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

This section of this Form 10-K generally discusses Fiscal 2020 and Fiscal 2019 and year-to-year comparisons between 2020 and 2019. Discussions of Fiscal 2018 and year-to-year comparisons between Fiscal 2019 and Fiscal 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II. Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Executive Overview and Key Performance Indicators

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

In the fourth quarter of Fiscal 2020, we revised our reportable segment structure and have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources based on adjusted operating income (loss). See Note 15. “Segment Reporting,” of the Notes to the Consolidated Financial Statements included herein for additional information.

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

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

A store is included in comparable sales in its thirteenth month of operation. When stores have a gross square footage increase of 25% or greater due to a remodel, they are removed from the comparable sales base, but are included in total sales. These stores are returned to the comparable sales base in the thirteenth month following the remodel.

Sales from company-owned stores, as well as sales from AEO Direct, are included in total comparable sales. Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures represent sales from stores and AEO Direct. AEO Direct sales are included in the individual American Eagle and Aerie brand comparable sales metric for the following reasons:

Our management considers comparable sales to be an important indicator of our current performance, and investors may find it useful as such. Comparable sales results are important to achieve leveraging of our costs, including store payroll, store supplies, rent, etc. Comparable sales also have a direct impact on our total net revenue, cash, and working capital.

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

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

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

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

Operating Income(Loss) — Our management views operating income as a key indicator of our performance. The key drivers of operating (loss) income are net revenue, gross profit, our ability to control selling, general, and administrative expenses, and our level of capital expenditures for a reasonable period of time. In light of store closures and disruptions from COVID-19, our operating income may not be comparable this year versus last year.

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

COVID-19

The spread of COVID-19, which was declared a pandemic by the World Health Organization in March 2020, caused state and municipal public officials to mandate jurisdiction-wide curfews, including “shelter-in-place” and closures of most non-essential businesses, as well as other measures to mitigate the spread of the virus. The COVID-19 pandemic remains highly volatile and continues to evolve on a daily basis. See Part I, Item 1A. Risk Factors herein for additional discussion regarding risks to our business associated with the COVID-19 pandemic.

Commencing in early 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. These actions significantly impacted our consolidated results for Fiscal 2020. Beginning May 2, 2020, we started to re-open stores and call back furloughed employees where state and local governments had lifted stay-at-home orders. As of January 30, 2021, nearly all of our stores have re-opened and remain open. However, our consolidated results of operations continued to be significantly impacted by reduced customer traffic in re-opened store locations, partially offset by continued growth in e-commerce.

Since the first day that stores were closed to the public, our digital sales growth has accelerated, significantly exceeding our expectations. In order to support online demand and utilize in-store inventory, we continued to leverage our store network for buy-online/ship-from-store capabilities, where possible. Online sales represented 45% of our revenues for Fiscal 2020. Despite our strength in digital sales, we have historically generated the majority of our revenue through stores. As a result, we do not believe that our results for Fiscal 2020 are directly comparable to the same period in Fiscal 2019.

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

Further, we continue to take precautionary measures and adjust our operational needs due to the impact of COVID-19. Since March 2020, the Company has taken the following actions to preserve our financial strength:

• a convertible notes issuance and credit facility borrowings;

In addition, we have had productive discussions with our vendors to reduce purchases and extend payment terms, as well as with our landlords regarding the extension of payment terms and rent concessions.

As of January 30, 2021, we had approximately $850.5 million in cash and cash equivalents, which includes the proceeds from our convertible notes issuance, discussed in greater detail below and in Note 9 to the Consolidated Financial Statements. We expect to be able to fund our future cash requirements through current cash holdings and available liquidity. Taking into account the measures described above, we believe that our current liquidity would enable us to continue operations beyond Fiscal 2021, if necessary, even if the majority of our retail locations were forced to close during the duration of that period.

The unpredictability of the trajectory of the COVID-19 pandemic has significantly diminished visibility into the future operating environment, and we are unable to accurately predict the impact that the COVID-19 pandemic will have on our consolidated operations and financial results going forward. We are monitoring the ongoing developments as the COVID-19 vaccines are being distributed and administered, and will take further actions that are in the best interests of our associates and customers, as needed. For further information about the risks associated with the COVID-19 pandemic, see “Risk Factors” in Part I, Item 1A of this Form 10-K.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require us to make estimates and assumptions that may affect the reported financial condition and results of operations should actual results differ from these estimates and assumptions. We base our estimates and assumptions on the best available information and believe them to be reasonable for the circumstances. We believe that of our significant accounting policies, the following involve a higher degree of judgment and complexity. Refer to Note 2 to the Consolidated Financial Statements for a complete discussion of our significant accounting policies. Management has reviewed these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition. In accordance with Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), we record revenue for store sales upon the purchase of merchandise by customers. The Company’s e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company’s Consolidated Balance Sheets.

Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined using historical average return percentages.

Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed (“gift card breakage”), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue.

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

Merchandise Inventory. Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company.

We review our inventory in order to identify slow-moving merchandise and generally use markdowns to clear merchandise. Additionally, we estimate a markdown reserve for future planned markdowns related to current inventory. If inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price, additional markdowns may be necessary. These markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected.

We estimate an inventory shrinkage reserve for anticipated losses for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve is calculated based on historical percentages and can be affected by changes in merchandise mix and changes in actual shrinkage trends. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our inventory shrinkage reserve. However, if actual physical inventory losses differ significantly from our estimate, our operating results could be adversely affected.

During Fiscal 2020, the Company focused on inventory optimization, which remains an ongoing priority.

Asset Impairment. In accordance with ASC 360, Property,Plant, and Equipment (“ASC 360”), we evaluate the value of leasehold improvements, store fixtures, and operating lease right-of-use assets associated with retail stores. We evaluate long-lived assets for impairment at the individual retail store level, which is the lowest level at which individual cash flows can be identified. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the projected undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded separately as a component of operating (loss) income.

Our impairment loss calculations require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values. The significant assumption used in our projected undiscounted cash flows analyses is revenue growth rates. Additionally, significant assumptions utilized in our fair value analyses include the aforementioned assumption, as well as market participant real estate assumptions and discount rate. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions, our operating results could be adversely affected.

In the first and fourth quarters of Fiscal 2020, developments related to the COVID-19 pandemic, among other things, triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets. See “Comparison of Fiscal 2020 to Fiscal 2019 – Impairment, Restructuring and COVID-19 Related Charges” below, as well as Note 16 to the Consolidated Financial Statements for more information.

Share-Based Payments. We account for share-based payments in accordance with ASC 718, Compensation –Stock Compensation (“ASC 718”). To determine the fair value of our stock option awards, we use the Black-Scholes option-pricing model, which requires management to apply judgment and make assumptions to determine the fair value of our awards. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”) and the estimated volatility of the price of our common stock over the expected term.

We calculate a weighted-average expected term based on historical experience. Expected stock price volatility is based on historical volatility of our common stock. Changes in these assumptions can materially affect the estimate of the fair value of our share-based payments and the related amount recognized in our Consolidated Financial Statements.

Income Taxes. We calculate income taxes in accordance with ASC 740, Income Taxes (“ASC 740”), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in our level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits, may materially impact the effective income tax rate.

