UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-33338

 

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)

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

77 Hot Metal Street, Pittsburgh, PA		15203-2329
(Address of principal executive offices)		(Zip 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 þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

þ Large accelerated filer		o Accelerated filer		o Non-accelerated filer		o Smaller reporting company
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 195,687,722 Common Shares were outstanding at November 12, 2010.

 

 

AMERICAN EAGLE OUTFITTERS, INC.
TABLE OF CONTENTS

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Balance Sheets: October 30, 2010, January 30, 2010 and October 31, 2009			3
Consolidated Statements of Operations and Retained Earnings: 13 and 39 weeks ended October 30, 2010 and October 31, 2009			4
Consolidated Statements of Cash Flows: 39 weeks ended October 30, 2010 and October 31, 2009			5
Notes to Consolidated Financial Statements			6
Report of Independent Registered Public Accounting Firm			23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			33
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			N/A
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			N/A
Item 4. Reserved			N/A
Item 5. Other Information			N/A
Item 6. Exhibits			36
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

		October 30,				January 30,				October 31,
(In thousands, except per share amounts)		2010				2010				2009
		(Unaudited)								(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	630,775			$	693,960			$	512,603
Short-term investments			3,700				4,675				3,300
Merchandise inventory			409,509				326,454				425,415
Accounts receivable			40,346				34,746				46,584
Prepaid expenses and other			52,757				47,039				52,188
Deferred income taxes			50,910				60,156				54,362
Total current assets			1,187,997				1,167,030				1,094,452
Property and equipment, at cost, net of accumulated depreciation and amortization			652,361				713,142				741,019
Goodwill			11,395				11,210				11,165
Long-term investments			5,915				197,773				203,152
Non-current deferred income taxes			27,475				27,305				22,719
Other assets, net			23,981				21,688				23,401
Total assets		$	1,909,124			$	2,138,148			$	2,095,908
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	196,504			$	158,526			$	198,978
Notes payable			—				30,000				50,000
Accrued compensation and payroll taxes			30,289				55,144				23,932
Accrued rent			71,133				68,866				67,983
Accrued income and other taxes			11,620				20,585				22,574
Unredeemed gift cards and gift certificates			20,266				39,389				19,632
Current portion of deferred lease credits			16,465				17,388				17,605
Other liabilities and accrued expenses			21,285				19,057				20,293
Total current liabilities			367,562				408,955				420,997
Non-current liabilities:
Deferred lease credits			81,730				89,591				93,607
Non-current accrued income taxes			36,302				38,618				36,265
Other non-current liabilities			22,246				22,467				21,734
Total non-current liabilities			140,278				150,676				151,606
Commitments and contingencies			—				—				—
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding			—				—				—
Common stock, $0.01 par value; 600,000 shares authorized; 249,559, 249,561 and 249,561 shares issued; 195,683, 206,832 and 206,781 shares outstanding, respectively			2,496				2,486				2,486
Contributed capital			543,265				554,399				538,007
Accumulated other comprehensive income			26,751				16,838				16,478
Retained earnings			1,745,912				1,764,049				1,726,531
Treasury stock, 53,876, 41,737 and 41,789 shares, respectively			(917,140	)			(759,255	)			(760,197	)
Total stockholders’ equity			1,401,284				1,578,517				1,523,305
Total liabilities and stockholders’ equity		$	1,909,124			$	2,138,148			$	2,095,908

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)

		13 Weeks Ended								39 Weeks Ended
		October 30,				October 31,				October 30,				October 31,
(In thousands, except per share amounts)		2010				2009				2010				2009
Net sales		$	751,507			$	736,011			$	2,051,471			$	1,984,488
Cost of sales, including certain buying, occupancy and warehousing expenses			439,198				431,836				1,241,758				1,202,812
Gross profit			312,309				304,175				809,713				781,676
Selling, general and administrative expenses			185,050				184,948				519,188				497,594
Depreciation and amortization expense			35,804				34,653				107,378				101,072
Operating income			91,455				84,574				183,147				183,010
Realized loss on sale of investment securities			(24,201	)			—				(24,426	)			(2,749	)
Other income (expense), net			1,986				(451	)			2,470				(3,939	)
Total other-than-temporary impairment losses			—				(129	)			(5,089	)			(3,068	)
Portion of loss recognized in other comprehensive income, before tax			—				129				3,841				2,843
Net impairment loss recognized in earnings			—				—				(1,248	)			(225	)
Income before income taxes			69,240				84,123				159,943				176,097
Provision for income taxes			36,049				16,175				65,047				42,316
Income from continuing operations			33,191				67,948				94,896				133,781
Loss from discontinued operations, net of tax			(167	)			(8,789	)			(41,287	)			(24,083	)
Net income		$	33,024			$	59,159			$	53,609			$	109,698
Basic income per common share
Income from continuing operations		$	0.17			$	0.33			$	0.47			$	0.65
Loss from discontinued operations			(0.00	)			(0.04	)			(0.20	)			(0.12	)
Net income per basic share		$	0.17			$	0.29			$	0.27			$	0.53
Diluted income per common share
Income from continuing operations		$	0.17			$	0.32			$	0.46			$	0.64
Loss from discontinued operations			(0.00	)			(0.04	)			(0.20	)			(0.11	)
Net income per diluted share		$	0.17			$	0.28			$	0.26			$	0.53
Cash dividends per common share		$	0.11			$	0.10			$	0.32			$	0.30
Weighted average common shares outstanding - basic			195,590				206,517				201,678				206,169
Weighted average common shares outstanding - diluted			197,323				209,393				203,539				208,663
Retained earnings, beginning		$	1,735,503			$	1,692,990			$	1,764,049			$	1,694,161
Net income			33,024				59,159				53,609				109,698
Cash dividends and dividend equivalents			(21,697	)			(20,875	)			(65,214	)			(62,526	)
Reissuance of treasury stock			(918	)			(4,743	)			(6,532	)			(14,802	)
Retained earnings, ending		$	1,745,912			$	1,726,531			$	1,745,912			$	1,726,531

