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 November 3, 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 (I.R.S. Employer
incorporation or organization) 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 No
------- -----------
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, 71,879,122 shares outstanding as of December 3,
2001.
AMERICAN EAGLE OUTFITTERS, INC.
-------------------------------
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Financial Statements
Consolidated Balance Sheets
November 3, 2001(Unaudited) and February 3, 2001 3
Consolidated Statements of Operations (Unaudited)
Three and nine months ended November 3, 2001 and October 28, 2000 4
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended November 3, 2001 and October 28, 2000 5
Notes to Consolidated Financial Statements 6-10
Review By Independent Accountants 11
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-14
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 N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit 15 Acknowledgement of Independent Accountants 17
2
PART I. FINANCIAL INFORMATION AMERICAN EAGLE OUTFITTERS, INC.
Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS
November 3, February 3,
(Dollars in thousands) 2001 2001
---- ----
Assets
Current assets: (Unaudited)
Cash and cash equivalents $ 72,951 $ 133,446
Short-term investments 11,853 27,927
Merchandise inventory 175,968 84,064
Accounts and note receivable, including related party 29,693 29,466
Prepaid expenses and other 29,558 18,864
Deferred income taxes 17,740 24,894
------------ ------------
Total current assets 337,763 318,661
------------ ------------
Fixed assets:
Land 1,865 1,855
Buildings 10,333 10,266
Fixtures and equipment 128,274 93,186
Leasehold improvements 188,378 134,930
------------ ------------
328,850 240,237
Less: Accumulated depreciation and amortization 77,678 56,864
------------ ------------
251,172 183,373
------------ ------------
Other assets, net of accumulated amortization 38,489 41,012
------------ ------------
Total assets $ 627,424 $ 543,046
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 77,198 $ 42,038
Current portion of note payable 4,040 4,300
Accrued compensation and payroll taxes 24,873 25,549
Accrued rent 28,522 22,577
Accrued income and other taxes 3,777 29,719
Unredeemed stored value cards and gift certificates 7,212 13,085
Other liabilities and accrued expenses 8,046 11,879
------------ ------------
Total current liabilities 153,668 149,147
------------ ------------
Commitments and contingencies - -
Note payable 20,352 24,889
Other non-current liabilities 1,500 1,315
------------ ------------
Total noncurrent liabilities 21,852 26,204
------------ ------------
Stockholders' equity:
Preferred stock - -
Common stock 718 704
Contributed capital 146,682 118,709
Accumulated other comprehensive (loss) income (1,760) 354
Retained earnings 335,885 274,292
------------ ------------
481,525 394,059
------------ ------------
Less: Deferred compensation 5,851 4,025
Treasury stock 23,770 22,339
------------ ------------
Total stockholders' equity 451,904 367,695
------------ ------------
Total liabilities and stockholders' equity $ 627,424 $ 543,046
============ ============
See Notes to Consolidated Financial Statements
3
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 363,659 $ 282,767 $ 907,599 $ 669,743
Cost of sales, including certain buying, occupancy
and warehousing expenses 214,120 162,688 548,201 416,018
------------ ------------ ------------ ------------
Gross profit 149,539 120,079 359,398 253,725
Selling, general and administrative expenses 88,610 67,644 233,509 169,367
Depreciation and amortization 11,403 5,709 29,352 14,952
------------ ------------ ------------ ------------
Operating income 49,526 46,726 96,537 69,406
Other income, net 53 1,186 1,898 3,847
------------ ------------ ------------ ------------
Income before income taxes 49,579 47,912 98,435 73,253
Provision for income taxes 18,837 18,686 36,842 28,642
------------ ------------ ------------ ------------
Net income $ 30,742 $ 29,226 $ 61,593 $ 44,611
============ ============ ============ ============
Basic income per common share $ 0.43 $ 0.42 $ 0.86 $ 0.64
============ ============ ============ ============
Diluted income per common share $ 0.42 $ 0.41 $ 0.83 $ 0.62
============ ============ ============ ============
Weighted average common shares outstanding - basic 71,891 69,173 71,416 69,633
============ ============ ============ ============
Weighted average common shares outstanding - diluted 73,455 71,496 73,880 72,021
============ ============ ============ ============
Retained earnings, beginning $ 305,143 $ 195,919 $ 274,292 $ 180,534
Net income 30,742 29,226 61,593 44,611
------------ ------------ ------------ ------------
Retained earnings, ending $ 335,885 $ 225,145 $ 335,885 $ 225,145
============ ============ ============ ============
See Notes to Consolidated Financial Statements
4
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In thousands)
Nine Months Ended
---------------------------------
November 3, October 28,
2001 2000
------------- -------------
Operating activities:
