American Eagle Apparel Stores

1. American EagleApparel Stores Module 10: Incorporating Additional Information By: Nick Cecero

2. 2 Goals When Incorporating Additional Info from AEO’S Notes 1) Focus more clearly on identification of enterprise operating and financing activities. • Examples that would pertain to American Eagle that we will look at include other assets which I originally classified as Net Enterprise Assets, but when broken down in the notes some of those other assets may not warrant an enterprise operation classification. 2) Using the data to facilitate improved forecasting assumptions. - An example that will be look at is Property, Plant, & Equipment where we may conclude that there will be no growth in the land or buildings, but only equipment is expected to grow at a certain rate.

3. Original Balance Sheet In accumulated other comprehensive income we will look for differences which may arise from other unspecified sources which we will then include later on in our expanded balance sheet.

4. Reformulated Balance Sheet NEA These six accounts which were originally identified as enterprise operations will have to be looked at in depth within the footnotes to decide if the classification still holds true. These two accounts which were classified as enterprise liabilities must also be looked at more in depth to be able to gain a better understanding of the specific components of these accounts.

5. Reformulated Balance Sheet NFL

6. Deferred Income Tax Assets & Liabilities • This item is an example where we are looking for any additional information that may help to refine our separation of enterprise and financing activities. We initially recorded both amounts as related to enterprise operations. • After careful analysis it so happens that all the deferred tax assets and deferred tax liabilities remain as part of the enterprise operations for American Eagle.

7. Footnote and Balance Sheet Do Not Reconcile • The amounts reported on the previous slide do not tie out to the amounts reported on the face of the financial statements, and this is driven by the netting effect that occurs. Companies such as American Eagle are allowed to net some deferred tax assets and liabilities, and also to combine deferred taxes with other accounts on the balance sheet. • Therefore, it is impossible to completely reconcile the tax footnote to the balance sheet.

8. AEO Deferred Taxes Exhibit • AEO Deferred Taxes: Reported on the Balance Sheet: Deferred Tax Asset, Net $58,230 Reported in Footnotes: Deferred Tax Asset $130,131 Deferred Tax Liability ($40,619) Noncurrent Deferred Tax Asset ($31,282) Total $58,230

9. Property, Plant, & Equipment • All the items relating to property, plant, and equipment will be classified as enterprise operating activities. Delving into the footnotes for P,P,&E is more about improving our ability to forecast the amount of fixed assets necessary for AEO as they relate to supporting future growth in the company. • It is evident from the footnotes that the following accounts would constitute the majority of growth for P,P,&E: 1) Buildings 2) Leasehold Improvements 3) Fixtures and Equipment

10. Intangibles • Along with P,P,&E, intangibles are items that will not be altered in terms of their classification as either enterprise operations or financing activities. Seeing the breakdown of intangibles will though help us to better forecast growth. • It is evident from the footnotes that Trademarks will constitute the majority of growth for intangible assets.

11. Goodwill • Goodwill is also another asset type that will not be altered in terms of its classification. The breakdown in the notes will although help us to better forecast growth.

12. Other Assets

13. Other Liabilities & Accrued Expenses • American Eagle as of the fiscal year 2012 divested 77kids business, but American Eagle is secondarily responsible for obligations under the lease agreements for 21 store leases assumed by the 3rd party purchaser. These obligations remain in effect until the leases expire through 2022. These would all be classified as other accrued liabilities and expenses.

14. Accumulated Other Comprehensive Income • The accumulated other comprehensive income account goes along with the deferred income tax asset and liability accounts in the sense that what is reported in the footnotes may not match the value reported on the balance sheet. In which case there would be an implied item which would be unclassified in the expanded balance sheet. • In this case as evident by the footnotes the ending balance in the footnotes ties out to the balance on the balance sheet so therefore there would be no unclassified item on the expanded balance sheet for American Eagle.

15. Original Income Statement

16. Reformulated Income Statement EPAT These two accounts will be looked at to better improve our forecasts of growth and also to decide if our prior classifications as either enterprise operations or financing activities still holds true.

17. Reformulated Income Statement FEAT

18. Sales By Segment • This detail on sales by country and operating segment, when combined with our knowledge of the business will help us going forward when we our forecasting future sales growth.

19. Selling, General, & Administrative Expense • The information regarding selling, general, and administrative expense will allow us to decide if all the expenses still classify as enterprise operations or if some should be changed to financing activities. The information from the footnotes will also help us with our forecasts. • After looking at the breakdown of SG&A it would still all be included as enterprise operations.

20. Appropriate Tax Rate • In the previous module’s we assumed an effective tax rate of 37% although this could be an incorrect percentage to use. • We have to delve into the footnotes to find the effective tax rate that American Eagle is subject to. • AEO’s effective tax rate is 34% so our 37% assumption was relatively accurate to begin with.

21. Other Information That Could Be Useful • Balance Sheet: - Accounts Receivable • Income Statement: - I tried to look for sales broken down by their three segments but could not find it in the footnotes, but thought that it would better help me to forecast future growth.

22. Summary of Significant Accounting Policies • The reason this was included is because when we look at the historical numbers to develop our forecasts of future growth the historical numbers prior to fiscal year 2012 and 2010 include two businesses that have been divested. American Eagle has divested 77kids in 2012 and in 2010 they divested M+O Brand.

23. Revenue Recognition • This deals with the returns, and although revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions, knowing the breakdown will help us derive a better sales growth forecast when we do our modeling. • Might be better to look at this footnote in the 10Q if it is in it. I would like to see how the sales returns are on a quarterly basis especially the breakdown on the fourth quarter alone since this would account for sales returns right after the holiday season. This would help us even more to derive a forecasted sales growth rate.

24. Accounts Receivable • This number increased by a little over 3.5 times in one year alone which is not a good sign which means this is revenue they are waiting to receive on mark down items that had to be sold to an off price retailer such as Marshall’s or TJ Maxx and realize thinner profit margins.

25. The End Any Questions?