American Eagle Outfitters 2005 Annual Report Download

Download and view the complete annual report

Please find the complete 2005 American Eagle Outfitters annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 94

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94

Annual Report 2005

Table of contents

  • Page 1
    Annual Report 2005

  • Page 2

  • Page 3
    ... every measure, 2005 was an extremely successful year for American Eagle Outfitters. We again demonstrated the approach that has made AE a true destination for our 15-25 year old customers: consistently on-trend, compelling assortments with an important value component. This on-going customer focus...

  • Page 4

  • Page 5
    ...first time in our history. For the second consecutive year our operating profit margins reached new highs, rising to 20.0% in 2005 from 19.3% last year, demonstrating the strength of the AE brand and strong execution throughout our company. Increased in-store traffic and higher transaction counts...

  • Page 6
    ... AMERICAN EAGLE OUTFITTERS We continue to have exciting opportunities to further expand and enhance the core American Eagle brand. For example, we are the denim destination brand for our customers, nearly doubling our market share in this category since 2003. Last year, AE jeans became the number...

  • Page 7

  • Page 8

  • Page 9
    ... AE lifestyle. Our real estate strategy supports the intimates initiative and will include expanded intimates shops located in existing AE stores, new side-by-side locations and stand-alone stores which we will test this year. Contributing to the support of the AE brand, we successfully launched AE...

  • Page 10
    .../10 AMERICAN EAGLE OUTFITTERS Over the last several years, we have significantly upgraded our real estate, which we believe is one of the best (and most productive) store portfolios in all of specialty retail. We have found the right formula for store size, market demographic, store location and...

  • Page 11

  • Page 12
    ... as improved site efficiency and faster check-out, will be an on-going area of focus. Business at ae.com continues to grow rapidly, exceeding our expectations in 2005 with sales increasing over 50% and profitability rising as well. Driving this success is the unique and dynamic shopping experience...

  • Page 13

  • Page 14
    ..., MARTIN + OSA. This new brand will give us access to the sportswear market for an entirely new generation of shoppers, the 25-40 year old customer. While operating separately from our successful American Eagle brand, MARTIN + OSA will embody the same virtues - namely excellence in fit, quality and...

  • Page 15
    AMERICAN EAGLE OUTFITTERS PAGE 13/14 MARTIN + OSA broadens the scope of our market penetration, giving us access to an entirely new generation of shoppers, the 25-40 year old customer.

  • Page 16
    ..., marketing, information technology, store operations and finance. We're relocating our corporate headquarters to an urban location in Pittsburgh to foster a more creative and productive work environment, while expanding our Warrendale distribution facility and building a new data center to...

  • Page 17
    AMERICAN EAGLE OUTFITTERS PAGE 15/16

  • Page 18
    ... to expand our core brand, launch new initiatives such as our new intimates sub-brand, aerie, and MARTIN + OSA, and pursue our other growth plans, their talent and dedication will power our future success. Thank you for your loyalty and continued support. James V. O'Donnell Chief Executive Officer

  • Page 19
    AMERICAN EAGLE OUTFITTERS PAGE 17/18

  • Page 20
    ... 19/20 AMERICAN EAGLE OUTFITTERS Financial Highlights 2005 For the Years Ended(1) In thousands, except per share amounts, ratios and other financial information Jan 28, 2006 Jan 29, 2005 Jan 31, 2004 Feb 1, 2003 Feb 2, 2002 Summary of Operations(2) Net sales Comparable store sales increase...

  • Page 21
    Form 10-K Form 10-K

  • Page 22

  • Page 23
    ... Number: 0-23760 American Eagle Outfitters, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) No. 13-2721761 (I.R.S. Employer Identification No.) 150 Thorn Hill Drive, Warrendale, PA (Address of principal executive...

  • Page 24
    AMERICAN EAGLE OUTFITTERS, INC. TABLE OF CONTENTS PART I Item 1. Business...1 Item 1A. Risk Factors ...7 Item 1B. Item 2. Item 3. Item 4. Unresolved Staff Comments...10 Properties...10 Legal Proceedings ...11 Submission of Matters to a Vote of Security Holders ...11 PART II Item 5. Item 6. Item 7. ...

