1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 3, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to______________ COMMISSION FILE NUMBER: 0-23760 AMERICAN EAGLE OUTFITTERS, INC. ------------------------------- (Exact name of registrant as specified in its charter) OHIO NO. 25-1724320 ---- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528 ------------------------------------ ---------- (Address of principal executive offices) (Zip code) (412) 776-4857 -------------- (Registrant's telephone number, including area code) 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, NO PAR VALUE, 9,923,550 SHARES OUTSTANDING AS OF MAY 19, 1997
2 AMERICAN EAGLE OUTFITTERS, INC. TABLE OF CONTENTS <TABLE> <S> <C> <C> PART I. FINANCIAL INFORMATION PAGE NO. --------------------- -------- Item 1. Financial Statements Consolidated Balance Sheets May 3, 1997 (unaudited) and February 1, 1997 3 Consolidated Statements of Operations (unaudited) Three months ended May 3, 1997 and May 4, 1996 4 Consolidated Statements of Cash Flows (unaudited) Three months ended May 3, 1997 and May 4, 1996 5 Notes to Consolidated Financial Statements 6-8 Review By Independent Accountants 9 Independent Accountants' Review Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 PART II. OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Changes in Securities N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit 23 Acknowledgment of Independent Accountants 15 </TABLE>
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (In thousands, except common stock share amounts) May 3, February 1, ASSETS 1997 1997 ----- ----- Current assets: (Unaudited) <S> <C> <C> Cash and cash equivalents $14,261 $ 34,326 Merchandise inventory 35,486 27,117 Receivables 1,637 3,556 Prepaid expenses and other 4,805 4,381 Deferred income taxes 4,425 4,380 ------- -------- Total current assets 60,614 73,760 ------- -------- Fixed assets: Fixtures and equipment 24,116 23,118 Leasehold improvements 33,105 32,671 ------- -------- 57,221 55,789 Less: Accumulated depreciation and amortization 20,775 21,598 ------- -------- 36,446 34,191 ------- -------- Other assets 2,670 2,487 ------- -------- Total assets $99,730 $110,438 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $19,107 $ 20,430 Accrued compensation and payroll taxes 3,941 4,926 Accrued rent 6,064 6,006 Accrued income and other taxes 526 5,478 Other liabilities and accrued expenses 2,267 2,542 ------- -------- Total current liabilities 31,905 39,382 ------- -------- Stockholders' equity: Common stock, 30,000,000 shares authorized, 10,053,350 shares issued (10,051,950 shares at February 1, 1997) 53,276 52,863 Contributed capital 5,539 5,535 Retained earnings 13,500 17,119 ------- -------- 72,315 75,517 Less: Deferred compensation 2,865 2,836 Treasury stock, 134,000 shares 1,625 1,625 ------- -------- Total stockholders' equity 67,825 71,056 ------- -------- Total liabilities and stockholders' equity $99,730 $110,438 ======= ======== </TABLE> See notes to Consolidated Financial Statements 3
4 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended -------------------- May 3, May 4, 1997 1996 ---- ---- <S> <C> <C> Net sales $ 60,952 $ 54,396 Cost of sales, including certain buying, occupancy and warehousing expenses 46,699 40,786 -------- -------- Gross profit 14,253 13,610 Selling, general and administrative expenses 18,910 17,286 Depreciation and amortization 1,669 1,567 -------- -------- Operating loss (6,326) (5,243) Interest income, net 330 314 -------- -------- Loss before income taxes (5,996) (4,929) Benefit for income taxes (2,377) (1,938) -------- -------- Net loss $ (3,619) $ (2,991) ======== ========= Net loss per common share $ (0.36) $ (0.30) ======== ========= Weighted average number of shares outstanding 9,918 9,875 ======== ========= Retained earnings, beginning $ 17,119 $ 11,194 Net loss (3,619) (2,991) -------- -------- Retained earnings, ending $ 13,500 $ 8,203 ======== ======== </TABLE> See notes to Consolidated Financial Statements 4
5 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH (In thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ May 3, May 4, 1997 1996 ---- ---- <S> <C> <C> Net loss $ (3,619) $ (2,991) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Depreciation and amortization 1,669 1,567 Loss on disposal 401 237 Restricted stock compensation 262 206 Deferred income taxes (45) - CHANGES IN ASSETS AND LIABILITIES: Merchandise inventory (8,369) (1,075) Receivables 1,782 3,173 Prepaid and other (523) (649) Accounts payable (2,066) (1,660) Accrued liabilities (5,725) (3,038) -------- -------- Total adjustments (12,614) (1,239) -------- -------- Net cash used for operating activities (16,233) (4,230) -------- -------- INVESTING ACTIVITIES: Capital expenditures (3,845) (1,467) Collection on notes from sale of outlet stores - 3,568 -------- -------- Net cash used for investing activities (3,845) 2,101 -------- -------- FINANCING ACTIVITIES: Stock options exercised 13 - -- - Net cash provided by financing activities 13 - -- - Net decrease in cash (20,065) (2,129) Cash - beginning of period 34,326 19,986 -------- -------- Cash - end of period $ 14,261 $ 17,857 ======== ======== </TABLE> See notes to Consolidated Financial Statements 5