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		39 Weeks Ended
		October 30,				October 31,
(In thousands)		2010				2009
Operating activities:
Net income		$	53,609			$	109,698
Loss from discontinued operations			41,287				24,083
Income from continuing operations		$	94,896			$	133,781
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			110,247				102,616
Share-based compensation			21,929				18,985
Provision for deferred income taxes			5,222				(24,765	)
Tax benefit from share-based payments			12,848				8,880
Excess tax benefit from share-based payments			(4,265	)			(2,729	)
Foreign currency transaction loss			44				6,537
Net impairment loss recognized in earnings			1,248				225
Realized loss on sale of investment securities			24,426				2,749
Changes in assets and liabilities:
Merchandise inventory			(89,988	)			(128,156	)
Accounts receivable			(7,454	)			(5,080	)
Prepaid expenses and other			(4,879	)			8,580
Other assets, net			(677	)			(1,317	)
Accounts payable			40,326				50,025
Unredeemed gift cards and gift certificates			(18,916	)			(23,028	)
Deferred lease credits			(2,868	)			8,748
Accrued compensation and payroll taxes			(24,379	)			(5,161	)
Accrued income and other taxes			(13,647	)			12,342
Accrued liabilities			2,336				1,622
Total adjustments			51,553				31,073
Net cash provided by operating activities from continuing operations			146,449				164,854
Investing activities:
Capital expenditures			(65,363	)			(105,955	)
Sale of available-for-sale securities			177,472				77,014
Other investing activities			(1,849	)			(1,108	)
Net cash provided by (used for) by investing activities from continuing operations			110,260				(30,049	)
Financing activities:
Payments on capital leases			(1,774	)			(1,337	)
Repayment of notes payable			(30,000	)			(25,000	)
Repurchase of common stock as part of publicly announced programs			(192,268	)			—
Repurchase of common stock from employees			(18,024	)			(230	)
Net proceeds from stock options exercised			5,762				8,736
Excess tax benefit from share-based payments			4,265				2,729
Cash used to net settle equity awards			(6,434	)			(1,414	)
Cash dividends paid			(64,659	)			(62,117	)
Net cash used for financing activities from continuing operations			(303,132	)			(78,633	)
Effect of exchange rates changes on cash			1,553				2,846
Cash flows from discontinued operations
Net cash used for operating activities			(18,309	)			(19,458	)
Net cash used for investing activities			(6	)			(299	)
Net cash used for financing activities			—				—
Effect of exchange rate on cash			—				—
Net cash used for discontinued operations			(18,315	)			(19,757	)
Net (decrease) increase in cash and cash equivalents			(63,185	)			39,261
Cash and cash equivalents — beginning of period			693,960				473,342
Cash and cash equivalents — end of period		$	630,775			$	512,603
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes		$	36,262			$	17,246
Cash paid during the period for interest		$	191			$	1,778

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

1. Interim Financial Statements

The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the “Company”) at October 30, 2010 and October 31, 2009 and for the 13 and 39 week periods ended October 30, 2010 and October 31, 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements. 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 2009 Annual Report. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and those further described in the footnotes that follow) considered necessary for a fair presentation have been included.

As used in this report, all references to “we,” “our,” and the “Company” refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. “American Eagle Outfitters,” “American Eagle,” “AE,” and the “AE Brand” refer to our U.S. and Canadian American Eagle Outfitters stores. “AEO Direct” refers to our e-commerce operations, ae.com, aerie.com and 77kids.com. “MARTIN+OSA” or “M+O” refers to the MARTIN+OSA stores and e-commerce operation which we operated until its closure during the 13 weeks ended July 31, 2010.

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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At October 30, 2010, the Company operated in one reportable segment.

On March 5, 2010, the Company’s Board of Directors approved management’s recommendation to proceed with the closure of the M+O brand. The Company notified employees and issued a press release announcing this decision on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the brand and review of strategic alternatives, which revealed that it was not achieving performance levels that warranted further investment. The Company completed the closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.

Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.

Fiscal Year

The Company’s financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2011” and “Fiscal 2010” refer to the 52 week periods ending January 28, 2012 and January 29, 2011, respectively. “Fiscal 2009” and “Fiscal 2008” refer to the 52 week periods ended January 30, 2010 and January 31, 2009, respectively.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our 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, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) approved the consensus on Emerging Issues Task Force (“EITF”) 08-1, Revenue Arrangements with Multiple Deliverables, primarily codified under Accounting Standards

Codification (“ASC”) 605, Revenue Recognition, as Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated among the various deliverables in a multi-element transaction using the relative selling price method. This guidance is effective for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The Company is currently evaluating the impact that the adoption of ASU 2009-13 will have on its Consolidated Financial Statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures Topic 820: Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim reporting periods within those years. The Company adopted the new disclosures effective January 31, 2010, except for the disclosure of activity within Level 3 fair value measurements. The Level 3 disclosures are effective for the Company at the beginning of Fiscal 2011. The adoption of ASU 2010-06 did not have a material impact on the disclosures within the Company’s Consolidated Financial Statements.

Foreign Currency Translation

The Canadian dollar is the functional currency for the Canadian business. In accordance with ASC 830, Foreign Currency Matters, assets and liabilities denominated in foreign currencies were translated into U.S. dollars (the reporting currency) at the exchange rate prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas, related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, Comprehensive Income (refer to Note 8 to the Consolidated Financial Statements).

Revenue Recognition

Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in net sales. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within net sales and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages.

Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of net sales. For further information on the Company’s gift card program, refer to the Gift Cards caption below.

The Company sells off end-of-season, overstock, and irregular merchandise to a third-party. The proceeds from these sales are presented on a gross basis, with proceeds and cost of sell-offs recorded in net sales and cost of sales, respectively.

Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively “merchandise costs”) and buying, occupancy, and warehousing costs. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Merchandise margin is the difference between net sales and merchandise costs. Gross profit is the difference between net sales and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income/expense and foreign currency transaction gain/loss.

Other-than-Temporary Impairment

The Company evaluates its investments for impairment in accordance with ASC 320, Investments — Debt and Equity Securities (“ASC 320”). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment’s cost and its fair value. As of May 3, 2009, the Company adopted ASC 320-10-65, Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments (“ASC 320-10-65”), which modifies the requirements for recognizing other-than-temporary impairment (“OTTI”) and changes the impairment model for debt securities. In addition, ASC 320-10-65 requires additional disclosures relating to debt and equity securities both in the interim and annual periods as well as requires the Company to present total OTTI in the Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss impairment amount recognized in other comprehensive income (“OCI”). During the 39 weeks ended October 30, 2010, the Company recorded OTTI charges in earnings related to credit losses on its investment securities of $1.2 million. There was $0.2 million of net impairment loss recognized in earnings during the 39 weeks ended October 31, 2009.

Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information regarding net impairment losses recognized in earnings.

Cash and Cash Equivalents, Short-term Investments and Long-term Investments

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

As of October 30, 2010, short-term investments included auction rate securities (“ARS”) classified as available for sale that the Company expects to be redeemed at par within 12 months, based on notice from the issuer.

