American Eagle Outfitters 2006 Annual Report Download - page 25

Net sales for Fiscal 2006 increased 20% to $2.794 billion, and consolidated comparable store salesincreased
12% compared to the corresponding 53 week period last year. Sales growth reflected consistently on-trend
merchandise assortments that were well received by our customers. Sales metrics were favorable, led by
increased in-store traffic, higher transaction counts and greater transaction value, which were driven by the
strength andappeal of the AE brand.
Operating income as apercent tonetsales rosetoarate of 21.0% for Fiscal 2006 from 19.8% for Fiscal 2005.
The increase was driven by an improvementingross profit anddepreciation andamortization expense as a
percent tonetsales, partially offset by an increase in selling, general and administrative expenses as apercent to
net sales.
ForFiscal 2006, net income increased 32% to arecord $387.4 million. As apercent tonetsales, net income
increased to 13.9% during Fiscal 2006, which is our highest historical rate to net sales. Net income perdiluted
share increased 35% to $1.70 from $1.26 per diluted share last year.
Cash flow was strong in Fiscal 2006 due to increased profitability. We ended Fiscal 2006 with $1.079 billion in
cash, short-term and long-term investments, an increase of $181.5 million from last year. During the year, we
continuedtomake significant investments in our business, including $225.9 million in capital expenditures.
These expenditures related primarily to our new and remodeled stores in the U.S. and Canada, the expansion of
our Ottawa, Kansas distribution center, the purchase and construction of our new Pittsburgh, Pennsylvania home
office, information technology upgrades at our home office and investments in our new MARTIN +OSAstores.
Additionally, during Fiscal 2006, we repurchased shares of our common stock for approximately $146.5 million.
This table shows, for the periods indicated, the percentage relationship to net sales of the listed items included in
the Company’s Consolidated Statements of Operations.
For the Fiscal Years Ended
February 3,
2007
January 28,
2006
January 29,
2005
Net sales 100.0% 100.0% 100.0%
Cost of sales, including certain buying, occupancy and warehousing
expenses 52.0 53.6 53.4
Gross profit 48.0 46.4 46.6
Selling, general and administrative expenses 23.8 23.2 23.8
Depreciation andamortization expense 3.2 3.4 3.7
Operating income 21.0 19.8 19.1
Other income, net 1.5 0.8 0.3
Income before income taxes 22.5 20.6 19.4
Provision for income taxes8.67.97.5
Income from continuing operations 13.9% 12.7% 11.9%
As aresult of the Bluenotes disposition duringFiscal 2004, our operations are now conducted in onereportable
segment. Prior to the disposition, Bluenotes was presented as aseparate reportable segment. The American Eagle
segment includes our 906 U.S. and Canadian retail stores, ae.com and our five MARTIN+OSAretail stores. At
the end of the current period, MARTIN +OSA was determined to be immaterial for classification as aseparate
reportable segment.
PAGE 20 ANNUAL REPORT 2006
Adoption of New Accounting Standard
As aresult of adopting SFAS No. 123(R) on January 29, 2006, our income before income taxes and net income
were lower by $3.9 million and $2.4 million, respectively, for Fiscal 2006, than if we had continued to account
for share-based compensation under APB No. 25. Net income perbasic anddiluted common share are each lower
by $0.01 for Fiscal 2006 than if we had not adopted SFAS No. 123(R).
As of February 3, 2007, we had $16.5 million and$3.1 million of unrecognized compensation expense related to
nonvested stockoption awardsand nonvested restricted stockawards, respectively. This unrecognized
compensation expense is expected to be recognized over the weighted average periods of 1.9 years for stock
options awards and 10 months for restricted stockawards.
Foradditional information on our adoption of SFAS No. 123(R), see Note 3 of the Consolidated Financial
Statements.
Comparison of Fiscal 2006 to Fiscal 2005
Net Sales
Net sales increased 20% to $2.794 billion from $2.322 billion. The sales increase was due to a 12% comparable
store salesincrease compared to the corresponding 53 week period last year, as well as an 8% increase in gross
square feet,due primarily to the addition of new stores. The comparable store sales increase was driven by strong
customer acceptance of our assortments, as well as positive store traffic. As aresult, we experienced ahigh
single-digit increase in our average transaction value, driven by a mid single-digit increase in units per
transaction and alow single-digit increase in our average unit retailprice. Comparable store sales percentages
increased in the low double-digits in both themen’s and women’s businesses over last year.
Gross Profit
Gross profit increased 24% to $1.340 billion from $1.078 billion in Fiscal 2005. Gross profit as apercent tonet
sales increased by 160 basis points to 48.0% from 46.4% last year. The percentage increase was attributed to a
100 basis point improvement in the merchandise marginrate, as well as a 60 basis point reduction of buying,
occupancy and warehousing costs as apercent tonetsales. Merchandisemarginimproved for the period due
primarily to lower markdowns, as well as ahigher markon, partially offset by increased design costs and the
impact of presenting the cost of merchandise sell-offs and therelated proceedsonagross basis. See Note 2 of the
Consolidated Financial Statements for additional information regarding merchandise sell-offs. Buying,
occupancy and warehousing expenses decreased as apercent tonetsales due primarily to an improvementinrent
expense as apercent tonetsales. Share-based payment expense included in gross profit increased to
approximately $5.8 million compared to $5.0 million last year due to our adoption of SFAS No. 123(R) at the
beginning of Fiscal 2006.
AMERICAN EAGLE OUTFITTERS PAGE 21
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123(R). SFAS
No. 123(R) requires that companies recognize allshare-based payments to employees, including grants of
employee stock options, in the financial statements based on the fair value of the equity or liability instruments
issued. On January 29, 2006, we adopted SFAS No. 123(R) using the modifiedprospective transition method.
Prior to this adoption, we accounted forshare-based payments to employees under the recognition and
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting forStock Issued
to Employees (“APB No. 25”), andrelated interpretations, as permitted by SFAS No. 123, Accounting forStock-
Based Compensation(“SFAS No. 123”). No share-based employee compensation cost related to stock options
was recognized in the Consolidated Statement of Operations during Fiscal 2005, as all options granted under those
plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.