American Eagle Outfitters 2008 Annual Report Download - page 24

Our management considers comparable store sales to be an important indicator of our current perfor-
mance. Comparable store sales results are important to achieve leveraging of our costs, including store payroll,
store supplies, rent, etc. Comparable store sales also have a direct impact on our total net sales, cash and
working capital.
Gross Profit — Gross profit measures whether we are optimizing the price and inventory levels of our
merchandise. Gross profit is the difference between net sales and cost of sales. Cost of sales consists of:
merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns,
shrinkage, certain promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and
warehousing costs consist of: compensation, employee benefit expenses 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; compensation and supplies for our distribution centers, including
purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce
operation. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of
markdowns could have an adverse effect on our gross profit and results of operations.
Operating Income — Our management views operating income as a key indicator of our success. The key
drivers of operating income are comparable store sales, gross profit, our ability to control selling, general and
administrative expenses, and our level of capital expenditures.
Store Productivity — Store productivity, including net sales per average square foot, sales per productive
hour, average unit retail price, conversion rate, the number of transactions per store, the number of units sold
per store and the number of units per transaction, is evaluated by our management in assessing our operational
performance.
Inventory Turnover — Our management evaluates inventory turnover as a measure of how productively
inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory. This can
be critical in determining the need to take markdowns on merchandise.
Cash Flow and Liquidity — Our management evaluates cash flow from operations, investing and
financing in determining the sufficiency of our cash position. Cash flow from operations has historically
been sufficient to cover our uses of cash. Our management believes that cash flow from operations will be
sufficient to fund anticipated capital expenditures and working capital requirements.
Results of Operations
Overview
In Fiscal 2008, the company’s financial performance did not meet management’s expectations. We faced an
increasingly challenging consumer environment, which impacted store traffic and transaction volume and had a
particularly negative impact on the fourth quarter results. The challenging fourth quarter led to an overall decrease
in Fiscal 2008 annual sales and net earnings compared to Fiscal 2007. In addition to this, we experienced slow
demand in AE Brand women’s merchandise, which is our highest volume division. Net sales decreased 2% to
$2.989 billion from $3.055 billion in the prior year. Annual comparable store sales declined 10%.
A slowdown in consumer demand resulted in significantly higher promotional activity, leading to a 17%
decline in gross profit. Negative comparable stores sales also impacted fixed expenses. Rent increased to 10.6%
from 9.0% as a percent to net sales while total selling, general, and administrative expenses increased to 24.8% from
23.4% as a rate to net sales.
Operating income as a percent to net sales was 10.1% for Fiscal 2008 compared to 19.6% for Fiscal 2007.
For Fiscal 2008, net income decreased 55% to $179.1 million. As a percent to net sales, net income decreased
to 6.0% during Fiscal 2008 from 13.1% during Fiscal 2007. Net income per diluted share decreased 53% to $0.86
from $1.82 last year.
We ended Fiscal 2008 with $734.9 million in cash, short-term and long-term investments, a decrease of
$50.9 million from last year. During the year, we continued to make investments in our business, including
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