AMERICAN EAGLE OUTFITTERS, INC. This section of this Form 10-K generally discusses Fiscal 2020 and Fiscal 2019 and year-to-year comparisons between 2020 and 2019. Discussions of Fiscal 2018 and year-to-year comparisons between Fiscal 2019 and Fiscal 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II. Item 7 of our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 .
Executive Overview and Key Performance Indicators
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 15. "Segment Reporting," of the Notes to the Consolidated Financial Statements included herein for additional information.
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 COVID-19, we have not disclosed comparable sales for Fiscal 2020, as Fiscal 2020 is not comparable with prior periods. A store is included in comparable sales in its thirteenth month of operation. When stores have a gross square footage increase of 25% or greater due to a remodel, they are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel. Sales from company-owned stores, as well as sales from AEO Direct, are included in total comparable sales. Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct. AEO Direct sales are included in the individual American Eagle and Aerie brand comparable sales metric for the following reasons:
• Our approach to customer engagement is "omni-channel," which provides a
seamless customer experience through both traditional and non-traditional
channels, including four wall store locations, web, mobile/tablet devices and
apps, social networks, email, in-store displays and kiosks. Additionally, we
fulfill online orders at stores through our buy online, ship from store
capability, maximizing store inventory exposure to digital traffic and accept
digital returns in stores; and
• Shopping behavior has continued to evolve across multiple channels that work
in tandem to meet customer needs. Management believes that presenting a brand
level performance metric that includes all channels (i.e., stores and AEO
Direct) to be the most appropriate given customer behavior.
Our management considers comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including store payroll, store supplies, rent, etc. Comparable sales also have a direct impact on our total net revenue, cash, and working capital. 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 within this 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).
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• 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.
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 results of operations.
Operating Income (Loss) - Our management views operating income as a key indicator of our performance. The key drivers of operating (loss) 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 COVID-19, our operating income may not be comparable this year versus last year. 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 spread of COVID-19, which was declared a pandemic by theWorld Health Organization inMarch 2020 , caused state and municipal public officials to mandate jurisdiction-wide curfews, including "shelter-in-place" and closures of most non-essential businesses, as well as other measures to mitigate the spread of the virus. The COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis. See Part I, Item 1A. Risk Factors herein for additional discussion regarding risks to our business associated with the COVID-19 pandemic. Commencing in earlyMarch 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 onMarch 17, 2020 ; however, we continued to operate our digital business. These actions significantly impacted our consolidated results for Fiscal 2020. BeginningMay 2, 2020 , we started to re-open stores and call back furloughed employees where state and local governments had lifted stay-at-home orders. As ofJanuary 30, 2021 , nearly all of our stores have re-opened and remain open. However, our consolidated results of operations continued to be significantly impacted by reduced customer traffic in re-opened store locations, partially offset by continued growth in e-commerce. Since the first day that stores were closed to the public, our digital sales growth has accelerated, significantly exceeding our expectations. In order to support online demand and utilize in-store inventory, we continued to leverage our store network for buy-online/ship-from-store capabilities, where possible. Online sales represented 45% of our revenues for Fiscal 2020. Despite our strength in digital sales, we have historically generated the majority of our revenue through stores. As a result, we do not believe that our results for Fiscal 2020 are directly comparable to the same period in Fiscal 2019. The safety and health of our associates and customers remains a paramount concern. InMarch 2020 , we hired a medical consultant to advise us on health and safety and to ensure we are followingCenters for Disease Control guidance and market practice for associate and customer in all of our locations. We instituted a work-from-home plan inmid-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. 28 -------------------------------------------------------------------------------- Further, we continue to take precautionary measures and adjust our operational needs due to the impact of COVID-19. SinceMarch 2020 , the Company has taken the following actions to preserve our financial strength:
• the deferred payment of the first quarter Fiscal 2020 cash dividend and
suspension of our second, third, and fourth quarter dividends as well as our
share repurchase program;
• temporary furloughs of store, field and corporate associates that began on
duration of store closures;
• reductions to operating expenses, which included suspended merit increases
for associates, a hiring freeze and other cost saving initiatives;
• a convertible notes issuance and credit facility borrowings;
• cuts to inventory receipts to align with lower demand due to store closures;
and
• planned reductions to capital expenditures across stores, information
technology and other projects.
