and cash equivalents-beginning of period 180,398 133,446 Cash and cash equivalents-end of period $ 109,246 $ 75,497 See Notes to Consolidated Financial Statements 7
AMERICAN EAGLE OUTFITTERS, INC. 1. Interim Financial Statements The accompanying Consolidated Financial Statements of American Eagle
Outfitters, Inc. (the "Company") at August 3, 2002 and for the three and six
month periods ended August 3, 2002 (the "current period") and August 4, 2001
(the "prior period") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The Consolidated Balance Sheet at February 2, 2002 was derived from
the audited financial statements. The Company's business is affected by the
pattern of seasonality common to most retail apparel businesses. The results for
the current and prior periods are not necessarily indicative of future financial
results. Certain notes and other information have been condensed or omitted from the
interim Consolidated Financial Statements presented in this Quarterly Report on
Form 10-Q. Therefore, these Consolidated Financial Statements should be read in
conjunction with the Company's Fiscal 2001 Annual Report. 2. Basis of Presentation Fiscal Year The Company's financial year is a 52/53 week year that ends on the Saturday
nearest to January 31. As used herein, "Fiscal 2002" and "Fiscal 2001" refer to
the fifty-two week period ending February 1, 2003 and the fifty-two week period
ended February 2, 2002, respectively. Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and
its subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation. Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires 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, management reviews its estimates based on currently
available information. Changes in facts and circumstances may result in revised
estimates. Recent Financial Accounting Developments In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which amends existing accounting guidance on asset impairment and provides a
single accounting model for long-lived assets to be disposed of. Additionally,
SFAS No. 144 broadens the reporting of discontinued operations and changes the
timing of recognizing losses on such operations. This standard supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB No. 30. The Company adopted the new standard on February 3,
2002, the beginning of Fiscal 2002. Adoption of SFAS 144 did not have a material
impact on the Company's earnings or its financial position. 8
In June 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit and Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002. Foreign Currency Translation The Canadian dollar is the functional currency for the Canadian businesses.
In accordance with SFAS Statement No. 52, Foreign Currency Translation,
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, net of income taxes,
in accordance with SFAS Statement No. 130, Reporting Comprehensive Income
(see Note 6 of the Consolidated Financial Statements). Revenue Recognition The Company principally records revenue upon purchase of merchandise by
customers. Revenue is not recorded on the purchase of stored value cards and
gift certificates by customers. A current liability is recorded upon purchase
and revenue is recognized when the card is redeemed for merchandise. Revenue is
recorded net of sales returns. A sales returns reserve is provided on gross
sales for projected merchandise returns based on historical average return
percentages. Cash and Cash Equivalents Cash includes cash equivalents. The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. Short-Term Investments Cash in excess of operating requirements is invested in marketable equity or
government debt obligations. As of August 3, 2002, short-term investments
included investments with an original maturity of greater than three months
(averaging approximately 10 months) and consisted primarily of tax-exempt
municipal bonds and commercial paper classified as available for sale. Capital Structure The Company has 250 million common shares authorized at $.01 par value,
74,144,168 and 73,823,625 shares issued and 71,833,065 and 71,906,072 shares
outstanding as of August 3, 2002 and February 2, 2002, respectively. The
Company has 5 million preferred shares authorized at $.01 par value, with none
issued or outstanding at August 3, 2002. On February 24, 2000, the Company's Board of Directors authorized the
repurchase of up to 3,750,000 shares of its stock. As part of this stock
repurchase program, the company purchased 337,100 shares of common stock for
approximately $5.6 million on the open market during the six months ended August
3, 2002. Additionally, during the six months ended August 3, 2002 and August 4,
2001, the Company purchased 56,000 shares and 44,000 shares, respectively, from
certain employees at market prices totaling $1.6 million and $1.4 million,
respectively, for the payment of taxes in connection with the vesting of
restricted stock as permitted under the 1999 Stock Incentive Plan. These
repurchases have been recorded as treasury stock. 9
Earnings Per Share Basic earnings per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share includes the dilutive effect of the Company's potentially dilutive
common shares, which include certain stock options and restricted stock. The
following table shows the amounts used in computing earnings per share and the
