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Dynamic quotes 
OFFON

AMERICAN EAGLE OUTFITTERS, INC.

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

11/23/2021 | 04:35pm EST
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our Management's Discussion and
Analysis of Financial Condition and Results of Operations for Fiscal 2020, which
can be found in our Fiscal 2020 Form 10-K filed with the Securities and Exchange
Commission on March 11, 2021.

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

Executive Overview

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


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

Financial highlights for the thirteen weeks ended October 30, 2021 include comparisons to the third quarter of Fiscal 2020:

•Record revenue of $1.27 billion increased 24%;

•Operating income reached an all-time third quarter high of $210 million;

•Revenue for Aerie increased 28%, with operating income up 46%; and

•American Eagle revenue increased 21%, with operating income up 68%.

Key Performance Indicators

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


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

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

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

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

• Total transactions represents the count of customer transactions over a

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

specified otherwise).

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

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

Direct, unless specified otherwise).

• Consolidated comparable traffic represents visits to our Company-owned

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

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


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Gross profit - Gross profit measures whether we are optimizing the profitability
of our sales. Gross profit is the difference between total net revenue and cost
of sales. Cost of sales consists of merchandise costs, including design,
sourcing, importing, and inbound freight costs, as well as markdowns, shrinkage,
and certain promotional costs (collectively, "merchandise costs") and buying,
occupancy and warehousing costs. Design costs consist of compensation, rent,
depreciation, travel, supplies, and samples.

Buying, occupancy and warehousing costs consist of: compensation, employee
benefit expenses, and travel for our buyers and certain senior merchandising
executives; rent and utilities related to our stores, corporate headquarters,
distribution centers, and other office space; freight from our distribution
centers to the stores; compensation and supplies for our distribution centers,
including purchasing, receiving, and inspection costs; and shipping and handling
costs related to our e-commerce operations.

The inability to obtain acceptable levels of sales, initial markups, or any significant increase in our use of markdowns could have an adverse effect on our gross profit and consolidated results of operations.


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

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



COVID-19


The 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.

As of October 30, 2021, all our stores have reopened and remain open. Our stores
are operating with restrictive and precautionary measures in place, such as
reduced operating hours, physical distancing, enhanced cleaning and sanitation,
and limited occupancy levels. We do not believe that our results for the third
quarter of Fiscal 2021 are directly comparable to the same period in Fiscal
2020.

The unpredictability of the trajectory of the COVID-19 pandemic has
significantly diminished visibility into the future operating environment, and
we believe that the Company may continue to experience degrees of volatility and
business disruptions and remain at risk for periods of closure of our stores,
distribution centers, and corporate facilities through the remainder of Fiscal
2021. While trends improved during the first nine months of 2021, we cannot
reasonably estimate the extent to which our business will continue to be
affected by the COVID-19 pandemic and to what extent the recent improved trends
will continue. Past and future impacts of COVID-19 also have the ability to
disrupt the operations of our partners, suppliers, and vendors, which could lead
to supply chain disruption, shipping delays, and freight cost increases. We are
monitoring the ongoing developments as the COVID-19 vaccines are being
distributed and administered, and we will take further actions that are in the
best interests of our associates and customers, as needed. For further
information about the risks associated with the COVID-19 pandemic, see "Risk
Factors" in Part I, Item 1A of our Fiscal 2020 Form 10-K and in Part II, Item 1A
of this Quarterly Report on Form 10-Q.

Results of Operations

Overview

Our third quarter Fiscal 2021 results reflected another quarter of record revenue and profitability. The work on our value creation plan drove meaningful improvements to our profitability through real estate and inventory optimization, omnichannel and customer focus, and our supply chain initiatives.


Additionally, during the 13 and 39 weeks ended October 31, 2020, our
consolidated results of operations were materially impacted by the effects of
COVID-19. Commencing in March 2020, we experienced a significant reduction in
customer traffic and demand resulting from the continued spread of COVID-19 and
government actions to combat it. In response, we closed our stores to the public
after the close of business on March 17, 2020; however, we continued to operate
our digital business. Subsequent to May 1, 2020, we began to reopen our stores,
and as of October 31, 2020, nearly all of our stores

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had reopened; however, we continued to experience reduced customer traffic in reopened store locations. Accordingly, our results for the third quarter of Fiscal 2020 were significantly impacted.


