AMERICAN EAGLE OUTFITTERS INC, 10-K filed on 3/10/2017
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 28, 2017
Mar. 6, 2017
Jul. 30, 2016
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 28, 2017 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
AEO 
 
 
Entity Registrant Name
AMERICAN EAGLE OUTFITTERS INC 
 
 
Entity Central Index Key
0000919012 
 
 
Current Fiscal Year End Date
--01-28 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
182,221,528 
 
Entity Public Float
 
 
$ 2,983,485,568 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 28, 2017
Jan. 30, 2016
Current assets:
 
 
Cash and cash equivalents
$ 378,613 
$ 260,067 
Merchandise inventory
358,446 
305,178 
Accounts receivable
86,634 
80,912 
Prepaid expenses and other
77,536 
77,218 
Total current assets
901,229 
723,375 
Property and equipment, at cost, net of accumulated depreciation
707,797 
703,586 
Intangible assets, at cost, net of accumulated amortization
49,373 
51,832 
Goodwill
14,887 
17,186 
Deferred income taxes
49,250 
64,927 
Other assets
60,124 
51,340 
Total assets
1,782,660 
1,612,246 
Current liabilities:
 
 
Accounts payable
246,204 
182,789 
Accrued compensation and payroll taxes
54,184 
79,302 
Accrued rent
78,619 
77,482 
Accrued income and other taxes
12,220 
22,223 
Unredeemed gift cards and gift certificates
52,966 
48,274 
Current portion of deferred lease credits
12,780 
12,711 
Other liabilities and accrued expenses
36,810 
40,901 
Total current liabilities
493,783 
463,682 
Non-current liabilities:
 
 
Deferred lease credits
45,114 
50,104 
Non-current accrued income taxes
4,537 
4,566 
Other non-current liabilities
34,657 
42,518 
Total non-current liabilities
84,308 
97,188 
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; 181,886 and 180,135 shares outstanding, respectively
2,496 
2,496 
Contributed capital
603,890 
590,820 
Accumulated other comprehensive loss, net of tax
(36,462)
(29,868)
Retained earnings
1,775,775 
1,659,267 
Treasury stock, 67,680 and 69,431 shares, respectively, at cost
(1,141,130)
(1,171,339)
Total stockholders' equity
1,204,569 
1,051,376 
Total liabilities and stockholders’ equity
$ 1,782,660 
$ 1,612,246 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Statement Of Financial Position [Abstract]
 
 
 
 
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
5,000,000 
5,000,000 
Preferred stock, issued
Preferred stock, outstanding
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
$ 0.01 
Common stock, shares authorized
600,000,000 
600,000,000 
600,000,000 
600,000,000 
Common stock, shares issued
249,566,000 
249,566,000 
249,566,000 
249,566,000 
Common stock, shares outstanding
181,886,000 
180,135,000 
194,516,000 
193,149,000 
Treasury stock, shares
67,680,000 
69,431,000 
55,050,000 
 
Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Income Statement [Abstract]
 
 
 
Total net revenue
$ 3,609,865 
$ 3,521,848 
$ 3,282,867 
Cost of sales, including certain buying, occupancy and warehousing expenses
2,242,938 
2,219,114 
2,128,193 
Gross profit
1,366,927 
1,302,734 
1,154,674 
Selling, general and administrative expenses
857,562 
834,700 
806,498 
Impairment and restructuring charges
21,166 
 
51,220 
Depreciation and amortization expense
156,723 
148,156 
141,191 
Operating income
331,476 
319,878 
155,765 
Other income, net
3,786 
1,993 
3,737 
Income before income taxes
335,262 
321,871 
159,502 
Provision for income taxes
122,813 
108,580 
70,715 
Income from continuing operations
212,449 
213,291 
88,787 
Discontinued operations, net of tax
 
4,847 
(8,465)
Net income
$ 212,449 
$ 218,138 
$ 80,322 
Basic income per common share:
 
 
 
Income from continuing operations
$ 1.17 
$ 1.10 
$ 0.46 
Discontinued operations
 
$ 0.02 
$ (0.04)
Basic net income per common share
$ 1.17 
$ 1.12 
$ 0.42 
Diluted income per common share:
 
 
 
Income from continuing operations
$ 1.16 
$ 1.09 
$ 0.46 
Discontinued operations
 
$ 0.02 
$ (0.04)
Diluted net income per common share
$ 1.16 
$ 1.11 
$ 0.42 
Weighted average common shares outstanding - basic
181,429 
194,351 
194,437 
Weighted average common shares outstanding - diluted
183,835 
196,237 
195,135 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net income
$ 212,449 
$ 218,138 
$ 80,322 
Other comprehensive loss:
 
 
 