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

The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance require management to make estimates and assumptions. We believe that our assumptions and estimates are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income (loss).

Results of Operations

Overview

Our business is affected by the pattern of seasonality common to most retail apparel businesses. Additionally, during Fiscal 2020, our consolidated results of operations were materially impacted by the effects of COVID-19.

Fiscal 2020 represented a challenging year; however, revenue strengthened as stores successfully reopened, the digital channel continued to accelerate, and Aerie posted strong growth. Operational disciplines, inventory optimization and reduced spending resulted in sequential improvement in operating earnings and positive cash flow, fortifying our financial position, ending the fiscal year with $850.5 million in cash and cash equivalents. The results for the current and prior periods are not necessarily indicative of future financial results.

The following table shows, for the periods indicated, the percentage relationship to total net revenue of the listed items included in our Consolidated Statements of Operations.

For the Fiscal Years Ended

January 30 February 1, February 2,

Selling, general and administrative expenses 26.0 23.9 24.3

Impairment, restructuring and COVID-19 related charges 7.4 1.9 0.0

Depreciation and amortization expense 4.3 4.1 4.2

Operating (loss) income (7.2 ) 5.4 8.4

Interest expense (income), net 0.7 (0.2 ) (0.1 )

Other income, net (0.1 ) (0.1 ) (0.1 )

(Loss) income before income taxes (7.8 ) 5.7 8.6

(Benefit) provision for income taxes (2.2 ) 1.3 2.1

Net (loss) income (5.6 ) % 4.4 % 6.5 %

Non-GAAP Information

This results of operations section contains net income per diluted share presented on a non-GAAP basis, which is a non-GAAP financial measure (“non-GAAP” or “adjusted”), comprised of earnings per share information excluding certain items. This financial measure is not based on any standardized methodology prescribed by U.S. generally accepted accounting principles (“GAAP”) and is not necessarily comparable to similar measures presented by other companies. Non-GAAP information is provided as a supplement to, not as a substitute for, or as superior to, measures of financial performance prepared in accordance with GAAP. We believe that this non-GAAP information is useful as an additional means for investors to evaluate our operating performance, when reviewed in conjunction with our GAAP financial statements and provides a higher degree of transparency. These amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating our business and operations. The table below reconciles the GAAP financial measure to the non-GAAP financial measure discussed above.

Earnings per Share

For the Fiscal Year Ended

Net loss per diluted share - GAAP Basis $ (1.26 )

Add: Impairment, restructuring and COVID-19 related charges (1) 1.20

Add: Convertible debt (2) 0.06

Net income per diluted share - Non-GAAP Basis $ (0.00 )

(2) Amortization of the non-cash discount on the Company's convertible notes

Earnings per Share

For the Fiscal Year Ended

Net income per diluted share - GAAP Basis $ 1.12

Add: Impairment and restructuring (1) 0.36

Net income per diluted share - Non-GAAP Basis $ 1.48

Comparison of Fiscal 2020 to Fiscal 2019

Total Net Revenue

Total net revenue for Fiscal 2020 decreased 13% to $3.759 billion compared to $4.308 billion for Fiscal 2019. Included in total net revenue during Fiscal 2019 is $40.0 million recognized for license royalties from a third-party operator of AE stores in Japan. The COVID-19 pandemic and the associated temporary closures of our retail stores since March 17, 2020 have negatively affected our consolidated financial results for Fiscal 2020. As of January 30, 2021, nearly all of our stores have opened and remain opened.

American Eagle

Total net revenue for Fiscal 2020 for the American Eagle brand was $2.734 billion compared to $3.480 billion for Fiscal 2019. Units per transaction decreased in the high single digits and average unit retail price increased in the high teens.

Aerie

Total net revenue for Fiscal 2020 for the Aerie brand was $990.0 million compared to $801.0 million for Fiscal 2019. Units per transaction decreased in the high single digits and average unit retail price increased in the high teens.

Gross Profit

Gross profit decreased 25% to $1.148 billion for Fiscal 2020 from $1.522 billion for Fiscal 2019. The gross profit margin declined 480 basis points to 30.5% of total net revenue. This reflected the decline in revenue from temporary retail store closures and the impact of fixed buying, occupancy and warehousing costs as a result of the revenue decline due to the impact of the COVID-19 pandemic on our business.

There was $15.9 million of share-based payment expense, consisting of both time and performance-based awards, included in gross profit this year. This is compared to $11.2 million of share-based payment expense included in gross profit last year.

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

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses decreased 5% to $977.3 million for Fiscal 2020, compared to $1.029 billion for Fiscal 2019. As a percentage of total net revenue, selling, general, and administrative expenses increased 210 basis points to 26.0%, compared to 23.9% for Fiscal 2019. The reduction in expense for Fiscal 2020 was primarily the result of lower store payroll and selling expense due to COVID-19 related closures, as well as discretionary spend reductions, partially offset by incremental corporate compensation costs.

There was $16.8 million of share-based payment expense, consisting of time and performance-based awards, included in selling, general, and administrative expenses for Fiscal 2020 compared to $11.8 million for Fiscal 2019.

Impairment, Restructuring and COVID-19 Related Charges

In Fiscal 2020, total impairment, restructuring and COVID-19 related charges were $279.8 million. We recorded asset impairment charges of $249.2 million. Included in this amount are retail store impairment charges of $203.2 million, of which $154.8 million relates to operating lease ROU assets and $48.4 million relates to store property and equipment (fixtures and equipment and leasehold improvements). We also recorded $28.0 million of impairment charges related to certain corporate property and equipment as well as $18.0 million of impairment charges of certain cost and equity method investments.

Additionally, we recorded $26.9 million for incremental COVID-19 related expenses consisting of personal protective equipment and supplies for our associates and customers and $3.7 million of severance and related employee costs.

In Fiscal 2019, impairment and restructuring charges were $80.5 million. We recorded asset impairment charges of $64.5 million on the assets of 20 retail stores. Of the total, $39.5 million related to the impairment of leasehold improvements and store fixtures, and $25.0 million related to the impairment of operating lease ROU assets. We also concluded that certain goodwill was impaired resulting in a $1.7 million charge. Additionally, we recorded $6.7 million for corporate and field severance, $4.2 million of charges related to the planned exit of a joint business venture, $1.8 million related to Japan market transition costs, and $1.5 million of China severance and closure costs related to Company-owned stores.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased 9% to $162.4 million for Fiscal 2020 from $179.1 million for Fiscal 2019, driven by asset impairments taken in Fiscal 2019 and 2020, as well as lower capital spending in Fiscal 2020. As a percentage of total net revenue, depreciation and amortization expense increased 20 basis points to 4.3% from 4.1% in Fiscal 2019.

Interest Expense (Income), Net

Interest expense was $24.6 million for Fiscal 2020, compared to interest income of $6.2 million for Fiscal 2019. The increase in expense was primarily attributable to interest expense related to our convertible notes issued this year and credit facility borrowings.

Other Income, Net

Other income was $3.7 million for Fiscal 2020, compared to $5.7 million for Fiscal 2019. The decrease was attributable to foreign currency fluctuations and other non-operating expenses.

