<PAGE> 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 August 1, 1998
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) (Zipcode)
(724) 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, 22,841,925 SHARES OUTSTANDING AS OF SEPTEMBER 9,
1998
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AMERICAN EAGLE OUTFITTERS, INC.
-------------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
August 1, 1998 (unaudited) and January 31, 1998 3
Consolidated Statements of Operations (unaudited)
Three months and six months ended August 1, 1998 and August 2, 1997 4
Consolidated Statements of Cash Flows (unaudited)
Six months ended August 1, 1998 and August 2, 1997 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 13
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>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) August 1, January 31,
ASSETS 1998 1998
----- -----
Current assets: (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 36,266 $ 48,359
Merchandise inventory 54,322 36,278
Accounts and note receivable, including related party 5,153 7,647
Prepaid expenses and other 6,812 5,388
Deferred income taxes 7,271 4,801
-------- --------
Total current assets 109,824 102,473
-------- --------
Fixed assets:
Fixtures and equipment 32,017 25,842
Leasehold improvements 40,170 35,978
-------- --------
72,187 61,820
Less: Accumulated depreciation and amortization 26,646 23,273
-------- --------
45,541 38,547
-------- --------
Other assets 4,355 3,775
-------- --------
Total assets $159,720 $144,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,007 $ 24,606
Accrued compensation and payroll taxes 10,625 9,227
Accrued rent 10,041 7,909
Accrued income and other taxes 1,134 8,738
Other liabilities and accrued expenses 4,517 3,507
-------- --------
Total current liabilities 50,324 53,987
-------- --------
Shareholders' equity:
Common stock, 30,000,000 shares authorized,
shares issued (22,832,925 and 22,624,088 shares
outstanding, respectively) 54,840 53,837
Contributed capital 6,441 4,832
Retained earnings 51,114 35,756
-------- --------
112,395 94,425
Less: Deferred compensation 2,397 1,992
Treasury stock, 254,000 shares and 301,500
shares, respectively 602 1,625
-------- --------
Total shareholders' equity 109,396 90,808
-------- --------
Stockholders' equityt
Total liabilities and shareholders' equity $159,720 $144,795
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 125,731 $ 86,159 $ 225,425 $ 147,111
Cost of sales, including certain buying, occupancy
and warehousing expenses 76,668 61,106 139,145 107,805
--------- --------- --------- ---------
Gross profit 49,063 25,053 86,280 39,306
Selling, general and administrative expenses 31,782 21,473 58,005 40,383
Depreciation and amortization 2,084 1,771 4,059 3,440
--------- --------- --------- ---------
Operating income (loss) 15,197 1,809 24,216 (4,517)
Interest income, net 541 69 1,083 399
--------- --------- --------- ---------
Income (loss) before income taxes 15,738 1,878 25,299 (4,118)
Provision (benefit) for income taxes 6,185 758 9,941 (1,619)
--------- --------- --------- ---------
Net income (loss) $ 9,553 $ 1,120 $ 15,358 $ (2,499)
========= ========= ========= =========
Basic income (loss) per common share $ 0.42 $ 0.05 $ 0.68 $ (0.11)
========= ========= ========= =========
Diluted income (loss) per common share $ 0.40 $ 0.05 $ 0.64 $ (0.11)
========= ========= ========= =========
Weighted average common shares outstanding - basic 22,621 22,074 22,519 22,028
========= ========= ========= =========
Weighted average common shares outstanding - diluted 24,056 22,600 23,882 22,028
========= ========= ========= =========
Retained earnings, beginning $ 41,561 $ 13,500 $ 35,756 $ 17,119
Net income (loss) 9,553 1,120 15,358 (2,499)
Acquisition of Prophecy, Ltd. - (2,251) - (2,251)
--------- --------- --------- ---------
Retained earnings, ending $ 51,114 $ 12,369 $ 51,114 $ 12,369
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
4
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AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
August 1, August 2,
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ 15,358 $ (2,499)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 4,059 3,440
Loss on impairment and write-off of fixed assets 1,118 757
Restricted stock compensation 1,833 434
Deferred income taxes (3,576) 1,434
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (18,044) (14,366)
Accounts and note receivable 2,238 (4,109)
Prepaid expenses and other (1,364) (1,422)
Accounts payable (264) (467)
Accrued liabilities (2,634) (5,148)
-------- --------
Total adjustments (16,634) (19,447)
-------- --------
Net cash used for operating activities (1,276) (21,946)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (12,215) (7,115)
Investment in Prophecy, Ltd. - (900)
-------- --------
Net cash used for investing activities (12,215) (8,015)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from stock options exercised 1,398 21
-------- --------
Net cash provided by financing activities 1,398 21
-------- --------
Net decrease in cash (12,093) (29,940)
Cash - beginning of period 48,359 34,326
-------- --------
Cash - end of period $ 36,266 $ 4,386
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
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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 August 1, 1998 and for the three and six month periods
ended August 1, 1998 (the "current period") and August 2, 1997 (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
31, 1998 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 1997 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.