Foreign currency translation loss
(6,594)
(19,924)
(22,101)1
Other comprehensive loss
(6,594)
(19,924)
(22,101)
Comprehensive income
$ 205,855 
$ 198,214 
$ 58,221 
Consolidated Statements of Stockholders' Equity (USD $)
Total
Common Stock
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Feb. 01, 2014
$ 1,166,178,000 
$ 2,496,000 
$ 573,008,000 
$ 1,569,851,000 
$ (991,334,000)1
$ 12,157,000 
Beginning Balance (in shares) at Feb. 01, 2014
193,149,000 
193,149,000 2
 
 
 
 
Stock awards
12,372,000 
 
12,372,000 
 
 
 
Repurchase of common stock from employees (in shares)2
 
(517,000)
 
 
 
 
Repurchase of common stock from employees
(7,464,000)
 
 
 
(7,464,000)1
 
Reissuance of treasury stock (in shares)
1,884,000 
1,884,000 2
 
 
 
 
Reissuance of treasury stock
7,741,000 
 
(17,988,000)
(7,503,000)
33,232,000 1
 
Net income
80,322,000 
 
 
80,322,000 
 
 
Other comprehensive loss
(22,101,000)
 
 
 
 
(22,101,000)
Cash dividends and dividend equivalents ($0.50 per share)
(97,302,000)
 
2,283,000 
(99,585,000)
 
 
Ending Balance at Jan. 31, 2015
1,139,746,000 
2,496,000 
569,675,000 
1,543,085,000 
(965,566,000)1
(9,944,000)
Ending Balance (in shares) at Jan. 31, 2015
194,516,000 
194,516,000 2
 
 
 
 
Stock awards
31,937,000 
 
31,937,000 
 
 
 
Repurchase of common stock as part of publicly announced programs (in shares)2
 
(15,563,000)
 
 
 
 
Repurchase of common stock as part of publicly announced programs
(227,071,000)
 
 
 
(227,071,000)1
 
Repurchase of common stock from employees (in shares)2
 
(324,000)
 
 
 
 
Repurchase of common stock from employees
(5,163,000)
 
 
 
(5,163,000)1
 
Reissuance of treasury stock (in shares)
1,506,000 
1,506,000 2
 
 
 
 
Reissuance of treasury stock
10,892,000 
 
(13,237,000)
(2,332,000)
26,461,000 1
 
Net income
218,138,000 
 
 
218,138,000 
 
 
Other comprehensive loss
(19,924,000)
 
 
 
 
(19,924,000)
Cash dividends and dividend equivalents ($0.50 per share)
(97,179,000)
 
2,445,000 
(99,624,000)
 
 
Ending Balance at Jan. 30, 2016
1,051,376,000 
2,496,000 
590,820,000 
1,659,267,000 
(1,171,339,000)1
(29,868,000)
Ending Balance (in shares) at Jan. 30, 2016
180,135,000 
180,135,000 2
 
 
 
 
Stock awards
27,877,000 
 
27,877,000 
 
 
 
Repurchase of common stock from employees (in shares)2
 
(455,000)
 
 
 
 
Repurchase of common stock from employees
(7,032,000)
 
 
 
(7,032,000)1
 
Reissuance of treasury stock (in shares)
2,206,000 
2,206,000 2
 
 
 
 
Reissuance of treasury stock
17,174,000 
 
(17,247,000)
(2,821,000)
37,241,000 1
 
Net income
212,449,000 
 
 
212,449,000 
 
 
Other comprehensive loss
(6,594,000)
 
 
 
 
(6,594,000)
Cash dividends and dividend equivalents ($0.50 per share)
(90,680,000)
 
2,440,000 
(93,120,000)
 
 
Ending Balance at Jan. 28, 2017
$ 1,204,569,000 
$ 2,496,000 
$ 603,890,000 
$ 1,775,775,000 
$ (1,141,130,000)1
$ (36,462,000)
Ending Balance (in shares) at Jan. 28, 2017
181,886,000 
181,886,000 2
 
 
 
 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Statement Of Stockholders Equity [Abstract]
 
 
 
Cash dividends and dividend equivalents, Per share
$ 0.50 
$ 0.50 
$ 0.50 
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
181,886,000 
180,135,000 
194,516,000 
Common stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
5,000,000 
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Preferred stock, par value
$ 0.01 
$ 0.01 
$ 0.01 
Treasury stock, shares
67,680,000 
69,431,000 
55,050,000 
Reissuance of treasury stock, shares
2,206,000 
1,506,000 
1,884,000 
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Jan. 28, 2017
Jan. 30, 2016
Jan. 31, 2015
Operating activities:
 
 
 
Net income
$ 212,449,000 
$ 218,138,000 
$ 80,322,000 
(Gain) loss from discontinued operations, net of tax
 
(4,847,000)
8,465,000 
Income from continuing operations
212,449,000 
213,291,000 
88,787,000 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
158,174,000 
148,858,000 
142,351,000 
Share-based compensation
29,137,000 
34,977,000 
16,070,000 
Deferred income taxes
14,838,000 
4,680,000 
(2,279,000)
Foreign currency transaction (gain) loss
(835,000)
2,977,000 
(495,000)
Loss on impairment of assets
20,576,000 
33,468,000 
Gain on sale of assets
 
