# AMERICAN EAGLE OUTFITTERS INC (AEO) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AMERICAN EAGLE OUTFITTERS INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/919012/000095017024032294/aeo-20240203.htm
Accession: 0000950170-24-032294
Filing date: 2024-03-15
Report date: 2024-02-03
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AEO/
All MD&A years: /company/AEO/mda/
Previous year: /company/AEO/mda/fy2023/ (FY 2023)
Next year: /company/AEO/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the Company, our operations and our present business environment. MD&A is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying Notes thereto contained in Part II, Item 8 – Financial Statements and Supplementary Data " — of this report.

This MD&A generally discusses Fiscal 2023 and Fiscal 2022 and provides year-to-year comparisons between Fiscal 2023 and Fiscal 2022. Discussions of Fiscal 2021 and year-to-year comparisons between Fiscal 2022 and Fiscal 2021 that are not included in this Annual Report 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 ended January 28, 2023.

Introduction

This MD&A is organized as follows:

[[GREPCENT_TABLE]]
[["\u2022Executive Overview"],["\u2022Key Performance Indicators"],["\u2022Current Trends and Outlook"],["\u2022Results of Operations"],["\u2022Non-GAAP Information"],["\u2022Liquidity and Capital Resources"],["\u2022Critical Accounting Policies and Estimates"],["\u2022Recent Accounting Pronouncements"]]
[[/GREPCENT_TABLE]]

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.

We have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources between segments based on adjusted operating income, which is a non-GAAP financial measure. See "Non-GAAP Information" within Part II. Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 15. “Segment Reporting,” of the Notes to the Consolidated Financial Statements included herein for additional information.

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 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 sales in the 13th month of operation. However, stores that have a gross square footage change of 25% or greater due to a remodel are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the 13th month following the remodel. Sales from American Eagle, Aerie, Todd Snyder, and Unsubscribed stores, as well as sales from AEO Direct and other digital channels, 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 include sales from stores and AEO Direct.

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 MD&A when we believe that they

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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.

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, Quiet Platforms costs to service our customers and buying, occupancy and warehousing costs and services. Design costs consist of compensation, rent, depreciation, travel, supplies, and samples.

Buying, occupancy and warehousing costs and services consists 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 consolidated gross profit and 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 SG&A expenses, and our level of capital expenditures.

Cash Flow and Liquidity — Our management evaluates cash flow from operations and 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 and liquidity will be sufficient to fund anticipated capital expenditures and working capital requirements for the next 12 months and beyond.

Current Trends and Outlook

Macroeconomic Conditions and Inflation

During Fiscal 2022 and Fiscal 2023, our results were negatively impacted by macro-economic challenges and global inflationary pressures impacting consumer spending behavior, which constrained revenue and increased margin pressure to clear through excess inventory. Given ongoing external uncertainties, we have taken additional actions to improve financial performance, including more operating efficiency initiatives. For further information about the risks associated with global economic conditions and the effect of economic pressures on our business, see “Risk Factors” in Part I, Item 1A of this Annual Report.

Omni-Channel and Digital Capabilities

We sell merchandise through our digital channels, www.ae.com, www.aerie.com, and our AEO apps, both domestically and internationally in approximately 80 countries. We also sell AE and Aerie brand merchandise on various international online marketplaces. We offer Todd Snyder and Unsubscribed brand products online at www.toddsnyder.com and www.unsubscribed.com, respectively. The digital channels reinforce each particular brand and are designed to complement the in-store experience.

Over the past several years, we have invested in building our technologies and digital capabilities. We focused our investments in three key areas: making significant advances in mobile technology, investing in digital marketing and improving the digital customer experience.

Shifting Strategy

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As e-commerce penetration and growth has normalized coming out of the COVID-19 pandemic, the supply chain landscape has continued to evolve. In Fiscal 2023, as part of our profit improvement initiative, we began to streamline and shift the operations of Quiet Platforms to better align with AEO's long term strategy. As a result of these changes, Quiet Platforms has refined its focus on its core capabilities as a regionalized fulfillment center network. The network has been updated to reflect this refined focus. The impact of the Quiet Platforms business changes resulted in $119.6 million impairment, restructuring and other charges in Fiscal 2023.

