<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 October 31, 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)
DELAWARE 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)
(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, 23,136,417 SHARES OUTSTANDING AS OF NOVEMBER 20,
1998
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<TABLE>
AMERICAN EAGLE OUTFITTERS, INC.
-------------------------------
TABLE OF CONTENTS
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
October 31, 1998 (unaudited) and January 31, 1998 3
Consolidated Statements of Operations (unaudited)
Three months and nine months ended October 31, 1998 and
November 1, 1997 4
Consolidated Statements of Cash Flows (unaudited)
Nine months ended October 31, 1998 and November 1, 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 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
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 N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 23 Acknowledgment of Independent Accountants 16
Exhibit 27 Financial Data Schedule 17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
October 31, January 31,
ASSETS 1998 1998
---- ----
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 44,045 $ 48,359
Merchandise inventory 74,934 36,278
Accounts and note receivable, including related party 6,086 7,647
Prepaid expenses and other 6,560 5,388
Deferred income taxes 7,415 4,801
-------- --------
Total current assets 139,040 102,473
-------- --------
Fixed assets:
Fixtures and equipment 35,676 25,842
Leasehold improvements 45,508 35,978
-------- --------
81,184 61,820
Less: Accumulated depreciation and amortization 28,650 23,273
-------- --------
52,534 38,547
-------- --------
Other assets 3,425 3,775
-------- --------
Total assets $194,999 $144,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,766 $ 24,606
Accrued compensation and payroll taxes 12,918 9,227
Accrued rent 12,092 7,909
Accrued income and other taxes 6,009 8,738
Other liabilities and accrued expenses 4,714 3,507
-------- --------
Total current liabilities 71,499 53,987
-------- --------
Shareholders' equity:
Common stock, 30,000,000 shares authorized,
shares issued (23,130,117 and 22,642,088 shares
outstanding, respectively) 54,967 53,837
Contributed capital 7,340 4,832
Retained earnings 64,985 35,756
-------- --------
127,292 94,425
Less: Deferred compensation 2,792 1,992
Treasury stock, 237,500 shares and 301,500
shares, respectively 1,000 1,625
-------- --------
Total shareholders' equity 123,500 90,808
-------- --------
Total liabilities and shareholders' equity $194,999 $144,795
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
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<TABLE>
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $149,068 $104,902 $374,493 $252,013
Cost of sales, including certain buying, occupancy
and warehousing expenses 88,648 66,248 227,793 174,053
-------- -------- -------- --------
Gross profit 60,420 38,654 146,700 77,960
Selling, general and administrative expenses 36,186 26,726 94,191 67,109
Depreciation and amortization 2,142 1,859 6,201 5,299
-------- -------- -------- --------
Operating income 22,092 10,069 46,308 5,552
Interest income, net 593 270 1,676 669
-------- -------- -------- --------
Income before income taxes 22,685 10,339 47,984 6,221
Provision for income taxes 8,814 4,063 18,755 2,444
-------- -------- -------- --------
Net income $ 13,871 $ 6,276 $ 29,229 $ 3,777
======== ======== ======== ========
Basic income per common share $ 0.61 $ 0.29 $ 1.30 $ 0.17
======== ======== ======== ========
Diluted income per common share $ 0.58 $ 0.27 $ 1.22 $ 0.17
======== ======== ======== ========
Weighted average common shares outstanding - basic 22,698 22,087 22,580 22,048
======== ======== ======== ========
Weighted average common shares outstanding - diluted 24,000 23,073 23,920 22,645
======== ======== ======== ========
Retained earnings, beginning $ 51,114 $ 12,369 $ 35,756 $ 17,119
Net income 13,871 6,276 29,229 3,777
Acquisition of Prophecy, Ltd. -- -- -- (2,251)
-------- -------- -------- --------
Retained earnings, ending $ 64,985 $ 18,645 $ 64,985 $ 18,645
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
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<TABLE>
AMERICAN EAGLE OUTFITTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
-----------------
October 31, November 1,
1998 1997
---- ----
<S> <C> <C>
Net income $ 29,229 $ 3,777
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED
BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 6,201 5,299
Loss on impairment and write-off of fixed assets 1,129 1,135
Restricted stock compensation 2,333 715
Deferred income taxes (2,873) (19)
CHANGES IN ASSETS AND LIABILITIES:
Merchandise inventory (38,656) (31,538)
Accounts and note receivable 1,305 (6,007)
Prepaid expenses and other (1,096) (1,052)
Accounts payable 11,495 15,685
Accrued liabilities 6,707 1,266
-------- --------
Total adjustments (13,455) (14,516)
-------- --------
Net cash provided by (used for) operating activities 15,774 (10,739)
-------- --------
INVESTING ACTIVITIES:
Capital expenditures (21,208) (10,131)
Investment in Prophecy, Ltd. -- (900)
-------- --------
Net cash used for investing activities (21,208) (11,031)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from stock options exercised 1,120 71
-------- --------
Net cash provided by financing activities 1,120 71
-------- --------
Net decrease in cash (4,314) (21,699)
Cash - beginning of period 48,359 34,326
-------- --------
Cash - end of period $ 44,045 $ 12,627
======== ========
</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 October 31, 1998 and for the three and nine month
periods ended October 31, 1998 (the "current period") and November 1, 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, the Company does not believe it
will 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 modifies established standards for disclosures
related to 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
6
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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 has not engaged in these types of risk management or investment
activities, therefore, this statement is not believed to have any impact on the
Company's financial statements.
