American Eagle Outfitters Inc: Form 10-Q for the period ended Aug 3, 2024

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") is intended to help the reader understand the Company, our operations and our present business environment. This MD&A is provided as a supplement to — and should be read in conjunction with — our MD&A for Fiscal 2023, which can be found in our Fiscal 2023 Form 10-K.

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

Introduction

This MD&A is organized as follows:

• Executive Overview
• Key Performance Indicators
• Current Trends and Outlook
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Estimates

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

Executive Overview

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

We have two reportable segments, American Eagle and Aerie. Our Chief Operating Decision Maker (defined as our CEO) analyzes segment results and allocates resources based on adjusted operating income (loss), which is a non-GAAP financial measure. See Note 12. “Segment Reporting,” of the Notes to the Consolidated Financial Statements included herein for additional information.

Key Performance Indicators

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

Comparable Sales — Comparable sales and comparable sales changes provide a measure of sales growth for stores and channels open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including Fiscal 2024, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable sales in the 13th month of operation. However, stores that have a gross square footage change of 25% or greater due to a remodel are removed from the comparable sales base but are included in total sales. These stores are returned to the comparable sales base in the 13th month following the remodel. Sales from American Eagle, Aerie, Todd Snyder, and Unsubscribed stores, as well as sales from AEO Direct and other digital channels, are included in total comparable sales. Sales from licensed stores are not included in comparable sales. Individual American Eagle and Aerie brand comparable sales disclosures include sales from stores and AEO Direct.

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

• Average unit retail price represents the selling price of our goods. It is the cumulative net sales divided by the net units sold for a period of time.
• Total transactions represents the count of customer transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
• Units per transaction represents the number of units sold divided by total transactions over a period of time (inclusive of Company-owned stores and AEO Direct, unless specified otherwise).
• Consolidated comparable traffic represents visits to our Company-owned stores, limited to those stores that qualify to be included in comparable sales as defined above, including AEO Direct, over a period of time.

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

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

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

Operating Income — Our management views operating income as a key indicator of our performance. The key drivers of operating income are net revenue, gross profit, our ability to control selling, general and administrative ("SG&A") expenses, and our level of capital expenditures.

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

Current Trends and Outlook

Macroeconomic Conditions and Inflation

During Fiscal 2023 and the 26 weeks ended August 3, 2024, our results were negatively impacted by macro-economic challenges and global inflationary pressures impacting consumer spending behavior, which constrained revenue and increased margin pressure to clear through excess inventory. Given ongoing external uncertainties, we have taken additional actions to improve financial performance, including more operating efficiency initiatives. For further information about the risks associated with global economic conditions and the effect of economic pressures on our business, see “Risk Factors” in Part I, Item 1A of our Fiscal 2023 Form 10-K.

Omni-Channel and Digital Capabilities

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

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

Profit Improvement Program

We launched our profit improvement program during Fiscal 2023, "Powering Profitable Growth," which focused on a comprehensive review of our cost structure. Early actions have been focused on the components of gross margin and contributed to margin expansion in Fiscal 2023. Other significant work streams have been identified, actioned and incorporated into our Fiscal 2024 plans. The results of these initiatives are expected to yield gross margin expansion, as well as SG&A and depreciation leverage, resulting in an improved operating profit rate. In the first half of Fiscal 2024, we saw expansion of our gross profit rate of 150 basis points and expansion of our operating rate of 340 basis points in comparison to the first half of Fiscal 2023 as a result of our initiatives.

Results of Operations

The second quarter of Fiscal 2024 showed continued progress on our "Powering Profitable Growth" plan, marked by the three strategic priorities. Compared to the second quarter of Fiscal 2023's:

• Amplifying our brands: Total revenue increased 8% to $1.291 billion from $1.201 billion, with American Eagle revenue increasing 8% year over year, and Aerie revenue increasing 9% year over year. American Eagle's comparable sales increased 5% year over year, and Aerie's comparable sales increased 4% year over year.
• Executing with financial discipline: Gross profit increased 10% to $499 million year over year, and increased by 90 basis points year over year to 38.6% as a percentage of revenue.
• Optimizing our operating capabilities: Operating income increased 55% to $101 million from $65 million last year, and increased by 240 basis points from last year to 7.8% as a percentage of revenue.

