10-Q

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 169,402,025 Common Shares were outstanding at May 23, 2022.

This Quarterly Report on Form 10-Q (this "Quarterly Report") contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on the views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. Words such as “estimate,” “project,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “potential,” and similar expressions may identify forward-looking statements. Our forward-looking statements include, but are not limited to, statements about:

Our forward-looking statements surrounding the novel strain of coronavirus ("COVID-19") include, but are not limited to, statements about:

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, the following:

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At April 30, 2022, the Company operated in two reportable segments, American Eagle and Aerie.

Fiscal Year

Our fiscal year is a 52- or 53-week year that ends on the Saturday nearest to January 31. As used herein, “Fiscal 2022” refers to the 52-week period that will end on January 28, 2023. “Fiscal 2021” refers to the 52-week period ended January 29, 2022. “Fiscal 2020” refers to the 52-week period ended January 30, 2021.

Estimates

The preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Recent Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-06, Debt with Conversion and Other Options (“ASU 2020-06”), which simplifies the accounting for convertible debt instruments. The new guidance eliminates two of the three models in Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options that require separating embedded conversion features from convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share (“EPS”) calculation. The guidance is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2020-06 effective January 30, 2022 under the modified retrospective method.

In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due 2025 (the "2025 Notes"). Prior to adoption, the 2025 Notes were accounted for under the cash conversion model, which is one of the models eliminated by ASU 2020-06. The adoption of ASU 2020-06 resulted in the 2025 Notes being accounted for as a single balance in long-term debt, rather than being accounted for as separate debt and equity components.

Upon adoption of ASU 2020-06, the Company recorded a cumulative retained earnings increase of $18.8 million, net of tax. The decrease to contributed capital as a result of adoption was $67.7 million, net of tax. The result of combining the debt and equity portions of the 2025 Notes into a single long-term debt balance, which reduced the non-cash discount and related amortization, resulted in a reduction of interest expense of $4.3 million ($3.3 million, net of tax) for the 13 weeks ended April 30, 2022. Under the previous methodology the Company would have recorded $8.8 million of interest expense.

As a result of this adoption we are required to use the "if-converted" method of calculating diluted EPS. This method requires us to consider the 2025 Notes as fully converted to shares as of the beginning of the period presented. For the 13 weeks ended April 30, 2022, this resulted in 49 million shares, or an incremental 21 million shares being included in our diluted EPS denominator. As the "if-converted" method requires the assumption that the 2025 Notes were fully converted as of the beginning of the period presented we are also required to add back interest expense of the 2025 Notes, net of tax, to net income prior to calculating diluted EPS, as the 2025 Notes would not have been outstanding during the period. As a result, the Company added back interest expense net of tax of $3.4 million to our numerator in the calculation of diluted EPS for the 13 weeks ended April 30, 2022. The impact of adoption of ASU 2020-06 to the 13 weeks ended April 30, 2022 was an increase of $0.02 of net income per diluted share.

Refer to Note 5 and Note 8 to the Consolidated Financial Statements for additional information regarding EPS and the long-term debt, respectively.

Foreign Currency Translation

In accordance with ASC 830, Foreign Currency Matters, the Company translates assets and liabilities denominated in foreign currencies into United States dollars (“USD”) (the reporting currency) at the exchange rates prevailing at the balance sheet date. The Company translates revenues and expenses denominated in foreign currencies into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the

consolidated results of operations, whereas related translation adjustments are reported as an element of other comprehensive income (loss) in accordance with ASC 220, Comprehensive Income.

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized gain of $0.5 million is included in accumulated other comprehensive income for the 13 week period ended April 30, 2022, primarily related to the fluctuations of the USD to Mexican peso and USD to Canadian dollar exchange rates.

Cash and Cash Equivalents and Short-Term Investments

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

Short-term investments classified as available-for-sale include certificates of deposit with a maturity greater than three months, but less than one year.

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

Receivables

The Company maintains an allowance for doubtful accounts for estimated losses from the failure of certain of our customers to make required payments for products or services delivered. The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical and expected future receivables and reserve trends and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required. Historically, the Company’s reserves have approximated actual experience.

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.

The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected.

The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends.

Property and Equipment

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


Buildings		25 years
Leasehold improvements		Lesser of 10 years or the term of the lease
Fixtures and equipment Information technology		Five years Three - five years

As of April 30, 2022, the weighted average remaining useful life of our assets was approximately 6.2 years.

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), the Company’s management evaluates the value of leasehold improvements, store fixtures, and operating lease right-of-use ("ROU") assets associated with retail stores. The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the 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 within the Consolidated Statements of Operations. No asset impairment charges were recorded during the 13 weeks ended April 30, 2022 or May 1, 2021.

When the Company closes, remodels, or relocates a store prior to the end of its lease term, the remaining net book value of the assets related to the store is recorded as a write-off of assets within depreciation and amortization expense. Refer to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment.

Goodwill and Intangible Assets, net

The Company’s goodwill is primarily related to the acquisition of its Supply Chain Platform in Fiscal 2021, as well as its importing operations and Canadian business, and represents the excess of cost over fair value of net assets of businesses acquired. 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. As a result of the Company's annual goodwill impairment test as of January 29, 2022, the Company concluded that its goodwill was not impaired. No indicators of impairment were present during the 13 weeks ended April 30, 2022 and May 1, 2021.