Our international business has also experienced changes in market conditions as a result of unbalanced recovery from the COVID-19 pandemic. The Company has made the decision to exit the Japan market fully as of the end of Fiscal 2023. Relative to Hong Kong, the Company has implemented a strategy to right-size our presence in the market given a slower than anticipated recovery. The impact of the change to our international strategy resulted in $21.8 million of impairment, restructuring and other charges recorded in Fiscal 2023.

Profit Improvement Program

We launched our profit improvement program during Fiscal 2023, which focused on a comprehensive review of our cost structure. Early actions have been focused on the components of gross margin and contributed to margin expansion in Fiscal 2023. Other significant work streams have been identified, actioned and incorporated into our Fiscal 2024 plans. The results of these initiatives are expected to yield gross margin expansion, as well as SG&A and depreciation leverage, resulting in an improved operating profit rate.

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Results of Operations

Overview

Fiscal 2023 showed continued progress on our strategic priorities to grow our brands and drive improved profit flow-through. Additionally, actions taken on our profit improvement initiatives resulted in improved gross margins year over year.

•
Total net revenue increased $272 million to $5.262 billion compared to $4.990 billion last year.

•
Total comparable sales increased 3%. By brand, American Eagle comparable sales increased 1% and comparable sales for Aerie increased 8%.

•
Gross profit increased 16% to $2.025 billion and increased by 350 basis points to 38.5% as a percentage of revenue. Adjusted gross profit increased 17% to $2.036 billion and increased by 370 basis points to 38.7% as a percentage of revenue.

•
Operating income decreased 10% to $222.7 million and decreased by 80 basis points to 4.2% as a percentage of total revenue. Adjusted operating income increased 39% to $375.4 million and increased by 170 basis points to 7.1% as a percentage of revenue.

•
Net income increased 36% to $170.0 million and increased by 70 basis points to 3.2% as a percentage of total revenue. Diluted earnings per share increased to $0.86 for Fiscal 2023 compared to $0.64 for Fiscal 2022. Adjusted net income increased 55% to $299.9 million and increased by 180 basis points to 5.7% as a percentage of revenue. Adjusted diluted earnings per share increased to $1.52 for Fiscal 2023 compared to $0.97 for Fiscal 2022.

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.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Comparison of Fiscal 2023 to Fiscal 2022

Total Net Revenue

Total net revenue for Fiscal 2023 increased $272 million this year to $5.262 billion compared to $4.990 billion for Fiscal 2022. The increase this year included $57 million from the 53rd week in Fiscal 2023. For Fiscal 2023, total comparable sales increased 3% compared to a 7% decrease for Fiscal 2022. Additionally, last year included an incremental $41 million of

34

revenue from excess end-of-season selloffs, which we did not anniversary this year, impacting revenue growth across brands and channels for the current year. Traffic and transactions both increased in the mid-single digits, with average unit retail increasing in the low-single digits, partially offset by lower units per transaction. Both digital and store revenue increased 6%, reflecting strong traffic across channels.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

American Eagle. The increase in net revenue was driven by increased traffic and transactions across channels. This increase was partially offset by $23 million of incremental revenue from excess end-of-season selloffs last year, which we did not anniversary this year. Total comparable sales increased 1% year-over-year, primarily due to digital traffic and transactions increasing in the mid-single digits year-over-year.

Aerie. The increase in net revenue was primarily due to 54 net new store openings since Fiscal 2021, as well as a 8% comparable sales increase. These amounts were partially offset by $17 million of incremental revenue from excess end-of-season selloffs in the prior year, which we did not anniversary this year.

Other. Net revenue increased compared to Fiscal 2022 due to an increase in Todd Snyder brand revenue of $31 million, partially offset by lower revenue from Quiet Platforms.

