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Dynamic quotes 
OFFON

AMERICAN EAGLE OUTFITTERS, INC.

(AEO)
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AMERICAN EAGLE OUTFITTERS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

09/02/2021 | 04:34pm EDT
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our Management's Discussion and
Analysis of Financial Condition and Results of Operations for Fiscal 2020 which
can be found in our Fiscal 2020 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.

Executive Overview

We are a leading global specialty retailer offering high-quality, on-trend clothing, accessories, and personal care products at affordable prices under our American Eagle® and Aerie® brands.


In the fourth quarter of Fiscal 2020, we revised our reportable segment
structure and have two reportable segments, American Eagle and Aerie. Our Chief
Operating Decision Maker (defined as our CEO) analyzes segment results and
allocates resources based on adjusted operating income (loss). See Note 12 to
the Consolidated Financial Statements included herein for additional
information.

Financial highlights for the thirteen weeks ended July 31, 2021 include comparisons to the second quarter of Fiscal 2020:

•Record revenue of $1.19 billion increased 35%

•Operating income hit an all-time high of $168 million;

•Revenue for Aerie increased 34%, with operating income up 132%; and

•American Eagle revenue increased 35%, with operating income up 234%.

Key Performance Indicators

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


Comparable sales - Comparable sales and comparable sales changes provide a
measure of sales growth for stores and channels open at least one year over the
comparable prior year period. In light of store closures and related disruptions
from the COVID-19 pandemic, we have not disclosed comparable sales for Fiscal
2021 or Fiscal 2020.

Omni-channel Sales Performance - Our management utilizes the following quality
of sales metrics in evaluating our omni-channel sales performance: comparable
sales, average unit retail price, total transactions, units per transaction, and
consolidated comparable traffic. We include these metrics in our discussion
within this Management's Discussion and Analysis ("MD&A") when we believe they
enhance the understanding of the matter being discussed. Investors may find them
useful as such. Each of these metrics is defined as follows (except comparable
sales, which is defined separately above):

• Average unit retail price represents the selling price of our goods. It is

the cumulative net sales divided by the net units sold for a period of time.

• Total transactions represents the count of customer transactions over a

period of time (inclusive of company-owned stores and AEO Direct, unless

specified otherwise).

• Units per transaction represents the number of units sold divided by total

transactions over a period of time (inclusive of Company-owned stores and AEO

Direct, unless specified otherwise).

• Consolidated comparable traffic represents visits to our Company-owned

stores, limited to those stores that qualify to be included in comparable

    sales as defined above, including AEO Direct, over a period of time


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Gross profit - Gross profit measures whether we are optimizing the profitability
of our sales. Gross profit is the difference between total net revenue and cost
of sales. 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. Design costs consist of compensation, rent,
depreciation, travel, supplies, and samples.

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 operations.

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 consolidated results of operations.


Operating income - Our management views operating income as a key indicator of
our performance. The key drivers of operating income are net revenue, gross
profit, our ability to control selling, general, and administrative expenses,
and our level of capital expenditures for a reasonable period of time. In light
of store closures and disruptions from the COVID-19 pandemic, our operating
income may not be comparable for Fiscal 2021 versus Fiscal 2020.

Cash flow and liquidity - Our management evaluates cash flow from operations,
investing and financing activities in determining the sufficiency of our cash
position and capital allocation strategies. Cash flow has historically been
sufficient to cover our uses of cash. Our management believes that cash flow
will be sufficient to fund anticipated capital expenditures, dividends, and
working capital requirements for the next twelve months.



COVID-19


The COVID-19 pandemic remains highly volatile and continues to evolve on a daily
basis, and we continue to see disruptions and volatility in our business caused
by the COVID-19 pandemic.

As of July 31, 2021, all our stores have re-opened and remain open. Our stores
are operating with restrictive and precautionary measures in place, such as
reduced operating hours, physical distancing, enhanced cleaning and sanitation,
and limited occupancy levels. We do not believe that our results for the second
quarter of Fiscal 2021 are directly comparable to the same period in Fiscal
2020.

The safety and health of our associates and customers remains of paramount
concern. In March 2020, we hired a medical consultant to advise us on health and
safety matters and to ensure that we are following science-based guidance and
best practices for associates and customers in all of our locations. We
instituted a work-from-home plan in mid-March 2020 ahead of stay-at-home
orders. We continue to take various precautions in our stores, which include
sanitation stations and masks for all customers to provide a safe and secure
environment. Plexiglas health guard partitions have also been installed at the
registers along with the implementation of enhanced cleaning routines and
protocols.