As of October 30, 2021, we had approximately $740.7 million in cash and cash
equivalents, which includes the proceeds from our Notes issuance, discussed in
greater detail below and in Note 8 to the Consolidated Financial Statements. We
expect to be able to fund our future cash requirements through current cash
holdings and available liquidity.

Absent the impacts of the COVID-19 pandemic, our business is affected by the
pattern of seasonality common to most retail apparel businesses. The results for
the current and prior periods are not necessarily indicative of future financial
results.

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

                                                    13 Weeks Ended                          39 Weeks Ended
                                            October 30,         October 31,         October 30,         October 31,
                                               2021                2020                2021                2020
Total net revenue                                  100.0   %           100.0   %           100.0   %           100.0   %
Cost of sales, including certain buying,
occupancy
  and warehousing expenses                          55.7                59.8                57.1                71.3
Gross profit                                        44.3                40.2                42.9                28.7
Selling, general and administrative
expenses                                            24.6                26.5                24.9                27.8
Impairment, restructuring and COVID-19
related charges                                        -                 0.6                   -                 7.1
Depreciation and amortization expense                3.2                 3.8                 3.4                 4.9
Operating income (loss)                             16.5                 9.3                14.6               (11.1 )
Interest expense, net                                0.7                 0.8                 0.7                 0.7
Other (income) expense, net                         (0.2 )              (0.2 )              (0.2 )                 -
Income (loss) before income taxes                   16.0                 8.7                14.1               (11.8 )
Provision (benefit) for income taxes                 4.1                 3.1                 3.6                (3.2 )
Net income (loss)                                   11.9   %             5.6   %            10.5   %            (8.6 ) %

The following table shows our consolidated store data:


                                                   13 Weeks Ended                      39 Weeks Ended
                                            October 30,       October 31,       October 30,       October 31,
                                               2021              2020              2021              2020
Number of stores:
Beginning of period                                1,090             1,098             1,078             1,095
Opened                                                31                10                62                29
Closed                                                 -                (3 )             (19 )             (19 )
End of period                                      1,121             1,105             1,121             1,105
Total gross square feet at end of period
(in '000)                                          6,924             6,858             6,924             6,858
International licensed/franchise stores
at end of
  period (1)                                         256               225               256               225


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




Our operations consist of 897 American Eagle retail stores, which include 181
Aerie side-by-side locations and 1 OFFLINE side-by-side locations; 216 Aerie
stand-alone locations (including 8 OFFLINE stand-alone locations and 5 OFFLINE
side-by-side location); and AEO Direct. Additionally, there are three Todd
Snyder stand-alone locations and four Unsubscribed locations.

Non-GAAP Information


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

                                       31

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our business and operations. The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.

                                                                  13 Weeks Ended
                                                          October 30,        October 31,
                                                             2021                2020
Net income per diluted share - GAAP Basis               $          0.74     $         0.32
Add: Incremental COVID-19 related expenses and
Restructuring(1)                                                      -     

0.02

Add: Convertible Debt(2)                                           0.02     

0.01

Net income per diluted share - Adjusted or Non-

  GAAP Basis                                            $          0.76     

$ 0.35

(1) 13 weeks ended October 31, 2020: $6.0 million of Incremental COVID-19

related expenses consisting of personal protective equipment and supplies

for our associates and customers and $1.0 million of corporate severance.

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

Comparison of the 13 weeks ended October 30, 2021 to the 13 weeks ended October 31, 2020


Total Net Revenue

Total net revenue increased 24%, or $242.5 million, to $1.274 billion compared
to $1.032 billion last year. As discussed above, the COVID-19 pandemic
negatively affected our financial results for the 13 weeks ended October 31,
2020; however, all our stores have reopened and we experienced increased store
traffic, transactions, and transaction value, driving a 29% increase in store
revenue and 10% increase in AEO Direct revenue for the third quarter of Fiscal
2021.

American Eagle

Total net revenue for the 13 weeks ended October 30, 2021 for the American Eagle brand increased 21% to $941.0 million compared to $776.0 million for the 13 weeks ended October 31, 2020.

Aerie

Total net revenue for the 13 weeks ended October 30, 2021 for the Aerie brand increased 28% to $315.0 million compared to $246.7 million for the 13 weeks ended October 31, 2020.

