AMERICAN EAGLE OUTFITTERS INC, 10-Q filed on 6/4/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
May 02, 2020
Jun. 01, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date May 02, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Trading Symbol AEO  
Entity Registrant Name American Eagle Outfitters, Inc.  
Entity Central Index Key 0000919012  
Current Fiscal Year End Date --02-02  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Shell Company false  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   165,500,429
Entity Interactive Data Current Yes  
Title of 12(b) Security Common Stock, $0.01 par value  
Security Exchange Name NYSE  
Entity File Number 1-33338  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 13-2721761  
Entity Address, Address Line One 77 Hot Metal Street  
Entity Address, City or Town Pittsburgh  
Entity Address, State or Province PA  
Entity Address, Postal Zip Code 15203-2329  
City Area Code 412  
Local Phone Number 432-3300  
Document Quarterly Report true  
Document Transition Report false  
v3.20.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
May 02, 2020
Feb. 01, 2020
May 04, 2019
Current assets:      
Cash and cash equivalents $ 855,769 $ 361,930 $ 304,671
Short-term investments 29,956 55,000 45,000
Merchandise inventory 421,729 446,278 456,160
Accounts receivable, net 106,751 119,064 73,836
Prepaid expenses and other 144,733 65,658 70,936
Total current assets 1,558,938 1,047,930 950,603
Property and equipment, at cost, net of accumulated depreciation 667,258 735,120 744,670
Operating lease right-of-use assets 1,292,769 1,418,916 1,444,225
Intangible assets net, including goodwill 51,973 53,004 57,221
Non-current deferred income taxes 25,612 22,724 20,951
Other Assets 33,561 50,985 37,683
Total assets 3,630,111 3,328,679 3,255,353
Current liabilities:      
Accounts payable 177,124 285,746 231,760
Current portion of operating lease liabilities 328,366 299,161 266,819
Accrued income and other taxes 2,405 9,514 25,146
Accrued compensation and payroll taxes 21,622 43,537 29,425
Dividends payable 22,756    
Unredeemed gift cards and gift certificates 48,503 56,974 42,025
Other current liabilities and accrued expenses 61,451 56,824 54,622
Total current liabilities 662,227 751,756 649,797
Non-current liabilities:      
Long-term debt, net 642,972    
Non-current operating lease liabilities 1,303,296 1,301,735 1,328,663
Other non-current liabilities 24,633 27,335 35,142
Total non-current liabilities 1,970,901 1,329,070 1,363,805
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; 165,500, 166,993 and 171,870 shares outstanding, respectively 2,496 2,496 2,496
Contributed capital 646,350 577,856 570,443
Accumulated other comprehensive loss (55,050) (33,168) (35,354)
Retained earnings 1,826,413 2,108,292 2,028,627
Treasury stock, 84,066, 82,573 and 77,696 shares, respectively (1,423,226) (1,407,623) (1,324,461)
Total stockholders’ equity 996,983 1,247,853 1,241,751
Total liabilities and stockholders’ equity $ 3,630,111 $ 3,328,679 $ 3,255,353
v3.20.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
May 02, 2020
Feb. 01, 2020
May 04, 2019
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 165,500,000 166,993,000 171,870,000
Treasury stock, shares 84,066,000 82,573,000 77,696,000
v3.20.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
May 02, 2020
May 04, 2019
Income Statement [Abstract]    
Total net revenue $ 551,692 $ 886,290
Cost of sales, including certain buying, occupancy and warehousing expenses 523,386 561,369
Gross profit 28,306 324,921
Selling, general and administrative expenses 188,197 230,741
Impairment and restructuring charges 155,619 1,543
Depreciation and amortization expense 42,730 44,791
Operating (loss) income (358,240) 47,846
Other (expense) income, net (3,129) 4,182
(Loss) income before income taxes (361,369) 52,028
(Benefit) provision for income taxes (104,207) 11,276
Net (loss) income $ (257,162) $ 40,752
Net (loss) income per basic share $ (1.54) $ 0.24
Net (loss) income per diluted share $ (1.54) $ 0.23
Weighted average common shares outstanding - basic 166,781 172,598
Weighted average common shares outstanding - diluted 166,781 174,073
v3.20.1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended
May 02, 2020
May 04, 2019
Statement Of Income And Comprehensive Income [Abstract]    
Net (loss) income $ (257,162) $ 40,752
Other comprehensive (loss) income:    
Foreign currency translation adjustments (21,882) (522)
Other comprehensive (loss): (21,882) (522)
Comprehensive (loss) income $ (279,044) $ 40,230
v3.20.1
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
$ in Thousands
Total
Common Stock