RECENT FASB PRONOUNCEMENTS
FASB 130 Reporting Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. This standard is effective for the
Company's Fiscal 1998 annual report, however, it is not believed to have any
impact on financial statement disclosures.
FASB 131 Disclosures about Segments of an Enterprise
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise", which establishes standards for the disclosure of selected
information about reportable segments, disclosures about product and services,
geographic areas, and major customers in financial statements. This standard is
effective for the Company's Fiscal 1998 annual report, however, it is not
believed to have any impact on financial statement disclosures.
FASB 132 Disclosures about Pensions and Other Postretirement Benefits
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 132, "Disclosures about Pensions and Other
Postretirement Benefits", which establishes standards for the disclosure
requirements for pensions and other postretirement benefits. This standard is
effective for the Company's Fiscal 1998 annual report, however, the Company does
not maintain any postretirement benefit plans, therefore, this statement is not
believed to have any impact on financial statement disclosures.
FASB 133 Accounting for Derivative Instruments and Hedging Activities
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133, "Accounting for
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Derivative Instruments and Hedging Activities" which establishes standards for
the recognition and measurement of derivatives and hedging activities. This
standard is effective for the Company's Fiscal 2000 annual report, however, the
Company is not engaging in these types of investment activities, therefore, this
statement is not believed to have any impact on financial statement disclosures.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (FASB 128), which was adopted for Fiscal 1997.
Earnings per share amounts for all periods have been restated to give effect to
the application of FASB 128. The effect of the restatement on earnings per share
for the restated periods is immaterial.
The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 9,553 $ 1,120 $ 15,358 ($ 2,499)
======== ======== ======== ========
Weighted average number of common shares used in
basic EPS 22,621 22,074 22,519 22,028
Effect of dilutive stock options and nonvested
restricted stock 1,435 526 1,363 -
-------- -------- -------- --------
Weighted average number of common shares and
dilutive potential common stock used in diluted EPS 24,056 22,600 23,882 22,028
======== ======== ======== ========
</TABLE>
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the August 1, 1998
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 or six months
ended August 1, 1998 or August 2, 1997. Income tax payments were $18.7 million
and $2.4 million during the six months ended August 1, 1998 and August 2, 1997,
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 primarily
through common ownership. The Company has an operating lease for its corporate
headquarters and distribution center with an affiliate. 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 and its subsidiaries purchase merchandise from and sell
merchandise to various related parties and use the services of a related
importing company.
During Fiscal 1997, the Company provided a short-term loan in the amount of $3.0
million to Azteca Production International, a related party vendor. The terms of
the note included annual interest at 7% plus a margin defined as the difference
between 8.5% and National City Bank's prime lending rate. The loan was paid off
in April 1998. The note receivable outstanding balance at January 31, 1998 was
7
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approximately $1.3 million.
