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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 May 3, 1997
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.
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(Exact name of registrant as specified in its charter)
OHIO NO. 25-1724320
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528
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(Address of principal executive offices) (Zip code)
(412) 776-4857
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE, 9,923,550 SHARES OUTSTANDING AS OF MAY 19, 1997
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AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Consolidated Balance Sheets
May 3, 1997 (unaudited) and February 1, 1997 3
Consolidated Statements of Operations (unaudited)
Three months ended May 3, 1997 and May 4, 1996 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended May 3, 1997 and May 4, 1996 5
Notes to Consolidated Financial Statements 6-8
Review By Independent Accountants 9
Independent Accountants' Review Report 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-12
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 13
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 23 Acknowledgment of Independent Accountants 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except common stock share amounts) May 3, February 1,
ASSETS 1997 1997
----- -----
Current assets: (Unaudited)
Cash and cash equivalents $14,261 $ 34,326
Merchandise inventory 35,486 27,117
Receivables 1,637 3,556
Prepaid expenses and other 4,805 4,381
Deferred income taxes 4,425 4,380
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Total current assets 60,614 73,760
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Fixed assets:
Fixtures and equipment 24,116 23,118
Leasehold improvements 33,105 32,671
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57,221 55,789
Less: Accumulated depreciation and amortization 20,775 21,598
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36,446 34,191
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Other assets 2,670 2,487
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Total assets $99,730 $110,438
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $19,107 $ 20,430
Accrued compensation and payroll taxes 3,941 4,926
Accrued rent 6,064 6,006
Accrued income and other taxes 526 5,478
Other liabilities and accrued expenses 2,267 2,542
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Total current liabilities 31,905 39,382
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Stockholders' equity:
Common stock, 30,000,000 shares authorized, 10,053,350
shares issued (10,051,950 shares at February 1, 1997) 53,276 52,863
Contributed capital 5,539 5,535
Retained earnings 13,500 17,119
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72,315 75,517
Less: Deferred compensation 2,865 2,836
Treasury stock, 134,000 shares 1,625 1,625
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Total stockholders' equity 67,825 71,056
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Total liabilities and stockholders' equity $99,730 $110,438
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See notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
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May 3, May 4,
1997 1996
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Net sales $ 60,952 $ 54,396
Cost of sales, including certain buying, occupancy
and warehousing expenses 46,699 40,786
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Gross profit 14,253 13,610
Selling, general and administrative expenses 18,910 17,286
Depreciation and amortization 1,669 1,567
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Operating loss (6,326) (5,243)
Interest income, net 330 314
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Loss before income taxes (5,996) (4,929)
Benefit for income taxes (2,377) (1,938)
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Net loss $ (3,619) $ (2,991)
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Net loss per common share $ (0.36) $ (0.30)
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Weighted average number of shares outstanding 9,918 9,875
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Retained earnings, beginning $ 17,119 $ 11,194
Net loss (3,619) (2,991)
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Retained earnings, ending $ 13,500 $ 8,203
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See notes to Consolidated Financial Statements
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(In thousands)
(Unaudited)
Three Months Ended
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May 3, May 4,
1997 1996
---- ----
Net loss $ (3,619) $ (2,991)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED
BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 1,669 1,567
Loss on disposal 401 237
Restricted stock compensation 262 206
Deferred income taxes (45) -
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (8,369) (1,075)
Receivables 1,782 3,173
Prepaid and other (523) (649)
Accounts payable (2,066) (1,660)
Accrued liabilities (5,725) (3,038)
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Total adjustments (12,614) (1,239)
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Net cash used for operating activities (16,233) (4,230)
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INVESTING ACTIVITIES:
Capital expenditures (3,845) (1,467)
Collection on notes from sale of outlet stores - 3,568
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Net cash used for investing activities (3,845) 2,101
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FINANCING ACTIVITIES:
Stock options exercised 13 -
-- -
Net cash provided by financing activities 13 -
-- -
Net decrease in cash (20,065) (2,129)
Cash - beginning of period 34,326 19,986
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Cash - end of period $ 14,261 $ 17,857
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See notes to Consolidated Financial Statements
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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 May 3, 1997 and for the three month periods
ended May 3, 1997 (the "current period") and May 4, 1996 (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 1, 1997 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 1996 Annual Report.