weighted average number of shares of potentially dilutive common stock (stock
options and restricted stock). Three Months Ended Six Months Ended (In thousands) August 3, August 4, August 3, August 4, Net Income $ 10,080 $ 15,306 $ 22,798 $ 30,851 Weighted average common shares outstanding: Basic Shares 72,119 71,537 72,075 71,187 Dilutive effect of stock options and non-vested restricted
stock 1,146 3,049 1,352 2,998 Diluted shares 73,265 74,586 73,427 74,185 Options to purchase 5,443,000 and 40,000 shares of common stock were
outstanding at August 3, 2002 and August 4, 2001, respectively, but were not
included in the computation of net income per diluted share because the options'
exercise prices were greater than the average market price of the underlying
shares. Reclassification Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the August 3, 2002
presentation. 3. Supplemental Disclosures of Cash Flow Information Six Months Ended (In thousands) August 3, August 4, Cash paid for interest $ 896 $ 993 Income tax payments $ 38,922 $ 40,793 Increases to contributed capital related to the tax benefits associated
with the exercise and vesting of stock options and restricted
stock 4. Related Party Transactions The Company has various transactions with related parties. The Company
believes that the terms of these transactions are as favorable to the Company as
those that could be obtained from third parties. The Company has an operating lease for its corporate
headquarters and distribution center with Linmar Realty Company, an affiliate of
Schottenstein Stores Corporation ("SSC"). The lease, which expires on December
31, 2020, provides for annual rental payments of approximately $2.4 million
through 2005, $2.6 million through 2015, and $2.7 million through the end of the
lease. Rent expense was $0.6 million and $0.5 million for the three months ended
August 3, 2002 and August 4, 2001, respectively, and $1.2 million for the six
months ended August 3, 2002 and August 4, 2001, under the lease. 10
In addition, the Company and its subsidiaries sell end-of-season, overstock
and irregular merchandise to various parties, including Value City Department
Stores, Inc. ("VCDS"), a publicly traded subsidiary of SSC. These sell-offs are
typically sold below cost. Proceeds from sell-offs have an insignificant effect
on cost of sales. For the three months ended August 3, 2002 and August 4, 2001,
proceeds from sell-offs to VCDS were $0.2 million and $1.4 million,
respectively. For the six months ended August 3, 2002 and August 4, 2001,
proceeds from sell-offs to VCDS were $3.9 million and $2.2 million,
respectively. The Company had approximately $1.6 million and $2.3 million included in
accounts receivable at August 3, 2002 and February 2, 2002, respectively, that
pertained to related parties. The majority of the receivable related to
merchandise sell-offs. SSC and its affiliates charge the Company for various professional services
provided to the Company, including certain legal, real estate and insurance
services. For the three months ended August 3, 2002 and August 4, 2001, the
Company paid approximately $0.1 million for these services. The Company paid
approximately $0.2 million and $0.6 million for these services for the six
months ended August 3, 2002 and August 4, 2001, respectively. Additionally, the Company paid $0.5 million and $0.7 million, respectively,
for the three and six months ended August 3, 2002 and $0.4 million for the six
months ended August 4, 2001, to cover its share of operating costs based on
usage of the corporate aircraft. There were no monies paid for usage of the
corporate aircraft during the three months ended August 4, 2001. 5. Accounts and Note Receivable August 3, February 2, Accounts receivable - construction allowances $ 4,875 $ 4,198 Related party accounts receivable 1,578 2,313 Note receivable 3,617 2,645 Accounts receivable - other 7,901 8,471 Total $ 17,971 $ 17,627 6. Other Comprehensive Income (Loss) Three Months Ended Six Months Ended (In thousands) August 3, August 4, August 3, August 4, Net Income $ 10,080 $ 15,306 $ 22,798 $ 30,851 Unrealized gain (loss)
on investments, net of tax (147) - 262 - Foreign
currency translation adjustment, net of tax (473) 628 (427) (343) Unrealized derivative
gains (losses) on cash
flow 62 (107) 216 (230) Other comprehensive income
(loss), net of tax (558) 521 51 (573) Total comprehensive income $ 9,522 $ 15,827 $ 22,849 $ 30,278 11
7. Goodwill and Other Intangible Assets
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549-0001
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of
principal executive offices)
(Zipcode)
(Registrant's telephone number,
including area code)
TABLE OF
CONTENTS
Consolidated Balance
Sheets
August 3, 2002 (Unaudited) and February 2, 2002
Three and six months ended August 3, 2002 and August 4,
2001
CONSOLIDATED BALANCE SHEETS
(In
thousands)
2002
(Unaudited)
2002
Cash and cash equivalents
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
2002
2001
2002
2001
209,469
184,403
377,343
334,081
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
2002
2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002
2001
2002
2001
2002
2001
$
1,148
$
12,482
(In thousands)
2002
2002
2002
2001
2002
2001
hedge, net
of tax
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.