Gross Profit


Gross profit increased $149.7 million to $564.5 million compared to $414.8
million last year. As a percentage of total net revenue, gross margin increased
to 44.3%, compared to 40.2% last year. This quarter's gross margin reflected
higher merchandise margins, primarily due to inventory optimization, higher
full-priced sales and markdown improvement, partially offset by higher freight
costs related to the global supply chain disruptions. Additionally, both rent
and delivery expense improved, as a percent of total net revenue.

For the 13 weeks ended October 31, 2020, gross margin was significantly impacted
by disruptions related to COVID-19, which reflected a reduction in store revenue
and higher delivery and distribution center costs primarily due to a strong
digital business, partly offset by lower rent expenses.

There was $3.5 million and $4.5 million of share-based payment expense included
in gross profit for the 13-week periods ended October 30, 2021 and October 31,
2020, respectively, comprised of both time- and performance-based awards.

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

Selling, General and Administrative Expenses


Selling, general and administrative ("SG&A") expenses increased 15%, or $40.6
million, to $313.9 million from $273.3 million last year. As a percentage of
total net revenue, SG&A expenses decreased 190 basis points to 24.6%, compared
to 26.5% last year.

The 13 weeks ended October 30, 2021 reflected increased SG&A expenses primarily
related to increased store payroll, as a result of improved store traffic, as
well as increased advertising, partially offset by lower incentive compensation.

The 13 weeks ended October 31, 2020 were significantly impacted by disruptions
related to COVID-19, resulting in lower operating expenses due to store closures
and other cost reductions.

There was $4.4 million and $4.5 million of share-based payment expense included
in SG&A expenses for the 13-week periods ended October 30, 2021 and October 31,
2020, respectively, comprised of both time- and performance-based awards.

Impairment, Restructuring and COVID-19 Related Charges


There were no impairment, restructuring and COVID-19 related charges recorded
for the 13 weeks ended October 30, 2021. For the 13 weeks ended October 31,
2020, impairment, restructuring and COVID-19 related charges were $7.0 million,
or 0.6% as a percentage of total net revenue. These charges consisted of $6.0
million of incremental COVID-19 related expenses, including personal protective
equipment and supplies for our associates and customers and $1.0 million of
severance costs. For further information, refer to Note 13 to the Consolidated
Financial Statements.

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

Depreciation and Amortization Expense


Depreciation and amortization expense increased 5%, or $2.0 million, to $40.9
million for the 13 weeks ended October 30, 2021, compared to $39.0 million for
the 13 weeks ended October 31, 2020. As a percentage of total net revenue,
depreciation and amortization expense was 3.2% for the 13 weeks ended October
30, 2021 compared to 3.8% for the 13 weeks ended October 31, 2020.

Interest Expense, Net


Interest expense, net increased $0.7 million to $8.6 million for the 13 weeks
ended October 30, 2021, compared to $7.9 million for the 13 weeks ended October
31, 2020. The increase in expense was primarily attributable to increased
interest expense related to our Notes and lower interest income.

Other (Income), Net


Other income, net was $3.1 million for the 13 weeks ended October 30, 2021,
compared to $2.2 million for the 13 weeks ended October 31, 2020. The increase
was primarily attributable to foreign currency fluctuations and changes in other
non-operating items.

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Provision for Income Taxes


The provision for income taxes is based on the current estimate of the annual
effective income tax rate and is adjusted as necessary for discrete quarterly
events. The effective income tax rate for the 13 weeks ended October 30, 2021
was 25.5% compared to 35.3% for the 13 weeks ended October 31, 2020.

The change in the effective tax rate, as compared to the prior period, is
primarily due to benefits recognized as a result of the enactment of the CARES
Act, which impacted the 13 weeks ended October 31, 2020. The CARES Act allowed
net operating losses generated within tax year 2020 to be carried back to
periods in which the U.S. federal corporate income tax rate was 35%, as opposed
to the current U.S. federal corporate income tax rate of 21%, which resulted in
a higher rate applicable to the 13 weeks ended October 31, 2020.

Net Income (Loss)


Net income increased $94.1 million to $152.2 million for the 13 weeks ended
October 30, 2021, or 11.9% as a percentage of total net revenue, as compared to
$58.1 million, or 5.6% as a percentage of total net revenue, for the 13 weeks
ended October 31, 2020.

Net income per share increased to $0.74 per diluted share for the 13 weeks ended
October 30, 2021, which included $0.02 of amortization of the non-cash discount
on the Notes, compared to $0.32 per diluted share, including $0.02 of
incremental COVID-19 related expenses and restructuring, and $0.01 of
amortization of the non-cash discount on the Notes, for the 13 weeks ended
October 31, 2020. The change in net income (loss) was attributable to the
factors identified above.

