American Eagle Outfitters 2008 Annual Report Download - page 28

Provision for Income Taxes
The effective tax rate decreased to approximately 37% from 38% in Fiscal 2006. The decrease in the effective
tax rate is primarily related to a reduction in state income taxes and audit settlements.
Net Income
Net income increased 3% to a record $400.0 million, or 13.1% as a percent to net sales, from $387.4 million, or
13.9% as a percent to net sales in Fiscal 2006. Net income per diluted share increased to $1.82 from $1.70 in Fiscal
2006. The increase in net income was attributable to the factors noted above. The increase in net income per diluted
share was attributable to the factors noted above, as well as a lower weighted average share count in Fiscal 2007
compared to Fiscal 2006.
Fiscal 2009 Outlook
Looking ahead, we expect consumer spending to remain under pressure. In response, we have planned Fiscal
2009 with negative comparable store sales and our inventory investment is planned down compared to last year.
Additionally, we have reduced budgeted selling, general and administrative expense through various expense
reduction initiatives and we have lowered our capital spending plans. We believe that our current cash holdings and
cash generated from operations in Fiscal 2009 will be sufficient to fund anticipated capital expenditures and
working capital requirements.
Adoption of New Accounting Standard
Effective February 4, 2007, we adopted FIN 48. As a result of adopting FIN 48, we recorded a net liability of
approximately $13.3 million for unrecognized tax benefits, which was accounted for as a reduction to the beginning
balance of retained earnings as of February 4, 2007. Refer to Note 12 to the Consolidated Financial Statements for a
discussion of the FIN 48 adoption.
Income Taxes
The effective tax rate used for the provision of income tax approximated 40% and 37% in Fiscal 2008 and
Fiscal 2007, respectively. The increase in the effective tax rate is primarily related to the OTTI charges recorded in
connection with the valuation of our investment securities in which no income tax benefit was recognized.
Fair Value Measurements
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands disclosures about fair value measurements. Fair value
is defined under SFAS No. 157 as the exit price associated with the sale of an asset or transfer of a liability in an orderly
transaction between market participants at the measurement date. We have adopted the provisions of SFAS No. 157 as
of February 3, 2008, for our financial instruments, including its investment securities.
Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable
inputs and minimize the use of unobservable inputs. Prior to Fiscal 2008, due to the auction process which took
place every 30 to 35 days for most of our auction rate securities, quoted market prices were readily available, thus
qualifying as Level 1 under SFAS No. 157. However, due to events in credit markets beginning in the first quarter of
Fiscal 2008, the auction events for most of these instruments failed and therefore we have determined the estimated
fair values of these securities using Level 2 and/or Level 3 inputs.
SFAS No. 157 establishes this three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include:
•Level 1 — Quoted prices in active markets for identical assets or liabilities. Our short-term investments with
active markets, which represent our preferred stock investments, as well as cash and cash equivalents are
reported at fair value utilizing Level 1 inputs. For these items, quoted current market prices are readily
available.
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