American Eagle Outfitters 2004 Annual Report Download

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2004 ANNUAL REPORT

Table of contents

  • Page 1
    2004 ANNUAL REPORT

  • Page 2
    DEAR STOCKHOLDERS,

  • Page 3
    American Eagle Outfitters had an outstanding fiscal 2004.

  • Page 4
    In every quarter, our business delivered record results,

  • Page 5
    ... store for jeans. In 2004, we nearly doubled our market share in specialty store denim, making AE jeans the 2nd most purchased brand by 15 to 25 year-olds. Now, we're after the number one slot. We have tremendous opportunities in other product categories as well. Driving productivity across key...

  • Page 6
    ... the two-for-one stock split distributed on March 7, 2005. (5) All amounts have been updated to reflect American Eagle operations only and exclude Bluenotes for all periods presented. (6) Net sales per average gross square foot is calculated using retail sales for the year divided by the straight...

  • Page 7
    Sales hit record levels in 2004, rising 31% to $1.9 billion. SALES GROWTH +31% $1.9 billion $1.4 billion +31% 2003 2004 We reconnected with our 15 to 25 year-old target customers. In 2004, we made key changes to fits and styles, which were very well accepted by our customers.

  • Page 8
    ... store sales performance was strong throughout 2004, rising 21% for the year. COMPARABLE STORE SALES GROWTH 1Q 2Q 3Q 4Q FISCAL 2004 +10% +14% +27% +29% +21% The market share for AE Jeans nearly doubled in 2004, growing to the #2 most purchased specialty store brand by 15 to 25 year-olds...

  • Page 9
    ... $224 million for the year. INCOME FROM CONTINUING OPERATIONS $224 million +170% $83 million 2003 2004 We strengthened our store base in 2004 through the addition of 41 net new stores. Our second Manhattan flagship store opened on West 34th Street in May to a terrific customer response.

  • Page 10
    Our company is in excellent financial condition, ending 2004 with $674 million in cash, short and long-term investments. CASH, SHORT AND LONG-TERM INVESTMENTS $674 million $362 million 2003 2004 We rocked college students at over 90 football games with our "AE Jeans will rock you" campaign.

  • Page 11
    FORM 10-K

  • Page 12

  • Page 13
    ... Number: 0-23760 American Eagle Outfitters, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) No. 13-2721761 (I.R.S. Employer Identification No.) 150 Thorn Hill Drive, Warrendale, PA (Address of principal executive...

  • Page 14
    ... Item 14. Directors and Executive Officers of the Registrant ...63 Executive Compensation...63 Security Ownership of Certain Beneficial Owners and Management ...63 Certain Relationships and Related Transactions...63 Principal Accounting Fees and Services ...63 PART IV Item 15. Exhibits and Financial...

  • Page 15
    ...like jeans, cargo pants, and graphic T's as well as a stylish assortment of accessories, outerwear and footwear under our American Eagle Outfitters® and AE® brand names. As of January 29, 2005, we operated 846 American Eagle Outfitters stores in the United States and Canada. As used in this report...

  • Page 16
    ...added seven new stores in California, a market with strong demographics for our target customer. We continue to expand in our newer markets including Puerto Rico, where we opened an additional store during Fiscal 2004. We also opened our second "flagship" store in New York City this year, located on...

  • Page 17
    ... square foot basis. At January 29, 2005, we operated 846 stores in the United States and Canada as shown below: United States, including the Commonwealth of Puerto Rico - 777 stores Alabama Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho...

  • Page 18
    ... anticipated sales volume and the quantity and mix of merchandise allocated to stores. Merchandise is shipped to the stores two to five times per week depending upon the season and store requirements. Ae.com, the Company's e-commerce operation, uses a third-party vendor for its fulfillment services...

  • Page 19
    ... foot central distribution center near Toronto and five smaller sub-centers located in Toronto and across Canada totaling approximately 120,000 square feet. Merchandise is shipped to the stores two to five times per week depending upon the season and store requirements. To support new store growth...

  • Page 20
    ... American Eagle Outfitters® in the Canadian Trademark Office for a wide variety of clothing products, as well as for retail clothing store services. In addition, we are exclusively licensed in Canada to use AE® and AEO® in connection with the sale of a wide range of clothing products. Employees...

  • Page 21
    ... Toronto, which is also used for the American Eagle Canada administrative offices. We also rent five smaller distribution sub-centers located in Toronto and across Canada as part of NLS with a total of approximately 120,000 square feet. The sub-center leases expire with various terms through 2010...

  • Page 22
    ... the Company's cash dividend to an annual rate of twenty cents per share. A quarterly dividend of five cents per share was paid on April 8, 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements...