(9,422,000)
 
Changes in assets and liabilities:
 
 
 
Merchandise inventory
(53,613,000)
(22,259,000)
8,586,000 
Accounts receivable
(7,705,000)
(10,093,000)
3,084,000 
Prepaid expenses and other
(332,000)
(7,027,000)
14,282,000 
Other assets
(6,705,000)
(10,017,000)
6,612,000 
Accounts payable
52,347,000 
(3,189,000)
(5,280,000)
Unredeemed gift cards and gift certificates
4,465,000 
755,000 
1,238,000 
Deferred lease credits
(5,229,000)
(4,099,000)
(4,528,000)
Accrued compensation and payroll taxes
(25,809,000)
34,234,000 
20,716,000 
Accrued income and other taxes
(10,695,000)
(17,615,000)
24,826,000 
Accrued liabilities
(15,467,000)
(14,133,000)
(9,012,000)
Total adjustments
153,147,000 
128,627,000 
249,639,000 
Net cash provided by operating activities from continuing operations
365,596,000 
341,918,000 
338,426,000 
Investing activities:
 
 
 
Capital expenditures for property and equipment
(161,494,000)
(153,256,000)
(245,002,000)
Acquisitions and purchase of long-lived assets in business combination
 
(10,442,000)
 
Proceeds from sale of assets
 
12,579,000 
 
Acquisition of intangible assets
(1,528,000)
(2,382,000)
(1,264,000)
Sale of available-for-sale securities
 
 
10,002,000 
Net cash used for investing activities from continuing operations
(163,022,000)
(153,501,000)
(236,264,000)
Financing activities:
 
 
 
Payments on capital leases and other
(4,375,000)
(7,635,000)
(7,143,000)
Repurchase of common stock as part of publicly announced programs
 
(227,071,000)
 
Repurchase of common stock from employees
(7,032,000)
(5,163,000)
(7,464,000)
Net proceeds from stock options exercised
16,260,000 
7,283,000 
7,305,000 
Excess tax benefit from share-based payments
763,000 
657,000 
742,000 
Cash dividends paid
(90,680,000)
(97,237,000)
(97,224,000)
Net cash used for financing activities from continuing operations
(85,064,000)
(329,166,000)
(103,784,000)
Effect of exchange rates on cash
1,036,000 
(3,076,000)
(7,578,000)
Cash flows of discontinued operations
 
 
 
Net cash (used for) provided by operating activities
 
(6,805,000)
963,000 
Net cash (used for) provided by discontinued operations
 
(6,805,000)
963,000 
Net increase (decrease) in cash and cash equivalents
118,546,000 
(150,630,000)
(8,237,000)
Cash and cash equivalents - beginning of period
260,067,000 
410,697,000 
418,933,000 
Cash and cash equivalents - end of period
$ 378,613,000 
$ 260,067,000 
$ 410,697,000 
Business Operations
Business Operations

1.  Business Operations

American Eagle Outfitters, Inc. (the “Company” or “AEO, Inc.”), a Delaware corporation, operates under the American Eagle Outfitters® (“AEO”) and Aerie® by American Eagle Outfitters® (“Aerie”) brands.  

Founded in 1977, AEO, Inc. is a leading multi-brand specialty retailer that operates more than 1,000 retail stores in the U.S. and internationally, online at www.ae.com and www.aerie.com and international store locations managed by third-party operators. Through its portfolio of brands, the Company offers high quality, on-trend clothing, accessories and personal care products at affordable prices. The Company’s online business, AEO Direct, ships to 81 countries worldwide.

In Fiscal 2015 , AEO Inc. acquired Tailgate Clothing Company (“Tailgate”), which owns and operates Tailgate, a vintage, sports-inspired apparel brand with a college town store concept, and Todd Snyder New York, a premium menswear brand.  

Merchandise Mix

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

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Men’s apparel and accessories

 

 

35

%

 

 

37

%

 

 

39

%

Women’s apparel and accessories (excluding Aerie)

 

 

54

%

 

 

54

%

 

 

53

%

Aerie

 

 

11

%

 

 

9

%

 

 

8

%

Total

 

 

100

%

 

 

100

%

 

 

100

%

 

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At January 28, 2017, the Company operated in one reportable segment.