Net income $ 61,593 $ 44,611
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 29,352 14,952
Stock compensation 2,149 693
Deferred income taxes 9,757 1,542
Other adjustments 2,158 566
Changes in assets and liabilities:
Merchandise inventory (92,877) (51,011)
Accounts and note receivable (138) (11,037)
Prepaid expenses and other (13,421) (8,452)
Accounts payable 39,030 26,124
Unredeemed stored value cards (5,847) (3,194)
Accrued liabilities (14,956) 12,957
------------- -------------
Total adjustments (44,793) (16,860)
------------- -------------
Net cash provided by operating activities 16,800 27,751
------------- -------------
Investing activities:
Capital expenditures (101,708) (70,750)
Purchase of an import services company, Blue Star Imports - (8,500)
Purchase of short-term investments (13,858) (24,016)
Sale of short-term investments 29,932 90,038
------------- -------------
Net cash used for investing activities (85,634) (13,228)
------------- -------------
Financing activities:
Repurchase of common stock (1,085) (22,339)
Net proceeds from stock options exercised 15,543 2,194
Principal payments on note payable (5,770) -
------------- -------------
Net cash provided by (used for) financing activities 8,688 (20,145)
------------- -------------
Effect of exchange rates on cash (349) -
Net decrease in cash and cash equivalents (60,495) (5,622)
------------- -------------
Cash and cash equivalents - beginning of period 133,446 76,581
------------- -------------
Cash and cash equivalents - end of period $ 72,951 $ 70,959
============= =============
See Notes to Consolidated Financial Statements
5
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 November 3, 2001 and for the three and nine month
periods ended November 3, 2001 (the "current period") and October 28, 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 accounting
principles generally accepted in the United States 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. 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 accounting principles
generally accepted in the United States 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 does not anticipate that the
effect of these tests will have an impact on its earnings or 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
6
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 an original 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. As of November 3, 2001, short-term investments
include investments with an original maturity of greater than three months
(averaging approximately five months) and consist primarily of commercial paper.
Capital Structure
The Company has 250,000,000 common shares authorized at $.01 par value,
73,796,285 and 72,228,716 shares issued and 71,878,732 and 70,418,966 shares
outstanding as of November 3, 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 November 3, 2001.
On February 24, 2000, the Company's Board of Directors authorized the repurchase
of up to 3,750,000 shares of its stock. For the nine months ended November 3,
2001, the Company purchased 63,800 shares of common stock on the open market for
approximately $1.1 million. These repurchases have been recorded as treasury
stock.
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 Nine Months Ended
------------------ -----------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Net income $30,742 $29,226 $61,593 $44,611
======= ======= ======= =======
Weighted average common shares outstanding:
Basic shares 71,891 69,173 71,416 69,633
Dilutive effect of stock options and
non-vested restricted stock 1,564 2,323 2,464 2,388
------- ------- ------- -------
Diluted shares 73,455 71,496 73,880 72,021
======= ======= ======= =======
Reclassification
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior periods in order to conform to the November 3, 2001
presentation.
7
3. Supplemental Disclosures of Cash Flow Information
(Dollars in thousands)
For the Nine Months Ended
-------------------------
November 3, October 28,
2001 2000
---- ----
Cash paid for interest $ 1,423 $ -
Income tax payments $ 56,566 $ 20,600
Increases to contributed capital related to the tax
benefits associated with the exercise and vesting
of stock options and restricted stock $ 12,372 $ 2,900
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
parties, including one related party. These sell-offs are typically out-of-
season or irregular merchandise items which reduce inventory levels and have an
insignificant effect on cost of sales.
Related party amounts follow:
(Dollars in thousands)
Three Months Ended Six Months Ended
------------------ ----------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Accounts receivable $ 2,070 $ 2,753 $ 2,070 $ 2,753
Rent expense $ 597 $ 616 $ 1,814 $ 1,904
Cash receipts from sell-offs $ 1,971 $ 702 $ 4,162 $ 10,040
In connection with the liquidation of the inventory from the Canadian
acquisition, 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 nine months ended
November 3, 2001, the Company paid $0.5 million and $1.7 million, respectively,
to the consultant, excluding reimbursement of direct expenses. As of November 3,
2001, all services have been completed under this agreement.