As of July 31, 2021, we had approximately $824.0 million in cash and cash
equivalents and short-term investments, which includes the proceeds from our
Notes issuance, discussed in greater detail below and in Note 8 to the
Consolidated Financial Statements. We expect to be able to fund our future cash
requirements through current cash holdings and available liquidity.

The unpredictability of the trajectory of the COVID-19 pandemic has
significantly diminished visibility into the future operating environment, and
we believe that the Company may continue to experience degrees of volatility and
business disruptions, and remain at risk for periods of closure of our stores,
distribution centers and corporate facilities through the remainder of Fiscal
2021. Past and future impacts of COVID-19 also have the ability to disrupt the
operations of our partners, suppliers, and vendors, which could lead to supply
chain disruption, shipping delays, and freight cost increases. We are monitoring
the ongoing developments as the COVID-19 vaccines are being distributed and
administered, and we will take further actions that are in the best interests of
our associates and customers, as needed. For further information about the risks
associated with the COVID-19 pandemic, see "Risk Factors" in Part I, Item 1A of
our Fiscal 2020 Form 10-K.

Results of Operations

Overview

Our second quarter Fiscal 2021 results reflected another quarter of record
revenue and profitability. Performance was underscored by the strength of our
brands, outstanding product and a leading customer experience across selling
channels.

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Aerie continued to achieve consistent multi-year growth producing a very strong
profit flow through. American Eagle was fueled by re-energized product and brand
initiatives.

Absent the impacts of the COVID-19 pandemic, 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.

Additionally, during the 13 and 26 weeks ended August 1, 2020, our consolidated
results of operations were materially impacted by the effects of
COVID-19. Commencing in March 2020, we experienced a significant reduction in
customer traffic and demand resulting from the continued spread of COVID-19 and
government actions to combat it. In response, we closed our stores to the public
after the close of business on March 17, 2020; however, we continued to operate
our digital business. Subsequent to May 1, 2020, we began to reopen our stores,
and as of August 1, 2020, nearly all of our stores had reopened; however, we
continued to experience reduced customer traffic in re-opened store
locations. Accordingly, our results for the second quarter of Fiscal 2020 were
significantly impacted.

The following table shows the percentage relationship to total net revenue of
the listed line items included in our Consolidated Statements of Operations:

                                                  13 Weeks Ended                     26 Weeks Ended
                                            July 31,         August 1,         July 31,         August 1,
                                              2021             2020              2021             2020
Total net revenue                               100.0   %         100.0   %        100.0   %         100.0   %
Cost of sales, including certain buying,
occupancy
  and warehousing expenses                       57.9              70.0             57.9              79.5
Gross profit                                     42.1              30.0             42.1              20.5
Selling, general and administrative
expenses                                         24.6              25.3             25.1              28.7
Impairment, restructuring and COVID-19
related charges                                   0.0               1.7              0.0              11.9
Depreciation and amortization expense             3.4               4.4              3.5               5.7
Operating income (loss)                          14.1              (1.4 )           13.5             (25.8 )
Interest expense, net                             0.8               1.0              0.7               0.6
Other (income) expense, net                      (0.1 )            (0.2 )           (0.1 )             0.1
Income (loss) before income taxes                13.4              (2.2 )           12.9             (26.5 )
Provision (benefit) for income taxes              3.2              (0.6 )            3.2              (7.6 )
Net income (loss)                                10.2   %          (1.6 ) %          9.7   %         (18.9 ) %

The following table shows our consolidated store data:

                                                 13 Weeks Ended                 26 Weeks Ended
                                            July 31,       August 1,       July 31,       August 1,
                                              2021           2020            2021           2020
Number of stores:
Beginning of period                             1,074           1,093          1,078           1,095
Opened                                             20              16             31              19
Closed                                             (4 )           (11 )          (19 )           (16 )
End of period                                   1,090           1,098          1,090           1,098
Total gross square feet at end of period
(in '000)                                       6,799           6,828          6,799           6,828
International licensed/franchise stores
at end of
  period (1)                                      242             220            242             220




   (1) International licensed/franchise stores are not included in the
       consolidated store data or the total gross square feet calculation.