6 AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INTERIM FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at May 3, 1997 and for the three month periods ended May 3, 1997 (the "current period") and May 4, 1996 (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 February 1, 1997 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 1996 Annual Report. 2. BASIS OF PRESENTATION 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. EARNINGS PER SHARE Earnings per share are based upon the weighted average number of common shares outstanding during the periods presented. Common share equivalents, principally in the form of employee stock option awards, are not reflected in the common stock outstanding as they are anti-dilutive. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted in the Company's 1997 annual report. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary (termed basic earnings per share) earnings per share, the dilutive effect of stock options will be excluded. The impact of Statement 128 on the calculation of primary and fully diluted earnings per share for the quarters ended May 3, 1997 and May 4, 1996 is not expected to be material. RECLASSIFICATION Certain reclassifications have been made to the Consolidated Financial Statements for the prior period in order to conform to the May 3, 1997 presentation. 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Because no borrowings were required under the terms of the Company's line of credit, there were no amounts paid for interest during the three months ended May 3, 1997 or May 4, 1996. Income tax payments were $2.4 million and $0.6 million during the three months ended May 3, 1997 and May 4, 1996, respectively. 4. RELATED PARTY TRANSACTIONS As described in the information that follows, the Company has various transactions with related parties. The nature of the relationship is 6
7 primarily through common ownership. The Company has an operating lease for its corporate headquarters and distribution center with an affiliate of the Company. The lease, which was entered into on January 1, 1996, and expires on December 31, 2010, provides for annual rental payments of approximately $1.2 million through 2001, $1.6 million through 2006, and $1.8 million through the end of the lease. In addition, the Company purchases merchandise from and sells merchandise to various related parties and uses the services of a related importing company. Transactions with these related parties and associated balance sheet amounts were as follows: (In thousands) <TABLE> <CAPTION> Three Months Ended ------------------ May 3, May 4, 1997 1996 ---- ----- <S> <C> <C> Merchandise purchases plus import administrative charges $ 12,377 $ 7,076 Accounts payable $ 5,985 $ 4,499 Accounts receivable $ 138 $ 401 Rent expense $ 401 $ 395 Merchandise sales $ 305 $ 178 </TABLE> The Company has provided one-year loans, which are renewed annually, to certain officers and other individuals to pay the taxes on the restricted stock that vested in April 1995. As of May 3, 1997, the outstanding value of these loans, including interest at 6.8%, approximated $515,000 as compared with $350,000 at May 4, 1996. 5. ACCOUNTS RECEIVABLE Accounts Receivable is comprised of the following: <TABLE> <CAPTION> May 3, February 1, 1997 1997 ---- ---- <S> <C> <C> Accounts Receivable - Landlord $ 898 $ 1,336 Related Party Accounts Receivable 138 1,334 Accounts Receivable - Other 601 886 ------- ------- Total $ 1,637 $ 3,556 ======= ======= </TABLE> 6. INCOME TAXES The provisions of FASB No. 109, "Accounting for Income Taxes", have been reflected in the preparation of the accompanying Consolidated Financial Statements. For the three months ended May 3, 1997 and May 4, 1996, the effective tax rate used to provide income tax amounts approximated 39%. 7. LEASE COMMITMENTS The Company is contingently liable for the rental payments totaling approximately $7.0 million for the outlet stores which were sold in October 1995. 7
8 8. SUBSEQUENT EVENT Effective May 4, 1997, the Company acquired Prophecy Ltd. (Prophecy), a New York-based contract apparel manufacturer. The majority partner of Prophecy was the Schottenstein family. The goals of the acquisition are to leverage the talent and expense of the Company's New York design office and to use Prophecy's production expertise and manufacturing relationships to shorten the product delivery cycle and enable the Company to continually improve product quality and value. The terms of the acquisition included a cash payment of $0.9 million at closing, as well as the assumption of net liabilities of approximately $2.7 million. 8