5. Accounts Receivable
Accounts and note receivable is comprised of the following:
(Dollars in thousands)
8
November 3, February 3,
2001 2001
---- ----
Accounts receivable - construction allowances $ 9,395 $ 7,346
Related party accounts receivable 2,070 2,149
Note receivable 8,359 5,904
Accounts receivable - other 9,869 14,067
----- ------
Total $ 29,693 $ 29,466
====== ======
6. Other Comprehensive Income (Loss)
Other comprehensive income (loss) is comprised of the following:
(Dollars in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---- ---- ---- ----
Net Income $ 30,742 $ $ 29,226 $ 61,593 $ 44,611
Unrealized gain on investments and reclassification
adjustment, net of tax - 2,105 - 2,342
Foreign currency translation adjustment, net of tax (1,195) - (1,183) -
Unrealized derivative losses on cash flow hedge, net of tax (347) - (577) -
---------- --------- -------- ----------
Other comprehensive (loss) gain, net of tax
(1,542) 2,105 (1,760) 2,342
---------- --------- -------- ----------
Total comprehensive income $ 29,200 $ 31,331 $ 59,833 $ 146,953
========== ========= ======== ==========
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 November 3, 2001,
unrealized net losses on derivative instruments of approximately $0.3 million,
net of related tax effects, were recorded in other comprehensive income (loss).
9
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 was completed
during the third quarter of Fiscal 2001. As of November 3, 2001, the Company had
$2.8 million remaining in the reserve balance which relates to potential future
lease buyouts for store locations.
The following table summarizes the changes in the exit cost accrual for the nine
months ended November 3, 2001.
(Dollars in thousands)
For the nine months ended November 3, 2001
------------------------------------------
Reserve at Adjustments to Reserve at
February 3, 2001 Payments the Reserve November 3, 2001
---------------- -------- ----------- ----------------
Operating Losses $ 4,166 $ 4,895 $ 729 $ -
Lease Costs 2,662 - 128 2,790
Severance Costs 439 223 (216) -
--- --- ----- -
Total $ 7,267 $ 5,118 $ 641 $ 2,790
===== ===== === =====
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 November
3, 2001, under the original terms of this executive's option agreements, 442,500
shares would have remained unvested which would have resulted in compensation
expense and a reduction to net income by $4.0 million.
10. Income Taxes
For the three and nine months ended November 3, 2001, the effective tax rate
used for the provision of income tax approximated 38% and 37%, respectively. For
the three and nine months ended October 28, 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.
10
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
November 3, 2001 and October 28, 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 November 3, 2001, and the related consolidated statements
of operations for the three and nine month periods ended November 3, 2001 and
October 28, 2000 and the consolidated statements of cash flows for the nine
month periods ended November 3, 2001 and October 28, 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 accounting principles generally accepted in
the United States.
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
November 15, 2001
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of three months ended November 3, 2001 to the three months ended
October 28, 2000
Net sales increased 28.6% to $363.7 million from $282.8 million for the same
period last year, primarily due to new stores. Our favorable sales performance
was driven by a 24.4% increase in units sold offset by a 7.5% decrease in prices
in our American Eagle stores in the United States. We operated 788 total stores
at the end of the period compared to 541 total stores at the end of the prior
period.
Comparable store sales increased 2.6% when compared to the same period last
year.
Gross profit increased to $149.5 million from $120.1 million. Gross profit as a
percent of net sales decreased to 41.1% from 42.5%. The decrease in gross profit
as a percent of net sales, was attributable to a primarily to a 1.1% increase in
buying, occupancy and warehousing costs and a 0.3% decrease in merchandise
margins. The increase in buying, occupancy and warehousing costs resulted
primarily from increased costs due to the timing of new store openings versus
last year. The decrease in merchandise margins resulted primarily from our
Canadian operations which was offset by an improvement in margins in our
American Eagle stores in the United States.
Selling, general and administrative expenses increased to $88.6 million from
$67.6 million. As a percent of net sales, these expenses increased to 24.4% from
23.9%. The increase in selling, general and administrative expenses as a percent
to sales is due primarily to increased communication costs related to the
implementation of a wide-area network, and increased equipment costs, offset by
the leveraging of salaries.
Depreciation and amortization expense increased to $11.4 million from $5.7
million. As a percent of net sales, these expenses increased to 3.1% from 2.1%
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 was $0.1 million, or 0.0% of net sales and $1.2 million, or 0.4% of
net sales for the three months ended November 3, 2001 and October 28, 2000,
respectively. The decrease as a percent of net sales was primarily due to 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 lines of credit during the
current or prior periods.
Income before income taxes increased to $49.6 million from $47.9 million. As a
percent of net sales, income before income taxes decreased to 13.6% from 16.9%.