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

Fiscal Year

Our fiscal year ends on the Saturday nearest to January 31. As used herein, “Fiscal 2017” refers to the 53-week period ending February 3, 2018. “Fiscal 2016”, “Fiscal 2015” and “Fiscal 2014” refer to the 52-week periods ended January 28, 2017, January 30, 2016 and January 31, 2015, respectively.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is 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. Originally, ASU 2014-09 was effective for annual reporting periods beginning after December 15, 2016. In July 2015, the FASB voted to approve amendments deferring the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017. Accordingly, the Company will adopt ASU 2014-09 on February 4, 2018. The Company does not expect a material impact of the adoption of this guidance on the Company’s consolidated financial condition, results of operations or cash flows.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The ASU may be applied prospectively or retrospectively. The Company adopted the ASU on January 30, 2016, applied retrospectively.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016–02”) which replaces the existing guidance in ASC 840, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.   The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and requires retrospective application. The Company will adopt in Fiscal 2019 and is currently evaluating the impact of ASU 2016-02 to its Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) (“ASU 2016-09”).  ASU 2016-09 makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies.  ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards.  The standard is effective for interim and annual reporting periods beginnings after December 15, 2016.  The Company will adopt in Fiscal 2017 and does not expect a material impact of the adoption of this guidance on the Company’s consolidated financial statements.

Foreign Currency Translation

In accordance with Accounting Standards Codification (“ASC”) 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into United States dollars (“USD”) (the 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 (refer to Note 11 to the Consolidated Financial Statements).

Cash and Cash Equivalents

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

As of January 28, 2017 and January 30, 2016, the Company held no short-term investments.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and 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 at the time which both title and risk of loss for the merchandise transfers to the Company.

The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Property and Equipment

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:

 

Buildings

25 years

Leasehold improvements

Lesser of 10 years or the term of the lease

Fixtures and equipment

5 years

 

In accordance with ASC 360, Property, Plant, and Equipment, the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open for a period of time sufficient to reach maturity. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on impairment of assets. During Fiscal 2015, the Company recorded no asset impairment charges.

During Fiscal 2016, the Company recorded pre-tax asset impairment charges of $20.5 million that includes $7.2 million for the impairment of all Company owned retail stores in the United Kingdom, Hong Kong and China.  This amount is included within impairment and restructuring charges in the Consolidated Statements of Operations. These charges are the result of business performance and exploring an initiative to convert these markets to licensed partnerships.  Retail stores in these markets no longer are able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores’ assets. Additionally, the Company recorded $10.8 million of impairment charges related to non-store corporate assets that support the United Kingdom, Hong Kong and China Company owned retail store and e-commerce operations and $2.5 million of goodwill impairment for the China and Hong Kong retail operations.

During Fiscal 2014, the Company recorded pre-tax asset impairment charges of $33.5 million that includes $25.1 million for the impairment of 79 retail stores recorded as a loss on impairment of assets in the Consolidated Statements of Operations. Based on the Company’s evaluation of current and future projected performance, it was determined that these stores would not be able to generate sufficient cash flow over the expected remaining lease term to recover the carrying value of the respective stores’ assets. Additionally, the Company recorded $8.4 million of impairment charges related to corporate assets.      

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

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding property and equipment and Note 16 for additional information regarding impairment charges.

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canadian, Hong Kong and China businesses and the recent acquisition of Tailgate and Todd Snyder. In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 28, 2017.  During Fiscal 2016, the Company concluded the goodwill was impaired for the Hong Kong and China businesses, resulting in a $2.5 million charge included within impairment and restructuring charges in the Consolidated Statements of Operations as a result of the Company’s plans to convert these markets to licensed partnerships.  All other goodwill for the Company was not impaired as a result of the annual goodwill impairment test.

Refer to Note 17 to the Consolidated Financial Statements for additional information on the acquisition of Tailgate.

Intangible Assets

Intangible assets are recorded on the basis of cost with amortization computed utilizing the straight-line method over the assets’ estimated useful lives.  The Company’s intangible assets, which primarily include trademark assets, are amortized over 15 to 25 years.

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows are less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded for all periods presented.

Refer to Note 8 to the Consolidated Financial Statements for additional information regarding intangible assets.

Deferred Lease Credits

Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the landlord.

Self-Insurance Liability

The Company is self-insured for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped through the use of stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Co-branded Credit Card and Customer Loyalty Program

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) 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 additional funding from the bank based on the Agreement and card activity. We recognize revenue for the additional 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.

Once a customer is approved to receive the AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in the credit card rewards program. Customers who make purchases at AEO and Aerie earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance.

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

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

Income Taxes

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

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

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

Revenue Recognition

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

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

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Beginning balance

 

$

3,349

 

 

$

3,249

 

 

$

2,205

 

Returns

 

 

(97,126

)

 

 

(90,719

)

 

 

(79,813

)

Provisions

 

 

97,416

 

 

 

90,819

 

 

 

80,857

 

Ending balance

 

$

3,639

 

 

$

3,349

 

 

$

3,249

 

 

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

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

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

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively "merchandise costs") and buying, occupancy and warehousing costs.

Design costs are related to the Company's Design Center operations and include compensation and employee benefit expenses, including salaries, incentives, travel, supplies and samples for our design teams, as well as rent and depreciation for the Company’s 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 for the Company’s buyers and certain senior merchandising executives; rent and utilities related to the Company’s stores, corporate headquarters, distribution centers and other office space; freight from the Company’s distribution centers to the stores; compensation and supplies for the Company’s 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 the Company’s 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 the Company’s design, sourcing and importing teams, the Company’s buyers and the Company’s distribution centers as these amounts are recorded in cost of sales.

