AMERICAN EAGLE OUTFITTERS INC, 10-Q filed on 8/30/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
6 Months Ended
Aug. 04, 2018
Aug. 27, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Aug. 04, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q2  
Trading Symbol AEO  
Entity Registrant Name AMERICAN EAGLE OUTFITTERS INC  
Entity Central Index Key 0000919012  
Current Fiscal Year End Date --02-02  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   177,365,947
v3.10.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
Aug. 04, 2018
Feb. 03, 2018
Jul. 29, 2017
Current assets:      
Cash and cash equivalents $ 323,322,000 $ 413,613,000 $ 192,558,000
Short-term investments 40,000,000   0
Merchandise inventory 466,112,000 398,213,000 433,458,000
Accounts receivable, net 74,153,000 78,304,000 80,673,000
Prepaid expenses and other 93,493,000 78,400,000 110,496,000
Total current assets 997,080,000 968,530,000 817,185,000
Property and equipment, at cost, net of accumulated depreciation 732,350,000 724,239,000 719,127,000
Intangible assets, at cost, net of accumulated amortization 45,064,000 46,666,000 47,520,000
Goodwill 14,926,000 15,070,000 15,069,000
Non-current deferred income taxes 8,558,000 9,344,000 28,761,000
Other assets 52,771,000 52,464,000 58,661,000
Total assets 1,850,749,000 1,816,313,000 1,686,323,000
Current liabilities:      
Accounts payable 264,247,000 236,703,000 275,479,000
Accrued compensation and payroll taxes 51,903,000 54,324,000 22,708,000
Accrued rent 85,416,000 83,312,000 78,697,000
Accrued income and other taxes 18,332,000 12,781,000 13,289,000
Unredeemed gift cards and gift certificates 33,185,000 52,347,000 32,573,000
Current portion of deferred lease credits 10,822,000 11,203,000 12,838,000
Other liabilities and accrued expenses 44,115,000 34,551,000 36,398,000
Total current liabilities 508,020,000 485,221,000 471,982,000
Non-current liabilities:      
Deferred lease credits 49,569,000 47,977,000 53,620,000
Non-current accrued income taxes 7,164,000 7,269,000 4,786,000
Other non-current liabilities 25,419,000 29,055,000 31,636,000
Total non-current liabilities 82,152,000 84,301,000 90,042,000
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; 177,366, 177,316 and 176,965 shares outstanding, respectively 2,496,000 2,496,000 2,496,000
Contributed capital 560,349,000 593,770,000 586,844,000
Accumulated other comprehensive loss (32,646,000) (30,795,000) (30,121,000)
Retained earnings 1,941,536,000 1,883,592,000 1,772,233,000
Treasury stock, at cost, 72,200, 72,250 and 72,601 shares, respectively (1,211,158,000) (1,202,272,000) (1,207,153,000)
Total stockholders’ equity 1,260,577,000 1,246,791,000 1,124,299,000
Total liabilities and stockholders’ equity $ 1,850,749,000 $ 1,816,313,000 $ 1,686,323,000
v3.10.0.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Aug. 04, 2018
Feb. 03, 2018
Jul. 29, 2017
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 177,366,000 177,316,000 176,965,000
Treasury stock, shares 72,200,000 72,250,000 72,601,000
v3.10.0.1
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Aug. 04, 2018
Jul. 29, 2017
Aug. 04, 2018
Jul. 29, 2017
Total net revenue $ 964,853 $ 844,557 $ 1,787,814 $ 1,606,393
Cost of sales, including certain buying, occupancy and warehousing expenses 611,752 551,908 1,130,271 1,035,922
Gross profit 353,101 292,649 657,543 570,471
Selling, general and administrative expenses 233,971 203,717 444,205 398,696
Restructuring charges [1]   9,746 1,568 15,193
Depreciation and amortization expense 42,739 40,283 84,674 80,730
Operating income 76,391 38,903 127,096 75,852
Other income (expense), net 860 (6,734) 1,362 (6,330)
Income before income taxes 77,251 32,169 128,458 69,522
