-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IfZBvIkPusXcZWizYV7touKAkSbZ3iCBBRUNU1v/xUCqonT3JmPK6yXUIpHxxMPN mQJ6JZapnmq2LTXed1/6tQ== 0000950152-98-007618.txt : 19980916 0000950152-98-007618.hdr.sgml : 19980916 ACCESSION NUMBER: 0000950152-98-007618 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980915 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN EAGLE OUTFITTERS INC CENTRAL INDEX KEY: 0000919012 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 251724320 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23760 FILM NUMBER: 98709801 BUSINESS ADDRESS: STREET 1: 150 THORN HILL DR CITY: WARRENDALE STATE: PA ZIP: 15095 BUSINESS PHONE: 4127764857 MAIL ADDRESS: STREET 1: 150 THORN HILL DRIVE STREET 2: P O BOX 788 CITY: WARRENDALE STATE: PA ZIP: 15095 10-Q 1 AMERICAN EAGLE OUTFITTERS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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 1, 1998 OR ( ) 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. (Exact name of registrant as specified in its charter) OHIO NO. 25-1724320 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528 (Address of principal executive offices) (Zipcode) (724) 776-4857 (Registrant's telephone number, including area code) 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, NO PAR VALUE, 22,841,925 SHARES OUTSTANDING AS OF SEPTEMBER 9, 1998 2 AMERICAN EAGLE OUTFITTERS, INC. ------------------------------- TABLE OF CONTENTS -----------------
PART I. FINANCIAL INFORMATION PAGE NO. --------------------- -------- Item 1. Financial Statements Consolidated Balance Sheets August 1, 1998 (unaudited) and January 31, 1998 3 Consolidated Statements of Operations (unaudited) Three months and six months ended August 1, 1998 and August 2, 1997 4 Consolidated Statements of Cash Flows (unaudited) Six months ended August 1, 1998 and August 2, 1997 5 Notes to Consolidated Financial Statements 6-8 Review By Independent Accountants 9 Independent Accountants' Review Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings 13 Item 2. Changes in Securities N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit 23 Acknowledgment of Independent Accountants 15
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS
(In thousands) August 1, January 31, ASSETS 1998 1998 ----- ----- Current assets: (Unaudited) Cash and cash equivalents $ 36,266 $ 48,359 Merchandise inventory 54,322 36,278 Accounts and note receivable, including related party 5,153 7,647 Prepaid expenses and other 6,812 5,388 Deferred income taxes 7,271 4,801 -------- -------- Total current assets 109,824 102,473 -------- -------- Fixed assets: Fixtures and equipment 32,017 25,842 Leasehold improvements 40,170 35,978 -------- -------- 72,187 61,820 Less: Accumulated depreciation and amortization 26,646 23,273 -------- -------- 45,541 38,547 -------- -------- Other assets 4,355 3,775 -------- -------- Total assets $159,720 $144,795 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 24,007 $ 24,606 Accrued compensation and payroll taxes 10,625 9,227 Accrued rent 10,041 7,909 Accrued income and other taxes 1,134 8,738 Other liabilities and accrued expenses 4,517 3,507 -------- -------- Total current liabilities 50,324 53,987 -------- -------- Shareholders' equity: Common stock, 30,000,000 shares authorized, shares issued (22,832,925 and 22,624,088 shares outstanding, respectively) 54,840 53,837 Contributed capital 6,441 4,832 Retained earnings 51,114 35,756 -------- -------- 112,395 94,425 Less: Deferred compensation 2,397 1,992 Treasury stock, 254,000 shares and 301,500 shares, respectively 602 1,625 -------- -------- Total shareholders' equity 109,396 90,808 -------- -------- Stockholders' equityt Total liabilities and shareholders' equity $159,720 $144,795 ======== ========
See Notes to Consolidated Financial Statements 3 4 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
Three Months Ended Six Months Ended ------------------ ---------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $ 125,731 $ 86,159 $ 225,425 $ 147,111 Cost of sales, including certain buying, occupancy and warehousing expenses 76,668 61,106 139,145 107,805 --------- --------- --------- --------- Gross profit 49,063 25,053 86,280 39,306 Selling, general and administrative expenses 31,782 21,473 58,005 40,383 Depreciation and amortization 2,084 1,771 4,059 3,440 --------- --------- --------- --------- Operating income (loss) 15,197 1,809 24,216 (4,517) Interest income, net 541 69 1,083 399 --------- --------- --------- --------- Income (loss) before income taxes 15,738 1,878 25,299 (4,118) Provision (benefit) for income taxes 6,185 758 9,941 (1,619) --------- --------- --------- --------- Net income (loss) $ 9,553 $ 1,120 $ 15,358 $ (2,499) ========= ========= ========= ========= Basic income (loss) per common share $ 0.42 $ 0.05 $ 0.68 $ (0.11) ========= ========= ========= ========= Diluted income (loss) per common share $ 0.40 $ 0.05 $ 0.64 $ (0.11) ========= ========= ========= ========= Weighted average common shares outstanding - basic 22,621 22,074 22,519 22,028 ========= ========= ========= ========= Weighted average common shares outstanding - diluted 24,056 22,600 23,882 22,028 ========= ========= ========= ========= Retained earnings, beginning $ 41,561 $ 13,500 $ 35,756 $ 17,119 Net income (loss) 9,553 1,120 15,358 (2,499) Acquisition of Prophecy, Ltd. - (2,251) - (2,251) --------- --------- --------- --------- Retained earnings, ending $ 51,114 $ 12,369 $ 51,114 $ 12,369 ========= ========= ========= =========
