AEO 10-Q
American Eagle Outfitters Inc (AEO)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
OR
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS
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Page Number |
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3 |
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Item 1. |
6 |
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Consolidated Balance Sheets: July 30, 2022, January 29, 2022 and July 31, 2021 |
6 |
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Consolidated Statements of Operations: 13 and 26 weeks ended July 30, 2022 and July 31, 2021 |
7 |
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8 |
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9 |
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Consolidated Statements of Cash Flows: 26 weeks ended July 30, 2022 and July 31, 2021 |
11 |
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12 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
36 |
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Item 4. |
36 |
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Item 1. |
37 |
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Item 1A. |
37 |
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Item 2. |
37 |
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Item 3. |
Defaults Upon Senior Securities |
N/A |
Item 4. |
Mine Safety Disclosures |
N/A |
Item 5. |
Other Information |
N/A |
Item 6. |
38 |
2
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on the views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “potential,” and similar expressions may identify forward-looking statements. Our forward-looking statements include, but are not limited to, statements about:
Our forward-looking statements surrounding the novel strain of coronavirus ("COVID-19") include, but are not limited to, statements about:
3
Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:
4
5
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
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July 30, |
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January 29, |
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July 31, |
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(In thousands, except per share amounts) |
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2022 |
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2022 |
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2021 |
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(Unaudited) |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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$ |
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Short-term investments |
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— |
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— |
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Merchandise inventory |
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Accounts receivable, net |
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Prepaid expenses and other |
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Total current assets |
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Operating lease right-of-use assets |
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Property and equipment, at cost, net of accumulated depreciation |
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Goodwill, net |
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Intangible assets, net |
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Non-current deferred income taxes |
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Other assets |
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Total assets |
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$ |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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$ |
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Current portion of operating lease liabilities |
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Unredeemed gift cards and gift certificates |
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Accrued compensation and payroll taxes |
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Accrued income and other taxes |
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Other current liabilities and accrued expenses |
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Total current liabilities |
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Non-current liabilities: |
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Non-current operating lease liabilities |
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Long-term debt, net |
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Other non-current liabilities |
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Total |
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— |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Contributed capital |
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Accumulated other comprehensive loss |
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( |
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( |
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Retained earnings |
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Treasury stock, at cost, |
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( |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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$ |
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Refer to Notes to Consolidated Financial Statements
6
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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(In thousands, except per share amounts) |
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2022 |
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2021 |
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2022 |
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2021 |
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Total net revenue |
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$ |
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$ |
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$ |
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$ |
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Cost of sales, including certain buying, occupancy and |
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Gross profit |
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Selling, general and administrative expenses |
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Depreciation and amortization expense |
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Operating income |
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Debt related charges |
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- |
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- |
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Interest expense, net |
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Other income, net |
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( |
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( |
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( |
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( |
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(Loss) income before income taxes |
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( |
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( |
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(Benefit) provision for income taxes |
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( |
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Net (loss) income |
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( |
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( |
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Net (loss) income per basic share |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Net (loss) income per diluted share |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Weighted average common shares outstanding - basic |
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Weighted average common shares outstanding - diluted |
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Refer to Notes to Consolidated Financial Statements
7
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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13 Weeks Ended |
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26 Weeks Ended |
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July 30, |
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July 31, |
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July 30, |
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July 31, |
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(In thousands) |
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2022 |
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2021 |
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2022 |
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2021 |
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Net (loss) income |
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$ |
( |
) |
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$ |
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$ |
( |
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$ |
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Other comprehensive income: |
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Foreign currency translation adjustments |
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Other comprehensive income: |
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Comprehensive (loss) income |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Refer to Notes to Consolidated Financial Statements
8
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
13 Weeks Ended July 30, 2022 and July 31, 2021
(In thousands, except per share amounts) |
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Shares |
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Common |
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Contributed |
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Retained |
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Treasury |
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Accumulated Other |
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Stockholders' |
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Balance at May 1, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Stock awards |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock from employees |
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( |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Reissuance of treasury stock |
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— |
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( |
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— |
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Equity portion of partial extinguishment of Convertible Senior Notes, net of tax |
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— |
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( |
) |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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Cash dividends and dividend equivalents ($ |
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— |
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— |
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( |
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— |
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— |
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( |
) |
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Balance at July 31, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Balance at April 30, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Stock awards |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock from employees |
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( |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Reissuance of treasury stock |
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— |
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( |
) |
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( |
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— |
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Accelerated share repurchase |
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( |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Exchange of Convertible Senior Notes |
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— |
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( |
) |
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( |
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— |
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Net loss |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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Cash dividends and dividend equivalents ($ |
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— |
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— |
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( |
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— |
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— |
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( |
) |
|
Balance at July 30, 2022 |
|
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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9
26 Weeks Ended July 30, 2022 and July 31, 2021
(In thousands, except per share amounts) |
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Shares |
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Common |
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Contributed |
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Retained |
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Treasury |
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Accumulated Other |
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Stockholders' |
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Balance at January 30, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Stock awards |
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— |
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— |
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— |
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— |
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— |
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Repurchase of common stock from employees |
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( |
) |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Reissuance of treasury stock |
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— |
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( |
) |
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— |
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Equity portion of partial extinguishment of Convertible Senior Notes, net of tax |
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— |
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( |
) |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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Cash dividends and dividend equivalents ($ |
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— |
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|
— |
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( |
) |
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— |
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— |
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( |
) |
|
Balance at July 31, 2021 |
|
|
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|
$ |
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$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
|
$ |
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|||||
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|||||||
Balance at January 29, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
|
|||||
Stock awards |
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— |
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— |
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— |
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— |
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— |
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||
Repurchase of common stock from employees |
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( |
) |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Reissuance of treasury stock |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
|||
Adoption of Accounting Standards Update 2020-06, net of tax |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Accelerated share repurchase |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Exchange of Convertible Senior Notes |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
|
|||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Cash dividends and dividend equivalents ($ |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at July 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Refer to Notes to Consolidated Financial Statements
10
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
26 Weeks Ended |
|
|||||
|
|
July 30, |
|
|
July 31, |
|
||
(In thousands) |
|
2022 |
|
|
2021 |
|
||
Operating activities: |
|
|
|
|
|
|
||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net (loss) income to net cash from operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Share-based compensation |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
( |
) |
|
Loss on exchange of convertible senior notes |
|
|
|
|
|
— |
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Merchandise inventory |
|
|
( |
) |
|
|
( |
) |
Operating lease assets |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Other assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Accrued compensation and payroll taxes |
|
|
( |
) |
|
|
( |
) |
Accrued and other liabilities |
|
|
( |
) |
|
|
|
|
Net cash (used for) provided by operating activities |
|
|
( |
) |
|
|
|
|
Investing activities: |
|
|
|
|
|
|
||
Capital expenditures for property and equipment |
|
|
( |
) |
|
|
( |
) |
Purchase of available-for-sale investments |
|
|
— |
|
|
|
( |
) |
Sale of available-for-sale investments |
|
|
— |
|
|
|
|
|
Other investing activities |
|
|
( |
) |
|
|
( |
) |
Net cash used for investing activities |
|
|
( |
) |
|
|
( |
) |
Financing activities: |
|
|
|
|
|
|
||
Accelerated share repurchase |
|
|
( |
) |
|
|
— |
|
Proceeds from revolving line of credit |
|
|
|
|
|
— |
|
|
Principal paid in connection with exchange of convertible senior notes due 2025 |
|
|
( |
) |
|
|
— |
|
Repurchase of common stock from employees |
|
|
( |
) |
|
|
( |
) |
Net proceeds from stock options exercised |
|
|
|
|
|
|
||
Cash dividends paid |
|
|
( |
) |
|
|
( |
) |
Other financing activities |
|
|
( |
) |
|
|
( |
) |
Net cash used for financing activities |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rates changes on cash |
|
|
( |
) |
|
|
|
|
Net change in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
Cash and cash equivalents - beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents - end of period |
|
$ |
|
|
$ |
|
||
Refer to Notes to Consolidated Financial Statements
11
AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Interim Financial Statements
The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company", “we”, and “our”), a Delaware corporation, at July 30, 2022 and July 31, 2021 and for the 13 and 26 week periods ended July 30, 2022 and July 31, 2021 have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2022 filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2022 (the “Fiscal 2021 Form 10-K”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those described in the notes that follow) considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report.
