American Eagle Outfitters 2009 Annual Report Download - page 26

Provision for Income Taxes
The effective income tax rate decreased to approximately 27% in Fiscal 2009 from 40% in Fiscal 2008. The
decrease in the effective income tax rate was primarily the result of the tax benefit associated with the repatriation of
foreign earnings from Canada as well as federal and state income tax settlements and other changes in income tax
reserves. Additionally, the effective income tax rate was higher in Fiscal 2008 primarily as a result of the
impairment charge recorded in connection with the valuation of certain ARS and auction rate preferred securities
(“ARPS”) in which no income tax benefit was recognized. The repatriation of foreign earnings from Canada in
Fiscal 2009 was a discrete event and has not changed the Company’s intention to indefinitely reinvest the earnings
of our Canadian subsidiaries to the extent not repatriated.
Refer to Note 13 to the Consolidated Financial Statements for additional information regarding our accounting
for income taxes.
Net Income
Net income decreased to $169.0 million in Fiscal 2009 from $179.1 million in Fiscal 2008. As a percent to net
sales, net income was 5.7% and 6.0% for Fiscal 2009 and Fiscal 2008. Net income per diluted share was $0.81
compared to $0.86 last year. The decrease in net income was attributable to the factors noted above.
Comparison of Fiscal 2008 to Fiscal 2007
Net Sales
Net sales decreased 2% to $2.989 billion from $3.055 billion. The decrease resulted primarily from a 10%
decrease in comparable store sales despite an increase in sales from our e-commerce operation and an increase in
gross square feet due to new and remodeled stores.
During Fiscal 2008, our AE Brand average transaction value was flat compared to Fiscal 2007. This was driven
by a mid-single digit increase in units per transaction offset by a mid-single digit decline in average unit retail price.
Comparable store sales were essentially flat in the AE Brand men’s business and declined in the high teens in the AE
Brand women’s business compared to Fiscal 2007.
Gross Profit
Gross profit decreased 17% to $1.174 billion from $1.423 billion in Fiscal 2007. Gross margin as a percent to
net sales decreased by 730 basis points to 39.3% from 46.6% last year. The percentage decrease was attributed to a
560 basis point decrease in the merchandise margin rate and a 170 basis point increase in buying, occupancy and
warehousing costs as a percent to net sales. Merchandise margin decreased for the period due primarily to increased
markdowns as well as an increase in merchandise costs.
Buying, occupancy and warehousing expenses increased 170 basis points as a percent to net sales. This was
primarily due to a 160 basis point increase in rent as a percent to net sales, driven by new store openings and the
negative comparable store sales, as well as higher utilities. These increases were partially offset by lower
distribution and warehousing service costs due to bringing our AEO Direct fulfillment and Canadian distribution
services in-house. Share-based payment expense included in gross profit decreased to approximately $5.7 million in
Fiscal 2008 compared to $6.2 million in Fiscal 2007.
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to
their distribution network, as well as design costs in cost of sales. Other retailers may exclude a portion of these
costs from cost of sales, including them in a line item such as selling, general and administrative expenses. Refer to
Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales,
including certain buying, occupancy and warehousing expenses.
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