Gross Profit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The increase in gross profit was primarily driven by:

•
an increase in merchandise margin of $340 million driven by increased net revenue from both American Eagle and Aerie, as well as an improvement in markup, primarily driven by $60 million of lower inbound transportation costs this year; partially offset by $11 million of inventory write-down charges related to restructuring our international operations (refer to the Impairment, Restructuring and Other charges caption below for additional information); and

•
a decrease in distribution, warehousing, and delivery costs of $20 million.

The increase was partially offset by increased incentive compensation of approximately $40 million and rent of $10 million primarily related to new store openings. Incentive compensation increased as we accrued performance-based incentives this year based on improvements in profitability compared to no accrual last year.

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

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ending","","Increase/(Decrease)"],["","","February 3, 2024","January 28, 2023"],["","","(in thousands)","","(in thousands)","","(Percentage)"],["Selling, general and administrative expenses","","$","1,433,300","","","$","1,269,095","","","","$","164,205","","","","13","","%"],["Selling, general and administrative expenses as a percentage of net revenue","","","27.2","","%","","25.4","","%","","180 basis points"]]
[[/GREPCENT_TABLE]]

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The increase in expenses was primarily related to:

•
an increase in incentive compensation accruals of approximately $60 million, as we accrued performance-based incentives this year based on improvements in profitability compared to no accrual last year;

•
increased store compensation up $24 million due to increased wage rates, the impact of the 53rd week, and new store openings, partially offset by efficiencies in our store labor model; and

•
an increase in advertising, professional services, corporate and store related expenses.

Impairment, Restructuring and Other Charges

[[GREPCENT_TABLE]]
[["","Fiscal Years Ending","","Increase/(Decrease)"],["","","February 3,","January 28,"],["","","2024","2023"],["","","(In thousands)","","(in thousands)","","(Percentage)"],["Charges recorded in operating expenses:"],["Quiet Platforms impairment, restructuring and other charges (1)","","$","119,572","","","$","3,844","","","","$","115,728","","","3011"],["International impairment and restructuring costs (2)","","","10,882","","","","7,997","","","","","2,885","","","36"],["Corporate impairment and restructuring charges (3)","","","11,241","","","","-","","","","","11,241","","","100"],["U.S. and Canada store impairment charges(4)","","","-","","","","10,368","","","","","(10,368",")","","(100",")"],["Impairment, restructuring and other charges","","$","141,695","","","$","22,209","","","","$","119,486","","","538","","%"],["Impairment, restructuring and other charges as a percentage of net revenue","","","2.7","","%","","0.4","","%","","230 basis points"]]
[[/GREPCENT_TABLE]]

The following footnotes relate to the impairment, restructuring and other charges in Fiscal 2023 and Fiscal 2022:

(1)
For Fiscal 2023, we impaired definite-lived intangible assets of $40.5 million consisting of $31.2 million of customer relationships and $9.3 million of trade names. We also impaired $39.6 million of goodwill. We recorded $24.7 million of long-term asset impairment primarily related to technology which is no longer a part of the long-term strategy. All impairments were recorded due to insufficient prospective cash flows to support the asset value, resulting from the restructuring of Quiet Platforms. We recorded $9.9 million of employee severance based on this revised strategy. We also recorded $4.9 million of contract related charges.

For Fiscal 2022, we recorded impairment of $2.8 million consisting of $2.3 million of of property and equipment and $0.5 million of ROU assets related to the closure of the Jacksonville, FL distribution center and severance of $1.0 million related to employees of that distribution center. The Jacksonville distribution center was replaced with a higher productivity location in Atlanta, GA.

(2)
For Fiscal 2023, we recorded $10.9 million of costs related to exiting the Japan market, including the closure of all four stores in January 2024, as well as impairment related to our Hong Kong retail operations. Of this amount, $4.7 million related to Japan ROU assets, $3.6 million of Japan store property and equipment, $1.3 million of Hong Kong store ROU assets, and $1.3 million of employee severance. All impairments were recorded due to insufficient prospective cash flows to support the asset value. Additionally, we recorded $11.0 million of inventory write-down charges related to restructuring our international operations, which was recorded separately in Cost of Sales. Refer to the Gross Profit caption above for additional information.