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>
(in thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $13,871 $ 6,276 $29,229 $ 3,777
======= ======= ======= =======
Weighted average number of common shares used in
basic EPS 22,698 22,087 22,580 22,048
Effect of dilutive stock options and nonvested
restricted stock 1,302 986 1,340 597
------- ------- ------- -------
Weighted average number of common shares and
dilutive potential common stock used in diluted EPS 24,000 23,073 23,920 22,645
======= ======= ======= =======
</TABLE>
RECLASSIFICATION
Certain reclassifications have been made to the Consolidated Financial
Statements for the prior period in order to conform to the October 31, 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 nine months
ended October 31, 1998 or November 1, 1997. Income tax payments were $22.3
million and $4.6 million during the nine months ended October 31, 1998 and
November 1, 1997, respectively.
4. RELATED PARTY TRANSACTIONS
As described in the information that follows, the Company conducts 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
7
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City Bank's prime lending rate. The loan was paid off in April 1998.
Related party amounts follow:
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Merchandise purchases plus
import administrative charges $25,689 $24,578 $61,015 $55,825
Accounts payable $ 9,182 $16,407 $ 9,182 $16,407
Accounts and notes receivable $ 189 $ 5,226 $ 189 $ 5,226
Rent expense $ 387 $ 387 $ 1,161 $ 1,175
Merchandise sales $ -- $ 3,389 $ 2,510 $ 7,661
</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 October 31, 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>
October 31, January 31,
1998 1998
---- ----
<S> <C> <C>
Accounts receivable - landlord $5,071 $1,518
Related party accounts and note receivable 189 3,755
Accounts receivable - other 826 2,374
------ ------
Total $6,086 $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 nine months ended October 31, 1998 and November 1, 1997, the
effective tax rate used for the provision of income tax amounts approximated
39%.
7. LEASE COMMITMENTS
The Company is contingently liable for the rental payments totaling
approximately $3.9 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 nine month periods
ended October 31, 1998 and November 1, 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 October 31, 1998, and the related consolidated statements
of operations for the three-month and nine-month periods ended October 31, 1998
and November 1, 1997 and the consolidated statements of cash flows for the
nine-month periods ended October 31, 1998 and November 1, 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
November 17, 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 the percentage relationship to net sales of the
listed items included in the Company's Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
October 31, November 1, October 31, November 1,
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 59.5 63.2 60.8 69.1
----- ----- ----- -----
Gross profit 40.5 36.8 39.2 30.9
Selling, general and administrative expenses 24.3 25.4 25.1 26.6
Depreciation and amortization 1.4 1.8 1.7 2.1
----- ----- ----- -----
Operating income 14.8 9.6 12.4 2.2
Interest income, net 0.4 0.3 0.4 0.3
----- ----- ----- -----
Income before income taxes 15.2 9.9 12.8 2.5
Provision for income taxes 5.9 3.9 5.0 1.0
----- ----- ----- -----
Net income 9.3% 6.0% 7.8% 1.5%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED OCTOBER 31, 1998 TO THE THREE MONTHS ENDED
NOVEMBER 1, 1997
Net sales for the three months ended October 31, 1998 (the "current period")
increased 42.1% to $149.1 million from $104.9 million for the three months ended
November 1, 1997 (the "prior period"). The increase in net sales resulted
primarily from increases of $29.8 million or 29.4% from comparable store sales
and $14.4 million from new and non-comparable stores sales. The total increase
in net sales resulted from an increase of 20.3% in units sold, as well as a
16.6% increase in prices. The Company operated 372 stores at the end of the
current period compared to 332 stores operated at the end of the prior period.