As of October 30, 2010, long-term investments included investments with remaining maturities of greater than 12 months and consisted of ARS classified as available-for-sale that have experienced failed auctions or have long-term auction resets and the Company’s ARS Call Option related to investment sales during the 13 weeks ended October 30, 2010. The remaining contractual maturities of our long-term ARS investments are approximately 20 months and the ARS Call Option expires on October 29, 2013.

Unrealized gains and losses on the Company’s available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders’ equity, within accumulated other comprehensive income, until realized. The components of OTTI losses related to credit losses, as defined by ASC 320, are considered by the Company to be realized losses. When available-for-sale securities are sold, the cost of the securities is specifically identified and is used to determine any realized gain or loss. Realized gains or losses are recognized separately on the Company’s Consolidated Statements of Operations as a realized gain or loss on sale of investment securities.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents, short-term investments and long-term investments.

Merchandise Inventory

Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer to the Company.

The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. 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 if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Income Taxes

The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact our effective tax rate.

The Company evaluates its income tax positions in accordance with ASC 740 which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits.

The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. The Company believes that its assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances, or net income.

Property and Equipment

Property and equipment is recorded on the basis of cost with depreciation computed utilizing the straight-line method over the assets’ estimated useful lives. The useful lives of our major classes of assets are as follows:

Buildings		25 years
Leasehold Improvements		Lesser of 10 years or the term of the lease
Fixtures and equipment		5 years

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements and store fixtures associated with retail stores, which have been open longer than one year. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating income under loss on impairment of assets. During the 26 weeks ended July 31, 2010, the Company recorded asset impairment charges of $18.0 million related to the impairment of M+O stores. Based on the Company’s decision to close all M+O stores in Fiscal 2010, the Company determined that the stores not previously impaired would not be able to generate sufficient cash flow

over the life of the related leases to recover the Company’s initial investment in them. No asset impairment charges were recorded in the 13 weeks ended October 30, 2010.

Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.

Goodwill

As of October 30, 2010, the Company had approximately $11.4 million of goodwill compared to $11.2 million as of January 30, 2010. The Company’s goodwill is primarily related to the acquisition of its importing operations on January 31, 2000, as well as the acquisition of its Canadian business on November 29, 2000. The increase in goodwill is due to the fluctuation in the foreign exchange spot rate at which the Canadian goodwill is translated. In accordance with ASC 350, Intangibles- Goodwill and Other, the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 30, 2010. As a result of the Company’s annual goodwill impairment test, the Company concluded that its goodwill was not impaired.

Gift Cards

The value of a gift card is recorded as a current liability upon purchase, and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of net sales. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended October 30, 2010 and October 31, 2009, the Company recorded $0.7 million and $1.0 million, respectively, of revenue related to gift card breakage. During the 39 weeks ended October 30, 2010 and October 31, 2009, the Company recorded $2.5 million and $4.2 million, respectively, of revenue related to gift card breakage.

Deferred Lease Credits

Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company’s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period) and any subsequent renewal terms. The receivable is reduced as amounts are received from the landlord.

Co-branded Credit Card and Customer Loyalty Program

The Company offers a co-branded credit card (the “AE Visa Card”) and a private label credit card (the “AE Credit Card”) under both the American Eagle and aerie brands. Both of these credit cards are issued by a third-party bank (the “Bank”), and the Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. Once a customer is approved to receive the AE Visa Card and the card is activated, the customer is eligible to participate in the Company’s credit card rewards program. On January 1, 2010, the Company modified the benefits of the AE Visa and AE Credit Card programs to make both credit cards a part of the rewards program. Customers who make purchases at AE, aerie and 77kids earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AE Visa Card customers, who make purchases at other retailers where the card is accepted, earn additional discounts. Savings certificates are valid for 90 days from issuance.

Points earned under the credit card rewards program on purchases at AE and aerie are accounted for by analogy to ASC 605-25, Revenue Recognition, Multiple Element Arrangements (“ASC 605-25”). The Company believes that points earned under its point and loyalty programs represent deliverables in a multiple element arrangement rather than a rebate or refund of cash. Accordingly, the portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire. Additionally, credit card reward points earned on non-AE or aerie purchases are accounted for in accordance with ASC 605-25. As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales.

Through December 31, 2009, the Company offered its customers the AE All-Access Pass (the “Pass”), a customer loyalty program. On January 1, 2010, the Company replaced the Pass, with the AEREWARD$^sm Loyalty Program (the “Program”). Under either loyalty program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds during three-month earning periods. Rewards earned during these periods are valid through the stated expiration date, which is approximately one month from the mailing date. These rewards can be redeemed for a discount on a

purchase of merchandise. Rewards not redeemed during the one-month redemption period are forfeited. The Company determined that rewards earned using the Pass and the Program should be accounted for in accordance with ASC 605-25. Accordingly, the portion of the sales revenue attributed to the award credits is deferred and recognized when the awards are redeemed or expire.

Stock Repurchases

During Fiscal 2007, the Company’s Board authorized a total of 60.0 million shares of our common stock for repurchase under our share repurchase program with expiration dates extending into Fiscal 2010. The Company repurchased 18.7 million shares during Fiscal 2007 and the authorization related to 11.3 million shares expired in Fiscal 2009. At the beginning of Fiscal 2010, the Company had 30.0 million shares remaining authorized for repurchase.

The Company repurchased 14.0 million shares as part of its publicly announced repurchase programs during the 39 weeks ended October 30, 2010 for approximately $192.3 million, at a weighted average price of $13.73 per share. As of October 30, 2010, the Company had 16.0 million shares remaining authorized for repurchase. These shares may be repurchased at the Company’s discretion. The authorization relating to the 16.0 million shares remaining under the program expires at the end of Fiscal 2010.

During the 39 weeks ended October 30, 2010 and October 31, 2009, the Company repurchased approximately 1.0 million and 16,000 shares, respectively, from certain employees at market prices totaling $18.0 million and $0.2 million, respectively. These shares were repurchased for the payment of taxes in connection with the vesting of share-based payments, as permitted under the 2005 Stock Award and Incentive Plan (the “2005 Plan”).

The aforementioned share repurchases have been recorded as treasury stock.

Segment Information

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified three operating segments (American Eagle Brand US and Canadian stores, aerie by American Eagle retail stores and AEO Direct) that reflect the basis used internally to review performance and allocate resources. All of the operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC 280.