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive (Loss)
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        
Stock awards 4,958   4,958      
Repurchase of common stock as part of publicly announced programs (20,000)       (20,000)  
Repurchase of common stock as part of publicly announced programs (in shares)   (911,000)        
Repurchase of common stock from employees (3,499)       (3,499)  
Repurchase of common stock from employees (in shares)   (169,000)        
Adoption of Accounting Standards Codification 842, net of tax | Accounting Standards Codification 842 (44,435)     (44,435)    
Reissuance of treasury stock 574   (9,874) 1,718 8,730  
Reissuance of treasury stock (in shares)   514,000        
Net (loss) income 40,752     40,752    
Other comprehensive (loss) (522)         (522)
Cash dividends declared and dividend equivalents ($0.1375 per share) (23,632)   430 (24,062)    
Ending Balance at May. 04, 2019 $ 1,241,751 $ 2,496 570,443 2,028,627 (1,324,461) (35,354)
Ending Balance (in shares) at May. 04, 2019 171,870,000 171,870,000        
Beginning Balance at Feb. 01, 2020 $ 1,247,853 $ 2,496 577,856 2,108,292 (1,407,623) (33,168)
Beginning Balance (in shares) at Feb. 01, 2020 166,993,000 166,993,000        
Stock awards $ 3,919   3,919      
Repurchase of common stock as part of publicly announced programs (20,000)       (20,000)  
Repurchase of common stock as part of publicly announced programs (in shares)   (1,720,000)        
Repurchase of common stock from employees (1,430)       (1,430)  
Repurchase of common stock from employees (in shares)   (115,000)        
Convertible Notes- Equity portion, net of tax 68,330   68,330      
Reissuance of treasury stock (299)   (4,165) (1,961) 5,827  
Reissuance of treasury stock (in shares)   342,000        
Net (loss) income (257,162)     (257,162)    
Other comprehensive (loss) (21,882)         (21,882)
Cash dividends declared and dividend equivalents ($0.1375 per share) (22,346)   410 (22,756)    
Ending Balance at May. 02, 2020 $ 996,983 $ 2,496 $ 646,350 $ 1,826,413 $ (1,423,226) $ (55,050)
Ending Balance (in shares) at May. 02, 2020 165,500,000 165,500,000        
v3.20.1
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares
3 Months Ended
May 02, 2020
May 04, 2019
Statement Of Stockholders Equity [Abstract]    
Cash dividends declared and dividend equivalents, Per share $ 0.1375 $ 0.1375
v3.20.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
May 02, 2020
May 04, 2019
Operating activities:    
Net (loss) income $ (257,162) $ 40,752
Adjustments to reconcile net income to net cash from operating activities:    
Depreciation and amortization 43,419 45,350
Share-based compensation 4,101 5,041
Deferred income taxes (791) 7,704
Loss on impairment of assets [1] 153,617  
Changes in assets and liabilities:    
Merchandise inventory 18,134 (32,075)
Operating lease assets 106,627 37,735
Operating lease liabilities (20,597) (53,551)
Other assets (87,575) 4,794
Accounts payable (109,482) (8,896)
Accrued compensation and payroll taxes (21,598) (52,736)
Accrued and other liabilities (38,587) 13,601
Net cash (used for) provided by operating activities (209,894) 7,719
Investing activities:    
Capital expenditures for property and equipment (33,910) (36,574)
Purchase of available-for-sale investments (14,956) (20,000)
Sale of available-for-sale investments 40,000 67,135
Other investing activities (191) (203)
Net cash (used for) provided by investing activities (9,057) 10,358
Financing activities:    
Repurchase of common stock as part of publicly announced programs (20,000) (20,000)
Repurchase of common stock from employees (1,430) (3,499)
Proceeds from convertible notes, net 406,108  
Proceeds from revolving credit facilities 330,000  
Net proceeds from stock options exercised   571
Cash dividends paid   (23,632)
Other financing activities (107) (79)
Net cash provided by (used for) financing activities 714,571 (46,639)
Effect of exchange rates changes on cash (1,781) (97)
Net change in cash and cash equivalents 493,839 (28,659)
Cash and cash equivalents - beginning of period 361,930 333,330
Cash and cash equivalents - end of period $ 855,769 $ 304,671
[1] During the 13 weeks ended May 2, 2020, the Company recorded impairment charges of $155.6 million.  Of the total, $84.1 million related to the impairment of the operating ROU assets of 272 stores.  We recorded $51.5 million related to the impairment of certain corporate and store property and equipment.  We also recorded $18.0 million of impairment of certain cost and equity method investments.
v3.20.1
Interim Financial Statements
3 Months Ended
May 02, 2020
Accounting Policies [Abstract]  
Interim Financial Statements

