American Eagle Outfitters (AEO) 10-Q 2002 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001

FORM 10-Q

( X )	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2001
OR
(   )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________to______________
Commission file number: 0-23760
American Eagle Outfitters, Inc.
(Exact name of registrant as specified in its charter)

Delaware	No. 13-2721761
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
150 Thorn Hill Drive, Warrendale, PA	15086-7528
(Address of principal executive offices)	(Zipcode)
(724) 776-4857 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x       Noo

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 71,972,971shares outstanding as of August 31, 2001.

AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION			PAGE NO.
Item 1.	Financial Statements
		Consolidated Balance Sheets
			August 4, 2001 (Unaudited) and February 3, 2001	3
		Consolidated Statements of Operations (Unaudited)
			Three and six months ended August 4, 2001 and July 29, 2000	4
		Consolidated Statements of Cash Flows (Unaudited)
			Six months ended August 4, 2001 and July 29, 2000	5-6
		Notes to Consolidated Financial Statements		7-11
		Review By Independent Accountants		12
		Independent Accountants' Review Report		12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			13-15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk			N/A
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings			N/A
Item 2.	Changes in Securities			N/A
Item 3.	Defaults Upon Senior Securities			N/A
Item 4.	Submission of Matters to a Vote of Security Holders			16
Item 5.	Other Information			N/A
Item 6.	Exhibits and Reports on Form 8-K			16
Signatures				17
Exhibit 15	Acknowledgement of Independent Accountants			18

PARTI.FINANCIAL INFORMATION          AMERICANEAGLE OUTFITTERS, INC.
Item1.Financial Statements                              CONSOLIDATED BALANCESHEETS

(Dollars in thousands)		August 4, 2001	February 3, 2001
Assets
Current assets:	(Unaudited)
Cash and cash equivalents	$	75,497	$	133,446
Short-term investments	—			27,927
Merchandise inventory		145,095		84,064
Accounts and note receivable, including related party		13,859		29,466
Prepaid expenses and other		23,582		18,864
Deferred income taxes		36,417		24,894
Total current assets		294,450		318,661
Fixed assets:
Land		1,855		1,855
Buildings		10,531		10,266
Fixtures and equipment		120,223		93,186
Leasehold improvements		175,099		134,930
		307,708		240,237
Less: Accumulated depreciation and amortization		72,026		56,864
		235,682		183,373
Goodwill, net of accumulated amortization		24,625		26,123
Deferred income taxes		9,203		10,129
Other assets, net of accumulated amortization		6,343		4,760
Total assets	$	570,303	$	543,046
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	45,384	$	42,038
Current portion of note payable		4,204		4,300
Accrued compensation and payroll taxes		20,150		25,549
Accrued rent		23,495		22,577
Accrued income and other taxes		9,509		29,719
Unredeemed stored value cards and gift certificates		7,064		13,085
Other liabilities and accrued expenses		11,815		11,879
Total current liabilities		121,621		149,147

Commitments and contingencies	—				—
Note payable		22,229			24,889
Other non-current liabilities		1,321			1,315
Total noncurrent liabilities		23,550			26,204
Stockholders’ equity:
Preferred stock	—				—
Common stock		718			704
Contributed capital		154,238			118,709
Accumulated other comprehensive income (loss)		(219	)		354
Retained earnings		305,143			274,292
		459,880			394,059
Less: Deferred compensation		10,979			4,025
Treasury stock		23,769			22,339
Total stockholders’ equity		425,132			367,695
Total liabilities and stockholders’ equity	$	570,303		$	543,046

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

		Three Months Ended				Six Months Ended
		August 4, 2001		July 29, 2000		August 4, 2001		July 29, 2000
Net sales	$	292,392	$	208,977	$	543,940	$	386,976
Cost of sales, including certain buying, occupancy       and warehousingexpenses		184,403		145,387		334,081		253,330
Gross profit		107,989		63,590		209,859		133,646
Selling, general and administrative expenses		75,284		55,016		144,899		101,723
Depreciation and amortization		9,851		4,952		17,949		9,243
Operating income		22,854		3,622		47,011		22,680
Other income, net		876		948		1,845		2,661
Income before income taxes		23,730		4,570		48,856		25,341
Provision for income taxes		8,424		1,793		18,005		9,956
Net income	$	15,306	$	2,777	$	30,851	$	15,385
Basic earnings per common share	$	0.21	$	0.04	$	0.43	$	0.22
Diluted earnings per common share	$	0.21	$	0.04	$	0.42	$	0.21
Weighted average common shares outstanding - basic		71,537		69,429		71,187		69,863
Weighted average common shares outstanding - diluted		74,586		71,366		74,185		72,305
Retained earnings, beginning	$	289,837	$	193,142	$	274,292	$	180,534
Net income		15,306		2,777		30,851		15,385
Retained earnings, ending	$	305,143	$	195,919	$	305,143	$	195,919