Reclassification

Certain reclassifications have been made to the Consolidated Financial Statements for prior periods in order to conform to the current period presentation.

3. Cash and Cash Equivalents, Short-term Investments and Long-term Investments

The following table summarizes the fair market values for the Company’s cash and marketable securities, which are recorded as cash and cash equivalents, short-term investments and long-term investments on the Consolidated Balance Sheets:

		October 30,				January 30,				October 31,
(In thousands)		2010				2010				2009
Cash and cash equivalents:
Cash		$	157,921			$	144,391			$	82,942
Commercial paper			61,697				25,420				—
Treasury bills			100,393				119,988				100,000
Money-market			310,764				404,161				329,661
Total cash and cash equivalents		$	630,775			$	693,960			$	512,603
Short-term investments:
Student-loan backed ARS		$	—			$	400			$	—
State and local government ARS			3,700				4,275				3,300
Total short-term investments		$	3,700			$	4,675			$	3,300
Long-term investments:
Student-loan backed ARS		$	—			$	149,031			$	151,048
State and local government ARS			5,500				35,969				38,724
Auction rate preferred securities			—				12,773				13,380
ARS call option			415				—				—
Total long-term investments		$	5,915			$	197,773			$	203,152
Total		$	640,390			$	896,408			$	719,055

Proceeds from the sale of available-for-sale securities were $177.5 million and $77.0 million for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively. There were no purchases of available-for-sale securities during the 39 weeks ended October 30, 2010 or October 31, 2009.

The following table presents the unrealized losses and fair value of available-for-sale securities for which OTTI has not been recognized in earnings and the length of time that the securities were in a continuous unrealized loss position.

										Greater Than or
		Less Than 12 Months								Equal to 12 Months
		Gross Unrealized								Gross Unrealized
(In thousands)		Holding Losses				Fair Value				Holding Losses				Fair Value
October 30, 2010
State and local government ARS		$	—			$	—			$	—			$	—
Total (1)		$	—			$	—			$	—			$	—
October 31, 2009
Student-loan backed ARS		$	(4,841	)		$	28,275			$	(3,711	)		$	31,173
State and local government ARS			(220	)			9,230				(206	)			11,494
Auction rate preferred securities			—				—				(1,395	)			13,380
Total (1)		$	(5,061	)		$	37,505			$	(5,312	)		$	56,047

As of October 30, 2010, the Company had a total of $640.4 million in cash and cash equivalents, short-term and long-term investments, including $9.2 million of investments in ARS whose fair value approximates par.

During the 13 weeks ended October 30, 2010, the Company liquidated $176.4 million par value ($163.3 million carrying value) of its available-for-sale securities. The Company received proceeds of $149.6 million plus accrued interest and recognized a net loss in its Consolidated Statements of Operations for the 13 weeks ended October 30, 2010 of $24.2 million, of which $10.9 million was previously included in OCI on the Company’s Consolidated Balance Sheet.

Relating to $119.7 million of the ARS securities sold during the 13 weeks ended October 30, 2010, the Company entered into a settlement agreement under which a financial institution (the “purchaser”) purchased the ARS at a discount to par, plus accrued interest. Additionally, under this agreement, the Company retained a right (the “ARS Call Option”), for a period ending October 29, 2013 to: (a) repurchase any or all of the ARS securities sold at the agreed upon purchase prices received from the purchaser plus accrued interest; and/or (b) receive additional proceeds from the purchaser upon certain redemptions of the ARS securities sold. The ARS Call Option is cancelable by the purchaser for additional cash consideration.

The Company is required to assess the value of the ARS Call Option at the end of each reporting period, with any changes in fair value recorded within the Consolidated Statement of Operations. As of October 30, 2010, the Company determined that the fair value was $0.4 million. The fair value of the ARS Call Option is included as an offsetting amount within the net loss on liquidation of $24.2 million referenced above and is classified as a long-term investment on the Consolidated Balance Sheet as of October 30, 2010.

The Company continues to monitor the market for ARS and consider the impact, if any, on the fair value of its investments. If current market conditions deteriorate further, or the anticipated recovery in market values does not occur, the Company may be required to record impairment charges on its remaining ARS investments.

Refer to Note 4 to the Consolidated Financial Statements for additional information regarding the fair value measurement of our investment securities.

4. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date.

Financial Instruments

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities.
	•		Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
	•		Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of October 30, 2010 and October 31, 2009, the Company held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including ARS, ARPS and the ARS Call Option as described in Note 3 to the Consolidated Financial Statements.

In accordance with ASC 820, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of October 30, 2010 and October 31, 2009:

		Fair Value Measurements at October 30, 2010
						Quoted Market
						Prices in Active								Significant
						Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
(In thousands)		Carrying Amount				(Level 1)				(Level 2)				(Level 3)
Cash and Cash Equivalents
Cash		$	157,921			$	157,921			$	—			$	—
Commercial Paper			61,697				61,697				—				—
Treasury bills			100,393				100,393				—				—
Money-market			310,764				310,764				—				—
Total cash and cash equivalents		$	630,775			$	630,775			$	—			$	—
Short-term Investments
State and local government ARS		$	3,700			$	—			$	—			$	3,700
Total Short-term Investments		$	3,700			$	—			$	—			$	3,700
Long-term Investments
State and local government ARS		$	5,500			$	—			$	—			$	5,500
ARS call option			415				—				—				415
Total Long-term Investments		$	5,915			$	—			$	—			$	5,915
Total		$	640,390			$	630,775			$	—			$	9,615

		Fair Value Measurements at October 31, 2009
						Quoted Market
						Prices in Active								Significant
						Markets for				Significant Other				Unobservable
						Identical Assets				Observable Inputs				Inputs
(In thousands)		Carrying Amount				(Level 1)				(Level 2)				(Level 3)
Cash and Cash Equivalents
Cash		$	82,942			$	82,942			$	—			$	—
Treasury bills			100,000				100,000				—				—
Money-market			329,661				329,661				—				—
Total cash and cash equivalents		$	512,603			$	512,603			$	—			$	—
Short-term Investments
State and local government ARS		$	3,300			$	—			$	—			$	3,300
Total Short-term Investments		$	3,300			$	—			$	—			$	3,300
Long-term Investments
Student-loan backed ARS		$	151,048			$	—			$	—			$	151,048
State and local government ARS			38,724				—				—				38,724
Auction rate preferred securities			13,380				—				—				13,380
Total Long-term Investments		$	203,152			$	—			$	—			$	203,152
Total		$	719,055			$	512,603			$	—			$	206,452

The Company uses a discounted cash flow model to value its Level 3 investments. At October 30, 2010, the assumptions in the Company’s model included different recovery periods, ranging from 8 to 20 months, depending on the type of security and varying discount factors for yield, ranging from 0.3% to 0.4%, and illiquidity of 0.5%. At October 31, 2009, the assumptions in the Company’s model included different recovery periods, ranging from 12 months to 11 years, depending on the type of security and varying discount factors for yield, ranging from 0.3% to 7.5%, and illiquidity, ranging from 0.3% to 1.0%. These assumptions are subjective. They are based on the Company’s current judgment and its view of current market conditions. The use of different assumptions would result in a different valuation and related charge.

