Business Context and Reporting Period
American Eagle Outfitters, Inc. operates the American Eagle Outfitters and aerie brands through stores, e-commerce and international franchise or license arrangements. This Form 10-K reports the 52-week fiscal year ended February 1, 2014, referred to as Fiscal 2013. The supplied request metadata identifies “2012 Q4,” but the filing is an annual report for Fiscal 2013 and includes quarterly information for the quarter ended February 1, 2014.
- At year-end, the Company operated 1,066 stores, including 944 American Eagle Outfitters stores and 122 aerie stand-alone stores.
- AEO Direct shipped to 81 countries; third-party operators managed 66 stores in 12 countries.
- The 77kids business was exited in Fiscal 2012 and is presented as discontinued operations for prior periods.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Total net revenue | $3.306 billion | $3.476 billion |
| Comparable sales change | (6)% | 9% |
| Gross profit | $1.114 billion | $1.390 billion |
| Gross margin | 33.7% | 40.0% |
| Operating income | $141.1 million | $394.6 million |
| Operating margin | 4.3% | 11.4% |
| Income from continuing operations | $83.0 million | $264.1 million |
| Diluted EPS from continuing operations | $0.43 | $1.32 |
| Net income | $83.0 million | $232.1 million |
| Cash flow from operating activities | $229.9 million | $499.7 million |
| Capital expenditures | $278.5 million | $93.9 million |
| Cash and short-term investments | $428.9 million | $631.0 million |
Fiscal 2013 adjusted diluted EPS from continuing operations was $0.74, excluding specified impairment, write-off, corporate, employee, fabric and tax-related items. Adjusted results are non-GAAP and should be evaluated with the reported GAAP results.
- Inventory was $291.5 million at year-end, down 16% on a cost-per-square-foot basis, reflecting improved inventory turns and changed ownership terms.
- Working capital was $508.1 million and the current ratio was 2.22.
- The Company had no borrowings under its $150.0 million unsecured revolving credit agreement, was in compliance with its covenants, and had $8.2 million of standby letters of credit outstanding. Trade letters of credit totaled $27.5 million.
- Stockholders’ equity was $1.166 billion; the filing reports no short-term or long-term debt on the balance sheet.
- Dividends paid totaled $72.3 million, and 1.6 million shares were repurchased for $33.1 million under the public repurchase program.
Material Changes Versus the Prior Comparable Period
- Revenue declined 5%, although Fiscal 2013 had 52 weeks versus 53 weeks in Fiscal 2012. Comparable sales declined 6%, with AEO Brand down 7% and aerie down 2%.
- Weak North American traffic, competitive pressure and increased promotional activity drove higher markdowns and reduced gross margin by 630 basis points.
- Gross profit fell 20%, while operating income declined 64% and income from continuing operations declined 69%.
- Operating cash flow decreased 54% to $229.9 million, primarily because of lower earnings and gross margin.
- Capital expenditures increased substantially to fund new stores, remodels, information technology, e-commerce and distribution infrastructure, including the new Hazleton, Pennsylvania distribution center.
- Fiscal 2013 included $44.5 million of asset impairment charges, consisting of $25.2 million for 69 retail stores and $19.3 million for the Warrendale distribution center. Fiscal 2012 included $34.9 million of retail-store impairments.
- Additional Fiscal 2013 charges included $24.1 million related to fabric and product liabilities and discontinuation of the AE Performance line, $14.3 million of corporate and store asset write-offs, $6.3 million related to the corporate jet, and $4.7 million of severance and related employee costs.
- The effective tax rate increased to approximately 42% from 34%, primarily due to foreign valuation allowances, lower earnings and the absence of the prior-year tax settlement benefits.
- The store base increased from 1,044 to 1,066 locations, including 58 new stores, six acquired franchised stores in Hong Kong and China, and 42 closures.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately 25 new AEO Factory stores, approximately 45 AEO store remodels or refurbishments, and closure of approximately 15 to 20 AEO stores and 25 to 30 aerie stores in Fiscal 2014. Square footage was expected to increase slightly.
- Management expected approximately $230 million of Fiscal 2014 capital expenditures, principally for the new distribution center, stores, information technology and e-commerce.
- The Hazleton distribution center was expected to open in the second quarter of Fiscal 2014, with Warrendale operations transitioning during 2015 and expected to be completed by July 2015. The Company expected additional after-tax Warrendale exit charges of $14 million to $15 million, including $12 million of non-cash impairment charges and $2 million to $3 million of severance-related costs.
- Key risks include changing fashion trends, discretionary consumer spending, markdown and inventory exposure, raw-material and labor-cost inflation, international expansion and foreign exchange, global sourcing disruptions, vendor compliance, cybersecurity, information-technology implementation, store impairment and seasonal concentration.
- The Company is secondarily liable for 21 former 77kids store leases through expiration dates extending to 2022, subject to reimbursement rights against the purchaser and a standby letter of credit. No liability was accrued for these guarantees.
- Contractual obligations totaled $2.260 billion, including $1.756 billion of operating lease commitments and $488.0 million of purchase obligations. Unrecognized tax benefits totaled $16.5 million.
- Management stated that current cash and operating cash flow were expected to fund North American operating needs, anticipated capital expenditures and working capital requirements, although additional financing could be needed for acquisitions or expanded growth initiatives.
- Ernst & Young issued an unqualified audit opinion on the financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify whether the 6% comparable-sales decline and 630-basis-point gross-margin decline stabilized after Fiscal 2013.
- Assess whether inventory productivity and lower promotional activity can restore gross margin without sacrificing sales.
- Confirm the timing, cost and operating benefits of the Hazleton distribution center and the closure of Warrendale.
- Reconcile GAAP EPS of $0.43 with adjusted EPS of $0.74 and evaluate whether excluded charges are recurring or nonrecurring.
- Monitor cash generation against approximately $230 million of planned capital expenditures, dividends and potential repurchases.
- Evaluate the economics of planned AEO Factory openings, international expansion and aerie store closures.
- Review lease commitments, former 77kids lease guarantees, purchase obligations, letters of credit and unrecognized tax benefits.