Diluted earnings per share increased to $0.39 for the 13 weeks ended August 3, 2024 compared to $0.25 for the 13 weeks ended July 29, 2023.

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

(In thousands)

(In thousands)

29

(In thousands)

(In thousands)

The following table shows our consolidated store data for the 13 and 26 weeks ended August 3, 2024 and July 29, 2023:

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

As of August 3, 2024, we operated 843 American Eagle retail stores, consisting of 187 Aerie side-by-side locations, five locations with AE brand, Aerie brand and OFFLINE™ connected as one store, and two OFFLINE™ side-by-side locations, 313 Aerie stand-alone stores (including 39 OFFLINE™ stand-alone stores and 36 OFFLINE™ side-by-side locations), and AEO Direct. Additionally, there were 17 Todd Snyder stand-alone locations and five Unsubscribed locations.

Comparison of the 13 weeks ended August 3, 2024 to the 13 weeks ended July 29, 2023

Total Net Revenue

Total net revenue increased 8% to $1.291 billion for the 13 weeks ended August 3, 2024, compared to $1.201 billion last year. The shift in the retail calendar contributed approximately $55 million to revenue for the 13 weeks ended August 3, 2024. Digital revenue increased 12%, and store revenue increased 7%, driven by increased transaction volume through increased traffic across channels and a slight increase in units per transaction. Total comparable sales increased by 4%, compared to a 1% decrease last year.

(In thousands)

(In thousands)

(In thousands)

American Eagle. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. American Eagle comparable sales increased 5%.

Aerie. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. Aerie comparable sales increased 4%.

Other. The decrease in net revenue was primarily attributable to planned lower revenue from Quiet Platforms offset by lower intersegment eliminations (net reduction of $6 million) due to our change in strategy for this business.

Gross Profit

(In thousands)

(In thousands)

The 10% increase in gross profit was primarily driven by an increase of $57 million in merchandise margin year over year due to increased net revenue from both American Eagle and Aerie, as well as improved product and transportation costs. Buying, occupancy and warehousing costs increased by $12 million, primarily as a result of the increase in sales volume. However, as a percent to net revenue, buying, occupancy, and warehousing costs decreased by 40 basis points, driven by rent and digital delivery, reflecting a lower product cost per order.

During the 13 weeks ended August 3, 2024 and July 29, 2023, $2.5 million and $5.0 million, respectively, of share-based payment expense were included in gross profit, representing both time and performance-based awards.

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

Selling, General and Administrative Expenses

(In thousands)

(In thousands)

The increase in expenses was primarily related to:

• a $7 million increase in advertising;
• a $6 million increase in store compensation due to increased wage rates; and
• an increase in other variable sales related expenses; partially offset by
• a $6 million reduction in performance-based incentive expense.

There was $4.3 million and $5.5 million of share-based payment expense included in SG&A expenses for the 13 week periods ended August 3, 2024 and July 29, 2023, respectively, comprised of both time and performance-based awards.

Depreciation and Amortization Expense

(In thousands)

(In thousands)

The decrease in depreciation and amortization expense was primarily driven by prior year impairments of definite-lived tangible and intangible assets of Quiet Platforms.

Operating Income

(In thousands)

(In thousands)

(In thousands)

The 55% increase in operating income, including approximately $20 million positive impact from the retail calendar shift, was primarily driven by by higher gross profit, a reduction in depreciation and amortization, and was partially offset by an increase in SG&A costs all of which are explained in detail above.

American Eagle. The 13% increase was primarily the result of the 8% increase in revenue discussed above, leading to a $23 million, or 7% increase in gross profit driven by a $30 million increase in merchandise margin, partially offset by increased buying, occupancy, and warehousing costs from the increased sales volume. The gross profit improvement was partially offset by an $8 million increase in SG&A costs, primarily from incremental advertising investment and other variable sales related expense to arrive at the $16 million increase in operating income.

Aerie. The 22% increase was primarily the result of the 9% increase in revenue discussed above, leading to a $23 million, or 16% increase in gross profit driven by a $22 million increase in merchandise margin. The gross profit improvement was partially offset by an $11 million increase in SG&A costs, primarily driven by store compensation and incremental advertising investment to arrive at the $12 million increase in operating income.