2. BASIS OF PRESENTATION
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.
EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common shares
outstanding during the periods presented. Common share equivalents, principally
in the form of employee stock option awards, are not reflected in the common
stock outstanding as they are anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted in the Company's 1997
annual report. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary (termed basic earnings per
share) earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of primary and fully
diluted earnings per share for the quarters ended May 3, 1997 and May 4, 1996
is not expected to be material.
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the May 3, 1997
presentation.
3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Because no borrowings were required under the terms of the Company's line of
credit, there were no amounts paid for interest during the three months ended
May 3, 1997 or May 4, 1996. Income tax payments were $2.4 million and $0.6
million during the three months ended May 3, 1997 and May 4, 1996,
respectively.
4. RELATED PARTY TRANSACTIONS
As described in the information that follows, the Company has various
transactions with related parties. The nature of the relationship is
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primarily through common ownership. The Company has an operating lease for its
corporate headquarters and distribution center with an affiliate of the
Company. The lease, which was entered into on January 1, 1996, and expires on
December 31, 2010, provides for annual rental payments of approximately $1.2
million through 2001, $1.6 million through 2006, and $1.8 million through the
end of the lease.
In addition, the Company purchases merchandise from and sells merchandise to
various related parties and uses the services of a related importing company.
Transactions with these related parties and associated balance sheet amounts
were as follows:
(In thousands)
Three Months Ended
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May 3, May 4,
1997 1996
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Merchandise purchases plus
import administrative charges $ 12,377 $ 7,076
Accounts payable $ 5,985 $ 4,499
Accounts receivable $ 138 $ 401
Rent expense $ 401 $ 395
Merchandise sales $ 305 $ 178
The Company has provided one-year loans, which are renewed annually, to certain
officers and other individuals to pay the taxes on the restricted stock that
vested in April 1995. As of May 3, 1997, the outstanding value of these loans,
including interest at 6.8%, approximated $515,000 as compared with $350,000 at
May 4, 1996.
5. ACCOUNTS RECEIVABLE
Accounts Receivable is comprised of the following:
May 3, February 1,
1997 1997
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Accounts Receivable - Landlord $ 898 $ 1,336
Related Party Accounts Receivable 138 1,334
Accounts Receivable - Other 601 886
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Total $ 1,637 $ 3,556
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6. INCOME TAXES
The provisions of FASB No. 109, "Accounting for Income Taxes", have been
reflected in the preparation of the accompanying Consolidated Financial
Statements. For the three months ended May 3, 1997 and May 4, 1996, the
effective tax rate used to provide income tax amounts approximated 39%.
7. LEASE COMMITMENTS
The Company is contingently liable for the rental payments totaling
approximately $7.0 million for the outlet stores which were sold in October
1995.
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8. SUBSEQUENT EVENT
Effective May 4, 1997, the Company acquired Prophecy Ltd. (Prophecy), a New
York-based contract apparel manufacturer. The majority partner of Prophecy was
the Schottenstein family. The goals of the acquisition are to leverage the
talent and expense of the Company's New York design office and to use Prophecy's
production expertise and manufacturing relationships to shorten the product
delivery cycle and enable the Company to continually improve product quality and
value. The terms of the acquisition included a cash payment of $0.9 million at
closing, as well as the assumption of net liabilities of approximately $2.7
million.
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REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, our independent accountants, have performed a limited review
of the Consolidated Financial Statements for the quarters ended May 3, 1997 and
May 4, 1996, 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 Shareholders
American Eagle Outfitters, Inc.