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 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 during the 13 weeks ended April 30, 2022 or May 1, 2021.

Refer to Note 7 to the Consolidated Financial Statements for additional information regarding goodwill and intangible assets.

Gift Cards

Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed ("gift card breakage") and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue.

The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. During the 13 weeks ended April 30, 2022 and May 1, 2021, the Company recorded approximately $2.7 million and $2.5 million, respectively, of revenue related to gift card breakage.

Construction Allowances

As part of certain lease agreements for retail stores, the Company receives construction allowances from lessors, which are generally comprised of cash amounts. The Company records a receivable and an adjustment to the operating lease ROU asset at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized as part of the single lease cost over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the lessor.

Self-Insurance Liability

The Company uses a combination of insurance and self-insurance mechanisms for certain losses related to employee medical benefits and worker’s compensation. Costs for self-insurance claims filed and claims incurred but not reported are accrued based on known claims and historical experience. Management believes that it has adequately reserved for its self-insurance liability, which is capped by stop loss contracts with insurance companies. However, any significant variation of future claims from historical trends could cause actual results to differ from the accrued liability.

Leases

The Company leases all store premises, regional distribution facilities, some of its office space, and certain information technology and office equipment. These leases are generally classified as operating leases.

Store leases generally provide for a combination of base rentals and contingent rent based on store sales. Additionally, most leases include lessor incentives such as construction allowances and rent holidays. The Company is typically responsible for tenant occupancy costs including maintenance costs, common area charges, real estate taxes and certain other expenses.

Most leases include one or more options to renew. The exercise of lease renewal options is at the Company’s discretion and is not reasonably certain at lease commencement. When measuring operating lease ROU assets and operating lease liabilities, the Company only includes cash flows related to options to extend or terminate leases once those options are executed.

Some leases have variable payments. However, because they are not based on an index or rate, they are not included in the measurement of operating lease ROU assets and operating lease liabilities.

When determining the present value of future payments for an operating lease that does not have a readily determinable implicit rate, the Company uses its incremental borrowing rate as of the date of initial possession of the leased asset.

For leases that qualify for the short-term lease exemption, the Company does not record an operating lease liability or operating lease ROU asset. Short-term lease payments are recognized on a straight-line basis over the lease term of 12 months or less.

Co-branded Credit Card

The Company offers a co-branded credit card and a private label credit card under the AE and Aerie brands. These credit cards are issued by a third party bank (the “Bank”) in accordance with a credit card agreement (the “Agreement”). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank’s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding as we fulfill our performance obligations under the Agreement. This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations.

For further information on the Company’s loyalty program, refer to the Customer Loyalty caption below.

Customer Loyalty Program

The Company offers a highly-digitized loyalty program called Real Rewards by American Eagle and Aerie™ (the “Program”). This Program features both shared and unique benefits for loyalty members and credit card holders. Under the Program, members accumulate points based on purchase activity and earn rewards by reaching certain point thresholds. Members earn rewards in the form of discount savings certificates. Rewards earned are valid through the stated expiration date, which is 60 days from the issuance date of the reward. Rewards not redeemed during the 60-day redemption period are forfeited.

Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”). The portion of the sales revenue attributed to the reward points is deferred and recognized when the reward is redeemed or when the points expire, using the relative stand-alone selling price method. Additionally, reward points earned using the co-branded credit card on non-AE or Aerie purchases are accounted for in accordance with ASC 606. As the points are earned, a current liability is recorded for the estimated cost of the reward, and the impact of adjustments is recorded in revenue.

The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606.

Sales Return Reserve

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.

The presentation on a gross basis consists of a separate right of return asset and liability. These amounts are recorded within (i) prepaid expenses and other and (ii) other current liabilities and accrued expenses, respectively, on the Consolidated Balance Sheets.

Income Taxes

The Company calculates income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the 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 the Company’s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the Company’s effective income tax rate.

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

The calculation of 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, requires management to make estimates and assumptions. The Company believes that its estimates and assumptions 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).

Refer to Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.

Revenue Recognition

The Company recognizes revenue pursuant to ASC 606. Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the 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 promotional price reductions. 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 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. For further information on the Company’s gift card program, refer to the Gift Cards caption above.

The Company recognizes royalty revenue generated from its license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee. This revenue is recorded as a component of total net revenue when earned and collection is probable.

The Company defers a portion of the sales revenue attributed to loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASC 606. Refer to the Customer Loyalty Program caption above for additional information.

Revenue associated to the Supply Chain Platform is recognized as the services are performed.

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

Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively, “merchandise costs”) and buying, occupancy and warehousing costs and services.

Design costs are related to the Company's Design Center operations and include compensation, travel and entertainment, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold.

Buying, occupancy and warehousing costs and services consist of compensation, employee benefit expenses and travel and entertainment for our buyers and certain senior merchandising executives; rent and utilities related to our stores,

corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Gross profit is the difference between total net revenue and cost of sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased.

SG&A expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales. Additionally, SG&A expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations, all of which are included in cost of sales.

Interest Expense, Net

Interest expense, net primarily consists of interest expense related to the Company’s 2025 Notes and borrowings under our five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”), as offset by interest income from cash, cash equivalents and short-term investments.