General Corporate Expenses. The decrease is primarily due to lower performance-based incentive compensation expense, as well as decreased depreciation and amortization.

Interest (Income) Expense, net

(In thousands)

(In thousands)

The increase in interest income, net was primarily attributable to increased interest income of approximately $1 million on deposits and a reduction in interest expense of approximately $1 million primarily related to borrowings on our revolving Credit Facility. No borrowings were outstanding on our Credit Facility during the 13 weeks ended August 3, 2024 as compared to an average of approximately $20 million outstanding on our revolving Credit Facility throughout the 13 weeks ended July 29, 2023.

Other (Income), net

(In thousands)

(In thousands)

Provision for Income Taxes

(In thousands)

(In thousands)

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 13 weeks ended August 3, 2024 was 25.4% compared to 27.0% for the 13 weeks ended July 29, 2023. The change in the effective tax rate, as compared to the prior period, is primarily due to a change in non-deductible executive compensation and international provisions of the Tax Cuts and Jobs Act ("the "Tax Act").

Net Income

(In thousands)

(In thousands)

Net income per share increased to $0.39 per diluted share for the 13 weeks ended August 3, 2024, compared to $0.25 per diluted share for the 13 weeks ended July 29, 2023. The increase in net income was attributable to the factors noted above.

Comparison of the 26 weeks ended August 3, 2024 to the 26 weeks ended July 29, 2023

Total Net Revenue

Total net revenue increased 7% to $2.435 billion for the 26 weeks ended August 3, 2024, compared to $2.282 billion last year. The shift in the retail calendar contributed approximately $70 million to revenue for the 26 weeks ended August 3, 2024. Digital revenue increased 12%, and store revenue increased 6%, driven by increased transaction volume as a result of increased traffic across channels. Total comparable sales increased by 5%, compared to a 1% decrease last year.

(In thousands)

(In thousands)

(In thousands)

American Eagle. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. This increase was partially offset by $5 million of incremental revenue from excess end-of-season selloffs, during the 26 weeks ended July 29, 2023, which we did not anniversary this year. American Eagle comparable sales increased 6%.

Aerie. The increase in net revenue was driven by increased transaction volume as a result of increased traffic across channels. This increase was partially offset by $9 million of incremental revenue from excess end-of-season selloffs, during the 26 weeks ended July 29, 2023, which we did not anniversary this year. Aerie comparable sales increased 5%.

Other. The decrease in net revenue was primarily attributable to planned lower revenue from Quiet Platforms offset by lower intersegment eliminations (net reduction of $10 million) due to our change in strategy for this business.

Gross Profit

(In thousands)

(In thousands)

The 11% increase in gross profit was primarily driven by an increase of $111 million in merchandise margin year over year due to increased net revenue from both American Eagle and Aerie, as well as improved product and transportation costs. Buying, occupancy and warehousing costs increased by $14 million, primarily as a result of the increase in sales volume. However, as a percent to net revenue, buying, occupancy, and warehousing costs decreased by 70 basis points, driven by rent and digital delivery, reflecting lower product cost per order.

During the 26 weeks ended August 3, 2024 and July 29, 2023, $9.1 million and $10.8 million, respectively of share-based payment expense were included in gross profit, representing both time and performance-based awards.

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

Selling, General and Administrative Expenses

(In thousands)

(In thousands)

The increase in expenses was primarily related to:

• a $20 million increase in compensation, primarily due to $13 million of incremental store compensation due to increased wage rates, partially offset by efficiencies in our store labor model;
• an increase of $11 million in advertising; and
• an increase in variable sales related expenses.

There was $18.3 million and $14.5 million of share-based payment expense included in SG&A expenses for the 26 week periods ended August 3, 2024 and July 29, 2023, respectively, comprised of both time and performance-based awards.

Impairment, Restructuring and Other Charges

(In thousands)

(In thousands)

There were no impairment, restructuring and other charges for the 26 weeks ended August 3, 2024. During the 26 weeks ended July 29, 2023, we recorded $21.3 million of impairment, restructuring and other charges related to Quiet Platforms. We recorded $10.8 million of impairment of supply chain technology assets due to insufficient prospective cash flows to support the asset value resulting from the restructuring of Quiet Platforms, $5.6 million of employee severance, and $4.9 million of contract related charges.