Our operations consist of 894 American Eagle retail stores, which include 182
Aerie side-by-side locations and one OFFLINE side-by-side location, 191 Aerie
stand-alone locations (including five OFFLINE stand-alone locations), and AEO
Direct. Additionally, there were three Todd Snyder stand-alone locations and two
Unsubscribed locations.

Non-GAAP Information

This results of operations section contains net income (loss) per diluted share
presented on an adjusted or non-GAAP basis, which is a non-GAAP financial
measure ("non-GAAP" or "adjusted"). This financial measure is not based on any
standardized methodology prescribed by U.S. generally accepted accounting
principles ("GAAP") and is not necessarily

                                       31

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comparable to similar measures presented by other companies. Non-GAAP
information is provided as a supplement to, not as a substitute for, or as
superior to, measures of financial performance prepared in accordance with GAAP.
We believe that this non-GAAP information is useful as an additional means for
investors to evaluate our operating performance, when reviewed in conjunction
with our GAAP consolidated financial statements, and provides a higher degree of
transparency. These amounts are not determined in accordance with GAAP and,
therefore, should not be used exclusively in evaluating our business and
operations. The table below reconciles the GAAP financial measure to the
non-GAAP financial measure discussed above.

                                                                 13 Weeks Ended
                                                           July 31,          August 1,
                                                             2021              2020
Net income (loss) per diluted share - GAAP Basis        $         0.58     $       (0.08 )
Add: Incremental COVID-19 related expenses and
Restructuring(1)                                                     -      

0.05

Add: Convertible Debt(2)                                          0.02      

0.03

Net income (loss) per diluted share - Adjusted or
Non-
  GAAP Basis                                            $         0.60     $        0.00

(1) 13 weeks ended August 1, 2020: $13.9 million of Incremental COVID-19

related expenses consisting of personal protective equipment and supplies

for our associates and customers and $0.7 million of corporate severance.

(2) Amortization of the non-cash discount on the Notes

Comparison of the 13 weeks ended July 31, 2021 to the 13 weeks ended August 1, 2020


Total Net Revenue

Total net revenue increased 35%, or $311 million, to a second quarter record
$1.194 billion compared to $883.5 million last year. As discussed above, the
COVID-19 pandemic negatively affected our financial results for the 13 weeks
ended August 1, 2020; however all of our stores have re-opened and we
experienced increased store traffic, transactions and transaction value, driving
a 73% increase in store revenue for the second quarter of Fiscal 2021. This was
partially offset by a 5% decline in AEO Direct revenue, reflecting the
anticipated channel shift associated with improved store traffic, as well as a
significant first quarter shipping back log last year, which resulted in revenue
related to these orders not being recognized until the second quarter last year.

American Eagle

Total net revenue for the 13 weeks ended July 31, 2021 for the American Eagle brand increased 35% to $845.9 million compared to $624.8 million for the 13 weeks ended August 1, 2020.

Aerie

Total net revenue for the 13 weeks ended July 31, 2021 for the Aerie brand increased 34% to $335.8 million compared to $251.5 million for the 13 weeks ended August 1, 2020.

Gross Profit


Gross profit increased $237.2 million, to $502.4 million compared to $265.2
million last year. Our gross margin percentage increased to 42.1% of revenue
from 30.0% of revenue last year. This quarter's gross margin reflected
significantly higher merchandise margins across brands, primarily due to higher
full-priced sales, lower promotions, and inventory optimization initiatives.

For the 13 weeks ended August 1, 2020, gross margin was significantly impacted
by disruptions related to COVID-19, which reflected a reduction in store revenue
and higher delivery and distribution center costs, primarily due to a strong
digital business and higher cost per shipment, partly offset by lower rent
expense and an increase in mark-up.

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There was $3.9 million and $4.5 million of share-based payment expense included
in gross profit for the 13 week periods ended July 31, 2021 and August 1, 2020,
respectively, comprised of both time- and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some
retailers include all costs related to their distribution network, as well as
design costs in cost of sales and others may exclude a portion of these costs
from cost of sales, including them in a line item such as selling, general and
administrative expenses. Refer to Note 2 to the Consolidated Financial
Statements for a description of our accounting policy regarding cost of sales,
including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses


Selling, general and administrative ("SG&A") expenses increased 31%, or $70.2
million to $293.9 million from $223.7 million last year. As a percentage of
total net revenue, SG&A expenses decreased 70 basis points to 24.6%, compared to
25.3% last year.