The Company operates under the American Eagle® ("AE") and Aerie® brands. We also operate Todd Snyder New York ("Todd Snyder"), a premium menswear brand, and Unsubscribed, a new brand with a focus on consciously-made slow fashion.
Founded in 1977, the Company is a leading multi-brand specialty retailer that operates more than
In Fiscal 2021, we acquired AirTerra, Inc. ("AirTerra") and Quiet Logistics, Inc. ("Quiet Logistics"), creating a new supply chain platform ("Quiet Platforms”). AirTerra is a middle-mile freight consolidator that provides cost effective shipping solutions. Quiet Logistics is a leading logistics company that operates a network of in-market fulfillment centers, locating products closer to need, creating inventory efficiencies, cost benefits and affordable same-day and next-day delivery options for customers and stores. Both acquisitions represent an important step in our ongoing supply chain transformation strategy. Quiet Platforms provides fulfillment benefits to American Eagle and Aerie. Additionally, it also provides AEO with a new long-term growth opportunity by extending its cutting-edge shared supply chain assets and capabilities to the platform's third party customer file of small and mid-sized retailers.
Historically, our operations have been seasonal, with a large portion of total net revenue and operating income occurring in the third and fourth fiscal quarters, reflecting increased demand during the back-to-school and year-end holiday selling seasons, respectively. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the acceptability of seasonal merchandise offerings, the timing and level of markdowns, store closings and remodels, competitive factors, weather and general economic and political conditions.
COVID-19 Pandemic
Impacts related to the ongoing COVID-19 pandemic have been significantly negative for the retail industry, our Company, our customers, and our associates. We have experienced and may continue to experience significant disruptions to our business due to the COVID-19 pandemic and the related suggested and mandated social distancing and shelter-in-place orders. While stores have been impacted by reduced mall traffic, we have focused on our omni-channel capabilities. As of July 30, 2022, all of our stores have reopened and remain open, although we continue to see residual impacts on foot traffic and in-store revenues.
The impacts of the COVID-19 pandemic on our business are discussed in further detail within these Notes to the Consolidated Financial Statements and within Item 2 of this Quarterly Report, of which these Notes form a part.
12
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At July 30, 2022, the Company operated in
Fiscal Year
Our fiscal year is a 52- or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2022” refers to the 52-week period that will end on January 28, 2023. “Fiscal 2021” refers to the 52-week period ended January 29, 2022. “Fiscal 2020” refers to the 52-week period ended January 30, 2021.
Estimates
The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.
Recent Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-06, Debt with Conversion and Other Options (“ASU 2020-06”), which simplifies the accounting for convertible debt instruments. The new guidance eliminates two of the three models in Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options that require separating embedded conversion features from convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share (“EPS”) calculation. The guidance is effective for fiscal years beginning after December 15, 2021. The Company
Refer to Note 5 and Note 8 to the Consolidated Financial Statements for additional information regarding EPS and the long-term debt, respectively.
Foreign Currency Translation
In accordance with ASC 830, Foreign Currency Matters, the Company translates assets and liabilities denominated in foreign currencies into United States dollars (“USD”) (the reporting currency) at the exchange rates prevailing at the balance sheet date. The Company translates revenues and expenses denominated in foreign currencies into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the consolidated results of operations, whereas related translation adjustments are reported as an element of other comprehensive income (loss) in accordance with ASC 220, Comprehensive Income.
We are exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. During the 13 weeks ended July 30, 2022, an unrealized gain of $
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents.
Short-term investments classified as available-for-sale include certificates of deposit with a maturity greater than three months, but less than one year.
Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and short-term investments.
Receivables
13
The Company maintains an allowance for doubtful accounts for estimated losses from the failure of certain of our customers to make required payments for products or services delivered. The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical and expected future receivables and reserve trends and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required. Historically, the Company’s reserves have approximated actual experience.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company.
The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when 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. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected.
The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.
Property and Equipment
Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the asset’s estimated useful life.
Buildings |
|
|
Leasehold improvements |
|
|
Fixtures and equipment Information technology |
|
- |
As of July 30, 2022, the weighted average remaining useful life of our assets was approximately
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements, store fixtures, and operating lease right-of-use ("ROU") assets associated with retail stores. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income within the Consolidated Statements of Operations.
When the Company closes, remodels, or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets within depreciation and amortization expense. Refer to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment.
Goodwill and Intangible Assets, net
The Company’s goodwill is primarily related to the acquisition of Quiet Logistics in Fiscal 2021, as well as its importing operations and Canadian business, and represents the excess of cost over fair value of net assets of businesses acquired. In accordance with ASC 350, Intangibles – Goodwill and Other, the Company evaluates goodwill for possible impairment at least annually as of the last day of the fiscal year and upon occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of a reporting unit may be below its carrying value. If the carrying value of the reporting unit exceeds the fair value, an impairment charge is recorded in the period of the evaluation based on that difference. As a result of the Company's annual goodwill impairment test as of January 29, 2022, the Company concluded
14
that its goodwill was
Definite-lived intangible assets are initially recorded at fair value, with amortization computed utilizing the straight-line method over the assets’ estimated useful lives. The Company’s definite-lived intangible assets, which consist primarily of trademark assets, are generally amortized over
The Company evaluates definite-lived intangible assets for impairment in accordance with ASC 360 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value.
Refer to Note 7 to the Consolidated Financial Statements for additional information regarding goodwill and intangible assets.
Gift Cards
Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed ("gift card breakage") and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue.
The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended July 30, 2022 and July 31, 2021, the Company recorded approximately $
Construction Allowances
As part of certain lease agreements for retail stores, the Company receives construction allowances from lessors, which are generally comprised of cash amounts. The Company records a receivable and an adjustment to the operating lease ROU asset at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized as part of the single lease cost over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the lessor.
Self-Insurance Liability
The Company uses a combination of insurance and self-insurance mechanisms for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped by stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.
Leases
The Company leases all store premises, regional distribution facilities, some of its office space, and certain information technology and office equipment. These leases are generally classified as operating leases.
Store leases generally provide for a combination of base rentals and contingent rent based on store sales. Additionally, most leases include lessor incentives such as construction allowances and rent holidays. The Company is typically responsible for tenant occupancy costs including maintenance costs, common area charges, real estate taxes and certain other expenses. When measuring operating lease ROU assets and operating lease liabilities, the Company only includes cash flows related to options to extend or terminate leases once those options are executed.
Some leases have variable payments. However, because they are not based on an index or rate, they are not included in the measurement of operating lease ROU assets and operating lease liabilities.
