American Eagle Outfitters 2009 Annual Report Download - page 49

proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s
gift card program, refer to the Gift Cards caption below.
The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds
from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of
sales, respectively.
January 30,
2010
January 31,
2009
February 2,
2008
For the Years Ended
(In thousands)
Proceeds from sell-offs ............................. $31,889 $38,240 $23,775
Marked-down cost of merchandise disposed of via sell-offs . . $31,345 $38,012 $25,805
Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses
Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as
well as markdowns, shrinkage and certain promotional costs (collectively “merchandise 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. Merchandise margin is the difference
between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of 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,
communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and
administrative expenses do not include compensation, employee benefit expenses and travel for our design,
sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.
Advertising Costs
Certain advertising costs, including direct mail, in-store photographs and other promotional costs are expensed
when the marketing campaign commences. As of January 30, 2010 and January 31, 2009, the Company had prepaid
advertising expense of $5.4 million and $2.9 million, respectively. All other advertising costs are expensed as
incurred. The Company recognized $68.9 million, $79.7 million and $74.9 million in advertising expense during
Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
Design Costs
The Company has certain design costs, including compensation, rent, depreciation, travel, supplies and
samples, which are included in cost of sales as the respective inventory is sold.
Store Pre-Opening Costs
Store pre-opening costs consist primarily of rent, advertising, supplies and payroll expenses. These costs are
expensed as incurred.
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AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)