Depreciation and Amortization Expense

(In thousands)

(In thousands)

The decrease in depreciation and amortization expense was primarily driven by prior year impairments of definite-lived tangible and intangible assets of Quiet Platforms.

Operating Income

(In thousands)

(In thousands)

(In thousands)

The 103% increase in operating income, including approximately $30 million positive impact from the retail calendar shift, was primarily driven by higher gross profit, a reduction in impairment, restructuring, and other charges, and a reduction in depreciation and amortization, partially offset by increased SG&A expenses, all of which are explained in detail above.

American Eagle. The 21% increase was primarily the result of the 8% increase in revenue discussed above, leading to a $58 million, or 10% increase in gross profit driven by a $67 million increase in merchandise margin, offset by a $9 million increase in buying, occupancy, and warehousing costs from the increased sales volume. The gross profit improvement was partially offset by an $11 million increase in SG&A costs, primarily from store compensation, incremental advertising, and other variable sales related costs to arrive at the $49 million increase in operating income.

Aerie. The 16% increase was primarily the result of the 7% increase in revenue discussed above, leading to a $37 million increase in gross profit driven by a $34 million increase in merchandise margin. The gross profit improvement was partially offset by a $20 million increase in SG&A expenses, primarily driven by store compensation, incremental advertising and other variable sales related costs to arrive at the $18 million increase in operating income.

Other. The decrease was primarily the result of a $6 million improvement from Quiet Platforms as a result of lower SG&A and depreciation and amortization expenses, partially offset by a $4 million decline in performance from the Todd Snyder and Unsubscribed brands.

Interest (Income) Expense, net

(In thousands)

(In thousands)

The increase in interest (income) expense, net was primarily attributable to increased interest income of $5 million on deposits, no borrowings on our Credit Facility, and the elimination of convertible note interest expense on the 2025 Notes due to their Early Redemption last year.

Other (Income), net

(In thousands)

(In thousands)

36

Provision for Income Taxes

(In thousands)

(In thousands)

The provision for income taxes is based on the current estimate of the annual effective income tax rate and is adjusted as necessary for discrete quarterly events. The effective income tax rate for the 26 weeks ended August 3, 2024 was 22.1% compared to 27.1% for the 26 weeks ended July 29, 2023. The change in the effective tax rate, as compared to the prior period, is primarily due to excess tax benefits on share-based payments and tax audit adjustments.

Net Income

(In thousands)

(In thousands)

Net income per share increased to $0.73 per diluted share for the 26 weeks ended August 3, 2024, compared to $0.34 per diluted share, for the 26 weeks ended July 29, 2023. The increase in net income was attributable to the factors noted above.

International Operations

We have agreements with multiple third-party operators to expand our brands internationally. Our international licensing partners acquire the right to sell, promote, market, and/or distribute various categories of our products in a given geographic area and to source products from us. International licensees' rights include the right to own and operate retail stores and may include rights to sell in wholesale markets, shop-in-shop concessions and operate online marketplace businesses. As of August 3, 2024, our international licensing partners operated in 313 licensed retail stores and concessions, as well as wholesale markets, online brand sites, and online marketplaces in approximately 30 countries.

As of August 3, 2024, we had 104 Company-owned stores in Canada, 83 in Mexico, 15 in Hong Kong, and seven in Puerto Rico.

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 stockholders through the repurchase of common stock and the payment of dividends. Additionally, our uses of cash have included the development of the Aerie brand, investments in technology and omni-channel capabilities, and our international expansion efforts.

Historically, our uses of cash have been funded with cash flow from operations and existing cash on hand. We also maintain an asset-based revolving Credit Facility that allows us to borrow up to $700 million, which will expire in June 2027. As of August 3, 2024, there were no borrowings under the Credit Facility. In April 2020, the Company issued $415 million aggregate principal amount of convertible senior notes due in 2025. As of July 29, 2023, the Company's 2025 Notes were fully redeemed. Refer to Note 8 to the Consolidated Financial Statements for additional information regarding our long-term debt.