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In thousands)

		Six Months Ended
			August 4, 2001			July 29, 2000
Operating activities:
Net income		$	30,851		$	15,385
Adjustments to reconcile net income to net cash used for operating activities:
	Depreciation and amortization		17,949			9,243
	Loss on impairment and write-off of fixed assets		1,706			504
	Stock compensation		1,434			299
	Deferred income taxes		(10,673	)		(3,029	)
Changes in assets and liabilities:
	Merchandise inventory		(61,181	)		(28,185	)
	Accounts and note receivable		14,385			(15,075	)
	Prepaid expenses and other		(6,500	)		(10,706	)
	Accounts payable		6,589			19,050
	Unredeemed stored value cards		(6,007	)		(3,362	)
	Accrued liabilities		(11,407	)		(10,991	)
	Total adjustments		(53,705	)		(42,252	)
Net cash used for operating activities			(22,854	)		(26,867	)
Investing activities:
Capital expenditures			(72,745	)		(46,626	)
Purchase of an import services company, Blue Star Imports			—			(8,500	)
Purchase of short-term investments			(6,953	)		(28,442	)
Sale of short-term investments			34,880			74,200
Other investing activities			(5,905	)		—
Net cash used for investing activities			(50,723	)		(9,368	)
Financing activities:
Repurchase of common stock			—			(22,339	)
Net proceeds from stock options exercised			15,111			1,858
Other financing activities			907			—
Net cash provided by (used for) financing activities			16,018			(20,481	)
Effect of exchange rates on cash			(390	)		—
Net decrease in cash and cash equivalents			(57,949	)		(56,716	)
Cash and cash equivalents – beginning of period			133,446			76,581
Cash and cash equivalents – end of period		$	75,497		$	19,865

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at August 4, 2001 and for the three and six month periods ended August 4, 2001 (the "current period") and July 29, 2000 (the "prior period") have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at February 3, 2001 was derived from the audited financial statements. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.

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 2000 Annual Report.

2.   Basis of Presentation

Fiscal Year

The Company's financial year is a 52/53 week year that ends on the Saturday nearest to January 31. For tax purposes, the Company reports on a July year-end. As used herein, "Fiscal 2002", "Fiscal 2001" and "Fiscal 2000" refers to the fifty-two week periods ending February 1, 2003, February 2, 2002 and the fifty-three week period ended February 3, 2001, respectively.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. The results of operations of the acquired Canadian businesses are included in the Consolidated Financial Statements beginning October 29, 2000. All intercompany transactions and balances have been eliminated in consolidation.

Estimates

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

Recent Financial Accounting Developments

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new standards, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.

The Company will apply the new standards on accounting for goodwill and other intangible assets beginning in the first quarter of Fiscal 2002. During Fiscal 2002, the Company will perform the required impairment tests of goodwill and indefinite lived intangible assets. The Company has not yet determined what the effect of these tests will be on its earnings and financial position.

Foreign Currency Translation

The Canadian dollar is the functional currency for the Canadian operations. In accordance with SFAS Statement No. 52, Foreign Currency Translation, assets and liabilities denominated in foreign currencies were translated into U.S. dollars at the exchange rate prevailing at the

balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the monthly average exchange rate 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 (loss), net of income taxes, in accordance with SFAS Statement No. 130, Reporting Comprehensive Income (See Note 6 of the Consolidated Financial Statements).

Cash and Cash Equivalents

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

Short-Term Investments

Cash in excess of operating requirements is invested in marketable equity or government debt obligations. Short-term investments include investments with an original maturity of greater than three months.

Capital Structure

At the Company's Annual Meeting of Stockholders on June 5, 2001, the shareholders approved the increase in the number of authorized shares of common stock from 150,000,000 to 250,000,000 common shares at $.01 par value. The Company has 73,796,219 and 72,228,716 shares issued and 71,942,466 and 70,418,966 shares outstanding as of August 4, 2001 and February 3, 2001, respectively. The Company has 5,000,000 preferred shares authorized at $.01 par value, with none issued or outstanding at August 4, 2001.