Other Income, Net

Other income, net consists primarily of allowances for uncollectible receivables, foreign currency fluctuations and changes in other non-operating items.

Segment Information

We have two reportable segments: American Eagle and Aerie. For additional information regarding the Company’s segments and geographic information, refer to Note 12 to the Consolidated Financial Statements.

3. Cash and Cash Equivalents and Short-Term Investments

The following table summarizes the fair market values for the Company’s cash and short-term investments, which are recorded in the Consolidated Balance Sheets:


(In thousands)	April 30, 2022		January 29, 2022		May 1, 2021
Cash and cash equivalents:
Cash	$	145,173	$	138,758	$	466,014
Interest bearing deposits		83,602		296,012		225,665
Certificates of deposit		—		—		25,000
Total cash and cash equivalents	$	228,775	$	434,770	$	716,679
Short-term investments
Certificates of deposit		—		—		75,000
Total short-term investments		—		—		75,000
Total	$	228,775	$	434,770	$	791,679

7. Goodwill and Intangible Assets, net

Goodwill and definite-lived intangible assets, net consist of the following:


	April 30, 2022										May 1, 2021
(In thousands)	American Eagle			Aerie		Corporate and Other(1)		Total (2)			American Eagle		Aerie		Corporate and Other(1)		Total (2)
Goodwill, net beginning balance	$	114,883		$	110,600	$	45,933	$	271,416		$	13,157	$	—	$	—	$	13,157
Foreign currency fluctuation		(18	)		—		—		(18	)		238		—		—		238
Goodwill, net ending balance	$	114,865		$	110,600	$	45,933	$	271,398		$	13,395	$	—	$	—	$	13,395

(1)

Corporate and Other includes goodwill allocated to the Supply Chain Platform reporting unit, which has been identified as a separate operating segment, but is not material to disclose as a separate reportable segment.

(2)

Beginning balances for both periods include accumulated impairment of $4.2 million


(In thousands)	April 30, 2022			May 1, 2021
Intangible assets, beginning balance, at cost	$	102,701		$	57,065
Additions		262			376
Amortization		(2,284	)		(1,140	)
Intangible assets, net(1)	$	100,679		$	56,301

(1)

The ending balance includes accumulated amortization of $44.8 million and $36.7 million as of April 30, 2022 and May 1, 2021, respectively.

8. Long-Term Debt, Net

Our long-term debt consisted of the following at April 30, 2022, January 29, 2022, and May 1, 2021:


(In thousands)	April 30, 2022		January 29, 2022		May 1, 2021
Convertible notes principal	$	412,025	$	412,025	$	415,025
Less: unamortized discount		6,218		71,023		85,307
Convertible notes, net	$	405,807	$	341,002	$	329,718

Convertible notes - equity portion, net of tax		—		58,454		68,330

Convertible notes

In April 2020, the Company issued $415 million aggregate principal amount of 2025 Notes in a private placement to qualified institutional buyers in reliance on Rule 144A under the Securities Act. The 2025 Notes have a stated interest rate of 3.75%, payable semi-annually. The Company may redeem the 2025 Notes, in whole or in part, at any time beginning April 17, 2023. The Company used the net proceeds from the offering for general corporate purposes.

The Company does not have the right to redeem the 2025 Notes prior to April 17, 2023. On or after April 17, 2023 and prior to the fortieth scheduled trading day immediately preceding the maturity date, the Company may redeem all or any portion of the 2025 Notes, at its option, for cash, if the last reported sale price of the Company's common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period. Beginning January 2025, noteholders may convert their notes for approximately 119.1 shares of the Company's common stock per $1,000 principal amount of the notes, equivalent to a conversion price of approximately $8.40 per share.

The effective interest rate for the 2025 Notes is 4.3% and we calculated the effective yield using a market approach. The remaining amortization period of the discount was 3.0 years as of April 30, 2022.

Interest expense for the 2025 Notes was:


	13 Weeks Ended
(In thousands)	April 30, 2022		May 1, 2021
Accrued interest for interest payments	$	3,906	$	3,934
Amortization of discount		527		4,428
Total interest expense	$	4,433	$	8,362

Refer to Note 2 to the Consolidated Financial Statements for additional information regarding the impact of the adoption of ASU 2020-06 on the 2025 Notes.

The following table discloses conversion amounts if the 2025 Notes were all converted as of the end of the period:


(In thousands, except per share amounts)	April 30, 2022
Number of shares convertible		49,058
Conversion price per share		8.40
Value in excess of principal if converted		515,282

Revolving credit facilities

In January 2019, the Company entered into an amended and restated Credit Agreement (the “Credit Agreement”) which provides for Credit Facilities. The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities expire on January 30, 2024.

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

As of April 30, 2022, the Company was in compliance with the terms of the Credit Agreement and had $7.9 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of April 30, 2022 and May 1, 2021.

9. Share-Based Compensation

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

Total share-based compensation expense included in the Consolidated Statements of Operations for the 13 weeks ended April 30, 2022 and May 1, 2021 was $14.3 million ($10.8 million, net of tax) and $12.6 million ($9.4 million, net of tax), respectively.