Advertising Costs

Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed when the marketing campaign commences. As of January 28, 2017 and January 30, 2016, the Company had prepaid advertising expense of $8.4 million and $6.1 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $124.5 million, $104.1 million and $94.2 million in advertising expense during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.

Store Pre-Opening Costs

Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are expensed as incurred.

Other Income, Net

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

Gift Cards

The value of a gift card is recorded as a current liability upon purchase and revenue is recognized when the gift card is redeemed for merchandise.  The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded gift card breakage of $9.1 million, $8.2 million and $7.0 million during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively.

Legal Proceedings and Claims

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

Supplemental Disclosures of Cash Flow Information

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

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Cash paid during the periods for:

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

$

126,592

 

 

$

116,765

 

 

$

38,501

 

Interest

 

$

1,155

 

 

$

1,173

 

 

$

638

 

 

Segment Information

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

The following tables present summarized geographical information:

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Total net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

3,160,699

 

 

$

3,091,205

 

 

$

2,895,310

 

Foreign (1)

 

 

449,166

 

 

 

430,643

 

 

 

387,557

 

Total net revenue

 

$

3,609,865

 

 

$

3,521,848

 

 

$

3,282,867

 

 

(1)

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

 

 

 

January 28,

 

 

January 30,

 

(In thousands)

 

2017

 

 

2016

 

Long-lived assets, net:

 

 

 

 

 

 

 

 

United States

 

$

693,061

 

 

$

692,252

 

Foreign

 

 

78,996

 

 

 

80,352

 

Total long-lived assets, net

 

$

772,057

 

 

$

772,604

 

 

Cash and Cash Equivalents
Cash and Cash Equivalents

3.  Cash and Cash Equivalents

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

 

(In thousands)

 

January 28,

2017

 

 

January 30,

2016

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Cash

 

$

265,332

 

 

$

205,359

 

Interest bearing deposits

 

 

83,281

 

 

 

54,708

 

Commercial paper

 

 

30,000

 

 

 

 

Total cash and cash equivalents

 

$

378,613

 

 

$

260,067

 

 

 

 

Fair Value Measurements
Fair Value Measurements

4.  Fair Value Measurements

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

Financial Instruments

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

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

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

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

As of January 28, 2017 and January 30, 2016, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and investments.

In accordance with ASC 820, the following tables represent the fair value hierarchy for the Company’s financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of January 28, 2017 and January 30, 2016:

 

 

Fair Value Measurements at January 28, 2017

 

(In thousands)

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

265,332

 

 

$

265,332

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

83,281

 

 

 

83,281

 

 

 

 

 

 

 

Commercial paper

 

30,000

 

 

 

30,000

 

 

 

 

 

 

 

Total cash and cash equivalents

$

378,613

 

 

 

378,613

 

 

 

 

 

 

 

Percent to total

 

100

%

 

 

100

%

 

 

 

 

 

 

 

 

Fair Value Measurements at January 30, 2016

 

(In thousands)

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

205,359

 

 

$

205,359

 

 

$

 

 

$

 

Interest bearing deposits

 

54,708

 

 

 

54,708

 

 

 

 

 

 

 

Total cash and cash equivalents

$

260,067

 

 

$

260,067

 

 

$

 

 

$

 

Percent to total

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at January 28, 2017 or January 30, 2016.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis.  However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value.  During Fiscal 2016, the Company concluded the goodwill was impaired for the Hong Kong and China businesses, resulting in a $2.5 million charge included within impairment and restructuring charges in the Consolidated Statements of Operations as a result of the performance of those businesses and the Company’s exploration of alternatives, including the licensing of these markets to third-party operators.  All other goodwill for the Company was not impaired as a result of the annual goodwill impairment test.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. During Fiscal 2016 and Fiscal 2014, certain long-lived assets related to the Company’s retail stores, goodwill and corporate assets were determined to be unable to recover their respective carrying values and were written down to their fair value, resulting in a loss of $20.5 million and $33.5 million, respectively, which is recorded within impairment and restructuring charges within the Consolidated Statements of Operations. The fair value of the impaired assets after the recorded loss is an immaterial amount.

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

Earnings per Share
Earnings per Share

5.  Earnings per Share

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

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands, except per share amounts)

 

2017

 

 

2016

 

 

2015

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

181,429

 

 

 

194,351

 

 

 

194,437

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

2,406

 

 

 

1,886

 

 

 

698

 

Dilutive number of common shares outstanding

 

 

183,835

 

 

 

196,237

 

 

 

195,135

 

 

Stock option awards to purchase approximately 2.2 million, 13,000 and 2.3 million shares of common stock during the Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

Additionally, approximately 0.1 million, 0.7 million, and 1.9 million of performance-based restricted stock awards for Fiscal 2016, Fiscal 2015, and Fiscal 2014, respectively, were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established performance goals.  