Earnings Per Share

The following table shows the amounts used in computing earnings per share and the effect on income per share and the weighted average number of shares of dilutive potential common stock (stock options and restricted stock).

(In thousands)	Three Months Ended				Six Months Ended
		August 4, 2001		July 29, 2000		August 4, 2001		July 29, 2000
Net income	$	15,306	$	2,777	$	30,851	$	15,385
Weighted average common shares outstanding:     Basic shares		71,537		69,429		71,187		69,863
Dilutive effect of stock options and non-vested     restricted stock		3,049		1,937		2,998		2,442
Diluted shares		74,586		71,366		74,185		72,305

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for the prior periods in order to conform to the August 4, 2001 presentation.

3.   Supplemental Disclosures of Cash Flow Information

(Dollars in thousands)
		For the Six Months Ended
		August 4, 2001		July 29, 2000
Cash paid for interest	$	993	$	—
Income tax payments	$	40,793	$	20,100
Increases to contributed capital related to the tax benefits associated with the exercise and vesting of stock options and restricted stock	$	12,482	$	1,900

4.   Related Party Transactions

The Company has various transactions with related parties. The nature of the relationship with each party is primarily through common ownership. The Company has an operating lease for its corporate headquarters and distribution center with an affiliate. The lease which expires on December 31, 2020, provides for annual rental payments of approximately $2.0 million through 2000, $2.4 million through 2005, $2.6 million through 2015, and $2.7 million through the end of the lease.

In addition, the Company and its subsidiaries sell merchandise to various related parties.

Related party amounts follow:

(Dollars in thousands)
	Three Months Ended				Six Months Ended
		August 4, 2001		July 29, 2000		August 4, 2001		July 29, 2000
Accounts receivable	$	408	$	8,370	$	408	$	8,370
Rent expense	$	482	$	624	$	1,217	$	1,288
Merchandise sales	$	1,449	$	8,562	$	2,191	$	9,338

In connection with the liquidation of the Braemar inventory, the Company engaged the services of a related party consultant. The agreement was in effect until July 2001, when all Braemar stores closed and were turned over to the Company for conversion to American Eagle stores (See Note 8 of the Consolidated Financial Statements). For the three and six months ended August 4, 2001, the Company paid $0.5 million and $1.2 million, respectively, to the consultant, excluding reimbursement of direct expenses. At August 4, 2001, the Company has a related accounts payable balance of $0.6 million under this agreement.

5.   Accounts Receivable

Accounts and note receivable is comprised of the following:

(Dollars in thousands)
		August 4, 2001		February 3, 2001
Accounts receivable – construction allowances	$	3,575	$	7,346
Related party accounts receivable		408		2,149
Note receivable		3,581		5,904
Accounts and notes receivable – other		6,295		14,067
Total	$	13,859	$	29,466

6.   Other Comprehensive Income (Loss)

Other comprehensive income (loss) is comprised of the following:

(Dollars in thousands)
		Three Months Ended						Six Months Ended
			August 4, 2001			July 29, 2000		August 4, 2001			July 29, 2000
Net Income		$	15,306		$	2,777	$	30,851		$	15,385
	Unrealized gain on investments and reclassification     adjustment, net of tax		—			969		—			237
	Foreign currency translation adjustment, net of tax		628			—		11			—
	Unrealized derivative losses on cash flow hedge, net of tax		(107	)		—		(230	)		—
Other comprehensive gain (loss), net of tax			521			969		(219	)		237
Total comprehensive income		$	15,827		$	3,746	$	30,632		$	15,622

7.   Accounting for Derivative Instruments and Hedging Activities

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, (SFAS No.133) on February 4, 2001, the beginning of Fiscal 2001. SFAS No. 133 requires the transition adjustment from adoption to be reported in net income or other comprehensive income (loss), as appropriate, as the cumulative effect of a change in accounting principle. In accordance with the transition provisions of SFAS No. 133, the Company recorded a cumulative transition adjustment to decrease other comprehensive income (loss) by approximately $0.3 million, net of related tax effects, to recognize the fair value of its derivative instruments as of the date of adoption.

The Company utilizes an interest rate swap to manage interest rate risk. The derivative effectively changes the interest rate on the borrowings under the non-revolving term facility from a variable rate to a fixed rate. The Company recognizes its derivative on the balance sheet at fair value at the end of each period. Changes in the fair value of the derivative that is designated and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income (loss). During the quarter ended August 4, 2001, unrealized net losses on derivative instruments of approximately $0.1 million, net of related tax effects, were recorded in other comprehensive income (loss).