See Notes to Consolidated Financial Statements 4 5 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended ---------------- August 1, August 2, 1998 1997 ---- ---- Net income (loss) $ 15,358 $ (2,499) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Depreciation and amortization 4,059 3,440 Loss on impairment and write-off of fixed assets 1,118 757 Restricted stock compensation 1,833 434 Deferred income taxes (3,576) 1,434 CHANGES IN ASSETS AND LIABILITIES: Merchandise inventory (18,044) (14,366) Accounts and note receivable 2,238 (4,109) Prepaid expenses and other (1,364) (1,422) Accounts payable (264) (467) Accrued liabilities (2,634) (5,148) -------- -------- Total adjustments (16,634) (19,447) -------- -------- Net cash used for operating activities (1,276) (21,946) -------- -------- INVESTING ACTIVITIES: Capital expenditures (12,215) (7,115) Investment in Prophecy, Ltd. - (900) -------- -------- Net cash used for investing activities (12,215) (8,015) -------- -------- FINANCING ACTIVITIES: Net proceeds from stock options exercised 1,398 21 -------- -------- Net cash provided by financing activities 1,398 21 -------- -------- Net decrease in cash (12,093) (29,940) Cash - beginning of period 48,359 34,326 -------- -------- Cash - end of period $ 36,266 $ 4,386 ======== ========
See Notes to Consolidated Financial Statements 5 6 AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INTERIM FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at August 1, 1998 and for the three and six month periods ended August 1, 1998 (the "current period") and August 2, 1997 (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 generally accepted accounting principles 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 January 31, 1998 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 1997 Annual Report. 2. BASIS OF PRESENTATION ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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 FASB PRONOUNCEMENTS FASB 130 Reporting Comprehensive Income In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components in financial statements. This standard is effective for the Company's Fiscal 1998 annual report, however, it is not believed to have any impact on financial statement disclosures. FASB 131 Disclosures about Segments of an Enterprise In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise", which establishes standards for the disclosure of selected information about reportable segments, disclosures about product and services, geographic areas, and major customers in financial statements. This standard is effective for the Company's Fiscal 1998 annual report, however, it is not believed to have any impact on financial statement disclosures. FASB 132 Disclosures about Pensions and Other Postretirement Benefits In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 132, "Disclosures about Pensions and Other Postretirement Benefits", which establishes standards for the disclosure requirements for pensions and other postretirement benefits. This standard is effective for the Company's Fiscal 1998 annual report, however, the Company does not maintain any postretirement benefit plans, therefore, this statement is not believed to have any impact on financial statement disclosures. FASB 133 Accounting for Derivative Instruments and Hedging Activities In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for 6 7 Derivative Instruments and Hedging Activities" which establishes standards for the recognition and measurement of derivatives and hedging activities. This standard is effective for the Company's Fiscal 2000 annual report, however, the Company is not engaging in these types of investment activities, therefore, this statement is not believed to have any impact on financial statement disclosures. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (FASB 128), which was adopted for Fiscal 1997. Earnings per share amounts for all periods have been restated to give effect to the application of FASB 128. The effect of the restatement on earnings per share for the restated periods is immaterial. The following table shows the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of dilutive potential common stock.