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

Accounts Receivable
Accounts Receivable

6.  Accounts Receivable

Accounts receivable are comprised of the following:

 

 

 

January 28,

 

 

January 30,

 

(In thousands)

 

2017

 

 

2016

 

Franchise and license receivable

 

$

35,983

 

 

$

35,834

 

Credit card program receivable

 

 

11,869

 

 

 

15,880

 

Merchandise sell-offs and vendor receivables

 

 

20,089

 

 

 

14,121

 

Gift card receivable

 

 

6,567

 

 

 

3,629

 

Landlord construction allowances

 

 

2,412

 

 

 

4,382

 

Other items

 

 

9,714

 

 

 

7,066

 

Total

 

$

86,634

 

 

$

80,912

 

 

Property and Equipment
Property and Equipment

7.  Property and Equipment

Property and equipment consists of the following:

 

 

 

January 28,

 

 

January 30,

 

(In thousands)

 

2017

 

 

2016

 

Land

 

$

17,910

 

 

$

17,910

 

Buildings

 

 

204,890

 

 

 

204,690

 

Leasehold improvements

 

 

606,522

 

 

 

580,758

 

Fixtures and equipment

 

 

1,028,117

 

 

 

963,758

 

Construction in progress

 

 

26,858

 

 

 

25,266

 

Property and equipment, at cost

 

$

1,884,297

 

 

$

1,792,382

 

Less:  Accumulated depreciation

 

 

(1,176,500

)

 

 

(1,088,796

)

Property and equipment, net

 

$

707,797

 

 

$

703,586

 

 

Depreciation expense is summarized as follows:

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Depreciation expense

 

$

152,644

 

 

$

140,616

 

 

$

132,529

 

 

Additionally, during Fiscal 2016, Fiscal 2015 and Fiscal 2014, the Company recorded $1.5 million, $4.8 million and $6.4 million, respectively, related to asset write-offs within depreciation and amortization expense.

 

Intangible Assets
Intangible Assets

8.  Intangible Assets

Intangible assets include costs to acquire and register the Company’s trademark assets. During Fiscal 2015, the Company added $5.7 million net intangible assets from the Tailgate acquisition. The following table represents intangible assets as of January 28, 2017 and January 30, 2016:

 

 

 

January 28,

 

 

January 30,

 

(In thousands)

 

2017

 

 

2016

 

Trademarks, at cost

 

$

68,978

 

 

$

67,398

 

Less: Accumulated amortization

 

 

(19,605

)

 

 

(15,566

)

Intangible assets, net

 

$

49,373

 

 

$

51,832

 

 

Amortization expense is summarized as follows:

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Amortization expense

 

$

4,007

 

 

$

3,483

 

 

$

3,465

 

 

The table below summarizes the estimated future amortization expense for intangible assets existing as of January 28, 2017 for the next five Fiscal Years:

 

 

 

Future

 

(In thousands)

 

Amortization

 

2017

 

$

3,643

 

2018

 

$

3,643

 

2019

 

$

3,643

 

2020

 

$

2,969

 

2021

 

$

2,642

 

 

 

Other Credit Arrangements
Other Credit Arrangements

9.  Other Credit Arrangements

In Fiscal 2014, the Company entered into a new Credit Agreement (“Credit Agreement”) for a 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 will be further secured by first-priority mortgages on certain real property.

As of January 28, 2017, the Company was in compliance with the terms of the Credit Agreement and had $5.7 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement on January 28, 2017.

Additionally, the Company has a borrowing agreement with one financial institution under which it may borrow an aggregate of $5 million USD for the purposes of trade letter of credit issuances.  The availability of any future borrowings under the trade letter of credit facilities is subject to acceptance by the respective financial institutions.

As of January 28, 2017, the Company had no outstanding trade letters of credit.  

Leases
Leases

10.  Leases

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

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

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

Store rent:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed minimum

 

$

286,850

 

 

$

282,300

 

 

$

279,640

 

Contingent

 

 

8,519

 

 

 

9,035

 

 

 

6,733

 

Total store rent, excluding common area maintenance

   charges, real estate taxes and certain other expenses

 

$

295,369

 

 

$

291,335

 

 

$

286,373

 

Offices, distribution facilities, equipment and other

 

 

18,172

 

 

 

16,063

 

 

 

15,449

 

Total rent expense

 

$

313,541

 

 

$

307,398

 

 

$

301,822

 

 

In addition, the Company is typically responsible under its store, office and distribution center leases for tenant occupancy costs, including maintenance costs, common area charges, real estate taxes and certain other expenses.