The 13 weeks ended July 31, 2021 reflected increased SG&A expenses primarily
related to the re-opening of our stores this year, including increased store
payroll and variable selling expenses, as well as increased advertising and
performance-based incentive compensation.

The 13 weeks ended August 1, 2020 were significantly impacted by disruptions
related to COVID-19, resulting in lower operating expenses due to store closures
and other cost reductions.

There was $5.1 million and $7.0 million of share-based payment expense included
in SG&A expenses for the 13 week periods ended July 31, 2021 and August 1, 2020,
respectively, comprised of both time and performance-based awards.

Impairment, Restructuring and COVID-19 Related Charges


There were no impairment, restructuring and COVID-19 related charges recorded
for the 13 weeks ended July 31, 2021. For the 13 weeks ended August 1, 2020,
impairment, restructuring and COVID-19 related charges were $14.6 million, or
1.7% as a percentage of total net revenue. These charges consisted of $13.9
million of incremental COVID-19 related expenses, including personal protective
equipment and supplies for our associates and customers and $0.7 million of
severance costs. There were no impairment charges for the 13 weeks ended August
1, 2020. For further information, refer to Note 13 to the Consolidated Financial
Statements.

Based on the uncertainty of the COVID-19 pandemic, we are unable to accurately
predict the ultimate impact that COVID-19 will have on our consolidated
operations going forward, including, among other things, the length of time that
such disruptions will continue and the impact of governmental regulations that
may be imposed in response to the COVID-19 pandemic. Accordingly, we may be
required to record further impairment and/or restructuring charges in future
periods.

Depreciation and Amortization Expense


Depreciation and amortization expense increased 3%, or $1.3 million, to $40.5
million for the 13 weeks ended July 31, 2021, compared to $39.1 million for the
13 weeks ended August 1, 2020. As a percentage of total net revenue,
depreciation and amortization expense was 3.4% for the 13 weeks ended July 31,
2021 compared to 4.4% for the 13 weeks ended August 1, 2020.

Interest Expense, Net


Interest expense, net increased $0.4 million to $8.9 million for the 13 weeks
ended July 31, 2021, compared to $8.5 million for the 13 weeks ended August 1,
2020. The increase in expense was primarily attributable to increased interest
expense related to our Notes and lower interest income.

Other (Income) Expense, Net


Other income, net was $1.4 million for the 13 weeks ended July 31, 2021,
compared to $1.6 million for the 13 weeks ended August 1, 2020. The decrease was
primarily attributable to foreign currency fluctuations and changes in other
non-operating items.

                                       33

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Provision for Income Taxes


The provision for income taxes is based on the current estimate of the annual
effective income tax rate and is adjusted as necessary for discrete quarterly
events. The effective income tax rate for the 13 weeks ended July 31, 2021 was
24.3% compared to the effective tax benefit rate of 28.5% for the 13 weeks ended
August 1, 2020.

The change in the effective tax rate, as compared to the prior period, is
primarily due to benefits recognized as a result of the passage of the CARES
Act, which occurred during the 13 weeks ended August 1, 2020. The CARES Act
allowed net operating losses generated within tax year 2020 to be carried back
to periods in which the U.S. federal corporate income tax rate was 35%, as
opposed to the current U.S. federal corporate income tax rate of 21%, which
resulted in a higher benefit rate applicable to the 13 weeks ended August 1,
2020. The effective tax rate for the current period was also impacted by higher
excess tax benefits on share-based payments.

Net Income (Loss)


Net income increased $135.3 million to $121.5 million for the 13 weeks ended
July 31, 2021, or 10.2% as a percentage of total net revenue, as compared to a
net loss of $(13.8) million, or (1.6%) as a percentage of total net revenue for
the 13 weeks ended August 1, 2020.

Net income per share increased to $0.58 per diluted share for the 13 weeks ended
July 31, 2021, which included $0.02 of amortization of the non-cash discount on
the Notes, compared to a net loss of $0.08 per diluted share, including $0.05 of
impairment, restructuring and COVID-19 related charges, and $0.03 of
amortization of the non-cash discount on the Notes, for the 13 weeks ended
August 1, 2020. The change in net income (loss) was attributable to the factors
noted above.

Comparison of the 26 weeks ended July 31, 2021 to the 26 weeks ended August 1, 2020


Total Net Revenue

Total net revenue increased 55%, or $793.6 million, to $2.229 billion compared
to $1.435 million last year. The COVID-19 pandemic and the associated closures
of our retail stores beginning March 17, 2020 negatively affected our financial
results for the 26 weeks ended August 1, 2020.