As a result of the discounted cash flow analysis, during the 39 weeks ended October 30, 2010, the Company recognized a net impairment of $0.6 million. The total cumulative impairment recognized in OCI prior to the Company’s liquidation of $176.4 million par value ($163.3 million carrying value) available-for-sale securities during the 13 weeks ended October 30,

2010 was $10.9 million ($6.8 million, net of tax). Total cumulative impairment recognized in OCI at the end of Fiscal 2009 was $10.3 million ($6.4 million, net of tax). The increase in temporary impairment was primarily driven by unfavorable changes in the discount rate. These amounts were previously recorded in OCI and resulted in a decrease in the investments’ estimated fair values. As a result of a credit rating downgrade on a student-loan backed ARS, the Company also recorded a net impairment loss in earnings of $1.2 million during the 39 weeks ended October 30, 2010.

As previously described in Note 3 to the Consolidated Financial Statements, the Company liquidated $176.4 million par value ($163.3 million carrying value) of its available-for-sale securities. Through the liquidation, the Company received proceeds of $149.6 million plus accrued interest and recognized a loss in its consolidated financial statements of operations for the 13 weeks ended October 30, 2010 of $24.2 million, net of the ARS Call Option gain of $0.4 million. The recognized loss included all $10.9 million of cumulative impairment which was previously included in OCI on the Consolidated Balance Sheet.

The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements was also estimated using a discounted cash flow model. The model considered potential changes in yields for securities with similar characteristics to the underlying ARS and evaluated possible future refinancing opportunities for the issuers of the ARS. The analysis then assessed the likelihood that the options would be exercisable as a result of the underlying ARS being redeemed or traded in a secondary market at an amount greater than the exercise price prior to the end of the option term. Future changes in the fair values of the ARS Call Option will be recorded within the Consolidated Statements of Operations.

The following table presents a rollforward of the amount of OTTI related to credit losses that has been recognized in earnings:

		39 Weeks Ended
(In thousands)		October 30, 2010
Beginning balance of credit losses previously recognized in earnings		$	940
Year-to-date OTTI credit losses recognized in earnings			1,248
Ending balance of cumulative credit losses recognized in earnings		$	2,188

The reconciliation of the Company’s assets measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:

		Level 3 (Unobservable inputs)
										Student
										Loan-
						Auction-				Backed				Auction-
						Rate				Auction-				Rate
						Municipal				Rate				Preferred				ARS Call
(In thousands)		Total				Securities				Securities				Securities				Option
Carrying Value at January 30, 2010		$	202,448			$	40,244			$	149,431			$	12,773			$	—
Settlements			(177,472	)			(29,101	)			(141,246	)			(7,125	)			—
Gains and (losses):
Reported in earnings			(25,674	)			(2,399	)			(16,755	)			(6,935	)			415
Reported in OCI			10,313				456				8,570				1,287				—
Balance at October 30, 2010		$	9,615			$	9,200			$	—			$	—			$	415
Carrying Value at January 31, 2009		$	251,007			$	69,970			$	169,254			$	11,783			$	—
Settlements			(69,250	)			(28,150	)			(41,100	)			—				—
Gains and (losses):
Reported in earnings			(225	)			—				—				(225	)			—
Reported in OCI			24,920				204				22,894				1,822				—
Balance at October 31, 2009		$	206,452			$	42,024			$	151,048			$	13,380			$	—

Non-Financial Assets and Liabilities

The Company’s non-financial assets, which include goodwill and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required and the Company is required to evaluate the non-financial instrument for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value. As a result of the Company’s annual goodwill impairment test

performed as of January 30, 2010, the Company concluded that its goodwill was not impaired. During the 13 and 39 weeks ended October 30, 2010, there were no triggering events that prompted an asset impairment test of the Company’s goodwill.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. Based on the decision to close all M+O stores in Fiscal 2010, the Company determined that the M+O stores not previously impaired would not be able to generate sufficient cash flow over the life of the related leases to recover the Company’s initial investment in them. Therefore, during the 26 weeks ended July 31, 2010, the M+O stores not previously impaired were written down to their fair value, resulting in a loss on impairment of assets of $18.0 million. The loss on impairment of assets was recorded within Loss from Discontinued Operations for the 39 weeks ended October 30, 2010. The fair value of those stores were determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

Refer to Note 12 to the Consolidated Financial Statements for additional information regarding the discontinued operations for M+O.

5. Earnings per Share

ASC 260-10-45, Participating Securities and the Two-Class Method (“ASC 260-10-45”), addresses whether awards granted in unvested share-based payment transactions that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and therefore are included in computing earnings per share under the two-class method, as described in ASC 260, Earnings Per Share (“ASC 260”). Participating securities are securities that may participate in dividends with common stock and the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that would otherwise have been available to common shareholders. Under the two-class method, earnings for the period are allocated between common shareholders and other shareholders, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees under the Company’s 2005 Plan are considered participating securities as these employees receive non-forfeitable dividends at the same rate as common stock. For the 13 and 39 weeks ended October 30, 2010 and October 31, 2009, the application of ASC 260-10-45 resulted in no change to basic EPS or diluted EPS.