  • Page 25
    ... like jeans and graphic Ts as well as essentials like accessories, outerwear, footwear, basics and swimwear under our American Eagle Outfitters®, American Eagle® and AE® brand names. The Company plans to open MARTIN + OSA™, a new sportswear concept targeting 25 to 40 year-old women and men, in...

  • Page 26
    ... seven new stores in California, a market with strong demographics for our target customer. We expanded our operations into all 50 states this year by opening two locations in Alaska. We also opened our latest "flagship" stores in Seattle and Union Square in New York City. Our flagship locations...

  • Page 27
    ... store locations. We are continuing to focus on the growth of ae.com through various initiatives, including improved site efficiency and faster check-out, expansion of sizes and styles, targeted marketing strategies and the launch of aerie by American Eagle, our new intimates sub-brand. MARTIN + OSA...

  • Page 28
    ...a selling square foot basis. At January 28, 2006, we operated 869 stores in the United States and Canada as shown below: United States, including the Commonwealth of Puerto Rico - 798 stores Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia...

  • Page 29
    ... distribution center in Ottawa, Kansas. This new facility will be used to support MARTIN + OSA and our new intimates sub-brand, aerie by American Eagle, as well as future growth opportunities. Customer Credit and Returns We offer our U.S. customers an American Eagle private label credit card, issued...

  • Page 30
    ...a variety of clothing items. We have registered American Eagle Outfitters® in the Canadian Trademark Office for a wide variety of clothing products, as well as for retail clothing store services. In addition, we are exclusively licensed in Canada to use AE® and AEO® in connection with the sale of...

  • Page 31
    ... the planned opening of approximately four to six stores in the United States; x the launch of our new intimates sub-brand, aerie by American Eagle, during Fiscal 2006; and x the completion of the purchase and initiation of the construction of our new corporate headquarters and data center. We...

  • Page 32
    ...and existing store remodels and expansions Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis. During Fiscal 2006, we plan to open approximately 50 new American Eagle stores in the...

  • Page 33
    ... guidelines for all of our vendors regarding working conditions, employment practices and compliance with local laws. A copy of the Vendor Code of Conduct is posted on our website, ae.com. We have a factory compliance program to audit for compliance with the Code of Conduct. However, there can be no...

  • Page 34
    ... Fiscal 2005, we purchased land in Ottawa, Kansas to be used for the construction of an additional distribution center. This new facility will be used to support new and existing growth initiatives, including MARTIN + OSA and our new intimates sub-brand, aerie by American Eagle. All of our stores in...

  • Page 35
    AMERICAN EAGLE OUTFITTERS PAGE 11 real estate taxes and certain other expenses. We have generally been successful in negotiating renewals as leases near expiration. ITEM 3. LEGAL PROCEEDINGS. We are a party to litigation incidental to our business. At this time, our Management does not expect the ...

  • Page 36
    ... Total Number of Shares Purchased Average Price Paid Per Share (1) $ - - 1,000,000 - 1,000,000 $ 22.30 $ - $ 22.30 (1) Average price paid per share excludes any broker commissions paid. (2) On November 15, 2005, our Board authorized the repurchase of 4,500,000 shares of our common stock. ITEM...

  • Page 37
    AMERICAN EAGLE OUTFITTERS PAGE 13 (In thousands, except per share amounts, ratios and other financial information) Summary of Operations (2) Net sales Comparable store sales increase (decrease) Gross profit Gross profit as a percentage of net sales Operating income Operating income as a percentage...

  • Page 38
    ... record revenue for store sales upon the purchase of merchandise by customers. Our ecommerce operation records revenue at the time the goods are shipped. 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...

  • Page 39
    ... that the ultimate outcome of any matter currently pending against us will not materially affect our financial position or results of operations. Self-Insurance Reserve. We are self-insured for certain losses related to employee medical benefits. Costs for selfinsurance claims filed and claims...

  • Page 40
    PAGE 16 AMERICAN EAGLE OUTFITTERS compensation and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; and compensation and supplies for our distribution centers, ...