The Company adopted SFAS No. 142 on February 3, 2002, the beginning of Fiscal 2002. The Company assessed the useful life of its goodwill and deemed it to have an indefinite life; therefore, amortization ceased on February 2, 2002. Additionally, the Company performed the related asset impairment tests and determined that no goodwill impairment exists.
Other intangible assets, net of accumulated amortization, were immaterial as of August 3, 2002 and August 4, 2001 and are included in other assets, net of accumulated amortization, on the balance sheet for the respective periods.
In accordance with SFAS No. 142, the Company did not restate the three or six months ended August 3, 2001 to add back the amortization expense of goodwill. For the three and six months ended August 3, 2001, goodwill amortization expense did not have a material impact on net income or earnings per share.
8. Accounting for Derivative Instruments and Hedging Activities
On November 30, 2000, the Company entered into an interest rate swap agreement, a derivative instrument, totaling $29.2 million in connection with the term facility. The swap amount decreases on a monthly basis beginning January 1, 2001 until the termination of the agreement in December 2007. The Company utilizes the interest rate swap to manage interest rate risk. The Company pays a fixed rate of 5.97% and receives a variable rate based on the one-month Bankers' Acceptance Rate. This agreement effectively changes the interest rate on the borrowings under the term facility from a variable rate to a fixed rate of 5.97% plus 140 basis points.
The Company recognizes its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that is designated and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss). For the three months ended August 3, 2002 and August 4, 2001, unrealized net gains (losses) on derivative instruments of approximately $0.1 million and $(0.1) million, respectively, net of related tax effects, were recorded in other comprehensive income (loss).
The Company does not believe there is any significant exposure to credit risk due to the creditworthiness of the bank. In the event of non-performance by the bank, the Company's loss would be limited to any unfavorable interest rate differential.
9. Contingency
During Fiscal 2000, a senior executive assumed a new position within the Company. As a result of this change, the Company accelerated the vesting on grants covering 780,000 shares of stock for this individual. This acceleration does not result in additional compensation expense unless this executive ceases employment with the Company prior to the original vesting dates. As of August 3, 2002, under the original terms of this executive's option agreements, 256,200 shares would have remained unvested which could result in compensation expense and a reduction to net income by $0.3 million based on the August 3, 2002 stock value if the executive ceases employment with the Company.
10. Income Taxes
For the three and six months ended August 3, 2002, the effective tax rate used for the provision of income tax approximated 38%. For the three and six months ended August 4, 2001, the effective tax rate used for the provision of income tax approximated 36% and 37%, respectively.
12
11. Legal Proceedings
The Company is a party to ordinary routine litigation incidental to its business. Management does not expect the results of the litigation to be material to the financial statements individually or in the aggregate.
13
Review by Independent Accountants
Ernst & Young LLP, our independent accountants, have performed a limited review of the Consolidated Financial Statements for the three and six month periods ended August 3, 2002 and August 4, 2001, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.
Independent Accountants' Review Report
The Board of Directors and Stockholders
American Eagle Outfitters,
Inc.