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company, “we”, and “our”) at May 2, 2020 and May 4, 2019 and for the 13 week periods ended May 2, 2020 and May 4, 2019 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 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2020 (the “Fiscal 2019 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.

American Eagle Outfitters, Inc. (the “Company,” “we” and “our”), a Delaware corporation, operates under the American Eagle® (“AE”) and Aerie® brands. We also operate Tailgate, a vintage, sports-inspired apparel brand with a college town store concept, and Todd Snyder New York, a premium menswear brand.

  

Founded in 1977, the Company 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 www.toddsnyder.com (which e-commerce operations we refer to as “AEO Direct”) and more than 200 international store locations managed by third-party operators.

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.

COVID-19 Pandemic

In March 2020, a novel strain of coronavirus (COVID-19) was declared a global pandemic by the World Health Organization.  National, state and local governments have responded to the COVID-19 pandemic in a variety of ways, including, but not limited to, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), requiring individuals to stay at home, and in most cases, ordering non-essential businesses to close or limit operations.  The Company’s business operations and financial performance for the 13 weeks ended May 2, 2020 were materially impacted by COVID-19.  These impacts are discussed within these notes to the Consolidated Financial Statements and within Item 2 of this report on Form 10-Q, of which these notes form a part.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to address the COVID-19 pandemic. The income tax related impacts of the CARES Act are discussed within Note 10 to the Consolidated Financial Statements.

 

 

v3.20.1
Summary of Significant Accounting Policies
3 Months Ended
May 02, 2020
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 May 2, 2020, and 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 2020” refers to the 52-week period that will end on January 30, 2021.  “Fiscal 2019” refers to the 52-week period ended 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 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 February 2016, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”) by issuing Accounting Standards Update (“ASU”) 2016-02. ASC 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements.

 

The standard establishes a right-of-use model (“ROU”) model 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 are classified as financing 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. The Company elected this 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 operating lease liabilities and operating lease ROU 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 operating lease ROU 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 operating lease ROU asset. Combined with the impairment discussed above, these reclassifications reduced the net operating lease ROU asset to $1.4 billion. Corresponding amounts were not reclassified in prior periods as those prior periods are presented under ASC 840, 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 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 the Company’s 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 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit for the determination of 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 the Company’s Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326) (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The Company adopted ASU 2016-13 on February 2, 2020.  The adoption did not have a material impact on the Company’s Consolidated Financial Statements. 

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, the Company translates assets and liabilities denominated in foreign currencies into United States dollars (“USD”) (the Company’s reporting currency) at the exchange rates prevailing at the balance sheet date. The Company translates revenues and expenses denominated in foreign currencies into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the consolidated results of operations, whereas related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income.

 

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized loss of $21.9 million is included in accumulated other comprehensive income as of May 2, 2020, primarily related to the decline in the US dollar to Mexican peso and US dollar to Canadian dollar exchange rates during the 13 weeks ended May 2, 2020.

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.

Short-term investments classified as available-for-sale include certificates of deposit and commercial paper with a maturity 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 net realizable value, 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

The Company recognizes revenue pursuant to ASC 606, Revenue from Contracts with Customers (“ASC 606”).  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 using 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 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.

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

 

 

 

May 2,

 

 

May 4,

 

 

 

2020

 

 

2019

 

Men’s apparel and accessories

 

 

22

%

 

 

28

%

Women’s apparel and accessories (excluding Aerie)

 

 

48

%

 

 

54

%

Aerie

 

 

30

%

 

 

18

%

Total

 

 

100

%

 

 

100

%

 

The following table disaggregates the Company’s total net revenue by geography for each of the periods indicated:

 

 

 

13 Weeks Ended

 

(In thousands)

 

May 2,

2020

 

 

May 4,

2019

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

488,876

 

 

$

768,480

 

Foreign (1)

 

 

62,816

 

 

 

117,810

 

Total Net Revenue

 

$

551,692

 

 

$

886,290

 

 

(1)

Amounts represent sales from American Eagle and Aerie international retail stores, and 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, all of which are included in cost of sales.

Other Income (expense), Net

Other income (expense), 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 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

 

Five years

Three - five years

 

As of May 2, 2020, the weighted average remaining useful life of our assets was approximately 7.5 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements, store fixtures, and operating lease ROU assets associated with retail stores, which have been open for a period 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 projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.  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 impairment and restructuring charges.