Related party amounts follow:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ----- ---- -----
<S> <C> <C> <C> <C>
Merchandise purchases plus
import administrative charges $20,277 $18,870 $35,326 $31,247
Accounts payable $ 9,616 $11,041 $ 9,616 $11,041
Accounts and notes receivable $ 1,119 $ 5,740 $ 1,119 $ 5,740
Rent expense $ 387 $ 387 $ 774 $ 788
Merchandise sales $ - $ 3,967 $ 2,534 $ 4,272
</TABLE>
The Company provided loans to certain officers and other individuals to pay the
taxes on the restricted stock that vested in April 1998. As of August 1, 1998,
the outstanding value of these loans approximated $843,000. There was no balance
outstanding as of January 31, 1998.
5. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
---- ----
<S> <C> <C>
Accounts receivable - landlord $ 2,536 $ 1,518
Related party accounts and note receivable 1,119 3,755
Accounts receivable - other 1,498 2,374
------------ ---------
Total $ 5,153 $ 7,647
============ =========
</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 six months ended August 1, 1998 and August 2, 1997, 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 $4.4 million for certain outlet stores which were sold in October
1995.
8. LEGAL PROCEEDINGS
The Company is also a party to ordinary routine litigation incidental to its
business. The Company does not expect any of such litigation to have a material
adverse effect on the Company's results of operations or financial condition.
8
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REVIEW BY INDEPENDENT ACCOUNTANTS
Ernst & Young LLP, our independent accountants, have performed a limited review
of the Consolidated Financial Statements for the three and six month periods
ended August 1, 1998 and August 2, 1997, 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 August 1, 1998, and the related consolidated statements
of operations for the three-month and six-month periods ended August 1, 1998 and
August 2, 1997 and the consolidated statements of cash flows for the six-month
periods ended August 1, 1998 and August 2, 1997. 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 January 31, 1998, and the related consolidated statements of operations and
cash flows for the year then ended (not presented herein) and in our report
dated March 3, 1998 (except for Note 13, as to which the date is April 14, 1998)
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 31, 1998, is fairly stated, in all material
respects, in relation to the consolidated financial statements from which it has
been derived.
Pittsburgh, Pennsylvania
August 19, 1998
9
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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 Six months ended
------------------ ----------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including certain buying,
occupancy and warehousing expenses 61.0 70.9 61.7 73.3
------ ------ ------ ------
Gross profit 39.0 29.1 38.3 26.7
Selling, general and administrative expenses 25.2 24.9 25.8 27.5
Depreciation and amortization 1.7 2.1 1.8 2.3
------ ------ ------ ------
Operating income (loss) 12.1 2.1 10.70 (3.1)
Interest income, net 0.4 0.1 0.5 0.3
------ ------ ------ ------
Income (loss) before income taxes 12.5 2.2 11.2 (2.8)
Provision (benefit) for income taxes 4.9 0.9 4.4 (1.1)
------ ------ ------ ------
Net income (loss) 7.6% 1.3% 6.8% (1.7)%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED AUGUST 1, 1998 TO THE THREE MONTHS ENDED AUGUST
2, 1997
Net sales for the three months ended August 1, 1998 (the "current period")
increased 45.9% to $125.7 million from $86.2 million for the three months ended
August 2, 1997 (the "prior period"). The increase in net sales resulted
primarily from increases of $29.7 million or 35.6% from comparable store sales
and $9.8 million from new and non-comparable stores sales. The total increase in
net sales resulted from an increase of 31.9% in units sold, as well as a 10.3%
increase in prices. The Company operated 347 stores at the end of the current
period compared to 315 stores operated at the end of the prior period.
Gross profit for the current period increased to $49.1 million from $25.1
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 39.0% from 29.1% for the prior period. This increase
was attributable to a 6.3% increase in merchandise margins as well as a 3.6%
improvement in buying, occupancy, and warehousing costs reflecting improved
leveraging of these expenses. The increase in merchandise margins resulted
primarily from a decrease of 5.8% in markdowns as a percent of sales as well as
reduced shrinkage costs of 0.7% of sales.