Stock Option Grants

The Company has granted time-based stock option awards, which vest over the requisite service period of the award or at an employee’s eligible retirement date, if earlier. A summary of the Company’s stock option activity for the 13 weeks ended April 30, 2022 follows:


				Weighted- Average		Weighted- Average Remaining Contractual		Aggregate
	Options			Exercise Price		Term		Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Outstanding - January 29, 2022		3,647		$	16.74
Granted		1,094		$	17.24
Exercised		(25	)	$	8.62
Cancelled		(138	)	$	10.84
Outstanding - April 30, 2022		4,578		$	17.08		4.5		6,993
Vested and expected to vest - April 30, 2022		3,182		$	17.14		3.1		2,683
Exercisable - April 30, 2022 (1)		1,042		$	11.15		3.5		4,132

(1)

Options exercisable represent “in-the-money” vested options based upon the weighted-average exercise price of vested options compared to the Company’s stock price on April 30, 2022.

Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $0.4 million and $0.6 million, respectively, for the 13 weeks ended April 30, 2022. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $12.1 million and $2.4 million, respectively, for the 13 weeks ended May 1, 2021.

As of April 30, 2022, there was $11.4 million of unrecognized compensation expense for stock option awards that is expected to be recognized over a weighted average period of 2.4 years.

The fair value of stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:


	13 Weeks Ended			13 Weeks Ended
	April 30,			May 1,
Black-Scholes Option Valuation Assumptions	2022			2021
Risk-free interest rate (1)		2.5	%		0.9	%
Dividend yield		3.8	%		1.6	%
Volatility factor (2)		52.2	%		50.7	%
Weighted-average expected term (3)	4.5 years			4.5 years

(1)

Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options.

(2)

Based on historical volatility of the Company’s common stock.

(3)

Represents the period of time options are expected to be outstanding. The weighted average expected option terms were determined based on historical experience.

Restricted Stock Grants

Time-based restricted stock awards are comprised of time-based restricted stock units. These awards vest over three years. Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

Performance-based restricted stock awards include performance-based restricted stock units. These awards cliff vest at the end of a three-year period based upon the Company’s achievement of pre-established goals throughout the term of the award. Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award.

The grant date fair value of time-based restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. A Monte-Carlo simulation was utilized for performance-based restricted stock awards.

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


	Time-Based Restricted Stock Units					Performance-Based Restricted Stock Units
	April 30, 2022					April 30, 2022
(Shares in thousands)	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Non-vested - January 29, 2022		2,702		$	16.25		1,462		$	20.95
Granted		1,484		$	16.96		524		$	19.00
Vested		(886	)	$	13.97		(257	)	$	21.28
Cancelled		(132	)	$	13.58		(27	)	$	16.89
Non-vested - April 30, 2022		3,168		$	17.33		1,702		$	20.36

As of April 30, 2022, there was $44.1 million of unrecognized compensation expense related to non-vested, time-based restricted stock unit awards that is expected to be recognized over a weighted-average period of 2.3 years. Based on current probable performance, there is $14.0 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement of performance goals is probable over a one to three year period.

As of April 30, 2022, the Company had 4.4 million shares available for all equity grants.

12. Segment Reporting

In accordance with ASC 280, Segment Reporting (“ASC 280”), the Company has identified two operating segments (American Eagle brand and Aerie brand) that also represent our reportable segments and reflect the Chief Operating Decision Maker’s (defined as our CEO) internal view of analyzing results and allocating resources. Additionally, our Todd Snyder brand, Unsubscribed brand, and Supply Chain Platform have been identified as separate operating segments; however, as they do not meet the quantitative thresholds for separate disclosure, they have been included in the Corporate and Other category, as permitted by ASC 280.

Our CEO analyzes segment results and allocates resources between segments based on the adjusted operating income (loss), or the operating income (loss) in periods where there are no adjustments, of each segment. Adjusted operating income (loss) is a non-GAAP financial measure ("non-GAAP" or "adjusted") that is defined by the Company as operating income excluding impairment, restructuring and COVID-19 related charges. Adjusted operating income (loss) is not based on any standardized methodology prescribed by 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 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. There were no adjustments recorded to operating income in either the 13 weeks ended April 30, 2022 or May 1, 2021 for any segment, therefore adjusted operating income (loss) is not presented in the table below.

Reportable segment information is presented in the following table:


(in thousands)	American Eagle		Aerie		Corporate and Other(1)			Total(2)
13 weeks ended April 30, 2022
Total net revenue	$	685,579	$	321,712	$	47,746		$	1,055,037

Operating income (loss)	$	103,905	$	43,073	$	(105,076	)	$	41,902

Capital expenditures	$	15,770	$	31,015	$	11,609		$	58,394


13 weeks ended May 1, 2021
Total net revenue	$	727,702	$	297,487	$	9,425		$	1,034,614

Operating income (loss)	$	151,232	$	69,978	$	(87,783	)	$	133,427

Capital expenditures	$	13,439	$	10,819	$	12,548		$	36,806

(1)

Corporate and Other includes revenue and operating results of the Todd Snyder brand, Unsubscribed brand, and Supply Chain Platform (net of intersegment eliminations), which have been identified as separate operating segments,

but are not material to disclose as separate reportable segments. Corporate operating costs represents certain costs that are not directly attributable to another reportable segment.