When determining the present value of future payments for an operating lease that does not have a readily determinable implicit rate, the Company uses its incremental borrowing rate as of the date of initial possession of the leased asset.
For leases that qualify for the short-term lease exemption, the Company does not record an operating lease liability or operating lease ROU asset. Short-term lease payments are recognized on a straight-line basis over the lease term of 12 months or less.
15
Co-branded Credit Card
The Company offers a co-branded credit card and a private label credit card under the AE and Aerie brands. These credit cards are issued by a third-party bank (the “Bank”) in accordance with a credit card agreement (the “Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding as we fulfill our performance obligations under the Agreement. This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.
For further information on the Company’s loyalty program, refer to the Customer Loyalty Program caption below.
Customer Loyalty Program
The Company offers a highly digitized loyalty program called Real Rewards by American Eagle and Aerie™ (the “Program”).
Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The portion of the sales revenue attributed to the reward points is deferred and recognized when the reward is redeemed or when the points expire, using the relative stand-alone selling price method. Additionally, reward points earned using the co-branded credit card on non-AE or Aerie purchases are accounted for in accordance with ASC 606. As the points are earned, a current liability is recorded for the estimated cost of the reward, and the impact of adjustments is recorded in revenue.
The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606.
Sales Return Reserve
Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined using historical average return percentages.
The presentation on a gross basis consists of a separate right of return asset and liability. These amounts are recorded within (i) prepaid expenses and other and (ii) other current liabilities and accrued expenses, respectively, on the Consolidated Balance Sheets.
Long-Term Debt
In April 2020, the Company issued $
In June 2022, the Company entered into an amended and restated credit agreement (the “Credit Agreement”). The Credit Agreement provides senior secured asset based revolving credit for loans and letters of credit up to $
Refer to Note 8 to the Consolidated Financial Statements for additional information regarding Long-Term Debt.
Income Taxes
The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statements carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that
16
some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.
The Company evaluates its income tax positions in accordance with ASC 740, which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.
The calculation of deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance, requires management to make estimates and assumptions. The Company believes that its estimates and assumptions are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income (loss).
Refer to Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.
Revenue Recognition
The Company recognizes revenue pursuant to ASC 606. Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.
Revenue is recorded net of estimated and actual sales returns and promotional price reductions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined using historical average return percentages.
Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on gift card breakage, determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company’s gift card program, refer to the Gift Cards caption above.
The Company recognizes royalty revenue generated from its license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee. This revenue is recorded as a component of total net revenue when earned and collection is probable.
The Company defers a portion of the sales revenue attributed to loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606. Refer to the Customer Loyalty Program caption above for additional information.
Revenue associated with Quiet Platforms is recognized as the services are performed.
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 and services.
Design costs are related to the Company's Design Center operations and include compensation, travel and entertainment, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold.
Buying, occupancy and warehousing costs and services consist of compensation, employee benefit expenses and travel and entertainment 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. Gross profit is the difference between total net revenue and cost of sales.
17
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") 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.
SG&A 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. Additionally, SG&A expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations, all of which are included in cost of sales.
Debt Related Charges
Debt related charges consists primarily of a $
Interest Expense, Net
Interest expense, net primarily consists of interest expense related to the Company’s 2025 Notes and borrowings under our Credit Facility, as offset by interest income from cash, cash equivalents and short-term investments.
Other Income, Net
Other income, net consists of allowances for uncollectible receivables, foreign currency fluctuations and changes in other non-operating items.
Segment Information
We have
3. Cash and Cash Equivalents and Short-Term Investments
The following table summarizes the fair market values for the Company’s cash and short-term investments, which are recorded in the Consolidated Balance Sheets:
(In thousands) |
|
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|||
Cash |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|||
Total cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Short-term investments |
|
|
|
|
|
|
|
|
|
|||
Certificates of deposit |
|
|
— |
|
|
|
— |
|
|
|
|
|
Total short-term investments |
|
|
— |
|
|
|
— |
|
|
|
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
4. Fair Value Measurements
ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
18
The Company’s cash equivalents and short-term investments are Level 1 financial assets and are measured at fair value on a recurring basis, for all periods presented. Refer to Note 3 to the Consolidated Financial Statements for additional information regarding cash equivalents and short-term investments.
|
|
Fair Value Measurements at July 30, 2022 |
|
|||||||||||||
(In thousands) |
|
Carrying Amount |
|
|
Quoted Market Prices |
|
|
Significant Other |
|
|
Significant |
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Interest bearing deposits |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Total cash and cash equivalents |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
||
Long-Term Debt
As of July 30, 2022, the fair value of the Company's $
The Company had approximately $
Refer to Note 8 to the Consolidated Financial Statements for additional information regarding long-term debt and other credit arrangements.
Non-Financial Assets
The Company’s non-financial assets, which include intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur and the Company is required to evaluate the non-financial asset for impairment, a resulting impairment would require that the non-financial asset be recorded at the estimated fair value. There were
The Company evaluates goodwill for possible impairment at least annually as of the last day of the fiscal year and upon occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of a reporting unit may be below its carrying value. The Company last performed an annual goodwill impairment test using Level 3 inputs as defined in ASC 820 as of January 29, 2022. As a result of the Company's annual goodwill impairment test, the Company
19
concluded that its goodwill was not impaired. No indicators of impairment were present during the 13 or 26 weeks ended July 30, 2022 and July 31, 2021.
5. Earnings per Share
The following is a reconciliation between the amounts used in the calculation of basic and diluted earnings per share:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
||||
(In thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of convertible notes |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Dilutive effect of stock options and non-vested |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Diluted number of common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Anti-Dilutive Shares (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive and anti-dilutive shares relate to share-based compensation. Refer to Notes 8 and 9 to the Consolidated Financial Statements for additional information regarding the 2025 Notes and share-based compensation, respectively.
On June 3, 2022, the Company entered into an accelerated share repurchase agreement (the “ASR Agreement”) with JPMorgan Chase Bank (“JPM”). Pursuant to the terms of the ASR Agreement, on June 3, 2022, the Company paid $
6. Property and Equipment
Property and equipment consists of the following:
|
|
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|||
(In thousands) |
|
2022 |
|
|
2022 |
|
|
2021 |
|
|||
Property and equipment, at cost |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Less: Accumulated depreciation and impairment |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
|
$ |
|
|||
7. Goodwill and Intangible Assets, net
Goodwill and definite-lived intangible assets, net consist of the following:
|
|
|
|
|||||||||
|
|
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|||
(In thousands) |
|
2022 |
|
|
2022 |
|
|
2021 |
|
|||
Goodwill, gross |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accumulated impairment (1) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Goodwill, net |
|
$ |
|
|
$ |
|
|
$ |
|
|||
20
|
|
|
|
|
|
|
|
|
|
|||
(In thousands) |
|
July 30, 2022 |
|
|
January 29, 2022 |
|
|
July 31, 2021 |
|
|||
Intangible assets, at cost |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
$ |
|
|
$ |
|
|
$ |
|
|||
8. Long-Term Debt, Net
Our long-term debt consisted of the following:
(In thousands) |
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|||
2025 Notes principal |
$ |
|
|
$ |
|
|
$ |
|
|||
Less: unamortized discount |
|
|
|
|
|
|
|
|
|||
2025 Notes, net |
$ |
|
|
$ |
|
|
$ |
|
|||
Credit Facility borrowings |
|
|
|
|
— |
|
|
|
— |
|
|
Total long-term debt, net |
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|||
2025 Notes - equity portion, net of tax |
|
— |
|
|
|
|
|
|
|
||
2025 Notes
In April 2020, the Company issued $
The Company does not have the right to redeem the 2025 Notes prior to
Note Exchange
In June 2022, the Company entered into separate privately negotiated exchange agreements with certain holders of the 2025 Notes, to exchange $
The Company paid cash of $
The effective interest rate for the 2025 Notes is
Interest expense for the 2025 Notes was:
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||
(In thousands) |
July 30, |
|
July 31, |
|
|
July 30, |
|
July 31, |
|
||||
Accrued interest for interest payments |
$ |
|
$ |
|
|
$ |
|
$ |
|
||||
Amortization of discount |
|
|
|
|
|
|
|
|
|
||||
Total interest expense |
$ |
|
$ |
|
|
$ |
|
$ |
|
||||
Refer to Note 2 and Note 5 to the Consolidated Financial Statements for additional information regarding the impact of the adoption of ASU 2020-06.