We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of August 3, 2002, the related consolidated statements of operations for the three and six month periods ended August 3, 2002 and August 4, 2001, and the consolidated statements of cash flows for the six month periods ended August 3, 2002 and August 4, 2001. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of American Eagle Outfitters, Inc. as of February 2, 2002, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated March 1, 2002 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 2, 2002, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
August 13, 2002
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Consolidated store data for the six months ended August 3, 2002 and August 4, 2001
Six Months Ended | ||||
(In thousands) |
August 3, |
August 4, | ||
Number of stores at end of period: |
||||
Beginning of year |
790 |
|
663 | |
Opened |
33 |
|
72 | |
Closed |
(1) |
|
(2) | |
End of period |
822 |
733 |
Store count and gross square feet by brand as of August 3, 2002 and August 4, 2001
August 3, |
August 4, | ||||||
Number of |
Gross square |
Number of |
Gross square | ||||
American Eagle Outfitters stores |
711 |
3,552,195 |
623 |
2,979,653 | |||
Bluenotes/Thriftys stores |
111 |
352,210 |
110 |
332,984 | |||
Total stores and gross square feet at end of period |
822 |
3,904,405 |
733 |
3,312,637 |
Comparison of three months ended August 3, 2002 to the three months ended August 4, 2001
Net sales increased 9.2% to $319.2 million from $292.4 million for the same period last year, primarily due to new stores. We operated 822 total stores at the end of the period compared to 733 total stores at the end of the prior period.
Consolidated comparable store sales, which include American Eagle and Bluenotes/Thriftys stores, decreased 5.5% when compared to the same period last year. Comparable store sales for the American Eagle stores declined 4.8% for the three months ended August 3, 2002.
Gross profit increased to $109.8 million from $108.0 million. Gross profit as a percent of net sales decreased to 34.4% from 36.9%. The decrease in gross profit as a percent of net sales was attributable primarily to lower merchandise margins and the deleveraging of buying, occupancy and warehousing costs in our American Eagle stores in the United States. Lower merchandise margins resulted from an increase in markdowns as a percent to sales offset by improved markon. The deleveraging of buying, occupancy and warehousing costs resulted primarily from an increase in rent expense as a percent to sales.
Selling, general and administrative expenses increased to $81.2 million from $75.3 million. As a percent of net sales, these expenses decreased to 25.4% from 25.7%. The decrease as a percent to sales is due primarily to a decrease in the cost of communications, store salaries, professional services, information technology, supplies and travel as a percent to sales.
15
Depreciation and amortization expense increased to $12.5 million from $9.9 million due primarily to our new store expansion in the United States. As a percent of net sales, these expenses increased to 3.9% from 3.4 %.
Other income decreased to $0.2 million, or 0.1% of net sales, from $0.9 million, or 0.3% of net sales. The decrease as a percent of net sales was primarily due to higher interest expense.
Income before income taxes decreased to $16.3 million from $23.7 million. As a percent of net sales, income before income taxes decreased to 5.2% from 8.1%. The decrease in income before income taxes as a percent of sales was attributable to the factors noted above.
Comparison of six months ended August 3, 2002 to the six months ended August 4, 2001
Net sales increased 9.8% to $597.1 million from $543.9 million for the same period last year, primarily due to new stores. We operated 822 total stores at the end of the period compared to 733 total stores at the end of the prior period.
Consolidated comparable store sales, which include American Eagle and Bluenotes/Thriftys stores, decreased 5.7% when compared to the same period last year. Comparable store sales for the American Eagle stores declined 4.9% for the six months ended August 3, 2002.
Gross profit increased to $219.8 million from $209.9 million. Gross profit as a percent of net sales decreased to 36.8% from 38.6%. The decrease in gross profit as a percent of net sales was attributable to the deleveraging of buying, occupancy and warehousing costs, which resulted primarily from an increase in rent expense as a percent to sales.
Selling, general and administrative expenses increased to $159.3 million from $144.9 million. As a percent of net sales, these expenses increased to 26.7% from 26.6%. The increase as a percent to sales is due primarily to an increase in the cost of communications and advertising offset by the leveraging of store salaries and travel.
Depreciation and amortization expense increased to $24.4 million from $17.9 million due primarily to our new store expansion in the United States. As a percent of net sales, these expenses increased to 4.1% from 3.3%.
Other income decreased to $0.9 million, or 0.2% of net sales, from $1.8 million, or 0.3% of net sales. The decrease as a percent of net sales was primarily due to lower investment income resulting from lower average investment rates and higher interest expense.
Income before income taxes decreased to $36.9 million from $48.9 million. As a percent of net sales, income before income taxes decreased to 6.2% from 9.0%. The decrease in income before income taxes as a percent of sales was attributable to the factors noted above.