(2)

The difference between operating income (loss) and income before income taxes includes the following, which are not allocated to our reportable segments:

- For the 13 weeks ended April 30, 2022: interest expense, net of $4.6 million and other income, net of $4.4 million

- For the 13 weeks ended May 1, 2021: interest expense, net of $8.5 million and other income, net of $1.9 million

ITEM 2. 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 MD&A for Fiscal 2021 which can be found in our Fiscal 2021 Form 10-K.

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

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.

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®, Aerie® and other 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 based on operating income (loss). See Note 12. “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 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 thirteenth 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 thirteenth 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 represent 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 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):

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 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 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 consolidated 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 for a reasonable period of time.

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 will be sufficient to fund anticipated capital expenditures, dividends, and working capital requirements for the next twelve months and beyond.

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

The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we believe that the Company may continue to experience degrees of volatility and business disruptions and remain at risk for periods of closure of our stores, distribution centers, and corporate facilities. While trends in new cases of COVID-19 in the United States improved during the first quarter of Fiscal 2022 compared to the final quarter of Fiscal 2021, caseloads have been increasing recently in many parts of the country and we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic. Past and future impacts of the COVID-19 pandemic also have the ability to disrupt the operations of our partners, suppliers, and vendors, which could lead to or exacerbate existing supply chain disruptions, shipping delays, and freight cost increases. We are monitoring ongoing developments, and we will take further actions that we believe are in the best interests of our associates and customers, as needed. For further information about the risks associated with the COVID-19 pandemic, see “Risk Factors” in Part I, Item 1A of our Fiscal 2021 Form 10-K.

On December 29, 2021, the Company completed the acquisition of Quiet Logistics. With this acquisition, the Company expects to be able to execute on operational efficiencies to create a supply chain platform with significant long-term growth potential.

We sell merchandise through our digital channels, www.ae.com, www.aerie.com, www.toddsnyder.com, www.unsubscribed.com, and our AEO apps, both domestically and internationally in 81 countries. We also sell merchandise on various international online marketplaces. The digital channels reinforce each particular brand platform 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.

Our first quarter of Fiscal 2022 proved to be challenging due to a tough macro environment. Comparisons from an extraordinary Spring last year driven by stimulus payments and pent-up customer demand, were compounded by rising inflation, higher gas prices and a stronger than anticipated pivot to other discretionary categories. Despite these near-term challenges, our brands remain strong with performance continuing to reflect structural improvements compared to pre-pandemic 2019.

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

As of April 30, 2022, we operated 878 American Eagle retail stores, which include 186 Aerie side-by-side locations and two OFFLINE™ side-by-side locations, 254 Aerie stand-alone stores (including 19 OFFLINE™ stand-alone stores and 18 OFFLINE™ side-by-side locations), and AEO Direct. Additionally, there were five Todd Snyder stand-alone locations and four Unsubscribed locations.

Comparison of the 13 weeks ended April 30, 2022 to the 13 weeks ended May 1, 2021

Total net revenue increased 2%, or $20.4 million, to $1.055 billion compared to $1.035 billion last year.

Total net revenue for the 13 weeks ended April 30, 2022 for the American Eagle brand was $685.6 million compared to $727.7 million for the 13 weeks ended May 1, 2021.

Total net revenue for the 13 weeks ended April 30, 2022 for the Aerie brand was $321.7 million compared to $297.5 million for the 13 weeks ended May 1, 2021.

Gross profit decreased $48.2 million, to $388.0 million compared to $436.2 million last year. Our gross margin percentage decreased to 36.8% of revenue from 42.2% of revenue last year. Higher freight costs impacted the gross margin by approximately 340 basis points and our Supply Chain Platform had a 120 basis point impact as we integrate and ramp up the business. Delivery and rent costs also increased, offset slightly by lower incentive compensation.

There was $5.4 million and $4.3 million of share-based payment expense included in gross profit for the periods ended April 30, 2022 and May 1, 2021, respectively, comprised of both time and performance-based awards.

Our gross profit may not be comparable to that of other retailers, as some retailers include all costs related to their distribution network as well as design costs in cost of sales and others may exclude a portion of these costs from cost of sales, including them in a line item such as SG&A 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.

SG&A expenses increased 13% or $34.3 million to $298.8 million from $264.5 million last year. As a percentage of total net revenue, SG&A expenses increased 270 basis points to 28.3%, compared to 25.6% last year. The increase in expenses was primarily related to increased store wages and hours and corporate compensation, professional services and advertising, partially offset by lower incentive compensation accruals.

There was $8.9 million and $8.3 million of share-based payment expense included in SG&A expenses for the periods ended April 30, 2022 and May 1, 2021, respectively, comprised of both time and performance-based awards.

Depreciation and amortization expense increased 24% or $9.1 million, to $47.4 million for the 13 weeks ended April 30, 2022, compared to $38.3 million for the 13 weeks ended May 1, 2021, which was primarily driven by increased capital spending and the recent acquisition of our Supply Chain Platform. As a percentage of total net revenue, depreciation and amortization expense was 4.5% for the 13 weeks ended April 30, 2022 compared to 3.7% for the 13 weeks ended May 1, 2021.

Interest expense decreased $3.9 million, to $4.6 million, for the 13 weeks ended April 30, 2022, compared to $8.5 million for the 13 weeks ended May 1, 2021. The decrease in expense was primarily attributable to the adoption of ASU 2020-06 which reduced non-cash interest expense related to amortization of the non-cash discount on our 2025 Notes.