Provision for income taxes 16,918 10,933 28,196 23,050
Net income $ 60,333 $ 21,236 $ 100,262 $ 46,472
Net income per basic share $ 0.34 $ 0.12 $ 0.57 $ 0.26
Net income per diluted share 0.34 0.12 0.56 0.26
Cash dividends per common share $ 0.1375 $ 0.1250 $ 0.275 $ 0.250
Weighted average common shares outstanding - basic 177,249 177,228 177,329 178,475
Weighted average common shares outstanding - diluted 178,505 178,788 178,730 180,473
Retained earnings, beginning $ 1,904,190 $ 1,774,315 $ 1,883,592 $ 1,775,775
Net income 60,333 21,236 100,262 46,472
Cash dividends and dividend equivalents (24,919) (22,783) (49,580) (45,385)
Reissuance of treasury stock 1,932 (535) 7,110 (4,629)
Retained earnings, ending $ 1,941,536 $ 1,772,233 1,941,536 $ 1,772,233
Accounting Standards Update 2014-09        
Adoption of Accounting Standards Update 2014-09 (see Note 2)     $ 152  
[1] Cash charges of $1.6 million for the 26 weeks ended August 4, 2018 consisted primarily of charges for corporate severance costs and $9.7 million and $15.2 million for the 13 and 26 weeks ended July 29, 2017, respectively, for lease termination, store closures and severance were recorded within Restructuring Charges on the Consolidated Statements of Operations and Retained Earnings
v3.10.0.1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Aug. 04, 2018
Jul. 29, 2017
Aug. 04, 2018
Jul. 29, 2017
Statement Of Income And Comprehensive Income [Abstract]        
Net income $ 60,333 $ 21,236 $ 100,262 $ 46,472
Other comprehensive income:        
Foreign currency translation income (2,290) 2,550 1,850 6,341
Other comprehensive income: (2,290) 2,550 1,850 6,341
Comprehensive income $ 58,043 $ 23,786 $ 102,112 $ 52,813
v3.10.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Aug. 04, 2018
Jul. 29, 2017
Operating activities:    
Net income $ 100,262 $ 46,472
Adjustments to reconcile net income to net cash from operating activities:    
Depreciation and amortization 85,745 81,697
Share-based compensation 11,731 9,798
Deferred income taxes (2,669) 20,423
Foreign currency transaction loss (gain) 1,574 (5,354)
Changes in assets and liabilities:    
Merchandise inventory (69,570) (70,979)
Accounts receivable 4,188 5,979
Prepaid expenses and other (15,457) (32,409)
Other assets (43) (96)
Accounts payable 22,992 28,055
Unredeemed gift cards and gift certificates (18,990) (20,598)
Deferred lease credits 1,436 8,251
Accrued compensation and payroll taxes (2,946) (30,387)
Accrued income and other taxes 5,804 1,884
Accrued liabilities 28,340 10,484
Total adjustments 52,135 6,748
Net cash provided by operating activities 152,397 53,220
Investing activities:    
Capital expenditures for property and equipment (101,360) (86,503)
Purchase of available-for-sale investments (40,000)  
Acquisition of intangible assets (428) (188)
Net cash used for investing activities (141,788) (86,691)
Financing activities:    
Payments on capital leases (4,556) (7,188)
Repurchase of common stock as part of publicly announced programs (44,913) (87,682)
Repurchase of common stock from employees (18,299) (12,035)
Net proceeds from stock options exercised 15,496 225
Cash dividends paid (48,612) (44,251)
Net cash used for financing activities (100,884) (150,931)
Effect of exchange rates changes on cash (16) (1,653)
Net change in cash and cash equivalents (90,291) (186,055)
Cash and cash equivalents - beginning of period 413,613 378,613
Cash and cash equivalents - end of period 323,322 192,558
Supplemental disclosure of cash flow information:    
Cash paid during the period for income taxes 30,012 32,786
Cash paid during the period for interest $ 550 $ 539
v3.10.0.1
Interim Financial Statements
6 Months Ended
Aug. 04, 2018
Accounting Policies [Abstract]  
Interim Financial Statements

