Business Context and Reporting Period
American Eagle Outfitters, Inc. operates the American Eagle, aerie and 77kids brands through U.S. and Canadian stores and e-commerce sites. This Form 10-K reports Fiscal 2010, the 52-week year ended January 29, 2011, compared primarily with Fiscal 2009 ended January 30, 2010. The request metadata refers to 2009 Q4, but the provided filing is an annual report for Fiscal 2010.
- Year-end store base: 1,086 stores, including 929 American Eagle, 148 aerie and nine 77kids locations.
- AEO Direct shipped to 76 countries; the Company also began international franchised-store expansion.
- MARTIN+OSA was closed during Fiscal 2010 and is presented as a discontinued operation.
Financial Performance and Key Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net sales | $2.968 billion | $2.940 billion |
| Comparable-store sales | (1)% | (4)% |
| Gross profit | $1.171 billion | $1.173 billion |
| Gross margin | 39.5% | 39.9% |
| Operating income | $317.3 million | $310.4 million |
| Operating margin | 10.7% | 10.6% |
| Income from continuing operations | $181.9 million | $213.4 million |
| Net income | $140.6 million | $169.0 million |
| Diluted EPS | $0.70 | $0.81 |
| Cash flow from continuing operations | $402.6 million | $400.3 million |
| Capital expenditures | $84.3 million | $127.1 million |
- Continuing-operations diluted EPS was $0.90, versus $1.02 in Fiscal 2009. Fiscal 2010 included a $24.4 million realized loss on investment securities, primarily from liquidating auction-rate securities.
- Discontinued operations generated a net loss of $41.3 million, including $43.4 million of pretax M+O closure charges.
- Cash, short-term investments and long-term investments totaled $740.6 million at year-end, compared with $896.4 million a year earlier.
- Cash and cash equivalents were $667.6 million; working capital was $786.6 million and the current ratio was 3.03.
- The Company had no outstanding debt at year-end after repaying a $30.0 million note payable. Outstanding letters of credit totaled approximately $30.0 million.
- Total assets were $1.880 billion and stockholders’ equity was $1.351 billion.
Material Changes Versus the Prior Comparable Period
- Sales increased 1%, while comparable-store sales improved from a 4% decline to a 1% decline. Lower traffic reduced transactions, partially offset by slightly higher conversion.
- Gross margin decreased 40 basis points because buying, occupancy and warehousing costs increased 50 basis points as a percentage of sales; merchandise margin improved 10 basis points due to lower markdowns.
- Selling, general and administrative expense decreased 2% to $713.2 million, reflecting lower incentive compensation and corporate profit initiatives.
- Operating income increased modestly despite lower gross profit, but income from continuing operations declined 15% because of investment-security losses, a higher tax rate and other items.
- The effective tax rate increased to approximately 38.3% from 29.9%, partly because Fiscal 2009 benefited from Canadian earnings repatriation and tax settlements, while Fiscal 2010 received no tax benefit for certain auction-rate-security losses.
- Operating cash flow remained approximately $402.6 million, while inventory declined to $301.2 million from $326.5 million.
- The Company repurchased 15.5 million shares for approximately $216.1 million and paid $183.2 million in dividends, including a $0.50-per-share special dividend.
- The store base declined to 1,086 from 1,103 at the beginning of the year, after 34 openings and 51 closings, including all 28 M+O stores.
Guidance, Outlook, Risks and Unusual Items
- For Fiscal 2011, management planned approximately 14 new American Eagle stores, 10 aerie stores and 12 77kids stores; 55 to 75 American Eagle remodels; and 15 to 25 American Eagle closures. Approximately 20 new franchised American Eagle stores were also planned.
- Fiscal 2011 capital expenditures were expected to be $90 million to $100 million, with approximately half directed to store growth and renovation.
- Management expected cash on hand and operating cash flow to fund anticipated capital expenditures and working-capital requirements.
- Management identified rising product costs, particularly in the second half of Fiscal 2011, as a significant headwind. Mitigation efforts included lower markdowns, selective price increases and additional expense savings.
- The Fiscal 2010 M+O closure produced $43.4 million of pretax charges: $18.0 million of asset impairments, $15.4 million of lease-related charges, $7.6 million of severance and employee-related costs, and $2.4 million of inventory charges.
- The Company liquidated approximately 95% of its auction-rate-security portfolio and recognized a $24.4 million realized loss. Remaining auction-rate investments totaled $9.2 million and were valued using Level 3 assumptions.
- Principal risks include fashion and inventory misjudgments, markdowns, discretionary consumer spending, cotton and other input-cost inflation, foreign sourcing and import disruptions, vendor failures, store impairment, technology disruptions, seasonality, regulatory matters and availability of credit facilities.
- Contractual obligations totaled $2.269 billion, including $1.773 billion of operating lease commitments, $457.4 million of purchase obligations and $38.7 million of unrecognized tax benefits.
- Management reported no material legal proceedings, no off-balance-sheet arrangements and effective disclosure and internal controls. Ernst & Young issued unqualified audit opinions.
Investor Verification Checklist
- Verify the filing period: the supplied document is Fiscal 2010, ended January 29, 2011, rather than a 2009 quarterly filing.
- Assess whether comparable-store sales, traffic and conversion improved sufficiently to support planned store expansion.
- Review the sustainability of the 10.7% operating margin after corporate cost savings and against rising merchandise, labor and occupancy costs.
- Separate recurring earnings from the $24.4 million investment-security loss and the $43.4 million M+O closure charges.
- Evaluate the effect of substantial lease and purchase commitments on future liquidity, especially during periods of weak consumer demand.
- Monitor remaining auction-rate securities, Level 3 valuation assumptions and any additional impairment risk.
- Review the balance between shareholder distributions and reinvestment: Fiscal 2010 repurchases and dividends materially exceeded capital expenditures.
- Track the performance and profitability of the aerie, 77kids, e-commerce and international franchise initiatives.