American Eagle Outfitters 2008 Annual Report Download - page 46

Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average
cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise
receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the
point at which title and risk of loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses mark-
downs to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned
permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer
demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed
price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of
inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count
and the balance sheet date. The estimate for the shrinkage reserve can be affected by changes in merchandise mix
and changes in actual shrinkage trends.
The Company sells end-of-season, overstock and irregular merchandise to a third party vendor. Below is a
summary of merchandise sell-offs presented on a gross basis for Fiscal 2008, Fiscal 2007 and Fiscal 2006. Refer to
the Revenue Recognition disclosure below for additional information regarding merchandise sell-offs.
January 31,
2009
February 2,
2008
February 3,
2007
For the Years Ended
(In thousands)
Proceeds from sell-offs ............................. $38,240 $23,775 $16,061
Marked-down cost of merchandise disposed of via sell-offs . . $38,012 $25,805 $22,656
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line
method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:
Buildings .............................. 25years
Leasehold improvements . . . ............... Lesser of 5 to 10 years or the term of the lease
Fixtures and equipment ................... 3to5years
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets
(“SFAS No. 144”), our management evaluates the ongoing value of leasehold improvements and store fixtures
associated with retail stores, which have been open longer than one year. The Company evaluates long-lived assets
for impairment at the individual store level, which is the lowest level at which individual cash flows can be
identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets
are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to
their estimated fair value and an impairment loss is recorded in selling, general and administrative expenses.
During Fiscal 2008, the Company recorded an asset impairment charge of $6.7 million related primarily to the
impairment of five M+O stores. Based on the Company’s review of the operating performance and projections of
future performance of these stores, the Company determined that these stores would not be able to generate
sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. During
Fiscal 2007, the Company recognized impairment losses of $0.6 million. The Company did not recognize any
impairment losses during Fiscal 2006.
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)