8.   Exit Cost Accrual

In connection with the acquisition of the three divisions of Dylex Limited, the Company announced its intention to convert certain retail locations to American Eagle retail stores. Management finalized and approved a plan related to the conversion during Fiscal 2000. The Company accrued approximately $7.3 million in exit costs consisting primarily of operating losses of the discontinued businesses, lease costs, and severance costs. The conversion plan is expected to be completed during the third quarter of Fiscal 2001.

The following table summarizes the changes in the exit cost accrual for the six months ended August 4, 2001.

(Dollars in thousands)
			For the six months ended August 4, 2001
		Reserve balance at February 3, 2001		Payments		Reallocation of Reserve Balance			Reserve balance at August 4, 2001
Operating Losses	$	4,166	$	4,231	$	65		$	—
Lease Costs		2,662		—		—			2,662
Severance Costs		439		223		(65	)		151
Total	$	7,267	$	4,454	$	—		$	2,813

The exit cost accrual was estimated and may be adjusted as new facts become evident. However, management does not believe that any potential changes would be material.

9.   Contingency

During Fiscal 2000, a senior executive assumed a new position within the Company. As a result of this change, the Company accelerated the vesting on grants covering 780,000 shares of stock for this individual. This acceleration does not result in additional compensation expense unless this executive ceases employment with the Company prior to the original vesting dates. As of August 4, 2001, under the original terms of this executive's option agreements, 442,500 shares would have been unvested which would have resulted in compensation expense reducing net income by $5.8 million.

10.   Income Taxes

For the three and six months ended August 4, 2001, the effective tax rate used for the provision of income tax approximated 36% and 37%, respectively. For the three and six months July 29, 2000, the effective tax rate used for the provision of income tax approximated 39%.

11.     Legal Proceedings

The Company is a party to ordinary routine litigation incidental to its business. Management does not expect the results of the litigation to be material to the financial statements individually or in the aggregate.

Review by Independent Accountants

Ernst & Young LLP, our independent accountants, have performed a limited review of the Consolidated Financial Statements for the three month periods ended August 4, 2001 and July 29, 2000, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.

Independent Accountants' Review Report

The Board of Directors and Stockholders
American Eagle Outfitters, Inc.

We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of August 4, 2001, and the related consolidated statements of operations for the three and six month periods ended August 4, 2001 and July 29, 2000 and the consolidated statements of cash flows for the six month periods ended August 4, 2001 and July 29, 2000. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of American Eagle Outfitters, Inc. as of February 3, 2001, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated March 9, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of February 3, 2001, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania
August 16, 2001

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Comparison of three months ended August 4, 2001 to the three months ended July 29, 2000

Net sales increased 39.9% to $292.4 million from $209.0 million for the same period last year. The increase was primarily attributable to new stores, remodeled stores and nonstore sales, and the addition of the Thriftys/Bluenotes and American Eagle stores in Canada. Our favorable sales performance was driven by a 14.4% increase in units sold and a 3.1% increase in prices in our American Eagle stores in the United States.

Comparable store sales increased 4.6% when compared to the same period last year.

Gross profit increased to $108.0 million from $63.6 million. Gross profit as a percent of net sales increased to 36.9% from 30.4%. The increase in gross profit as a percent of net sales, was attributable primarily to a 6.4% increase in merchandise margins and a 0.1% decrease in buying, occupancy, and warehousing costs. The decrease in merchandise costs resulted primarily from reduced markdowns and improved markons in our American Eagle stores in the United States.

Selling, general and administrative expenses increased to $75.3 million from $55.0 million. As a percent of net sales, these expenses decreased to 25.7% from 26.3%. The improvement in selling, general and administrative expenses as a percent to sales is due primarily to lower advertising costs as a percentage of sales and reduced fulfillment costs in our e-commerce business. These reductions were offset by increased communications costs related to the implementation of a wide area network and an increase in compensation costs mainly attributable to our Canadian operations.

Depreciation and amortization expense increased to $9.9 million from $5.0 million. As a percent of net sales, these expenses increased to 3.4% from 2.4% due primarily to our U.S. expansion, including new stores, remodeled stores and our new distribution center in Kansas as well as due to our Canadian acquisition and expansion.