For Fiscal 2022, we recorded $7.5 million of store impairment due to insufficient cash flows to support the asset value and $0.5 million of employee severance related to downsizing our Hong Kong retail operations.

(3)
For Fiscal 2023, we recorded charges of $11.2 million, consisting of $6.0 million of employee severance related to corporate realignment and asset impairment of $5.2 million of investments related to further strategic business changes.

(4)
For Fiscal 2022, we recorded $10.4 million of impairment charges, consisting of $9.2 million of ROU assets and $1.2 million of store property and equipment due to insufficient prospective cash flows to support the asset value in the U.S. and Canada.

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Refer to Note 16. "Impairment, Restructuring and Other Charges," to the Consolidated Financial Statements included in this Annual Report for additional information.

Depreciation and Amortization Expense

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The increase in depreciation and amortization expense was primarily driven by investments in new stores and technology in Fiscal 2023.

American Eagle. The increase was primarily driven by increased investments in new and remodeled stores.

Aerie. The increase was primarily driven by increased investments in new and remodeled stores.

Operating Income

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The decrease in total operating income was primarily driven by higher gross profit, offset by increased SG&A and depreciation and amortization expenses.

American Eagle. The increase was the result of a $121 million increase in gross profit driven by incremental merchandise margin on the increase in total net revenue as well as improved markup, primarily from $27 million of incremental freight costs incurred last year, as well as $10 million of lower rent expense resulting from 14 net store closures this year, partially offset by $15 million of incremental incentive compensation expense.

The gross profit improvement was partially offset by a $52 million increase in SG&A costs, primarily from:

•
an $18 million increase in incentive compensation;

•
an $11 million increase in advertising expense; and

•
an increase in various store related expenses.

Additionally, depreciation and amortization expense increased by $10 million, primarily related to store remodels.

Aerie. The increase in operating income was primarily the result of a $153 million increase in gross profit driven by incremental merchandise margin on the increase in total net revenue, as well as improved markup, including a $34 million

37

benefit from incremental freight costs incurred last year and lower markdowns reflecting inventory control. These improvements were partially offset by $12 million in incremental rent related to new store openings and $13 million of incremental incentive compensation expense.

The gross profit improvement was partially offset by a $37 million increase in SG&A expenses primarily driven by:

•
a $30 million increase from store and incentive compensation, primarily due to new store openings, and

•
an increase in various store related expenses.

Additionally, depreciation and amortization expense increased $7 million related to new store openings and remodels.

Other. The improvement in operating loss was primarily the result of improved performance from the Todd Snyder and Unsubscribed brands of $6 million and lower operating loss from Quiet Platforms of $15 million, partially as a result of restructuring the operations in Fiscal 2023.

General Corporate Expenses. General corporate expenses increased primarily due to a $32 million increase in corporate compensation and incentives, as well as various increases in other corporate expenses.

Debt Related Charges

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

There were no debt related charges in Fiscal 2023. In Fiscal 2022, debt related charges of $64.7 million consisted primarily of $60.4 million of induced conversion expense related to the exchanges of our 2025 Notes, along with certain other costs related to actions we took to strengthen our capital structure.

Interest (Income) Expense, Net

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

The increase in interest income, net was primarily attributable to $12 million of lower interest expense on the 2025 Notes as a result of the Note Exchanges and Early Redemption and lower borrowings on our Credit Facility, as well as increased interest income of $8 million, primarily from short-term investments in Fiscal 2023.

Other Income, Net

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ending","","Increase/(Decrease)"],["","","February 3,","January 28,"],["","2024","2023"],["","","(In thousands)","","(In thousands)","(Percentage)"],["Other income, net","","$","(10,951",")","","$","(10,465",")","","","$","486","","","","5","","%"],["Other income, net as a percentage of net revenue","","","(0.2",")","%","","(0.2",")","%","","0 basis points"]]
[[/GREPCENT_TABLE]]

Other Income was relatively flat in Fiscal 2023 compared to Fiscal 2022.