Comparison of the 39 weeks ended October 30, 2021 to the 39 weeks ended October 31, 2020


Total Net Revenue

Total net revenue increased 42%, or $1.036 billion, to $3.503 billion compared
to $2.467 billion last year. The COVID-19 pandemic and the associated closures
of our retail stores beginning March 17, 2020 negatively affected our financial
results for the 39 weeks ended October 31, 2020.

American Eagle

Total net revenue for the 39 weeks ended October 30, 2021 for the American Eagle brand was $2.514 billion compared to $1.791 billion for the 39 weeks ended October 31, 2020.

Aerie


Total net revenue for the 39 weeks ended October 30, 2021 for the Aerie brand
was $947.9 million compared to $653.2 million for the 39 weeks ended October 31,
2020.

Gross Profit

Gross profit increased $794.8 million to $1.503 billion compared to $708.3
million last year. Our gross margin percentage increased to 42.9% of revenue
from 28.7% of revenue last year. The increase in gross margin reflected higher
merchandise margins across brands, primarily due to higher full-priced sales and
lower promotions, as well as improved rent and delivery expense, as a percent of
total net revenue.

The 39 weeks ended October 31, 2020 were significantly impacted by disruptions
related to COVID-19, which resulted in a decline in revenue from retail store
closures, higher markdowns, and promotions to clear through spring and summer
merchandise, and inventory provisions.

There was $11.6 million of share-based payment expense included in gross profit
for both of the 39-week periods ended October 30, 2021 and October 31, 2020,
comprised of both time- and performance-based awards.

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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


SG&A expenses for the 39 weeks ending October 30, 2021 increased 27%, or $187.1
million, to $872.3 million from $685.2 million last year. As a percentage of
total net revenue, SG&A expenses decreased 290 basis points to 24.9%, compared
to 27.8% last year.

The 39 weeks ended October 30, 2021 reflected increased SG&A expenses primarily
related to the reopening of our stores, including increased store payroll and
variable selling expenses, as well as increased advertising, services and
compensation costs.

The 39 weeks ended October 31, 2020 were significantly impacted by the
disruption related to COVID-19, including the impact of lower store salaries
from furloughs that took effect in early April 2020 related to the retail store
closures.

There was $17.8 million and $13.0 million of share-based payment expense included in SG&A expenses for the periods ended October 30, 2021 and October 31, 2020, respectively, comprised of both time- and performance-based awards.

Impairment, Restructuring and COVID-19 Related Charges


There were no impairment, restructuring and COVID-19 related charges recorded
for the 39 weeks ended October 30, 2021. Impairment, restructuring and COVID-19
related charges were $177.2 million, or 7.1% as a percentage of total net
revenue, for the 39 weeks ended October 31, 2020. During the 39 weeks ended
October 31, 2020, the Company recorded asset impairment charges of $153.6
million. Included in this amount are retail store impairment charges of $109.6
million, of which $84.1 million relates to operating lease ROU assets and $25.5
million relates to store property and equipment (fixtures and equipment and
leasehold improvements). We also recorded $26.0 million of impairment related
charges to certain corporate property and equipment, as well as $18.0 million of
impairment charges related to certain cost and equity method investments.
Additionally, there was $19.8 million of incremental COVID-19 related expenses
and $3.7 million of severance costs. For further information, refer to Note 13
to the Consolidated Financial Statements.

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

Depreciation and Amortization Expense


Depreciation and amortization expense decreased 1%, or $1.1 million, to $119.7
million for the 39 weeks ended October 30, 2021, compared to $120.8 million for
the 39 weeks ended October 31, 2020. As a percentage of total net revenue,
depreciation and amortization expense was 3.4% for the 39 weeks ended October
30, 2021 compared to 4.9% for the 39 weeks ended October 31, 2020. The decrease
in expense was primarily attributable to asset impairment recorded in Fiscal
2020.

Interest Expense, Net

Interest expense, net increased $9.4 million to $26.0 million for the 39 weeks
ended October 30, 2021, compared to $16.6 million for the 39 weeks ended October
31, 2020. The increase in expense was primarily attributable to increased
interest expense related to our Notes and lower interest income, partially
offset by no interest expense incurred for borrowings on our revolving credit
facilities during the 39 weeks ended October 30, 2021.