1.  Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at August 4, 2018 and July 29, 2017 and  for the 13 and 26 week periods ended August 4, 2018 and July 29, 2017 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 2017 Annual Report on Form 10-K filed on March 16, 2018 (the “Fiscal 2017 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) that are considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q.

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

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

 

v3.10.0.1
Summary of Significant Accounting Policies
6 Months Ended
Aug. 04, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Summary of Significant Accounting Policies

2.  Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.  At August 4, 2018, the Company operated in one reportable segment.

Fiscal Year

The Company’s financial year is a 52 or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2018” refers to the 52-week period ending February 2, 2019. “Fiscal 2017” refers to the 53-week period ended February 3, 2018.

Estimates

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

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016–02”) which replaces the existing guidance in Accounting Standard Certification (“ASC”) 840, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations.   The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The guidance in ASU 2016-02 permits a Company to adopt using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients that the Company plans to elect.  The Company will adopt the new standard in Fiscal 2019 and expects that it will result in a significant increase to its long-term assets and liabilities on the Consolidated Balance Sheets as the Company has a significant number of leases.  As of August 4, 2018, the Company had undiscounted future minimum lease commitments under non-cancellable operating leases totaling $1.6 billion.  The Company has formed an implementation team, is substantially complete in identifying its lease population and has begun to input the required information into its existing software used to manage its leases in accordance with this new accounting standard.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU 2018-02 in Fiscal 2019 and does not expect a material impact from the adoption of this guidance to its Consolidated Financial Statements.

Foreign Currency Translation

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

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017.

The Company adopted ASU 2014-09 on February 4, 2018 using the modified retrospective method applied to all contracts as of February 4, 2018. Results for reporting periods beginning on or after February 4, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.  The impact was the result of accounting for customer loyalty programs using a relative stand-alone selling price method vs. incremental cost method.  The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASU 2014-09. Refer to the Customer Loyalty Program caption below for additional information.

Additionally, ASU 2014-09 changes the balance sheet presentation of the Company’s sales return reserve.  Presentation on a gross basis is now required, consisting of a separate right of return asset and liability.  These amounts are recorded within (i) Prepaid Expenses and Other and (ii) Other Liabilities and Accrued Expenses, respectively, on the Consolidated Balance Sheets.  Historically, the Company presented the net sales return liability within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheets. Refer to the Sales Return Reserve caption below for additional information.

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

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

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

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

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

 

 

 

August 4,

 

 

July 29,

 

 

 

2018

 

 

2017

 

Men’s apparel and accessories

 

 

30

%

 

 

32

%

Women’s apparel and accessories (excluding Aerie)

 

 

54

%

 

 

55

%

Aerie

 

 

16

%

 

 

13

%

Total

 

 

100

%

 

 

100

%

 

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

 

 

 

13 Weeks Ended

 

(In thousands)

 

August 4,

2018

 

 

July 29,

2017

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

835,692

 

 

$

730,284

 

Foreign (1)

 

 

129,161

 

 

 

114,273

 

Total Net Revenue

 

$

964,853

 

 

$

844,557

 

(1)

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

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

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

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

Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel and entertainment for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.  Additionally, selling, general and administrative expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations.

Other Income (Expense), Net

Other income, net consists primarily of allowances for uncollectible receivables, foreign currency transaction gain/loss and interest income/expense.  

Cash and Cash Equivalents and Short-term Investments

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

As of August 4, 2018, short-term investments include certificates of deposit with a maturity of greater than three months, but less than one year.

As of July 29, 2017, the Company held no short or long-term investments.

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.

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.

Property and Equipment

Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, with depreciation computed utilizing the straight-line method over the asset’s estimated useful life. The useful lives of our major classes of assets are as follows:

 

Buildings

 

25 years

Leasehold improvements

 

Lesser of 10 years or the term of the lease

Fixtures and equipment

Information technology

 

5 years

3-5 years

 

As of August 4, 2018, the weighted average remaining useful life of our assets is approximately 8 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified, for stores that have been open for a period of time sufficient to reach maturity.  Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded. No long-lived asset impairment charges were recorded during the 13 or 26 weeks ended August 4, 2018 or July 29, 2017.

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

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate and Todd Snyder brands.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of February 3, 2018.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.  

Intangible Assets

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

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 26 weeks ended August 4, 2018 or July 29, 2017.

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 adoption of ASU 2014-09 did not have an impact of the Company’s accounting for gift card breakage.

The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $2.1 million and $2.0 million of revenue related to gift card breakage during the 13 weeks ended August 4, 2018 and July 29, 2017, respectively. During the 26 weeks ended August 4, 2018 and July 29, 2017, the Company recorded $4.6 million and $4.5 million, respectively, of revenue related to gift card breakage.

Deferred Lease Credits

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

Co-branded Credit Card

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (the “Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured.  This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings. The adoption of ASU 2014-09 did not have an impact of the Company’s accounting for the co-branded credit card.

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

Customer Loyalty Program

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

Points earned under the Program on purchases at AE and Aerie are accounted for in accordance with ASU 2014-09.  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-AEO or Aerie purchases are accounted for in accordance with ASU 2014-09.  As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.  The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.    

 

Sales Return Reserve

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

As of August 4, 2018, the Company recorded a Right of Return Asset of $5.4 million within Prepaid Expenses and Other on the Consolidated Balance Sheet, offset by a Sales Return Reserve Liability of $12.3 million within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheet.  The Sales Return Reserve Liability was $4.9 million, recorded within Other Liabilities and Accrued Expenses, at July 29, 2017.