Three Months Ended Six Months Ended ------------------ ---------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss) $ 9,553 $ 1,120 $ 15,358 ($ 2,499) ======== ======== ======== ======== Weighted average number of common shares used in basic EPS 22,621 22,074 22,519 22,028 Effect of dilutive stock options and nonvested restricted stock 1,435 526 1,363 - -------- -------- -------- -------- Weighted average number of common shares and dilutive potential common stock used in diluted EPS 24,056 22,600 23,882 22,028 ======== ======== ======== ========
RECLASSIFICATION Certain reclassifications have been made to the Consolidated Financial Statements for the prior period in order to conform to the August 1, 1998 presentation. 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Because no borrowings were required under the terms of the Company's line of credit, there were no amounts paid for interest during the three or six months ended August 1, 1998 or August 2, 1997. Income tax payments were $18.7 million and $2.4 million during the six months ended August 1, 1998 and August 2, 1997, respectively. 4. RELATED PARTY TRANSACTIONS As described in the information that follows, the Company has various transactions with related parties. The nature of the relationship is primarily through common ownership. The Company has an operating lease for its corporate headquarters and distribution center with an affiliate. The lease, which was entered into on January 1, 1996, and expires on December 31, 2010, provides for annual rental payments of approximately $1.2 million through 2001, $1.6 million through 2006, and $1.8 million through the end of the lease. In addition, the Company and its subsidiaries purchase merchandise from and sell merchandise to various related parties and use the services of a related importing company. During Fiscal 1997, the Company provided a short-term loan in the amount of $3.0 million to Azteca Production International, a related party vendor. The terms of the note included annual interest at 7% plus a margin defined as the difference between 8.5% and National City Bank's prime lending rate. The loan was paid off in April 1998. The note receivable outstanding balance at January 31, 1998 was 7 8 approximately $1.3 million. Related party amounts follow: (In thousands)
Three Months Ended Six Months Ended ------------------ ---------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ---- ----- ---- ----- Merchandise purchases plus import administrative charges $20,277 $18,870 $35,326 $31,247 Accounts payable $ 9,616 $11,041 $ 9,616 $11,041 Accounts and notes receivable $ 1,119 $ 5,740 $ 1,119 $ 5,740 Rent expense $ 387 $ 387 $ 774 $ 788 Merchandise sales $ - $ 3,967 $ 2,534 $ 4,272
The Company provided loans to certain officers and other individuals to pay the taxes on the restricted stock that vested in April 1998. As of August 1, 1998, the outstanding value of these loans approximated $843,000. There was no balance outstanding as of January 31, 1998. 5. ACCOUNTS RECEIVABLE Accounts receivable is comprised of the following:
August 1, January 31, 1998 1998 ---- ---- Accounts receivable - landlord $ 2,536 $ 1,518 Related party accounts and note receivable 1,119 3,755 Accounts receivable - other 1,498 2,374 ------------ --------- Total $ 5,153 $ 7,647 ============ =========
6. INCOME TAXES The provisions of FASB No. 109, "Accounting for Income Taxes", have been reflected in the preparation of the accompanying Consolidated Financial Statements. For the six months ended August 1, 1998 and August 2, 1997, the effective tax rate used to provide income tax amounts approximated 39%. 7. LEASE COMMITMENTS The Company is contingently liable for the rental payments totaling approximately $4.4 million for certain outlet stores which were sold in October 1995. 8. LEGAL PROCEEDINGS The Company is also a party to ordinary routine litigation incidental to its business. The Company does not expect any of such litigation to have a material adverse effect on the Company's results of operations or financial condition. 8 9 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 1, 1998 and August 2, 1997, 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 Shareholders American Eagle Outfitters, Inc. We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of August 1, 1998, and the related consolidated statements of operations for the three-month and six-month periods ended August 1, 1998 and August 2, 1997 and the consolidated statements of cash flows for the six-month periods ended August 1, 1998 and August 2, 1997. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 31, 1998, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated March 3, 1998 (except for Note 13, as to which the date is April 14, 1998) 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 January 31, 1998, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Pittsburgh, Pennsylvania August 19, 1998 9 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of the listed items included in the Company's Consolidated Statements of Operations.