21
The following table discloses conversion amounts if the 2025 Notes were all converted as of the end of the period:
(In thousands, except per share amounts) |
July 30, |
|
|
Number of shares convertible |
|
|
|
Conversion price per share |
$ |
|
|
Value in excess of principal if converted |
$ |
|
|
Revolving Credit Facility
In June 2022, the Company entered into the amended and restated Credit Agreement which provides senior secured asset-based revolving credit for loans and letters of credit up to $
All obligations under the Credit Facility are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by certain assets of the Company and certain subsidiaries.
As of July 30, 2022, the Company was in compliance with the terms of the Credit Agreement and had $
Borrowings under the Credit Facility accrue interest at the election of the Company at an adjusted secured overnight financing rate ("SOFR") rate of SOFR plus
9. Share-Based Compensation
The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation, which requires the Company to measure and recognize compensation expense for all share-based payments at fair value.
Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 and 26 weeks ended July 30, 2022 was $
Stock Option Grants
The Company has granted time-based stock option awards, which vest over the requisite service period of the award or at an employee’s eligible retirement date, if earlier. A summary of the Company’s stock option activity for the 26 weeks ended July 30, 2022 follows:
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
Aggregate |
|
||||
|
|
Options |
|
|
Exercise Price |
|
|
Term |
|
|
Intrinsic Value |
|
||||
|
|
(In thousands) |
|
|
|
|
|
(In years) |
|
|
(In thousands) |
|
||||
Outstanding - January 29, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Granted |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Cancelled |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Outstanding - July 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Vested and expected to vest - July 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercisable - July 30, 2022 (1) |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
22
Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $
As of July 30, 2022, there was $
The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
26 Weeks Ended |
|
26 Weeks Ended |
|
||
|
|
July 30, |
|
July 31, |
|
||
Black-Scholes Option Valuation Assumptions |
|
2022 |
|
2021 |
|
||
Risk-free interest rate (1) |
|
|
% |
|
% |
||
Dividend yield |
|
|
% |
|
% |
||
Volatility factor (2) |
|
|
% |
|
% |
||
Weighted-average expected term (3) |
|
|
|
||||
Restricted Stock Grants
Time-based restricted stock awards are comprised of time-based restricted stock units. These awards vest over
Performance-based restricted stock awards include performance-based restricted stock units. These awards cliff vest at the end of a
The grant date fair value of time-based restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. A Monte-Carlo simulation was utilized for performance-based restricted stock awards.
A summary of the Company’s restricted stock activity is presented in the following table:
|
|
Time-Based Restricted |
|
|
Performance-Based Restricted |
|
||||||||||
|
|
July 30, 2022 |
|
|
July 30, 2022 |
|
||||||||||
(Shares in thousands) |
|
Shares |
|
|
Weighted- |
|
|
Shares |
|
|
Weighted- |
|
||||
Non-vested - January 29, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Vested |
|
|
( |
) |
|
$ |
|
|
|
( |
) |
|
$ |
|
||
Cancelled |
|
|
( |
) |
|
$ |
|
|
|
( |
) |
|
$ |
|
||
Non-vested - July 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
As of July 30, 2022, there was $
As of July 30, 2022, the Company had
23
10. Income Taxes
The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax benefit rate for the 13 weeks ended July 30, 2022 was
The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Unrecognized tax benefits did not change significantly during the 13 weeks ended July 30, 2022. Over the next twelve months, the Company believes that it is reasonably possible that unrecognized tax benefits may decrease by approximately $
11. Legal Proceedings
The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or consolidated cash flows of the Company. However, our assessment of any litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
12. Segment Reporting
In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified
Our CEO analyzes segment results and allocates resources between segments based on the adjusted operating income (loss), or the operating income (loss) in periods where there are no adjustments, of each segment. Adjusted operating income (loss) is a non-GAAP financial measure ("non-GAAP" or "adjusted") that is defined by the Company as operating income excluding impairment, restructuring and COVID-19 related charges. Adjusted operating income (loss) is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP consolidated financial statements and provides a higher degree of transparency. These amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating our business and operations. There were no adjustments to operating income in either the 13 or 26 weeks ended July 30, 2022 or July 31, 2021 for any segment, therefore adjusted operating income (loss) is not presented in the table below.
24
Reportable segment information is presented in the following table:
(in thousands) |
American Eagle |
|
|
Aerie |
|
|
Corporate and Other(1) |
|
|
Total(2) |
|
||||
13 weeks ended July 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Capital expenditures |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
13 weeks ended July 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Capital expenditures |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
(in thousands) |
American Eagle |
|
|
Aerie |
|
|
Corporate and Other(1) |
|
|
Total(2) |
|
||||
26 weeks ended July 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Capital expenditures |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
26 weeks ended July 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Operating income (loss) |
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Capital expenditures |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
- For the 13 weeks ended July 30, 2022: debt related charges of $
- For the 13 weeks ended July 31, 2021: interest expense, net of $
We do not allocate assets at the reportable segment level and therefore our CEO does not use segment asset information to make decisions.
The following table presents summarized geographical information:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
(In thousands) |
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
||||
Total net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Foreign (1) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total net revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company, our operations and our present business environment. The following MD&A is provided as a supplement to — and should be read in conjunction with — our MD&A for Fiscal 2021 which can be found in our Fiscal 2021 Form 10-K.
In addition, 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 these statements and notes thereto.
Introduction
This MD&A is organized as follows:
Executive Overview |
General description of the Company’s business and certain segment information. |
Key Performance Indicators |
Overview of key performance indicators reviewed by management to gauge the Company’s results. |
Current Trends and Outlook |
Discussion of trends and uncertainties facing the Company, including those related to the COVID-19 pandemic’s impact on the Company’s business, recent acquisitions and the Company’s long-term plans for growth. In addition, this section also provides a summary of the Company’s performance over the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Non-GAAP Information |
Discussion of certain financial measures that have been determined to not be in accordance with GAAP. This section includes certain reconciliations from GAAP to non-GAAP financial measures and additional details on these financial non-GAAP measures, including information as to why the Company believes the non-GAAP financial measures provided within MD&A are useful to investors. |
Results of Operations |
Provides an analysis of certain components of the Company’s Consolidated Statements of Operations for the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Liquidity and Capital Resources |
Discussion of the Company’s financial condition and changes in financial condition and liquidity for the 13 and 26 weeks ended July 30, 2022 and the 13 and 26 weeks ended July 31, 2021. |
Critical Accounting Policies and Estimates |
Discusses where information may be found about accounting policies and estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application. |
Recent accounting pronouncements the Company has adopted or is currently evaluating prior to adoption, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2. “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included herein.
