| AMERICAN EAGLE OUTFITTERS INC ITEM 1A RISK FACTORS This report contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following: • the planned opening of approximately 50 American Eagle stores in the United States and Canada during Fiscal 2006; • the selection of approximately 50 American Eagle stores in the United States and Canada for remodeling during Fiscal 2006; • the completion of improvements and expansion at our distribution centers; • the possibility of growth through acquisitions and/or internally developing additional new brands; • the expected payment of a dividend in future periods; • the launch of our new brand concept, MARTIN + OSA, during Fiscal 2006, including the planned opening of approximately four to six stores in the United States; • the launch of our new intimates sub-brand, aerie by American Eagle, during Fiscal 2006; and • the completion of the purchase and initiation of the construction of our new corporate headquarters and data center |
| We caution that these statements are further qualified by factors that could cause our actual results to differ materially from those in the forward-looking statements, including without limitation, the following: Our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner Our future success depends, in part, upon our ability to identify and respond to fashion trends in a timely manner |
| The specialty retail apparel business fluctuates according to changes in the economy and customer preferences, dictated by fashion and season |
| These fluctuations especially affect the inventory owned by apparel retailers because merchandise typically must be ordered well in advance of the selling season |
| While we endeavor to test many merchandise items before ordering large quantities, we are still susceptible to changing fashion trends and fluctuations in customer demands |
| In addition, the cyclical nature of the retail business requires that we carry a significant amount of inventory, especially during our peak selling seasons |
| We enter into agreements for the manufacture and purchase of our private label apparel well in advance of the applicable selling season |
| As a result, we are vulnerable to changes in consumer demand, pricing shifts, and the timing and selection of merchandise purchases |
| The failure to enter into agreements for the manufacture and purchase of merchandise in a timely manner could, among other things, lead to a shortage of inventory and lower sales |
| Changes in fashion trends, if unsuccessfully identified, forecasted or responded to by us, could, among other things, lead to lower sales, excess inventories and higher markdowns, which in turn could have a material adverse effect on our results of operations and financial condition |
| 7 ______________________________________________________________________ [34]Table of Contents Our ability to continue our current level of sales and earnings growth During the past year, we realized substantial growth in both sales and earnings |
| A number of factors have historically affected, and will continue to affect, our rate of growth and performance |
| These factors include, among other things, customer trends and preferences, competition, economic conditions and new store openings |
| Additionally, any decline in our future growth or performance could have a material adverse effect on the market price of our common stock |
| The effect of competitive pressures from other retailers and other business factors The specialty retail industry is highly competitive |
| We compete primarily on the basis of quality, fashion, service, selection and price |
| There can be no assurance that we will be able to successfully compete in the future |
| The success of our operations also depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, consumer debt, interest rates and consumer confidence |
| There can be no assurance that consumer spending will not be negatively affected by general or local economic conditions, thereby adversely impacting our continued growth and results of operations |
| Our ability to grow through new store openings and existing store remodels and expansions Our continued growth and success will depend in part on our ability to open and operate new stores and expand and remodel existing stores on a timely and profitable basis |
| During Fiscal 2006, we plan to open approximately 50 new American Eagle stores in the US and Canada |
| Additionally, we plan to remodel or expand approximately 50 existing stores during Fiscal 2006 |
| Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites for new and expanded stores at acceptable costs, the hiring and training of qualified personnel, particularly at the store management level, the integration of new stores into existing operations and the expansion of our buying and inventory capabilities |
| There can be no assurance that we will be able to achieve our store expansion goals, manage our growth effectively, successfully integrate the planned new stores into our operations or operate our new and remodeled stores profitably |
| Our ability to grow through the internal development of new brands We have announced plans to launch a new brand concept, MARTIN + OSA, and a new intimates sub-brand, aerie by American Eagle, during Fiscal 2006 |
| Our ability to succeed in these new brands requires significant capital expenditures and management attention |
| Additionally, any new brand is subject to certain risks including customer acceptance, competition, product differentiation, the ability to attract and retain qualified personnel, including management and designers, and the ability to obtain suitable sites for new stores at acceptable costs |
| There can be no assurance that these new brands will grow or become profitable |
| If we are unable to succeed in developing profitable new brands, this could adversely impact our continued growth and results of operations |
| Our international merchandise sourcing strategy Substantially all of our merchandise is purchased from foreign suppliers |
| Although we purchase a significant portion of our merchandise from a single foreign vendor, we do not maintain any exclusive commitments to purchase from any vendor |