In addition, we have had productive discussions with our vendors to reduce purchases and extend payment terms, as well as with our landlords regarding the extension of payment terms and rent concessions.
As ofJanuary 30, 2021 , we had approximately$850.5 million in cash and cash equivalents, which includes the proceeds from our convertible notes issuance, discussed in greater detail below and in Note 9 to the Consolidated Financial Statements. We expect to be able to fund our future cash requirements through current cash holdings and available liquidity. Taking into account the measures described above, we believe that our current liquidity would enable us to continue operations beyond Fiscal 2021, if necessary, even if the majority of our retail locations were forced to close during the duration of that period. The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we are unable to accurately predict the impact that the COVID-19 pandemic will have on our consolidated operations and financial results going forward. We are monitoring the ongoing developments as the COVID-19 vaccines are being distributed and administered, and 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 this Form 10-K.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"), which require us to make estimates and assumptions that may affect the reported financial condition and results of operations should actual results differ from these estimates and assumptions. We base our estimates and assumptions on the best available information and believe them to be reasonable for the circumstances. We believe that of our significant accounting policies, the following involve a higher degree of judgment and complexity. Refer to Note 2 to the Consolidated Financial Statements for a complete discussion of our significant accounting policies. Management has reviewed these critical accounting policies and estimates with the Audit Committee of our Board of Directors. Revenue Recognition. In accordance with Accounting Standard Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"), we record revenue 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 total net revenue. 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 total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined using historical average return percentages. Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, 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 total net revenue. 29 --------------------------------------------------------------------------------
The Company recognizes royalty revenue generated from its license or franchise agreements based upon a percentage of merchandise sales by the licensee/franchisee. This revenue is recorded as a component of total net revenue when earned.
Merchandise Inventory. Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company. We review our inventory in order to identify slow-moving merchandise and generally use markdowns to clear merchandise. Additionally, we estimate a markdown reserve for future planned markdowns related to current inventory. If 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, additional markdowns may be necessary. These markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. We estimate an inventory shrinkage reserve for anticipated losses for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve is calculated based on historical percentages and can be affected by changes in merchandise mix and changes in actual shrinkage trends. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our inventory shrinkage reserve. However, if actual physical inventory losses differ significantly from our estimate, our operating results could be adversely affected.
During Fiscal 2020, the Company focused on inventory optimization, which remains an ongoing priority.
Asset Impairment. In accordance with ASC 360, Property, Plant, and Equipment
("ASC 360"), we evaluate the value of leasehold improvements, store fixtures,
and operating lease right-of-use assets associated with retail stores. We
evaluate long-lived assets for impairment at the individual retail 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
projected undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts. 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 (loss) income.
Our impairment loss calculations require management to make assumptions and to
apply judgment to estimate future cash flows and asset fair values. The
significant assumption used in our projected undiscounted cash flows analyses is
revenue growth rates. Additionally, significant assumptions utilized in our fair
value analyses include the aforementioned assumption, as well as market
participant real estate assumptions and discount rate. We do not believe there
is a reasonable likelihood that there will be a material change in the estimates
or assumptions we use to calculate long-lived asset impairment losses. However,
if actual results are not consistent with our estimates and assumptions, our
operating results could be adversely affected.
In the first and fourth quarters of Fiscal 2020, developments related to the
COVID-19 pandemic, among other things, triggered the need to perform impairment
assessments of our long-lived assets, goodwill and other intangible assets. See
"Comparison of Fiscal 2020 to Fiscal 2019 - Impairment, Restructuring and
COVID-19 Related Charges" below, as well as Note 16 to the Consolidated
Financial Statements for more information.