Selling, general and administrative expenses for the current period increased to
$31.8 million from $21.5 million for the prior period. As a percent of net
sales, these expenses increased to 25.2% from 24.9% for the prior period. The
increase of $10.3 million included $1.9 million to support the new stores that
were opened since the second quarter last year, as well as an increase of $1.1
million in advertising costs related to direct mail costs and costs related to
television and print advertising. Also included were $5.0 million of increased
salary and benefit costs incurred as a result of the favorable sales and
earnings performance, in addition to increased professional fees of $0.3
million. The remaining increase resulted from additional costs incurred to
support the increased sales volumes.
Depreciation and amortization expense for the current period increased to $2.1
million from $1.8 million for the prior period and represented 1.7% of sales in
the current period as compared to 2.1% of sales in the prior period.
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Interest income for the current period increased to $0.5 million from $0.1
million for the prior period because of higher cash reserves available for
investment. No borrowings were required under the terms of the Company's line of
credit during the current period.
Income before income taxes for the current period increased to $15.7 million
from $1.9 million for the prior period. As a percent of net sales, the income
before income taxes for the current period increased to 12.5% from 2.2% for the
prior period. The increase in income before income taxes as a percent of sales
was attributable to the factors noted above.
COMPARISON OF SIX MONTHS ENDED AUGUST 1, 1998 TO THE SIX MONTHS ENDED AUGUST 2,
1997
Net sales for the six months ended August 1, 1998 (the "current period")
increased 53.2% to $225.4 million from $147.1 million for the six months ended
August 2, 1997 (the "prior period"). The increase in net sales resulted
primarily from increases of $60.5 million or 42.5% from comparable store sales
and $17.8 million from non-comparable stores sales. The total increase in net
sales resulted primarily from an increase of 36.5% in units sold as well a 12.3%
increase in prices. The Company operated 347 stores at the end of the current
period compared to 315 stores operated at the end of the prior period.
Gross profit for the current period increased to $86.3 million from $39.3
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 38.3% from 26.7% for the prior period. This increase
was attributable to a 6.6% increase in merchandise margins as well as a 5.0%
improvement in buying, occupancy, and warehousing costs reflecting improved
leveraging of these expenses. The increase in merchandise margins resulted
primarily from a 6.9% decrease in markdowns as a percent of sales.
Selling, general and administrative expenses for the current period increased to
$58.0 million from $40.4 million for the prior period. As a percent of net
sales, these expenses decreased to 25.8% from 27.5% for the prior period. The
increase of $17.6 million included $3.2 million to support the new stores that
were opened since the first quarter last year, as well as an increase of $1.8
million in advertising costs related to direct mail costs, advertising to
enhance brand imaging, and costs related to television and print advertising.
Also included were $7.9 million of increased salary and benefit costs incurred
as a result of the favorable sales and earnings performance, in addition to
increased professional fees of $0.7 million. The remaining increase resulted
from additional costs incurred to support the increased sales volumes.
Depreciation and amortization expense for the current period increased to $4.1
million from $3.4 million for the prior period and represented 1.8% of sales in
the current period as compared to 2.3% of sales in the prior period.
Interest income for the current period increased to $1.1 million from $0.4
million for the prior period because of higher cash reserves available for
investment. No borrowings were required under the terms of the Company's line of
credit during the current period.
Income before income taxes for the current period increased to $25.3 million
from a $4.1 million loss for the prior period. As a percent of net sales, the
income before income taxes for the current period increased to 11.2% from (2.8%)
for the prior period. The increase in income before income taxes as a percent of
sales was attributable to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of cash in the current period was net income. The
primary use of cash in the current period was cash flow used by operating
activities, primarily to support inventory increases of $18.0 million for
anticipated sales and new store growth. Additionally, the Company used cash of
$12.2 million for capital expenditures. The Company had working capital of $59.5
million and $26.8 million at August 1, 1998 and August 2, 1997, respectively.
At August 1, 1998, the Company had an unsecured demand lending arrangement with
a bank to provide a $75.0 million line of credit (which reflects a $15.0 million
increase in line availability for letters of credit, which occurred in July
1998) at either the lender's prime lending rate (8.50% at August 1, 1998) 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 $46.7 million were outstanding at August 1, 1998 and the remaining
balance on the line was $28.3 million at August 1, 1998.