Income Taxes

The effective income tax benefit rate is 28.4% for Fiscal 2020 compared to an effective tax rate of 22.0% for Fiscal 2019. The effective income tax benefit rate this year is primarily a result of the provisions of the Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”) which permit the carry back of current year losses to a tax year where the U.S. federal corporate income tax rate was 35%, offset by an incremental rate increase on the revaluation of deferred tax assets and liabilities for current year activity and an increase to the valuation allowances recorded in the current year. Our effective income tax rate is also dependent upon the overall mix of earnings in jurisdictions with different tax rates. Refer to Notes 2 and 14 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.

Net (Loss) Income

Net loss was $209.3 million for Fiscal 2020 compared to net income of $191.3 million for Fiscal 2019. The change in net (loss) income was attributable to the factors described above. As a percentage of total net revenue, net (loss) income was (5.6%) and 4.4% for Fiscal 2020 and Fiscal 2019, respectively. Net loss per diluted share was ($1.26), which included $279.8 million ($1.20 per diluted share) of pre-tax impairment, restructuring, and COVID-19 related charges and $12.3 million ($0.06 per diluted share) of pre-tax non-cash interest related to our convertible notes.

Net income per diluted share for Fiscal 2019 was $1.12 and included $80.5 million ($0.36 per diluted share) of pre-tax impairment and restructuring charges.

Liquidity and Capital Resources

Our uses of cash have historically been for working capital, the construction of new stores and remodeling of existing stores, information technology and e-commerce upgrades and investments, distribution center improvements and expansion and the return of value to shareholders through the repurchase of common stock, and the payment of dividends. Additionally, our uses of cash have included the development of the Aerie brand, investments in technology and omni-channel capabilities, and our international expansion efforts. The rapid expansion of the COVID-19 global pandemic, the related economic impacts, and the closure of our retail stores, resulted in a decline in net sales and earnings for Fiscal 2020, which had a corresponding impact on our liquidity and uses of cash.

Historically, our uses of cash have been funded with cash flow from operations and existing cash on hand. We also maintain an asset-based revolving credit facility that allows us to borrow up to $400 million, which will expire in January 2024. In April 2020, we issued $415 million aggregate principal amount of convertible senior notes due in 2025. We have outstanding contractual obligations of $1.7 billion undiscounted related to our operating leases, of which a total of $363 million will be paid in 2021.

As discussed in the overview, we are focused on preserving our liquidity and managing our cash flows through certain actions to enhance our ability to meet short-term liquidity needs. We have taken a series of actions to reinforce our liquidity and financial flexibility, including:

• a convertible notes issuance and credit facility borrowings;

As of January 30, 2021, we had approximately $850.5 million in cash and cash equivalents, which includes the proceeds from our convertible notes. 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 9 to the Consolidated Financial Statements for additional information regarding our long-term debt. We expect to be able to fund our future cash requirements through current cash holdings and available liquidity.

The following sets forth certain measures of our liquidity:

January 30 February 1,

Working capital as of January 30, 2021 increased $368.0 million compared to February 1, 2020. The largest increase came from increased cash and short-term investments of $433.5 million due primarily to the $406.1 million proceeds from our convertible notes issuance. Compared to February 1, 2020, the remaining change was primarily due to a $55.0 million increase in prepaid expenses and a $27.0 million increase in accounts receivable, offset by a $40.8 million decrease in merchandise inventory and a $98.7 million increase in accrued compensation and payroll taxes.

Cash Flows Provided by Operating Activities

Net cash provided by operating activities totaled $202.5 million during Fiscal 2020, compared to $415.4 million during Fiscal 2019. For both periods, our major source of cash from operations was merchandise sales and our primary outflow of cash from operations was for the payment of operational costs.

Cash Flows Used for Investing Activities

Investing activities for Fiscal 2020 included $128.0 million in capital expenditures for property and equipment partially offset by $55.0 million of net short-term investment sales. Investing activities for Fiscal 2019 included $210.4 million in capital expenditures for property and equipment offset by $37.1 million of net short-term investment sales. For further information on capital expenditures, refer to the Capital Expenditures for Property and Equipment caption below.

Cash Flows Provided by (Used for) Financing Activities

During Fiscal 2020, cash provided by financing activities primarily consisted of $406.1 million of net proceeds from our revolving line of credit and the issuance of convertible notes. This was partially offset by $22.9 million for the payment of dividends, $20.0 million used for purchases of 1.7 million shares of common stock under publicly-announced programs in 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.

Early in Fiscal 2020, we borrowed on our revolving line of credit and issued convertible notes to strengthen our cash position and provide us with additional financial flexibility during the remainder of the ongoing COVID-19 pandemic. By August 2020, we had repaid the $330.0 million in revolving line of credit borrowings.

During Fiscal 2019, cash used for financing activities primarily consisted of $112.4 million of purchases of common stock under publicly announced programs, $92.8 million for the payment of dividends, and $8.1 million for the repurchase of common stock from employees for the payment of taxes in connection with the vesting of share-based payments.

Cash returned to shareholders through dividends and share repurchases was $42.9 million and $205.2 million in Fiscal 2020 and Fiscal 2019, respectively.

Capital Expenditures for Property and Equipment

Fiscal 2020 capital expenditures were $128.0 million, compared to $210.4 million in Fiscal 2019. Fiscal 2020 expenditures included $55.8 million related to investments in our stores, including 40 AEO stores (8 AE, 31 Aerie stand-alone, and 1

Todd Snyder), 8 remodeled and refurbished stores, and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in information technology initiatives ($33.2 million), e-commerce ($27.5 million) and other home office projects ($11.5 million).

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

Credit Facilities

In January 2019, we entered into a credit agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment.

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

In March 2020, we borrowed $330.0 million under the Credit Facilities which we repaid in full by August 2020. As of January 30, 2021, we were in compliance with the terms of the Credit Agreement and had $7.9 million outstanding in stand-by letters of credit.

Stock Repurchases

During Fiscal 2016, our Board of Directors (our “Board”) authorized the repurchase of 25.0 million shares of our common stock. The authorization of the repurchase of the remaining 3.6 million shares that may yet be repurchased under the Fiscal 2016 authorization expired on January 30, 2021.

During Fiscal 2019, our Board authorized the repurchase of 30.0 million shares under a new share repurchase program, which expires on February 3, 2024. In early March 2020, as part of our publicly-announced share repurchase program, we repurchased 1.7 million shares for $20.0 million, at a weighted average price of $11.63 per share. As of January 30, 2021, our total remaining share repurchase authorization was 30.0 million shares.

As previously announced, to preserve cash liquidity in response to the uncertainty created by the impact of COVID-19, the company suspended its publicly-announced share repurchase program. Accordingly, we did not repurchase any shares pursuant to this program during the second, third or fourth quarters of Fiscal 2020. Subsequent to January 30, 2021, the Company has unsuspended its share repurchase program. During Fiscal 2019, we repurchased 6.3 million shares for approximately $112.4 million at a weighted average price of $17.74 per share.

During both Fiscal 2020 and Fiscal 2019, we repurchased approximately 0.4 million shares from certain employees at market prices totaling $5.4 million and $8.1 million, respectively. These shares were repurchased for the payment of taxes in connection with the vesting of share-based payments, as permitted under our equity incentive plans.