 

During the 13 weeks ended May 2, 2020, the Company recorded impairment of property and equipment of $51.5 million.  No long-lived asset impairment charges were recorded during the 13 weeks ended May 4, 2019.  Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the impairment of these 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 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 brand.  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 1, 2020. As a result of the impact of the COVID-19 pandemic and the resulting significant decline in the Company’s results of operations during the 13 weeks ended May 2, 2020, an interim indicator of goodwill impairment was present.  As a result, the Company performed an interim impairment test as of May 2, 2020 and determined that the fair value of its goodwill continues to be in excess of its carrying value and therefore no impairment charge was recorded.

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 consist 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 weeks ended May 2, 2020 and May 4, 2019.

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. During the 13 weeks ended May 2, 2020 and May 4, 2019, the Company recorded approximately $1.7 million and $2.0 million, respectively, of revenue related to gift card breakage.   

 

Construction Allowances

As part of certain lease agreements for retail stores, the Company receives construction allowances from lessors, which are generally comprised of cash amounts. 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 lessor.

 

Self-Insurance Liability

The Company uses a combination of insurance and self-insurance mechanisms 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 by 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.

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 lessor 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 operating lease ROU assets and operating lease liabilities, 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 operating lease ROU assets and operating lease liabilities.

When determining the present value of future payments for an operating lease that does not have a readily determinable implicit rate, the Company uses its incremental borrowing rate as of the date of initial possession of the leased asset.

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

 

During the 13 weeks ended May 2, 2020, the Company recorded impairment of operating lease ROU assets of $84.1 million.  No operating lease ROU asset impairment charges were recorded during the 13 weeks ended May 4, 2019.  Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the impairment of these assets.

 

Deferred lease credits represent the unamortized portion of construction allowances received from lessors related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its lessor 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 lessor.

 

Co-branded Credit Card

The Company offers a co-branded credit card and a private label 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 as we fulfill our performance obligations under the Agreement. This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.

Customer Loyalty Program

In 2017, the Company launched a highly digitized loyalty program called AEO ConnectedTM (the “Program”).  This Program integrates the credit card rewards program and the AEREWARDS® 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 s recorded in revenue.   

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.

 

 

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 using 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 10 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.  

 

v3.20.1
Cash and Cash Equivalents and Short-Term Investments
3 Months Ended
May 02, 2020
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)

 

May 2,

2020

 

 

February 1,

2020

 

 

May 4,

2019

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

149,205

 

 

$

126,087

 

 

$

91,853

 

Money market securities

 

 

350,054

 

 

 

 

 

 

 

Interest bearing deposits

 

 

296,509

 

 

 

235,843

 

 

 

177,952

 

Certificates of deposit

 

 

60,000

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

34,866

 

Total cash and cash equivalents

 

$

855,769

 

 

$

361,930

 

 

$

304,671

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

15,000

 

 

 

55,000

 

 

 

45,000

 

Commercial paper

 

 

14,956

 

 

 

 

 

 

 

Total short-term investments

 

 

29,956

 

 

 

55,000

 

 

 

45,000

 

Total

 

$

885,725

 

 

$

416,930

 

 

$

349,671

 

 

v3.20.1
Fair Value Measurements
3 Months Ended
May 02, 2020
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.

Long-Term Debt

As of May 2, 2020, the fair value of the Company's $330.0 million in outstanding borrowings under its revolving credit facilities approximated the carrying value.

The fair value of the Company's convertible notes is not required to be measured at fair value on a recurring basis.  Upon issuance, the fair value of these convertible notes was measured using a using a secondary market quoted price, which considers market related conditions, and is therefore within Level 2 of the fair value hierarchy.

Refer to Note 8 to the Consolidated Financial Statements for additional information regarding long-term debt and other credit arrangements.

Non-Financial Assets

The Company’s non-financial assets, which include 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 and the Company is required to evaluate the non-financial asset for impairment, a resulting impairment would require that the non-financial asset be recorded at the estimated fair value.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. During the 13 weeks ended May 2, 2020, the Company recorded asset impairment charges of $135.6 million on the assets of 272 retail stores and certain other corporate assets. Of the total, $84.1 million related to the impairment of operating lease ROU assets and $51.5 million related to the impairment of store and corporate property and equipment.  This impairment was primarily driven by store closures due to the COVID-19 pandemic.  Additionally, we recorded impairment of $18.0 million of certain cost and equity method investments. The assets were adjusted to their fair value and the loss on impairment was recorded within impairment and restructuring charges in the Consolidated Statements of Operations. The fair value of the impaired assets, after the recorded loss, is approximately $163.4 million.