| Since we rely on a small number of foreign sources for a significant portion of our purchases, any event causing the disruption of imports, including the insolvency of a significant supplier or a significant labor dispute, could have an adverse effect on our operations |
| Other events which could also cause a disruption of imports include the imposition of additional trade law provisions or import restrictions, such as increased duties, tariffs, anti-dumping provisions, increased Custom’s enforcement actions, or political or economic disruptions |
| 8 ______________________________________________________________________ [35]Table of Contents We have a Vendor Code of Conduct that provides guidelines for all of our vendors regarding working conditions, employment practices and compliance with local laws |
| A copy of the Vendor Code of Conduct is posted on our website, ae |
| We have a factory compliance program to audit for compliance with the Code of Conduct |
| However, there can be no assurance that our factory compliance program will be effective in discovering violations |
| Publicity regarding violation of our Vendor Code of Conduct or other social responsibility standards by any of our vendor factories could adversely affect our sales and financial performance |
| Since the time of the attack on the World Trade Centers in 2001, we believe that there has been an increased risk of terrorist activity on a global basis |
| Such activity might take the form of a physical act that impedes the flow of imported goods or the insertion of a harmful or injurious agent to an imported shipment |
| We have instituted policies and procedures designed to reduce the chance or impact of such actions including, but not limited to, a significant increase in the number of factory audits performed; the revision of our factory audit protocol to include all critical security issues; the review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and the cancellation of agreements with entities who fail to meet our security requirements |
| In addition, we have become a certified member of the Customs - Trade Partnership Against Terrorism program, a voluntary program in which an importer agrees to work with Customs to strengthen overall supply chain security |
| There can be no assurance that terrorist activity can be prevented and we cannot predict the likelihood of any such activities or the extent of their adverse impact on our operations |
| Seasonality Historically, our operations have been seasonal, with a significant amount of net sales and net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season |
| During Fiscal 2005, the third and fourth fiscal quarters accounted for approximately 58prca of our sales and approximately 61prca of our income from continuing operations |
| As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year could have a material adverse effect on our financial condition and results of operations for the entire year |
| Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the acceptability of seasonal merchandise offerings, the timing and level of markdowns, store closings and remodels, competitive factors, weather and general economic conditions |
| Our reliance on key personnel Our success depends to a significant extent upon the continued services of our key personnel, including senior management, as well as its ability to attract and retain qualified key personnel and skilled employees in the future |
| Our operations could be adversely affected if, for any reason, one or more key executive officers ceased to be active in our management |
| Our ability to successfully upgrade and maintain our information systems We rely upon our various information systems to manage our operations and regularly make investments to upgrade, enhance or replace these systems |
| Any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with our current systems, or any other disruptions affecting our information systems, could have a material adverse impact on our business |
| Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in future periods, we must continuously document, test, monitor and enhance our internal control over financial reporting |
| There can be no assurance that the periodic evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies and/or material weaknesses or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting |
| Failure to maintain the effectiveness of our internal control over financial reporting or to comply with the requirements of this Act could have a material adverse effect on our reputation, financial condition and market price of our common stock |
| 9 ______________________________________________________________________ [36]Table of Contents Our reliance on third-party distribution services for our Canadian stores Our stores in Canada receive merchandise through logistics services provided under a transitional services agreement with the NLS Purchaser |
| Any significant interruption in the logistics services provided by the NLS Purchaser could have a material adverse effect on the operation of our stores in Canada and on our financial condition and results |
| Other risk factors Additionally, other factors could adversely affect our financial performance, including factors such as: our ability to successfully acquire and integrate other businesses; any interruption of our key business systems; any disaster or casualty resulting in the interruption of service from our distribution centers or in a large number of our stores; any interruption of key services provided by third party vendors; any interruption of our business related to an outbreak of a pandemic disease, such as the Avian Flu, in a country where we source or market our merchandise; changes in weather patterns; the effects of changes in current exchange rates and interest rates; and international and domestic acts of terror |
| The impact of any of the previously discussed factors, some of which are beyond our control, may cause our actual results to differ materially from expected results in these statements and other forward-looking statements we may make from time-to-time |