Other income, net was $0.9 million, or 0.3% of net sales and $0.9 million, or 0.5% of net sales for the three months ended August 4, 2001 and July 29, 2000, respectively. The decrease as a percent of net sales was primarily due to lower cash reserves available for investment and lower average investment rates which resulted in lower investment income, and interest expense on the note payable issued in connection with the Canadian acquisition. No borrowings were required under the terms of our line of credit during the current or prior periods.

Income before income taxes increased to $23.7 million from $4.6 million. As a percent of net sales, income before income taxes increased to 8.1% from 2.2%. The increase in income before income taxes as a percent of sales was attributable to the factors noted above.

Comparison of six months ended August 4, 2001 to the six months ended July 29, 2000

Net sales increased 40.6 % to $543.9 million from $387.0 million for the same period last year. The increase was primarily attributable to new stores, remodeled stores and nonstore sales, and the addition of the Thriftys/Bluenotes and American Eagle stores in Canada. Our favorable sales performance was driven by a 19.4% increase in units sold and a 2.6% increase in prices in our American Eagle stores in the United States.

Comparable store sales increased 6.2% when compared to the same period last year.

Gross profit increased to $209.9 million from $133.6 million. Gross profit as a percent of net sales increased to 38.6% from 34.6%. The increase in gross profit as a percent of net sales, was attributable primarily to a 4.0% increase in merchandise margins resulting primarily from reduced markdowns and improved markons in our American Eagle stores in the United States.

Selling, general and administrative expenses increased to $144.9 million from $101.7 million. As a percent of net sales, these expenses increased to 26.6% from 26.3%. The increase in selling, general and administrative expenses as a percent to sales is due primarily to an increase in compensation costs mainly attributable to our Canadian operations, increased communication costs related to the

implementation of a wide area network and increased costs to support technology capability in our stores. These increases were offset by lower advertising costs as a percent of sales.

Depreciation and amortization expense increased to $17.9 million from $9.2 million. As a percent of net sales, these expenses increased to 3.3% from 2.4% due primarily to our U.S. expansion, including new stores, remodeled stores and our new distribution center in Kansas as well as due to our Canadian acquisition and expansion.

Other income, net decreased to $1.8 million, or 0.3% of net sales, from $2.7 million, or 0.6% of net sales. The decrease as a percent of net sales was primarily due to lower cash reserves available for investment and lower average investment rates which resulted in lower investment income, and interest expense on the note payable issued in connection with the Canadian acquisition. No borrowings were required under the terms of our line of credit during the current or prior periods

Income before income taxes increased to $48.9 million from $25.3 million. As a percent of net sales, income before income taxes increased to 9.0% from 6.5%. The increase in income before income taxes as a percent of sales was attributable to the factors noted above.

Liquidity and Capital Resources

The following sets forth certain measures of the Company's liquidity:

		For the Six Months Ended
(In thousands)
		August 4, 2001		July 29, 2000
Working Capital	$	172,829	$	126,542
Current ratio		2.42		2.36

Net cash used for operating activities was $22.9 million for the six months ended August 4, 2001. This was primarily a result of net income for the period of $30.9 million offset by net cash used primarily for working capital of $53.7 million. The working capital change consisted primarily of an increase in inventory from February 3, 2001 due to the seasonality of the retail business.

Cash outflows for investing activities for the six months ended August 4, 2001 were primarily for capital expenditures of $72.7 million offset by net proceeds from the sale of short-term investments of $27.9 million.

Net cash provided by financing activities of $16.0 million was primarily from stock options exercises during the six months ended August 4, 2001.

At August 4, 2001, the Company had an unsecured demand lending arrangement with a bank to provide a $145.0 million line of credit at either the lender's prime lending rate (6.8% at August 4, 2001) or a negotiated rate such as LIBOR. This includes a temporary increase to the line of $20.0 million which was approved in June 2001. The facility has a limit of $40.0 million that can be used for direct borrowing. No borrowings were required against the line for the current or prior period. At August 4, 2001, letters of credit in the amount of $79.6 million were outstanding, leaving a remaining available balance on the line of $65.4 million.During June 2001, the Company entered into an agreement with a separate financial institution for an uncommitted letter of credit facility for $50.0 million. There were no amounts outstanding under this facility as of August 4, 2001.

During November 2000, the Company entered into a $29.1 million non-revolving term facility (the "term facility") and a $4.9 million revolving operating facility (the "operating facility"). The term facility matures in December 2007 and bears interest at the one month Bankers' Acceptance Rate (3.7 % at August 4, 2001) plus 140 basis points. The operating facility is due in November 2001, has six additional one year extensions, and bears interest at either the lender's prime lending rate (6.8% at August 4, 2001) or the Bankers' Acceptance Rate (3.7% at August 4, 2001) plus 120 basis points. There were no borrowings under the operating facility for the period ended August 4, 2001.