The fair value of the impaired assets was determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest and a real estate market participant discount rate for the ROU assets. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

v3.20.1
Earnings per Share
3 Months Ended
May 02, 2020
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

 

 

 

May 2,

 

 

May 4,

 

(In thousands)

 

2020

 

 

2019

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

166,781

 

 

 

172,598

 

Dilutive effect of stock options and non-vested

   restricted stock*

 

 

 

 

 

1,475

 

Diluted number of common shares outstanding

 

 

166,781

 

 

 

174,073

 

Anti-Dilutive Shares*

 

 

3,040

 

 

 

171

 

      

*For the quarter ended May 2, 2020, there were 0.7 million potentially dilutive equity awards that were excluded from diluted earnings per share calculation because the Company incurred a net loss for this period and their inclusion would be anti-dilutive.

 

The Company has the right to settle its convertible notes in any combination of cash and shares of common stock.  However, the Company intends to settle the original principal portion of the notes in cash and any conversion value above the principal in stock.  Because of this repayment policy, only the conversion spread portion of the amount owed is reflected as dilutive in our weighted average diluted shares outstanding.  The Company uses the average of the closing prices of its common stock (NYSE: AEO) as reported on the New York Stock Exchange for the most recent quarter to calculate the conversion spread.  For the period of issuance of the convertible notes through May 2, 2020, the average closing price of our stock was below the conversion price per share of $8.75, and, therefore, the convertible notes did not have a dilutive effect.   These convertible notes could have a potential dilutive effect in future periods.

 

Dilutive and anti-dilutive shares relate to share based compensation.  Refer to Note 8 and 9 to the Consolidated Financial Statements for additional information regarding our convertible notes and share-based compensation, respectively.

v3.20.1
Property and Equipment
3 Months Ended
May 02, 2020
Property Plant And Equipment [Abstract]  
Property and Equipment

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

May 2,

 

 

February 1,

 

 

May 4,

 

(In thousands)

 

2020

 

 

2020

 

 

2019

 

Property and equipment, at cost

 

$

2,232,380

 

 

$

2,314,428

 

 

$

2,190,627

 

Less:  Accumulated depreciation and impairment

 

 

(1,565,122

)

 

 

(1,579,308

)

 

 

(1,445,957

)

Property and equipment, net

 

$

667,258

 

 

$

735,120

 

 

$

744,670

 

 

v3.20.1
Intangible Assets, including Goodwill
3 Months Ended
May 02, 2020
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets, including Goodwill

7.  Intangible Assets, including Goodwill

Intangible assets consist of the following:

 

 

 

May 2,

 

 

February 1,

 

 

May 4,

 

(In thousands)

 

2020

 

 

2020

 

 

2019

 

Goodwill, gross

 

$

17,164

 

 

$

17,353

 

 

$

17,305

 

Accumulated impairment (1)

 

 

(4,196

)

 

 

(4,196

)

 

 

(2,484

)

Goodwill, net

 

$

12,968

 

 

$

13,157

 

 

$

14,821

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks, at cost

 

 

71,879

 

 

 

71,685

 

 

 

71,150

 

Accumulated amortization

 

 

(32,874

)

 

 

(31,838

)

 

 

(28,750

)

Trademarks, net

 

$

39,005

 

 

$

39,847

 

 

$

42,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets, net, including goodwill

 

$

51,973

 

 

$

53,004

 

 

$

57,221

 

 

(1)

Accumulated impairment includes $2.5 million recorded in Fiscal 2016 and $1.7 million in Fiscal 2019.

v3.20.1
Long-Term Debt, Net
3 Months Ended
May 02, 2020
Debt Disclosure [Abstract]  
Long-Term Debt, Net

8.  Long-Term Debt, Net

Our long-term debt consisted of the following at each of May 2, 2020, February 1, 2020, and May 4, 2019:

 

(In thousands)

May 2,

2020

 

February 1,

2020

 

May 4,

2019

 

Convertible notes principal

$

415,025

 

 

-

 

 

-

 

Less: unamortized discount

 

(102,053

)

 

-

 

 

-

 

Convertible notes, net

$

312,972

 

 

-

 

 

-

 

Revolving credit facility borrowings

 

330,000

 

 

-

 

 

-

 

Total long-term debt, net

$

642,972

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

Convertible Notes- Equity portion, net of tax

 

68,330

 

 

-

 

 

-

 

 

 

 

Convertible notes

 

In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due in 2025 (“notes”). The notes have a stated interest rate of 3.75%, payable semi-annually. The Company may redeem the notes, in whole or in part, at any time beginning April 2023.  The Company intends to use the net proceeds from the offering for general corporate purposes.