  • Page 23
    ... Long-term investments Working capital Stockholders' equity Long-term debt Current ratio Average return on stockholders' equity Other Financial Information (6) Total stores at year-end Capital expenditures (000's) Net sales per average selling square foot (7) Total selling square feet at end...

  • Page 24
    ... American Eagle operations only and exclude Bluenotes for all periods presented. See Note 10 of the accompanying Consolidated Financial Statements for additional information regarding the disposition of Bluenotes. (7) Net sales per average square foot is calculated using retail sales for the year...

  • Page 25
    ... Consolidated Financial Statements. Revenue Recognition. The Company records revenue for store sales upon the purchase of merchandise by customers. The Company's e-commerce operation records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current...

  • Page 26
    ... costs. Buying, occupancy and warehousing costs consists of compensation and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies...

  • Page 27
    ... the year we continued to make significant investments in our business, including $97.3 million in capital expenditures, which related primarily to our new and remodeled stores in the U.S. and Canada, as well as the purchase of our corporate headquarters and distribution center near Pittsburgh, PA...

  • Page 28
    ... to the disposition, Bluenotes was presented as a separate reportable segment. The American Eagle segment includes the Company's 846 U.S. and Canadian retail stores and the Company's ecommerce operation, ae.com. Comparison of Fiscal 2004 to Fiscal 2003 Net Sales Net sales increased 31.1% to $1.881...

  • Page 29
    ... salaries, advertising, leasing costs, asset write-offs related to store closings, communications, travel and services purchased. These improvements were partially offset by the deleveraging of incentive compensation, which was not incurred in the prior year, as well as the deleveraging of holiday...

  • Page 30
    ... and Capital Resources The Company's uses of cash are primarily for working capital, the construction of new stores and the remodeling of existing stores, information technology upgrades, distribution center improvements, the purchase of both short and long-term investments and the payment of...

  • Page 31
    ... the United States and Canada, as well as $20.0 million for the acquisition of our corporate headquarters and distribution center. The remaining capital expenditures related primarily to fixtures and improvements to existing stores and technological improvements. The Company purchased both short and...

  • Page 32
    ... the Company's cash dividend to an annual rate of twenty cents per share. A quarterly dividend of five cents per share was paid on April 8, 2005. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements...

  • Page 33
    ...related to two store leases that were assigned to 6295215 Canada Inc. (the "Purchaser"). These guarantees were provided to the applicable landlords and will remain in effect until the leases expire in 2007 and 2015, respectively. The lease guarantees require the Company to make all required payments...

  • Page 34
    ... required. The Company is currently in the process of determining the transition method that it will use to adopt the new standard. The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using...

  • Page 35
    ... of various professional services provided to the Company, including certain legal, real estate, travel and insurance services. The Company discontinued its cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft. The Company incurred operating costs and...

  • Page 36
    ... its store expansion goals, manage its growth effectively, successfully integrate the planned new stores into the Company's operations or operate its new and remodeled stores profitably. Our ability to grow through the internal development of a new brand During Fiscal 2004, the Company announced...

  • Page 37
    ... developing a profitable new brand, this could adversely impact the Company's continued growth and results of operations. Our ability to continue the Company's current level of sales and earnings growth During Fiscal 2004, the Company realized substantial growth in both sales and earnings. A number...

  • Page 38
    ... of Cash Flows. Under SFAS No. 123(R), all forms of share-based payments to employees, including grants of employee stock options, are treated the same as other forms of compensation by recognizing the related cost in the Statement of Operations. Currently, the Company accounts for its stock-based...

  • Page 39
    ... in the interruption of service from our distribution centers or in a large number of our stores; any interruption of key services provided by third party vendors; changes in weather patterns; the effects of changes in current exchange rates and interest rates; and international and domestic acts of...

  • Page 40
    26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...27 Consolidated Balance Sheets ...28 Consolidated Statements of Operations ...29 Consolidated Statements of Comprehensive Income ...30 ...

  • Page 41
    ... Registered Public Accounting Firm The Board of Directors and Stockholders of American Eagle Outfitters, Inc. We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 29, 2005 and January 31, 2004, and the related consolidated...

  • Page 42
    28 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) Assets Current assets: Cash and cash equivalents Short-term investments Merchandise inventory Accounts and note receivable, including related party Prepaid expenses and other Deferred income taxes Total current assets ...

  • Page 43
    29 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended January 31, January 29, 2004 2005 (Restated) Net sales Cost of sales, including certain buying, occupancy and warehousing expenses Gross profit Selling, general and administrative expenses Depreciation and ...

  • Page 44
    ... Financial Statements Net income Other comprehensive income: Unrealized (loss) gain on investments, net of tax Foreign currency translation adjustment Reclassification adjustment for losses realized in net income related to the sale of Bluenotes Unrealized derivative gains (losses) on cash...