The table below summarizes future minimum lease obligations, consisting of fixed minimum rent, under operating leases in effect at January 28, 2017:

 

(In thousands)

 

Future Minimum

 

Fiscal years:

 

Lease Obligations

 

2017

 

$

287,822

 

2018

 

$

260,847

 

2019

 

$

228,085

 

2020

 

$

207,029

 

2021

 

$

182,219

 

Thereafter

 

$

489,739

 

Total

 

$

1,655,742

 

 

Other Comprehensive Income
Other Comprehensive Income

11.  Other Comprehensive Income

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

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Before

 

 

Tax

 

 

Other

 

 

 

Tax

 

 

Benefit

 

 

Comprehensive

 

(In thousands)

 

Amount

 

 

(Expense)

 

 

Income

 

Balance at February 1, 2014

 

$

12,157

 

 

 

 

 

$

12,157

 

Foreign currency translation loss (1)

 

 

(22,101

)

 

 

 

 

 

(22,101

)

Balance at January 31, 2015

 

$

(9,944

)

 

 

 

 

$

(9,944

)

Foreign currency translation loss (1)

 

 

(14,535

)

 

 

 

 

 

(14,535

)

Loss on long-term intra-entity foreign currency transactions

 

 

(8,805

)

 

 

3,416

 

 

 

(5,389

)

Balance at January 30, 2016

 

$

(33,284

)

 

 

3,416

 

 

$

(29,868

)

Foreign currency translation loss (1)

 

 

(8,380

)

 

 

 

 

 

(8,380

)

Gain on long-term intra-entity foreign currency transactions

 

 

2,919

 

 

 

(1,133

)

 

 

1,786

 

Balance at January 28, 2017

 

$

(38,745

)

 

$

2,283

 

 

$

(36,462

)

 

(1)

Foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in our subsidiaries.

Share-Based Payments
Share-Based Payments

12.  Share-Based Payments

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation – Stock Compensation (“ASC 718”), which requires the Company to measure and recognize compensation expense for all share-based payments at fair value.  Total share-based compensation expense included in the Consolidated Statements of Operations for Fiscal 2016, Fiscal 2015 and Fiscal 2014 was $29.1 million ($18.5 million, net of tax), $35.0 million ($23.2 million, net of tax) and $16.1 million ($9.9 million, net of tax), respectively.

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

At January 28, 2017, the Company had awards outstanding under two share-based compensation plans, which are described below.

Share-based compensation plans

2014 Stock Award and Incentive Plan

The 2014 Plan was approved by the stockholders on May 29, 2014.  The 2014 Plan authorized 11.5 million shares for issuance, in the form of options, stock appreciation rights (“SARS”), restricted stock, restricted stock units, bonus stock and awards, performance awards, dividend equivalents and other stock based awards. The 2014 Plan provides that the maximum number of shares awarded to any individual may not exceed 4.0 million shares per year for options and SARS and no more than 1.5 million shares may be granted with respect to each of restricted shares of stock and restricted stock units plus any unused carryover limit from the previous year.  The 2014 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards that are mandatory under the 2014 Plan.  The 2014 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed in value $300,000 in any single calendar year ($500,000 in the first year a person becomes a non-employee director). Through January 28, 2017, approximately 4.6 million shares of restricted stock and approximately 2.3 million shares of common stock had been granted under the 2014 Plan to employees and directors.  Approximately 50% of the restricted stock awards are performance-based and are earned if the established performance goals are met.  The remaining 50% of the restricted stock awards are time-based and 85% vest ratably over three years, 6% cliff vest in one year, 5% cliff vest in two years and 4% cliff vest in three years.

2005 Stock Award and Incentive Plan

The 2005 Plan was approved by the stockholders on June 15, 2005.  The 2005 Plan authorized 18.4 million shares for issuance.    The 2005 Plan was subsequently amended in Fiscal 2009 to increase the shares available for grant to 31.9 million without taking into consideration 9.1 million non-qualified stock options, 2.9 million shares of restricted stock and 0.2 million shares of common stock that had been previously granted under the 2005 plan to employees and directors (without considering cancellations as of January 31, 2009 of awards for 2.9 million shares). The 2005 Plan provides that the maximum number of shares awarded to any individual may not exceed 6.0 million shares per year for options and SAR and no more than 4.0 million shares may be granted with respect to each of restricted shares of stock and restricted stock units plus any unused carryover limit from the previous year.  The 2005 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards that are mandatory under the 2005 Plan.  The 2005 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed 20,000 shares per year (not to be adjusted for stock splits). Through January 28, 2017, 17.1 million non-qualified stock options, 10.4 million shares of restricted stock and 0.4 million shares of common stock had been granted under the 2005 Plan to employees and directors (without considering cancellations to date of awards for 14.0 million shares).  Approximately 95% of the options granted under the 2005 Plan vest over three years, 4% vest over one year and 1% vest over five years.  Options were granted for ten and seven year terms.  Approximately 62% of the restricted stock awards are performance-based and are earned if the Company meets established performance goals.  The remaining 38% of the restricted stock awards are time-based and vest over three years. The 2005 Plan terminated on May 29, 2014 with all rights of the awardees and all unexpired awards continuing in force and operation after the termination.