16
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
(In thousands) |
August 3, |
February 2, | ||
Working capital |
$ |
239,975 |
$ |
228,088 |
Current ratio |
2.57 |
2.52 |
Net cash used for operating activities was $12.8 million for the six months ended August 3, 2002 compared to $22.9 million for the same period last year. The decrease in net cash used for operating activities was due primarily to an increase in accounts payable compared to the prior year offset by decreased accrued liabilities and increased receivables compared to the prior year.
Net cash used for investing activities of $56.8 million was primarily for capital expenditures of $32.1 million and the net purchase of short-term investments of $22.7 million for the six months ended August 3, 2002.
Cash outflows for financing activities for the six months ended August 3, 2002 were primarily for stock repurchases of $5.6 million offset by $4.8 million provided by borrowings on the revolving operating facility.
At August 3, 2002, the Company had an unsecured demand lending arrangement (the "facility") with a bank to provide a $125.0 million line of credit at either the lender's prime lending rate (4.8% at August 3, 2002) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million that can be used for direct borrowing. No borrowings were required against the line for the current or prior period. At August 3, 2002, letters of credit in the amount of $50.0 million were outstanding leaving a remaining available balance on the facility of $75.0 million. During June 2001, the Company entered into an agreement with a separate financial institution for an uncommitted letter of credit facility for $50.0 million. At August 3, 2002, letters of credit in the amount of $23.4 million were outstanding, leaving a remaining available balance on the uncommitted letter of credit facility of $26.6 million.
During November 2000, the Company entered into a $29.1 million non-revolving term facility (the "term facility") and a $4.9 million revolving operating facility (the "operating facility") in connection with the Canadian acquisition. The term facility matures in December 2007 and bears interest at the one-month Bankers' Acceptance Rate (2.8% at August 3, 2002) plus 140 basis points. The operating facility is due in November 2002, has five additional one-year extensions, and bears interest at either the lender's prime lending rate (4.5% at August 3, 2002) or the Bankers' Acceptance Rate (2.8% at August 3, 2002) plus 120 basis points. At August 3, 2002, borrowings under the operating facility were $4.8 million.
Capital expenditures, net of construction allowances, totaled $32.1 million for the six months ended August 3, 2002. This amount consisted primarily of expenditures related to new and remodeled American Eagle stores in the United States.
We expect capital expenditures during the remainder of Fiscal 2002 to be approximately $50 to $55 million, net of construction allowances, which will relate primarily to approximately 45-50 new American Eagle stores in the United States and Canada, remodeling approximately 15-20 American Eagle stores in the United States and system improvements. This forward-looking statement will be influenced by factors including our financial position, consumer spending, and the number of acceptable mall store leases that may become available. We believe that our existing cash and investment balances, our cash flow from operations, and our bank lines of credit will be sufficient to meet our anticipated cash requirements through Fiscal 2002.
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Critical Accounting Policies
The accompanying Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company's specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties. Accordingly, results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. For more information regarding the Company's critical accounting policies, please see the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended February 2, 2002.
Impact of Inflation
We do not believe that inflation has had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future.
Safe Harbor Statement, Seasonality, and Business Risks
This report contains various 'forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:
- the planned opening of approximately 45-50 American Eagle stores in the United States and
Canada during the
remainder of Fiscal 2002,
- the planned
remodeling of approximately 15-20 American Eagle stores during the remainder of Fiscal 2002,
and
- the sufficiency of existing cash and investment balances, cash flows
and line of credit facilities to meet Fiscal
2002 cash requirements.
We caution that these statements are further qualified by factors that could cause actual results to differ materially from those in the forward-looking statements, including without limitation, the following:
- our ability to anticipate and respond to changing consumer preferences and
fashion trends in a timely manner,
- the ability to obtain suitable sites for
new stores at acceptable costs,
- our ability to successfully acquire and
integrate other businesses,
- the expansion of buying and inventory
capabilities,
- the interruption of the flow of merchandise from key
vendors,
- any disaster or casualty resulting in the interruption of service
for our distribution centers,
- the effect of overall economic conditions and
consumer spending patterns,
- the effect of changes in weather patterns,
-
the change in currency and exchange rates, interest rates, duties, tariffs, or
quotas,
- the effect of competitive pressures from other retailers,
- the effect of international and domestic acts of terror, and
-
the potential for a strike by the International Longshoreman's Workers Union on
the entire United States West
Coast.