The aforementioned share repurchases have been recorded as treasury stock.

Dividends

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

Recent Accounting Pronouncements

Recent accounting pronouncements are disclosed in Note 2 of the Consolidated Financial Statements.

Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under

ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date:

Financial Instruments

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

• Level 1 — Quoted prices in active markets.

As of January 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.

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 January 30, 2021:

Fair Value Measurements at January 30, 2021

Cash and cash equivalents

Long-Term Debt

The fair value of the Company's $415 million aggregate principal amount of convertible senior notes due in 2025 is not required to be measured at fair value on a recurring basis. Upon issuance, the fair value of these convertible notes was measured using two approaches that consider market related conditions, including market benchmark rates and a secondary market quoted price, and is therefore within Level 2 of the fair value hierarchy.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have market risk exposure related to interest rates and foreign currency exchange rates. Market risk is measured as the potential negative impact on earnings, cash flows, or fair values resulting from a hypothetical change in interest rates or foreign currency exchange rates over the next year.

We have estimated our market risk exposure using sensitivity analysis. To test the sensitivity of our market risk exposure, we have estimated the changes in fair value of market risk sensitive instruments assuming a hypothetical 10 percent adverse change in market prices or rates. The results of the sensitivity analyses are summarized below.

Interest Rate Risk

Our earnings from our investments are not materially affected by changes in market interest rates. If our Fiscal 2020 average yield rate decreases by 10% in Fiscal 2021, our loss before taxes will increase by approximately $0.1 million. Comparatively, if our Fiscal 2019 average yield rate had decreased by 10% in Fiscal 2020, our income before taxes would have decreased by approximately $0.1 million. These amounts are determined by considering the impact of the hypothetical yield rates on our cash and investment balances and assumes no change in our investment structure.

Foreign Exchange Rate Risk

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. We do not utilize hedging instruments to mitigate foreign currency exchange risks. A hypothetical 10% movement in the Canadian dollar and Mexican peso exchange rate could result in a $20.2 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive income in the Consolidated Balance Sheets. An unrealized loss of $7.6 million is included in accumulated other comprehensive income as of January 30, 2021. This is primarily related to the decline in the US dollar to Mexican peso and US dollar to Canadian dollar exchange rates during the 13 weeks ended May 2, 2020, partially offset by the strengthening of the US dollar during the 39 weeks ended January 30, 2021.

This sensitivity analysis has inherent limitations. The analysis disregards the possibility that rates of multiple foreign currencies will not always move in the same direction relative to the value of the US dollar over time.

Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm 40

Consolidated Balance Sheets 42

Consolidated Statements of Operations 43

Consolidated Statements of Comprehensive Income 44

Consolidated Statements of Stockholders’ Equity 45

Consolidated Statements of Cash Flows 46

Notes to Consolidated Financial Statements 47

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of American Eagle Outfitters, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 30, 2021 and February 1, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended January 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), and our report dated March 11, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Retail Store Long-Lived Asset Impairment

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1993.

Pittsburgh, Pennsylvania

March 11, 2021

AMERICAN EAGLE OUTFITTERS, INC.

Consolidated Balance Sheets

January 30, February 1,

(In thousands, except per share amounts) 2021 2020

Assets

Current assets:

Short-term investments (available for sale) - 55,000

Property and equipment, at cost, net of accumulated depreciation 623,808 735,120

Intangible assets, net, including goodwill 70,332 53,004

Liabilities and Stockholders’ Equity

Current liabilities:

Current portion of operating lease liabilities 328,624 299,161

Unredeemed gift cards and gift certificates 62,181 56,974

Other current liabilities and accrued expenses 55,343 56,824

Non-current liabilities:

Commitments and contingencies — —

Stockholders’ equity:

Accumulated other comprehensive loss, net of tax (40,748 ) (33,168 )

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

Consolidated Statements of Operations

For the Years Ended

January 30, February 1, February 2,

Basic net (loss) income per common share $ (1.26 ) $ 1.13 $ 1.48

Diluted net (loss) income per common share $ (1.26 ) $ 1.12 $ 1.47

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended

January 30, February 1, February 2,

Other comprehensive gain (loss):

Foreign currency translation (loss) gain (7,580 ) 1,664 (4,037 )

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

Consolidated Statements of Stockholders' Equity

Repurchase of common stock from employees (943 ) — — — (19,668 ) — (19,668 )

Other comprehensive loss — — — — — (4,037 ) (4,037 )

Repurchase of common stock from employees (431 ) — — — (8,087 ) — (8,087 )

Other comprehensive income — — — — — 1,664 1,664

Repurchase of common stock from employees (449 ) — — — (5,413 ) — (5,413 )

Convertible Notes - Equity portion, net of tax — — 68,330 — — — 68,330

Other comprehensive loss — — — — — (7,580 ) (7,580 )

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

Consolidated Statements of Cash Flows

For the Years Ended

January 30, February 1, February 2,

Operating activities:

Changes in assets and liabilities:

Investing activities:

Financing activities:

Repurchase of common stock from employees (5,413 ) (8,087 ) (19,668 )

Proceeds from revolving line of credit and convertible notes 736,108 — —

Principal payments on revolving line of credit (330,000 ) — —

Effect of exchange rates on cash 87 (696 ) (1,596 )

Refer to Notes to Consolidated Financial Statements

AMERICAN EAGLE OUTFITTERS, INC.

Notes to Consolidated Financial Statements

For the Year Ended January 30, 2021

1. Business Operations

American Eagle Outfitters, Inc. (the “Company,” “we” and “our”), a Delaware corporation, operates under the American Eagle® (“AE”) and Aerie® brands. We also operate Todd Snyder New York, a premium menswear brand.

Founded in 1977, the Company is a leading multi-brand specialty retailer that operates more than 1,000 retail stores in the U.S. and internationally, online through our digital channels at www.ae.com and www.aerie.com, www.toddsnyder.com and more than 200 international store locations managed by third-party operators. Through its portfolio of brands, the Company offers high quality, on-trend clothing, accessories, and personal care products at affordable prices. The Company’s online business, AEO Direct, ships to 81 countries worldwide.

AEO Direct reinforces each particular brand platform and is designed to complement the in-store experience. We offer the ability for customers to return products seamlessly via any channel regardless of where it was originally purchased. We also offer a variety of channels to fulfill customer orders. These include “ship to home”, which can be fulfilled either through our distribution center or our store sites (buy online, ship from stores) when purchased online or through our app; “store pick-up”, which consist of online orders being fulfilled either in store or curbside, and we offer “store-to-door” capability where customers order within our store, and the goods are shipped directly to their home.

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 January 30, 2021, 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 2021” refers to the 52-week period that will end on January 29, 2022. “Fiscal 2020” refers to the 52-week period ended January 30, 2021. “Fiscal 2019” refers to the 52-week period ended February 1, 2020. “Fiscal 2018” refers to the 52-week period ended February 2, 2019.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 February 2016, the Financial Accounting Standards Board (“FASB”) established Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), by issuing Accounting Standards Update (“ASU”) No. 2016-02 (“ASU 2016-02”). ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements.