9 REVIEW BY INDEPENDENT ACCOUNTANTS Ernst & Young LLP, our independent accountants, have performed a limited review of the Consolidated Financial Statements for the quarters ended May 3, 1997 and May 4, 1996, 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 Shareholders American Eagle Outfitters, Inc. We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of May 3, 1997, and the related consolidated statements of operations for the three-month periods ended May 3, 1997 and May 4, 1996 and the consolidated statements of cash flows for the three-month periods ended May 3, 1997 and May 4, 1996. 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 generally accepted auditing standards, 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 generally accepted auditing standards, the consolidated balance sheet of American Eagle Outfitters, Inc. as of February 1, 1997, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated March 7, 1997 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 February 1, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Pittsburgh, Pennsylvania May 27, 1997 9
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net sales of the listed items included in the Company's Consolidated Statements of Operations. <TABLE> <CAPTION> Three months ended ------------------ May 3, May 4, 1997 1996 ---- ---- <S> <C> <C> Net sales 100.0% 100.0% Cost of sales, including certain buying, occupancy and warehousing expenses 76.7 75.0 ----- ----- Gross profit 23.3 25.0 Selling, general and administrative expenses 31.0 31.8 Depreciation and amortization 2.7 2.9 ----- ----- Operating loss (10.4) (9.7) Interest income, net 0.5 0.6 ----- ----- Loss before income taxes (9.9) (9.1) Benefit for income taxes (3.9) (3.6) ----- ----- Net loss (6.0)% (5.5)% ===== ===== </TABLE> COMPARISON OF THREE MONTHS ENDED MAY 3, 1997 TO THREE MONTHS ENDED MAY 4, 1996 Net sales for the three months ended May 3, 1997 (the "current period") increased 12.0% to $60.9 million from $54.4 million for the three months ended May 4, 1996 (the "prior period"). The increase in net sales resulted primarily from increases of $5.2 million from non-comparable store sales and $1.7 million or 3.3% in comparable stores sales, offset by a decrease of $0.3 million from merchandise sales to Mycal Ltd. (formerly Nimius). The total increase in net sales resulted primarily from an increase in units sold rather than from an increase in prices. The Company operated 309 stores, excluding 3 temporary locations, at the end of the current period, compared to 274 stores, excluding 3 temporary locations, operated at the end of the prior period. Gross profit for the current period increased to $14.3 million from $13.6 million for the prior period. This increase was attributable to higher initial mark-ups, offset by higher markdowns and occupancy costs compared to the prior period. Gross profit as a percent of net sales for the current period decreased to 23.3% from 25.0% for the prior period. This decrease was attributable to the increased markdowns as a percent of net sales, only partially offset by an increase as a percent of net sales of higher initial mark-ups. Selling, general and administrative expenses for the current period increased to $18.9 million from $17.3 million for the prior period. As a percent of net sales, these expenses decreased to 31.0% from 31.8% for the prior period. The increase of $1.6 million resulted from an increase of $1.0 million in salaries primarily to support the new store growth, an increase of $0.4 million in promotional advertising, and an increase of $0.3 million in services purchased. Depreciation and amortization expense for the current period increased to $1.7 million from $1.6 million for the prior period and represented 2.7% of sales in the current period as compared to 2.9% of sales in the prior period. Interest income for the current and prior periods was $0.3 million. Interest income was generated on cash available for investment. No 10
11 borrowings were required under the terms of the Company's line of credit during the current period. The loss before income taxes for the current period increased to $6.0 million from a $4.9 million loss before income taxes for the prior period. As a percent of net sales, the loss before income taxes for the current period increased to 9.9% from 9.1% for the prior period. The increase in the loss before income taxes of $1.1 million was primarily a result of higher selling, general, and administrative expenses and depreciation, offset by increased gross profit dollars. LIQUIDITY AND CAPITAL RESOURCES The Company's primary uses of working capital in the current period were cash flow used by operating activities, primarily to support inventory increases for anticipated sales and new store growth and accounts payable decreases. Additionally, the Company used working capital to support capital expenditures. The Company had working capital of $28.7 and $34.4 million at May 3, 1997 and February 1, 1997, respectively. At May 3, 1997, the Company had an unsecured demand lending arrangement with a bank to provide a $60.0 million line of credit at either the lender's prime lending rate (8.25% at May 3, 1997) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million that can be used for direct borrowing. Cash generated from operations in prior periods was sufficient enough to finance operations so that no borrowings were required against the line during the current period. Letters of credit in the amount of $22.1 million were outstanding at May 3, 1997. The remaining available balance on the line was $37.9 million at May 4, 1997. Capital expenditures, net of construction allowances, totaled $3.8 million for the three months ended May 3, 1997. These expenditures included the addition of 10 new store locations (including 3 temporary locations), 12 store remodels, leasehold improvements in existing stores, and the purchase of CAD equipment and software. The Company expects to open an additional 15 stores during the remainder of the fiscal year. The Company has also selected an additional 8 of its better-performing older stores to upgrade to the newest store design during the remainder of Fiscal 1997. These locations were selected based upon criteria such as historical sales performance and lease terms. These forward-looking statements will be influenced by factors including the Company's financial position, consumer spending, and the number of advantageous mall store leases that may become available. The Company believes that the cash flow from operations and its bank line of credit will be sufficient to meet its presently anticipated cash requirements through Fiscal 1997. SEASONALITY Historically, the Company's operations have been seasonal, with highest 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. The Company has generally recognized net losses during its first and second fiscal quarters. IMPACT OF INFLATION The Company does not believe that the relatively modest levels of inflation which have been experienced in the United States in recent years have had a significant effect on its net sales or its profitability. Substantial increases in cost, however, could have a significant impact on the Company and the industry in the future. SAFE HARBOR STATEMENT 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 the Company's expectations or beliefs concerning future events, including the following: the planned opening of 15 stores during the remainder of Fiscal 1997; the selection of 8 stores for remodeling during the remainder of Fiscal 1997; and the sufficiency of cash flows and line of credit facilities to meet Fiscal 1997 cash requirements. The Company cautions 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: a decline in demand for the merchandise offered by the Company; any events causing the disruption of imports including the insolvency of a significant supplier; the ability of the Company to locate and obtain favorable store sites and negotiate acceptable lease terms; the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand; the effect of the economic conditions; and the effect of competitive pressures from other retailers. 11
12 Results actually achieved thus may differ materially from expected results in any forward-looking statements. The Company's results of operations will also fluctuate from quarter to quarter in the future as a result of numerous other factors. These include factors the Company cannot control that impact mall-based retailers generally, such as factors affecting the amount of traffic in enclosed shopping malls and regional and national economic conditions affecting disposable consumer income. They also include factors over which the Company has some control, such as distinguishing itself from its competitors based on the quality and design of its private label brand names; identifying and responding to fashion trends in a timely manner; the ability to direct source merchandise closer to need and in appropriate quantities; the ability to retain qualified personnel; and the number and timing of the opening of new stores. Any one or a combination of these factors could have a material adverse affect on the Company's results of operations and financial condition. 12
13 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its 1997 Annual Meeting of Shareholders on May 7, 1997. Holders of 7,978,306 Common Shares of the Company were present representing approximately 80% of the Company's 9,917,950 Common Shares issued and outstanding. (b) The following persons were elected as members of the Company's Board of and Directors to serve until the annual meeting following their election or (c) until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicate below. <TABLE> <CAPTION> Name Votes For Votes Withheld - ---- --------- -------------- <S> <C> <C> Martin P. Doolan 7,538,723 439,583 Thomas R. Ketteler 7,538,723 439,583 George Kolber 7,538,214 440,092 John L. Marakas 7,538,725 439,581 Jay L. Schottenstein 7,538,823 440,483 Saul Schottenstein 7,523,223 455,083 David W. Thompson 7,538,216 440,090 </TABLE> The proposal to approve the amendments to the Company's 1994 Stock Option Plan described in the Proxy Statement passed with 6,377,605 votes For, 641,304 votes Against and 11,923 votes withheld. (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 10.10 Purchase Agreement re: Prophecy Limited Partnership. 23. Acknowledgment of Independent Accountants 27. Financial Data Schedule (b) Reports on Form 8-K - None 13
14 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 16, 1997 American Eagle Outfitters, Inc. (Registrant) /s/ Laura A. Weil ------------------------------------ Laura A. Weil Executive Vice President and Chief Financial Officer /s/ Dale E. Clifton ----------------------------------- Dale E. Clifton Vice President, Controller and Chief Accounting Officer 14