Gross profit for the current period increased to $60.4 million from $38.7
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 40.5% from 36.8% for the prior period. This increase
was attributable to a 1.5% increase in merchandise margins as well as a 2.2%
improvement in buying, occupancy, and warehousing costs reflecting improved
leveraging of these expenses. The increase in merchandise margins resulted
primarily from a decrease in markdowns as a percent of sales.
Selling, general and administrative expenses for the current period increased to
$36.2 million from $26.7 million for the prior period. As a percent of net
sales, these expenses decreased to 24.3% from 25.4% for the prior period. The
increase of $9.5 million included $2.6 million to support the new stores that
were opened since the third quarter last year, as well as an increase of $2.1
million in advertising costs related to direct mail costs, costs related to
television and print advertising, and promotional advertising costs related to
the web site. Also included were $2.8 million of increased salary and benefit
costs incurred as a result of the favorable sales and earnings performance, $1.0
million in increased services purchased costs including consulting and temporary
agency services, as well as increased professional fees of $0.5 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 $1.9 million for the prior period and represented 1.4% of sales in
the current period as compared to 1.8% of sales in the prior period.
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Interest income for the current period increased to $0.6 million from $0.3
million for the prior period because of higher cash reserves available for
investment. No borrowings were required against the line of credit during the
current period.
Income before income taxes for the current period increased to $22.7 million
from $10.3 million for the prior period. As a percent of net sales, the income
before income taxes for the current period increased to 15.2% from 9.9% 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 NINE MONTHS ENDED OCTOBER 31, 1998 TO THE NINE MONTHS ENDED
NOVEMBER 1, 1997
Net sales for the nine months ended October 31, 1998 (the "current period")
increased 48.6% to $374.5 million from $252.0 million for the nine months ended
November 1, 1997 (the "prior period"). The increase in net sales resulted
primarily from increases of $90.3 million or 37.2% from comparable store sales
and $32.2 million from new and non-comparable stores sales. The total increase
in net sales resulted from an increase of 30.4% in units sold as well a 13.4%
increase in prices. The Company operated 372 stores at the end of the current
period compared to 332 stores operated at the end of the prior period.
Gross profit for the current period increased to $146.7 million from $78.0
million for the prior period. Gross profit as a percent of net sales for the
current period increased to 39.2% from 30.9% for the prior period. This increase
was attributable to a 4.6% increase in merchandise margins as well as a 3.7%
improvement in buying, occupancy, and warehousing costs reflecting improved
leveraging of these expenses. The increase in merchandise margins resulted
primarily from a decrease in markdowns as a percent of sales.
Selling, general and administrative expenses for the current period increased to
$94.2 million from $67.1 million for the prior period. As a percent of net
sales, these expenses decreased to 25.1% from 26.6% for the prior period. The
increase of $27.1 million included $4.2 million to support the new stores that
were opened since the third quarter last year, as well as an increase of $3.9
million in advertising costs related to direct mail costs, advertising to
enhance brand imaging, costs related to television and print advertising, and
promotional advertising costs related to our web site. Also included were $10.0
million of increased salary and benefit costs incurred as a result of the
favorable sales and earnings performance, $1.9 million in increased services
purchased costs including consulting and temporary agency services, in addition
to increased professional fees of $1.3 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 $6.2
million from $5.3 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.
Interest income for the current period increased to $1.7 million from $0.7
million for the prior period because of higher cash reserves available for
investment. No borrowings were required against the line of credit during the
current period.
Income before income taxes for the current period increased to $48.0 million
from $6.2 million for the prior period. As a percent of net sales, the income
before income taxes for the current period increased to 12.8% from 2.5% 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 and
the primary use of cash was to support inventory increases of $38.7 million for
anticipated sales and new store growth. Additionally, the Company used cash of
$21.2 million for capital expenditures and had working capital of $67.5 million
and $32.4 million at October 31, 1998 and November 1, 1997, respectively.
At October 31, 1998, the Company had an unsecured demand lending arrangement
with a bank to provide a $75.0 million line of credit at either the lender's
prime lending rate (8.0% at October 31, 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 $47.1 million were
outstanding at October 31, 1998 and the remaining balance on the line was $27.9
million at October 31, 1998.
Capital expenditures, net of construction allowances, totaled $21.2 million for
the nine months ended October 31, 1998. These expenditures included the addition
of 42 new stores and 15 remodeled locations totaling approximately $11.6
million, expenditures related to future store openings and remodelings of $2.1
million, the expansion and upgrade of distribution center facilities totaling
approximately
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$6.0 million, the purchase of information systems hardware, software, and
licenses totaling approximately $0.6 million, and other expenditures totaling
$0.9 million.
We are currently planning to open approximately 14 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. We believe that cash
flow from operations and our bank line of credit will be sufficient to meet our
anticipated cash requirements through Fiscal 1998.
SEASONALITY
We experience seasonal fluctuations in our 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. Our quarterly results of operations may also
fluctuate significantly from 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
We do not believe that the relatively modest levels of inflation occurring in
the United States in recent years have significantly effected our net sales or
our profitability. Substantial increases in cost, however, could have a
significant impact on the Company and the industry in the future.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruption of operations, including among other things, a temporary inability to
process transactions or engage in similar normal business activities.
Based on detailed assessments which were recently completed, the Company
determined that it will be required to modify or replace portions of hardware
and software so that those systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with modifications and replacement
of existing hardware and software, the Year 2000 issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 issue could have an adverse impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 issue involves two major phases:
detection and correction. The detection phase includes planning, inventory,
triage, and detailed assessment. The correction phase includes repair and
resolution and testing and implementation. To date, the Company has fully
completed the detection phase of the plan. The completed assessment indicated
that a portion of the Company's significant information technology systems could
be affected. Further, the Company's operations are impacted by systems that
interface directly with its significant suppliers and business partners. If not
resolved on a timely basis, these systems could hamper the Company's ability to
conduct business and adversely affect the Company's financial performance. The
Company is developing a contingency plan which will allow the continuation of
business operations in the event that the Company or any of its significant
suppliers and business partners do not properly address Year 2000 issues.
To date, the Company is in the repair and resolution phase and expects to
complete this phase by the end of Fiscal 1998. After completing this phase, the
plan calls for testing and implementation of remediated information technology
systems. The plan calls for remediated systems to be installed by June 1999,
however, a risk exists that such remediated systems may not function properly.
With respect to third parties, the Company has initiated communications 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's significant
suppliers or business partners to properly address Year 2000 issues could
potentially adversely affect the Company's business and financial performance.
The Company is utilizing both internal and external resources to modify and
replace the software and hardware for Year 2000 modifications and internal
resources will test and implement the software and hardware. The total cost of
the Year 2000 project is estimated at $1.8 million and is being funded through
cash flows from operating activities. To date, the Company has incurred
approximately $0.6 million which has
12
<PAGE> 13
been expensed as incurred. Of the total remaining project costs, approximately
$0.5 million is attributable to the purchase of new software and hardware, which
will be capitalized. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from these plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel training in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
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 our expectations or
beliefs concerning future events, including the following: the planned opening
of 14 stores during the remainder of Fiscal 1998; completing 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. 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: decline in demand for the Company's merchandise; our ability to
obtain suitable sites for new stores at acceptable costs; our ability to retain,
hire and train qualified personnel; our ability to integrate new stores into our
existing operations; our ability to expand buying and inventory capabilities;
the availability of capital; our ability 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 our ability or the ability of any of our significant suppliers or business
partners to properly address Year 2000 issues. Results actually achieved may
differ materially from expected results in these statements.
Historically, our 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 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 may also fluctuate due to
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.
13
<PAGE> 14
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.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 23 Acknowledgement of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
(b) Report on Form 8-K filed November 9, 1998, Item 5
Other Events relating to reincorporation in Delaware,
report dated November 2, 1998.
14
<PAGE> 15
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 November 24, 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
15
<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
November 17, 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 October 31, 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
November 20, 1998
16
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