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Income Taxes

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ending","","Increase/(Decrease)"],["","February 3,","January 28,"],["","2024","2023"],["","","(In thousands)","","(In thousands)","","(Percentage)"],["Provision for income taxes","","$","69,820","","","$","53,358","","","","$","16,462","","","31","","%"],["Effective tax rate","","","29.1","","%","","29.9","","%","","-80 basis points"]]
[[/GREPCENT_TABLE]]

The effective income tax rate was 29.1% for Fiscal 2023, compared to an effective income tax rate of 29.9% for Fiscal 2022.The lower effective income tax rate this year is primarily driven by international provisions of the Tax Cut and Jobs Act of 2017 (the "Tax Act") and federal credits, offset by the non-deductible goodwill impairment charge. Our effective income tax rate is also dependent upon the overall mix of earnings in jurisdictions with different tax rates.

The Organization for Economic Cooperation and Development (“OECD”) Global Anti-Base Erosion Pillar Two minimum tax rules, also referred to as “Pillar Two”, are intended to apply to tax years beginning in 2024 and generally provide for a minimum effective tax rate of 15%. In 2023, the OECD issued administrative guidance providing transitional safe harbor rules concerning the implementation of the Pillar Two framework, which will apply to fiscal years beginning on or before December 31, 2026. The EU member states and many other countries have committed to implement or have already enacted legislation adopting the Pillar Two rules. We are monitoring developments and evaluating the impacts of these new rules, however, we do not expect a material impact to our effective tax rate or our consolidated results of operation, financial position, and cash flows.

Refer to Note 2, "Summary of Significant Accounting Policies," and Note 14, "Income Taxes," to the Consolidated Financial Statements included herein for additional information regarding our accounting for income taxes.

Net Income

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ending","","Increase/(Decrease)"],["","February 3,","January 28,"],["","2024","2023"],["","","(in thousands)","","(In thousands)","(Percentage)"],["Net income","","$","170,038","","","$","125,136","","","","$","44,902","","","","36","","%"],["Net income as a percentage of net revenue","","","3.2","","%","","2.5","","%","","70 basis points"]]
[[/GREPCENT_TABLE]]

The change in net income was attributable to the factors described above.

Net income per diluted share for Fiscal 2023 was $0.86, which includes $152.6 million ($0.66 per diluted share) of pre-tax impairment, restructuring and other charges. Refer to "Non-GAAP information" below for additional detail.

Net income per diluted share for Fiscal 2022 was $0.64, which included $64.7 million ($0.24 per diluted share) of pre-tax debt-related charges and $22.2 million ($0.09 per diluted share) of pre-tax impairment and restructuring charges.

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Non-GAAP Information

This Results of Operations section contains gross profit, operating income, net income and net income per diluted share presented on a non-GAAP basis, which are non-GAAP financial measures (“non-GAAP” or “adjusted”). These financial measures are not based on any standardized methodology prescribed by GAAP and are 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 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 for Fiscal 2023:

[[GREPCENT_TABLE]]
[["American Eagle Outfitters Inc."],["GAAP to Non-GAAP Reconciliation"],["(Dollars in thousands, except per share amounts)"],["53 Weeks Ended February 3, 2024"],["","","","","","","","","","","","","Earnings per"],["","Gross Profit(1)","","","Operating Income(1)(2)","","","Income Tax Expense","","Effective Tax Rate","Net Income","","Diluted Share"],["GAAP Basis","$","2,024,578","","","$","222,717","","","$","69,820","","29.1%","$","170,038","","$","0.86"],["% of Revenue","","38.5","%","","","4.2","%","","","","","","3.2","%"],["Add: Impairment, Restructuring and Other Charges","$","10,950","","","$","152,645","","","","","","$","129,875","","$","0.66"],["Tax effect of the above(3)","","","","","","","$","22,770","","(5.5)%"],["Non-GAAP Basis","$","2,035,528","","","$","375,362","","","$","92,590","","23.6%","$","299,913","","$","1.52"],["% of Revenue","","38.7","%","","","7.1","%","","","","","","5.7","%"]]
[[/GREPCENT_TABLE]]

The following footnotes relate to the impairment, restructuring and other charges in Fiscal 2023:

(1)
$11.0 million of inventory write-down charges related to our international businesses as further described in note (2) below.