  • Page 45
    ... value preferred stock at January 29, 2005, January 31, 2004 and February 1, 2003. (2) Amount represents cash dividends paid for two quarters only. Note that the Company's first ever cash dividend was initiated during the third quarter of Fiscal 2004. See Notes to Consolidated Financial Statements...

  • Page 46
    ... Stock compensation Deferred income taxes Tax benefit from exercise of stock options Other adjustments Changes in assets and liabilities: Merchandise inventory Accounts and note receivable, including related party Prepaid expenses and other Accounts payable Unredeemed stored value cards and gift...

  • Page 47
    ...high quality merchandise at affordable prices. American Eagle's collection offers modern basics like jeans, cargo pants, and graphic T's as well as a stylish assortment of accessories, outerwear and footwear. The Company operates retail stores located primarily in regional enclosed shopping malls in...

  • Page 48
    ... of Prior Financial Information On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their...

  • Page 49
    ...the effects of the restatement adjustments on our Consolidated Financial Statements. Consolidated Statements of Operations (In thousands, except per share amounts) Fiscal year ended January 31, 2004 Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization...

  • Page 50
    ... American Jobs Creation Act of 2004 In December 2004, the FASB issued Staff Position No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2"). FSP No. 109-2 allows additional time for companies...

  • Page 51
    ... required. The Company is currently in the process of determining the transition method that it will use to adopt the new standard. The Company currently accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using...

  • Page 52
    ... method. Average cost includes merchandise design and sourcing costs and related expenses. The Company recognizes its inventory at the point when it arrives at one of our deconsolidation centers. The Company reviews its inventory levels in order to identify slow-moving merchandise and generally uses...

  • Page 53
    ... during Fiscal 2004, this impairment loss has been reclassified to discontinued operations in the accompanying Consolidated Financial Statements. The Company has approximately $10.1 million of goodwill remaining at January 29, 2005, which is attributed to the American Eagle reportable segment. Long...

  • Page 54
    ... or issue derivative financial instruments for trading purposes. Stock Repurchases On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 7,500,000 shares of its stock. The Company did not purchase any shares of common stock on the open market during Fiscal 2004 as...

  • Page 55
    ... Compensation-Transition and Disclosure ("SFAS No. 148"), issued in December 2002. SFAS No. 148 requires that the pro forma information regarding net income and earnings per share be determined as if the Company had accounted for its employee stock options granted beginning in the fiscal year...

  • Page 56
    ... of compensation and employee benefit expenses, other than for our design, sourcing and importing teams, our buyers and our distribution centers. Such compensation and employee benefit expenses include salaries, incentives and related benefits associated with our stores and corporate headquarters...

  • Page 57
    ... in advertising expense during Fiscal 2004, Fiscal 2003 and Fiscal 2002, respectively. Design Costs The Company has certain design costs, including compensation, rent, travel, supplies and samples, which are included in cost of sales as the respective inventory is sold. Store Pre-Opening Costs Store...

  • Page 58
    ...they are being presented in discontinued operations. See Note 10 of the Consolidated Financial Statements for additional information regarding Bluenotes. (2) Amounts represent sales from American Eagle's Canadian retail stores, as well as AE Direct sales which are billed to and/or shipped to foreign...

  • Page 59
    ...related party merchandise sell-offs as well as a corporate aircraft arrangement, which is further discussed below. SSC and its affiliates charge the Company for various professional services provided to the Company, including certain legal, real estate, travel and insurance services. For Fiscal 2004...

  • Page 60
    ... Fiscal 2004 and $1.0 million during Fiscal 2003 and Fiscal 2002 to cover its share of operating costs based on usage of the corporate aircraft under the cost sharing arrangement. See Part III, Item 13 of this Form 10-K for additional information regarding related party transactions. 4. Accounts and...

  • Page 61
    ... a remaining available balance on the line of $32.4 million. Non-revolving Term Facility and Revolving Operating Facility During Fiscal 2004, the Company retired its $29.1 million non-revolving term facility (the "term facility") for $16.2 million. The term facility required annual payments of...

  • Page 62
    ...The Company leases all store premises, some of our office and distribution facility space, and certain information technology and office equipment. The store leases generally have initial terms of ten years. Most of these store leases provide for base rentals and the payment of a percentage of sales...

  • Page 63
    ... remaining cash proceeds will be received as the inventory is sold by the Purchaser in the normal course of business through April 2, 2005. The transaction resulted in an after-tax loss of $4.8 million, or $0.03 per diluted share, which has been recorded in discontinued operations during Fiscal 2004...

  • Page 64
    ... of Bluenotes, which are being presented as discontinued operations, were as follows: (In thousands) Net sales Loss from operations, net of income tax benefit (1) Loss on disposition, net of income tax benefit Loss from discontinued operations, net of income tax benefit (2) January 29, 2005 $69,825...