The following is a reconciliation between basic and diluted weighted average shares outstanding:

		13 Weeks Ended								39 Weeks Ended
		October 30,				October 31,				October 30,				October 31,
(In thousands, except per share amounts)		2010				2009				2010				2009
Weighted average common shares outstanding:
Basic number of common shares outstanding			195,590				206,517				201,678				206,169
Dilutive effect of stock options and non-vested restricted stock			1,733				2,876				1,861				2,494
Dilutive number of common shares outstanding			197,323				209,393				203,539				208,663
Basic net income per common share
Net income		$	33,024			$	59,159			$	53,609			$	109,698
Less: Income allocated to participating securities			—				194				93				219
Net income available to common shareholders		$	33,024			$	58,965			$	53,516			$	109,479
Basic net income per common share		$	0.17			$	0.29			$	0.27			$	0.53
Dilutive net income per common share
Net income		$	33,024			$	59,159			$	53,609			$	109,698
Less: Income allocated to participating securities			—				191				93				149
Net income available to common shareholders		$	33,024			$	58,968			$	53,516			$	109,549
Dilutive net income per common share		$	0.17			$	0.28			$	0.26			$	0.53

Equity awards to purchase approximately 6.9 million and 7.9 million shares of common stock during the 13 and 39 weeks ended October 30, 2010, respectively, and approximately 6.6 million and 6.7 million shares of common stock during the 13

and 39 weeks ended October 31, 2009, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

Approximately 0.8 million shares of restricted stock units for both the 13 and 39 weeks ended October 30, 2010 and approximately 1.4 million shares of restricted stock for both the 13 and 39 weeks ended October 31, 2009 were not included in the computation of weighted average diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established annual performance goals. Additionally, there were approximately 27,000 shares for the 39 weeks ended October 30, 2010 of time-based restricted stock units that were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would have been anti-dilutive.

6. Property and Equipment

Property and equipment consists of the following:

		October 30,				January 30,				October 31,
(In thousands)		2010				2010				2009
Property and equipment, at cost		$	1,414,453			$	1,394,806			$	1,397,961
Less: Accumulated depreciation and amortization			(762,092	)			(681,664	)			(656,942	)
Net property and equipment		$	652,361			$	713,142			$	741,019

7. Note Payable and Other Credit Arrangements

The Company has borrowing agreements with four separate financial institutions under which it may borrow an aggregate of $310.0 million United States Dollars (“USD”) and $25.0 million Canadian Dollars (“CAD”). Of this amount, $200.0 million USD can be used for demand letter of credit facilities, $50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the remaining $60.0 million USD can be used for either letters of credit or demand line borrowings at the Company’s discretion. The expiration dates of the USD demand line facilities are April 20, 2011 and May 22, 2011 and the $25.0 million CAD demand line has an expiration date of November 20, 2010.

As of October 30, 2010, the Company had outstanding demand letters of credit of $42.1 million USD and no demand line borrowings.

The availability of any future borrowings is subject to acceptance by the respective financial institutions. The average borrowing rate on the demand line for outstanding borrowings during Fiscal 2010 was 2.1%.

8. Comprehensive Income

Comprehensive income is comprised of the following:

		13 Weeks Ended								39 Weeks Ended
		October 30,				October 31,				October 30,				October 31,
(In thousands)		2010				2009				2010				2009
Net income			$33,024				$59,159				$53,609				$109,698
Other comprehensive income:
Temporary impairment reversal (loss) related to auction-rate securities, net of tax (1)			—				3,369				(1,180	)			15,318
Reclassification adjustment for realized losses in net income related to ARS, net of tax (2)			6,722				—				6,722				—
Reclassification adjustment for OTTI charges realized in net income related to ARS, net of tax (3)			—				—				819				139
Foreign currency translation adjustment			779				(2,458	)			3,552				15,410
Other comprehensive income:			7,501				911				9,913				30,867
Total comprehensive income			$40,525				$60,070				$63,522				$140,565

9. Share-Based Compensation

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation - Stock Compensation (“ASC 718”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value.

Total share-based compensation expense from continuing operations included in the Consolidated Statements of Operations for the 13 and 39 weeks ended October 30, 2010 was $3.5 million ($2.2 million, net of tax) and $21.9 million ($13.5 million, net of tax) and for the 13 and 39 weeks ended October 31, 2009 was $9.8 million ($6.0 million, net of tax) and $19.0 million ($11.7 million, net of tax), respectively.

Stock Option Grants

The Company grants both time-based and performance-based stock options under its 2005 Plan. Time-based stock option awards vest over the requisite service period of the award or to an employee’s eligible retirement date, if earlier. Performance-based stock option awards vest over three years and are earned if the Company meets pre-established performance goals during each year.

A summary of the Company’s stock option activity for the 39 weeks ended October 30, 2010 follows:

		39 Weeks Ended
		October 30, 2010
										Weighted-Average
										Remaining				Aggregate
						Weighted-Average				Contractual				Intrinsic Value
		Options				Exercise Price				Term (in years)				(in thousands)
Outstanding — January 30, 2010			14,904,942			$	15.01
Granted			1,381,246			$	17.04
Exercised (1)			1,149,208			$	8.46
Cancelled			3,011,303			$	15.28
Outstanding — October 30, 2010			12,125,677			$	15.79				3.9			$	40,703
Vested and expected to vest — October 30, 2010			11,873,169			$	15.82				3.8			$	39,950
Exercisable — October 30, 2010			3,619,178			$	7.37				2.4			$	31,304

The weighted-average grant date fair value of stock options granted during the 39 weeks ended October 30, 2010 and October 31, 2009 was $5.19 and $3.55, respectively. The aggregate intrinsic value of options exercised during the 39 weeks ended October 30, 2010 and October 31, 2009 was $10.7 million and $11.4 million, respectively.

Cash received from the exercise of stock options was $5.8 million for the 39 weeks ended October 30, 2010 and $8.7 million for the 39 weeks ended October 31, 2009. The actual tax benefit realized from stock option exercises totaled $12.8 million for the 39 weeks ended October 30, 2010 and $8.9 million for the 39 weeks ended October 31, 2009.

The fair value of stock options was estimated based on the closing market price of the Company’s common stock on the date of the grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

		39 Weeks Ended
		October 30				October 31,
Black-Scholes Option Valuation Assumptions		2010				2009
Risk-free interest rate (1)			2.3	%			1.7	%
Dividend yield			2.1	%			3.9	%
Volatility factor (2)			40.2	%			62.1	%
Weighted-average expected term (3)		4.5 years				4.5 years
Expected forfeiture rate (4)			8.0	%			8.0	%

As of October 30, 2010, there was $5.4 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.5 years.

Restricted Stock Grants

Time-based restricted stock awards include two types of awards; time-based restricted stock and time-based restricted stock units. Time-based restricted stock awards vest over three years and participate in nonforfeitable dividends. Time-based restricted stock units vest over three years; however, they may be accelerated to vest over one year if the Company meets pre-established performance goals in the year of grant. Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

Performance-based restricted stock awards include two types of awards; performance-based restricted stock and performance-based restricted stock units. Performance-based restricted stock awards vest over one year based upon the Company’s achievement of pre-established goals and participate in nonforfeitable dividends. Performance-based restricted stock units cliff vest at the end of a three year period based upon the Company’s achievement of pre-established goals. Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions as the original award.

