AMERICAN EAGLE OUTFITTERS INC, 10-Q filed on 9/5/2019
Quarterly Report
v3.19.2
Document and Entity Information - shares
6 Months Ended
Aug. 03, 2019
Sep. 03, 2019
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Aug. 03, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Trading Symbol AEO  
Entity Registrant Name AMERICAN EAGLE OUTFITTERS INC  
Entity Central Index Key 0000919012  
Current Fiscal Year End Date --02-01  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Title of 12(b) Security Common Stock  
Security Exchange Name NYSE  
Entity File Number 1-33338  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 13-2721761  
Entity Address, Address Line One 77 Hot Metal Street  
Entity Address, City or Town Pittsburgh  
Entity Address, State or Province PA  
Entity Address, Postal Zip Code 15203-2329  
City Area Code 412  
Local Phone Number 432-3300  
Document Quarterly Report true  
Document Transition Report false  
Entity Common Stock, Shares Outstanding   168,963,058
v3.19.2
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Aug. 03, 2019
Feb. 02, 2019
Aug. 04, 2018
Current assets:      
Cash and cash equivalents $ 267,166 $ 333,330 $ 323,322
Short-term investments 50,000 92,135 40,000
Merchandise inventory 534,762 424,404 466,112
Accounts receivable, net 98,604 93,477 74,153
Prepaid expenses and other 69,541 102,907 93,493
Total current assets 1,020,073 1,046,253 997,080
Property and equipment, at cost, net of accumulated depreciation 754,031 742,149 732,350
Operating lease right-of-use assets 1,462,544    
Intangible assets net, including goodwill 56,326 58,167 59,990
Non-current deferred income taxes 16,759 14,062 8,558
Other assets 49,426 42,747 52,771
Total assets 3,359,159 1,903,378 1,850,749
Current liabilities:      
Accounts payable 316,995 240,671 264,247
Current portion of operating lease liabilities 279,207    
Accrued income and other taxes 17,754 20,064 18,332
Accrued compensation and payroll taxes 54,683 82,173 51,903
Unredeemed gift cards and gift certificates 34,742 53,997 33,185
Other current liabilities and accrued expenses 60,265 145,740 140,353
Total current liabilities 763,646 542,645 508,020
Non-current liabilities:      
Non-current operating lease liabilities 1,338,634    
Other non-current liabilities 28,302 73,178 82,152
Total non-current liabilities 1,366,936 73,178 82,152
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 shares issued; 168,962, 172,436 and 176,217 shares outstanding, respectively 2,496 2,496 2,496
Contributed capital 568,413 574,929 560,349
Accumulated other comprehensive loss (36,630) (34,832) (32,646)
Retained earnings 2,070,077 2,054,654 1,941,536
Treasury stock, 80,604, 77,130 and 73,349 shares, respectively (1,375,779) (1,309,692) (1,211,158)
Total stockholders’ equity 1,228,577 1,287,555 1,260,577
Total liabilities and stockholders’ equity $ 3,359,159 $ 1,903,378 $ 1,850,749
v3.19.2
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Aug. 03, 2019
Feb. 02, 2019
Aug. 04, 2018
Statement Of Financial Position [Abstract]      
Preferred stock, par value $ 0.01 $ 0.01 $ 0.01
Preferred stock, shares authorized 5,000,000 5,000,000 5,000,000
Preferred stock, issued 0 0 0
Preferred stock, outstanding 0 0 0
Common stock, par value $ 0.01 $ 0.01 $ 0.01
Common stock, shares authorized 600,000,000 600,000,000 600,000,000
Common stock, shares issued 249,566,000 249,566,000 249,566,000
Common stock, shares outstanding 168,962,000 172,436,000 176,217,000
Treasury stock, shares 80,604,000 77,130,000 73,349,000
v3.19.2
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Aug. 03, 2019
Aug. 04, 2018
Aug. 03, 2019
Aug. 04, 2018
Income Statement [Abstract]        
Total net revenue $ 1,040,879 $ 964,853 $ 1,927,169 $ 1,787,814
Cost of sales, including certain buying, occupancy and warehousing expenses 658,308 611,752 1,219,677 1,130,271
Gross profit 382,571 353,101 707,492 657,543
Selling, general and administrative expenses 253,051 233,971 483,791 444,205
Restructuring charges 2,728   4,272 1,568
Depreciation and amortization expense 44,870 42,739 89,661 84,674
Operating income 81,922 76,391 129,768 127,096
Other income, net 3,990 860 8,172 1,362
Income before income taxes 85,912 77,251 137,940 128,458
Provision for income taxes 20,931 16,918 32,206 28,196
Net income $ 64,981 $ 60,333 $ 105,734 $ 100,262
Net income per basic share $ 0.38 $ 0.34 $ 0.61 $ 0.57
Net income per diluted share $ 0.38 $ 0.34 $ 0.61 $ 0.56
Weighted average common shares outstanding - basic 170,756 177,249 172,291 177,329
Weighted average common shares outstanding - diluted 171,781 178,505 173,701 178,730
v3.19.2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Aug. 03, 2019
Aug. 04, 2018
Aug. 03, 2019
Aug. 04, 2018
Statement Of Income And Comprehensive Income [Abstract]        
Net income $ 64,981 $ 60,333 $ 105,734 $ 100,262
Other comprehensive income:        
Foreign currency translation (loss) income (1,276) (2,290) (1,798) 1,850
Other comprehensive (loss) income: (1,276) (2,290) (1,798) 1,850
Comprehensive income $ 63,705 $ 58,043 $ 103,936 $ 102,112
v3.19.2
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 Feb. 03, 2018 $ 1,246,791 $ 2,496 $ 593,770 $ 1,883,592 $ (1,202,272) $ (30,795)
Beginning Balance (in shares) at Feb. 03, 2018   177,316,000        
Stock awards 11,379   11,379      
Repurchase of common stock as part of publicly announced programs (44,913)       (44,913)  
Repurchase of common stock as part of publicly announced programs (in shares)   (2,300,000)        