(2)
$119.6 million of charges related to the Quiet Platforms restructuring. Of this amount, we impaired definite lived intangible assets of $40.5 million consisting of $31.2 million of customer relationships and $9.3 million of trade names. We also impaired $39.6 million of goodwill. We recorded $24.7 million of long-term asset impairment primarily related to technology which is no longer a part of the long-term strategy. All impairments were recorded due to insufficient prospective cash flows to support the asset value, resulting from the restructuring of Quiet Platforms. We recorded $9.9 million of severance based on this revised strategy. We also recorded $4.9 million of contract related charges.

$10.9 million of charges related to exiting the Japan market, including the closure of all four stores in January 2024, as well as impairment related to our Hong Kong retail operations. Of this amount, $4.7 million related to Japan store ROU assets, $3.6 million of Japan store property and equipment, $1.3 million of Hong Kong store ROU assets, and $1.3 million of employee severance. All impairments were recorded due to insufficient respective cash flows to support the asset values. Additionally, we recorded $11.0 million of inventory write-down charges related to restructuring our international operations, which was recorded separately in Cost of Sales and discussed in note (1) above.

$11.2 million, consisting of $6.0 million of employee severance related to corporate realignment and other asset impairment of $5.2 million of investments related to further strategic business changes.

(3)
The income tax impact of $22.8 million related to restructuring is primarily caused by the non-deductibility of

goodwill impairment and international restructuring charges as well as the additional tax expense on the

overall mix of earnings in jurisdictions with different tax rates.

40

For Fiscal 2022, the table below reconciles the GAAP financial measure to the non-GAAP financial measure:

[[GREPCENT_TABLE]]
[["American Eagle Outfitters Inc."],["GAAP to Non-GAAP Reconciliation"],["(Dollars in thousands, except per share amounts)"],["52 Weeks Ended January 28, 2023"],["","","","","","","","","","","","","Earnings per"],["","Operating Income(1)","","","Debt-related charges(2)","","","Income Tax Expense","","Effective Tax Rate","Net Income","","Diluted Share"],["GAAP Basis","$","247,047","","","$","64,721","","","$","53,358","","29.9%","$","125,136","","$","0.64"],["% of Revenue","","5.0","%"],["Add: Impairment and restructuring charges","$","22,209","","","","","","","","","","18,221","","$","0.09"],["Less: Debt-related charges","$","-","","","$","(64,721",")","","","","","","49,679","","$","0.24"],["Tax effect of the above(3)","","","","","","","$","19,030","","(2.6)%"],["Non-GAAP Basis","$","269,256","","","$","-","","","$","72,388","","27.3%","$","193,036","","$","0.97"],["% of Revenue","","5.4","%","","","","","","","","","3.9","%"]]
[[/GREPCENT_TABLE]]

(1)
Quiet Platforms impairment of $2.8 million consisting of $2.3 million of ROU asset and $0.5 million of property and equipment related to the closure of the Jacksonville, FL distribution center and severance of $1.0 million related to employees of that distribution center. The Jacksonville distribution center was replaced with a higher productivity location in Atlanta, GA.

$7.5 million of international store impairment due to insufficient cash flows to support the asset value and $0.5 million of severance related to downsizing our Hong Kong retail operations.

$10.4 million of store impairment charges, consisting of $9.2 million of store ROU assets and $1.2 million of store property and equipment related to insufficient cash flows to support the asset in the U.S. and Canada.