The impact of the above factors, some of which are beyond our control, may cause our actual results to differ materially from expected results in these statements and other forward-looking statements we may make from time-to-time.
18
Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2001, these periods accounted for approximately 60.4% of our sales. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) | The Company held its 2002 Annual Meeting of Stockholders on June 5, 2002. Holders of 64,556,997 shares of the Company's common stock were present in person or by proxy representing approximately 89.6% of the Company's 72,056,581 shares outstanding on the record date. |
(b) and (c) | The following persons continue to serve as Class II directors: Thomas R. Ketteler, John L. Marakas, David W. Thompson and Gerald E. Wedren; and the following persons continue to serve as Class III directors: Jon P. Diamond, Martin P. Doolan, Gilbert W. Harrison and James V. O'Donnell. The following persons were elected as Class I members of the Board of Directors to serve a three year term until the annual meeting in 2005 or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated below. |
Name | Shares For | Shares Abstain |
Ari Deshe | 61,327,401 | 3,229,596 |
Michael G. Jesselson | 61,802,221 | 2,754,776 |
George Kolber | 61,273,459 | 3,283,538 |
Roger S. Markfield | 53,976,875 | 10,580,122 |
Jay L. Schottenstein | 53,733,759 | 10,823,238 |
The stockholder proposal regarding adoption of human rights standards did not pass. It received 4,797,762 shares for, 48,741,229 shares against, 1,947,747 shares abstain and 9,070,259 shares not voted. The Company has an existing comprehensive vendor compliance program that contractually requires all suppliers to meet our global workplace standards, including human rights standards.
(d) | Not applicable |
Item 6. Exhibits
(a) | Exhibit 15 Acknowledgement of Ernst & Young LLP Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) | None. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated September 13, 2002
American Eagle Outfitters, Inc.
(Registrant)/s/ Laura A. Weil
Laura A. Weil
Executive Vice President and Chief Financial Officer/s/ Dale E. Clifton
Dale E. Clifton
Vice President, Controller and Chief Accounting Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Jay L. Schottenstein, Chief Executive Officer of American Eagle
Outfitters, Inc., certify that:
September 13, 2002
/s/ Jay L. Schottenstein
Jay L. Schottenstein
Chief Executive Officer
22
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Laura A. Weil, Chief Financial Officer of American Eagle Outfitters, Inc., certify that:
September 13, 2002
/s/ Laura A. Weil
Laura A. Weil
Executive Vice President and Chief Financial Officer
23
Exhibit 15
Acknowledgment of Ernst & Young LLP
The Board of Directors and Stockholders
American Eagle Outfitters, Inc.
We are aware of the incorporation by reference in the American Eagle Outfitters, Inc. Registration Statements as follows:
- 1999 Stock Incentive Plan (Registration Nos. 333-34748 and 333-75188),
- Employee Stock Purchase Plan (Registration No. 333-3278),
- 1994 Restricted Stock Plan (Registration No. 33-79350),
- 1994 Stock Option Plan (Registration Nos. 333-44759, 333-79358, and 333-12661),
- Stock Fund of American Eagle Outfitters, Inc. Profit Sharing and 401(k) Plan
(Registration No. 33-84796), and
- Registration Statement (Form S-3) (Registration No. 333-68875)
of our report dated August 13, 2002 relating to the unaudited consolidated interim financial statements of American Eagle Outfitters, Inc. that are included in its Form 10-Q for the quarter ended August 3, 2002.
Pursuant to Rule 436(c) of the Securities Act of 1933, our reports are not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ Ernst & Young
Pittsburgh, Pennsylvania
August 13, 2002
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Exhibit 99.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of American Eagle Outfitters, Inc. on Form 10-Q for the period ended August 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jay L. Schottenstein, Chief Executive Officer of American Eagle Outfitters, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Jay L. Schottenstein
Jay L. Schottenstein
Chief Executive Officer
September 13, 2002
25
Exhibit 99.2
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of American Eagle Outfitters, Inc. on Form 10-Q for the period ended August 3, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Laura A. Weil, Chief Financial Officer of American Eagle Outfitters, Inc., certify to the best of my knowledge, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that:
/s/ Laura A. Weil
Laura A. Weil
Executive Vice President and Chief Financial
Officer
September 13, 2002
26