Repurchase of common stock from employees (18,299)       (18,299)  
Repurchase of common stock from employees (in shares)   (903,000)        
Adoption of ASC | ASC 606 152     152    
Reissuance of treasury stock 15,668   (45,768) 7,110 54,326  
Reissuance of treasury stock (in shares)   3,253,000        
Net income 100,262     100,262    
Other comprehensive income, net of tax (1,850)         (1,850)
Cash dividends and dividend equivalents($0.1375, $0.275 per share) (48,612)   968 (49,580)    
Ending Balance at Aug. 04, 2018 $ 1,260,577 $ 2,496 560,349 1,941,536 (1,211,158) (32,646)
Ending Balance (in shares) at Aug. 04, 2018 176,217,000 177,366,000        
Beginning Balance at May. 05, 2018 $ 1,207,381 $ 2,496 565,033 1,904,190 (1,229,402) (34,936)
Beginning Balance (in shares) at May. 05, 2018   176,216,000        
Stock awards 5,826   5,826      
Repurchase of common stock from employees (4,086)       (4,086)  
Repurchase of common stock from employees (in shares)   (180,000)        
Reissuance of treasury stock 13,220   (11,042) 1,932 22,330  
Reissuance of treasury stock (in shares)   1,330,000        
Net income 60,333     60,333    
Other comprehensive income, net of tax 2,290         2,290
Cash dividends and dividend equivalents($0.1375, $0.275 per share) (24,387)   532 (24,919)    
Ending Balance at Aug. 04, 2018 $ 1,260,577 $ 2,496 560,349 1,941,536 (1,211,158) (32,646)
Ending Balance (in shares) at Aug. 04, 2018 176,217,000 177,366,000        
Beginning Balance at Feb. 02, 2019 $ 1,287,555 $ 2,496 574,929 2,054,654 (1,309,692) (34,832)
Beginning Balance (in shares) at Feb. 02, 2019 172,436,000 172,436,000        
Stock awards $ 14,166   14,166      
Repurchase of common stock as part of publicly announced programs (80,000)       (80,000)  
Repurchase of common stock as part of publicly announced programs (in shares)   (4,336,000)        
Repurchase of common stock from employees (7,921)       (7,921)  
Repurchase of common stock from employees (in shares)   (421,000)        
Adoption of ASC | ASC 842 (44,435)     (44,435)    
Reissuance of treasury stock 2,141   (21,672) 1,979 21,834  
Reissuance of treasury stock (in shares)   1,283,000        
Net income 105,734     105,734    
Other comprehensive income, net of tax (1,798)         (1,798)
Cash dividends and dividend equivalents($0.1375, $0.275 per share) (46,865)   990 (47,855)    
Ending Balance at Aug. 03, 2019 $ 1,228,577 $ 2,496 568,413 2,070,077 (1,375,779) (36,630)
Ending Balance (in shares) at Aug. 03, 2019 168,962,000 168,962,000        
Beginning Balance at May. 04, 2019 $ 1,241,751 $ 2,496 570,443 2,028,627 (1,324,461) (35,354)
Beginning Balance (in shares) at May. 04, 2019   171,870,000        
Stock awards 9,207   9,207      
Repurchase of common stock as part of publicly announced programs (60,000)       (60,000)  
Repurchase of common stock as part of publicly announced programs (in shares)   (3,425,000)        
Repurchase of common stock from employees (4,423)       (4,423)  
Repurchase of common stock from employees (in shares)   (252,000)        
Reissuance of treasury stock 1,569   (11,797) 261 13,105  
Reissuance of treasury stock (in shares)   769,000        
Net income 64,981     64,981    
Other comprehensive income, net of tax (1,276)         (1,276)
Cash dividends and dividend equivalents($0.1375, $0.275 per share) (23,232)   560 (23,792)    
Ending Balance at Aug. 03, 2019 $ 1,228,577 $ 2,496 $ 568,413 $ 2,070,077 $ (1,375,779) $ (36,630)
Ending Balance (in shares) at Aug. 03, 2019 168,962,000 168,962,000        
v3.19.2
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended 6 Months Ended
Aug. 03, 2019
Aug. 04, 2018
Aug. 03, 2019
Aug. 04, 2018
Statement Of Stockholders Equity [Abstract]        
Cash dividends and dividend equivalents, Per share $ 0.1375 $ 0.1375 $ 0.275 $ 0.275
v3.19.2
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Aug. 03, 2019
Aug. 04, 2018
Operating activities:    
Net income $ 105,734 $ 100,262
Adjustments to reconcile net income to net cash from operating activities:    
Depreciation and amortization 90,787 85,745
Share-based compensation 14,298 11,731
Deferred income taxes 11,823 (2,669)
Changes in assets and liabilities:    
Merchandise inventory (110,768) (69,570)
Operating lease assets and liabilities, net (12,038)  
Other assets (27,368) (11,312)
Accounts payable 76,326 22,992
Accrued compensation and payroll taxes (27,436) (2,946)
Accrued and other liabilities (3,761) 18,164
Net cash provided by operating activities 117,597 152,397
Investing activities:    
Capital expenditures for property and equipment (91,793) (101,360)
Purchase of available-for-sale investments (50,000) (40,000)
Sale of available-for-sale investments 92,135  
Other investing activities (1,201) (428)
Net cash used for investing activities (50,859) (141,788)
Financing activities:    
Repurchase of common stock as part of publicly announced programs (80,000) (44,913)
Repurchase of common stock from employees (7,921) (18,299)
Net proceeds from stock options exercised 2,119 15,496
Cash dividends paid (46,865) (48,612)
Other financing activities (108) (4,556)
Net cash used for financing activities (132,775) (100,884)
Effect of exchange rates changes on cash (127) (16)
Net change in cash and cash equivalents (66,164) (90,291)
Cash and cash equivalents - beginning of period 333,330 413,613
Cash and cash equivalents - end of period $ 267,166 $ 323,322
v3.19.2
Interim Financial Statements
6 Months Ended
Aug. 03, 2019
Accounting Policies [Abstract]  
Interim Financial Statements