American Eagle

Total net revenue for the 26 weeks ended July 31, 2021 for the American Eagle brand was $1.574 billion compared to $1.015 million for the 26 weeks ended August 1, 2020.

Aerie

Total net revenue for the 26 weeks ended July 31, 2021 for the Aerie brand was $633.3 million compared to $406.5 million for the 26 weeks ended August 1, 2020.

Gross Profit

Gross profit increased $645.1 million to $938.6 million compared to $293.5 million last year. Our gross margin percentage increased to 42.1% of revenue from 20.5% of revenue last year.


The 26 weeks ended August 1, 2020 were significantly impacted by disruptions
related to COVID-19, which resulted in a decline in revenue from retail store
closures, higher markdowns and promotions to clear through spring and summer
merchandise, and inventory provisions.

This year's gross margin reflected significantly higher merchandise margins
across brands, primarily due to higher full-priced sales, lower promotions, and
inventory optimization initiatives. This was partly offset by higher delivery
and distribution center costs, due to increased digital mix and higher shipment
costs, as well as increased performance-based incentive compensation.

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There was $8.2 million and $7.1 million of share-based payment expense included
in gross profit for the 26 week periods ended July 31, 2021 and August 1, 2020,
respectively, comprised of both time- and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some
retailers include all costs related to their distribution network, as well as
design costs in cost of sales and others may exclude a portion of these costs
from cost of sales, including them in a line item such as selling, general and
administrative expenses. Refer to Note 2 to the Consolidated Financial
Statements for a description of our accounting policy regarding cost of sales,
including certain buying, occupancy and warehousing expenses.

Selling, General and Administrative Expenses


Selling, general and administrative ("SG&A") expenses increased 36%, or $146.5
million, to $558.4 million from $411.9 million last year. As a percentage of
total net revenue, SG&A expenses decreased 360 basis points to 25.1%, compared
to 28.7% last year.

The 26 weeks ended July 31, 2021 reflected increased SG&A expenses primarily
related to the re-opening of our stores this year, including increased store
payroll and variable selling expenses, as well as increased advertising and
higher levels of performance-based incentive compensation.

The 26 weeks ended August 1, 2020 were significantly impacted by the disruption
related to COVID-19, including the impact of lower store salaries from furloughs
that took effect in early April 2020 related to the retail store closures.

There was $13.4 million and $8.5 million of share-based payment expense included in SG&A expenses for the periods ended July 31, 2021 and August 1, 2020, respectively, comprised of both time- and performance-based awards.

Impairment, Restructuring and COVID-19 Related Charges


There were no impairment, restructuring and COVID-19 related charges recorded
for the 26 weeks ended July 31, 2021. Impairment, restructuring and COVID-19
related charges were $170.2 million, or 11.9% as a percentage of total net
revenue, for the 26 weeks ended August 1, 2020. During the 26 weeks ended August
1, 2020, the Company recorded asset impairment charges of $153.6
million. Included in this amount are retail store impairment charges of $109.6
million, of which $84.1 million relates to operating lease ROU assets and $25.5
million relates to store property and equipment (fixtures and equipment and
leasehold improvements). We also recorded $26.0 million of impairment related
charges to certain corporate property and equipment, as well as $18.0 million of
impairment charges related to certain cost and equity method investments.
Additionally, there was $13.9 million of incremental COVID-19 related expenses
and $2.7 million of severance costs. For further information, refer to Note 13
to the Consolidated Financial Statements.

Based on the uncertainty of the COVID-19 pandemic, we are unable to accurately
predict the ultimate impact that COVID-19 will have on our consolidated
operations going forward, including, among other things, the length of time that
such disruptions will continue and the impact of governmental regulations that
may be imposed in response to the COVID-19 pandemic. Accordingly, we may be
required to record further impairment and/or restructuring charges in future
periods.

Depreciation and Amortization Expense


Depreciation and amortization expense decreased 4%, or $3.1 million, to $78.7
million for the 26 weeks ended July 31, 2021, compared to $81.8 million for the
26 weeks ended August 1, 2020. As a percentage of total net revenue,
depreciation and amortization expense was 3.5% for the 26 weeks ended July 31,
2021 compared to 5.7% for the 26 weeks ended August 1, 2020. The decrease in
expense was primarily attributable to asset impairment recorded in Fiscal 2020
and lower capital spending.