(2)
$64.7 million pre-tax debt related charges related primarily to the induced conversion expense on the exchange of our convertible notes, along with certain other costs related to actions we took to strengthen our capital structure.

(3)
The income tax impact of $19.0 million related to restructuring is primarily caused by the non-deductibility of

the portion of the induced conversion expense associated with the Note Exchanges. Furthermore, there

was additional tax expense on the overall mix of earnings in jurisdictions with different tax rates.

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 $700 million, which will expire in June 2027. In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due 2025 (the "2025 Notes"). The 2025 Notes were fully redeemed during Fiscal 2023. Refer to Note 9 to the Consolidated Financial Statements for additional information regarding our long-term debt.

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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:

[[GREPCENT_TABLE]]
[["","February 3, 2024"],["Working capital, in thousands","$","","542,178"],["Current Ratio","","","1.61"]]
[[/GREPCENT_TABLE]]

The following table sets forth net cash flows in operating, investing, and financing activities for Fiscal 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","","Fiscal Years Ending","Increase/(Decrease)"],["","","","February 3,","January 28,"],["","2024","2023"],["","(In thousands)"],["Total cash provided by (used for):"],["Operating activities","","$","580.7","","","","$","406.3","","","","$","174.4"],["Investing activities","","","(287.4",")","","","","(261.4",")","","","","(26.0",")"],["Financing activities","","","(109.5",")","","","","(407.9",")","","","","298.4"],["Effect of foreign currency exchange rate changes on cash and cash equivalents","","","0.1","","","","","(1.6",")","","","","1.7"],["Increase (decrease) in cash and cash equivalents","","$","183.9","","","","$","(264.6",")","","","$","448.5"]]
[[/GREPCENT_TABLE]]

Cash Flows Provided by Operating Activities

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 2023 primarily consisted of capital expenditures for property and equipment and the purchase of available-for-sale securities. For Fiscal 2022, investing activities primarily consisted of capital expenditures for property and equipment. For further information on capital expenditures, refer to "Capital Expenditures for Property and Equipment" below.

Cash Flows Used for Financing Activities

During Fiscal 2023, cash used for financing activities consisted primarily of $83.8 million of dividend payments paid at a quarterly rate of $0.10 per share for the first three quarters of the year, and $0.125 for the fourth quarter of the year and $20.3 million used to repurchase common stock under publicly announced programs.

During Fiscal 2022, cash used for financing activities consisted of $200.0 million used to repurchase the Company's common stock under an accelerated share repurchase agreement, $136.4 million used for the principal paid in connection with the exchange of our 2025 Notes, $64.8 million used for cash dividends paid at a quarterly rate of $0.18 per share during the first and second quarters and $9.8 million used for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments.

Cash returned to shareholders through dividends and share repurchases was $104.1 million and $264.8 million in Fiscal 2023 and Fiscal 2022, respectively.

Capital Expenditures for Property and Equipment

For Fiscal 2023, capital expenditures totaled $174.4 million. See below for a breakdown of expenditures:

42

[[GREPCENT_TABLE]]
[["","Fiscal Years Ending","Increase/(Decrease)"],["","February 3,","January 28,"],["","2024","2023"],["","(In thousands)","(In thousands)","(Percentage)"],["Store, fixture, and visual investments","","$","87,625","","","","$","148,501","","","","$","(60,876",")","","","","(41",")","%"],["Information technology initiatives","","","57,355","","","","","70,024","","","","","(12,669",")","","","","(18",")"],["Supply chain infrastructure","","","27,616","","","","","39,453","","","","","(11,837",")","","","","(30",")"],["Other home office projects","","","1,841","","","","","2,400","","","","","(559",")","","","","(23",")"],["Capital Expenditures","","$","174,437","","","","$","260,378","","","","$","(85,941",")","","","","(33",")","%"]]
[[/GREPCENT_TABLE]]

For Fiscal 2024, we expect capital expenditures to be in the range of $200 million to $250 million related to the continued support of our expansion efforts, stores, information technology upgrades to support growth and investments in e-commerce, as well as to support and enhance our supply chain. We expect to be able to fund our capital expenditures through current cash holdings and cash generated from operations.