Executive Overview
We are a leading global specialty retailer offering high-quality, on-trend clothing, accessories and personal care products at affordable prices under our American Eagle®, Aerie® and other brands.
We have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources between segments based on adjusted operating income (loss), or the operating income (loss) in periods where there are no adjustments, of each segment. See Note 12. “Segment Reporting,” of the Notes to the Consolidated Financial Statements included herein for additional information.
26
Key Performance Indicators
Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:
Comparable sales — Comparable sales and comparable sales changes provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable sales in the thirteenth month of operation. However, stores that have a gross square footage change of 25% or greater due to a remodel are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from American Eagle, Aerie, Todd Snyder, and Unsubscribed stores, as well as sales from AEO Direct and other digital channels, are included in total comparable sales. Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct.
Omni-channel Sales Performance – Our management utilizes the following quality of sales metrics in evaluating our omni-channel sales performance: comparable sales, average unit retail price, total transactions, units per transaction, and consolidated comparable traffic. We include these metrics in our discussion within this MD&A when we believe they enhance the understanding of the matter being discussed. Investors may find them useful as such. Each of these metrics is defined as follows (except comparable sales, which is defined separately above):
Gross profit — Gross profit measures whether we are optimizing the profitability of our sales. Gross profit is the difference between total net revenue and cost of sales. Cost of sales consists of merchandise costs, including design, sourcing, importing, and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs and buying, occupancy and warehousing costs and services. Design costs consist of compensation, rent, depreciation, travel, supplies, and samples.
Buying, occupancy and warehousing costs and services 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 operations.
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 consolidated profit and results of operations.
Operating income — Our management views operating income as a key indicator of our performance. The key drivers of operating income are net revenue, gross profit, our ability to control SG&A expenses, and our level of capital expenditures for a reasonable period of time.
Cash flow and liquidity — Our management evaluates cash flow from operations and investing and financing activities in determining the sufficiency of our cash position and capital allocation strategies. Cash flow has historically been sufficient to cover our uses of cash. Our management believes that cash flow and liquidity will be sufficient to fund anticipated capital expenditures and working capital requirements for the next twelve months and beyond.
Current Trends and Outlook
Inflation
During the second quarter of Fiscal 2022, our quarterly results were negatively impacted by macro-economic challenges and global inflationary pressures impacting consumer spending behavior, which constrained revenue and increased margin pressure to clear through excess inventory. Given ongoing external uncertainties, we have taken additional actions to improve financial performance, including more extensive expense and capital expenditure reductions. For
27
further information about the risks associated with global economic conditions and the effect of economic pressures on our business, see “Risk Factors” in Part I, Item 1A of our Fiscal 2021 Form 10-K.
COVID-19
The ongoing COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis, and we continue to see disruptions and volatility in our business caused by the COVID-19 pandemic.
The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we believe that the Company may continue to experience degrees of volatility and business disruptions and remain at risk for periods of closure of our stores, distribution centers, and corporate facilities. While trends in new cases of COVID-19 in the United States improved during the six months ended July 30, 2022 compared to the final quarter of Fiscal 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic. Past and future impacts of the COVID-19 pandemic may disrupt the operations of our partners, suppliers, and vendors, which could lead to or exacerbate existing supply chain disruptions, shipping delays, freight cost increases, and labor shortages. We are monitoring ongoing developments, and we will take further actions that we believe are in the best interests of our associates and customers, as needed. For further information about the risks associated with the COVID-19 pandemic, see “Risk Factors” in Part I, Item 1A of our Fiscal 2021 Form 10-K.
Quiet Platforms
In Fiscal 2021, the Company completed the acquisition of AirTerra and Quiet Logistics. With these acquisitions, the Company expects to be able to execute on operational efficiencies to create a supply chain platform, which we refer to as Quiet Platforms, with significant long-term growth potential.
Omni-Channel and Digital Capabilities
We sell merchandise through our digital channels, www.ae.com, www.aerie.com, www.toddsnyder.com, www.unsubscribed.com, and our AEO apps, both domestically and internationally in 81 countries. We also sell merchandise on various international online marketplaces. The digital channels reinforce each particular brand and are designed to complement the in-store experience.
Over the past several years, we have invested in building our technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the digital customer experience.
Non-GAAP Information
The results of operations section below contains net income (loss) per diluted share presented on an adjusted or non-GAAP basis, which is a non-GAAP financial measure. This financial measure is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similar measures presented by other companies. Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance when reviewed in conjunction with our GAAP Consolidated Financial Statements and provides a higher degree of transparency. These amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating our business and operations. The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.
|
|
13 Weeks Ended |
|
|||||
|
|
July 30, |
|
|
July 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Net (loss) income per diluted share - GAAP Basis |
|
$ |
(0.24 |
) |
|
$ |
0.58 |
|
Add: Debt related charges (1) |
|
|
0.28 |
|
|
|
— |
|
Add: Convertible Debt (2) |
|
|
— |
|
|
|
0.02 |
|
Net income per diluted share - Adjusted or Non- |
|
$ |
0.04 |
|
|
$ |
0.60 |
|
28
|
|
26 Weeks Ended |
|
|||||
|
|
July 30, |
|
|
July 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Net (loss) income per diluted share - GAAP Basis |
|
$ |
(0.06 |
) |
|
$ |
1.04 |
|
Add: Debt related charges (1) |
|
|
0.26 |
|
|
|
— |
|
Add: Convertible Debt (2) |
|
|
— |
|
|
|
0.04 |
|
Net income per diluted share - Adjusted or Non- |
|
$ |
0.20 |
|
|
$ |
1.08 |
|
Results of Operations
Overview
Demand in the second quarter was soft, reflecting the impact of inflationary pressure and a related shift in consumer spending patterns. In this environment, margin pressure was more amplified as we worked to clear through excess spring and summer goods. Given ongoing uncertainties in the macroeconomic environment, we have taken additional steps to position the business for improved financial performance. This includes further resetting inventory plans for the back half of the year, expanding the scope of expense and capital expenditure reductions.