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at August 3, 2019 and August 4, 2018 and for the 13 and 26 week periods ended August 3, 2019 and August 4, 2018 have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) 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 GAAP for complete financial statements. 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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2019 (the “Fiscal 2018 Form 10-K”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the footnotes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

As used in this report, all references to “we,” “our” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle,” “AE” and the “AE Brand” refer to our American Eagle stores. “Aerie” refers to our Aerie® by American Eagle® stores. “AEO Direct” refers to our e-commerce operations, www.ae.com and www.aerie.com.  “Tailgate” refers to our Tailgate brand of vintage, sports- inspired apparel.  “Todd Snyder” refers to our Todd Snyder New York premium menswear brand.

Our business is affected by the pattern of seasonality common to most retail apparel businesses.  Historically, a large portion of total net revenue and operating income occurs in the third and fourth fiscal quarters, reflecting the increased demand during the back-to-school and year-end holiday selling seasons, respectively.  The results for the current and prior periods are not necessarily indicative of future financial results.

 

v3.19.2
Summary of Significant Accounting Policies
6 Months Ended
Aug. 03, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
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 August 3, 2019, and for all periods presented, the Company operated in one reportable segment.

Fiscal Year

Our fiscal year is a 52- or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2019” refers to the 52-week period that will end on February 1, 2020.  “Fiscal 2018” refers to the 52-week period ended February 2, 2019.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our 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 the Company’s estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), by issuing Accounting Standards Update (“ASU”) No. 2016-02. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

 

The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

The Company adopted ASU 2016-02 and its subsequent amendments effective February 3, 2019. Financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before February 3, 2019.  The Company elected the new standard’s package of practical expedients, which permits the Company to maintain prior conclusions about lease identification, lease classification, and initial direct costs. The Company elected to use the go-forward practical expedient to not separate lease and non-lease components for all of our leases. The Company also elected to use the short-term lease recognition exemption for all leases that qualify.

