American Eagle Outfitters 2005 Annual Report Download - page 38

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PAGE 14 AMERICAN EAGLE OUTFITTERS
(1) All fiscal years presented include 52 weeks.
(2) All amounts presented are from continuing operations and exclude Bluenotes’ results of operations for all periods.
See Note 9 of the accompanying Consolidated Financial Statements for additional information regarding
discontinued operations and the disposition of Bluenotes.
(3) Per share results for all periods presented reflect the two-for-one stock split distributed on March 7, 2005. See Note
2 of the accompanying Consolidated Financial Statements for additional information regarding the stock split.
(4) Amount for the year ended January 29, 2005 represents cash dividends paid for two quarters only. Note that the
Company initiated dividend payments during the third quarter of Fiscal 2004.
(5) Amounts for the years ended January 28, 2006, January 29, 2005, January 31, 2004 and February 1, 2003 have
been adjusted to reflect a change in the Company’s recognition of its in-transit merchandise inventory. See Note 2
of the accompanying Consolidated Financial Statements for additional information.
(6) Calculations for the years ended January 28, 2006 and January 29, 2005 reflect certain assets of NLS as held-for-
sale. See Note 9 of the accompanying Consolidated Financial Statements for additional information regarding
assets held-for-sale.
(7) All amounts reflect American Eagle operations only and exclude Bluenotes for all periods presented. See Note 9
of the accompanying Consolidated Financial Statements for additional information regarding the disposition
of Bluenotes.
(8) Net sales per average square foot is calculated using retail sales for the year divided by the straight average of the
beginning and ending square footage for the year.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations are based upon our Consolidated
Financial Statements and should be read in conjunction with those statements and notes thereto.
Critical Accounting Policies
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the
United States, which require us to make estimates and assumptions that may affect the reported financial condition and
results of operations should actual results differ. We base our estimates and assumptions on the best available
information and believe them to be reasonable for the circumstances. We believe that of our significant accounting
policies, the following involve a higher degree of judgment and complexity. See also Note 2 of the Consolidated
Financial Statements.
Revenue Recognition. We record revenue for store sales upon the purchase of merchandise by customers. Our 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 revenue is recognized when the gift card is redeemed for
merchandise. Revenue is recorded net of actual sales returns and deductions for coupon redemptions and other promotions.
Revenue is not recorded on the sell-off of end-of-season, overstock and irregular merchandise to off-price retailers.
These sell-offs are typically sold below cost and the proceeds are reflected in cost of sales. See Note 3 of the
Consolidated Financial Statements for further discussion.
Merchandise Inventory. Merchandise inventory is valued at the lower of average cost or market, utilizing the retail
method. Average cost includes merchandise design and sourcing costs and related expenses.
We review our inventory levels in order to identify slow-moving merchandise and generally use markdowns to clear
merchandise. If inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer
preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock
will not sell at its currently ticketed price, additional markdowns may be necessary. These markdowns may have a
material adverse impact on earnings, depending on the extent and amount of inventory affected. We also estimate a
shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the