The decrease in income before income taxes as a percent of sales was
attributable to the factors noted above.
Comparison of nine months ended November 3, 2001 to the nine months ended
October 28, 2000
Net sales increased 35.5 % to $907.6 million from $669.7 million for the same
period last year, primarily due to new stores. Our favorable sales performance
was driven primarily by a 20.0% increase in units sold in our American Eagle
stores in the United States. We operated 788 total stores at the end of the
period compared to 541 total stores at the end of the prior period.
Comparable store sales increased 4.7% when compared to the same period last
year.
Gross profit increased to $359.4 million from $253.7 million. Gross profit as a
percent of net sales increased to 39.6% from 37.9%. The increase in gross profit
as a percent of net sales, was attributable primarily to a 2.1% increase in
merchandise margins as a percent of net sales resulting primarily from reduced
markdowns and improved markons in our American Eagle stores in the United
States.
Selling, general and administrative expenses increased to $233.5 million from
$169.4 million. As a percent of net sales, these expenses increased to 25.7%
from 25.3%. The increase in selling, general and administrative expenses as a
percent to sales is due primarily to increased communication costs related to
the implementation of a wide area network and due to an increase in compensation
costs mainly attributable to our Canadian operations, offset by decreased
advertising costs as a percent of sales.
12
Depreciation and amortization expense increased to $29.4 million from $15.0
million. As a percent of net sales, these expenses increased to 3.2% from 2.2%
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 decreased to $1.9 million, or 0.2% of net sales, from $3.8 million,
or 0.5% of net sales. The decrease as a percent of net sales was primarily due
to 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 $98.4 million from $73.3 million. As a
percent of net sales, income before income taxes was 10.9% for the nine months
ended November 3, 2001 and October 28, 2000.
Liquidity and Capital Resources
The following sets forth certain measures of the Company's liquidity:
(In thousands)
November 3, October 28,
2001 2000
---- ----
Working Capital $184,095 $141,374
Current ratio 2.20 2.14
Net cash provided by operating activities was $16.8 million for the nine months
ended November 3, 2001. This was primarily a result of net income for the period
of $61.6 million offset by net cash used primarily for working capital of $44.8
million. The working capital increase consisted primarily of an increase in
inventory from February 3, 2001 due to the seasonality of the retail business
and new stores, offset by an increase in accounts payable.
Cash outflows for investing activities for the nine months ended November 3,
2001 were primarily for capital expenditures of $101.7 million offset by net
proceeds from the sale of short-term investments of $16.1 million.
Net cash provided by financing activities of $8.7 million was primarily from
$15.5 million from stock options exercised during the nine months ended November
3, 2001 offset by $5.8 million used for principal payments on the note payable
and capital lease obligations and $1.1 million used for stock repurchases.
At November 3, 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 (5.5% at November 3, 2001) or a negotiated rate such as
LIBOR. This includes a temporary increase to the line of $20.0 million through
November 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 November 3, 2001, letters of credit in the amount of $71.2
million were outstanding, leaving a remaining available balance on the line of
$73.8 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. At November 3, 2001, letters of credit in the amount of $4.3
million were outstanding, leaving a remaining available balance on the line of
$45.7 million.
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") in connection with the Canadian acquisition.
The term facility matures in December 2007 and bears interest at the one month
Bankers' Acceptance Rate (2.7 % at November 3, 2001) plus 140 basis points. The
operating facility was due in November 2001, has six additional one year
extensions, and bears interest at either the lender's prime lending rate (5.5%
at November 3, 2001) or the Bankers' Acceptance Rate (2.7% at November 3, 2001)
plus 120 basis points. In November 2001, the Company entered into a one year
extension for the operating facility. There were no borrowings under the
operating facility for the
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period ended November 3, 2001.
Capital expenditures, net of construction allowances, totaled $101.7 million for
the nine months ended November 3, 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 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 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 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,
- -the effect of competitive pressures from other retailers, and
- -the effect of international and domestic potential acts of terror.
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.
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PART II - OTHER INFORMATION
Item 6. Exhibits
(a) Exhibit 15 Acknowledgement of Ernst & Young LLP
(b) None.
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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 December 5, 2001
American Eagle Outfitters, Inc.
(Registrant)
/s/ Laura A. Weil
-----------------------------------------------
Laura A. Weil
Executive Vice President and Chief Financial
Officer
/s/ Dale E. Clifton
-----------------------------------------------
Dale E. Clifton
Vice President, Controller and Chief Accounting
Officer
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