 

Beginning January 2025, noteholders may convert their notes for approximately 114.3 shares of common stock per $1,000 principal amount.

 

The Company has the right to settle conversions in any combination of cash and shares of common stock. However, the Company intends to settle the original principal portion of the notes in cash and any conversion value above the principal in stock. Because of this repayment policy, only the conversion spread portion of the amount owed is reflected as dilutive in earning per share.

 

The effective interest rate for the notes is 10.0% and we calculated the effective yield using a market approach.  The remaining amortization period of the discount is five years.

 

Interest expense for the convertible notes was:

 

 

13 Weeks Ended

 

(In thousands)

May 2,

2020

 

May 4,

2019

 

Accrued interest for interest payments

$

215

 

$

-

 

Amortization of discount

 

213

 

 

-

 

Total interest expense

$

428

 

$

-

 

 

  

 

The following table discloses conversion amounts if the notes were all converted as of the end of the period:

 

(In thousands, except per share amounts)

May 2,

2020

 

Number of shares convertible

 

47,437

 

Conversion price per share

$

8.75

 

Value in excess of principal if converted

$

-

 

 

Revolving credit facilities

 

In January 2019, the Company entered into an amended and restated Credit Agreement (the “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 expire January 30, 2024.

 

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.

 

As of May 2, 2020 the Company was in compliance with the terms of the Credit Agreement and has $330.0 million in borrowings and $7.9 million outstanding in stand-by letters of credit.  

 

 

The current interest rate for borrowings under the Credit Facilities is the one month LIBOR, plus an adjusted spread based on leverage as reflected in the Credit Facilities.  The weighted average interest rate is 2.5%.  The total interest expense for period ended May 2, 2020 was $1.1 million.  

 

 

 

v3.20.1
Share-Based Compensation
3 Months Ended
May 02, 2020
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-Based Compensation

9.  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 weeks ended May 2, 2020 and May 4, 2019 was $4.1 million ($2.9 million, net of tax) and $5.0 million ($3.9 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 13 weeks ended May 2, 2020 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - February 1, 2020

 

 

2,584

 

 

$

18.18

 

 

 

 

 

 

 

 

 

Granted

 

 

932

 

 

$

8.62

 

 

 

 

 

 

 

 

 

Outstanding - May 2, 2020

 

 

3,516

 

 

$

15.65

 

 

 

5.2

 

 

$

 

Vested and expected to vest - May 2, 2020

 

 

2,810

 

 

$

16.11

 

 

 

4.0

 

 

$

 

Exercisable - May 2, 2020 (1)

 

 

1,797

 

 

$

17.08

 

 

 

2.2

 

 

$

 

 

(1)

The Company’s stock price was below the exercise price for all outstanding awards as of May 2, 2020.

Cash received from the exercise of stock options was $0.6 million for the 13 weeks ended May 4, 2019. 

As of May 2, 2020, there was $5.8 million of unrecognized compensation expense for stock option awards that is expected to be recognized over a weighted average period of 2.0 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:

 

 

 

13 Weeks Ended

 

13 Weeks Ended

 

 

 

May 2,

 

May 4,

 

Black-Scholes Option Valuation Assumptions

 

2020

 

2019

 

Risk-free interest rate (1)

 

 

0.6

%

 

2.2

%

Dividend yield

 

 

6.0

%

 

2.4

%

Volatility factor (2)

 

 

43.1

%

 

38.2

%

Weighted-average expected term (3)

 

4.4 years

 

4.4 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 historical volatility of the Company’s common stock.

(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 tables:

 

 

 

Time-Based Restricted

Stock Units

 

 

Performance-Based Restricted

Stock Units

 

 

 

13 Weeks Ended

 

 

13 Weeks Ended

 

 

 

May 2, 2020

 

 

May 2, 2020

 

(Shares in thousands)

 

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

 

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

Nonvested - February 1, 2020

 

 

2,196

 

 

$

18.56

 

 

 

2,138

 

 

$

18.37

 

Granted

 

 

2,247

 

 

$

8.62

 

 

 

 

 

$

 

Vested

 

 

 

 

$

 

 

 

(319

)

 

$

14.50

 

Cancelled

 

 

(82

)

 

$

18.08

 

 

 

(359

)

 

$

20.45

 

Nonvested - May 2, 2020

 

 

4,361

 

 

$

12.83

 

 

 

1,460

 

 

$

18.72

 

 

As of May 2, 2020, there was $37.4 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 $1.4 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 two- year period.