The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. The Company grants to its employees both restricted stock awards, which entitles the holders to receive nonforfeitable dividends prior to vesting, and restricted stock unit awards. The restricted stock unit awards differ from the restricted stock awards in that they do not contain nonforfeitable rights to dividends and are therefore not considered participating securities in accordance with ASC 260-10-45.

A summary of the Company’s restricted stock activity is presented in the following tables:

		Time-Based Restricted Stock								Performance-Based Restricted Stock
		39 Weeks Ended								39 Weeks Ended
		October 30, 2010								October 30, 2010
						Weighted-Average Grant								Weighted-Average Grant
		Shares				Date Fair Value				Shares				Date Fair Value
Nonvested — January 30, 2010			1,883			$	13.28				989,664			$	9.66
Granted			—				—				—				—
Vested			—				—				(989,664	)			9.66
Cancelled			1,883				13.28				—				—
Nonvested — October 30, 2010			—				—				—				—

		Time-Based Restricted Stock Units								Performance-Based Restricted Stock Units
		39 Weeks Ended								39 Weeks Ended
		October 30, 2010								October 30, 2010
						Weighted-Average Grant								Weighted-Average Grant
		Shares				Date Fair Value				Shares				Date Fair Value
Nonvested — January 30, 2010			1,668,092			$	9.79				406,231			$	9.82
Granted			1,098,844				17.39				312,363				17.24
Vested			(1,650,077	)			9.79				—				—
Cancelled			(92,487	)			17.46				(77,465	)			15.45
Nonvested — October 30, 2010			1,024,372			$	17.25				641,129			$	12.75

As of October 30, 2010, there was $15.3 million of unrecognized compensation expense related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 2.4 years.

As of October 30, 2010, the Company had 25.9 million shares available for all equity grants.

10. Income Taxes

The provision for income taxes from continuing operations is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for quarterly events. The effective income tax rate from continuing operations based on actual operating results for the 13 weeks ended October 30, 2010 was 52.1% compared to 19.2% for the 13 weeks ended October 31, 2009. The effective income tax rate from continuing operations based on actual operating results for the 39 weeks ended October 30, 2010 was 40.7% compared to 24.0% for the 39 weeks ended October 31, 2009. The increase in the effective income tax rate for Fiscal 2010 was primarily due to losses on the sale of certain ARS investments in which no income tax benefit was recognized. Additionally, the effective income tax rate was lower in Fiscal 2009 due to the tax benefit associated with the repatriation of foreign earnings as well as federal and state income tax settlements and other changes in income tax reserves.

The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company recognizes income tax liabilities related to unrecognized tax benefits in accordance with ASC 740 and adjusts these liabilities when its judgment changes as the result of the evaluation of new information not previously available. There were no significant changes in unrecognized tax benefits during the 39 weeks ended October 30, 2010. Unrecognized tax benefits decreased by $7.3 million during the 39 weeks ended October 31, 2009, primarily due to federal and state income tax settlements and other changes in income tax reserves. The Company does not anticipate any significant changes to the unrecognized tax benefits recorded at the balance sheet date within the next 12 months.

11. Legal Proceedings

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), management records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position or results of operations of the Company.

12. Discontinued Operations

On March 5, 2010, the Company’s Board of Directors approved management’s recommendation to proceed with the closure of the M+O brand. The Company notified employees and issued a press release announcing this decision on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the brand and review of strategic alternatives, which revealed that it was not achieving performance levels that warranted further investment. The Company completed the closure of the M+O stores and e-commerce operation during the 13 weeks ended July 31, 2010 and the Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation.

Costs associated with exit or disposal activities are recorded when incurred. A summary of the exit and disposal costs recognized within Loss from Discontinued Operations on the Consolidated Income Statement for the 39 weeks ended October 30, 2010 are included in the table as follows. Results from discontinued operations were nominal for the 13 weeks ended October 30, 2010.

		39 Weeks Ended
		October 30,
(In thousands)		2010
Non-cash charges
Asset impairments		$	17,980
Cash charges
Lease-related charges (1)			15,377
Inventory charges			2,422
Severence charges			7,660
Total charges		$	43,439

A rollforward of the liabilities recognized in the Consolidated Balance Sheet is as follows:

		October 30,
(In thousands)		2010
Accrued liability as of January 30, 2010		$	—
Add: Costs incurred, excluding non-cash charges			30,879
Less: Cash payments			(28,398	)
Accrued liability as of October 30, 2010 (1)		$	2,481

The table below presents the significant components of M+O’s results included in Loss from Discontinued Operations on the Consolidated Statements of Operations for 13 and 39 weeks ended October 30, 2010 and October 31, 2009, respectively.

		13 Weeks Ended								39 Weeks Ended
		October 30,				October 31,				October 30,				October 31,
(In thousands)		2010				2009				2010				2009
Net sales		$	—			$	12,951			$	21,881			$	34,056
Loss from discontinued operations, before income taxes			(271	)			(14,268	)			(66,959	)			(39,041	)
Income tax benefit			104				5,479				25,672				14,958
Loss from discontinued operations, net of tax		$	(167	)		$	(8,789	)		$	(41,287	)		$	(24,083	)
Loss per common share from discontinued operations:
Basic		$	—			$	(0.04	)		$	(0.20	)		$	(0.12	)
Diluted		$	—			$	(0.04	)		$	(0.20	)		$	(0.11	)

The major classes of assets and liabilities included in the Consolidated Balance Sheets for M+O as of October 30, 2010, January 30, 2010 and October 31, 2009 is as follows.

		October 30,				January 30,				October 31,
(In thousands)		2010				2010				2009
Current assets		$	226			$	13,378			$	18,051
Non-current assets			—				21,227				41,095
Total assets		$	226			$	34,605			$	59,146
Total current liabilities		$	2,793			$	6,110			$	7,436
Total non-current liabilities			—				4,604				4,728
Total liabilities		$	2,793			$	10,714			$	12,164

13. Subsequent Events

The Company has evaluated the existence of subsequent events through the filing date of this Quarterly Report on Form 10-Q.

Review by Independent Registered Public Accounting Firm

Ernst & Young LLP, our independent registered public accounting firm, has performed a limited review of the unaudited Consolidated Financial Statements as of and for the 13 and 39 week periods ended October 30, 2010 and October 31, 2009, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the unaudited Consolidated Financial Statements referred to above.