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. All operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.  

 

v3.10.0.1
Cash and Cash Equivalents and Short-term Investments
6 Months Ended
Aug. 04, 2018
Cash Cash Equivalents And Short Term Investments [Abstract]  
Cash and Cash Equivalents and Short-term Investments

3.  Cash and Cash Equivalents and Short-term Investments

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

 

(In thousands)

 

August 4,

2018

 

 

February 3,

2018

 

 

July 29,

2017

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

184,280

 

 

$

184,107

 

 

$

162,763

 

Interest bearing deposits

 

 

72,886

 

 

 

174,577

 

 

 

29,795

 

Commercial paper

 

 

66,156

 

 

 

54,929

 

 

 

 

Total cash and cash equivalents

 

$

323,322

 

 

$

413,613

 

 

$

192,558

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

40,000

 

 

 

 

 

 

 

Total short-term investments

 

 

40,000

 

 

 

 

 

 

 

Total

 

$

363,322

 

 

$

413,613

 

 

$

192,558

 

 

Purchases of investments were $40.0 million for the 26 weeks ended August 4, 2018.  There were no sales or purchases of investments for the 26 weeks ended July 29, 2017.

v3.10.0.1
Fair Value Measurements
6 Months Ended
Aug. 04, 2018
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.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis at August 4, 2018 and July 29, 2017:

 

 

 

Fair Value Measurements at August 4, 2018

 

(In thousands)

 

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

184,280

 

 

$

184,280

 

 

 

 

 

 

 

Interest bearing deposits

 

 

72,886

 

 

 

72,886

 

 

 

 

 

 

 

Commercial paper

 

 

66,156

 

 

 

66,156

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

323,322

 

 

$

323,322

 

 

 

 

 

 

 

Short-term investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of Deposit

 

 

40,000

 

 

 

40,000

 

 

 

 

 

 

 

Total short-term investments

 

 

40,000

 

 

 

40,000

 

 

 

 

 

 

 

 

 

Total

 

$

363,322

 

 

$

363,322

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at July 29, 2017

 

(In thousands)

 

Carrying Amount

 

 

Quoted Market

Prices in Active

Markets for

Identical

Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

162,763

 

 

$

162,763

 

 

 

 

 

 

 

Interest bearing deposits

 

 

29,795

 

 

 

29,795

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

192,558

 

 

$

192,558

 

 

$

 

 

$

 

 

In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at August 4, 2018 or July 29, 2017.

Non-Financial Assets

The Company’s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis.  However, if certain triggering events occur, or if an annual impairment test is required, and the Company is required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value.  During the 13 and 26 weeks ended for August 4, 2018, the Company did not impair any non-financial assets.

 

v3.10.0.1
Earnings per Share
6 Months Ended
Aug. 04, 2018
Earnings Per Share [Abstract]  
Earnings per Share

5.  Earnings per Share

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

 

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 4,

 

 

July 29,

 

 

August 4,

 

 

July 29,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic number of common shares outstanding

 

 

177,249

 

 

 

177,228

 

 

 

177,329

 

 

 

178,475

 

Dilutive effect of stock options and non-vested

   restricted stock

 

 

1,256

 

 

 

1,560

 

 

 

1,401

 

 

 

1,998

 

Diluted number of common shares outstanding

 

 

178,505

 

 

 

178,788

 

 

 

178,730

 

 

 

180,473

 

 

Equity awards to purchase approximately 0.7 million shares of common stock during both the 13 and 26 weeks ended August 4, 2018, respectively, and approximately 3.3 million shares of common stock during both the 13 and 26 weeks ended July 29, 2017 were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive.

Additionally, approximately 0.7 million shares of restricted stock units for the 13 and 26 weeks ended August 4, 2018, and 1.3 million shares of restricted stock units for the 13 and 26 weeks ended July 29, 2017,were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive. Furthermore, approximately 1.1 million and 1.4 million shares of restricted stock units for the 13 and 26 weeks ended August 4, 2018, respectively, and 0.6 million shares of restricted stock units for both the 13 and 26 weeks ended July 29, 2017, respectively, were not included in the computation of weighted average diluted common shares amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual performance goals.  