Other (Income), Net


Other income, net was $6.4 million for the 39 weeks ended October 30, 2021.
Other income, net was $0.8 million for the 39 weeks ended October 31, 2020. The
increase was primarily attributable to foreign currency fluctuations and changes
in other non-operating items.

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Provision for Income Taxes


The provision for income taxes is based on the current estimate of the annual
effective income tax rate and is adjusted as necessary for discrete quarterly
events. The effective income tax rate for the 39 weeks ended October 30, 2021
was 24.9% compared to the effective tax benefit rate of 26.8% for the 39 weeks
ended October 31, 2020.

The change in the effective tax rate, as compared to the prior period, is
primarily due to benefits recognized as a result of the enactment of the CARES
Act, which impacted the 39 weeks ended October 31, 2020. The CARES Act allowed
net operating losses generated within tax year 2020 to be carried back to
periods in which the U.S. federal corporate income tax rate was 35%, as opposed
to the current U.S. federal corporate income tax rate of 21%, which resulted in
a higher benefit rate applicable to the 39 weeks ended October 31, 2020. The
effective tax rate for the 39 weeks ended October 30, 2021 was also impacted by
higher excess tax benefits on share-based payments.

Net Income (Loss)


Net income increased $582.0 million to $369.2 million for the 39 weeks ended
October 30, 2021, or 10.5% as a percentage of total net revenue, as compared to
a net loss of $212.8 million, or (8.6%) as a percentage of total net revenue,
for the 39 weeks ended October 31, 2020. The change in net income (loss) was
attributable to the factors identified above.

International Operations


We have agreements with multiple third-party operators to expand our brands
internationally. Through these agreements, a series of franchised, licensed, or
other brand-dedicated American Eagle stores have opened and will continue to
open in Asia, Europe, India, Latin America, and the Middle East. These
agreements do not involve a significant capital investment or operational
involvement from us. We continue to increase the number of countries in which we
enter into these types of arrangements as part of our strategy to expand
internationally. As of October 30, 2021, we had 256 stores operated by our
third-party operators in 30 countries. International third-party operated stores
are not included in the consolidated store data or the total gross square feet
calculation.

As of October 30, 2021, we had 96 Company-owned stores in Canada, 58 in Mexico, 12 in Hong Kong, and 7 in Puerto Rico.

Fair Value Measurements


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

Financial Instruments

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

• Level 1 - Quoted prices in active markets.

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

indirectly.

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

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

liabilities.

As of October 30, 2021, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash and cash equivalents.

                                       36

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




                                                                      Fair 

Value Measurements at October 30, 2021

                                                                        Quoted Market
                                                                       Prices in Active
                                                                         Markets for                                        Significant
                                                                          Identical              Significant Other         Unobservable
                                                                            Assets               Observable Inputs            Inputs
(In thousands)                                 Carrying Amount            (Level 1)                  (Level 2)               (Level 3)
Cash and cash
  equivalents:
Cash                                          $         364,769       $          364,769       $                    -     $             -
Interest bearing
  deposits                                              375,899                  375,899                            -                   -
Total cash and cash
  equivalents                                 $         740,668       $          740,668                            -                   -




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

Liquidity and Capital Resources


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

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

As of October 30, 2021, we had approximately $740.7 million in cash and cash
equivalents, which includes the proceeds from the Notes. We expect to be able to
fund our future cash requirements through current cash holdings and available
liquidity. Subsequent to October 30, 2021, we entered into an agreement to
acquire Quiet Logistics, Inc. and strategic equity investments for $350 million
in cash, subject to certain adjustments. This transaction is expected to close
in the fourth quarter of Fiscal 2021. Refer to Note 14 to the Consolidated
Financial Statements for information regarding the subsequent event.

The following sets forth certain measures of our liquidity:



                                  October 30,       January 30,       October 31,
                                     2021              2021              2020

Working Capital (in thousands) $ 905,958$ 664,161$ 613,450 Current Ratio

                             2.04              1.77              1.69




Working capital increased $241.8 million compared to January 30, 2021 and $292.5
million compared to October 31, 2020. The $292.5 million increase in our working
capital, compared to October 31, 2020, is driven by a $179.8 million increase in
inventory, a $103.9 million increase in accounts receivable, a $48.3 million
increase in cash and short-term investments, a $46.6 million decrease in current
operating lease liabilities, and a $22.8 million decrease due to dividends
payable, offset by a $64.3 million decrease in prepaid expenses, a $18.1 million
increase in accrued income and other taxes, and a $10.0 million increase in
accounts payable.