Share-Based Payments. We account for share-based payments in accordance with ASC
718, Compensation - Stock Compensation ("ASC 718"). To determine the fair value
of our stock option awards, we use the Black-Scholes option-pricing model, which
requires management to apply judgment and make assumptions to determine the fair
value of our awards. These assumptions include estimating the length of time
employees will retain their vested stock options before exercising them (the
"expected term") and the estimated volatility of the price of our common stock
over the expected term.
We calculate a weighted-average expected term based on historical experience.
Expected stock price volatility is based on historical volatility of our common
stock. Changes in these assumptions can materially affect the estimate of the
fair value of our share-based payments and the related amount recognized in our
Consolidated Financial Statements.
Income Taxes. We calculate 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 our level and composition of earnings, tax laws
or the deferred tax valuation allowance, as well as the results of tax audits,
may materially impact the effective income tax rate.
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We evaluate our 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. We
believe that our 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 (loss).
Results of Operations
Overview
Our business is affected by the pattern of seasonality common to most retail
apparel businesses. Additionally, during Fiscal 2020, our consolidated results
of operations were materially impacted by the effects of COVID-19.
Fiscal 2020 represented a challenging year; however, revenue strengthened as
stores successfully reopened, the digital channel continued to accelerate, and
Aerie posted strong growth. Operational disciplines, inventory optimization and
reduced spending resulted in sequential improvement in operating earnings and
positive cash flow, fortifying our financial position, ending the fiscal year
with $850.5 million in cash and cash equivalents. The results for the current
and prior periods are not necessarily indicative of future financial results.
The following table shows, for the periods indicated, the percentage relationship to total net revenue of the listed items included in our Consolidated Statements of Operations.
For the Fiscal Years Ended
January 30 February 1, February 2,
2021 2020 2019
Total net revenue 100.0 % 100.0 % 100.0 %
Cost of sales, including certain buying,
occupancy
and warehousing expenses 69.5 64.7 63.1
Gross profit 30.5 35.3 36.9
Selling, general and administrative
expenses 26.0 23.9 24.3
Impairment, restructuring and COVID-19
related charges 7.4 1.9 0.0
Depreciation and amortization expense 4.3 4.1 4.2
Operating (loss) income (7.2 ) 5.4 8.4
Interest expense (income), net 0.7 (0.2 ) (0.1 )
Other income, net (0.1 ) (0.1 ) (0.1 )
(Loss) income before income taxes (7.8 ) 5.7 8.6
(Benefit) provision for income taxes (2.2 ) 1.3 2.1
Net (loss) income (5.6 ) % 4.4 % 6.5 %
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Non-GAAP Information
This results of operations section contains net income per diluted share
presented on a non-GAAP basis, which is a non-GAAP financial measure ("non-GAAP"
or "adjusted"), comprised of earnings per share information excluding certain
items. This financial measure is not based on any standardized methodology
prescribed by U.S. generally accepted accounting principles ("GAAP") and is not
necessarily 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 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.