Refer to Note 9 to the Consolidated Financial Statements for additional information regarding share-based compensation.

v3.10.0.1
Property and Equipment
6 Months Ended
Aug. 04, 2018
Property Plant And Equipment [Abstract]  
Property and Equipment

6.  Property and Equipment

Property and equipment consists of the following:

 

 

 

August 4,

 

 

February 3,

 

 

July 29,

 

(In thousands)

 

2018

 

 

2018

 

 

2017

 

Property and equipment, at cost

 

$

2,096,940

 

 

$

2,023,875

 

 

$

1,955,756

 

Less:  Accumulated depreciation and impairment

 

 

(1,364,590

)

 

 

(1,299,636

)

 

 

(1,236,629

)

Property and equipment, net

 

$

732,350

 

 

$

724,239

 

 

$

719,127

 

 

v3.10.0.1
Intangible Assets
6 Months Ended
Aug. 04, 2018
Goodwill And Intangible Assets Disclosure [Abstract]  
Intangible Assets

7.  Intangible Assets

Intangible assets consist of the following:

 

 

 

August 4,

 

 

February 3,

 

 

July 29,

 

(In thousands)

 

2018

 

 

2018

 

 

2017

 

Trademarks, at cost

 

$

70,750

 

 

$

70,322

 

 

$

69,166

 

Less:  Accumulated amortization

 

 

(25,686

)

 

 

(23,656

)

 

 

(21,646

)

Intangible assets, net

 

$

45,064

 

 

$

46,666

 

 

$

47,520

 

 

v3.10.0.1
Other Credit Arrangements
6 Months Ended
Aug. 04, 2018
Debt Disclosure [Abstract]  
Other Credit Arrangements

8.  Other Credit Arrangements

In Fiscal 2014, the Company entered into a Credit Agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment.

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

As of August 4, 2018, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of August 4, 2018.    

  

v3.10.0.1
Share-Based Compensation
6 Months Ended
Aug. 04, 2018
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. The Company adopted ASU 2016-09, Compensation—Stock Compensation (“ASU 2016-09”) prospectively at the beginning of Fiscal 2017 and now records excess tax benefits and deficiencies as a discrete adjustment to income tax expense when stock awards vest or are exercised, rather than in contributed capital where they have been historically recorded.  ASU 2016-09 also requires cash flows related to excess tax benefits from share-based compensation to be presented in operating activities, rather than separately as a financing activity, in the Consolidated Statement of Cash Flows.

Total share-based compensation expense included in the Consolidated Statements of Operations and Retained Earnings for the 13 weeks and 26 weeks ended August 4, 2018 was $6.0 million ($4.7 million, net of tax) and $11.7 million ($9.0 million, net of tax), respectively, and for the 13 weeks and 26 weeks ended July 29, 2017 was $5.0 million ($3.3 million, net of tax) and $9.8 million ($6.5 million, net of tax), respectively.  

Stock Option Grants

The Company grants both time-based and performance-based stock options. A summary of the Company’s stock option activity for the 26 weeks ended August 4, 2018 follows:

 

 

 

 

 

 

 

Weighted-

Average

 

 

Weighted-

Average

Remaining

Contractual

 

 

Aggregate

 

 

 

Options

 

 

Exercise Price

 

 

Term

 

 

Intrinsic Value

 

 

 

(In thousands)

 

 

 

 

 

 

(In years)

 

 

(In thousands)

 

Outstanding - February 3, 2018

 

 

2,190

 

 

$

14.59

 

 

 

 

 

 

 

 

 

Granted

 

 

715

 

 

$

19.60

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(991

)

 

$

15.59

 

 

 

 

 

 

 

 

 

Cancelled

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Outstanding - August 4, 2018

 

 

1,914

 

 

$

16.76

 

 

 

5.8

 

 

$

16,831

 

Vested and expected to vest - August 4, 2018

 

 

1,681

 

 

$

17.06

 

 

 

5.8

 

 

$

13,628

 

Exercisable - August 4, 2018 (2)

 

 

174

 

 

$

15.00

 

 

 

5.2

 

 

$

1,836

 

 

(1)

Options exercised during the 26 weeks ended August 4, 2018 had exercise prices ranging from $13.70 to $15.89.   

(2)

Options exercisable represent “in-the-money” vested options based upon the weighted-average exercise price of vested options compared to the Company’s stock price on August 4, 2018.

Cash received from the exercise of stock options was $15.5 million for the 26 weeks ended August 4, 2018 and $0.2 million for the 26 weeks ended July 29, 2017.   The actual tax benefit realized from stock option exercises totaled $0.9 million for the 26 weeks ended August 4, 2018 and $0.7 million for the 26 weeks ended July 29, 2017.     

