American Eagle Outfitters 2009 Annual Report Download - page 23

Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing
our performance:
Comparable store sales — Comparable store sales provide a measure of sales growth for stores open at
least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including
Fiscal 2007, the prior year period is shifted by one week to compare similar calendar weeks. A store is included
in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage
increase of 25% or greater due to a remodel are removed from the comparable store sales base, but are included
in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the
remodel. Sales from American Eagle, aerie and MARTIN+OSA stores are included in comparable store sales.
Sales from AEO Direct are not included in comparable store sales.
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 and achieving an optimal level of sales. 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 and certain senior merchandising executives; 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. The inability to obtain acceptable
levels of sales, 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
Fiscal 2009 started with numerous challenges, including a difficult consumer environment, which impacted
store traffic and transaction volume. This, combined with weak demand for AE merchandise, resulted in a sales and
earnings decline during the first two quarters of Fiscal 2009 compared to Fiscal 2008. We made improvements to
our product assortments and business stabilized, particularly during the second half of the year. Although third
quarter operating results declined compared to 2008, we began to see an improved customer response to certain core
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