American Eagle Outfitters 2008 Annual Report Download - page 34

Certain Relationships and Related Party Transactions
Refer to Part III, Item 13 of this Form 10-K for information regarding related party transactions.
Impact of Inflation/Deflation
We do not believe that inflation has had a significant effect on our net sales or our profitability. Substantial
increases in cost, however, could have a significant impact on our business and the industry in the future.
Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our
average unit retail price, resulting in lower sales and profitability.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have market risk exposure related to interest rates, foreign currency exchange rates and investment security
valuation. Market risk is measured as the potential negative impact on earnings, cash flows or fair values resulting
from a hypothetical change in interest rates or foreign currency exchange rates over the next year.
Interest Rate Risk
Our earnings are affected by changes in market interest rates as a result of our investments in money market
funds and auction rate securities, which have long-term contractual maturities but feature variable interest rates that
reset at short-term intervals. If our Fiscal 2008 average yield rate decreases by 10% in Fiscal 2009, our income
before taxes will decrease by approximately $0.8 million. Comparatively, if our Fiscal 2007 portfolio average yield
rate had decreased by 10% in Fiscal 2008, our income before taxes would have decreased by approximately
$2.9 million. These amounts are determined by considering the impact of the hypothetical yield rates on our cash,
short-term and long-term investment balances.
Additionally, borrowings under our demand lines, which expire on April 22, 2009, bear interest at variable
rates based on the prime rate or LIBOR. At January 31, 2009, the weighted average interest rate on our borrowings
was 2.4%. Based upon a sensitivity analysis as of January 31, 2009, assuming average outstanding borrowing
during Fiscal 2008 of $75.0 million, a 50 basis point increase in interest rates would have resulted in a potential
increase in interest expense of approximately $375,000.
These analyses do not consider the effects of the reduced level of overall investments that could happen in such
an environment. Further, in the event of a change of such magnitude, management would likely take actions to
further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be
taken and their possible effects, the sensitivity analysis assumes no changes in our investments structure.
Foreign Exchange Rate Risk
We are exposed to the impact of foreign exchange rate risk primarily through our Canadian operations where
the functional currency is the Canadian dollar. We do not hedge against foreign currency exchange risks. We believe
our foreign currency translation risk is minimal as a hypothetical 10% change in the Canadian foreign exchange rate
would not materially affect our results of operations or cash flows.
Investment Securities
As of January 31, 2009, we had a total of $734.9 million in cash and cash equivalents, short-term and long-term
investments, which included $255.3 million of investments in ARS and $6.2 million of preferred securities, net of
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