 

Upon adoption, the Company:

 

Recognized lease liabilities and right-of-use assets of $1.6 billion, for the present value of the remaining minimum rental payments on existing operating leases (including consideration related to non-lease components due to the related practical expedient).

Recognized a transition adjustment of $44.4 million (net of tax effects of $15.0 million) to beginning retained earnings related to the impairment of newly recognized right-of-use assets related to store assets that were impaired prior to the date of adoption.

Reclassified $82.9 million of straight-line deferred rent, $55.0 million of deferred lease credits, and $40.4 million of prepaid rent to the ROU asset. Combined with the impairment discussed above, these reclassifications reduced the net ROU asset to $1.4 billion. Corresponding amounts were not reclassified in prior periods as those prior periods are presented under ASC 840, Leases.

 

Refer to Note 9 to the Consolidated Financial Statements for information regarding leases.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (“ASU 2018-02”). This guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019. The adoption did not have a material impact on our Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04)”.  This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized.  The Company adopted ASU 2017-04 on February 3, 2019. The adoption did not have an impact on our Consolidated Financial Statements, as no goodwill was determined to be impaired during the 26 weeks ended August 3, 2019.

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (our reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates 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.

Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

As of both August 3, 2019 and August 4, 2018, short-term investments classified as available-for-sale included certificates of deposit with a maturity of greater than three months, but less than one year.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and short-term investments.

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 when control of the merchandise has transferred 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.

Revenue Recognition

In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers (“ASC 606”), a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASC 606 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASC 606 on February 4, 2018.  Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.  The impact was the result of accounting for customer loyalty programs using a relative stand-alone selling price method versus incremental cost method.  The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606. Refer to the Customer Loyalty Program caption below for additional information.

 

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the 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 promotional price reductions. 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.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, 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 license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee.  This revenue is recorded as a component of total net revenue when earned and collection is probable.

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

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 3,

 

 

August 4,

 

 

August 3,

 

 

August 4,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Men’s apparel and accessories

 

 

28

%

 

 

30

%

 

 

28

%

 

 

30

%

Women’s apparel and accessories (excluding Aerie)

 

 

53

%

 

 

54

%

 

 

54

%

 

 

54

%

Aerie

 

 

19

%

 

 

16

%

 

 

18

%

 

 

16

%

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

The following table disaggregates the Company’s Total Net Revenue by geography:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(In thousands)

 

August 3,

2019

 

 

August 4,

2018

 

 

August 3,

2019

 

 

August 4,

2018

 

Total net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

869,001

 

 

$

835,692

 

 

$

1,642,482

 

 

$

1,550,650

 

Foreign (1)

 

 

171,878

 

 

 

129,161

 

 

 

284,687

 

 

 

237,164

 

Total net revenue

 

$

1,040,879

 

 

$

964,853

 

 

$

1,927,169

 

 

$

1,787,814

 

 

(1)

Amounts represent sales from American Eagle and Aerie international retail stores, e-commerce sales that are billed and/or shipped to foreign countries, and international franchise royalty revenue.

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.

Design costs are related to the Company's Design Center operations and include compensation, travel and entertainment, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold.

Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel and entertainment 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. 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.  Additionally, selling, general and administrative expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations.

Other Income, Net

Other income, net consists primarily of foreign currency transaction gain/loss, interest income/expense and realized investment gains/losses. 

  

Property and Equipment

Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, with depreciation computed utilizing the straight-line method over the asset’s estimated useful life. 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

Information technology

 

5 years

3-5 years

 

As of August 3, 2019, the weighted average remaining useful life of our assets was approximately 8 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), 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, for stores that have been open for a period of time sufficient to reach maturity.  Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded. No long-lived asset impairment charges were recorded during the 13 or 26 weeks ended August 3, 2019 or August 4, 2018.

Refer to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment.

Intangible Assets including Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate and Todd Snyder brands.  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, 2019.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.  

Definite-lived 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 definite-lived intangible assets, which consists primarily of trademark assets, are generally amortized over 15 to 25 years.

The Company evaluates definite-lived 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 is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No definite-lived intangible asset impairment charges were recorded during the 13 or 26 weeks ended August 3, 2019 or August 4, 2018.

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding intangible assets.

Gift Cards

Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance, 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 $1.8 million and $2.1 million of revenue related to gift card breakage during the 13 weeks ended August 3, 2019 and August 4, 2018, respectively.   During the 26 weeks ended August 3, 2019 and August 4, 2018, the Company recorded $3.9 million and $4.6 million, respectively, of revenue related to gift card breakage.   

 

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 an adjustment to the operating lease ROU asset at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized as part of the single lease cost over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the landlord.

 

Co-branded Credit Card

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AE and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (“the Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured.  This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings. The adoption of ASC 606 did not have an impact of the Company’s accounting for the co-branded credit card.