  • Page 41
    ... to the disposition, Bluenotes was presented as a separate reportable segment. The American Eagle segment includes the Company's 869 U.S. and Canadian retail stores and the Company's e-commerce operation, ae.com. Comparison of Fiscal 2005 to Fiscal 2004 Net Sales Net sales increased 22.8% to $2.309...

  • Page 42
    ... strong comparable store sales growth. During the period, direct compensation, incentive compensation, services purchased/professional services and leasing costs improved as a percent to net sales. These improvements were partially offset by development costs for MARTIN + OSA, our new brand concept...

  • Page 43
    ... as well as our cost control initiatives. During the period, direct salaries, advertising, leasing costs, asset write-offs related to store closings, communications, travel and services purchased improved as a percent to net sales. These improvements were partially offset by an increase in incentive...

  • Page 44
    PAGE 20 AMERICAN EAGLE OUTFITTERS Liquidity and Capital Resources Our uses of cash are generally for working capital, the construction of new stores and remodeling of existing stores, information technology upgrades, distribution center improvements and expansion, the purchase of both short and ...

  • Page 45
    ... Canada, the construction of our new distribution center in Ottawa, Kansas and the purchase and initiation of the construction of our new corporate headquarters and data center. We plan to fund these capital expenditures through existing cash and cash generated from operations. Our growth strategy...

  • Page 46
    ... (1) Letters of credit represent commitments, guaranteed by a bank, to pay vendors for merchandise upon presentation of documents demonstrating that the merchandise has shipped. Guarantees In connection with the disposition of Bluenotes, we have provided guarantees related to two store leases that...

  • Page 47
    ... cost of various professional services provided to us, including certain legal, real estate, travel and insurance services. x We discontinued our cost sharing arrangement with SSC for the acquisition of an interest in several corporate aircraft. We incurred operating costs and usage fees under...

  • Page 48
    PAGE 24 AMERICAN EAGLE OUTFITTERS 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 ...

  • Page 49
    AMERICAN EAGLE OUTFITTERS PAGE 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...26 Consolidated Balance Sheets ...27 Consolidated Statements of Operations ...28 Consolidated Statements of ...

  • Page 50
    ... Accounting Firm The Board of Directors and Stockholders of American Eagle Outfitters, Inc. We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations...

  • Page 51
    ... EAGLE OUTFITTERS PAGE 27 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS (In thousands) Assets Current assets: Cash and cash equivalents Short-term investments Merchandise inventory Accounts and note receivable Prepaid expenses and other Deferred income taxes Assets held-for-sale...

  • Page 52
    ...28 AMERICAN EAGLE OUTFITTERS AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended January 28, January 29, 2006 2005 ...,343 (In thousands, except per share amounts) Net sales Cost of sales, including certain buying, occupancy and warehousing expenses (exclusive...

  • Page 53
    AMERICAN EAGLE OUTFITTERS PAGE 29 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended January 29, January 31, 2005 2004 $213,343 (231) 7,315 2,467 71 437 10,059 $223,402 $59,622 (84) 3,958 (In thousands) Net income Other comprehensive income: ...

  • Page 54
    ..., 2004 Stock awards Two-for-one stock split - March 7, 2005 Net income Other comprehensive income, net of tax Cash dividends ($0.06 per share) (3) Balance at January 29, 2005 Stock awards Repurchase of common stock as part of publicly announced programs Repurchase of common stock from employees Net...

  • Page 55
    ... EAGLE OUTFITTERS PAGE 31 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS January 28, 2006 For the Years Ended January 29, January 31, 2005 2004 (Revised) Operating activities: Net income (Income) loss from discontinued operations Income from continuing operations Adjustments...

  • Page 56
    ... affordable prices. American Eagle's collection includes standards like jeans and graphic Ts as well as essentials like accessories, outerwear, footwear, basics and swimwear. The Company operates retail stores located primarily in regional enclosed shopping malls in the United States and Canada. The...

  • Page 57
    ... Payment Awards In November 2005, the FASB issued Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards ("FSP No. 123(R)-3"). FSP No. 123(R)-3 provides an alternative transition method for calculating the tax effects of stock...