Interest Expense, Net

Interest expense, net increased $8.7 million to $17.4 million for the 26 weeks
ended July 31, 2021, compared to $8.7 million for the 26 weeks ended August 1,
2020. The increase in expense was primarily attributable to increased interest
expense related to our Notes and lower interest income, partially offset by no
interest expense incurred for borrowings on our revolving credit facilities
during the 26 weeks ended July 31, 2021.

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Other (Income) Expense, Net


Other income, net was $3.2 million for the 26 weeks ended July 31, 2021. Other
expense, net was $1.4 million for the 26 weeks ended August 1, 2020. The
increase was primarily attributable to foreign currency fluctuations and changes
in other non-operating items.

Provision for Income Taxes


The provision for income taxes is based on the current estimate of the annual
effective income tax rate and is adjusted as necessary for discrete quarterly
events. The effective income tax rate for the 26 weeks ended July 31, 2021 was
24.5% compared to the effective tax benefit rate of 28.8% for the 26 weeks ended
August 1, 2020.

The change in the effective tax rate, as compared to the prior period, is
primarily due to benefits recognized as a result of the passage of the CARES
Act, which occurred during the 26 weeks ended August 1, 2020. The CARES Act
allowed net operating losses generated within tax year 2020 to be carried back
to periods in which the U.S. federal corporate income tax rate was 35%, as
opposed to the current U.S. federal corporate income tax rate of 21%, which
resulted in a higher benefit rate applicable to the 26 weeks ended August 1,
2020. The effective tax rate for the current period was also impacted by higher
excess tax benefits on share-based payments.

Net Income (Loss)


Net income increased $487.9 million to $217.0 million for the 26 weeks ended
July 31, 2021, or 9.7% as a percentage of total net revenue, as compared to a
net loss of $(270.9) million, or (18.9%) as a percentage of total net revenue
for the 26 weeks ended August 1, 2020.

Net income per diluted share increased to $1.04 for the 26 weeks ended July 31,
2021, which included $0.03 of amortization of the non-cash discount on the
Notes, compared to a net loss of $1.63 per diluted share, including $0.76 of
impairment, restructuring and COVID-19 related charges and $0.02 of amortization
of the non-cash discount on the Notes for the 26 weeks ended August 1, 2020. The
change in net income (loss) was attributable to the factors noted above.

International Operations


We have agreements with multiple third-party operators to expand our brands
internationally. Through these agreements, a series of franchised, licensed, or
other brand-dedicated American Eagle stores have opened and will continue to
open in Asia, Europe, India, Latin America, and the Middle East. These
agreements do not involve a significant capital investment or operational
involvement from us. We continue to increase the number of countries in which we
enter into these types of arrangements as part of our strategy to expand
internationally. As of July 31, 2021, we had 242 stores operated by our
third-party operators in 29 countries. International third-party operated stores
are not included in the consolidated store data or the total gross square feet
calculation.

As of July 31, 2021, we had 92 Company-owned stores in Canada, 55 in Mexico, 10 in Hong Kong and 7 in Puerto Rico.

Fair Value Measurements


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.

• Level 2 - Inputs other than Level 1 that are observable, either directly or

indirectly.

• Level 3 - Unobservable inputs that are supported by little or no market

activity and that are significant to the fair value of the assets or

liabilities.



As of July 31, 2021, we held certain assets that are required to be measured at
fair value on a recurring basis. These include cash and cash equivalents and
short-term investments.

                                       36

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In accordance with ASC 820, the following table represents the fair value hierarchy of our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of July 31, 2021:





                                                                     Fair

Value Measurements at July 31, 2021

                                                                        Quoted Market
                                                                       Prices in Active
                                                                         Markets for                                    Significant
                                                                          Identical             Significant Other       Unobservable
                                                                            Assets              Observable Inputs          Inputs
(In thousands)                                 Carrying Amount            (Level 1)                 (Level 2)            (Level 3)
Cash and cash
  equivalents:
Cash                                          $         498,211       $          498,211       $                 -     $            -
Interest bearing
  deposits                                              275,783                  275,783                         -                  -
Total cash and cash
  equivalents                                           773,994                  773,994                         -                  -
Short-term investments
Certificates of Deposit                                  50,000                   50,000                         -                  -
Total short-term
  investments                                            50,000                   50,000
Total                                         $         823,994       $          823,994                         -                  -


The fair value of the Notes is not required to be measured at fair value on a
recurring basis. Upon issuance, the fair value of the Notes was measured using
two approaches that consider market related conditions, including market
benchmark rates and a secondary market quoted price, and is therefore within
Level 2 of the fair value hierarchy.