The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a right-of-use, “ROU” asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The Company adopted ASU 2016-02 and its subsequent amendments effective February 3, 2019. Financial information has not been updated and the disclosures required under the new standard have not been provided for dates and periods before February 3, 2019. The Company elected the new standard’s package of practical expedients, which permits the Company to maintain prior conclusions about lease identification, lease classification, and initial direct costs. The Company elected to use the go-forward practical expedient to not separate lease and non-lease components for all of our leases. The Company also elected to use the short-term lease recognition exemption for all leases that qualify.

Upon adoption, the Company:

Refer to Note 10 to the Consolidated Financial Statements for information regarding leases.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses, which modifies the measurement of expected credit losses of certain financial instruments. The Company adopted this ASU on February 2, 2020. The adoption did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (“ASU 2020-06”), which simplifies accounting for convertible instruments. The new guidance eliminates two of the three models in ASC 470-20 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 calculation. The guidance is effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2020-06 on its Consolidated Financial Statements, which may be material.

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 in accordance with ASC 220, Comprehensive Income. (Refer to Note 11 to the Consolidated Financial Statements for information regarding comprehensive income).

Cash, 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 included certificates of deposit with a maturity greater than three months, but less than one year as of February 1, 2020.

Refer to Note 3 to the Consolidated Financial Statements for information regarding cash, 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 assets’ estimated useful lives. 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 Five years

Information technology Three - five years

As of January 30, 2021, the weighted average remaining useful life of our assets was approximately 7.2 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 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 (loss) income within Impairment, restructuring and COVID-19 related charges in the Consolidated Statements of Operations.

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 7 to the Consolidated Financial Statements for additional information regarding property and equipment, and refer to Note 16 for additional information regarding impairment charges for Fiscal 2020 and Fiscal 2019.

Intangible Assets, including Goodwill

The Company’s goodwill is primarily related to the acquisition of its importing operations, Canada business, and Tailgate. In accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of January 30, 2021. As a result, there was no goodwill impairment charge recorded during Fiscal 2020. During Fiscal 2019, the Company concluded that certain goodwill was impaired resulting in a $1.7 million charge included within Impairment, restructuring and COVID-19 related charges in the Consolidated Statements of Operations.

Definite-lived intangible assets are recorded on the basis of cost 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 15 to 25 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 for all periods presented.

Refer to Note 8 to the Consolidated Financial Statements for additional information regarding intangible assets, including goodwill.

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 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. The Company recorded $8.8 million, $9.5 million, and $8.9 million during Fiscal 2020, Fiscal 2019, and Fiscal 2018, 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, 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.

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

Lease Modifications and COVID-19

The FASB staff issued a Q&A document in April 2020 providing guidance on how to apply the lease modification guidance in ASC 842 to rent concessions arising from COVID-19, allowing companies to elect accounting for the concessions as if enforceable rights and obligations existed, regardless of whether they are explicitly stated in the lease contract. Per the FASB staff Q&A guidance, entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (e.g., deferrals of lease payments, cash payments made to the lessee, reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee.

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 Program caption below.

Customer Loyalty Program

In June 2020, the Company launched a highly-digitized loyalty program called Real Rewards by American Eagle and AerieTM (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. Prior to this launch in June 2020, under our previous program, AEO ConnectedTM, we also offered additional rewards for key items such as jeans and bras. 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 award points is deferred and recognized when the award 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

For the Years Ended

January 30, February 1, February 2,

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 Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in 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 14 to the Consolidated Financial Statements for additional information.

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.

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.

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.

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 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 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.

Selling, general and administrative 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, selling, general and administrative 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.

Advertising Costs

Certain advertising costs, including direct mail, in-store photographs, and other promotional costs are expensed when the marketing campaign commences. As of January 30, 2021 and February 1, 2020, the Company had prepaid advertising expense of $5.7 million and $14.5 million, respectively. All other advertising costs are expensed as incurred. The Company recognized $150.0 million, $151.5 million, and $143.2 million in advertising expense during Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively.

Store Pre-Opening Costs

Store pre-opening costs consist primarily of rent, advertising, supplies, and payroll expenses. These costs are expensed as incurred.

Interest Expense (Income), Net

Interest expense (income), net primarily consists of interest expense related to the Company’s convertible notes and borrowings under the revolving credit facility, as well as interest income from cash, cash equivalents and short-term investments.

Other (Income), Net

Other income, net consists primarily of gains and losses resulting from foreign currency transactions.

Legal Proceedings and Claims

The Company is subject to certain legal proceedings and claims arising out of the conduct of its business. In accordance with ASC 450, Contingencies (“ASC 450”), the Company records a reserve for estimated losses when the loss is probable and the amount can be reasonably estimated. If a range of possible loss exists and no anticipated loss within the range is more likely than any other anticipated loss, the Company records the accrual at the low end of the range, in accordance with ASC 450. As the Company believes that it has provided adequate reserves, it anticipates that the ultimate outcome of any matter currently pending against the Company will not materially affect the consolidated financial position, results of operations or cash flows of the Company. 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.

Supplemental Disclosures of Cash Flow Information

The table below shows supplemental cash flow information for cash amounts paid during the respective periods:

For the Years Ended

January 30, February 1, February 2,

Cash paid during the periods for:

Segment Information

We have two reportable segments: American Eagle and Aerie. For additional information, regarding the Company’s segment and geographic information, refer to Note 15 to the Consolidated Financial Statements.

3. Cash, Cash Equivalents, and Short-term Investments

The following table summarizes the fair market value of our cash and short-term investments, which are recorded on the Consolidated Balance Sheets:

January 30, February 1,

Cash and cash equivalents:

Certificates of deposit 50,000 —

Short-term investments:

Certificates of deposit — 55,000

Total short-term investments — 55,000

4. Fair Value Measurements

ASC 820, Fair Value Measurement Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. Fair value is defined under 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.

The Company’s cash equivalents and short-term investments are Level 1 financial assets and are measured at fair value on a recurring basis, for all periods presented. Refer to Note 3 to the Consolidated Financial Statements for additional information regarding cash equivalents and short-term investments.

The Company had no other financial instruments that required fair value measurement for any of the periods presented.

Long-Term Debt

As of January 30, 2021 the Company had no outstanding borrowings under its revolving credit facilities.

In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due in 2025.

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

Refer to Note 9 to the Consolidated Financial Statements for additional information regarding long-term debt and other credit arrangements.

Non-Financial Assets

The Company’s non-financial assets, which include intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur and the Company is required to evaluate the non-financial asset for impairment, a resulting impairment would require that the non-financial asset be recorded at the estimated fair value.

Certain long-lived assets were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in ASC 820. During Fiscal 2020, the Company recorded asset impairment charges of $249.2 million. Included in this amount are retail store impairment charges of $203.2 million, of which $154.8 million relates to operating lease ROU assets and $48.4 million relates to store property and equipment (fixtures and equipment and leasehold improvements).We also recorded $28.0 million of impairment charges related to certain corporate property and equipment as well as $18.0 million of impairment charges of certain cost and equity method investments.The assets were adjusted to their fair valueand the loss on impairment was recorded within impairment, restructuring and COVID-19 related charges in the Consolidated Statements of Operations. The fair value of the impaired assets, after the recorded loss, is approximately $93.2 million.

