American Eagle Outfitters - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-0001

FORM 10-Q

For the quarterly period ended April 29, 2000

OR

For the transition period from ______________to______________

Commission file number: 0-23760

American Eagle Outfitters, Inc.
(Exact name of registrant as specified in its charter)

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.

Yes X   No      

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common stock, $.01 par value, 46,644,599 shares outstanding as of May 26, 2000.

AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at April 29, 2000 and for the three month period ended April 29, 2000 (the "current period") and May 1, 1999 (the "prior period") have been prepared in accordance with generally accepted accounting principles 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 footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at January 29, 2000 was derived from the audited financial statements. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results.

Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company's Fiscal 1999 Annual Report.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires 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, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Financial Accounting Standards Board Pronouncement

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" which interprets APB Opinion No. 25. This interpretation is effective on July 1, 2000. The Company does not believe the interpretation will affect its current accounting practice for stock options.

Cash and Cash Equivalents

Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.

Short-Term Investments and Other Comprehensive Loss

Cash in excess of operating requirements is invested in marketable equity or government debt obligations. As of April 29, 2000, short-term investments include investments with an original maturity of greater than three months (averaging approximately 10 months) and consist primarily of tax-exempt municipal bonds classified as available for sale and marketable equity securities. The primary difference between net income and comprehensive income is related to the change in the market value, net of tax, of the above described investments as follows:

Capital Structure

The Company has 125,000,000 common shares authorized at $.01 par value, 47,222,595 shares issued and 46,972,595 shares outstanding as of April 29, 2000 and 46,740,917 shares issued and outstanding as of January 29, 2000. The Company has 5,000,000 preferred shares authorized at $.01 par value, with none issued or outstanding at April 29, 2000.

On February 24, 2000, the Company's Board of Directors authorized the repurchase of up to 2,500,000 shares of its stock. For the three months ended April 29, 2000, the Company purchased 250,000 shares of common stock on the open market for $6.5 million. Subsequent to the end of the current period, an additional 645,500 shares were purchased for $11.2 million.

Earnings Per Share

The following table shows the amounts used in computing earnings per share and the effect on income per share and the weighted average number of shares of dilutive potential common stock (stock options and restricted stock).

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for the prior period in order to conform to the April 29, 2000 presentation.

Because there were no borrowings under the terms of the Company's line of credit, there were no amounts paid for interest during the three months ended April 29, 2000 or May 1, 1999. Income tax payments were $19.8 million and $10.9 million during the three months ended April 29, 2000 and May 1, 1999, respectively. During the three months ended April 29, 2000 and May 1, 1999, $1.7 million and $2.4 million, respectively, were recognized as increases to contributed capital, related to the tax benefits associated with the exercise and vesting of stock options and restricted stock.

The Company has various transactions with related parties. The nature of the relationship with each party is primarily through common ownership. The Company has an operating lease for its corporate headquarters and distribution center with an affiliate. The lease which expires on December 31, 2020, provides for annual rental payments of approximately $2.0 million through 2000, $2.4 million through 2005, $2.6 million through 2015, and $2.7 million through 2020.

In addition, the Company and its subsidiaries sell merchandise to various related parties.

Effective January 31, 2000, the Company acquired importing operations from Schottenstein Stores Corporation, a related party. The purpose of the acquisition was to integrate the expertise of the importing operation into the Company's supply chain process and to streamline and improve the efficiency of the process. The terms of the acquisition required a payment of $8.5 million to Schottenstein Stores Corporation which was made on March 6, 2000. The acquisition price was recorded as goodwill and is being amortized over a period of fifteen years.

Related party amounts follow:

(Dollars in thousands)

Accounts receivable is comprised of the following:

(Dollars in thousands)

For the three months ended April 29, 2000 and May 1, 1999, the effective tax rate used for the provision of income tax approximated 39%.

The Company is a party to ordinary routine litigation incidental to its business. Management does not expect the results of the litigation to be material to the financial statements individually or in the aggregate.

The Company may be contingently liable for the remaining rental payments for the outlet stores that were sold in October 1995. In January 2000, the company which owns the outlet stores sought protection under Chapter 11 of the Bankruptcy Act. Currently, there is insufficient information to determine the amount of the loss the Company may incur, if any, related to this potential contingent liability.

Review by Independent Accountants

Ernst & Young LLP, our independent accountants, have performed a limited review of the Consolidated Financial Statements for the three month periods ended April 29, 2000 and May 1, 1999, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review.