Capital expenditures, net of construction allowances, totaled $72.7 million for the six months ended August 4, 2001. This amount consisted primarily of expenditures related to new American Eagle stores in the United States and Canada, expenditures related to our new distribution center facility in Kansas and expenditures for remodeled and relocated stores.

We plan to open approximately 56 American Eagle Outfitters stores in the United States and Canada and three Thriftys/Bluenotes stores during the remainder of the fiscal year. This forward-looking statement will be influenced by factors including our financial position, consumer spending, and the number of acceptable mall store leases that may become available. We believe that our existing cash and investment balances, our cash flow from operations, and our bank line of credit will be sufficient to meet our anticipated cash requirements through Fiscal 2001.

Impact of Inflation

We do not believe that the relatively modest levels of inflation experienced in the United States in recent years have had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future.

Safe Harbor Statement, Seasonality, and Business Risks

This report contains various `forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:

-the planned opening of approximately 56 American Eagle stores and three Bluenotes stores during the remainder of Fiscal 2001, and
-the sufficiency of existing cash and investment balances, cash flows and line of credit facilities to meet Fiscal 2001 cash requirements.

We caution that these statements are further qualified by factors that could cause actual results to differ materially from those in the forward-looking statements, including without limitation, the following:

-our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner,
-decline in demand for our merchandise,
-the ability to obtain suitable sites for new stores at acceptable costs,
-the integration of new stores into existing operations,
-the acceptance of our AE brand in Canada,
-customer acceptance of our new store design,
-the hiring and training of qualified personnel,
-our ability to successfully acquire and integrate other businesses,
-the integration of our additional distribution facility into existing operations,
-the expansion of buying and inventory capabilities,
-the availability of capital,
-any disaster or casualty resulting in the interruption of service for our distribution centers,
-the effect of economic conditions and consumer spending patterns,
-the effect of changes in weather patterns,
-the change in currency and exchange rates, duties, tariffs, or quotas, and
-the effect of competitive pressures from other retailers.

The impact of the above factors, some of which are beyond our control, may cause our actual results to differ materially from expected results in these statements and other forward-looking statements we may make from time-to-time.

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 2000, these periods accounted for approximately 65% of our sales and approximately 84% of our net income. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

(a)

The Company held its 2001 Annual Meeting of Stockholders on June 5, 2001. Holders of 67,713,399 shares of the Company's common stock were present in person or by proxy representing approximately 95.6% of the Company's 70,854,218 shares outstanding on the record date.

(b) and (c)

The following persons continued to serve as Class I directors: Ari Deshe, Michael G. Jesselson, George Kolber, Roger S. Markfield and Jay L. Schottenstein; and the following persons continue to serve as Class II directors: John L. Marakas, Saul Schottenstein, David W. Thompson and Gerald E Wedren. The following persons were elected as Class III members of the Company's Board of Directors to serve a three year term until the annual meeting in 2004 or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated below.

Name	Shares For	Shares Abstain	Shares Not Voted
Jon P. Diamond	66,709,448	983,952	19,999
Martin P. Doolan	66,825,576	867,824	19,999
Gilbert W. Harrison	67,157,107	536,293	19,999
Thomas R. Ketteler	66,831,756	861,644	19,999
James V. O'Donnell	53,119,289	14,574,111	19,999

The proposal to amend the Company's 1999 Stock Incentive Plan to increase the number of shares available to be issued thereunder from 6 million shares to 11 million shares passed with 36,846,638 shares for, 24,698,869 shares against, 59,063 shares abstain, and 6,108,829 shares not voted.

The proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of common stock to 250 million passed with 63,746,712 shares for, 3,950,458 shares against and 16,229 shares abstain.

The stockholder proposal regarding adoption of human rights standards did not pass. It received 6,637,737 shares for, 51,828,374 shares against, 3,138,459 shares abstain and 6,108,829 shares not voted.

(d) Not applicable

Item 6. Exhibits

(a)	Exhibit 15	Acknowledgement of Ernst & Young LLP
(b)	None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated September 5, 2001

American Eagle Outfitters, Inc.

(Registrant)

/s/ Laura A. WeilLaura A. Weil
Executive Vice President and Chief Financial Officer

/s/ Dale E. CliftonDale E. Clifton
Vice President, Controller and Chief Accounting Officer