The fair value of the Company’s stores was determined by estimating the amount and timing of net future cash flows and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located.

During Fiscal 2019, the Company concluded that certain goodwill was impaired resulting in a $1.7 million charge included within Impairment, restructuring and COVID-19 related charges in the Consolidated Statements of Operations. The measurement of the goodwill impairment included Level 3 measurements.

5. Earnings per Share

The following is a reconciliation between basic and diluted weighted average shares outstanding:

For the Years Ended

January 30, February 1, February 2,

Weighted average common shares outstanding:

Dilutive effect of stock options and non-vested restricted stock — 1,156 1,559

*In Fiscal 2020, there were 1.9 million potentially dilutive equity awards and 12.4 million potentially dilutive shares from the Company’s convertible notes that were excluded from the diluted earnings per share calculation because the company incurred a net loss for this period and their inclusion would be anti-dilutive. For all other periods, anti-dilutive shares relate to stock options and unvested restricted stock.

The Company has the right to settle its convertible notes in any combination of cash and shares of common stock. However, the Company intends to settle the original principal portion of the convertible notes in cash and any conversion value above the principal in stock. Because of this repayment policy election, only the conversion spread portion of the amount owed is reflected as dilutive in our weighted average diluted shares outstanding. The Company uses the average of the closing prices of its common stock (NYSE: AEO) as reported on the New York Stock Exchange to calculate the conversion spread. These convertible notes could have a potential dilutive effect in future periods.

Refer to Note 9 and Note 12 to the Consolidated Financial Statements for additional information regarding the Company’s convertible notes and share-based compensation.

6. Accounts Receivable, net

Accounts receivable, net is comprised of the following:

January 30, February 1,

Merchandise sell-offs and vendor receivables 45,096 24,474

7. Property and Equipment, net

Property and equipment, net consists of the following:

January 30, February 1,

Depreciation expense is as follows:

For the Years Ended

January 30, February 1, February 2,

Additionally, during Fiscal 2020, Fiscal 2019, and Fiscal 2018, the Company recorded $2.2 million, $4.3 million and $2.0 million, respectively, related to asset write-offs within depreciation and amortization expense.

8. Intangible Assets, net, including Goodwill

Intangible assets, net, including goodwill, consists of the following:

January 30, February 1,

Trademarks and other intangibles, at cost 92,663 71,685

Trademarks and other intangibles, net $ 57,065 $ 39,847

Intangibles, net, including goodwill $ 70,332 $ 53,004

Amortization expense is as follows:

For the Years Ended

January 30, February 1, February 2,

The table below summarizes the estimated future amortization expense for intangible assets existing as of January 30, 2021 for the next five Fiscal Years:

Future

(In thousands) Amortization

9. Long-Term Debt, Net

The Company’s long-term debt consisted of the following as of January 30, 2021:

January 30,

Convertible notes principal $ 415,025

Less: unamortized discount 89,735

Convertible notes, net $ 325,290

Revolving credit facility borrowings —

Total long-term debt, net $ 325,290

Convertible Notes - Equity portion, net of tax 68,330

Convertible notes

In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due in 2025 (the “Notes”) in a private placement to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933. The Notes have a stated interest rate of 3.75%, payable semi-annually. The Company may redeem the Notes, in whole or in part, at any time beginning April 2023. The Company used the net proceeds from the offering for general corporate purposes.

The Company does not have the right to redeem the 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 Notes, at its option, for cash, if the last reported sale price of AEO’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 115.1 shares of common stock per $1,000 principal amount of the Notes, equivalent to a conversion price of approximately $8.69 per share.

The Company has the right to settle conversions in any combination of cash and shares of common stock. However, the Company intends to settle the original principal portion of the Notes in cash and any conversion value above the principal in stock. Because of this repayment policy, only the conversion spread portion of the amount owed is reflected as dilutive in earnings per share.

The effective interest rate for the Notes is 10.0% and we calculated the effective yield using a market approach. The remaining amortization period of the discount was 4.25 years as of January 30, 2021.

Interest expense for the Notes was:

Year ended January 30,

Cash interest expense $ 11,857

Amortization of discount $ 12,517

Total interest expense $ 24,374

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

January 30,

(In thousands, except per share amounts) 2021

Number of shares convertible 47,780

Conversion price per share $ 8.69

Value in excess of principal if converted $ 512,646

Revolving credit facilities

In January 2019, the Company entered into an amended and restated Credit Agreement (“Credit Agreement”) for five-year, syndicated, asset-based revolving credit facilities (the “Credit Facilities”). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations.

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 will be further secured by first-priority mortgages on certain real property.

As of January 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 January 30, 2021. In March 2020, the Company borrowed $330.0 million on the Credit Facilities and repaid the borrowings by August 2020.

The interest rate for borrowing under the Credit Facilities is one month LIBOR, plus an adjusted spread based on leverage as reflected in the Credit Facilities. The weighted average interest rate on borrowings under the Credit Facilities during Fiscal 2020 was 1.66% and the total interest expense for Fiscal 2020 was $2.5 million.

10. Leases

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

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 after the date of adoption of ASC 842 (February 3, 2019), 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.

The following table summarizes expense categories and cash payments for operating leases during the period. It also includes the total non-cash transaction activity for new operating lease ROU assets and related operating lease liabilities entered into during the period.

For the Year Ended

January 30, February 1,

Lease costs

Short-term leases and other lease costs 11,090 37,293

Other information

Cash paid for operating lease liability $ (331,543 ) $ (328,925 )

New operating lease ROU asset entered into during the period $ 116,128 $ 227,562

The following table contains the average remaining lease term and discount rate, weighted by outstanding operating lease liability as of the end of the period:

Lease term and discount rate January 30, 2021

Weighted-average remaining lease term - operating leases 5.8 years

Weighted-average discount rate - operating leases 4.9%

The table below is a maturity analysis of the operating leases in effect as of the end of the period. Undiscounted cash flows for finance leases and short-term leases are not material for the periods reported and are excluded from the table below:

Undiscounted cash flows

(In thousands)

Fiscal years:

Total undiscounted cash flows $ 1,709,963

Less: discount on lease liability (232,597 )

The Company adopted ASC 842 as of February 3, 2019 through the modified retrospective method. Prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting treatment. In accordance with the transition guidance within ASC 842, the following table provides the disclosures related to Fiscal Year 2018 as required under ASC 840, Leases. Refer to Note 2 for further information about the Company’s adoption of ASC 842.

For the Year Ended

February 2,

Store rent:

Offices, distribution facilities, equipment and other 18,636

11. Other Comprehensive Loss

The accumulated balances of other comprehensive loss included as part of the Consolidated Statements of Stockholders’ Equity follow:

Accumulated

Before Tax Other

Tax Benefit Comprehensive

(In thousands) Amount (Expense) Loss

Foreign currency translation loss (1) (834 ) — (834 )

Foreign currency translation gain (1) 2,094 — 2,094

Loss on long-term intra-entity foreign currency transactions (577 ) 147 (430 )

Foreign currency translation loss (1) (7,053 ) — (7,053 )

Loss on long-term intra-entity foreign currency transactions 592 (1,119 ) (527 )

12. Share-Based Payments

The Company accounts for share-based compensation under the provisions of ASC 718, Compensation – Stock Compensation (“ASC 718”), 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 Fiscal 2020, Fiscal 2019 and Fiscal 2018 was $32.8 million ($24.6 million, net of tax), $23.0 million ($17.9 million, net of tax) and $27.5 million ($20.9 million, net of tax), respectively.