We have reviewed the accompanying consolidated balance sheet of American Eagle
Outfitters, Inc. as of May 3, 1997, and the related consolidated statements of
operations for the three-month periods ended May 3, 1997 and May 4, 1996 and
the consolidated statements of cash flows for the three-month periods ended May
3, 1997 and May 4, 1996. 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 generally accepted auditing standards, 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 generally accepted auditing
standards, the consolidated balance sheet of American Eagle Outfitters, Inc. as
of February 1, 1997, and the related consolidated statements of operations and
cash flows for the year then ended (not presented herein) and in our report
dated March 7, 1997 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 1, 1997, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
Pittsburgh, Pennsylvania
May 27, 1997
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
Three months ended
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May 3, May 4,
1997 1996
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Net sales 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and warehousing expenses 76.7 75.0
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Gross profit 23.3 25.0
Selling, general and administrative
expenses 31.0 31.8
Depreciation and amortization 2.7 2.9
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Operating loss (10.4) (9.7)
Interest income, net 0.5 0.6
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Loss before income taxes (9.9) (9.1)
Benefit for income taxes (3.9) (3.6)
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Net loss (6.0)% (5.5)%
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COMPARISON OF THREE MONTHS ENDED MAY 3, 1997 TO THREE MONTHS ENDED MAY 4, 1996
Net sales for the three months ended May 3, 1997 (the "current period")
increased 12.0% to $60.9 million from $54.4 million for the three months ended
May 4, 1996 (the "prior period"). The increase in net sales resulted primarily
from increases of $5.2 million from non-comparable store sales and $1.7 million
or 3.3% in comparable stores sales, offset by a decrease of $0.3 million from
merchandise sales to Mycal Ltd. (formerly Nimius). The total increase in net
sales resulted primarily from an increase in units sold rather than from an
increase in prices. The Company operated 309 stores, excluding 3 temporary
locations, at the end of the current period, compared to 274 stores, excluding 3
temporary locations, operated at the end of the prior period.
Gross profit for the current period increased to $14.3 million from $13.6
million for the prior period. This increase was attributable to higher initial
mark-ups, offset by higher markdowns and occupancy costs compared to the prior
period. Gross profit as a percent of net sales for the current period decreased
to 23.3% from 25.0% for the prior period. This decrease was attributable to the
increased markdowns as a percent of net sales, only partially offset by an
increase as a percent of net sales of higher initial mark-ups.
Selling, general and administrative expenses for the current period increased
to $18.9 million from $17.3 million for the prior period. As a percent of net
sales, these expenses decreased to 31.0% from 31.8% for the prior period. The
increase of $1.6 million resulted from an increase of $1.0 million in salaries
primarily to support the new store growth, an increase of $0.4 million in
promotional advertising, and an increase of $0.3 million in services purchased.
Depreciation and amortization expense for the current period increased to $1.7
million from $1.6 million for the prior period and represented 2.7% of sales in
the current period as compared to 2.9% of sales in the prior period.
Interest income for the current and prior periods was $0.3 million. Interest
income was generated on cash available for investment. No
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borrowings were required under the terms of the Company's line of credit during
the current period.
The loss before income taxes for the current period increased to $6.0 million
from a $4.9 million loss before income taxes for the prior period. As a percent
of net sales, the loss before income taxes for the current period increased to
9.9% from 9.1% for the prior period. The increase in the loss before income
taxes of $1.1 million was primarily a result of higher selling, general, and
administrative expenses and depreciation, offset by increased gross profit
dollars.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of working capital in the current period were cash
flow used by operating activities, primarily to support inventory increases for
anticipated sales and new store growth and accounts payable decreases.
Additionally, the Company used working capital to support capital expenditures.
The Company had working capital of $28.7 and $34.4 million at May 3, 1997 and
February 1, 1997, respectively.
At May 3, 1997, the Company had an unsecured demand lending arrangement with a
bank to provide a $60.0 million line of credit at either the lender's prime
lending rate (8.25% at May 3, 1997) or a negotiated rate such as LIBOR. The
facility has a limit of $40.0 million that can be used for direct borrowing.
Cash generated from operations in prior periods was sufficient enough to
finance operations so that no borrowings were required against the line during
the current period. Letters of credit in the amount of $22.1 million were
outstanding at May 3, 1997. The remaining available balance on the line was
$37.9 million at May 4, 1997.