Other income, net was $4.4 million for the 13 weeks ended April 30, 2022, compared to $1.9 million for the 13 weeks ended May 1, 2021. The increase was primarily attributable to foreign currency fluctuations and changes in other non-operating items.

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks ended April 30, 2022 was 24.0% compared to 24.7% for the 13 weeks ended May 1, 2021. The change in the effective tax rate, as compared to the prior period, is primarily due to the decrease in nondeductible executive compensation offset by lower excess tax benefits on share-based payments.

Net income decreased $63.7 million, to $31.7 million for the 13 weeks ended April 30, 2022, or 3.0% as a percentage of total net revenue, compared to $95.5 million, or 9.2% as a percentage of total net revenue for the 13 weeks ended May 1, 2021.

Net income per share decreased to $0.16 per diluted share for the 13 weeks ended April 30, 2022, compared to $0.46 per diluted share, including $0.02 of the amortization of the non-cash discount on the 2025 Notes for the 13 weeks ended May 1, 2021. The change in net income was attributable to the factors noted above.

We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As of April 30, 2022, our international licensing partners operated in 258 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in 25 countries.

As of April 30, 2022, we had 101 company-owned stores in Canada, 64 in Mexico, 15 in Hong Kong and 7 in Puerto Rico.

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 Credit Facilities that allow us to borrow up to $400 million, which will expire in January 2024. In April 2020, the Company issued $415 million aggregate principal amount of convertible notes due in 2025 in a private placement to qualified institutional buyers. Interest is payable semi-annually. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding our long-term debt.

As of April 30, 2022, we had approximately $228.8 million in cash and cash equivalents and short-term investments. We expect to be able to fund our future cash requirements through current cash holdings and available liquidity.

Working capital decreased $10.9 million compared to January 29, 2022 and decreased $208.2 million compared to last year. The $208.2 million decrease in our working capital compared to May 1, 2021, is driven by a $562.9 million decrease in cash and short-term investments primarily related to the acquisition of our Supply Chain Platform in Fiscal 2021 totaling $358.1 million, partially offset by a $215.4 million increase in inventory, a $81.4 million increase in net accounts receivable, and a $53.0 million decrease in accrued compensation.

Net cash used for operating activities totaled $108.2 million for the 13 weeks ended April 30, 2022, compared to net cash provided by operating activities of $0.4 million for the 13 weeks ended May 1, 2021. 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.

Net cash used for investing activities totaled $58.7 million for the 13 weeks ended April 30, 2022, compared to net cash used for investing activities of $112.2 million for the 13 weeks ended May 1, 2021. Investing activities for the 13 weeks ended April 30, 2022 primarily consisted of $58.4 million of capital expenditures for property and equipment. Investing activities for the 13 weeks ended May 1, 2021 primarily consisted of $75.0 million of short-term investment purchases and $36.8 million of capital expenditures for property and equipment.

Net cash used for financing activities totaled $38.4 million for the 13 weeks ended April 30, 2022, compared to net cash used for financing activities of $22.1 million for the 13 weeks ended May 1, 2021. Cash used for financing activities for the 13 weeks ended April 30, 2022 consisted primarily of $30.4 million for cash dividends paid at a quarterly rate of $0.18 and $8.2 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments.

Cash used for financing activities for the 13 weeks ended May 1, 2021 consisted primarily of $22.9 million for cash dividends paid at a quarterly rate of $0.1375 and $10.9 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $12.1 million of proceeds from stock option exercises.

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

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

Capital expenditures for the 13 weeks ended April 30, 2022 were $58.4 million, and included $44.0 million related to investments in our stores, including 19 new stores (7 American Eagle stores and 12 Aerie stand-alone stores), and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($12.5 million) and our Supply Chain Platform ($1.0 million).

For Fiscal 2022, we expect capital expenditures to be approximately $275 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.

During Fiscal 2019, our Board of Directors (“Board”) authorized the repurchase of 30.0 million shares under a share repurchase program. During the 13 weeks ended April 30, 2022, we did not repurchase any shares under our publicly-announced share repurchase program. As of April 30, 2022, our total remaining share repurchase authorization was 30.0 million shares.

During the 13 weeks ended April 30, 2022 and May 1, 2021, we repurchased approximately 0.5 million and 0.4 million shares, respectively, from certain employees at market prices totaling $8.2 million and $10.9 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.

During the 13 weeks ended April 30, 2022, our Board declared a quarterly cash dividend of $0.18 per share on March 2, 2022, which was paid on March 24, 2022.

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

Our critical accounting policies and estimates are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended January 29, 2022 contained in our Fiscal 2021 Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of our critical accounting policies and estimates may require our management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Our management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

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

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

As of April 30, 2022, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash and cash equivalents.

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 April 30, 2022:

The fair value of the 2025 Notes is not required to be measured at fair value on a recurring basis. Upon issuance, the fair value of the 2025 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.

We are primarily exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized gain of $0.5 million is included in accumulated other comprehensive income during the 13 weeks ended April 30 2022. Our market risk profile as January 29, 2022 is disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Fiscal 2021 Form 10-K, which is unchanged as of April 30, 2022.

