American Eagle Outfitters 2009 Annual Report Download - page 34

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Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements.
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 of the Consolidated Financial Statements.
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 and foreign currency exchange rates. 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 2009 average yield rate decreases by 10% in Fiscal 2010, our income
before taxes will decrease by approximately $0.2 million. Comparatively, if our Fiscal 2008 portfolio average yield
rate had decreased by 10% in Fiscal 2009, our income before taxes would have decreased by approximately
$0.8 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 21, 2010 and May 22, 2010, bear
interest at variable rates based on the prime rate or LIBOR. At January 30, 2010, the weighted average interest rate
on our borrowings was 2.1%. Based upon a sensitivity analysis as of January 30, 2010, assuming average
outstanding borrowing during Fiscal 2009 of $62.7 million, a 50 basis point increase in interest rates would have
resulted in a potential increase in interest expense of approximately $313,000.
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 utilize hedging instruments to mitigate 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.
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