  • Page 58
    PAGE 34 AMERICAN EAGLE OUTFITTERS requirements of other applicable GAAP when the rights conveyed by the instrument to the holder are no longer dependent on the holder being an employee. FSP No. 123(R)-1 is required to be applied upon initial adoption of SFAS No. 123(R). The Company does not ...

  • Page 59
    ... of an award must be recognized immediately upon grant. Refer to the Stock Option Plan disclosure on pages 40 and 41 of this Annual Report on Form 10-K for additional discussion of the non-substantive vesting period approach. Based on its current analysis and information, the Company has determined...

  • Page 60
    ... tax-exempt municipal bonds, taxable agency bonds, corporate notes, variable rate demand notes ("VRDNs") and auction rate securities classified as available for sale. The Company had previously included VRDNs as a component of cash and cash equivalents on its Consolidated Balance Sheets, but has now...

  • Page 61
    ... Flows for the years ended January 29, 2005 and January 31, 2004 to reflect this change. These adjustments did not result in a change in cash and cash equivalents for either period. The Company reviews its inventory levels in order to identify slow-moving merchandise and generally uses markdowns to...

  • Page 62
    ... AMERICAN EAGLE OUTFITTERS 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 those assets. When events...

  • Page 63
    ... for the payment of taxes in connection with the vesting of restricted stock. The aforementioned share repurchases have been recorded as treasury stock. Income Taxes The Company calculates income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the...

  • Page 64
    ... as if the Company had accounted for its employee stock options granted beginning in the fiscal year subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the...

  • Page 65
    ... Recognition The Company records revenue for store sales upon the purchase of merchandise by customers. The Company's e-commerce operation records revenue at the time the goods are shipped. Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase and...

  • Page 66
    ... compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, freight related to interstore...

  • Page 67
    AMERICAN EAGLE OUTFITTERS PAGE 43 the recipient a one dollar per month service fee, where allowed by law, which is automatically deducted from the remaining value of the card. This service fee is recorded within selling, general and administrative expenses. Legal Proceedings and Claims The Company...

  • Page 68
    ... and Related Information ("SFAS No. 131"), the Company has identified three operating segments (U.S. retail stores, Canadian retail stores and the Company's e-commerce operation, ae.com) that reflect the basis used internally to review performance and allocate resources. The three operating segments...

  • Page 69
    ...cover its share of operating costs based on usage of the corporate aircraft under the cost sharing arrangement. No payments were made during Fiscal 2005, as a result of the discontinuation of this arrangement. See Part III, Item 13 of this Form 10-K for additional information regarding related party...

  • Page 70
    PAGE 46 AMERICAN EAGLE OUTFITTERS 4. Accounts and Note Receivable Accounts and note receivable are comprised of the following: (In thousands) Fabric Construction allowances Sell-offs to non-related parties Taxes Distribution services Sale of Bluenotes Interest income Property insurance claims ...

  • Page 71
    AMERICAN EAGLE OUTFITTERS PAGE 47 6. Note Payable and Other Credit Arrangements Unsecured Demand Lending Arrangement The Company has a $90.0 million unsecured letter of credit facility for letters of credit and a $40.0 million unsecured demand line of credit that can be used for letters of credit ...

  • Page 72
    ... Company leases all store premises, some of our office space and certain information technology and office equipment. The store leases generally have initial terms of ten years. Most of these store leases provide for base rentals and the payment of a percentage of sales as additional rent when sales...

  • Page 73
    AMERICAN EAGLE OUTFITTERS PAGE 49 A summary of fixed minimum and contingent rent expense for all operating leases follows: For the Years Ended January 29, January 31, 2005 2004 $124,507 6,788 131,295 11,265 $142,560 $100,418 4,758 105,176 16,943 $122,119 (In thousands) Store rent: Fixed minimum ...

  • Page 74
    ... 29, 2005, have not been reclassified to reflect Bluenotes as discontinued operations. As of January 28, 2006, there were no remaining assets related to Bluenotes recorded in the Company's Consolidated Balance Sheet. The Company received approximately $23 million as consideration for the sale of...