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the management of American Eagle Outfitters, Inc. (the “Management”), including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

In connection with the preparation of this Quarterly Report on Form 10-Q, as of April 30, 2022, the Company performed an evaluation under the supervision and with the participation of our Management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing, and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are involved, from time to time, in actions associated with or incidental to our business, including, among other things, matters involving consumer privacy, trademark and other intellectual property, licensing, importation of products, taxation, and employee relations. We believe at present that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect on our financial position or results of operations. However, our assessment of any litigation or other legal claims could potentially change in light of the discovery of facts not presently known or determinations by judges, juries, or other finders of fact that are not in accord with management's evaluation of the possible liability or outcome of such litigation or claims. Consistent with SEC Regulation S-K Item 103, we have elected to disclose those environmental proceedings with a governmental entity as a party where the company reasonably believes such proceeding would result in monetary sanctions, exclusive of interest and costs, of $1.0 million or more. Applying this threshold, there are no environmental matters to disclose for this period.

Refer to Note 11. “Legal Proceedings” of the notes to the Consolidated Financial Statements included herein for additional information.

Risk factors that affect our business and financial results are discussed within Part I, Item 1A of our Fiscal 2021 Form 10-K. There have been no material changes to our risk factors as disclosed in the Fiscal 2021 Form 10-K.

The following table provides information regarding our repurchases of our common stock during the 13 weeks ended April 30, 2022:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


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

77 Hot Metal Street, Pittsburgh, PA		15203-2329
(Address of principal executive offices)		(Zip Code)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	AEO	New York Stock Exchange


		Page Number
	PART I - FINANCIAL INFORMATION

	Forward Looking Statements	3

Item 1.	Financial Statements	6
	Consolidated Balance Sheets: April 30, 2022, January 29, 2022 and May 1, 2021	6
	Consolidated Statements of Operations: 13 weeks ended April 30, 2022 and May 1, 2021	7
	Consolidated Statements of Comprehensive Income: 13 weeks ended April 30, 2022 and May 1, 2021	8
	Consolidated Statements of Stockholders' Equity: 13 weeks ended April 30, 2022 and May 1, 2021	9
	Consolidated Statements of Cash Flows: 13 weeks ended April 30, 2022 and May 1, 2021	10
	Notes to Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	N/A
Item 4.	Mine Safety Disclosures	N/A
Item 5.	Other Information	N/A
Item 6.	Exhibits	34


	April 30,			January 29,			May 1,
(In thousands, except per share amounts)	2022			2022			2021
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	228,775		$	434,770		$	716,679
Short-term investments		—			—			75,000
Merchandise inventory		682,100			553,458			466,698
Accounts receivable, net		230,469			286,683			149,056
Prepaid expenses and other		139,195			122,013			88,347
Total current assets		1,280,539			1,396,924			1,495,780
Operating lease right-of-use assets		1,210,169			1,193,021			1,130,743
Property and equipment, at cost, net of accumulated depreciation		745,165			728,272			627,967
Goodwill, net		271,398			271,416			13,395
Intangible assets, net		100,679			102,701			56,301
Non-current deferred income taxes		42,977			44,167			45,995
Other assets		50,591			50,142			30,485
Total assets	$	3,701,518		$	3,786,643		$	3,400,666
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	236,376		$	231,782		$	231,932
Current portion of operating lease liabilities		317,844			311,005			297,561
Unredeemed gift cards and gift certificates		59,256			71,365			50,754
Accrued compensation and payroll taxes		34,469			141,817			87,488
Accrued income and other taxes		15,550			16,274			20,250
Other current liabilities and accrued expenses		73,984			70,628			56,498
Total current liabilities		737,479			842,871			744,483
Non-current liabilities:
Non-current operating lease liabilities		1,150,951			1,154,481			1,126,165
Long-term debt, net		405,807			341,002			329,718
Other non-current liabilities		24,275			24,617			24,737
Total non-current liabilities		1,581,033			1,520,100			1,480,620
Commitments and contingencies		—			—			—
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding		—			—			—
Common stock, $0.01 par value; 600,000 shares authorized; 249,566 shares issued; 169,421, 168,699, and 167,671 shares outstanding, respectively		2,496			2,496			2,496
Contributed capital		562,973			636,355			648,434
Accumulated other comprehensive loss		(40,315	)		(40,845	)		(37,810	)
Retained earnings		2,224,113			2,203,772			1,951,496
Treasury stock, at cost, 80,145, 80,867, and 81,895 shares, respectively		(1,366,261	)		(1,378,106	)		(1,389,053	)
Total stockholders’ equity		1,383,006			1,423,672			1,175,563
Total liabilities and stockholders’ equity	$	3,701,518		$	3,786,643		$	3,400,666


	13 Weeks Ended
	April 30,			May 1,
(In thousands, except per share amounts)	2022			2021

Total net revenue	$	1,055,037		$	1,034,614
Cost of sales, including certain buying, occupancy and warehousing expenses		667,011			598,424
Gross profit		388,026			436,190
Selling, general and administrative expenses		298,755			264,492
Depreciation and amortization expense		47,369			38,271
Operating income		41,902			133,427
Interest expense, net		4,588			8,506
Other income, net		(4,444	)		(1,860	)
Income before income taxes		41,758			126,781
Provision for income taxes		10,018			31,318
Net income		31,740			95,463

Net income per basic share	$	0.19		$	0.57
Net income per diluted share	$	0.16		$	0.46

