American Eagle Outfitters 2008 Annual Report Download - page 49

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.
Revenue Recognition
Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s
e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping
and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is
included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other
promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales
and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise
returns determined through the use of historical average return percentages. A summary of activity in the sales
return reserve account follows:
January 31,
2009
February 2,
2008
For the Years Ended
(In thousands)
Beginning balance .......................................... $ 4,683 $ 5,998
Returns................................................... (81,704) (83,082)
Provisions................................................. 81,113 81,767
Ending balance ............................................. $ 4,092 $ 4,683
Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and
revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes
revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card
breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in pro-
portion to actual gift card redemptions as a component of net sales. For further information on a change in the
Company’s gift card program, refer to the Gift Cards caption below.
The Company sells end-of-season, overstock and irregular merchandise to a third party vendor. For Fiscal
2008, the Company recorded $38.2 million of proceeds and $38.0 million of cost of sell-offs within net sales and
cost of sales, respectively. For Fiscal 2007, the Company recorded $23.8 million of proceeds and $25.8 million of
cost of sell-offs within net sales and cost of sales, respectively. For Fiscal 2006, the Company recorded $5.3 million
of proceeds and $6.5 million of cost of sell-offs within net sales and cost of sales, respectively. During the three
months ended October 28, 2006, the Company began classifying sell-offs on a gross basis, with proceeds and cost of
sell-offs recorded in net sales and cost of sales, respectively. Prior to this time, the Company had presented the
proceeds and cost of sell-offs on a net basis within cost of sales. Amounts for the six months ended July 29, 2006
were not adjusted to reflect this change as the amounts were determined to be immaterial.
Shipping and handling amounts billed to customers are recorded as revenue. During Fiscal 2008, Fiscal 2007
and Fiscal 2006, the Company recorded shipping and handling revenue of $16.9 million, $16.1 million and
$17.7 million, respectively, in net sales.
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)