For further information on the Company’s loyalty program, refer to the Customer Loyalty Program caption below.

Customer Loyalty Program

In 2017, the Company launched a new, digitized loyalty program called AEO ConnectedTM (the “Program”).  This Program integrates the credit card rewards program and the AEREWARDSÒ loyalty program into one combined customer offering.  Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds.  Customers earn rewards in the form of discount savings certificates. Rewards earned are valid through the stated expiration date, which is 45 days from the issuance date of the reward. Rewards not redeemed during the 45-day redemption period are forfeited.  Additional rewards are also given for key items such as jeans and bras. 

Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASC 606.  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, using the relative stand-alone selling price method.  Additionally, reward points earned using the co-branded credit card on non-AE or Aerie purchases are accounted for in accordance with ASC 606.  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.   

 

Sales Return Reserve

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.  

The presentation on a gross basis consists of a separate right of return asset and liability.  These amounts are recorded within (i) prepaid expenses and other and (ii) other current liabilities and accrued expenses, respectively, on the Consolidated Balance Sheets.

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 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, requires management to make estimates and assumptions. The Company believes that its estimates and assumptions 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.

Refer to Note 11 to the Consolidated Financial Statements for additional information regarding income taxes.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified two operating segments (American Eagle Brand and Aerie Brand) that reflect the basis used internally to review performance and allocate resources. Both operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.  

 

v3.19.2
Cash and Cash Equivalents and Short-term Investments
6 Months Ended
Aug. 03, 2019
Cash And Cash Equivalents [Abstract]  
Cash and Cash Equivalents and Short-term Investments

3.  Cash and Cash Equivalents and Short-term Investments

The following table summarizes the fair market values for the Company’s cash and short-term investments, which are recorded on the Consolidated Balance Sheets:

 

(In thousands)

 

August 3,

2019

 

 

February 2,

2019

 

 

August 4,

2018

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

144,241

 

 

$

108,216

 

 

$

184,280

 

Interest bearing deposits

 

 

122,925

 

 

 

165,274

 

 

 

72,886

 

Commercial paper

 

 

 

 

 

59,840

 

 

 

66,156

 

Total cash and cash equivalents

 

$

267,166

 

 

$

333,330

 

 

$

323,322

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

50,000

 

 

 

70,000

 

 

 

40,000

 

Commercial paper

 

 

 

 

 

22,135

 

 

 

 

Total short-term investments

 

 

50,000

 

 

 

92,135

 

 

 

40,000

 

Total

 

$

317,166

 

 

$

425,465

 

 

$

363,322

 

 

v3.19.2
Fair Value Measurements
6 Months Ended
Aug. 03, 2019
Fair Value Disclosures [Abstract]  
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 a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include:

Level 1 — Quoted prices in active markets.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s cash equivalents and short-term investments are Level 1 financial assets and are measured at fair value on a recurring basis, for all periods presented.  Refer to Note 3 to the Consolidated Financial Statements for additional information regarding cash equivalents and short-term investments.

During the 13 and 26 weeks ended August 3, 2019 and August 4, 2018, we did not have any financial instruments that required other fair value measurements.  

 

v3.19.2
Earnings per Share
6 Months Ended
Aug. 03, 2019
Earnings Per Share [Abstract]  
Earnings per Share

5.  Earnings per Share

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

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 3,

 

 

August 4,

 

 

August 3,

 

 

August 4,

 

(In thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

170,756

 

 

 

177,249

 

 

 

172,291

 

 

 

177,329

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

1,025

 

 

 

1,256

 

 

 

1,410

 

 

 

1,401

 

Diluted number of common shares outstanding

 

 

171,781

 

 

 

178,505

 

 

 

173,701

 

 

 

178,730

 

Anti-dilutive shares

 

 

768

 

 

 

1,418

 

 

 

434

 

 

 

1,421

 

 

Dilutive and anti-dilutive shares relate to share-based compensation.  Refer to Note 10 to the Consolidated Financial Statements for additional information regarding share-based compensation.

v3.19.2
Property and Equipment
6 Months Ended
Aug. 03, 2019
Property Plant And Equipment [Abstract]  
Property and Equipment

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

August 3,

 

 

February 2,

 

 

August 4,

 

(In thousands)

 

2019

 

 

2019

 

 

2018

 

Property and equipment, at cost

 

$

2,271,371

 

 

$

2,180,850

 

 

$

2,096,940

 

Less:  Accumulated depreciation and impairment

 

 

(1,517,340

)

 

 

(1,438,701

)

 

 

(1,364,590

)

Property and equipment, net

 

$

754,031

 

 

$

742,149

 

 

$

732,350

 

 

v3.19.2
Intangible Assets, including Goodwill
6 Months Ended
Aug. 03, 2019
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets, including Goodwill