  • Page 65
    ... of the Company's deferred tax assets and liabilities were as follows: (In thousands) Deferred tax assets: Current: Inventories Rent Deferred compensation Capital loss Valuation allowance Other Total current deferred tax assets Long-term: Purchase accounting basis differences Operating losses Other...

  • Page 66
    ...18 years old, have completed sixty days of service, and work at least twenty hours a week. Contributions are determined by the employee, with a maximum of $60 per pay period, with the Company matching 15% of the investment. These contributions are used to purchase shares of Company stock in the open...

  • Page 67
    53 by the Compensation and Stock Option Committee of the Board of Directors, primarily vest over five years and expire ten years from the date of grant. The 1994 Plan terminated on January 2, 2004 with all rights of the optionees and all unexpired options continuing in force and operation after the...

  • Page 68
    ... the above Plans. The compensation expense related to stock options was recorded for non-employee grants in accordance with APB No. 25. 14. Contingencies Guarantees In connection with the disposition of Bluenotes, the Company has provided guarantees related to two store leases that were assigned to...

  • Page 69
    ... December 2004, Bluenotes' results of operations are presented as discontinued operations for all periods. As a result, the quarterly data presented below will not agree to previously issued quarterly statements. Additionally, due to the restatement related to changes in the Company's accounting...

  • Page 70
    ...Net sales Gross profit Income from continuing operations, net of tax Loss from discontinued operations, net of income tax benefit Net income Basic per common share amounts: Income from continuing operations Loss from discontinued operations Net income per basic share Diluted per common share amounts...

  • Page 71
    ...Net income per basic share Diluted per common share amounts: Income from continuing operations Loss from discontinued operations Net income per diluted share As Previously Reported May 1, 2004 $332,230 146,052 26,834 (1,727) 25,107 Restatement Due to Change in Lease Accounting Practices $2,667 167...

  • Page 72
    ... income per basic share Diluted per common share amounts: Income from continuing operations Loss from discontinued operations Net income per diluted share As Previously Reported July 31, 2004 $395,402 161,129 31,952 (2,328) 29,624 Restatement Due to Change in Lease Accounting Practices $1,725 (370...

  • Page 73
    ... have been restated to reflect this stock split. On March 8, 2005, the Company's Board of Directors voted to raise its cash dividend payment by 67% to an annual rate of $0.20 per share, from $0.12 per share. A quarterly cash dividend of $0.05 per share was paid on April 8, 2005 to stockholders of...

  • Page 74
    ..."), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management of American Eagle Outfitters, Inc. (the "Management"), including the Company's Chief Executive Officer ("CEO...

  • Page 75
    ... Independent Registered Public Accounting Firm The Board of Directors and Stockholders of American Eagle Outfitters, Inc. We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting, that American Eagle Outfitters, Inc...

  • Page 76
    ... determining the nature, timing, and extent of audit tests applied in our audit of the fiscal 2004 financial statements, and this report does not affect our report dated April 8, 2005 on those financial statements. In our opinion, management's assessment that American Eagle Outfitters, Inc. did not...

  • Page 77
    ...is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information appearing in our Proxy Statement relating to our 2005 Annual Meeting of Stockholders under the captions "Executive Officer Compensation," "Option/SAR Grants in Last Fiscal Year," and "Aggregated Option Exercises in...

  • Page 78
    64 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) The following consolidated financial statements are included in Item 8: Consolidated Balance Sheets as of January 29, 2005 and January 31, 2004 Consolidated Statements of Operations for the fiscal years ended January 29, 2005, ...

  • Page 79
    ... Purchase Amending Agreement between the Registrant and 6295215 Canada Inc. dated December 10, 2004 (17) Profit Sharing and 401(k) Plan (18) Subsidiaries Consent of Independent Registered Public Accounting Firm Power of Attorney Certification by James V. O'Donnell pursuant to Rule 13a-14(a) or Rule...

  • Page 80
    66 (b) Exhibits The exhibits to this report begin on page 68. (c) Financial Statement Schedules None. Part IV

  • Page 81
    ... Chief Executive Officer and Director (Principal Executive Officer) Vice-Chairman, President and Director Executive Vice President and Chief Financial Officer (Principal Financial Officer) Vice President, Controller, and Chief Accounting Officer (Principal Accounting Officer) Chairman of the Board...

  • Page 82
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 83
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 84
    ... Real Estate and Store Planning and Chief Operating Officer, New York Design Center Michael Rempell Senior Vice President, Supply Chain and Technology Henry Stafford Vice President, General Merchandising Manager Stockholder Information Headquarters of the Company 150 Thorn Hill Drive Warrendale, PA...

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    2004 ANNUAL REPORT