American Eagle Outfitters 2011 Annual Report Download - page 24

Table of Contents
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 profit is the difference between net sales and merchandise costs. The
inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our
gross profit and results of operations.
Operating income — Our management views operating income as a key indicator of our success. The key drivers of operating income are
comparable store sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures.
Store productivity — Store productivity, including net sales per average square foot, sales per productive hour, average unit retail price ("AUR"),
conversion rate, the number of transactions per store, the number of units sold per store and the number of units per transaction, is evaluated by our
management in assessing our operational performance.
Inventory turnover — Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory
turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.
Cash flow and liquidity — Our management evaluates cash flow from operations, investing and financing in determining the sufficiency of our
cash position. Cash flow from operations has historically been sufficient to cover our uses of cash. Our management believes that cash flow from
operations will be sufficient to fund anticipated capital expenditures and working capital requirements.
Results of Operations
Overview
We delivered positive top-line sales performance as a result of investments in key categories and a revenue driving promotional strategy in the fourth
quarter. Total comparable stores sales for the year increased 3%, in contrast to the 4% decrease recorded in the first half of the year, driven by the 10%
comparable store sales growth in the fourth quarter. For the year, AE comparable store sales increased 3%, aerie comparable store sales increased 2% and
sales for AEO Direct increased 15%.
The increased sales levels partially offset higher product costs. Increased product costs and our second half promotional activity resulted in pressure on
merchandise margin for the year, which declined 360 basis points as a rate to sales. Operating expenses were well controlled leading to 70 basis points of
improvement in selling, general and administrative expense as a rate to sales. SG&A dollars increased due to variable expense related to the sales increase and
planned investments in advertising.
Operating income for the year was $231.1 million, which includes $20.7 million in store impairment charges and $5.5 million of executive transition
costs. Income from continuing operations was $0.77 per diluted share, and includes a $0.07 per diluted share impact from the store impairment and a $0.02
per diluted share impact from executive transition costs. This compares to income from continuing operations of $0.90 per diluted share last year, which
includes a realized loss from the sale of investment securities of $0.12 per diluted share.
We ended Fiscal 2011 with $745.9 million in cash, short-term and long-term investments, an increase of $5.3 million from last year. During the year,
we generated $239.3 million of cash from operations. The cash from operations was offset by $100.1 million of capital expenditures, a $34.2 million purchase
of intangible assets, and value returned to shareholders through share repurchases of $15.2 million and dividend payments of $85.6 million. Merchandise
inventory at the end of Fiscal 2011 was $378.4 million, an increase of 24% on a cost per square foot basis. The increase reflects a high single-digit increase in
the ending average cost per unit driven by increased cotton costs.
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