ASC 718 requires recognition of compensation cost under a non-substantive vesting period approach for awards containing provisions that accelerate or continue vesting upon retirement. Accordingly, for awards with such provisions, the Company recognizes compensation expense over the period from the grant date to the date retirement eligibility is achieved, if that is expected to occur during the nominal vesting period. Additionally, for awards granted to retirement eligible employees, the full compensation cost of an award must be recognized immediately upon grant.

At January 30, 2021, the Company had awards outstanding under three share-based compensation plans, which are described below.

Share-based compensation plans

2020 Stock Award and Incentive Plan (“2020 Plan”)

The 2020 Plan was approved by the stockholders on April 13, 2020. The 2020 Plan authorized 10.2 million shares for issuance, in the form of options, stock appreciation rights (“SARS”), restricted stock, restricted stock units, bonus stock and awards, performance awards, dividend equivalents and other stock-based awards. The 2020 Plan provides that for awards intended to qualify as “performance-based compensation” under Code Section 162(m), (i) the maximum number of shares awarded to any individual may not exceed 3.0 million shares per year for options and SARS and (ii) no more than 1.5 million shares may be granted with respect to each of restricted shares of stock and restricted stock units (subject to certain adjustments and exceptions provided therein). The 2020 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards under the 2020 Plan. The 2020 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed in value $750,000 in any single fiscal year. Through January 30, 2021, approximately 0.9 million shares of restricted stock and approximately 0.8 million shares of common stock had been granted under the 2020 Plan to employees and directors. Approximately 50% of the restricted stock awards are performance-based and are earned if the established performance goals are met. The remaining 50% of the restricted stock awards are time-based and 94% vest ratably over three years and 6% vest over a period of one to two years.

2017 Stock Award and Incentive Plan (“2017 Plan”)

The 2017 Plan was approved by the stockholders on May 23, 2017. The 2017 Plan authorized 11.2 million shares for issuance, in the form of options, stock appreciation rights (“SARS”), restricted stock, restricted stock units, bonus stock and awards, performance awards, dividend equivalents and other stock-based awards. The 2017 Plan provides that for awards intended to qualify as “performance-based compensation” under Code Section 162(m) (i) the maximum number of shares awarded to any individual may not exceed 3.0 million shares per year for options and SARS and (ii) no more than 1.5 million shares may be granted with respect to each of restricted shares of stock and restricted stock units (subject to certain adjustments and exceptions provided therein). The 2017 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards under the 2017 Plan. The 2017 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed in value $750,000 in any single fiscal year. Through January 30, 2021, approximately 7.7 million shares of restricted stock and approximately 3.5 million shares of common stock had been granted under the 2017 Plan to employees and directors. Approximately 70% of the restricted stock awards are performance-based and are earned if the established performance goals are met. The remaining 30% of the restricted stock awards are time-based and 98% vest ratably over three years and 2% vest over a period of one to two years. After April 13, 2020, no new awards may be granted under the 2017 Plan and all outstanding awards at that time continued in force and operation in accordance with their respective terms.

2014 Stock Award and Incentive Plan (“2014 Plan”)

The 2014 Plan was approved by the stockholders on May 29, 2014. The 2014 Plan authorized 11.5 million shares for issuance, in the form of options, SARS, restricted stock, restricted stock units, bonus stock and awards, performance awards, dividend equivalents and other stock-based awards. The 2014 Plan provides that the maximum number of shares awarded to any individual may not exceed 4.0 million shares per year for options and SARS and no more than 1.5 million shares may be granted with respect to each of restricted shares of stock and restricted stock units (subject to certain adjustments and exceptions provided therein). The 2014 Plan allows the Compensation Committee of the Board to determine which employees receive awards and the terms and conditions of the awards under the 2014 Plan. The 2014 Plan provides for grants to directors who are not officers or employees of the Company, which are not to exceed in value $300,000 in any single calendar year ($500,000 in the first year a person becomes a non-employee director). Through February 3, 2018, approximately 6.3 million shares of restricted stock and approximately 2.6 million shares of common stock had been granted under the 2014 Plan to employees and directors. Approximately 60% of the restricted stock awards are performance-based and are earned if the established performance goals are met. The remaining 40% of the restricted stock awards are time-based and 89% vest ratably over three years, 5% vest ratably over two years and 6% cliff vest in three years. After May 23, 2017, no new awards may be granted under the 2014 Plan and all outstanding awards at that time continued in force and operation in accordance with their respective terms.

Stock Option Grants

The Company has granted time-based stock options under the 2014, 2017 and 2020 Plans. Time-based stock option awards vest over the requisite service period of the award or to an employee’s eligible retirement date, if earlier.

A summary of the Company’s stock option activity under the 2014, 2017 and 2020 Plans for Fiscal 2020 follows:

For the Year Ended January 30, 2021

Weighted- Average Weighted- Average Remaining Contractual Aggregate Intrinsic

Options Exercise Price Term Value

(In thousands) (In years) (In thousands)

(1) Options exercised during Fiscal 2020 ranged in price from $17.25 to $20.15.

(2)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 January 30, 2021.

The weighted-average grant date fair value of stock options granted during Fiscal 2020 and Fiscal 2019 was $3.06 and $5.98, respectively. The aggregate intrinsic value of options exercised during Fiscal 2020, Fiscal 2019, and Fiscal 2018 was $0.7 million, $0.8 million and $7.4 million, respectively. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $3.3 million and $1.2 million, respectively, for Fiscal 2020. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $2.1 million and $1.2 million, respectively, for Fiscal 2019. Cash received from the exercise of stock options and the actual tax benefit realized from share-based payments was $15.5 million and $3.1 million, respectively, for Fiscal 2018.

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:

For the Years Ended

January 30, February 1,

Black-Scholes Option Valuation Assumptions 2021 2020

Risk-free interest rates (1) 0.3 - 0.6% 2.2%

Dividend yield 3.5 - 6.0 % 2.4%

Weighted-average expected term (3) 4.4 years 4.4 years

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

As of January 30, 2021, there was $5.3 million of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted average period of 1.9 years.

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 some 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 the remaining performance awards.

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

Time-Based Restricted Stock Units Performance- Based Restricted Stock Units

For the year ended For the year ended

As of January 30, 2021, there was $27.7 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 1.9 years. Based on current probable performance, there is $5.4 million of unrecognized compensation expense related to performance-based restricted stock unit awards expected to be recognized as achievement of performance goals is probable over a one to two-year period.

As of January 30, 2021, the Company had 8.9 million shares available for all equity grants.