Earnings per Share
For the Fiscal
Year Ended
January 30,
2021
Net loss per diluted share - GAAP Basis $ (1.26 ) Add: Impairment, restructuring and COVID-19 related charges (1)
1.20
Add: Convertible debt (2)
0.06
Net income per diluted share - Non-GAAP Basis $
(0.00 )
(1)
-
-
-
severance
(2) Amortization of the non-cash discount on the Company's convertible notes
Earnings per Share
For the Fiscal
Year Ended
February 1,
2020
Net income per diluted share - GAAP Basis $ 1.12
Add: Impairment and restructuring (1)
0.36
Net income per diluted share - Non-GAAP Basis $
1.48
(1)
-
assets and a
-
severance,
transition costs in
to Company-owned and operated stores
Comparison of Fiscal 2020 to Fiscal 2019
Total Net Revenue
Total net revenue for Fiscal 2020 decreased 13% to$3.759 billion compared to$4.308 billion for Fiscal 2019. Included in total net revenue during Fiscal 2019 is$40.0 million recognized for license royalties from a third-party operator of AE stores inJapan . The COVID-19 pandemic and the associated temporary closures of our retail stores sinceMarch 17, 2020 have negatively affected our consolidated financial results for Fiscal 2020. As ofJanuary 30, 2021 , nearly all of our stores have opened and remain opened. American Eagle 32
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Total net revenue for Fiscal 2020 for the American Eagle brand was
Aerie
Total net revenue for Fiscal 2020 for the Aerie brand was
Gross Profit
Gross profit decreased 25% to$1.148 billion for Fiscal 2020 from$1.522 billion for Fiscal 2019. The gross profit margin declined 480 basis points to 30.5% of total net revenue. This reflected the decline in revenue from temporary retail store closures and the impact of fixed buying, occupancy and warehousing costs as a result of the revenue decline due to the impact of the COVID-19 pandemic on our business.
There was
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 expenses decreased 5% to$977.3 million for Fiscal 2020, compared to$1.029 billion for Fiscal 2019. As a percentage of total net revenue, selling, general, and administrative expenses increased 210 basis points to 26.0%, compared to 23.9% for Fiscal 2019. The reduction in expense for Fiscal 2020 was primarily the result of lower store payroll and selling expense due to COVID-19 related closures, as well as discretionary spend reductions, partially offset by incremental corporate compensation costs.
There was
Impairment, Restructuring and COVID-19 Related Charges
In Fiscal 2020, total impairment, restructuring and COVID-19 related charges were$279.8 million . We recorded asset impairment charges of$249.2 million . Included in this amount are retail store impairment charges of$203.2 million , of which$154.8 million relates to operating lease ROU assets and$48.4 million relates to store property and equipment (fixtures and equipment and leasehold improvements). We also recorded$28.0 million of impairment charges related to certain corporate property and equipment as well as$18.0 million of impairment charges of certain cost and equity method investments.
Additionally, we recorded
In Fiscal 2019, impairment and restructuring charges were$80.5 million . We recorded asset impairment charges of$64.5 million on the assets of 20 retail stores. Of the total,$39.5 million related to the impairment of leasehold improvements and store fixtures, and$25.0 million related to the impairment of operating lease ROU assets. We also concluded that certain goodwill was impaired resulting in a$1.7 million charge. Additionally, we recorded$6.7 million for corporate and field severance,$4.2 million of charges related to the planned exit of a joint business venture,$1.8 million related toJapan market transition costs, and$1.5 million ofChina severance and closure costs related to Company-owned stores.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 9% to$162.4 million for Fiscal 2020 from$179.1 million for Fiscal 2019, driven by asset impairments taken in Fiscal 2019 and 2020, as well as lower capital spending in Fiscal 2020. As a percentage of total net revenue, depreciation and amortization expense increased 20 basis points to 4.3% from 4.1% in Fiscal 2019. 33 --------------------------------------------------------------------------------
Interest Expense (Income), Net
Interest expense was$24.6 million for Fiscal 2020, compared to interest income of$6.2 million for Fiscal 2019. The increase in expense was primarily attributable to interest expense related to our convertible notes issued this year and credit facility borrowings.
Other Income, Net
Other income was
Income Taxes
The effective income tax benefit rate is 28.4% for Fiscal 2020 compared to an effective tax rate of 22.0% for Fiscal 2019. The effective income tax benefit rate this year is primarily a result of the provisions of the Coronavirus Aid, Relief, and Economic Security Act, (the "CARES Act") which permit the carry back of current year losses to a tax year where theU.S. federal corporate income tax rate was 35%, offset by an incremental rate increase on the revaluation of deferred tax assets and liabilities for current year activity and an increase to the valuation allowances recorded in the current year. Our effective income tax rate is also dependent upon the overall mix of earnings in jurisdictions with different tax rates. Refer to Notes 2 and 14 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.