Three months ended Six months ended ------------------ ---------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including certain buying, occupancy and warehousing expenses 61.0 70.9 61.7 73.3 ------ ------ ------ ------ Gross profit 39.0 29.1 38.3 26.7 Selling, general and administrative expenses 25.2 24.9 25.8 27.5 Depreciation and amortization 1.7 2.1 1.8 2.3 ------ ------ ------ ------ Operating income (loss) 12.1 2.1 10.70 (3.1) Interest income, net 0.4 0.1 0.5 0.3 ------ ------ ------ ------ Income (loss) before income taxes 12.5 2.2 11.2 (2.8) Provision (benefit) for income taxes 4.9 0.9 4.4 (1.1) ------ ------ ------ ------ Net income (loss) 7.6% 1.3% 6.8% (1.7)% ====== ====== ====== ======
COMPARISON OF THREE MONTHS ENDED AUGUST 1, 1998 TO THE THREE MONTHS ENDED AUGUST 2, 1997 Net sales for the three months ended August 1, 1998 (the "current period") increased 45.9% to $125.7 million from $86.2 million for the three months ended August 2, 1997 (the "prior period"). The increase in net sales resulted primarily from increases of $29.7 million or 35.6% from comparable store sales and $9.8 million from new and non-comparable stores sales. The total increase in net sales resulted from an increase of 31.9% in units sold, as well as a 10.3% increase in prices. The Company operated 347 stores at the end of the current period compared to 315 stores operated at the end of the prior period. Gross profit for the current period increased to $49.1 million from $25.1 million for the prior period. Gross profit as a percent of net sales for the current period increased to 39.0% from 29.1% for the prior period. This increase was attributable to a 6.3% increase in merchandise margins as well as a 3.6% improvement in buying, occupancy, and warehousing costs reflecting improved leveraging of these expenses. The increase in merchandise margins resulted primarily from a decrease of 5.8% in markdowns as a percent of sales as well as reduced shrinkage costs of 0.7% of sales. Selling, general and administrative expenses for the current period increased to $31.8 million from $21.5 million for the prior period. As a percent of net sales, these expenses increased to 25.2% from 24.9% for the prior period. The increase of $10.3 million included $1.9 million to support the new stores that were opened since the second quarter last year, as well as an increase of $1.1 million in advertising costs related to direct mail costs and costs related to television and print advertising. Also included were $5.0 million of increased salary and benefit costs incurred as a result of the favorable sales and earnings performance, in addition to increased professional fees of $0.3 million. The remaining increase resulted from additional costs incurred to support the increased sales volumes. Depreciation and amortization expense for the current period increased to $2.1 million from $1.8 million for the prior period and represented 1.7% of sales in the current period as compared to 2.1% of sales in the prior period. 10 11 Interest income for the current period increased to $0.5 million from $0.1 million for the prior period because of higher cash reserves available for investment. No borrowings were required under the terms of the Company's line of credit during the current period. Income before income taxes for the current period increased to $15.7 million from $1.9 million for the prior period. As a percent of net sales, the income before income taxes for the current period increased to 12.5% from 2.2% for the prior period. The increase in income before income taxes as a percent of sales was attributable to the factors noted above. COMPARISON OF SIX MONTHS ENDED AUGUST 1, 1998 TO THE SIX MONTHS ENDED AUGUST 2, 1997 Net sales for the six months ended August 1, 1998 (the "current period") increased 53.2% to $225.4 million from $147.1 million for the six months ended August 2, 1997 (the "prior period"). The increase in net sales resulted primarily from increases of $60.5 million or 42.5% from comparable store sales and $17.8 million from non-comparable stores sales. The total increase in net sales resulted primarily from an increase of 36.5% in units sold as well a 12.3% increase in prices. The Company operated 347 stores at the end of the current period compared to 315 stores operated at the end of the prior period. Gross profit for the current period increased to $86.3 million from $39.3 million for the prior period. Gross profit as a percent of net sales for the current period increased to 38.3% from 26.7% for the prior period. This increase was attributable to a 6.6% increase in merchandise margins as well as a 5.0% improvement in buying, occupancy, and warehousing costs reflecting improved leveraging of these expenses. The increase in merchandise margins resulted primarily from a 6.9% decrease in markdowns as a percent of sales. Selling, general and administrative expenses for the current period increased to $58.0 million from $40.4 million for the prior period. As a percent of net sales, these expenses decreased to 25.8% from 27.5% for the prior period. The increase of $17.6 million included $3.2 million to support the new stores that were opened since the first quarter last year, as well as an increase of $1.8 million in advertising costs related to direct mail costs, advertising to enhance brand imaging, and costs related to television and print advertising. Also included were $7.9 million of increased salary and benefit costs incurred as a result of the favorable sales and earnings performance, in addition to increased professional fees of $0.7 million. The remaining increase resulted from additional costs incurred to support the increased sales volumes. Depreciation and amortization expense for the current period increased to $4.1 million from $3.4 million for the prior period and represented 1.8% of sales in the current period as compared to 2.3% of sales in the prior period. Interest income for the current period increased to $1.1 million from $0.4 million for the prior period because of higher cash reserves available for investment. No borrowings were required under the terms of the Company's line of credit during the current period. Income before income taxes for the current period increased to $25.3 million from a $4.1 million loss for the prior period. As a percent of net sales, the income before income taxes for the current period increased to 11.2% from (2.8%) for the prior period. The increase in income before income taxes as a percent of sales was attributable to the factors noted above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of cash in the current period was net income. The primary use of cash in the current period was cash flow used by operating activities, primarily to support inventory increases of $18.0 million for anticipated sales and new store growth. Additionally, the Company used cash of $12.2 million for capital expenditures. The Company had working capital of $59.5 million and $26.8 million at August 1, 1998 and August 2, 1997, respectively. At August 1, 1998, the Company had an unsecured demand lending arrangement with a bank to provide a $75.0 million line of credit (which reflects a $15.0 million increase in line availability for letters of credit, which occurred in July 1998) at either the lender's prime lending rate (8.50% at August 1, 1998) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million that can be used for direct borrowing. Cash generated from operations in prior periods was sufficient enough to finance operations so that no borrowings were required against the line during the current period. Letters of credit in the amount of $46.7 million were outstanding at August 1, 1998 and the remaining balance on the line was $28.3 million at August 1, 1998. Capital expenditures, net of construction allowances, totaled $12.2 million for the six months ended August 1, 1998. These expenditures included the addition of 17 new stores and 12 remodeled locations totaling approximately $6.0 million, the expansion and upgrade of 11 12 distribution center facilities totaling approximately $5.7 million, the purchase of information systems hardware, software, and licenses totaling approximately $0.3 million, and other expenditures totaling $0.2 million. The Company is currently planning to open approximately 35 stores during the remainder of the fiscal year. This forward-looking statement will be influenced by factors including the Company's financial position, consumer spending, and the number of acceptable mall store leases that may become available. The Company believes that the cash flow from operations and its bank line of credit will be sufficient to meet its presently anticipated cash requirements through Fiscal 1998. SEASONALITY The Company experiences seasonal fluctuations in its net sales and net income, with a disproportionate amount of net sales and a majority of its net income typically realized in the fourth quarter. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain holiday seasons and new store openings, the net sales contributed by new stores, merchandise mix, and the timing and level of markdowns. IMPACT OF INFLATION The Company does not believe that the relatively modest levels of inflation which have been experienced in the United States in recent years have had a significant effect on its net sales or its profitability. Substantial increases in cost, however, could have a significant impact on the Company and the industry in the future. IMPACT OF YEAR 2000 Management has developed a comprehensive plan designed to enable its computer information systems to properly process transactions in the Year 2000 and beyond. The project team began working on the plan in Fiscal 1997 and expects to complete the project by July 1999. The Company is currently communicating with its significant suppliers and business partners to determine to what extent they are addressing their own Year 2000 issues. The failure of the Company or any of its significant suppliers or business partners to properly address Year 2000 issues could potentially adversely affect the Company's business and financial performance. SAFE HARBOR STATEMENT 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 the Company's expectations or beliefs concerning future events, including the following: the planned opening of 35 stores during the remainder of Fiscal 1998; the completion of modifications to computer systems to enable the processing of transactions in the Year 2000 and beyond; and sufficiency of cash flows and line of credit facilities to meet Fiscal 1998 cash requirements. The Company cautions 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: decline in demand for the merchandise offered by the Company; the ability to obtain suitable sites for new stores at acceptable costs; the retention, hiring and training of qualified personnel; the integration of new stores into existing operations; the expansion of buying and inventory capabilities; the availability of capital; the ability of the Company to anticipate and respond to changing consumer preferences and fashion trends in a timely manner; the effect of economic conditions; the effect of competitive pressures from other retailers, and the ability of the Company or any of its significant suppliers or business partners to properly address Year 2000 issues. Results actually achieved may differ materially from expected results in these statements. Historically, the Company's operations have been seasonal, with a disproportionate amount of net sales and a majority of 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. As a result of this seasonality, any factors negatively affecting the Company during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on the Company's financial condition and results of operations for the entire year. The Company's quarterly results of operations may also 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. 12 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders (a) thru (d) Not applicable. 13 14 SIGNATURES 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 15 , 1998 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 14 EX-23 2 EXHIBIT 23 1 Exhibit 23 Acknowledgment of Ernst & Young LLP The Board of Directors and Shareholders American Eagle Outfitters, Inc. We are aware of the incorporation by reference in the Registration Statements (Forms S-8) of American Eagle Outfitters, Inc. pertaining to the American Eagle Outfitters, Inc. Employee Stock Purchase Plan, the American Eagle Outfitters, Inc. 1994 Restricted Stock Plan, the American Eagle Outfitters, Inc. 1994 Stock Option Plan, and the American Eagle Outfitters, Inc. Stock Fund of American Eagle Outfitters, Inc. Profit Sharing and 401(k) Plan of our report dated August 19, 1998 relating to the unaudited consolidated interim financial statements of American Eagle Outfitters, Inc. which are included in its Form 10-Q for the quarter ended August 1, 1998. 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. Pittsburgh, Pennsylvania September 14, 1998 15 EX-27 3 EXHIBIT 27
5 3-MOS JAN-30-1999 MAY-03-1998 AUG-01-1998 36,266 0 5,153 0 54,322 109,824 72,187 26,646 159,720 50,324 0 0 0 54,840 54,556 159,720 125,731 125,731 76,668 76,668 33,866 0 (541) 15,738 6,185 9,553 0 0 0 9,553 .42 .40
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