 

Stock Option Grants

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

A summary of the Company’s stock option activity under all plans for Fiscal 2016 follows:

 

 

 

For the Year Ended January 28, 2017

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - January 30, 2016

 

 

1,213

 

 

$

14.83

 

 

 

 

 

 

 

 

 

Granted

 

 

2,211

 

 

$

15.35

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(1,068

)

 

$

14.83

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(42

)

 

$

14.50

 

 

 

 

 

 

 

 

 

Outstanding - January 28, 2017

 

 

2,314

 

 

$

15.33

 

 

 

6.1

 

 

 

108

 

Vested and expected to vest - January 28, 2017

 

 

2,133

 

 

$

15.33

 

 

 

6.0

 

 

 

107

 

Exercisable - January 28, 2017 (2)

 

 

39

 

 

$

12.10

 

 

 

0.8

 

 

 

99

 

 

(1)

Options exercised during Fiscal 2016 ranged in price from $11.51 to $15.81.

(2)

Options exercisable represent “in-the-money” vested options based upon the weighted average exercise price of vested options compared to the Company’s stock price at January 28, 2017.

The weighted-average grant date fair value of stock options granted during Fiscal 2016 and Fiscal 2014 was $3.55 and $3.99, respectively. The aggregate intrinsic value of options exercised during Fiscal 2016, Fiscal 2015 and Fiscal 2014 was $3.8 million, $0.4 million and $1.3 million, respectively. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $16.2 million and $0.3 million, respectively, for Fiscal 2016. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $7.3 million and $(0.5) million, respectively, for Fiscal 2015.  Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $6.2 million and $(0.5 )million, respectively, for Fiscal 2014.

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

 

 

 

For the Years

Ended

 

 

 

January 28,

 

January 31,

 

Black-Scholes Option Valuation Assumptions

 

2017

 

2015

 

Risk-free interest rates (1)

 

 

1.3%

 

 

1.5%

 

Dividend yield

 

 

3.0%

 

 

3.1%

 

Volatility factors of the expected market price of

   the Company's common stock (2)

 

 

35.4%

 

 

41.2%

 

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.  

As of January 28, 2017, there was $6.1 million of unrecognized compensation expense related to nonvested stock option awards that is expected to be recognized over a weighted average period of 2.6 years.

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

 

 

 

Time-Based Restricted Stock Units

 

 

Performance-Based Restricted Stock Units

 

 

 

For the year ended

 

 

For the year ended

 

 

 

January 28, 2017

 

 

January 28, 2017

 

(Shares in thousands)

 

Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

 

Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Nonvested - January 30, 2016

 

 

1,935

 

 

$

15.17

 

 

 

2,609

 

 

$

16.02

 

Granted

 

 

1,080

 

 

 

16.16

 

 

 

1,112

 

 

 

15.73

 

Vested

 

 

(916

)

 

 

16.06

 

 

 

(195

)

 

 

14.82

 

Cancelled/Forfeited

 

 

(98

)

 

 

13.24

 

 

 

(701

)

 

 

19.73

 

Nonvested - January 28, 2017

 

 

2,001

 

 

 

15.39

 

 

 

2,825

 

 

 

15.07

 

 

As of January 28, 2017, there was $20.9 million of unrecognized compensation expense related to nonvested time-based restricted stock unit awards that is expected to be recognized over a weighted average period of 2.0 years. Based on current probable performance, there is $9.2 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 January 28, 2017, the Company had 3.4 million shares available for all equity grants.

Retirement Plan and Employee Stock Purchase Plan
Retirement Plan and Employee Stock Purchase Plan

13.  Retirement Plan and Employee Stock Purchase Plan

The Company maintains a profit sharing and 401(k) plan (the “Retirement Plan”). Under the provisions of the Retirement Plan, full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 20½ years of age.  In addition, full-time employees need to have completed 60 days of service and part-time employees must complete 1,000 hours worked to be eligible. Individuals can decline enrollment or can contribute up to 50% of their salary to the 401(k) plan on a pretax basis, subject to IRS limitations. After one year of service, the Company will match 100% of the first 3% of pay plus an additional 25% of the next 3% of pay that is contributed to the plan. Contributions to the profit sharing plan, as determined by the Board, are discretionary. The Company recognized $9.8 million, $10.6 million and $10.5 million in expense during Fiscal 2016, Fiscal 2015 and Fiscal 2014, respectively, in connection with the Retirement Plan.

The Employee Stock Purchase Plan is a non-qualified plan that covers all full-time employees and part-time employees who are at least 18 years old and have completed 60 days of service. Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market.

Income Taxes
Income Taxes

14.  Income Taxes

The components of income before income taxes from continuing operations were:

 

 

 

For the Years Ended

 

 

 

January 28,

 

 

January 30,

 

 

January 31,

 

(In thousands)

 

2017

 

 

2016

 

 

2015

 

U.S.

 

$

315,199

 

 

$

289,697

 

 

$

193,167

 

Foreign

 

 

20,063

 

 

 

32,174

 

 

 

(33,665

)

Total

 

$

335,262

 

 

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