As of May 2, 2020, the Company had 0.4 million shares available for all equity grants.

 

v3.20.1
Income Taxes
3 Months Ended
May 02, 2020
Income Tax Disclosure [Abstract]  
Income Taxes

10.  Income Taxes

On March 27, 2020, the U.S. government enacted the CARES Act to address the COVID-19 pandemic. One of the provisions of the CARES Act allows net operating losses generated within tax years 2018 through 2020 to be carried back up to five years, including years in which the U.S. federal corporate income tax rate was 35%, as opposed to the current U.S federal corporate income tax rate of 21%.

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 May 2, 2020 was 28.8% compared to 21.7% for the 13 weeks ended May 4, 2019.  The increase in the effective income tax rate this year is primarily a result of the above-described provisions of the CARES Act which permit the carry back of current year losses to a tax year where the U.S. federal corporate income tax rate was 35%, offset by an incremental rate increase on the revaluation of deferred tax assets and liabilities for current year activity and an increase to the valuation allowance recorded in the current year.  We recorded our income tax expense, deferred tax assets and related liabilities based on management’s best estimates.

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 did not change significantly during the 13 weeks ended May 2, 2020.  Over the next twelve months, the Company believes that it is reasonably possible that unrecognized tax benefits may decrease by approximately $0.6 million due to settlements, expiration of statute of limitations or other changes in unrecognized tax benefits.

 

v3.20.1
Legal Proceedings
3 Months Ended
May 02, 2020
Commitments And Contingencies Disclosure [Abstract]  
Legal Proceedings

11.  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.

v3.20.1
Impairment and Restructuring Charges
3 Months Ended
May 02, 2020
Restructuring And Related Activities [Abstract]  
Impairment and Restructuring Charges

12. Impairment and Restructuring Charges

The following table represents impairment and restructuring charges for the 13 weeks ended May 2, 2020 and May 4, 2019.  All amounts were recorded within impairment and restructuring charges on the Consolidated Statements of Operations.

 

 

 

13 weeks ended

 

 

 

May 2,

 

 

May 4,

 

(In thousands)

 

2020

 

 

2019

 

Impairment charges (1)

 

$

153,617

 

 

$

 

Severance and related employee

   costs

 

 

2,002

 

 

 

1,543

 

Total impairment and restructuring

   charges

 

$

155,619

 

 

$

1,543

 

 

 

(1)

During the 13 weeks ended May 2, 2020, the Company recorded impairment charges of $155.6 million.  Of the total, $84.1 million related to the impairment of the operating ROU assets of 272 stores.  We recorded $51.5 million related to the impairment of certain corporate and store property and equipment.  We also recorded $18.0 million of impairment of certain cost and equity method investments.

A roll-forward of restructuring liabilities recognized in accrued compensation and other liabilities and accrued expenses in the Consolidated Balance Sheet is as follows:

 

 

 

13 Weeks Ended

 

 

 

May 2,

 

(In thousands)

 

2020

 

Accrued liability as of February 1, 2020

 

$

4,187

 

Add: Costs incurred, excluding non-cash charges

 

 

2,002

 

Less:  Cash payments and adjustments

 

 

(1,250

)

 

 

 

 

 

Accrued liability as of May 2, 2020

 

$

4,939

 

v3.20.1
Summary of Significant Accounting Policies (Policies)
3 Months Ended
May 02, 2020
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 May 2, 2020, and 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 2020” refers to the 52-week period that will end on January 30, 2021.  “Fiscal 2019” refers to the 52-week period ended 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 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

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”) 2016-02. ASC 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements.

 

The standard establishes a right-of-use model (“ROU”) model 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 are classified as financing 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. The Company elected this 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 operating lease liabilities and operating lease ROU 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 operating lease ROU 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 operating lease ROU asset. Combined with the impairment discussed above, these reclassifications reduced the net operating lease ROU asset to $1.4 billion. Corresponding amounts were not reclassified in prior periods as those prior periods are presented under ASC 840, 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 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 the Company’s 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 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit for the determination of 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 the Company’s Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326) (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The Company adopted ASU 2016-13 on February 2, 2020.  The adoption did not have a material impact on the Company’s Consolidated Financial Statements. 