See below for a breakdown for stores remodeled and new stores opened in Fiscal 2023 and Fiscal 2022:

[[GREPCENT_TABLE]]
[["","Fiscal Years Ending"],["","February 3, 2024","January 28, 2023"],["","New Stores","","Remodels","","New Stores","","Remodels"],["American Eagle (1)","","18","","","27","","","25","","","15"],["Aerie (2)","","17","","","3","","","56","","","19"],["Todd Snyder","","6","","","-","","","5","","","-"],["Unsubscribed","","1","","","-","","","1","","","-"],["Total stores","","42","","","30","","","87","","","34"]]
[[/GREPCENT_TABLE]]

(1) American Eagle includes AE stand-alone stores, Aerie side-by-side stores connected to an AE brand location, AE, Aerie, and OFFLINE locations connected as one store, and OFFLINE side-by-side stores connected to an AE brand location

(2) Aerie includes Aerie stand-alone, OFFLINE stand-alone, and OFFLINE side-by-side stores connected to an Aerie brand location

Revolving Credit Facility

In June 2022, we entered into an amended and restated credit agreement (the "Credit Agreement"). The Credit Agreement provides senior secured asset-based revolving credit for loans and letters of credit up to $700 million, subject to customary borrowing base limitations (the "Credit Facility). The Credit Facility expires on June 24, 2027.

All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by certain assets of the Company and certain subsidiaries.

As of February 3, 2024, we were in compliance with the terms of the Credit Agreement and had $7.7 million outstanding in stand-by letters of credit.

Share Repurchases

During Fiscal 2023, there were 1.0 million shares repurchased as part of our publicly announced share repurchase program during the 14 weeks ended February 3, 2024. On February 1, 2024, our Board authorized the public repurchase of 30.0 million shares under a new share repurchase program, which expires on February 3, 2029. The remaining 12.0 million shares that may yet be repurchased under the Fiscal 2019 authorization expired on February 3, 2024.

As of February 3, 2024, our total share repurchase authorization was approximately 30 million shares from the new share repurchase program. There were no repurchases under this authorization during Fiscal 2023.

Dividends

Dividends are disclosed in Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

43

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions that may affect the reported consolidated 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.

Revenue Recognition. In accordance with Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, 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.

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.

Revenue associated with Quiet Platforms is recognized as the services are performed.

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, or 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 consolidated operating results could be adversely affected.

Impairment of long-lived assets. 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 ("ROU") 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 income (loss) in the Consolidated Statements of Operations.

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 fair value analysis is forecasted revenue. 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 consolidated operating results could be adversely affected.

Impairment of goodwill and intangible assets. Definite-lived intangible assets are initially recorded at fair value, with amortization computed utilizing the straight-line method over the assets’ estimated useful lives. The Company’s definite-lived intangible assets, which consist primarily of trademark assets, are generally amortized over 10 to 15 years. The

44

Company evaluates definite-lived intangible assets for impairment in accordance with ASC 360 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No definite-lived intangible asset impairment charges were recorded for all periods presented.

In accordance with ASC 350, Intangibles – Goodwill and Other, the Company evaluates goodwill for possible impairment at least annually as of the last day of the fiscal year and upon occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of a reporting unit may be below its carrying value. If the carrying value of the reporting unit exceeds the fair value, an impairment charge is recorded in the period of the evaluation based on that difference.

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 awards, we use the Black-Scholes option-pricing model for stock option awards and a Monte-Carlo simulation for performance-based restricted stock awards, 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 Statements 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.

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, and 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).

Recent Accounting Pronouncements

Recent accounting pronouncements the Company has adopted or is currently evaluating prior to adoption, including the dates of adoption or expected dates of adoption, as applicable, and anticipated effects on the Company’s audited Consolidated Financial Statements, are included in Note 2. “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements included herein.

45