As of August 4, 2018, there was $6.7 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:

 

 

 

26 Weeks Ended

 

26 Weeks Ended

 

 

 

August 4,

 

July 29,

 

Black-Scholes Option Valuation Assumptions

 

2018

 

2017

 

Risk-free interest rate (1)

 

 

2.6

%

 

2.1

%

Dividend yield

 

 

2.5

%

 

3.1

%

Volatility factor (2)

 

 

39.5

%

 

38.5

%

Weighted-average expected term (3)

 

4.5 years

 

4.5 years

 

 

(1)

Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.

(2)

Based on a combination of historical volatility of the Company’s common stock and implied volatility.

(3)

Represents the period of time options are expected to be outstanding. The weighted average expected option terms were determined based on historical experience.            

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units.  These awards vest over three years.  Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

Performance-based restricted stock awards include performance-based restricted stock units.  These awards cliff vest at the end of a three-year period based upon the Company’s achievement of pre-established goals throughout the term of the award.  Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

The grant date fair value of all restricted stock awards is based on the closing market price per share 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

 

 

 

26 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 4, 2018

 

 

August 4, 2018

 

(Shares in thousands)

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

 

Shares

 

 

Weighted

-Average

Grant Date

Fair Value

 

Nonvested - February 3, 2018

 

 

2,189

 

 

$

13.27

 

 

 

2,138

 

 

$

15.16

 

Granted

 

 

713

 

 

$

24.14

 

 

 

508

 

 

$

19.63

 

Vested

 

 

(948

)

 

$

13.67

 

 

 

(901

)

 

$

14.87

 

Cancelled

 

 

(83

)

 

$

13.29

 

 

 

(18

)

 

$

15.42

 

Nonvested - August 4, 2018

 

 

1,871

 

 

$

17.21

 

 

 

1,727

 

 

$

16.62

 

 

As of August 4, 2018, there was $28.2 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 2.3 years. Based on current probable performance, there is $5.0 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement of performance goals is probable over a one to three -year period.

As of August 4, 2018, the Company had 8.2 million shares available for all equity grants.

 

v3.10.0.1
Income Taxes
6 Months Ended
Aug. 04, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

10.  Income Taxes

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks ended August 4, 2018 was 21.9% compared to 34.0% for the 13 weeks ended July 29, 2017.  The effective income tax rate for the 26 weeks ended August 4, 2018 was 21.9% compared to 33.2% for the 26 weeks ended July 29, 2017.  The decrease in the effective income tax rate for the 13 weeks and 26 weeks ended August 4, 2018 was primarily due to the reduction in the U.S. federal corporate tax rate from 35% to 21% as a result of the enactment of the Tax Cut and Jobs Act (the “Tax Act”) in December 2017, and excess tax benefits from share-based payments in accordance with ASU 2016-09 Compensation—Stock Compensation (Topic 718) (“ASU 2016-09”).  

The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available.  Unrecognized tax benefits decreased by approximately $1.7 million during the 13 weeks ended August 4, 2018 due to income tax settlements.  Over the next twelve months, the Company believes that it is reasonably possible that unrecognized tax benefits may decrease by approximately $3.1 million due to settlements, expiration of statute of limitations or other changes in unrecognized tax benefits. 

 

The Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The Company is applying the guidance in Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), when accounting for the enactment-date effects of the Tax Act. At August 4, 2018, the Company has not completed its accounting for the tax effects of the Tax Act; however, it has made reasonable estimates of the tax effects. During the 13 weeks ended August 4, 2018, the Company has not recorded any adjustments to the provisional amounts recorded at February 3, 2018 related to the remeasurement of its deferred balances and the one-time transition tax.  In all cases, the Company is continuing to make and refine its calculations as additional analysis is completed. In addition, the Company’s estimates may also be affected as it gains a more thorough understanding of the tax law and certain aspects of the Tax Act are clarified by the taxing authorities. See Note 14 to the Consolidated Financial Statements in the Fiscal 2017 Form 10-K for further details on the Tax Act and SAB 118.

 

 

v3.10.0.1
Legal Proceedings
6 Months Ended
Aug. 04, 2018
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.

v3.10.0.1
Restructuring Charges
6 Months Ended
Aug. 04, 2018
Restructuring And Related Activities [Abstract]  
Restructuring Charges

12.  Restructuring Charges

 

During the 26 weeks ended August 4, 2018, the Company recorded pre-tax restructuring charges of $1.6 million. These amounts consist primarily of charges for corporate severance costs. The Company may incur additional charges for corporate and international restructuring in Fiscal 2018. The magnitude is dependent on a number of factors, including negotiating third-party agreements, adherence to notification requirements and local laws.