7.  Intangible Assets, including Goodwill

Intangible assets consist of the following:

 

 

 

August 3,

 

 

February 2,

 

 

August 4,

 

(In thousands)

 

2019

 

 

2019

 

 

2018

 

Goodwill

 

$

14,875

 

 

$

14,899

 

 

$

14,926

 

Trademarks, at cost

 

 

71,226

 

 

 

70,994

 

 

 

70,750

 

Less:  Accumulated amortization

 

 

(29,775

)

 

 

(27,726

)

 

 

(25,686

)

Intangible assets, net

 

$

56,326

 

 

$

58,167

 

 

$

59,990

 

 

v3.19.2
Other Credit Arrangements
6 Months Ended
Aug. 03, 2019
Debt Disclosure [Abstract]  
Other Credit Arrangements

8.  Other Credit Arrangements

In January 2019, the Company entered into an amended and restated Credit Agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment.

All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by a first-priority security interest in certain working capital assets of the borrowers and guarantors, consisting primarily of cash, receivables, inventory and certain other assets and have been further secured by first-priority mortgages on certain real property.

v3.19.2
Leases
6 Months Ended
Aug. 03, 2019
Leases [Abstract]  
Leases

9.  Leases

The Company leases all store premises, some of its office space and certain information technology and office equipment. These leases are generally classified as operating leases.

 

Store leases generally provide for a combination of base rentals and contingent rent based on store sales. Additionally, most leases include landlord incentives such as construction allowances and rent holidays. The Company is typically responsible for tenant occupancy costs including maintenance costs, common area charges, real estate taxes, and certain other expenses.

 

Most leases include one or more options to renew. The exercise of lease renewal options is at the Company’s discretion and is not reasonably certain at lease commencement. When measuring ROU assets and lease liabilities after the date of adoption of ASC 842, the Company only includes cash flows related to options to extend or terminate leases once those options are executed.

 

Some leases have variable payments. However, because they are not based on an index or rate, they are not included in the measurement of ROU assets and lease liabilities.

 

The Company uses its incremental borrowing rate as a basis for the discount rates used in the measurement of ROU assets and lease liabilities.

 

For leases that qualify for the short-term lease exemption, the Company does not record a lease liability or ROU asset. Short-term lease payments are recognized on a straight-line basis over the lease term of 12 months or less.

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

Aug 3, 2019

 

 

Aug 3, 2019

 

(In thousands)

 

 

 

 

 

 

 

 

Lease costs

 

 

 

 

 

 

 

 

Operating lease costs

 

$

85,519

 

 

$

168,081

 

Variable lease costs

 

 

24,899

 

 

 

48,455

 

Short-term leases and other lease costs

 

 

11,057

 

 

 

23,901

 

Total lease costs

 

$

121,475

 

 

$

240,437

 

 

 

 

 

 

 

 

 

 

Other information

 

 

 

 

 

 

 

 

Operating cash flows for operating leases

 

$

(80,397

)

 

$

(153,403

)

New ROU asset for operating leases entered into

   during the period

 

$

99,830

 

 

$

155,927

 

 

Lease term and discount rate

 

Aug 3, 2019

 

Weighted-average remaining lease term - operating leases

 

6.4 years

 

Weighted-average discount rate - operating leases

 

5.1%

 

 

The table below is a maturity analysis of the operating leases in effect as of the end of the period.  Undiscounted cash flows for finance leases and short-term leases are not material for the periods reported and are excluded from the table below:

 

 

 

Undiscounted

cash flows

 

 

 

Aug 3, 2019

 

(In thousands)

 

 

 

 

Fiscal years:

 

 

 

 

2019 (remaining 26 weeks)

 

$

146,995

 

2020

 

 

353,668

 

2021

 

 

312,430

 

2022

 

 

261,947

 

2023

 

 

240,622

 

Thereafter

 

 

608,750

 

Total undiscounted cash flows

 

$

1,924,412

 

Less: discount on lease liability

 

 

(306,571

)

Total lease liability

 

$

1,617,841

 

 

v3.19.2
Share-Based Compensation
6 Months Ended
Aug. 03, 2019
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-Based Compensation

10.  Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies 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 the 13 and 26 weeks ended August 3, 2019 and was $9.3 million ($7.0 million, net of tax) and $14.3 million ($10.9 million, net of tax), respectively, and for the 13 and 26 weeks ended August 4, 2018 was $6.0 million ($4.7 million, net of tax) and $11.7 million ($9.0 million, net of tax), respectively.    