Weighted average common shares outstanding - basic		168,460			167,257
Weighted average common shares outstanding - diluted		219,742			206,562


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


(In thousands, except per share amounts)	Shares Outstanding			Common Stock		Contributed Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Stockholders' Equity
Balance at January 30, 2021		166,335		$	2,496	$	663,718		$	1,868,613		$	(1,407,414	)	$	(40,748	)	$	1,086,665
Stock awards		—			—		12,553			—			—			—			12,553
Repurchase of common stock from employees		(396	)		—		—			—			(10,944	)		—			(10,944	)
Reissuance of treasury stock		1,732			—		(28,515	)		11,020			29,305			—			11,810
Net income		—			—		—			95,463			—			—			95,463
Other comprehensive income		—			—		—			—			—			2,938			2,938
Cash dividends declared and dividend equivalents ($0.1375 per share)		—			—		678			(23,600	)		—			—			(22,922	)
Balance at May 1, 2021		167,671		$	2,496	$	648,434		$	1,951,496		$	(1,389,053	)	$	(37,810	)	$	1,175,563

Balance at January 29, 2022		168,699		$	2,496	$	636,355		$	2,203,772		$	(1,378,106	)	$	(40,845	)	$	1,423,672
Stock awards		—			—		14,154			—			—			—			14,154
Repurchase of common stock from employees		(452	)		—		—			—			(8,171	)		—			(8,171	)
Reissuance of treasury stock		1,174			—		(20,506	)		819			20,016			—			329
Adoption of Accounting Standards Update 2020-06, net of tax		—			—		(67,686	)		18,830			—			—			(48,856	)
Net income		—			—		—			31,740			—			—			31,740
Other comprehensive income		—			—		—			—			—			530			530
Cash dividends declared and dividend equivalents ($0.18 per share)		—			—		656			(31,048	)		—			—			(30,392	)
Balance at April 30, 2022		169,421		$	2,496	$	562,973		$	2,224,113		$	(1,366,261	)	$	(40,315	)	$	1,383,006


Executive Overview	General description of the Company’s business and certain segment information.
Key Performance Indicators	Overview of key performance indicators reviewed by management to gauge the Company’s results.
Current Trends and Outlook	Discussion related to the COVID-19 pandemic’s impact on the Company’s business, recent acquisitions and the Company’s long-term plans for growth. In addition, this section also provides a summary of the Company’s performance over the 13 weeks ended April 30, 2022 and the 13 weeks ended May 1, 2021.
Results of Operations	Provides an analysis of certain components of the Company’s Consolidated Statements of Operations for the 13 weeks ended April 30, 2022 and the 13 weeks ended May 1, 2021.
Liquidity and Capital Resources	Discussion of the Company’s financial condition and changes in financial condition and liquidity for the 13 weeks ended April 30, 2022 and the 13 weeks ended May 1, 2021.
Critical Accounting Policies and Estimates	Discusses where information may be found about accounting policies and estimates considered to be important to the Company’s results of operations and financial condition, which typically require significant judgment and estimation on the part of the Company’s management in their application.


	Fair Value Measurements at April 30, 2022
(In thousands)	Carrying Amount		Quoted Market Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	145,173	$	145,173	$	—	$	—
Interest bearing deposits		83,602		83,602		—		—
Total cash and cash equivalents	$	228,775	$	228,775	$	—	$	—


	Total				Total Number of		Maximum Number of
	Number of		Average		Shares Purchased as		Shares that May
	Shares		Price Paid		Part of Publicly		Yet Be Purchased
Period	Purchased		Per Share		Announced Programs		Under the Program
	(1)		(2)		(1)		(1) (3)
Month #1 (January 30, 2022 through February 26, 2022)		1,842	$	24.12		—		30,000,000
Month #2 (February 27, 2022 through April 2, 2022)		378,219	$	18.28		—		30,000,000
Month #3 (April 3, 2022 through April 30, 2022)		72,421	$	16.22		—		30,000,000
Total		452,482	$	17.97		—		30,000,000



* Exhibit 31.1		Certification by Jay L. Schottenstein pursuant to Rule 13a-14(a) or Rule 15d-14(a)

* Exhibit 31.2		Certification by Michael A. Mathias pursuant to Rule 13a-14(a) or Rule 15d-14(a)

** Exhibit 32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

** Exhibit 32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Exhibit 101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2022, formatted as inline eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Balance Sheets as of April 30, 2022, January 29, 2022 and May 1, 2021, (ii) Consolidated Statements of Operations for the 13 weeks ended April 30, 2022 and May 1, 2021, (iii) Consolidated Statements of Comprehensive Income for the 13 weeks ended April 30, 2022 and May 1, 2021, (iv) Consolidated Statements of Stockholders’ Equity for the 13 weeks ended April 30, 2022 and May 1, 2021, and (v) Consolidated Statements of Cash Flows for the 13 weeks ended April 30, 2022 and May 1, 2021
* Exhibit 104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2022, formatted in inline XBRL


		American Eagle Outfitters, Inc. (Registrant)

By:		/s/ Jay L. Schottenstein
		Jay L. Schottenstein
		Chief Executive Officer
		(Principal Executive Officer)

By:		/s/ Michael A. Mathias
		Michael A. Mathias
		Executive Vice President, Chief Financial Officer
		(Principal Financial Officer)