 

During the 13 and 26 weeks ended July 29, 2017, the Company recorded pre-tax restructuring related charges of $20.7 million and $26.2 million, respectively. These amounts consist of costs related to the planned exit of a joint business venture; charges for home office restructuring; and the previously announced initiative to explore the closure or conversion of Company owned and operated stores in Hong Kong, China, and the United Kingdom to licensed partnerships.  The closure of Company owned and operated stores in the United Kingdom was completed in the 13 weeks ended July 29, 2017.

 

 

 

26 Weeks Ended

 

 

13 Weeks Ended

 

 

26 Weeks Ended

 

 

 

August 4,

 

 

July 29,

 

 

July 29,

 

(In thousands)

 

2018

 

 

2017

 

 

2017

 

Lease termination and store closure costs

 

$

 

 

$

7,860

 

 

$

8,032

 

Severance and related employee costs

 

 

1,568

 

 

 

1,886

 

 

 

7,161

 

Total cash restructuring charges (1)

 

 

1,568

 

 

 

9,746

 

 

 

15,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joint business venture charges (2)

 

 

 

 

 

9,311

 

 

 

9,311

 

Inventory charges (3)

 

 

 

 

 

1,669

 

 

 

1,669

 

Total restructuring charges

 

$

1,568

 

 

$

20,726

 

 

$

26,173

 

(1)

Cash charges of $1.6 million for the 26 weeks ended August 4, 2018 consisted primarily of charges for corporate severance costs and $9.7 million and $15.2 million for the 13 and 26 weeks ended July 29, 2017, respectively, for lease termination, store closures and severance were recorded within Restructuring Charges on the Consolidated Statements of Operations and Retained Earnings

(2)

$9.3 million ($5.1 million cash and $4.2 million non-cash) of charges related to the planned exit of a joint business venture were recorded within Other (Expense) Income, Net on the Consolidated Statements of Operations and Retained Earnings

(3)

Non-cash inventory charges of $1.7 million related to restructuring activities for our United Kingdom and Asia markets recorded as a reduction in Gross Profit on the Consolidated Statements of Operations and Retained Earnings.

 

 

A rollforward of the liabilities recognized in the Consolidated Balance Sheet is as follows.  The accrued liability as of February 3, 2018 relates to previous restructuring activities disclosed in the Company’s Fiscal 2017 Form 10-K, which remained unpaid at the beginning of Fiscal 2018.

 

 

 

26 Weeks Ended

 

 

 

August 4,

 

(In thousands)

 

2018

 

Accrued liability as of February 3, 2018

 

$

7,650

 

Add: Costs incurred, excluding non-cash charges

 

 

1,568

 

Less:  Cash payments and adjustments

 

 

(4,577

)

 

 

 

 

 

Accrued liability as of August 4, 2018

 

$

4,641

 

 

 

 

 

 

 

v3.10.0.1
Summary of Significant Accounting Policies (Policies)
6 Months Ended
Aug. 04, 2018
Accounting Policies [Abstract]  
Principles of Consolidation

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.  At August 4, 2018, the Company operated in one reportable segment.

Fiscal Year

Fiscal Year

The Company’s financial year is a 52 or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2018” refers to the 52-week period ending February 2, 2019. “Fiscal 2017” refers to the 53-week period ended February 3, 2018.

Estimates

Estimates

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016–02”) which replaces the existing guidance in Accounting Standard Certification (“ASC”) 840, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations.   The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The guidance in ASU 2016-02 permits a Company to adopt using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients that the Company plans to elect.  The Company will adopt the new standard in Fiscal 2019 and expects that it will result in a significant increase to its long-term assets and liabilities on the Consolidated Balance Sheets as the Company has a significant number of leases.  As of August 4, 2018, the Company had undiscounted future minimum lease commitments under non-cancellable operating leases totaling $1.6 billion.  The Company has formed an implementation team, is substantially complete in identifying its lease population and has begun to input the required information into its existing software used to manage its leases in accordance with this new accounting standard.

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU 2018-02 in Fiscal 2019 and does not expect a material impact from the adoption of this guidance to its Consolidated Financial Statements.

Foreign Currency Translation

Foreign Currency Translation

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

Revenue Recognition

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017.

The Company adopted ASU 2014-09 on February 4, 2018 using the modified retrospective method applied to all contracts as of February 4, 2018. Results for reporting periods beginning on or after February 4, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.  The impact was the result of accounting for customer loyalty programs using a relative stand-alone selling price method vs. incremental cost method.  The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASU 2014-09. Refer to the Customer Loyalty Program caption below for additional information.