The following table shows the percentage relationship to total net revenue of the listed line items included in our Consolidated Statements of Operations:
|
|
13 Weeks Ended |
|
|
|
26 Weeks Ended |
|
|
||||||||||||
|
|
July 30, |
|
|
|
July 31, |
|
|
|
July 30, |
|
|
|
July 31, |
|
|
||||
|
|
2022 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
|
||||
Total net revenue |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
|
|
100.0 |
|
% |
Cost of sales, including certain buying, occupancy |
|
|
69.1 |
|
|
|
|
57.9 |
|
|
|
|
66.4 |
|
|
|
|
57.9 |
|
|
Gross profit |
|
|
30.9 |
|
|
|
|
42.1 |
|
|
|
|
33.6 |
|
|
|
|
42.1 |
|
|
Selling, general and administrative expenses |
|
|
25.7 |
|
|
|
|
24.6 |
|
|
|
|
26.9 |
|
|
|
|
25.1 |
|
|
Depreciation and amortization expense |
|
|
4.0 |
|
|
|
|
3.4 |
|
|
|
|
4.2 |
|
|
|
|
3.5 |
|
|
Operating income |
|
|
1.2 |
|
|
|
|
14.1 |
|
|
|
|
2.5 |
|
|
|
|
13.5 |
|
|
Debt related charges |
|
|
5.1 |
|
|
|
|
- |
|
|
|
|
2.7 |
|
|
|
|
- |
|
|
Interest expense, net |
|
|
0.3 |
|
|
|
|
0.8 |
|
|
|
|
0.4 |
|
|
|
|
0.7 |
|
|
Other income, net |
|
|
(0.2 |
) |
|
|
|
(0.1 |
) |
|
|
|
(0.3 |
) |
|
|
|
(0.1 |
) |
|
(Loss) income before income taxes |
|
|
(4.0 |
) |
|
|
|
13.4 |
|
|
|
|
(0.3 |
) |
|
|
|
12.9 |
|
|
(Benefit) provision for income taxes |
|
|
(0.5 |
) |
|
|
|
3.2 |
|
|
|
|
0.2 |
|
|
|
|
3.2 |
|
|
Net (loss) income |
|
|
(3.5 |
) |
% |
|
|
10.2 |
|
% |
|
|
(0.5 |
) |
% |
|
|
9.7 |
|
% |
29
The following table shows our consolidated store data:
|
|
13 Weeks Ended |
|
|
26 Weeks Ended |
|
||||||||||
|
|
July 30, |
|
|
July 31, |
|
|
July 30, |
|
|
July 31, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Number of stores: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Beginning of period |
|
|
1,141 |
|
|
|
1,074 |
|
|
|
1,133 |
|
|
|
1,078 |
|
Opened |
|
|
29 |
|
|
|
20 |
|
|
|
48 |
|
|
|
31 |
|
Closed |
|
|
(10 |
) |
|
|
(4 |
) |
|
|
(21 |
) |
|
|
(19 |
) |
End of period |
|
|
1,160 |
|
|
|
1,090 |
|
|
|
1,160 |
|
|
|
1,090 |
|
Total gross square feet at end of period (in '000) |
|
|
7,205 |
|
|
|
6,799 |
|
|
|
7,205 |
|
|
|
6,799 |
|
International licensed/franchise stores at end of |
|
|
260 |
|
|
|
242 |
|
|
|
260 |
|
|
|
242 |
|
As of July 30, 2022, we operated 873 American Eagle retail stores, which include 185 Aerie side-by-side locations and 2 OFFLINE™ side-by-side locations, 276 Aerie stand-alone stores (including 31 OFFLINE™ stand-alone stores and 21 OFFLINE™ side-by-side locations), and AEO Direct. Additionally, there were six Todd Snyder stand-alone locations and five Unsubscribed locations.
Comparison of the 13 weeks ended July 30, 2022 to the 13 weeks ended July 31, 2021
Total Net Revenue
Total net revenue increased $4.0 million, to $1.198 billion compared to $1.194 billion last year.
American Eagle
Total net revenue for the 13 weeks ended July 30, 2022 for the American Eagle brand was $777.8 million compared to $845.9 million for the 13 weeks ended July 31, 2021.
Aerie
Total net revenue for the 13 weeks ended July 30, 2022 for the Aerie brand was $371.7 million compared to $335.8 million for the 13 weeks ended July 31, 2021.
Gross Profit
Gross profit decreased 26% or $132.4 million to $370.0 million compared to $502.4 million last year. Our gross margin percentage decreased to 30.9% of revenue from 42.1% of revenue last year. The gross margin decline was driven by a 750 basis point impact from higher markdowns, largely reflecting initiatives to clear excess inventory as a result of the larger than expected reduction in our sales trend. Higher freight costs impacted the gross margin by approximately 200 basis points and Quiet Platforms had a 60 basis point impact as we integrate and ramp up business. Delivery, warehousing costs and rent also increased, offset by lower incentive compensation accruals.
There was $4.0 million and $3.9 million of share-based payment expense included in gross profit for the 13 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.
Selling, General and Administrative Expenses
SG&A expenses increased 5% or $13.9 million to $307.8 million from $293.9 million last year. As a percentage of total net revenue, SG&A expenses increased 110 basis points to 25.7%, compared to 24.6% last year. The increase in expenses was primarily related to increased store wages and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.
30
There was $4.6 million and $5.1 million of share-based payment expense included in SG&A expenses for the 13 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 19% or $7.7 million, to $48.2 million for the 13 weeks ended July 30, 2022, compared to $40.5 million for the 13 weeks ended July 31, 2021, which was primarily driven by increased capital spending and the recent acquisition of Quiet Logistics. As a percentage of total net revenue, depreciation and amortization expense was 4.0% for the 13 weeks ended July 30, 2022 compared to 3.4% for the 13 weeks ended July 31, 2021.
Debt Related Charges
Debt related charges of $60.1 million for the 13 weeks ended June 30, 2022 consists primarily of a $55.7 million induced conversion expense relating to the Note Exchange, along with certain other costs related to actions we took to strengthen our capital structure.
Interest Expense, net
Interest expense, net decreased $5.5 million, to $3.4 million, for the 13 weeks ended July 30, 2022, compared to $8.9 million for the 13 weeks ended July 31, 2021. The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes, partially offset by $1.0 million of interest expense from borrowings under our Credit Facility this year.
Other Income, net
Other income, net was $1.8 million for the 13 weeks ended July 30, 2022, compared to $1.4 million for the 13 weeks ended July 31, 2021.
(Benefit) Provision for Income Taxes
The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax benefit rate for the 13 weeks ended July 30, 2022 was 10.9% compared to the effective income tax rate of 24.3% for the 13 weeks ended July 31, 2021. The change in the effective tax rate, as compared to the prior period, is primarily due to the Note Exchange as a portion of the inducement charge was not deductible, lower excess tax benefits on share-based payments, and state legislative changes.
Net (Loss) Income
Net (loss) income decreased $164.0 million, to a net loss of $42.5 million for the 13 weeks ended July 30, 2022, or (3.5%) as a percentage of total net revenue, compared to net income of $121.5 million, or 10.2% as a percentage of total net revenue for the 13 weeks ended July 31, 2021.
Net (loss) income per share decreased to a net loss of $0.24 per diluted share, including $0.28 of debt related charges for the 13 weeks ended July 30, 2022, compared to net income of $0.58 per diluted share, including $0.02 of the amortization of the non-cash discount on the 2025 Notes for the 13 weeks ended July 31, 2021. The change in net (loss) income was attributable to the factors noted above.
Comparison of the 26 weeks ended July 30, 2022 to the 26 weeks ended July 31, 2021
Total Net Revenue
Total net revenue increased 1%, or $24.4 million, to $2.253 billion compared to $2.229 billion last year.
American Eagle
Total net revenue for the 26 weeks ended July 30, 2022 for the American Eagle brand was $1.463 billion compared to $1.574 billion for the 26 weeks ended July 31, 2021.
Aerie
Total net revenue for the 26 weeks ended July 30, 2022 for the Aerie brand was $693.4 million compared to $633.3 million for the 26 weeks ended July 31, 2021.
31
Gross Profit
Gross profit decreased 19% or $180.6 million, to $758.0 million compared to $938.6 million last year. Our gross margin percentage decreased to 33.6% of revenue from 42.1% of revenue last year. The gross margin decline was driven by a 440 basis point impact from higher markdowns, largely reflecting initiatives to clear excess inventory. Higher freight costs impacted the gross margin by approximately 270 basis points and Quiet Platforms had a 90 basis point impact as we integrate and ramp up the business. Delivery, warehousing costs and rent also increased, offset by lower incentive compensation accruals.