13. Retirement Plan and Employee Stock Purchase Plan

The Company maintains a profit sharing and 401(k) plan (the “Retirement Plan”). Under the provisions of the Retirement Plan, full-time employees and part-time employees are automatically enrolled to contribute 3% of their salary if they have attained 201⁄2 years of age. In addition, full-time employees need to have completed 30 days of service and part-time employees must complete 1,000 hours worked to be eligible. Individuals can decline enrollment or can contribute up to 50% of their salary to the 401(k) plan on a pretax basis, subject to Internal Revenue Service (“IRS) limitations. After one year of service, the Company will match 100% of the first 3% of pay plus an additional 25% of the next 3% of pay that is contributed to the plan. Employees are 100% vested in the Company match after 2 years. Contributions to the profit sharing plan, as determined by the Board, are discretionary. The Company recognized $13.3 million, $11.5 million and $12.1 million in expense during Fiscal 2020, Fiscal 2019, and Fiscal 2018, respectively, in connection with the Retirement Plan.

The Employee Stock Purchase Plan is a non-qualified plan that covers all full-time employees and part-time employees who are at least 18 years old and have completed 60 days of service. Contributions are determined by the employee, with the Company matching 15% of the investment up to a maximum investment of $100 per pay period. These contributions are used to purchase shares of Company stock in the open market.

14. Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation in the form of the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act significantly changed U.S. international tax laws for tax years beginning after December 31, 2017 and included a provision designed to currently tax global intangible low-taxed income (“GILTI”) earned by non-U.S. corporate subsidiaries of large U.S. shareholders. The Company has elected to treat GILTI as a period expense, and the effect of the GILTI inclusion for Fiscal 2020 is not material.

In addition, on March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to address the COVID-19 pandemic. The CARES Act allows net operating losses (“NOL”) generated within tax years 2018 through 2020 to be carried back up to five years, including years 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%. The CARES Act contains other key income and payroll tax provisions, including the immediate write-off of qualified improvement property.

The components of (loss) income before taxes were:

For the Years Ended

January 30, February 1, February 2,

The significant components of the Company’s deferred tax assets and liabilities were as follows:

January 30, February 1,

Deferred tax assets:

Accruals not currently deductible 5,667 7,332

Employee compensation and benefits 3,166 3,176

Deferred tax liabilities:

Convertible Senior Note (20,589 ) —

The increase in net deferred tax assets was primarily due to an increase in the net deferred tax asset of operating lease ROU assets and operating lease liabilities, partially offset by an increase in the deferred tax liability of the convertible senior note.

As of January 30, 2021, the Company had deferred tax assets related to state and foreign net operating loss carryovers of $5.9 million and $4.3 million, respectively that could be utilized to reduce future years’ tax liabilities. A portion of these net operating loss carryovers expire in future years and some have an indefinite carryforward period.Management believes it is more likely than not that the foreign net operating loss carryovers will not reduce future years’ tax liabilities in certain jurisdictions. As such, valuation allowances of $4.3 million and $3.5 million have been recorded on the deferred tax assets related to the cumulative foreign net operating loss carryovers as of January 30, 2021 and February 1, 2020 respectively. We also provided for valuation allowances of approximately $0.8 million and $0.7 million related to other foreign deferred tax assets as of January 30, 2021 and February 1, 2020, respectively.

The Company had foreign tax credit carryovers in the amount of $0.9 million and $1.1 million as of January 30, 2021 and February 1, 2020, respectively. The foreign tax credit carryovers begin to expire in Fiscal 2028 to the extent not utilized. Management believes it is more likely than not that this category of foreign tax credit carryover will not reduce future years’ tax liabilities. As such, valuation allowances of $0.9 million and $1.1 million have been recorded on the deferred tax assets related to the foreign tax credit carryovers as of January 30, 2021 and February 1, 2020, respectively.

The Company had state income tax credit carryforwards of $7.4 million (net of federal tax) and $7.1 million (net of federal tax) as of January 30, 2021 and February 1, 2020, respectively. These income tax credits can be utilized to offset future state income taxes, with the majority having a carryforward period of 16 years. They will begin to expire in Fiscal 2024. Management believes it is more likely than not that a portion of the state income tax credit carryovers will not reduce future years’ tax liabilities in certain jurisdictions. As such, valuation allowances of $1.8 million and $0.5 million have been recorded on the deferred tax assets related to the cumulative state income tax credit carryovers as of January 30, 2021 and February 1, 2020, respectively.

In Fiscal 2020, the Company generated U.S. and state capital losses of $4.5 million. Generally, the capital losses have a carryforward period of 5 years. The Company has recorded a valuation allowance for $4.5 million on the deferred tax asset attributable to these capital losses.

Significant components of the (benefit) provision for income taxes were as follows:

For the Years Ended

January 30, February 1, February 2,

Current:

Deferred:

As of January 30, 2021, the undistributed earnings of the Company’s foreign subsidiaries were approximately $53.4 million.The Company intends to permanently reinvest a portion of its earnings outside of the United States for the foreseeable future. On the remaining earnings, the Company has not recognized deferred tax expense because we expect any potential distribution to be made out of previously taxed earnings, or qualify for the 100 percent dividends received deduction provided for in the Tax Act, along with little to no foreign withholding taxes.

The following table summarizes the activity related to our unrecognized tax benefits:

For the Years Ended

January 30, February 1, February 2,

Unrecognized tax benefits, beginning of the year balance $ 2,781 $ 6,534 $ 7,286

Increases in current period tax positions 602 422 565

Increases in tax positions of prior periods 1 151 2,279

Lapse of statute of limitations (289 ) (720 ) (545 )

Decreases in tax positions of prior periods (82 ) (1,383 ) (1,654 )

Unrecognized tax benefits, end of the year balance $ 2,563 $ 2,781 $ 6,534

As of January 30, 2021, the gross amount of unrecognized tax benefits was $2.6 million, of which $2.0 million would affect the effective income tax rate if recognized. The gross amount of unrecognized tax benefits as of February 1, 2020 was $2.8 million, of which $2.3 million would affect the effective income tax rate if recognized.

Unrecognized tax benefits decreased by $0.2 million during Fiscal 2020, decreased by $3.8 million during Fiscal 2019, and increased by $0.8 million during Fiscal 2018. Over the next twelve months, the Company believes it is reasonably possible that the unrecognized tax benefits could decrease by as much as $0.7 million as a result of federal and state tax settlements, statute of limitations lapses, and other changes to the reserves.

The Company records accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties related to unrecognized tax benefits included in the Consolidated Balance Sheet were $0.7 million and $0.7 million as of January 30, 2021 and February 1, 2020, respectively. An immaterial amount of interest and penalties was recognized in the (benefit) provision for income taxes during Fiscal 2020, Fiscal 2019, and Fiscal 2018.

The Company and its subsidiaries file income tax returns in the U.S. federal and various state and foreign jurisdictions. The IRS has completed examinations under the IRS Compliance Assurance Program (“CAP”) through February 1, 2020, for which the majority of the issues have been resolved. The Company does not anticipate that any adjustments will result in a material change to its consolidated financial position, results of operations or cash flows. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, generally, the Company and its subsidiaries are no longer subject to income tax audits for tax years before Fiscal 2014 (ended January 31, 2015). Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest, and penalties have been provided for any adjustments that are expected to result from these years.

AEO US Equity

AEO · 10-K · period ended 2021-01-30

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data.

AEO US Equity☆

AEO · 10-K · period ended 2021-01-30

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data.

AEO US Equity