                                       37

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Cash Flows provided by (used for) Operating Activities


Net cash provided by operating activities totaled $133.7 million for the 39
weeks ended October 30, 2021, compared to net cash used for operating activities
of $10.4 million for the 39 weeks ended October 31, 2020. For the 39 weeks ended
October 30, 2021, our major source of cash from operations was merchandise sales
and our primary outflow was for the payment of operational costs. For the period
ended October 31, 2020, our major source of cash from operations was merchandise
sales and our primary outflow of cash for operations was for the payment of
operational costs.

Cash Flows used for Investing Activities


Net cash used for investing activities totaled $148.8 million for the weeks
ended October 30, 2021, compared to net cash used for investing activities of
$38.1 million for the 39 weeks ended October 31, 2020. Investing activities for
the 39 weeks ended October 30, 2021 primarily consisted of $144.4 million of
capital expenditures for property and equipment. Investing activities for 39 the
weeks ended October 31, 2020 primarily included $92.6 million of capital
expenditures for property and equipment, offset by $55.0 million of net
short-term investment sales.

Cash Flows (used for) provided by Financing Activities


Net cash used for financing activities totaled $94.8 million for the weeks ended
October 30, 2021, compared to net cash provided by financing activities of
$379.9 million for the 39 weeks ended October 31, 2020. Cash used for financing
activities for the 39 weeks ended October 30, 2021 consisted primarily of $83.6
million for cash dividends paid at quarterly rates of $0.1375 for the 13 weeks
ended May 2, 2021 and $0.18 for the 13 weeks ended July 31, 2021 and October 30,
2021, and $24.0 million for the repurchase of common stock from employees for
the payment of taxes in connection with vesting of share-based payments,
partially offset by $13.1 million of proceeds from stock option exercises.

Cash provided by financing activities for the 39 weeks ended October 31, 2020
consisted primarily of $406.1 million of net proceeds from the issuance of
convertible senior notes. This was partially offset by $20.0 million used for
purchases of 1.7 million shares of common stock under publicly-announced
programs in early March 2020, and $5.4 million for the repurchase of common
stock from employees for the payment of taxes in connection with the vesting of
share-based payments.

Credit Facilities

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

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

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

Capital Expenditures for Property and Equipment

Capital expenditures for the 39 weeks ended October 30, 2021 were $144.4 million, and included $78.6 million related to investments in our stores, including 61 new AEO stores (14 American Eagle stores, 43 Aerie stand-alone stores (including 4 OFFLINE stores), three Unsubscribed stores and one Todd Snyder store), 13 remodeled and refurbished stores, and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($46.0 million), e-commerce ($10.6 million), and other home office projects ($9.2 million).

                                       38

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

Stock Repurchases


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

In Fiscal 2020, to preserve cash liquidity in response to the uncertainty
created by COVID-19, the Company suspended its publicly-announced share
repurchase program. The Company unsuspended its share repurchase program at the
beginning of Fiscal 2021, but did not repurchase any shares under this program
during the 39 weeks ended October 30, 2021. In early 2020, prior to the
suspension of our share repurchase program, we repurchased 1.7 million shares
for $20.0 million, at a weighted average price of $11.63 per share.

During the 39 weeks ended October 30, 2021 and October 31, 2020, we repurchased
approximately 0.8 million and 0.4 million shares, respectively, from certain
employees at market prices totaling $24.0 million and $5.4 million,
respectively.  These shares were repurchased for the payment of taxes, in
connection with the vesting of share-based payments, as permitted under our
equity incentive plans. The aforementioned repurchased shares have been recorded
at cost in treasury stock in the Consolidated Balance Sheet.

Dividends


During the 13 weeks ended July 31, 2021, our Board of Directors ("Board") raised
our annual dividend rate from $0.55 per share ($0.1375 per share on a quarterly
basis) to $0.72 per share ($0.18 per share on a quarterly basis), a 31%
increase. Additionally, our Board declared a quarterly cash dividend of $0.18
per share on September 9, 2021, which was paid on October 22, 2021.

Subsequent to the third quarter of Fiscal 2021, our Board declared a $0.18 per
share dividend, payable on December 29, 2021, to the stockholders of record at
the close of business on December 10, 2021.

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

Critical Accounting Policies and Estimates


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

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