There was $9.4 million and $8.2 million of share-based payment expense included in gross profit for the 26 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A expenses. Refer to Note 2 to the Consolidated Financial Statements for a description of our accounting policy regarding cost of sales, including certain buying, occupancy and warehousing expenses.
Selling, General and Administrative Expenses
SG&A expenses increased 9% or $48.2 million to $606.6 million from $558.4 million last year. As a percentage of total net revenue, SG&A expenses increased 180 basis points to 26.9%, compared to 25.1% last year. The increase in expenses was primarily related to increased store wages and hours and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.
There was $13.5 million and $13.4 million of share-based payment expense included in SG&A expenses for the 26 week periods ended July 30, 2022 and July 31, 2021, respectively, comprised of both time and performance-based awards.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 21% or $16.8 million, to $95.5 million for the 26 weeks ended July 30, 2022, compared to $78.7 million for the 26 weeks ended July 31, 2021, which was primarily driven by increased capital spending and the recent acquisition of Quiet Logistics. As a percentage of total net revenue, depreciation and amortization expense was 4.2% this year compared to 3.5% last year.
Debt Related Charges
Debt related charges of $60.1 million for the 26 weeks ended June 30, 2022 consists primarily of a $55.7 million induced conversion expense related to the Note Exchange, along with certain other costs related to actions we took to strengthen our capital structure.
Interest Expense, net
Interest expense, net decreased $9.4 million, to $8.0 million, for the 26 weeks ended July 30, 2022, compared to $17.4 million for the 26 weeks ended July 31, 2021. The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes, partially offset by $1.0 million of interest expense from borrowings under our Credit Facility.
Other Income, net
Other income, net was $6.3 million for the 26 weeks ended July 30, 2022, compared to $3.2 million for the 26 weeks ended July 31, 2021.
Provision for Income Taxes
The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 26 weeks ended July 30, 2022 was -82.5% compared to 24.5% for the 26 weeks ended July 31, 2021. The change in the effective tax rate, as compared to the prior period, is primarily due to the Note Exchange as a portion of the inducement charge was not deductible, lower excess tax benefits on share-based payments, and state legislative changes.
32
Net (Loss) Income
Net (loss) income decreased $227.7 million, to a net loss of $10.7 million for the 26 weeks ended July 30, 2022, or (0.5%) as a percentage of total net revenue, compared to $217.0 million, or 9.7% as a percentage of total net revenue for the 26 weeks ended July 31, 2021.
Net (loss) income per share decreased to a net loss of $0.06 per diluted share, including $0.26 of debt related charges for the 26 weeks ended July 30, 2022, compared to net income of $1.04 per diluted share, including $0.03 of the amortization of the non-cash discount on the 2025 Notes for the 26 weeks ended July 31, 2021. The change in net (loss) income was attributable to the factors noted above.
International Operations
We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As of July 30, 2022, our international licensing partners operated in more than 260 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in 26 countries.
As of July 30, 2022, we had 103 company-owned stores in Canada, 64 in Mexico, 17 in Hong Kong and 7 in Puerto Rico.
Liquidity and Capital Resources
Our uses of cash have historically been for working capital, the construction of new stores and remodeling of existing stores, information technology and e-commerce upgrades and investments, distribution center improvements and expansion, and the return of value to shareholders through the repurchase of common stock and the payment of dividends. Additionally, our uses of cash have included the development of the Aerie brand, investments in supply chain technology and omni-channel capabilities, and our international expansion efforts.
Historically, our uses of cash have been funded with cash flow from operations and existing cash on hand. We also maintain a Credit Facility that allows us to borrow up to $700 million, which will expire in June 2027. As of July 30, 2022, we had borrowings under the Credit Facility of $307.7 million. Additionally, approximately $69.6 million aggregate principal amount of the 2025 Notes remain outstanding at July 30, 2022.
As of July 30, 2022, we had approximately $98.2 million in cash and cash equivalents. We expect to be able to fund our current and long-term cash requirements through current cash holdings and available liquidity.
The following sets forth certain measures of our liquidity:
|
|
July 30, |
|
|
January 29, |
|
|
July 31, |
|
|||
|
|
2022 |
|
|
2022 |
|
|
2021 |
|
|||
Working Capital (in thousands) |
|
$ |
459,328 |
|
|
$ |
554,053 |
|
|
$ |
832,365 |
|
Current Ratio |
|
|
1.64 |
|
|
|
1.66 |
|
|
|
2.08 |
|
Working capital decreased $94.7 million compared to January 29, 2022 and decreased $373.0 million compared to last year. The $373.0 million decrease in our working capital compared to July 31, 2021, is driven by a $725.8 million decrease in cash and short-term investments. This decrease is primarily related to our acquisition of Quiet Logistics and AirTerra in Fiscal 2021 totaling $358.1 million (net of cash acquired), as well as $200.0 million in share repurchases under our ASR Agreement and $136.1 million in cash paid to holders of the 2025 Notes pursuant to the Note Exchange. This decrease in working capital was partially offset by a $183.5 million increase in inventory, a $82.4 million decrease in accrued compensation and a $65.4 million increase in net accounts receivable.
Cash Flows (Used for) Provided by Operating Activities
Net cash used for operating activities totaled $105.3 million for the 26 weeks ended July 30, 2022, compared to net cash provided by operating activities of $121.9 million for the 26 weeks ended July 31, 2021. For both periods, our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs.
Cash Flows Used for Investing Activities
Net cash used for investing activities totaled $128.4 million for the 26 weeks ended July 30, 2022, compared to net cash used for investing activities of $140.4 million for the 26 weeks ended July 31, 2021. Investing activities for the 26 weeks
33
ended July 30, 2022 primarily consisted of $127.9 million of capital expenditures for property and equipment. Investing activities for the 26 weeks ended July 31, 2021 primarily consisted of $86.2 million of capital expenditures for property and equipment and $50.0 million of net short-term investment purchases.
Cash Flows Used for Financing Activities
Net cash used for financing activities totaled $102.1 million for the 26 weeks ended July 30, 2022, compared to net cash used for financing activities of $58.1 million for the 26 weeks ended July 31, 2021. Cash used for financing activities for the 26 weeks ended July 30, 2022 consisted primarily of $200.0 million used to repurchase the Company's common stock under the ASR Agreement, $136.1 million used for the principal paid in connection with the Note Exchange, $64.8 million used for cash dividends paid at a quarterly rate of $0.18 per share and $9.6 million used for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $307.7 million of proceeds from borrowings under our Credit Facility.
Cash used for financing activities for the 26 weeks ended July 31, 2021 consisted primarily of $53.2 million for cash dividends paid at quarterly rates of $0.1375 and $0.18 per share for the 13 weeks ended May 2, 2021 and July 31, 2021, respectively, and $17.5 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $13.1 million of proceeds from stock option exercises.
Credit Facility
In June 2022, we entered into the Credit Agreement, which provides senior secured asset-based revolving credit for loans and letters of credit up to $700 million pursuant to the Credit Facility, subject to customary borrowing base limitations. The Credit Facility expires on June 24, 2027.
All obligations under the Credit Facility are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by certain assets of the Company and certain subsidiaries.
As of July 30, 2022, the Company was in compliance with the terms of the Credit Agreement and had $307.7 million in borrowings and $7.9 million outstanding in stand-by letters of credit. No loans were outstanding under the Company's previous credit agreement as of July 31, 2021.
Capital Expenditures for Property and Equipment
Capital expenditures for the 26 weeks ended July 30, 2022 were $127.9 million, and included $85.7 million related to investments in our stores, including 48 new stores (11 American Eagle stores, 35 Aerie stand-alone stores (including 12 OFFLINE™ stand-alone stores), one Todd Snyder store, and one Unsubscribed store), and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($33.1 million), Quiet Platforms ($7.0 million) and other home office projects ($2.1 million).
For Fiscal 2022, we expect total capital expenditures to be approximately $250 million, related to the continued support of our expansion efforts, stores, information technology upgrades to support growth, and investments in e-commerce, as well as to support and enhance our supply chain. We expect to be able to fund our capital expenditures through current cash holdings and available liquidity.
Share Repurchases
During Fiscal 2019, our Board of Directors (“Board”) authorized the repurchase of 30.0 million shares under a share repurchase program.
On June 3, 2022, the Company entered into an ASR Agreement with JPMorgan Chase Bank (“JPM”) to repurchase an aggregate of $200.0 million of the Company’s common stock.
Pursuant to the terms of the ASR Agreement, on June 3, 2022, the Company paid to JPM $200.0 million in cash and received an initial delivery of 13.4 million shares of its common stock on June 3, 2022. At final settlement, on July 28, 2022, an additional 3.7 million shares were received. The cumulative repurchase under the ASR Agreement was 17.0 million shares repurchased at an average price per share of $11.75.
As of July 30, 2022, our total remaining share repurchase authorization was approximately 13.0 million shares.
During both the 26 weeks ended July 30, 2022 and July 31, 2021, we repurchased approximately 0.6 million shares from certain employees at market prices totaling $9.6 million and $17.5 million, respectively. These shares were repurchased for the payment of taxes, in connection with the vesting of share-based payments, as permitted under our equity incentive plans.
34
The aforementioned repurchased shares have been recorded as treasury stock.
Dividends
During the 13 weeks ended July 30, 2022, our Board declared a quarterly cash dividend of $0.18 per share on June 8, 2022, which was paid on July 22, 2022.
The Company maintains the right to defer the record and payment dates of its dividends, depending upon, among other factors, the progression of the COVID-19 outbreak, business performance, and the macroeconomic environment. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation, and other relevant factors.
Subsequent to the 13 weeks ended, the Company announced that, given ongoing external uncertainties, in order to increase financial flexibility it is temporarily suspending its quarterly cash dividends.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the Notes to our Consolidated Financial Statements for the year ended January 29, 2022 contained in our Fiscal 2021 Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report. The application of our critical accounting policies and estimates may require our management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Our management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.
Financial Instruments
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
As of July 30, 2022, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash and cash equivalents.
In accordance with ASC 820, the following table represents the fair value hierarchy of our financial assets (cash equivalents) measured at fair value on a recurring basis as of July 30, 2022:
|
|
Fair Value Measurements at July 30, 2022 |
|
|||||||||||||
(In thousands) |
|
Carrying Amount |
|
|
Quoted Market Prices |
|
|
Significant Other |
|
|
Significant |
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash |
|
$ |
98,111 |
|
|
$ |
98,111 |
|
|
$ |
— |
|
|
$ |
— |
|
Interest bearing deposits |
|
|
103 |
|
|
|
103 |
|
|
|
— |
|
|
|
— |
|
Total cash and cash equivalents |
|
$ |
98,214 |
|
|
$ |
98,214 |
|
|
$ |
— |
|
|
$ |
— |
|
35
Long-Term Debt
The fair value of the 2025 Notes is not required to be measured at fair value on a recurring basis. Upon issuance, the fair value of the 2025 Notes was measured using two approaches that consider market related conditions, including market benchmark rates and a secondary market quoted price, and is therefore within Level 2 of the fair value hierarchy.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized gain of $0.3 million and $0.8 million was included in other comprehensive income during the 13 and 26 weeks ended July 30, 2022, respectively. Our market risk profile as of January 29, 2022, is disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Fiscal 2021 Form 10-K, and is unchanged as of July 30, 2022.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act, 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 our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In connection with the preparation of this Quarterly Report, as of July 30, 2022, the Company performed an evaluation under the supervision and with the participation of our Management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing, and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
36
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved, from time to time, in actions associated with or incidental to our business, including, among other things, matters involving consumer privacy, trademark and other intellectual property, licensing, importation of products, taxation, and employee relations. We believe at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial position or results of operations. However, our assessment of any litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact that are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims.
Refer to Note 11. “Legal Proceedings” of the notes to the Consolidated Financial Statements included herein for additional information.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed within Part I, Item 1A of our Fiscal 2021 Form 10-K. There have been no material changes to our risk factors as disclosed in the Fiscal 2021 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table provides information regarding our repurchases of our common stock during the 13 weeks ended July 30, 2022:
|
|
Total |
|
|
|
|
|
Total Number of |
|
|
Maximum Number of |
|
||||
|
|
Number of |
|
|
Average |
|
|
Shares Purchased as |
|
|
Shares that May |
|
||||
|
|
Shares |
|
|
Price Paid |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
||||
Period |
|
Purchased |
|
|
Per Share |
|
|
Announced Programs |
|
|
Under the Program |
|
||||
|
|
(1) |
|
|
(2) |
|
|
(1) |
|
|
(1) (3) |
|
||||
Month #1 (May 1, 2022 through May 28, 2022) |
|
|
1,944 |
|
|
$ |
13.86 |
|
|
|
— |
|
|
|
30,000,000 |
|
Month #2 (May 29, 2022 through July 2, 2022) |
|
|
13,464,929 |
|
|
$ |
12.79 |
|
|
|
13,355,593 |
|
|
|
16,644,407 |
|
Month #3 (July 3, 2022 through July 30, 2022) |
|
|
3,669,080 |
|
|
$ |
7.96 |
|
|
|
3,667,277 |
|
|
|
12,977,130 |
|
Total |
|
|
17,135,953 |
|
|
$ |
11.75 |
|
|
|
17,022,870 |
|
|
|
12,977,130 |
|
37
ITEM 6. EXHIBITS.
|
|
|
10.1 |
|
|
10.2 |
|
|
10.3 |
|
|
* 31.1 |
|
Certification by Jay L. Schottenstein pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
|
|
* 31.2 |
|
Certification by Michael A. Mathias pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
|
|
|
** 32.1 |
|
|
|
|
|
** 32.2 |
|
|
|
|
|
* 101 |
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2022, formatted as inline eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of July 30, 2022, January 29, 2022 and July 31, 2021, (ii) Consolidated Statements of Operations for the 13 and 26 weeks ended July 30, 2022 and July 31, 2021, (iii) Consolidated Statements of Comprehensive Income for the 13 and 26 weeks ended July 30, 2022 and July 31, 2021, (iv) Consolidated Statements of Stockholders’ Equity for the 13 and 26 weeks ended July 30, 2022 and July 31, 2021, and (v) Consolidated Statements of Cash Flows for the 26 weeks ended July 30, 2022 and July 31, 2021 |
* 104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2022, formatted in inline XBRL |
* Filed with this report.
** Furnished with this report.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: September 7, 2022
|
|
American Eagle Outfitters, Inc. (Registrant) |
|
|
|
|
|
By: |
|
/s/ Jay L. Schottenstein |
|
|
|
Jay L. Schottenstein |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
By: |
|
/s/ Michael A. Mathias |
|
|
|
Michael A. Mathias |
|
|
|
Executive Vice President, Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
39