Net (Loss) Income
Net loss was$209.3 million for Fiscal 2020 compared to net income of$191.3 million for Fiscal 2019. The change in net (loss) income was attributable to the factors described above. As a percentage of total net revenue, net (loss) income was (5.6%) and 4.4% for Fiscal 2020 and Fiscal 2019, respectively. Net loss per diluted share was ($1.26 ), which included$279.8 million ($1.20 per diluted share) of pre-tax impairment, restructuring, and COVID-19 related charges and$12.3 million ($0.06 per diluted share) of pre-tax non-cash interest related to our convertible notes.
Net income per diluted share for Fiscal 2019 was
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. The rapid expansion of the COVID-19 global pandemic, the related economic impacts, and the closure of our retail stores, resulted in a decline in net sales and earnings for Fiscal 2020, which had a corresponding impact on our liquidity and uses of cash. 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 inJanuary 2024 . InApril 2020 , we issued$415 million aggregate principal amount of convertible senior notes due in 2025. We have outstanding contractual obligations of$1.7 billion undiscounted related to our operating leases, of which a total of$363 million will be paid in 2021. As discussed in the overview, we are focused on preserving our liquidity and managing our cash flows through certain actions to enhance our ability to meet short-term liquidity needs. We have taken a series of actions to reinforce our liquidity and financial flexibility, including:
• the deferred payment of the first quarter Fiscal 2020 cash dividend and
suspension of our second, third, and fourth quarter dividends as well as our
share repurchase program;
• temporary furloughs of store, field, and corporate associates that began on
duration of store closures;
• reductions to operating expenses, which include suspended merit increases for
associates, a hiring freeze, and other cost-saving initiatives;
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• a convertible notes issuance and credit facility borrowings;
• cuts to inventory receipts to align with lower demand due to store closures;
and
• planned reductions to capital expenditures across stores, information
technology and other projects.
As ofJanuary 30, 2021 , we had approximately$850.5 million in cash and cash equivalents, which includes the proceeds from our convertible notes. InApril 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 9 to the Consolidated Financial Statements for additional information regarding our long-term debt. 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:
January 30 February 1, 2021 2020
Working Capital (in thousands)
1.77 1.39
Working capital as of January 30, 2021 increased $368.0 million compared to
February 1, 2020 . The largest increase came from increased cash and short-term
investments of $433.5 million due primarily to the $406.1 million proceeds from
our convertible notes issuance. Compared to February 1, 2020 , the remaining
change was primarily due to a $55.0 million increase in prepaid expenses and a
$27.0 million increase in accounts receivable, offset by a $40.8 million
decrease in merchandise inventory and a $98.7 million increase in accrued
compensation and payroll taxes.
Cash Flows Provided by Operating Activities
Net cash provided by operating activities totaled$202.5 million during Fiscal 2020, compared to$415.4 million during Fiscal 2019. For both periods, our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs.
Cash Flows Used for Investing Activities
Investing activities for Fiscal 2020 included$128.0 million in capital expenditures for property and equipment partially offset by$55.0 million of net short-term investment sales. Investing activities for Fiscal 2019 included$210.4 million in capital expenditures for property and equipment offset by$37.1 million of net short-term investment sales. For further information on capital expenditures, refer to the Capital Expenditures for Property and Equipment caption below.