Additionally, ASU 2014-09 changes the balance sheet presentation of the Company’s sales return reserve.  Presentation on a gross basis is now required, consisting of a separate right of return asset and liability.  These amounts are recorded within (i) Prepaid Expenses and Other and (ii) Other Liabilities and Accrued Expenses, respectively, on the Consolidated Balance Sheets.  Historically, the Company presented the net sales return liability within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheets. Refer to the Sales Return Reserve caption below for additional information.

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

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

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

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

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

 

 

 

August 4,

 

 

July 29,

 

 

 

2018

 

 

2017

 

Men’s apparel and accessories

 

 

30

%

 

 

32

%

Women’s apparel and accessories (excluding Aerie)

 

 

54

%

 

 

55

%

Aerie

 

 

16

%

 

 

13

%

Total

 

 

100

%

 

 

100

%

 

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

 

 

 

13 Weeks Ended

 

(In thousands)

 

August 4,

2018

 

 

July 29,

2017

 

Total Net Revenue:

 

 

 

 

 

 

 

 

United States

 

$

835,692

 

 

$

730,284

 

Foreign (1)

 

 

129,161

 

 

 

114,273

 

Total Net Revenue

 

$

964,853

 

 

$

844,557

 

(1)

Amounts represent sales from American Eagle and Aerie international retail stores, and e-commerce sales that are billed to 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.

Other Income (Expense), Net

Other Income (Expense), Net

Other income, net consists primarily of allowances for uncollectible receivables, foreign currency transaction gain/loss and interest income/expense.  

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 maturity of three months or less to be cash equivalents.

As of August 4, 2018, short-term investments include certificates of deposit with a maturity of greater than three months, but less than one year.

As of July 29, 2017, the Company held no short or long-term investments.

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.

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.

Property and Equipment

Property and Equipment

Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, with depreciation computed utilizing the straight-line method over the asset’s estimated useful life. The useful lives of our major classes of assets are as follows:

 

Buildings

 

25 years

Leasehold improvements

 

Lesser of 10 years or the term of the lease

Fixtures and equipment

Information technology

 

5 years

3-5 years

 

As of August 4, 2018, the weighted average remaining useful life of our assets is approximately 8 years.

 

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified, for stores that have been open for a period of time sufficient to reach maturity.  Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded. No long-lived asset impairment charges were recorded during the 13 or 26 weeks ended August 4, 2018 or July 29, 2017.

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

Goodwill

Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate and Todd Snyder brands.  In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of February 3, 2018.  As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.  

Intangible Assets

Intangible Assets

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

The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 26 weeks ended August 4, 2018 or July 29, 2017.

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 adoption of ASU 2014-09 did not have an impact of the Company’s accounting for gift card breakage.

The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $2.1 million and $2.0 million of revenue related to gift card breakage during the 13 weeks ended August 4, 2018 and July 29, 2017, respectively. During the 26 weeks ended August 4, 2018 and July 29, 2017, the Company recorded $4.6 million and $4.5 million, respectively, of revenue related to gift card breakage.

Deferred Lease Credits

Deferred Lease Credits

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

Co-branded Credit Card

Co-branded Credit Card

The Company offers a co-branded credit card (the “AEO Visa Card”) and a private label credit card (the “AEO Credit Card”) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (the “Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured.  This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings. The adoption of ASU 2014-09 did not have an impact of the Company’s accounting for the co-branded credit card.

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

Customer Loyalty Program

Customer Loyalty Program

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

Points earned under the Program on purchases at AE and Aerie are accounted for in accordance with ASU 2014-09.  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-AEO or Aerie purchases are accounted for in accordance with ASU 2014-09.  As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.  The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption.    

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 through the use of historical average return percentages.  

As of August 4, 2018, the Company recorded a Right of Return Asset of $5.4 million within Prepaid Expenses and Other on the Consolidated Balance Sheet, offset by a Sales Return Reserve Liability of $12.3 million within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheet.  The Sales Return Reserve Liability was $4.9 million, recorded within Other Liabilities and Accrued Expenses, at July 29, 2017.

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. All 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:

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.

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. The Company adopted ASU 2016-09, Compensation—Stock Compensation (“ASU 2016-09”) prospectively at the beginning of Fiscal 2017 and now records excess tax benefits and deficiencies as a discrete adjustment to income tax expense when stock awards vest or are exercised, rather than in contributed capital where they have been historically recorded.  ASU 2016-09 also requires cash flows related to excess tax benefits from share-based compensation to be presented in operating activities, rather than separately as a financing activity, in the Consolidated Statement of Cash Flows.

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.