Stock Option Grants

The Company grants both time-based and performance-based stock options. A summary of the Company’s stock option activity for the 26 weeks ended August 3, 2019 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - February 2, 2019

 

 

1,912

 

 

$

16.75

 

 

 

 

 

 

 

 

 

Granted

 

 

807

 

 

$

21.26

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(124

)

 

$

16.06

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(11

)

 

$

19.89

 

 

 

 

 

 

 

 

 

Outstanding - August 3, 2019

 

 

2,584

 

 

$

18.18

 

 

 

5.4

 

 

$

1,446

 

Vested and expected to vest - August 3, 2019

 

 

2,279

 

 

$

18.25

 

 

 

5.4

 

 

$

510

 

Exercisable - August 3, 2019 (2)

 

 

997

 

 

$

16.10

 

 

 

4.5

 

 

$

910

 

 

(1)

Options exercised during the 26 weeks ended August 3, 2019 had exercise prices ranging from $14.59 to $23.53.     

(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 on August 3, 2019.

Cash received from the exercise of stock options was $2.1 million and $15.5 million for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. The actual tax benefit realized from stock option exercises totaled $0.1 million for the 26 weeks ended August 3, 2019 and $0.9 million for the 26 weeks ended August 4, 2018.

As of August 3, 2019, there was $7.6 million of unrecognized compensation expense for stock option awards that is expected to be recognized over a weighted average period of 2.2 years.  

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:

 

 

 

26 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 3,

 

 

August 4,

 

Black-Scholes Option Valuation Assumptions

 

2019

 

 

2018

 

Risk-free interest rate (1)

 

 

2.2

%

 

 

2.6

%

Dividend yield

 

 

2.4

%

 

 

2.5

%

Volatility factor (2)

 

 

38.2

%

 

 

39.5

%

Weighted-average expected term (3)

 

4.4 years

 

 

4.5 years

 

 

(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 terms were determined based on historical experience.            

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units.  These awards vest over three years.  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 Company’s restricted stock activity is presented in the following table:

 

 

 

Time-Based Restricted

Stock Units

 

 

Performance-Based Restricted

Stock Units

 

 

 

26 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 3, 2019

 

 

August 3, 2019

 

(Shares in thousands)

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

Nonvested - February 2, 2019

 

 

1,999

 

 

$

18.00

 

 

 

1,900

 

 

$

17.44

 

Granted

 

 

1,141

 

 

$

17.54

 

 

 

591

 

 

$

19.87

 

Vested

 

 

(906

)

 

$

16.06

 

 

 

(245

)

 

$

15.99

 

Cancelled

 

 

(47

)

 

$

16.82

 

 

 

(346

)

 

$

16.00

 

Nonvested - August 3, 2019

 

 

2,187

 

 

$

18.58

 

 

 

1,900

 

 

$

19.14

 

 

As of August 3, 2019, there was $32.0 million of unrecognized compensation expense related to non-vested, time-based restricted stock unit awards that is expected to be recognized over a weighted-average period of 2.4 years. Based on current probable performance, there is $7.3 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement of performance goals is probable over a one to three year period.

As of August 3, 2019, the Company had 4.0 million shares available for all equity grants.

 

v3.19.2
Income Taxes
6 Months Ended
Aug. 03, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

11.  Income Taxes

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks ended August 3, 2019 was 24.4% compared to 21.9% for the 13 weeks ended August 4, 2018.  The effective income tax rate for the 26 weeks ended August 3, 2019 was 23.3% compared to 21.9% for the 26 weeks ended August 4, 2018.   The increase in the effective income tax rate this year is primarily due to changes in unrecognized tax benefits and less favorable excess tax benefits from share-based payments in accordance with ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  

The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Unrecognized tax benefits decreased by approximately $2.0 million during the 13 weeks ended August 3, 2019.  Over the next twelve months, the Company believes that it is reasonably possible that unrecognized tax benefits may decrease by approximately $2.5 million due to settlements, expiration of statute of limitations or other changes in unrecognized tax benefits.

 

v3.19.2
Legal Proceedings
6 Months Ended
Aug. 03, 2019
Commitments And Contingencies Disclosure [Abstract]  
Legal Proceedings

12.  Legal Proceedings

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.  However, our assessment of any litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.

v3.19.2
Restructuring Charges
6 Months Ended
Aug. 03, 2019
Restructuring And Related Activities [Abstract]  
Restructuring Charges

13.  Restructuring Charges

 

During the 13 and 26 weeks ended August 3, 2019, the Company recorded pre-tax restructuring charges of $2.7 million and $4.3 million, respectively.  These amounts consist primarily of corporate severance charges and closure costs for our company-owned and operated stores in China. 

 

During the 26 weeks ended August 4, 2018, the Company recorded pre-tax restructuring charges of $1.6 million. These amounts consist primarily of charges for corporate severance costs.