Independent Accountants' Review Report

The Board of Directors and Stockholders
American Eagle Outfitters, Inc.

We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of April 29, 2000, and the related consolidated statements of operations and cash flows for the three month periods ended April 29, 2000 and May 1, 1999. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 29, 2000, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated February 24, 2000 (except for Note 12, as to which the date is March 6, 2000) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 29, 2000, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.

Pittsburgh, Pennsylvania
May 11, 2000

Results of Operations

This table shows the percentage relationship to net sales of the listed items included in the Company's Consolidated Statements of Operations.

Comparison of three months ended April 29, 2000 to the three months ended May 1, 1999

Net sales increased 22.4% to $178.0 million from $145.4 million. The increase includes:

The increase resulted from an increase of 28.5% in units sold, offset by a 4.7% decrease in prices. We operated 491 stores at the end of the current period, compared to 401 stores at the end of the prior period.

Gross profit increased 18.7% to $70.1 million from $59.0 million. Gross profit as a percent of net sales decreased to 39.4% from 40.6%. The decrease in gross profit as a percent of net sales, was attributable primarily to a 0.6% increase in buying, occupancy, and warehousing costs and 0.6% decrease in merchandise margins, which resulted primarily from decreased mark–ons and increased markdowns.

Selling, general and administrative expenses increased to $46.7 million from $37.1 million. As a percent of net sales, these expenses increased to 26.2% from 25.5%. The $9.6 million increase includes:

Depreciation and amortization expense increased to $4.3 million from $2.5 million. As a percent of net sales, these expenses increased to 2.5% from 1.7 %. The increase includes $0.7 million related to new stores.

Investment income increased to $1.7 million, or 1.0% of net sales, from $0.7 million, or 0.5% of net sales, because of higher cash reserves available for investment as well as higher rates earned on these investments. No borrowings were required under the terms of our line of credit during the current or prior periods.

Income before income taxes increased to $20.8 million from $20.2 million. As a percent of net sales, income before income taxes decreased to 11.7% from 13.9%. The decrease in income before income taxes as a percent of sales was attributable to the factors noted above.

Liquidity and Capital Resources

Our sources of cash in the current period included net income and $45.2 million from the maturity of our short-term investments. Our primary uses of cash included $24.7 million in capital expenditures, $21.4 million to support inventory increases for new store growth, $20.4 million related to decreased accrued liabilities, $18.0 million to purchase short-term investments, $8.5 million to purchase Blue Star Imports, and $6.5 million to repurchase common stock. Working capital at April 29, 2000 was $153.3 million compared to $107.2 million at May 1, 1999. The increase in working capital was the result of investing cash to support the growth in new stores.

Capital expenditures, net of construction allowances, totaled $24.7 million for the three months ended April 29, 2000. These expenditures included:

At April 29, 2000, the Company had an unsecured demand lending arrangement with a bank to provide a $100.0 million line of credit at either the lender's prime lending rate (9.0% at April 29, 2000) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million that can be used for direct borrowing. No borrowings were required against the line for the current or prior period. At April 29, 2000, letters of credit in the amount of $90.7 million were outstanding leaving a remaining available balance on the line of $9.3 million. We are in negotiations with the bank to increase the line of credit to $125.0 million.

We plan to open approximately 65 stores during the remainder of the fiscal year. This forward–looking statement will be influenced by factors including our financial position, consumer spending, and the number of acceptable mall store leases that may become available. We believe that our existing cash and investment balances, our cash flow from operations, and our bank line of credit will be sufficient to meet our anticipated cash requirements through Fiscal 2000.

Impact of Inflation

We do not believe that the relatively modest levels of inflation experienced in the United States in recent years have had a significant effect on our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on our business and the industry in the future.

Safe Harbor Statement, Seasonality, and Business Risks

This report contains various `forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following:

We caution that these statements are further qualified by factors that could cause actual results to differ materially from those in the forward–looking statements, including without limitation, the following:

The impact of the above factors, some of which are beyond our control, may cause our actual results actually to differ materially from expected results in these statements and other forward–looking statements we may make from time–to–time.

Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year–end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back–to–school selling season. During Fiscal 1999, these periods accounted for approximately 56% of our sales. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. 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 amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions.

PART II – OTHER INFORMATION

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 June 1, 2000