American Eagle Outfitters 2008 Annual Report Download - page 23

value at the time the impairment is deemed to have occurred. Future adverse changes in market conditions,
continued poor operating results of underlying investments or other factors could result in further losses that may
not be reflected in an investment’s current carrying value, possibly requiring an additional impairment charge in the
future. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment
is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of
Operations equal to the difference between the investment’s carrying value and its fair value.
Share-Based Payments. We account for share-based payments in accordance with the provisions of
SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”). To determine the fair value of our
stock option awards, we use the Black-Scholes option pricing model, which requires management to apply
judgment and make assumptions to determine the fair value of our awards. These assumptions include estimating
the length of time employees will retain their vested stock options before exercising them (the “expected term”) and
the estimated volatility of the price of our common stock over the expected term.
We calculate a weighted-average expected term based on historical experience. Expected stock price volatility
is based on a combination of historical volatility of our common stock and implied volatility. We chose to use a
combination of historical and implied volatility as we believe that this combination is more representative of future
stock price trends than historical volatility alone. Changes in these assumptions can materially affect the estimate of
the fair value of our share-based payments and the related amount recognized in our Consolidated Financial
Statements.
Income Taxes. Effective February 4, 2007, we adopted Financial Accounting Standards Board (the “FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file
or not to file in a particular jurisdiction. Under FIN 48, a tax benefit from an uncertain position may be recognized
only if it is “more likely than not” that the position is sustainable based on its technical merits. Refer to Note 12 to
the Consolidated Financial Statements for further discussion of the adoption of FIN 48.
We calculate income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”),
which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing
assets and liabilities and their respective tax bases as computed pursuant to FIN 48. Deferred tax assets and
liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published
guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is
established against the deferred tax assets when it is more likely than not that some portion or all of the deferred
taxes may not be realized. Changes in our level and composition of earnings, tax laws or the deferred tax valuation
allowance, as well as the results of tax audits may materially impact our effective tax rate.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from
an uncertain position and to establish a valuation allowance require management to make estimates and assump-
tions. We believe that our assumptions and estimates are reasonable, although actual results may have a positive or
negative material impact on the balances of deferred tax assets and liabilities, valuation allowances, or net income.
Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing
our performance:
Comparable Store Sales — Comparable store sales provide a measure of sales growth for stores open at
least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including
Fiscal 2007, the prior year period is shifted by one week to compare similar calendar weeks. A store is included
in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage
increase of 25% or greater due to a remodel are removed from the comparable store sales base, but are included
in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the
remodel. Sales from AEO Direct are not included in comparable store sales.
21