Report of Independent Registered Public Accounting Firm

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

We have reviewed the consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of October 30, 2010 and October 31, 2009, and the related consolidated statements of operations and retained earnings for the thirteen and thirty-nine week periods ended October 30, 2010 and October 31, 2009 and the consolidated statements of cash flows for the thirty-nine week periods ended October 30, 2010 and October 31, 2009. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of 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 consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 30, 2010, and the related consolidated statements of operations, comprehensive income, stockholder’s equity, and cash flows for the year then ended not presented herein, and in our report dated March 26, 2010, 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 30, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

November 19, 2010

ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our Fiscal 2009 Management’s Discussion and Analysis of Financial Condition and Results of Operations which can be found in our Fiscal 2009 Annual Report on Form 10-K.

In addition, the following discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements and should be read in conjunction with these statements and notes thereto.

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 new American Eagle stores, 11 new aerie stores, and nine new 77kids stores in the United States and Canada during Fiscal 2010;
	•		the selection of approximately 25 to 35 American Eagle stores in the United States and Canada for remodeling during Fiscal 2010;
	•		the planned closure of 15 to 25 American Eagle stores in the United States and Canada during Fiscal 2010;
	•		the success of aerie by American Eagle and aerie.com;
	•		the success of 77kids by american eagle stores and 77kids.com;
	•		the expected payment of a dividend in future periods;
	•		the possibility of growth through acquisitions, internally developing additional new brands, and/or engaging in future franchise agreements;
	•		the possibility that we may be required to take temporary or other-than-temporary impairment charges relating to our investment securities;
	•		the possibility that our credit facilities may not be available for future borrowings; and
	•		the possibility that we may be required to take store impairment charges related to underperforming stores.

We caution that these forward-looking statements, and those described elsewhere in this report, involve material risks and uncertainties and are subject to change based on factors beyond our control as discussed within Item 1A of this Quarterly Report on Form 10-Q and Item 1A of our Fiscal 2009 Annual Report on Form 10-K. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements.

Key Performance Indicators

Our management evaluates the following items, which are considered key performance indicators, in assessing our performance:

Comparable store sales — Comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to a remodel are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the remodel. Sales from American Eagle and aerie stores are included in comparable store sales. Sales from AEO Direct are not included in comparable store sales.

Our management considers comparable store sales to be an important indicator of our current performance. Comparable store sales results are important to achieve leveraging of our costs, including store payroll, store supplies, rent, etc. Comparable store sales also have a direct impact on our total net sales, cash and working capital.

Gross profit — Gross profit measures whether we are optimizing the price and inventory levels of our merchandise and achieving an optimal level of sales. Gross profit is the difference between net sales and cost of sales. Cost of sales consists of: merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, certain promotional costs and buying, occupancy and warehousing costs. Buying, occupancy and warehousing costs consist of: compensation, employee benefit expenses and travel for our buyers; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. The inability to obtain acceptable levels of sales, initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating income — Our management views operating income as a key indicator of our success. The key drivers of operating income are comparable store sales, gross profit, our ability to control selling, general and administrative expenses, and our level of capital expenditures.

Store productivity — Store productivity, including net sales per average square foot, sales per productive hour, average unit retail price, conversion rate, the number of transactions per store, the number of units sold per store and the number of units per transaction, is evaluated by our management in assessing our operational performance.

Inventory turnover — Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.

Cash flow and liquidity — Our management evaluates cash flow from operations, investing and financing in determining the sufficiency of our cash position. Cash flow from operations has historically been sufficient to cover our uses of cash. Our management believes that cash flow from operations will be sufficient to fund anticipated capital expenditures and working capital requirements.

Results of Operations

Overview

The third quarter demonstrated progress toward driving our brands forward, while enhancing overall profitability. The increase in operating income reflects the initial positive impact of recent activities including improved merchandising, efficient inventory management, organizational streamlining and expense reductions.

We experienced growth in both sales and gross margin during the quarter. Strong sales performance during the peak back-to-school selling period resulted in a 1% increase in comparable store sales. Merchandise margin was improved over last year resulting from lower markdown activity.

Operating income for the 13 weeks ended October 30, 2010 was $91.5 million compared to $84.6 million last year. As a rate to sales, operating income was 12.2% for the 13 weeks ended October 30, 2010 compared to 11.5% for the 13 weeks ended October 31, 2009. The 70 basis point increase in operating margin is due to our positive comparable store sales for the 13 weeks ended October 30, 2010, our improved gross margin and the positive impact of our expense reduction initiatives.

Income from continuing operations for the 13 weeks ended October 30, 2010 was $33.2 million, or $0.17 per diluted share, and includes a $0.12 per diluted share realized loss from the sale of investment securities related to our ARS liquidation. This compares to income from continuing operations for the 13 weeks ended October 31, 2009 of $67.9 million, or $0.32 per diluted share, and includes a $0.07 per diluted share tax benefit related to the repatriation of earnings from Canada.

Net income for the 13 weeks ended October 30, 2010 was $33.0 million compared to $59.2 million for the 13 weeks ended October 31, 2009. Net income for the 13 weeks ended October 30, 2010 and October 31, 2009 includes the Loss from Discontinued Operations related to MARTIN+OSA (“M+O”) of $0.2 million and $8.8 million, respectively.

We had $640.4 million in cash and cash equivalents, short-term and long-term investments as of October 30, 2010. This includes $9.2 million of investments in auction rate securities (“ARS”).

Our 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.

The following table shows the percentage relationship to net sales of the listed line items included in our Consolidated Statements of Operations.

		13 Weeks Ended								39 Weeks Ended
		October 30,				October 31,				October 30,				October 31,
		2010				2009				2010				2009
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses			58.4				58.7				60.5				60.6
Gross profit			41.6				41.3				39.5				39.4
Selling, general and administrative expenses			24.6				25.1				25.3				25.1
Depreciation and amortization expense			4.8				4.7				5.3				5.1
Operating income			12.2				11.5				8.9				9.2
Realized loss on sale of investment securities			(3.2	)			—				(1.2	)			(0.1	)
Other income (expense), net			0.2				(0.1	)			0.1				(0.2	)
Net impairment loss recognized in earnings			—				—				—				—
Income before income taxes			9.2				11.4				7.8				8.9
Provision for income taxes			4.8				2.2				3.2				2.2
Income from continuing operations			4.4				9.2				4.6				6.7
Loss from discontinued operations, net of tax			—				(1.2	)			(2.0	)			(1.2	)
Net income			4.4	%			8.0	%			2.6	%			5.5	%