Capital expenditures, net of construction allowances, totaled $3.8 million for
the three months ended May 3, 1997. These expenditures included the addition of
10 new store locations (including 3 temporary locations), 12 store remodels,
leasehold improvements in existing stores, and the purchase of CAD equipment
and software.
The Company expects to open an additional 15 stores during the remainder of the
fiscal year. The Company has also selected an additional 8 of its
better-performing older stores to upgrade to the newest store design during the
remainder of Fiscal 1997. These locations were selected based upon criteria
such as historical sales performance and lease terms. These forward-looking
statements will be influenced by factors including the Company's financial
position, consumer spending, and the number of advantageous mall store leases
that may become available. The Company believes that the cash flow from
operations and its bank line of credit will be sufficient to meet its presently
anticipated cash requirements through Fiscal 1997.
SEASONALITY
Historically, the Company's operations have been seasonal, with highest 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. The Company has generally recognized net losses during its first and
second fiscal quarters.
IMPACT OF INFLATION
The Company does not believe that the relatively modest levels of inflation
which have been experienced in the United States in recent years have had a
significant effect on its net sales or its profitability. Substantial increases
in cost, however, could have a significant impact on the Company and the
industry in the future.
SAFE HARBOR STATEMENT 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 the Company's
expectations or beliefs concerning future events, including the following: the
planned opening of 15 stores during the remainder of Fiscal 1997; the selection
of 8 stores for remodeling during the remainder of Fiscal 1997; and the
sufficiency of cash flows and line of credit facilities to meet Fiscal 1997
cash requirements. The Company cautions 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: a decline in demand for the merchandise offered by the Company; any
events causing the disruption of imports including the insolvency of a
significant supplier; the ability of the Company to locate and obtain favorable
store sites and negotiate acceptable lease terms; the ability of the Company to
gauge the fashion tastes of its customers and provide merchandise that
satisfies customer demand; the effect of the economic conditions; and the
effect of competitive pressures from other retailers.
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Results actually achieved thus may differ materially from expected results in
any forward-looking statements.
The Company's results of operations will also fluctuate from quarter to quarter
in the future as a result of numerous other factors. These include factors the
Company cannot control that impact mall-based retailers generally, such as
factors affecting the amount of traffic in enclosed shopping malls and regional
and national economic conditions affecting disposable consumer income. They
also include factors over which the Company has some control, such as
distinguishing itself from its competitors based on the quality and design of
its private label brand names; identifying and responding to fashion trends in
a timely manner; the ability to direct source merchandise closer to need and in
appropriate quantities; the ability to retain qualified personnel; and the
number and timing of the opening of new stores. Any one or a combination of
these factors could have a material adverse affect on the Company's results of
operations and financial condition.
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PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 1997 Annual Meeting of Shareholders on May 7,
1997. Holders of 7,978,306 Common Shares of the Company were present
representing approximately 80% of the Company's 9,917,950 Common Shares
issued and outstanding.
(b) The following persons were elected as members of the Company's Board of
and Directors to serve until the annual meeting following their election or
(c) until their successors are duly elected and qualified. Each person
received the number of votes for or the number of votes with authority
withheld indicate below.
Name Votes For Votes Withheld
- ---- --------- --------------
Martin P. Doolan 7,538,723 439,583
Thomas R. Ketteler 7,538,723 439,583
George Kolber 7,538,214 440,092
John L. Marakas 7,538,725 439,581
Jay L. Schottenstein 7,538,823 440,483
Saul Schottenstein 7,523,223 455,083
David W. Thompson 7,538,216 440,090
The proposal to approve the amendments to the Company's 1994 Stock
Option Plan described in the Proxy Statement passed with 6,377,605
votes For, 641,304 votes Against and 11,923 votes withheld.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.10 Purchase Agreement re: Prophecy Limited
Partnership.
23. Acknowledgment of Independent Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K - 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 June 16, 1997
American Eagle Outfitters, Inc.
(Registrant)
/s/ Laura A. Weil
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Laura A. Weil
Executive Vice President and Chief Financial Officer
/s/ Dale E. Clifton
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Dale E. Clifton
Vice President, Controller and Chief Accounting Officer
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