Capital expenditures, net of construction allowances, totaled $12.2 million for
the six months ended August 1, 1998. These expenditures included the addition of
17 new stores and 12 remodeled locations totaling approximately $6.0 million,
the expansion and upgrade of
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distribution center facilities totaling approximately $5.7 million, the purchase
of information systems hardware, software, and licenses totaling approximately
$0.3 million, and other expenditures totaling $0.2 million.
The Company is currently planning to open approximately 35 stores during the
remainder of the fiscal year. This forward-looking statement will be influenced
by factors including the Company's financial position, consumer spending, and
the number of acceptable 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 1998.
SEASONALITY
The Company experiences seasonal fluctuations in its net sales and net income,
with a disproportionate amount of net sales and a majority of its net income
typically realized in the fourth quarter. The Company's quarterly results of
operations may also fluctuate significantly as a result of a variety of other
factors, including the timing of certain holiday seasons and new store openings,
the net sales contributed by new stores, merchandise mix, and the timing and
level of markdowns.
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.
IMPACT OF YEAR 2000
Management has developed a comprehensive plan designed to enable its computer
information systems to properly process transactions in the Year 2000 and
beyond. The project team began working on the plan in Fiscal 1997 and expects to
complete the project by July 1999. The Company is currently communicating with
its significant suppliers and business partners to determine to what extent they
are addressing their own Year 2000 issues. The failure of the Company or any of
its significant suppliers or business partners to properly address Year 2000
issues could potentially adversely affect the Company's business and financial
performance.
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 35 stores during the remainder of Fiscal 1998; the completion
of modifications to computer systems to enable the processing of transactions in
the Year 2000 and beyond; and sufficiency of cash flows and line of credit
facilities to meet Fiscal 1998 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: decline in demand for the
merchandise offered by the Company; the ability to obtain suitable sites for new
stores at acceptable costs; the retention, hiring and training of qualified
personnel; the integration of new stores into existing operations; the expansion
of buying and inventory capabilities; the availability of capital; the ability
of the Company to anticipate and respond to changing consumer preferences and
fashion trends in a timely manner; the effect of economic conditions; the effect
of competitive pressures from other retailers, and the ability of the Company or
any of its significant suppliers or business partners to properly address Year
2000 issues. Results actually achieved may differ materially from expected
results in these statements.
Historically, the Company's operations have been seasonal, with a
disproportionate amount of net sales and a majority of 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. As a result of this
seasonality, any factors negatively affecting the Company during the third and
fourth fiscal quarters of any year, including adverse weather or unfavorable
economic conditions, could have a material adverse effect on the Company's
financial condition and results of operations for the entire year. The Company's
quarterly results of operations may also 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.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) thru (d) Not applicable.
13
<PAGE> 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 September 15 , 1998
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
<PAGE> 1
Exhibit 23
Acknowledgment of Ernst & Young LLP
The Board of Directors and Shareholders
American Eagle Outfitters, Inc.
We are aware of the incorporation by reference in the Registration Statements
(Forms S-8) of American Eagle Outfitters, Inc. pertaining to the American Eagle
Outfitters, Inc. Employee Stock Purchase Plan, the American Eagle Outfitters,
Inc. 1994 Restricted Stock Plan, the American Eagle Outfitters, Inc. 1994 Stock
Option Plan, and the American Eagle Outfitters, Inc. Stock Fund of American
Eagle Outfitters, Inc. Profit Sharing and 401(k) Plan of our report dated August
19, 1998 relating to the unaudited consolidated interim financial statements of
American Eagle Outfitters, Inc. which are included in its Form 10-Q for the
quarter ended August 1, 1998.
Pursuant to Rule 436 (c) of the Securities Act of 1933, our reports are not a
part of the registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
Pittsburgh, Pennsylvania
September 14, 1998
15
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<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> AUG-01-1998
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0
0
<COMMON> 54,840
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