 

The Company may incur additional charges for corporate and international restructuring in Fiscal 2019. The magnitude is dependent on a number of factors, including negotiating third-party agreements, adherence to notification requirements and local laws.

 

 

A rollforward of the liabilities recognized in the Consolidated Balance Sheet is in the table below.  The accrued liability as of February 2, 2019 relates to previous restructuring activities disclosed in the Company’s Fiscal 2018 Form 10-K, which remained unpaid at the beginning of Fiscal 2019. As of August 3, 2019, $2.3 million of accrued liability is included in accrued compensation and $1.8 million is included in other current liabilities on the consolidated balance sheet.

 

 

 

26 Weeks Ended

 

 

 

August 3,

 

(In thousands)

 

2019

 

Accrued liability as of February 2, 2019

 

$

6,629

 

Add: Costs incurred, excluding non-cash charges

 

 

4,272

 

Less:  Cash payments and adjustments

 

 

(6,835

)

 

 

 

 

 

Accrued liability as of August 3, 2019

 

$

4,066

 

v3.19.2
Summary of Significant Accounting Policies (Policies)
6 Months Ended
Aug. 03, 2019
Accounting Policies [Abstract]  
Principles of Consolidation

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 August 3, 2019, and for all periods presented, the Company operated in one reportable segment.

Fiscal Year

Fiscal Year

Our fiscal year is a 52- or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2019” refers to the 52-week period that will end on February 1, 2020.  “Fiscal 2018” refers to the 52-week period ended February 2, 2019.

Estimates

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our 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 the Company’s estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), by issuing Accounting Standards Update (“ASU”) No. 2016-02. ASC 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

 

The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

 

The Company adopted ASU 2016-02 and its subsequent amendments effective February 3, 2019. Financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before February 3, 2019.  The Company elected the new standard’s package of practical expedients, which permits the Company to maintain prior conclusions about lease identification, lease classification, and initial direct costs. The Company elected to use the go-forward practical expedient to not separate lease and non-lease components for all of our leases. The Company also elected to use the short-term lease recognition exemption for all leases that qualify.

 

Upon adoption, the Company:

 

Recognized lease liabilities and right-of-use assets of $1.6 billion, for the present value of the remaining minimum rental payments on existing operating leases (including consideration related to non-lease components due to the related practical expedient).

Recognized a transition adjustment of $44.4 million (net of tax effects of $15.0 million) to beginning retained earnings related to the impairment of newly recognized right-of-use assets related to store assets that were impaired prior to the date of adoption.

Reclassified $82.9 million of straight-line deferred rent, $55.0 million of deferred lease credits, and $40.4 million of prepaid rent to the ROU asset. Combined with the impairment discussed above, these reclassifications reduced the net ROU asset to $1.4 billion. Corresponding amounts were not reclassified in prior periods as those prior periods are presented under ASC 840, Leases.

 

Refer to Note 9 to the Consolidated Financial Statements for information regarding leases.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (“ASU 2018-02”). This guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019. The adoption did not have a material impact on our Consolidated Financial Statements.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04)”.  This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized.  The Company adopted ASU 2017-04 on February 3, 2019. The adoption did not have an impact on our Consolidated Financial Statements, as no goodwill was determined to be impaired during the 26 weeks ended August 3, 2019.

Foreign Currency Translation

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (our reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates 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.

Cash and Cash Equivalents and Short-term Investments

Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.

As of both August 3, 2019 and August 4, 2018, short-term investments classified as available-for-sale included certificates of deposit with a maturity of greater than three months, but less than one year.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and short-term investments.

Merchandise Inventory

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 when control of the merchandise has transferred 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.

Revenue Recognition

Revenue Recognition

In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers (“ASC 606”), a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASC 606 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASC 606 on February 4, 2018.  Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.  The impact was the result of accounting for customer loyalty programs using a relative stand-alone selling price method versus incremental cost method.  The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606. Refer to the Customer Loyalty Program caption below for additional information.

 

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the 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 promotional price reductions. 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.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, 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 license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee.  This revenue is recorded as a component of total net revenue when earned and collection is probable.

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

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 3,

 

 

August 4,

 

 

August 3,

 

 

August 4,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Men’s apparel and accessories

 

 

28

%

 

 

30

%

 

 

28

%

 

 

30

%

Women’s apparel and accessories (excluding Aerie)

 

 

53

%

 

 

54

%

 

 

54

%

 

 

54

%

Aerie

 

 

19

%

 

 

16

%

 

 

18

%

 

 

16

%

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

 

100

%

 

The following table disaggregates the Company’s Total Net Revenue by geography:

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

(In thousands)

 

August 3,

2019

 

 

August 4,

2018

 

 

August 3,

2019

 

 

August 4,

2018

 

Total net revenue: