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AMERICAN EAGLE OUTFITTERS INC
10-K405, 2000-04-12
FAMILY CLOTHING STORES

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Delaware		No. 13-2721761
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

150 Thorn Hill Drive, Warrendale, PA		15086-7528
(Address of principal executive offices)		(Zip Code)

(Title of class)

PART I
ITEM 1.     BUSINESS.

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. For tax purposes, we report on a July year-end. As used herein, "Fiscal 1999", "Fiscal 1998", "Fiscal 1997" and "Fiscal 1996" refer to the respective 52-week periods ended January 29, 2000, January 30, 1999, January 31, 1998 and February 1, 1997. "Transition 1996" refers to the twenty-seven week period from July 30, 1995 to February 3, 1996. "Fiscal 2000" refers to the 53-week period ending January 27, 2001.

		Fiscal 1999		Fiscal 1998		Fiscal 1997		Fiscal 1996		Transition 1996
Stores at beginning of period		386		332		303		272		266
Stores opened during the period		80		56		36		38		11
Stores closed during the period		—		(2	)	(7	)	(7	)	(5	)
Total Stores at End of Period		466		386		332		303		272

Direct to Consumer Opportunities

		Fiscal 1999			Fiscal 1998			Fiscal 1997			Fiscal 1996			Transition 1996
Men's apparel		39	%		40	%		41	%		36	%		52	%
Women's apparel		53	%		52	%		50	%		47	%		20	%
Footwear and accessories —men's and women's		8	%		8	%		9	%		17	%		18	%
		100	%		100	%		100	%		100	%		100	%

 

Store Locations

Our stores average approximately 4,400 gross square feet and approximately 3,500 on a selling square foot basis. At January 29, 2000, we operated 466 stores in 45 states and the District of Columbia shown below:

Alabama	Indiana	Missouri	Oregon
11 stores	14 stores	12 stores	3 stores
Arkansas	Iowa	Nebraska	Pennsylvania
3 stores	12 stores	4 stores	36 stores
California	Kansas	Nevada	Rhode Island
3 stores	5 stores	3 stores	1 store
Colorado	Kentucky	New Hampshire	South Carolina
5 stores	6 stores	4 stores	8 stores
Connecticut	Louisiana	New Jersey	South Dakota
9 stores	8 stores	16 stores	2 stores
Delaware	Maine	New Mexico	Tennessee
1 store	1 store	2 stores	14 stores
District of Columbia	Maryland	New York	Texas
1 store	12 stores	28 stores	21 stores
Florida	Massachusetts	North Carolina	Utah
20 stores	16 stores	18 stores	5 stores
Georgia	Michigan	North Dakota	Vermont
16 stores	22 stores	3 stores	2 stores
Idaho	Minnesota	Ohio	Virginia
1 store	10 stores	28 stores	21 stores
Illinois	Mississippi	Oklahoma	Washington
22 stores	5 stores	5 stores	10 stores
			West Virginia
			7 stores
			Wisconsin
			10 stores

Purchasing

We purchase merchandise from approximately 110 North American and foreign suppliers who either manufacture their own merchandise or supply merchandise manufactured by others, or both. During Fiscal 1999, approximately 21% of our merchandise was purchased from North American suppliers and the remaining 79% from foreign suppliers. Since we rely on a small number of overseas sources for a significant portion of our purchases, any event causing the disruption of imports including the insolvency of a significant supplier, the imposition of additional import restrictions, or political or economic disruptions in a country where our vendor factories are located, could have a material adverse affect on our operations. We do not maintain any long-term or exclusive commitments or arrangements to purchase from any single supplier.

All of our suppliers receive a vendor compliance manual that describes our quality standards and shipping instructions. We maintain a quality control department at our distribution center to inspect incoming merchandise shipments for uniformity of sizes and colors, and for overall quality of manufacturing. Periodic quality inspections are also made by our employees at manufacturing facilities in the United States and internationally to identify potential problems prior to shipment of merchandise. Additionally, our merchant group works directly with many factories to address quality control issues before merchandise is shipped.

Merchandise Design

A key element of our business strategy is to design products geared to a well-defined customer group and which embody the image of a casual, youthful lifestyle. Our internal design group is divided primarily into separate mens and womens design teams. The product development process begins with senior management in the merchandising and design areas, who develop seasonal merchandise themes and concepts. These design themes and concepts are developed through domestic and foreign travel, retail shopping and an awareness of fashions and activities currently favored by the young, active segment of the population. These themes and concepts are then used to create items for the merchandise line that are then developed by the designers. The designers collaborate with our buyers to create a coordinated merchandise presentation for each season, which is augmented by periodic, in-season merchandise updates.

Merchandise Inventory, Replenishment and Distribution

Purchase orders, executed by our buyers, are entered into the computerized merchandise data system at the time of order. Merchandise is normally shipped directly from vendors to our central distribution center near Pittsburgh, PA. Upon receipt, merchandise is entered into the merchandise data system, then processed and prepared for shipment to the stores or forwarded to a warehouse holding area to be used as store replenishment goods. The allocation of merchandise among stores varies based upon a number of factors relating to the specific characteristics of each store such as geographic location, customer demographics or store size. Merchandise is shipped to the stores two to three times per week depending upon the season and store requirements.

The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, dictated by fashion and season. These fluctuations especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of its selling season. While we endeavor to test many merchandise items before ordering large quantities, we are still vulnerable to changing fashion trends and fluctuations in customer demands. In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially prior to peak selling seasons, when we build up our inventory levels. We enter into agreements for the manufacture and purchase of our private label apparel well in advance of the applicable selling season. As a result, we are vulnerable to changes in consumer demand, pricing shifts, and the timing and selection of merchandise purchases.

We continually review our inventory levels in order to identify slow-moving merchandise and generally use markdowns to clear this merchandise. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or we determine that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have an adverse impact on our earnings, depending on the extent and amount of inventory affected.

Customer Credit

We offer our customers an American Eagle Outfitters private label credit card. We have no liability to the card issuer for bad debt expense, provided that purchases are made in accordance with the issuing banks' procedures. We believe that providing in-store credit through use of our proprietary credit card promotes incremental sales and encourages customer loyalty. Our credit card holders receive special promotional offers and advance notice of all in-store sales events. The names and addresses of these preferred customers are added to our customer database which is used primarily for direct mail purposes. Customers may also pay for their purchases with American Express®, Discover®, MasterCard®, Visa ®, cash or check. During Fiscal 1999, approximately 48% of all purchases were paid for with credit cards.

In November 1998, we replaced our gift certificate program with stored value gift cards. Gift cards with values from $10 to $200 can be purchased. When the recipient uses the gift card, the value of the purchase is electronically deducted and any remaining value can be used for future purchases. During Fiscal 1999, we sold 98% more in gift cards and certificates than the prior year. In connection with stored value cards and gift certificates, a deferred revenue amount is established upon the purchase of the card by the customer and revenue is recognized upon redemption and purchase of the merchandise.

Marketing and Advertising

Our marketing and advertising strategies are designed to increase consumer recognition of our merchandise and establish American Eagle Outfitters as a differentiated lifestyle brand. We currently focus our advertising efforts on direct mail, in-store signage, promotional events, and print media. Seasonally, we review and consider other means of advertising.

In-store advertising is primarily communicated through large graphics that portray men and women engaged in activities associated with an active lifestyle. Promotions, contests and gifts with purchase are also offered to customers, often in conjunction with corporate partners whose target customer demographics are similar to ours. Examples of co-marketing efforts include music compact discs produced in conjunction with a national music magazine and contests for prizes including mountain bikes, four-wheel drive vehicles and vacation trips.

We utilize direct mail to announce upcoming sales, the arrival of new merchandise and to promote our image. Promotional materials are also included in the monthly statement for our private label credit card. We use our own list of customers and database mining techniques to target direct mail materials to existing and potential customers.

We also utilize print advertising to build recognition of our brand. Our print ads appear in nationwide publications with reader demographic profiles that match a segment of our target customer range.

Information Systems

Our computer information systems consist of a full range of retail financial and merchandising systems which include merchandise planning, distribution center processing, inventory allocation, shipment processing, in-store systems, sales reporting, and financial processing and reporting.

In Fiscal 1999, our computer disaster recovery planning was expanded to cover all aspects of our business and we now have a detailed execution plan in the event of a major business disruption. During 1999, we made significant technological improvements in our stores including testing of in-store computers, implementing thermal printers, installing hand-held devices in our stores to increase efficiency in price changes and re-ticketing merchandise. A new merchandise allocation software application was implemented to support increased sales volumes. We initiated the planning, design, and testing of a new warehouse management system to be fully implemented in Spring 2000. We standardized hardware and software for both our home office and field personnel.

In June 1999, we completed the testing and implementation of software and systems to ensure that they successfully responded to the Year 2000 change. As a result of these efforts, we experienced no significant disruptions in mission critical information technology and non-information technology systems. We will continue to monitor our mission critical computer applications and those of our suppliers and business partners throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.

During 2000, we plan to install in-store computers in all our stores to link them with the home office. We will modify our programs related to our hand-held devices to encompass inventory receiving and transfer processing. We will begin implementation of supply chain software and begin creating a data warehouse for our organization.

Competition

The retail apparel industry is very competitive. We compete primarily on the basis of quality, fashion, service, selection and price. We compete with various divisions of The Limited and The Gap, as well as with retail chains such as Abercrombie & Fitch, The Buckle, Pacific Sunwear, and other national, regional and local retailers catering to a youthful customer. We also compete with the casual apparel and footwear departments of department stores, often in the same mall as our stores. Many of our competitors are considerably larger and have substantially greater financing, marketing, and other resources.

Trademarks and Service Marks

We have registered American Eagle Outfitters® in the U.S. Patent and Trademark Office ("PTO") as a trademark for clothing products and for a variety of non-clothing products, and as a service mark for retail clothing store service. We have also registered AE ® as a trademark for clothing products, and AEO® as a trademark for clothing products and a variety of non-clothing products. AE® is pending for a variety of non-clothing and personal care items. American Eagle has applied to the PTO for the registration of AE™ as a trademark for footwear that will be registered in the near future, and AE Khaki™, and AE Supply™ as trademarks for clothing products. Additionally, the on-line retail clothing trademark, @e, is registered as a trademark.

Employees

As of March 1, 2000, we had 8,149 employees, of whom 1,754 were full-time salaried employees, 609 were full-time hourly employees and 5,786 were part-time and seasonal hourly employees. We consider our relationship with our employees to be satisfactory.

ITEM 2.     PROPERTIES.

We rent our headquarters and distribution facilities near Pittsburgh, PA from Linmar Realty Company ("Linmar"), a related party. Our headquarters and distribution center occupy approximately 430,000 square feet, 49,000 square feet of which is used for executive, administrative and buying offices. This includes an expansion of 120,000 square feet in September 1999. As a result of this expansion, a new lease was entered into which expires on December 31, 2020. We also lease additional office space comprising approximately 20,000 square feet near Pittsburgh, PA and approximately 15,000 square feet for our design and production offices in New York, NY. These leases expire in August 2004 and October 2008, respectively. In addition, we lease a distribution facility near Mexico City, Mexico for approximately 42,000 square feet.

All of our stores are leased. The store leases generally have terms of approximately 10 years. Most of these leases provide for base rent and require the payment of a percentage of sales as additional rent when sales reach specified levels. Under our store leases, we are typically responsible for maintenance and common area charges, real estate taxes and certain other expenses. We have generally been successful in negotiating renewals as leases near expiration.

ITEM 3.    LEGAL PROCEEDINGS.

We are subject to various claims and legal actions that arise in the ordinary course of our business. We believe that such claims and legal actions, individually and in the aggregate, will not have a material adverse effect on our business or our financial condition.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5.

MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our stock is traded on the Nasdaq National Market under the symbol "AEOS". The following table sets forth the range of high and low sales prices of the common stock as reported on The Nasdaq National Market during the periods indicated. As of March 20, 2000, there were 197 stockholders of record. However, when including associates who own shares through the Company's 401(k) retirement plan and employee stock purchase plan and others holding shares in broker accounts under street name, the Company estimates the shareholder base at approximately 20,000. The following information reflects the January 1998, May 1998, and May 1999 stock splits.

For the Quarters Ended	Market Price
	High			Low
April 1998	$	20.79		$	7.75
July 1998	$	26.75		$	16.57
October 1998	$	27.31		$	14.13
January 1999	$	34.19		$	21.88
April 1999	$	43.88		$	31.31
July 1999	$	51.69		$	37.88
October 1999	$	57.63		$	32.69
January 2000	$	49.63		$	34.56

We have never paid cash dividends and presently anticipate that all of our future earnings will be retained for the development of our business and the share repurchase program (See Note 12 of the Consolidated Financial Statements). We do not anticipate paying cash dividends in the foreseeable future. The payment of any future dividends will be at the discretion of our Board of Directors and will be based on future earnings, financial condition, capital requirements and other relevant factors.

 

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA.

	For the Years Ended
	January 29,		January 30,		January 31,		February 1,		February 3,
	2000		1999		1998		1997		1996(2)
									(Unaudited)
Net sales (1)	$   832,104		$   587,600		$   405,713		$    326,404		$    340,323
Gross profit	$   356,508		$   234,511		$   136,967		$       98,756		$       90,908
Gross profit as a percentage of sales	42.8	%	39.9	%	33.8	%	30.3	%	26.7	%
Operating income (loss) (1)	$   149,514		$     87,053		$     31,120		$         8,859		($ 1,073	)
Net income (loss)	$     90,660		$     54,118		$     19,537		$         5,925		($ 1,334	)
Net income (loss) as a percentage of sales	10.9	%	9.2	%	4.8	%	1.8	%	(0.4	%)
Basic earnings (loss) per share	$          1.96		$          1.20		$          0.44		$           0.13		($ 0.03	)
Diluted earnings (loss) per share	$          1.86		$          1.13		$          0.43		$           0.13		($ 0.03	)
Weighted average basic shares outstanding	46,370		45,281		44,181		43,899		43,890
Weighted average diluted shares outstanding	48,742		47,952		45,633		45,388		43,890
Total assets	$   354,628		$   210,948		$   144,795		$    110,438		$       95,363
Total cash and short-term investments	$   168,492		$     85,300		$     48,359		$       34,326		$       19,986
Working capital	$   174,137		$     94,753		$     48,486		$       34,378		$       24,775
Stockholders' equity	$   264,501		$   151,197		$     90,808		$       71,056		$       63,796
Average return on stockholders' equity	43.6	%	44.7	%	24.1	%	8.8	%	(2.3	%)
Current ratio	2.97		2.59		1.90		1.87		1.78
Total non-current liabilities	$        1,702		--		--		--		--
Long term debt	--		--		--		--		--
Total stores at year-end	466		386		332		303		273
Comparable store sales increase (decrease)	20.9	%	32.1	%	15.1	%	(1.8	%)	6.6	%
Net sales per average selling square foot (3)	$           569		$           497		$           391		$            340		$            381
Total selling square feet at end of period	1,625,731		1,276,889		1,080,657		990,980		916,796
Net sales per average gross square foot (3)	$           451		$           388		$           303		$            261		$            288
Total gross square feet at end of period	2,039,380		1,624,933		1,393,361		1,285,598		1,200,816

 

(1)

The prior year amounts have been reclassified to conform to the January 29, 2000 classifications.

(2)

The 53-week period ended February 3, 1996 includes 9 months of sales, or $21.5 million, from outlet stores sold in October 1995. It also includes 6 months of operations from the year ended July 29, 1995, representing $113.7 million of net sales, $13.7 million of operating loss, and $8.4 million of net loss.

(3)

Average net sales per square foot is calculated using retail sales for the period divided by the straight average of the beginning and ending square footage for the period.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Overview

—	invested in our brand through increased marketing efforts,

—	committed to key merchandise items that are current, value-priced, intelligently-sourced and carefully promoted to maximize sales and profitability,

—	premiered a new store design, and

—	increased our focus on AE Direct, our internet and catalog business.