  • Page 75
    ... Provision for income taxes As a result of additional tax deductions related to vested restricted stock grants and stock option exercises, tax benefits have been recognized as contributed capital for the years ended January 28, 2006, January 29, 2005 and January 31, 2004 in the amounts of $35...

  • Page 76
    ...days of service, and work at least twenty hours a week. Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market. 4 - - - - - 39...

  • Page 77
    ... the remaining grants vesting over one year. All options expire after ten years. Restricted stock is earned if the Company meets established performance goals. The 1999 Plan terminated on June 15, 2005 with all rights of the awardees and all unexpired awards continuing in force and operation after...

  • Page 78
    ... AMERICAN EAGLE OUTFITTERS A summary of the Company's stock option activity under all plans follows: For the Years Ended January 28, 2006 (1) January 29, 2005 (1) January 31, 2004 (1) WeightedAverage Exercise Price $9.92 $7.18 $2.86 $11.05 $9.28 $8.73 $3.74 Outstanding - beginning of year Granted...

  • Page 79
    AMERICAN EAGLE OUTFITTERS PAGE 55 13. Contingencies Guarantees In connection with the disposition of Bluenotes, the Company has provided guarantees related to two store leases that were assigned to the Bluenotes Purchaser. These guarantees were provided to the applicable landlords and will remain ...

  • Page 80
    PAGE 56 AMERICAN EAGLE OUTFITTERS 14. Quarterly Financial Information - Unaudited The sum of the quarterly EPS amounts may not equal the full year amount as the computations of the weighted average shares outstanding for each quarter and the full year are calculated independently. Quarters Ended ...

  • Page 81
    ..."), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management of American Eagle Outfitters, Inc. (the "Management"), including the Company's Chief Executive Officer ("CEO...

  • Page 82
    .... Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of American Eagle Outfitters, Inc. We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that American Eagle Outfitters...

  • Page 83
    ... also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Eagle Outfitters, Inc. as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, comprehensive...

  • Page 84
    ... AMERICAN EAGLE OUTFITTERS PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) The following consolidated financial statements are included in Item 8: Consolidated Balance Sheets as of January 28, 2006 and January 29, 2005 Consolidated Statements of Operations for the fiscal years...

  • Page 85
    AMERICAN EAGLE OUTFITTERS PAGE 61 10.16 10.17 10.18 10.19 10.20 10.21 10.22 21* 23* 24* 31.1* 31.2* 32.1** 32.2** 2005 Stock Award and Incentive Plan (18) Employment Agreement between the Registrant and Thomas DiDonato, dated June 29, 2005 (19) Form of Director Deferred Compensation Agreement (20...

  • Page 86
    ... AMERICAN EAGLE OUTFITTERS (17) Previously filed as Exhibit 10.1 to the Form 8-K dated December 30, 2004, filed May 25, 2005 and incorporated herein by reference. (18) Previously filed as Appendix B to the Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders held on June 15, 2005...

  • Page 87
    ... Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EAGLE OUTFITTERS, INC. By: /s/ James V. O'Donnell James V. O'Donnell Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of...

  • Page 88
    PAGE 64 AMERICAN EAGLE OUTFITTERS Exhibit 31.1 CERTIFICATIONS I, James V. O'Donnell, certify that: 1. 2. I have reviewed this annual report on Form 10-K of American Eagle Outfitters, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state ...

  • Page 89
    ... other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer(s) and I are responsible for...

  • Page 90
    ... DENNIS R. PARODI Executive Vice President and Chief Operating Officer, NY Design Center KATHERINE J. SAVITT Executive Vice President and Chief Marketing Officer, AE Brand Corporate Officers JOHN BEZEK Vice President, Construction GUY BRADFORD Executive Vice President, Customs Compliance Officer...

  • Page 91
    ...- Women's CHARLES MARTIN Chief of Design, General Merchandising Manager - Men's JAMES OLSSON Vice President, General Merchandising Manager - Men's Stockholder Information HEADQUARTERS OF THE COMPANY 150 Thorn Hill Drive Warrendale, PA 15086-7528 (724) 776-4857 FORM 10-K A copy of our Report on Form...

  • Page 92

  • Page 93

  • Page 94