Liquidity and Capital Resources


Our uses of cash have historically been for working capital, the construction of
new stores and remodeling of existing stores, information technology and
e-commerce upgrades and investments, distribution center improvements and
expansion, and the return of value to shareholders through the repurchase of
common stock and the payment of dividends. Additionally, our uses of cash have
included the development of the Aerie brand, investments in technology and
omni-channel capabilities, and our international expansion efforts.

Historically, our uses of cash have been funded with cash flow from operations
and existing cash on hand. We also maintain an asset-based revolving credit
facility that allows us to borrow up to $400 million, which will expire in
January 2024. In April 2020, the Company issued $415 million aggregate principal
amount of 3.75% convertible senior notes due in 2025 in a private placement to
qualified institutional buyers. Interest is payable semi-annually. Refer to Note
8 to the Consolidated Financial Statements for additional information regarding
our long-term debt.

As of July 31, 2021, we had approximately $824.0 million in cash and cash
equivalents and short-term investments, which includes the proceeds from the
Notes. We expect to be able to fund our future cash requirements through current
cash holdings and available liquidity.

The following sets forth certain measures of our liquidity:




                                 July 31,       January 30,      August 1,
                                   2021            2021             2020

Working Capital (in thousands) $ 832,365 $ 664,161 $ 741,953 Current Ratio

                         2.08              1.77           1.88




Working capital increased $168.2 million compared to January 30, 2021 and $90.4
million compared to last year. The $90.4 million increase in our working
capital, compared to August 1, 2020, is driven by an $82.3 million increase in
inventory, a $73.8 million decrease in accounts payable, a $60.4 million
decrease in current operating lease liabilities, a $48.1 million increase in
accounts receivable, and a $22.8 million decrease due to dividends payable,
offset by a $74.8 million decrease

                                       37

--------------------------------------------------------------------------------

in cash and short-term investments, a $67.1 million increase in accrued compensation, and a $36.4 million decrease in prepaid expenses.

Cash Flows provided by (used for) Operating Activities


Net cash provided by operating activities totaled $121.9 million for the 26
weeks ended July 31, 2021, compared to net cash used for operating activities of
($36.4) million for the 26 weeks ended August 1, 2020. Our primary outflow for
the 26 weeks ended July 31, 2021 was for the payment of operational costs. For
the period ended August 1, 2020, our major source of cash from operations was
merchandise sales and our primary outflow of cash for operations was for the
payment of operational costs.

Cash Flows used for Investing Activities


Net cash used for investing activities totaled $140.4 million for the 26 weeks
ended July 31, 2021, compared to net cash used for investing activities of $6.8
million for the 26 weeks ended August 1, 2020. Investing activities for the 26
weeks ended July 31, 2021 primarily consisted of $86.2 million of capital
expenditures for property and equipment and $50.0 million of net short-term
investment purchases. Investing activities for the 26 weeks ended August 1, 2020
primarily included $61.4 million of capital expenditures for property and
equipment, partially offset by $55.0 million of net short-term investment
sales.

Cash Flows (used for) provided by Financing Activities


Net cash used for financing activities totaled $58.1 million for the 26 weeks
ended July 31, 2021, compared to net cash provided by financing activities of
$580.2 million for the 26 weeks ended August 1, 2020. Cash used for financing
activities for the 26 weeks ended July 31, 2021 consisted primarily of $53.2
million for cash dividends paid at quarterly rates of $0.1375 and $0.18, for the
13 weeks ended May 2, 2021 and July 31, 2021, respectively, and $17.5 million
for the repurchase of common stock from employees for the payment of taxes in
connection with vesting of share-based payments, partially offset by $13.1
million of proceeds from stock option exercises.

Cash provided by financing activities for the 26 weeks ended August 1, 2020
consisted primarily of $406.1 million of net proceeds from the issuance of the
Notes and the $200.0 million of borrowings on our Credit Facilities, net of a
$130.0 million pay-down on the Credit Facility during the 13 weeks ended August
1, 2020. This was partially offset by $20.0 million used for purchases of 1.7
million shares of common stock under publicly-announced programs in early March
2020, and $5.2 million for the repurchase of common stock from employees for the
payment of taxes in connection with the vesting of share-based payments. We
borrowed on our Credit Facilities and issued the Notes to strengthen our cash
position and provide us with additional financial flexibility during the ongoing
COVID-19 pandemic.

Credit Facilities

In January 2019, we entered into a Credit Agreement for five-year, syndicated,
asset-based revolving Credit Facilities. The Credit Agreement provides senior
secured revolving credit for loans and letters of credit up to $400 million,
subject to customary borrowing base limitations. The Credit Facilities expire
January 30, 2024.

All obligations under the Credit Facilities are unconditionally guaranteed by
certain subsidiaries. The obligations under the Credit Agreement are secured by
a first-priority security interest in certain working capital assets of the
borrowers and guarantors, consisting primarily of cash, receivables, inventory,
and certain other assets and have been further secured by first-priority
mortgages on certain real property.

As of July 31, 2021, the Company was in compliance with the terms of the Credit
Agreement and had $7.9 million outstanding in stand-by letters of credit. No
loans were outstanding under the Credit Agreement as of July 31, 2021.

Capital Expenditures for Property and Equipment


Capital expenditures for the 26 weeks ended July 31, 2021 were $86.2 million,
and included $46.6 million related to investments in our stores, including 20
new AEO stores (7 American Eagle stores, 12 Aerie stand-alone stores, and one
Todd Snyder store), eight remodeled and refurbished stores, and fixtures and
visual investments. Additionally, we continued to support our infrastructure
growth by investing in information technology initiatives ($25.9 million),
e-commerce ($6.3 million), and other home office projects ($7.4 million).

                                       38

--------------------------------------------------------------------------------

For Fiscal 2021, we expect capital expenditures to be in the range of $250 million to $275 million related to the continued support of our expansion efforts, stores, information technology upgrades to support growth, and investments in e-commerce. We expect to be able to fund our capital expenditures through current cash holdings and cash generated from operations.

Stock Repurchases


During Fiscal 2019, our Board authorized the repurchase of 30.0 million shares
of common stock under a new share repurchase program, which expires on February
3, 2024, bringing our total share repurchases authorization to 30.0 million
shares.

In Fiscal 2020, to preserve cash liquidity in response to the uncertainty
created by COVID-19, the Company suspended its publicly-announced share
repurchase program. The Company unsuspended its share repurchase program at the
beginning of Fiscal 2021, but did not repurchase any shares under this program
during the 26 weeks ended July 31, 2021. In early 2020, prior to the suspension
of our share repurchase program, we repurchased 1.7 million shares for $20.0
million, at a weighted average price of $11.63 per share.

During the 26 weeks ended July 31, 2021 and August 1, 2020, we repurchased
approximately 0.6 million and 0.4 million shares, respectively, from certain
employees at market prices totaling $17.5 million and $5.2 million,
respectively.  These shares were repurchased for the payment of taxes, in
connection with the vesting of share-based payments, as permitted under our
equity incentive plans. The aforementioned repurchased shares have been recorded
as treasury stock.

Dividends

During the 13 weeks ended July 31, 2021, our Board of Directors ("Board") raised
our annual dividend rate from $0.55 per share ($0.1375 per share on a quarterly
basis) to $0.72 per share ($0.18 per share on a quarterly basis), a 31%
increase. Additionally, our Board declared a quarterly cash dividend of $0.18
per share on June 3, 2021, which was paid on July 23, 2021.

The Company maintains the right to defer the record and payment dates of its
dividends, depending upon, among other factors, the progression of the COVID-19
pandemic, business performance, and the macroeconomic environment. The payment
of future dividends is at the discretion of our Board and is based on future
earnings, cash flow, financial condition, capital requirements, changes in U.S.
taxation, and other relevant factors.

Critical Accounting Policies and Estimates


Our critical accounting policies and estimates are described in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and in the Notes to our Consolidated Financial Statements for the
year ended January 30, 2021 contained in our Fiscal 2020 Form 10-K. Any new
accounting policies or updates to existing accounting policies as a result of
new accounting pronouncements have been discussed in the Notes to the
Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The
application of our critical accounting policies and estimates may require our
management to make judgments and estimates about the amounts reflected in the
Consolidated Financial Statements. Our management uses historical experience and
all available information to make these estimates and judgments, and different
amounts could be reported using different assumptions and estimates.

© Edgar Online, source Glimpses

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