As of August 3, 2024, we had approximately $191.8 million in cash and cash equivalents. 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:

The following table sets forth net cash flows in operating, investing, and financing activities for the 26 weeks ended August 3, 2024 and July 29, 2023:

(In thousands)

Cash Flows Provided By Operating Activities

Our major source of cash from operations for both periods 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 the 26 weeks ended August 3, 2024 primarily consisted of capital expenditures of $96.9 million, offset by the sales of available-for-sale investments of $100.0 million.

Investing activities for the 26 weeks ended July 29, 2023 primarily consisted of capital expenditures of $92.0 million.

Cash Flows Used for Financing Activities

Cash used for financing activities for the 26 weeks ended August 3, 2024 consisted primarily of $130.9 million, including commissions and excise taxes, used for the repurchase of common stock under our publicly announced programs, and $48.6 million for cash dividends paid at a quarterly rate of $0.125 per share.

Cash used for financing activities for the 26 weeks ended July 29, 2023 consisted primarily $39.4 million for cash dividends paid at a quarterly rate of $0.10 per share and $10.4 million for the repurchase of common stock from employees for the payment of taxes in connection with vesting of share-based payments, partially offset by $3.0 million of net borrowings under our Credit Facility.

Revolving Credit Facility

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

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

As of August 3, 2024, the Company was in compliance with the terms of the Credit Agreement and had no borrowings and had $12.0 million outstanding in stand-by letters of credit. As of July 29, 2023, the Company had $3.0 million in outstanding borrowings and $7.7 million outstanding in stand-by letters of credit.

Capital Expenditures for Property and Equipment

For the 26 weeks ended August 3, 2024, capital expenditures totaled $96.9 million. See below for a breakdown of expenditures:

(In thousands)

(In thousands)

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

See below for a breakdown for stores remodeled and new stores opened in the 26 weeks ended August 3, 2024 and July 29, 2023:

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

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

Share Repurchases

On February 1, 2024, our Board authorized the public repurchase of 30.0 million shares under a new share repurchase program, which expires on February 3, 2029. During the 26 weeks ended August 3, 2024, there were 6.0 million shares repurchased under this authorization.

During the 26 weeks ended August 3, 2024 and July 29, 2023, we repurchased approximately 0.5 million and 0.7 million shares, respectively, from certain employees at market prices totaling $13.3 million and $10.4 million, respectively. These shares were repurchased for the payment of taxes, in connection with the vesting of share-based payments, as permitted under our equity incentive plans.

The aforementioned repurchased shares have been recorded as treasury stock.

Dividends

During the 13 weeks ended August 3, 2024, our Board declared a quarterly cash dividend of $0.125 per share on June 4, 2024, which was paid on July 26, 2024.

The Company maintains the right to defer the record and payment dates of any declared dividends, depending upon, among other factors, business performance and the macroeconomic environment. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in United States taxation, and other relevant factors.

Critical Accounting Estimates

Our critical accounting policies and estimates are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in the notes to our Consolidated Financial Statements for the year ended February 3, 2024 contained in our Fiscal 2023 Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the notes to our Consolidated Financial Statements in this Quarterly Report. The application of our critical accounting policies and estimates may require our management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Our management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

We are primarily exposed to the impact of foreign exchange rate risk primarily through our Canadian and Mexican operations where the functional currency is the Canadian dollar and Mexican peso, respectively. The impact of all other foreign currencies is currently immaterial to our consolidated financial results. An unrealized loss of $23.5 million and $22.9 million is included in accumulated other comprehensive (loss) income during the 13 and 26 weeks ended August 3, 2024, respectively. Our market risk profile as of February 3, 2024 is disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Fiscal 2023 Form 10-K, which is unchanged as of August 3, 2024.

Disclosure Controls and Procedures

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

In connection with the preparation of this Quarterly Report, as of August 3, 2024, the Company performed an evaluation under the supervision and with the participation of our Management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon that evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing, and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

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

Risk factors that affect our business and financial results are discussed within Part I, Item 1A of our Fiscal 2023 Form 10-K. There have been no material changes to our risk factors as disclosed in the Fiscal 2023 Form 10-K.