Cash Flows Provided by (Used for) Financing Activities
During Fiscal 2020, cash provided by financing activities primarily consisted of$406.1 million of net proceeds from our revolving line of credit and the issuance of convertible notes. This was partially offset by$22.9 million for the payment of dividends,$20.0 million used for purchases of 1.7 million shares of common stock under publicly-announced programs in earlyMarch 2020 , and$5.4 million for the repurchase of common stock from employees for the payment of taxes in connection with the vesting of share-based payments. Early in Fiscal 2020, we borrowed on our revolving line of credit and issued convertible notes to strengthen our cash position and provide us with additional financial flexibility during the remainder of the ongoing COVID-19 pandemic. ByAugust 2020 , we had repaid the$330.0 million in revolving line of credit borrowings. During Fiscal 2019, cash used for financing activities primarily consisted of$112.4 million of purchases of common stock under publicly announced programs,$92.8 million for the payment of dividends, and$8.1 million for the repurchase of common stock from employees for the payment of taxes in connection with the vesting of share-based payments.
Cash returned to shareholders through dividends and share repurchases was
Capital Expenditures for Property and Equipment
Fiscal 2020 capital expenditures were$128.0 million , compared to$210.4 million in Fiscal 2019. Fiscal 2020 expenditures included$55.8 million related to investments in our stores, including 40 AEO stores (8 AE, 31 Aerie stand-alone, and 1 35
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For Fiscal 2021, we expect capital expenditures to be in the range of
Credit Facilities
InJanuary 2019 , we entered into a credit agreement ("Credit Agreement") for five-year, syndicated, asset-based revolving credit facilities (the "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 provide increased financial flexibility and take advantage of a favorable credit environment. 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. InMarch 2020 , we borrowed$330.0 million under the Credit Facilities which we repaid in full byAugust 2020 . As ofJanuary 30, 2021 , we were in compliance with the terms of the Credit Agreement and had$7.9 million outstanding in stand-by letters of credit.
Stock Repurchases
During Fiscal 2016, our Board of Directors (our "Board") authorized the repurchase of 25.0 million shares of our common stock. The authorization of the repurchase of the remaining 3.6 million shares that may yet be repurchased under the Fiscal 2016 authorization expired onJanuary 30, 2021 . During Fiscal 2019, our Board authorized the repurchase of 30.0 million shares under a new share repurchase program, which expires onFebruary 3, 2024 . In earlyMarch 2020 , as part of our publicly-announced share repurchase program, we repurchased 1.7 million shares for$20.0 million , at a weighted average price of$11.63 per share. As ofJanuary 30, 2021 , our total remaining share repurchase authorization was 30.0 million shares. As previously announced, to preserve cash liquidity in response to the uncertainty created by the impact of COVID-19, the company suspended its publicly-announced share repurchase program. Accordingly, we did not repurchase any shares pursuant to this program during the second, third or fourth quarters of Fiscal 2020. Subsequent toJanuary 30, 2021 , the Company has unsuspended its share repurchase program. During Fiscal 2019, we repurchased 6.3 million shares for approximately$112.4 million at a weighted average price of$17.74 per share. During both Fiscal 2020 and Fiscal 2019, we repurchased approximately 0.4 million shares from certain employees at market prices totaling$5.4 million and$8.1 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 share repurchases have been recorded as treasury stock.
Dividends
Dividends are disclosed in Part II. Item 5. Market for the Registrant's Common
Equity, Related Stockholder Matters, and Issuer Purchases of
Recent Accounting Pronouncements
Recent accounting pronouncements are disclosed in Note 2 of the Consolidated Financial Statements.
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
36
--------------------------------------------------------------------------------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 this 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
In accordance with ASC 820, the following table represents the fair value
hierarchy of our financial assets (cash equivalents) measured at fair value on a
recurring basis as of
Fair Value
Measurements at
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 $ 524,970 $ 524,970 - -
Interest bearing deposits 275,507 275,507 - -
Certificates of deposits 50,000 50,000 - -Total cash and cash equivalents $ 850,477 $ 850,477
- -
Long-Term Debt
The fair value of the Company's $415 million aggregate principal amount of
convertible senior notes due in 2025 is not required to be measured at fair
value on a recurring basis. Upon issuance, the fair value of these convertible
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.
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