Foreign Currency Translation

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, the Company translates assets and liabilities denominated in foreign currencies into United States dollars (“USD”) (the Company’s reporting currency) at the exchange rates prevailing at the balance sheet date. The Company translates revenues and expenses denominated in foreign currencies into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the consolidated results of operations, whereas related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income.

 

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized loss of $21.9 million is included in accumulated other comprehensive income as of May 2, 2020, primarily related to the decline in the US dollar to Mexican peso and US dollar to Canadian dollar exchange rates during the 13 weeks ended May 2, 2020.

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.

Short-term investments classified as available-for-sale include certificates of deposit and commercial paper with a maturity 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 net realizable value, 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

The Company recognizes revenue pursuant to ASC 606, Revenue from Contracts with Customers (“ASC 606”).  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 using 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 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.

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

 

 

 

May 2,

 

 

May 4,

 

 

 

2020

 

 

2019

 

Men’s apparel and accessories

 

 

22

%

 

 

28

%

Women’s apparel and accessories (excluding Aerie)

 

 

48

%

 

 

54

%

Aerie

 

 

30

%

 

 

18

%

Total

 

 

100

%

 

 

100

%

 

The following table disaggregates the Company’s total net revenue by geography for each of the periods indicated:

 

 

 

13 Weeks Ended

 

(In thousands)

 

May 2,

2020

 

 

May 4,

2019

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

488,876

 

 

$

768,480

 

Foreign (1)

 

 

62,816

 

 

 

117,810

 

Total Net Revenue

 

$

551,692

 

 

$

886,290

 

 

(1)

Amounts represent sales from American Eagle and Aerie international retail stores, and 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, 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

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, all of which are included in cost of sales.

Other Income (Expenses), Net

Other Income (expense), Net

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

Property and Equipment

Property and Equipment

Property and equipment is recorded on the basis of cost 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

 

Five years

Three - five years

 

As of May 2, 2020, the weighted average remaining useful life of our assets was approximately 7.5 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements, store fixtures, and operating lease ROU assets associated with retail stores, which have been open for a period 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 projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts.  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 impairment and restructuring charges.

 

During the 13 weeks ended May 2, 2020, the Company recorded impairment of property and equipment of $51.5 million.  No long-lived asset impairment charges were recorded during the 13 weeks ended May 4, 2019.  Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the impairment of these 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 6 to the Consolidated Financial Statements for additional information regarding property and equipment.

Intangible Assets Including Goodwill

Intangible Assets, including Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate brand.  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 1, 2020. As a result of the impact of the COVID-19 pandemic and the resulting significant decline in the Company’s results of operations during the 13 weeks ended May 2, 2020, an interim indicator of goodwill impairment was present.  As a result, the Company performed an interim impairment test as of May 2, 2020 and determined that the fair value of its goodwill continues to be in excess of its carrying value and therefore no impairment charge was recorded.

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 consist 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 weeks ended May 2, 2020 and May 4, 2019.

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

Gift Cards

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. During the 13 weeks ended May 2, 2020 and May 4, 2019, the Company recorded approximately $1.7 million and $2.0 million, respectively, of revenue related to gift card breakage.   

Construction Allowances

Construction Allowances

As part of certain lease agreements for retail stores, the Company receives construction allowances from lessors, which are generally comprised of cash amounts. 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 lessor.

Self-Insurance Liability

Self-Insurance Liability

The Company uses a combination of insurance and self-insurance mechanisms 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 by 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.

Leases

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 lessor 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 operating lease ROU assets and operating lease liabilities, 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 operating lease ROU assets and operating lease liabilities.

When determining the present value of future payments for an operating lease that does not have a readily determinable implicit rate, the Company uses its incremental borrowing rate as of the date of initial possession of the leased asset.

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

 

During the 13 weeks ended May 2, 2020, the Company recorded impairment of operating lease ROU assets of $84.1 million.  No operating lease ROU asset impairment charges were recorded during the 13 weeks ended May 4, 2019.  Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the impairment of these assets.

 

Deferred lease credits represent the unamortized portion of construction allowances received from lessors related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its lessor 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 lessor.

Co-branded Credit Card

Co-branded Credit Card

The Company offers a co-branded credit card and a private label 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 as we fulfill our performance obligations under the Agreement. This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.

Customer Loyalty Program

Customer Loyalty Program

In 2017, the Company launched a highly digitized loyalty program called AEO ConnectedTM (the “Program”).  This Program integrates the credit card rewards program and the AEREWARDS® 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 s recorded in revenue.   

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.

Sales Return Reserve

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 using 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

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 10 to the Consolidated Financial Statements for additional information regarding income taxes.

 

Segment Information

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.  

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: