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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K


☑		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the Fiscal Year Ended January 29, 2011
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-33338

American Eagle Outfitters, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		No. 13-2721761 (I.R.S. Employer Identification No.)
77 Hot Metal Street, Pittsburgh, PA (Address of principal executive offices)		15203-2329 (Zip Code)

Registrant's telephone number, including area code:

(412) 432-3300

Securities registered pursuant to Section 12(b) of the Act:


Common Shares, $0.01 par value (Title of class)		New York Stock Exchange (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☑ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Sections 15(d) of the Act. YES o NO ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at the past 90 days. YES ☑ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☑ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ☑	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO ☑

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of July 31, 2010 was $2,196,680,330.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 194,690,703 Common Shares were outstanding at March 7, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Part III - Proxy Statement for 2011 Annual Meeting of Stockholders, in part, as indicated.

AMERICAN EAGLE OUTFITTERS, INC.

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		Page
		Number

PART I
Item 1.	Business		2
Item 1A.	Risk Factors		9
Item 1B.	Unresolved Staff Comments		12
Item 2.	Properties		12
Item 3.	Legal Proceedings		13
Item 4.	Reserved		13

PART II
Item 5.	Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		13
Item 6.	Selected Consolidated Financial Data		16
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 8.	Financial Statements and Supplementary Data		32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		69
Item 9A.	Controls and Procedures		69
Item 9B.	Other Information		71

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		71
Item 11.	Executive Compensation		71
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		71
Item 13.	Certain Relationships and Related Transactions, and Director Independence		71
Item 14.	Principal Accounting Fees and Services		71

PART IV
Item 15.	Exhibits, Financial Statement Schedules		71
EX-10.24
EX-10.25
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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PART I


ITEM 1.	*BUSINESS.*

General

American Eagle Outfitters, Inc., a Delaware corporation, (the "Company") operates under the American Eagle ® , aerie ® by American Eagle ® , and 77kids by american eagle ® brands. The Company operated the MARTIN+OSA ® brand ("M+O") until its closure during the 52 weeks ended January 29, 2011.

Founded in 1977, American Eagle Outfitters ® is a leading apparel and accessories retailer that operates more than 1,000 retail stores in the U.S. and Canada, and online at ae.com ® . Through its family of brands, American Eagle Outfitters, Inc. offers high quality, on-trend clothing, accessories and personal care products at affordable prices. Our online business, AEO Direct, ships to 76 countries worldwide.

As used in this report, all references to "we," "our" and the "Company" refer to American Eagle Outfitters, Inc. ("AEO, Inc.") and its wholly-owned subsidiaries. "American Eagle Outfitters," "American Eagle," "AE" and the "AE Brand" refer to our U.S. and Canadian American Eagle Outfitters stores. "AEO Direct" refers to our e-commerce operations, ae.com, aerie.com and 77kids.com. "MARTIN+OSA" or "M+O" refers to the MARTIN+OSA stores and e-commerce operation which we operated until its closure during the 52 week period ended January 29, 2011. "NLS" refers to National Logistics Services which we operated in Canada prior to its disposition during the 53 week period ended February 3, 2007.

Our financial year is a 52/53 week year that ends on the Saturday nearest to January 31. As used herein, "Fiscal 2011" refers to the 52 week period ending January 28, 2012. "Fiscal 2010," "Fiscal 2009," "Fiscal 2008" and "Fiscal 2007" refer to the 52 week periods ended January 29, 2011, January 30, 2010, January 31, 2009 and February 2, 2008, respectively. "Fiscal 2006" refers to the 53 week period ended February 3, 2007.

On March 5, 2010, the Company's Board of Directors (the "Board") approved management's recommendation to proceed with the closure of the M+O brand. We notified employees and issued a press release announcing this decision on March 9, 2010. The decision to take this action resulted from an extensive evaluation of the brand and review of strategic alternatives, which revealed that it was not achieving performance levels that warranted further investment. We completed the closure of M+O stores and its e-commerce operation during the 13 weeks ended July 31, 2010. The Consolidated Financial Statements reflect the presentation of M+O as a discontinued operation. Refer to Note 14 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O.

As of January 29, 2011, we operated 929 American Eagle Outfitters stores, 148 aerie stand-alone stores and nine 77kids stores.

Information concerning our segments and certain geographic information is contained in Note 2 of the Consolidated Financial Statements included in this Form 10-K and is incorporated herein by reference.

Growth Strategy

Our primary growth strategies are focused on the following key areas of opportunity:

AE Brand

The American Eagle Outfitters ® brand targets 15 to 25-year old men and women, achieving the perfect combination of American prep and current fashion. Denim is the cornerstone of the American Eagle ® product assortment, which is complemented by other key categories including sweaters, graphic t-shirts, fleece, outerwear and accessories. American Eagle ® is honest, real, individual and fun. American Eagle ® is priced to be worn by everyone, everyday, delivering value through quality and style.

Gaining market share in key categories, such as knit tops and fleece, is a primary focus within the AE Brand. In addition, we will build upon our number one position in denim. Delivering value, variety and versatility to our customers remains a top priority. We will offer value at all levels of the assortment, punctuated with compelling,

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pre-planned promotions that are profitable to the business. We are reducing production lead-times, which enables us to react more quickly to emerging trends. Finally, we continue to innovate our store experience to be more impactful from front to back.

aerie by American Eagle

In the fall of 2006, the Company launched aerie ® by American Eagle ® ("aerie"), a collection of Dormwear ® , intimates and personal care products for the AE ® girl. What started as a sub-brand quickly became a standalone concept in its own right. The collection is available in 148 standalone aerie stores throughout the United States and Canada, online at aerie.com, and at select American Eagle ® stores. aerie is being repositioned as a more complete lifestyle brand with intimates as the inspiration. aerie is a lifestyle brand for a modern 21-year-old girl that is beautiful, feminine, soft, sensuous, yet comfortable. It is simple and stylish apparel that is made to live in and wear out.

77kids by american eagle

Introduced in October of 2008 as an online-only brand, 77kids by american eagle ® ("77kids") offers on-trend, high-quality clothing and accessories for kids ages two to 10 and babies under the brand name little77 tm . Beginning in Fiscal 2010, nine 77kids ® stores were opened. The brand draws from the strong heritage of American Eagle Outfitters ® , with a point-of-view that's thoughtful, playful and real. Like American Eagle ® clothing, 77kids focuses on great fit, value and style. All 77kids ® clothing is backed by the brand's 77wash tm and 77soft tm guarantees to maintain size, shape and quality and to be extremely soft and comfortable through dozens of washes.

AEO Direct

We sell merchandise via our e-commerce operations, ae.com ® , aerie.com and 77kids.com, which are extensions of the lifestyle that we convey in our stores. We currently ship to 76 countries. In addition to purchasing items online, customers can experience AEO Direct in-store through Store-to-Door. Store-to-Door enables store associates to sell any item available online to an in-store customer in a single transaction. Customers are taking advantage of Store-to-Door by purchasing extended sizes that are not available in-store, as well as finding a certain size or color that happens to be out-of-stock at the time of their visit. The ordered items are shipped to the customer's home free of charge. We accept PayPal ® and Bill Me Later ® as a means of payment from our ae.com ® , aerie.com and 77kids.com customers. We are continuing to focus on the growth of AEO Direct through various initiatives, including improved site efficiency and faster check-out, expansion of sizes and styles, on-line specialty shops and targeted marketing strategies.

Real Estate

We are continuing to take a more cautious stance on real estate growth in light of the current economic environment. However, we remain focused on the real-estate strategies that we have in place to grow our business and strengthen our financial performance.

We are continuing the expansion of our brands throughout the United States. At the end of Fiscal 2010, we operated in all 50 states, Puerto Rico and Canada. During Fiscal 2010, we opened 34 new stores, consisting of 14 AE stores, 11 aerie stores and nine 77kids stores. These store openings, offset by 51 store closings that include all 28 M+O stores, decreased our total store base to 1,086 stores.

Our gross square footage increased by approximately 2% during Fiscal 2010, excluding the impact of M+O closings, with approximately 71% attributable to new store openings and the remaining 29% attributable to the incremental square footage from 29 store remodels and refurbishes.

Remodeling of our AE stores into our current store format is important to enhance our customer's shopping experience. In order to maintain a balanced presentation and to accommodate additional product categories, we selectively enlarge our stores during the remodeling process to an average 6,500 gross square feet, either within their existing location or by upgrading the store location within the mall. We believe the larger format can better

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accommodate our expansion of merchandise categories. We select stores for expansion or relocation based on market demographics and store volume forecasts.

During Fiscal 2010, we remodeled 18 stores, including 17 AE stores and one aerie store. Of the 18 remodeled stores, nine stores were remodeled or refurbished with an expansion to their existing locations, six stores were relocated to a larger space within the mall and three stores were remodeled within their existing locations. Additionally, 11 stores were refurbished as discussed below.

We maintain a cost effective store refurbishment program targeted towards our lower volume stores, typically located in smaller markets. Stores selected as part of this program maintain their current location and size but are updated to include certain aspects of our current store format, including paint and new fixtures.

In Fiscal 2011, we plan to open approximately 14 AE, 10 aerie and 12 77kids stores. We also plan to remodel between 55 and 75 existing AE stores. Our square footage growth is expected to increase slightly in Fiscal 2011. We believe that there are attractive retail locations where we can continue to open American Eagle stores and our other brands in enclosed regional malls, urban areas and lifestyle centers.

The table below shows certain information relating to our historical store growth.


	Fiscal			Fiscal			Fiscal			Fiscal			Fiscal
	2010			2009			2008			2007			2006

Consolidated stores at beginning of period		1,103			1,098			987			911			869
Consolidated stores opened during the period		34			29			122			80			50
Consolidated stores closed during the period		(51	)		(24	)		(11	)		(4	)		(8	)

Total consolidated stores at end of period		1,086			1,103			1,098			987			911


	Fiscal			Fiscal			Fiscal			Fiscal			Fiscal
	2010			2009			2008			2007			2006

AE Brand stores at beginning of period		938			954			929			903			869
AE Brand stores opened during the period		14			8			35			30			42
AE Brand stores closed during the period		(23	)		(24	)		(10	)		(4	)		(8	)

Total AE Brand stores at end of period		929			938			954			929			903


	Fiscal		Fiscal		Fiscal		Fiscal		Fiscal
	2010		2009		2008		2007		2006

aerie stores at beginning of period		137		116		39		3		-
aerie stores opened during the period		11		21		77		36		3
aerie stores closed during the period		-		-		-		-		-

Total aerie stores at end of period		148		137		116		39		3


	Fiscal		Fiscal		Fiscal		Fiscal		Fiscal
	2010		2009		2008		2007		2006

77kids stores at beginning of period		-		-		-		-		-
77kids stores opened during the period		9		-		-		-		-
77kids stores closed during the period		-		-		-		-		-

Total 77kids stores at end of period		9		-		-		-		-

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	Fiscal			Fiscal		Fiscal			Fiscal		Fiscal
	2010			2009		2008			2007		2006

M+O stores at beginning of period		28			28		19			5		-
M+O stores opened during the period		-			-		10			14		5
M+O stores closed during the period		(28	)		-		(1	)		-		-

Total M+O stores at end of period		-			28		28			19		5

Consolidated Store Locations

Our stores average approximately 5,800 gross square feet and approximately 4,700 on a selling square foot basis. As of January 29, 2011, we operated 1,086 stores in the United States and Canada under the American Eagle Outfitters, aerie and 77kids brands as shown below:

United States, including the Commonwealth of Puerto Rico - 994 stores


Alabama	18	Indiana	22	Nebraska	8	Rhode Island	4
Alaska	5	Iowa	13	Nevada	4	South Carolina	16
Arizona	16	Kansas	10	New Hampshire	8	South Dakota	3
Arkansas	8	Kentucky	12	New Jersey	29	Tennessee	25
California	81	Louisiana	14	New Mexico	3	Texas	72
Colorado	12	Maine	5	New York	64	Utah	12
Connecticut	18	Maryland	18	North Carolina	30	Vermont	3
Delaware	5	Massachusetts	32	North Dakota	4	Virginia	28
Florida	50	Michigan	33	Ohio	39	Washington	19
Georgia	34	Minnesota	22	Oklahoma	12	West Virginia	9
Hawaii	4	Mississippi	8	Oregon	11	Wisconsin	18
Idaho	4	Missouri	19	Pennsylvania	66	Wyoming	2
Illinois	35	Montana	2	Puerto Rico	5

Canada - 92 stores


Alberta	14	New Brunswick	4	Ontario	46
British Columbia	12	Newfoundland	1	Quebec	9
Manitoba	2	Nova Scotia	2	Saskatchewan	2

International Expansion

In Fiscal 2009, we entered into an international franchise agreement with Alshaya Trading Co. to open a series of American Eagle stores in the Middle East, Northern Africa and Eastern Europe over the next several years. The first three franchised stores opened during Fiscal 2010 in Dubai and Kuwait City and are not included in the table above.

During Fiscal 2010, we entered into a franchise agreement with Dickson Concepts (International) Limited to open a series of American Eagle stores in Hong Kong, China and Macau beginning in Fiscal 2011. Additionally, we entered into franchise agreements with Sumikin Bussan Corporation and Fox-Wizel, Ltd. to open a series of American Eagle and aerie stores in Japan and Israel, respectively. The first stores are scheduled to be opened in Fiscal 2012. These franchise arrangements do not involve a capital investment from AEO and require minimal operational involvement.

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Purchasing

We purchase merchandise from suppliers who either manufacture their own merchandise, supply merchandise manufactured by others or both. During Fiscal 2010, we purchased a majority of our merchandise from non-North American suppliers.

All of our merchandise suppliers receive a vendor compliance manual that describes our quality standards and shipping instructions. We maintain a quality control department at our distribution centers to inspect incoming merchandise shipments for uniformity of sizes and colors and for overall quality of manufacturing. Periodic inspections are also made by our employees and agents at manufacturing facilities to identify quality problems prior to shipment of merchandise.

Corporate Responsibility

The Company is firmly committed to the principle that the people who make our clothes should be treated with dignity and respect. We seek to work with apparel suppliers throughout the world who share our commitment to providing safe and healthy workplaces. At a minimum, we require our suppliers to maintain a workplace environment that complies with local legal requirements and meets universally-accepted human rights standards.

Our Vendor Code of Conduct (the "Code"), which is based on universally-accepted human rights principles, sets forth our expectations for suppliers. The Code must be posted in every factory that manufactures our clothes in the local language of the workers. All suppliers must agree to abide by the terms of our Code before we will place production with them.

We maintain an extensive factory inspection program, through our Hong Kong compliance office, to monitor compliance with our Code. The Hong Kong team validates the inspection reporting of our third-party vendor compliance auditors and works with new and existing factories on remediation of issues. New garment factories must pass an initial inspection in order to do business with us. Once new factories are approved, we then strive to re-inspect them at least once a year. We review the outcome of these inspections with factory management with the goal of helping them to continuously improve their performance. In cases where a factory is unable or unwilling to meet our standards, we will take steps up to and including the severance of our business relationship.

Security Compliance

During recent years, there has been an increasing focus within the international trade community on concerns related to global terrorist activity. Various security issues and other terrorist threats have brought increased demands from the Bureau of Customs and Border Protection ("CBP") and other agencies within the Department of Homeland Security that importers take responsible action to secure their supply chains. In response, we became a certified member of the Customs - Trade Partnership Against Terrorism program ("C-TPAT") during 2004. C-TPAT is a voluntary program offered by CBP in which an importer agrees to work with CBP to strengthen overall supply chain security. Our internal security procedures were reviewed by CBP during February 2005 and a validation of processes with respect to our external partners was completed in June 2005 and then re-evaluated in June 2008. We received formal written validations of our security procedures from CBP during Fiscal 2006 and Fiscal 2008, each indicating the highest level of benefits afforded to C-TPAT members.

Historically, we took significant steps to expand the scope of our security procedures, including, but not limited to: a significant increase in the number of factory audits performed; a revision of the factory audit format to include a review of all critical security issues as defined by CBP; a review of security procedures of our other international trading partners, including forwarders, consolidators, shippers and brokers; and a requirement that all of our international trading partners be members of C-TPAT. In Fiscal 2007, we further increased the scope of our inspection program to strive to include pre-inspections of all potential production facilities. In Fiscal 2009, we again expanded the program to require all suppliers that have passed pre-inspections and reached a satisfactory level of security compliance through annual factory re-audits to provide us with security self-assessments on at least an annual basis. Additionally, in Fiscal 2009, we began evaluating additional oversight options for high-risk security countries and among other things, implemented full third-party audits on an annual basis.

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Trade Compliance

We act as the importer of record for substantially all of the merchandise we purchase overseas from foreign suppliers. Accordingly, we have an affirmative obligation to comply with the rules and regulations established for importers by the CBP regarding issues such as merchandise classification, valuation and country of origin. We have developed and implemented a comprehensive series of trade compliance procedures to assure that we adhere to all CBP requirements. In its most recent review and audit of our import operations and procedures, CBP found no unacceptable risks of non-compliance.

Merchandise Inventory, Replenishment and Distribution

Merchandise is generally shipped directly from our vendors and routed through third-party transloaders at key ports of entry to our three U.S. distribution centers, one in Warrendale, Pennsylvania and the other two in Ottawa, Kansas, or to our Canadian distribution center in Mississauga, Ontario. Additionally, certain product is eligible to be shipped directly to stores, by-passing our distribution centers.

Upon receipt at one of our distribution centers, merchandise is processed and prepared for shipment to the stores or forwarded to a warehouse holding area to be used as store replenishment goods. The allocation of merchandise among stores varies based upon a number of factors, including geographic location, customer demographics and store size. Merchandise is shipped to our stores two to five times per week depending upon the season and store requirements.

The expansion of our Kansas distribution center in Fiscal 2007 enabled us to bring fulfillment services for AEO Direct in-house. The second phase of this expansion was completed in Fiscal 2008 to enhance operating efficiency and support our future growth.

Customer Credit and Returns

We offer a co-branded credit card (the "AEO Visa Card") and a private label credit card (the "AEO Credit Card") under the American Eagle, aerie, and 77kids brands. These credit cards are issued by a third-party bank (the "Bank"), and we have no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank's procedures. Once a customer is approved to receive the AEO Visa Card or the AEO Credit Card and the card is activated, the customer is eligible to participate in our credit card rewards program that was implemented on January 1, 2010. Customers who make purchases at AE, aerie and 77kids earn discounts in the form of savings certificates when certain purchase levels are reached. Also, AEO Visa Card customers who make purchases at other retailers where the card is accepted earn additional discounts. Savings certificates are valid for 90 days from issuance. AEO Credit Card holders will also receive special promotional offers and advance notice of all American Eagle in-store sales events. The AEO Credit Card is accepted at all of our stores and at ae.com, aerie.com, and 77kids.com. The AEO Visa Card is accepted in all of our stores and AEO Direct sites as well as merchants worldwide that accept Visa ® .

Customers in our U.S. and Canada stores may also pay for their purchases with American Express ® , Discover ® , MasterCard ® , Visa ® , bank debit cards, cash or check. Our AEO Direct customers may pay for their purchases using American Express ® , Discover ® , MasterCard ® and Visa ® . They may also pay for their purchases using PayPal ® and Bill Me Later ® .

Customers may also use gift cards to pay for their purchases. AE, aerie, and 77kids gift cards can be purchased in our American Eagle, aerie, and 77kids stores, respectively, and can be used both in-store and online. In addition, AE, aerie and 77kids gift cards are available for purchase through ae.com, aerie.com or 77kids.com. When the recipient uses the gift card, the value of the purchase is electronically deducted from the card and any remaining value can be used for future purchases. Our gift cards do not expire and we do not charge a service fee on inactive gift cards.

We offer our retail customers a hassle-free return policy. We believe that our competitors offer similar credit card and customer service policies.

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Competition

The retail apparel industry, including retail stores and e-commerce, is highly competitive. We compete with various individual and chain specialty stores, as well as the casual apparel and footwear departments of department stores and discount retailers, primarily on the basis of quality, fashion, service, selection and price.

Trademarks and Service Marks

We have registered AMERICAN EAGLE OUTFITTERS ® , AMERICAN EAGLE ® , AE ® and AEO ® with the United States Patent and Trademark Office. We have also registered or have applied to register these trademarks with the registries of many of the foreign countries in which our stores and/or manufacturers are located and/or where our product is shipped.

We have registered AMERICAN EAGLE OUTFITTERS ® and have applied to register AMERICAN EAGLE tm with the Canadian Intellectual Property Office. In addition, we are exclusively licensed in Canada to use AE tm and AEO ® in connection with the sale of a wide range of clothing products.

In the United States and around the world, we have also registered, or have applied to register, a number of other marks used in our business, including aerie ® , 77kids by american eagle ® and little77 by american eagle tm .

These trademarks are renewable indefinitely and their registrations are properly maintained in accordance with the laws of the country in which they are registered. We believe that the recognition associated with these trademarks makes them extremely valuable and, therefore, we intend to use and renew our trademarks in accordance with our business plans.

Employees

As of January 29, 2011, we had approximately 39,900 employees in the United States and Canada, of whom approximately 33,000 were part-time and seasonal hourly employees. We consider our relationship with our employees to be good.

Seasonality

Historically, our operations have been seasonal, with a large portion of net sales and operating income occurring in the third and fourth fiscal quarter, reflecting increased demand during the back-to-school and year-end holiday selling seasons, respectively. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, 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.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available, free of charge, under the "About AEO, Inc." section of our website at www.ae.com. These reports are available as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (the "SEC").

Our corporate governance materials, including our corporate governance guidelines, the charters of our audit, compensation, and nominating and corporate governance committees, and our code of ethics may also be found under the "About AEO, Inc." section of our website at www.ae.com. Any amendments or waivers to our code of ethics will also be available on our website. A copy of the corporate governance materials is also available upon written request.

Additionally, our investor presentations are available under the "About AEO, Inc." section of our website at www.ae.com. These presentations are available as soon as reasonably practicable after they are presented at investor conferences.

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Certifications

As required by the New York Stock Exchange ("NYSE") Corporate Governance Standards Section 303A.12(a), on June 30, 2010 our Chief Executive Officer submitted to the NYSE a certification that he was not aware of any violation by the Company of NYSE corporate governance listing standards. Additionally, we filed with this Form 10-K, the Principal Executive Officer and Principal Financial Officer certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.


ITEM 1A.	*RISK FACTORS*

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.

The effect of economic pressures and other business factors

The global economic crisis that began during the second half of 2008 continues to cause uncertainty and a wide-ranging lack of liquidity in the credit markets. This market uncertainty continues to result in a lack of consumer confidence and spending.

The success of our operations 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, increases in energy costs and consumer confidence. There can be no assurance that consumer spending will not be further negatively affected by general or local economic conditions, thereby adversely impacting our continued growth and results of operations.

Our ability to react to raw material cost increases, labor and energy prices

Increases in our costs, such as raw materials, labor and fuel, may reduce our overall profitability. Specifically, fluctuations in the price of cotton that is used in the manufacture of merchandise we purchase from our suppliers have begun to negatively impact our cost of sales. We have strategies in place to mitigate the rising cost of raw materials and our overall profitability depends on the success of those strategies. Additionally, increases in other costs, including labor and energy, could further reduce our profitability if not mitigated.

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 2011, we plan to open 14 new American Eagle stores in the U.S. and Canada, 10 aerie stand-alone stores and 12 77kids stores. Additionally, we plan to remodel or expand between 55 and 75 existing American Eagle stores during Fiscal 2011. Accomplishing our new and existing store expansion goals will depend upon a number of factors, including the ability to obtain suitable sites

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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 achieve planned store financial performance

The results achieved by our stores may not be indicative of long-term performance or the potential performance of stores in other locations. The failure of stores to achieve acceptable results could result in store asset impairment charges, which could adversely affect our continued growth and results of operations.

Our ability to grow through the internal development of new brands

We launched our new brand concepts, aerie and 77kids, during Fiscal 2006 and Fiscal 2008, respectively. Our ability to succeed in these new brands requires significant 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 through a single foreign buying agent, 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 that 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 CBP enforcement actions, or political or economic disruptions.

We have a Vendor Code of Conduct (the "Code") that provides guidelines for all of our vendors regarding working conditions, employment practices and compliance with local laws. A copy of the Code is posted on our website, www.ae.com, and is also included in our vendor manual in English and multiple other languages. We have a factory compliance program to audit for compliance with the Code. However, there can be no assurance that our factory compliance program will be fully effective in discovering all violations. Publicity regarding violation of our Code or other social responsibility standards by any of our vendor factories could adversely affect our sales and financial performance.

We believe that there is a risk of terrorist activity on a global basis, and 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, factory audits and self-assessments, including audit protocols on 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, the United States CBP has recognized us as a validated, tier three 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. However, there can be no assurance that terrorist activity can be prevented entirely and we cannot predict the likelihood of any such activities or the extent of their adverse impact on our operations.

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Our reliance on external vendors

Given the volatility and risk in the current markets, our reliance on external vendors leaves us subject to certain risks should one or more of these external vendors become insolvent. Although we monitor the financial stability of our key vendors and plan for contingencies, the financial failure of a key vendor could disrupt our operations and have an adverse effect on our cash flows, results of operations and financial condition.

Seasonality

Our reliance on our ability to implement and sustain information technology systems

We regularly evaluate our information technology systems and are currently implementing modifications and/or upgrades to the information technology systems that support our business. Modifications include replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality. We are aware of inherent risks associated with replacing and modifying these systems, including inaccurate system information and system disruptions. We believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation, as well as securing appropriate commercial contracts with third-party vendors supplying such replacement technologies. Information technology system disruptions and inaccurate system information, if not anticipated and appropriately mitigated, could have a material adverse effect on our results of operations.

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 our 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.

Failure to comply with regulatory requirements

As a public company, we are subject to numerous regulatory requirements. Our policies, procedures and internal controls are designed to comply with all applicable laws and regulations, including those imposed by the Sarbanes-Oxley Act of 2002, the SEC and the NYSE. Failure to comply with such laws and regulations could have a material adverse effect on our reputation, financial condition and on the market price of our common stock.

Our ability to obtain and/or maintain our credit facilities

We believe that we have sufficient cash flows from operating activities to meet our operating requirements. In addition, the banks participating in our various credit facilities are currently rated as investment grade, and all of the amounts under the credit facilities are currently available to us. We draw on our credit facilities to increase our cash position to add financial flexibility. Although we expect to continue to generate positive cash flow despite the current economy, there can be no assurance that we will be able to successfully generate positive cash flow in the future. Continued negative trends in the credit markets and/or continued financial institution failures could lead to lowered credit availability as well as difficulty in obtaining financing. In the event of limitations on our access to credit facilities, our liquidity, continued growth and results of operations could be adversely affected.

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Our efforts to expand internationally through franchising

We have entered into franchise agreements with multiple franchisees to open and operate stores throughout the Middle East, Northern Africa, Eastern Europe, Hong Kong, China, Macau, Israel and Japan over the next several years. While the franchise arrangements do not involve a capital investment from us and require minimal operational involvement, the effect of these arrangements on our business and results of operations is uncertain and will depend upon various factors, including the demand for our products in new markets internationally. Furthermore, although we provide store operation training, literature and support, to the extent that the franchisee does not operate its stores in a manner consistent with our requirements regarding our brand and customer experience standards, the value of our brand could be negatively impacted. A failure to protect the value of our brand or any other adverse actions by a franchisee could have an adverse effect on our results of operations and our reputation.

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 infrastructure 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 our business related to an outbreak of a pandemic disease 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.


ITEM 1B.	*UNRESOLVED STAFF COMMENTS.*

Not applicable.


ITEM 2.	*PROPERTIES.*

We own two buildings in urban Pittsburgh, Pennsylvania which house our corporate headquarters. These buildings total 186,000 square feet and 150,000 square feet, respectively. We lease two locations near our headquarters, which are used primarily for store and corporate support services, totaling approximately 60,000 square feet. These leases expire with various terms through 2024.

We own a 423,000 square foot building located in a suburban area near Pittsburgh, Pennsylvania, which houses our distribution center and contains approximately 120,000 square feet of office space. We also own a 45,000 square foot building, which houses our data center and additional office space. We lease an additional location of approximately 18,000 square feet, which is used for storage space. This lease expires in 2015.

We rent approximately 131,000 square feet of office space in New York, New York for our designers and sourcing and production teams. The lease for this space expires in May 2016. We also lease an additional 55,000 square feet of office space in New York, New York, with various terms expiring through 2018.

We own a distribution facility in Ottawa, Kansas consisting of approximately 1,220,000 total square feet, including two expansions of 544,000 square feet and 280,000 square feet, respectively. This expanded facility is used to support new and existing growth initiatives, including AEO Direct, aerie and 77kids.

We lease a building in Mississauga, Ontario with approximately 294,000 square feet, which houses our Canadian distribution center. The lease expires in 2017.

We lease our flagship store in the Times Square area of New York, New York. The 25,000 square foot location has an initial term of 15 years with three options to renew for five years each. This flagship store opened in November 2009 and the initial lease term expires in 2024.

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All of our stores in the United States and Canada are leased. The store leases generally have initial terms of 10 years. Certain leases also include early termination options, which can be exercised under specific conditions. Most of these leases provide for base rent and require the payment of a percentage of sales as additional contingent rent when sales reach specified levels. Under our store leases, we are typically responsible for tenant occupancy costs, including maintenance and common area charges, real estate taxes and certain other expenses. We have generally been successful in negotiating renewals as leases near expiration.


ITEM 3.	*LEGAL PROCEEDINGS.*

We are a party to various legal actions incidental to our business, including certain actions in which we are the plaintiff. At this time, our management does not expect the results of any of the legal actions to be material to our financial position or results of operations.


ITEM 4.	*RESERVED.*

PART II


ITEM 5.	*MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.*

Our common stock is traded on the NYSE under the symbol "AEO". As of March 7, 2011, there were 628 stockholders of record. However, when including associates who own shares through our employee stock purchase plan, and others holding shares in broker accounts under street name, we estimate the stockholder base at approximately 50,000. The following table sets forth the range of high and low closing prices of the common stock as reported on the NYSE during the periods indicated.


	Market Price				Cash Dividends per
For the Quarters Ended	High		Low		Common Share

January 29, 2011	$	17.16	$	14.02	$	0.61
October 30, 2010	$	17.36	$	12.04	$	0.11
July 31, 2010	$	17.13	$	11.60	$	0.11
May 1, 2010	$	19.34	$	15.73	$	0.10
January 30, 2010	$	18.06	$	14.54	$	0.10
October 31, 2009	$	19.62	$	13.37	$	0.10
August 1, 2009	$	15.53	$	12.80	$	0.10
May 2, 2009	$	15.60	$	8.44	$	0.10

During Fiscal 2010 and Fiscal 2009, we paid quarterly dividends as shown in the table above. Cash dividends per common share for the quarter ended January 29, 2011 consisted of a regular quarterly dividend of $0.11 per common share and a special cash dividend of $0.50 per common share. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

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Performance Graph

The following Performance Graph and related information shall not be deemed "soliciting material" or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares the changes in the cumulative total return to holders of our common stock with that of the S&P Midcap 400 and the Dynamic Retail Intellidex. The comparison of the cumulative total returns for each investment assumes that $100 was invested in our common stock and the respective index on January 28, 2006 and includes reinvestment of all dividends. The plotted points are based on the closing price on the last trading day of the fiscal year indicated.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among American Eagle Outfitters, Inc., The S&P Midcap 400 Index
And A Peer Group

1/28/06

2/3/07

2/2/08

1/31/09

1/30/10

1/29/11

American Eagle Outfitters, Inc.

100.00

187.99

139.04

54.88

99.42

96.79

S&P Midcap 400

100.00

107.97

105.56

66.53

95.38

127.30

Dynamic Retail Intellidex

100.00

105.85

92.90

65.75

94.22

121.79

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The following table provides information regarding our repurchases of common stock during the three months ended January 29, 2011.

Issuer Purchases of Equity Securities


					Total Number of		Maximum Number of
	Total		Average		Shares Purchased as		Shares that May
	Number of		Price Paid		Part of Publicly		Yet be Purchased
	Shares Purchased		Per Share		Announced Programs		Under the Program
Period	(1)		(2)		(1)(3)		(3)

Month #1 (October 31, 2010 through November 27, 2010)		-		-		-		16,000,000
Month #2 (November 28, 2010 through January 1, 2011)		1,501,197	$	15.85		1,500,000		14,500,000
Month #3 (January 2, 2011 through January 29, 2011)		-		-		-		14,500,000

Total		1,501,197	$	15.85		1,500,000		14,500,000


(1)		Shares purchased during Month #2 included 1.5 million shares repurchased as part of our publically announced share repurchase program and 1,197 shares repurchased for the payment of taxes in connection with the vesting of share-based payments.

(2)		Average price paid per share excludes any broker commissions paid.

(3)		In January 2008, our Board authorized the repurchase of 30.0 million shares of our common stock, originally expiring at the end of Fiscal 2010. In November 2010, our Board extended the authorization for the remaining 16.0 million shares through Fiscal 2012. Accordingly, the authorization of the remaining 14.5 million shares that may be repurchased under the program expires at the end of Fiscal 2012.

The following table sets forth additional information as of the end of Fiscal 2010, about shares of our common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements not submitted to the Company's stockholders for approval. The information includes the number of shares covered by and the weighted average exercise price of, outstanding options and other rights and the number of shares remaining available for future grants excluding the shares to be issued upon exercise of outstanding options, warrants and other rights.

Equity Compensation Plan Table

Column (a)

Column (b)

Column(c)

Number of Securities

Remaining Available

Number of Securities

Weighted-Average

for Issuance Under

to be Issued Upon

Exercise Price of

Equity Compensation

Exercise of Outstanding

Outstanding Options,

Plans (Excluding

Options,

Warrants and

Securities Reflected

Warrants and Rights(1)

Rights(1)

in Column (a))(1)

Equity compensation plans approved by stockholders

12,124,456

15.25

25,697,047

Equity compensation plans not approved by stockholders

Total

12,124,456

15.25

25,697,047


(1)		Equity compensation plans approved by stockholders include the 1994 Stock Option Plan, the 1999 Stock Incentive Plan and the 2005 Stock Award and Incentive Plan, as amended (the "2005 Plan").

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ITEM 6.	*SELECTED CONSOLIDATED FINANCIAL DATA.*

The following Selected Consolidated Financial Data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," included under Item 7 below and the Consolidated Financial Statements and Notes thereto, included in Item 8 below. Most of the selected data presented below is derived from our Consolidated Financial Statements, if applicable, which are filed in response to Item 8 below. The selected Consolidated Statement of Operations data for the years ended February 2, 2008 and February 3, 2007 and the selected Consolidated Balance Sheet data as of January 31, 2009, February 2, 2008 and February 3, 2007 are derived from audited Consolidated Financial Statements not included herein.


	For the Years Ended(1)
	January 29,			January 30,			January 31,			February 2,			February 3,
	2011			2010			2009			2008			2007
	(In thousands, except per share amounts, ratios and other financial information)

Summary of Operations (2)
Net sales	$	2,967,559		$	2,940,269		$	2,948,679		$	3,041,158		$	2,790,976
Comparable store sales (decrease) increase(3)		(1	)%		(4	)%		(10	)%		1	%		12	%
Gross profit	$	1,170,959		$	1,173,430		$	1,197,186		$	1,438,236		$	1,353,703
Gross profit as a percentage of net sales		39.5	%		39.9	%		40.6	%		47.3	%		48.5	%
Operating income(4)	$	317,261		$	310,392		$	382,797		$	652,201		$	629,240
Operating income as a percentage of net sales		10.7	%		10.6	%		13.0	%		21.4	%		22.5	%
Income from continuing operations	$	181,934		$	213,398		$	229,984		$	433,507		$	413,583
Income from continuing operations as a percentage of net sales		6.1	%		7.3	%		7.8	%		14.3	%		14.8	%
*Per Share Results* (5)
Income from continuing operations per common share-basic	$	0.91		$	1.04		$	1.12		$	2.01		$	1.86
Income from continuing operations per common share-diluted	$	0.90		$	1.02		$	1.11		$	1.97		$	1.81
Weighted average common shares outstanding - basic		199,979			206,171			205,169			216,119			222,662
Weighted average common shares outstanding - diluted		201,818			209,512			207,582			220,280			228,384
Cash dividends per common share	$	0.93		$	0.40		$	0.40		$	0.38		$	0.28
*Balance Sheet Information*
Total cash and short-term investments	$	734,695		$	698,635		$	483,853		$	619,939		$	813,813
Long-term investments	$	5,915		$	197,773		$	251,007		$	165,810		$	264,944
Total assets	$	1,879,998		$	2,138,148		$	1,963,676		$	1,867,680		$	1,979,558
Short-term debt	$	-		$	30,000		$	75,000		$	-		$	-
Long-term debt	$	-		$	-		$	-		$	-		$	-
Stockholders' equity	$	1,351,071		$	1,578,517		$	1,409,031		$	1,340,464		$	1,417,312
Working capital	$	786,573		$	758,075		$	523,596		$	644,656		$	724,490
Current ratio		3.03			2.85			2.30			2.71			2.56
Average return on stockholders' equity		9.6	%		11.3	%		13.0	%		29.0	%		30.1	%

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	For the Years Ended(1)
	January 29,		January 30,		January 31,		February 2,		February 3,
	2011		2010		2009		2008		2007
	(In thousands, except per share amounts, ratios and other financial information)

Other Financial Information (2)
Total stores at year-end		1,086		1,075		1,070		968		906
Capital expenditures	$	84,259	$	127,080	$	243,564	$	249,640	$	210,082
Net sales per average selling square foot(6)	$	524	$	526	$	563	$	644	$	644
Total selling square feet at end of period		5,067,489		4,981,595		4,920,285		4,492,198		4,191,973
Net sales per average gross square foot(6)	$	420	$	422	$	452	$	522	$	525
Total gross square feet at end of period		6,339,469		6,215,355		6,139,663		5,581,769		5,136,962
Number of employees at end of period		39,900		38,800		36,900		38,400		27,400


(1)		Except for the fiscal year ended February 3, 2007, which includes 53 weeks, all fiscal years presented include 52 weeks.

(2)		All amounts presented are from continuing operations and exclude MARTIN+OSA's results of operations for all periods. Refer to Note 14 to the accompanying Consolidated Financial Statements for additional information regarding the discontinued operations of MARTIN+OSA.

(3)		The comparable store sales increase for the period ended February 2, 2008 is compared to the corresponding 52 week period in Fiscal 2006. The comparable store sales increase for the period ended February 3, 2007 is compared to the corresponding 53 week period in the preceding fiscal year.

(4)		All amounts presented exclude gift card service fee income, which was reclassified to other income, net during Fiscal 2006. Refer to Note 2 to the accompanying Consolidated Financial Statements for additional information regarding gift cards.

(5)		Per share results for all periods presented reflect the three-for-two stock split distributed on December 18, 2006.

(6)		Net sales per average square foot is calculated using retail store sales for the year divided by the straight average of the beginning and ending square footage for the year.


ITEM 7.	*MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.*

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 those statements and notes thereto.

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 14 new American Eagle stores, 10 new aerie stores and 12 new 77kids stores in the United States and Canada during Fiscal 2011;

	•	the selection of approximately 55 to 75 American Eagle stores in the United States and Canada for remodeling during Fiscal 2011;

	•	the planned closure of 15 to 25 American Eagle stores in the United States and Canada during Fiscal 2011;

	•	the planned opening of 20 new franchised American Eagle stores during Fiscal 2011;

	•	the success of aerie by American Eagle and aerie.com;

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	•	the success of 77kids by american eagle and 77kids.com;

	•	the expected payment of a dividend in future periods;

	•	the possibility of engaging in future franchise agreements, growth through acquisitions, and/or internally developing additional new brands;

	•	the possibility that our credit facilities may not be available for future borrowings;

	•	the possibility that rising prices of raw materials, labor, energy and other inputs to our manufacturing process, if unmitigated, will have a significant impact to our profitability; and

	•	the possibility that we may be required to take store impairment charges related to underperforming stores.

We caution that these forward-looking statements, and those described elsewhere in this report, involve material risks and uncertainties and are subject to change based on factors beyond our control, as discussed within Part I, Item 1A of this Form 10-K. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statement.

Critical Accounting Policies

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. 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.

Revenue Recognition. We record revenue for store sales upon the purchase of merchandise by customers. Our e-commerce operation records revenue upon the estimated customer receipt date of the merchandise. Revenue is not recorded on the purchase of gift cards. A current liability is recorded upon purchase, and revenue is recognized when the gift card is redeemed for merchandise.

Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The estimated sales return reserve is based on projected merchandise returns determined through the use of historical average return percentages. 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 sales return reserve. However, if the actual rate of sales returns increases significantly, our operating results could be adversely affected.

We estimate gift card breakage and recognize revenue in proportion to actual gift card redemptions as a component of net sales. We determine 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.

Merchandise Inventory. Merchandise inventory is valued at the lower of average cost or market, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts at the time merchandise is delivered to the foreign shipping port by the manufacturer (FOB port). This is the point at which title and risk of loss transfer 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

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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.

Asset Impairment. In accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 360, Property, Plant, and Equipment , we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable. Assets are evaluated for impairment by comparing the projected undiscounted future cash flows of the asset, over its remaining useful life, to the carrying value. If the future undiscounted cash flows are projected to be less than the carrying value of the asset, we adjust the asset value to its estimated fair value and an impairment loss is recorded as a component of operating income within selling, general and administrative expense.

Our impairment loss calculations require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. 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.

Investment Securities. In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), we measure our investment securities using Level 1, Level 2 and Level 3 inputs. Level 1 and Level 2 inputs are valued using quoted market prices while we use a discounted cash flow ("DCF") model to determine the fair value of our Level 3 investments. The assumptions in our DCF model include different recovery periods depending on the type of security and varying discount factors for yield and illiquidity. These assumptions are subjective and they are based on our current judgment and our view of current market conditions. The use of different assumptions would result in a different valuation and related charge. Future adverse changes in market conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an investment's current carrying value, possibly requiring an additional net impairment loss recognized in earnings in the future.

We evaluate our investments for impairment in accordance with ASC 320, Investments - Debt and Equity Securities ("ASC 320"). ASC 320 provides guidance for determining when an investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss is recognized in the Consolidated Statement of Operations equal to the difference between the investment's cost and its fair value. As of May 3, 2009, we adopted ASC 320-10-65, Transition Related to FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary-Impairments ("ASC 320-10-65"), which modifies the requirements for recognizing other-than-temporary impairment ("OTTI") and changes the impairment model for debt securities. In addition, ASC 320-10-65 requires additional disclosures relating to debt and equity securities both in the interim and annual periods as well as requires the Company to present total OTTI in the Consolidated Statements of Operations, with an offsetting reduction for any non-credit loss impairment amount recognized in other comprehensive income ("OCI").

Share-Based Payments. We account for share-based payments in accordance with the provisions of 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 a combination of historical volatility of our common stock and implied volatility. We chose to use a combination of historical and implied volatility as we believe that this combination is more representative of future stock price trends than historical volatility alone. Changes in these assumptions can materially affect the estimate of

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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.

Key Performance Indicators

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

Comparable store sales - Comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period. In fiscal years following those with 53 weeks, including Fiscal 2007, the prior year period is shifted by one week to compare similar calendar weeks. A store is included in comparable store sales in the thirteenth month of operation. However, stores that have a gross square footage increase of 25% or greater due to a remodel are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the remodel. Sales from American Eagle and aerie stores are included in comparable store sales. Sales from AEO Direct are not included in comparable store sales. Sales from 77kids stores will be included in comparable store sales upon achieving 13 months of operations.

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

Gross profit - Gross profit measures whether we are optimizing the price and inventory levels of our merchandise and achieving an optimal level of sales. Gross profit is the difference between net sales and cost of sales. Cost of sales consists of: merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage, certain promotional costs and buying, occupancy and warehousing costs. 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 operation. 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.

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Operating income - Our management views operating income as a key indicator of our success. The key drivers of operating income are comparable store sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures.

Store productivity - Store productivity, including net sales per average square foot, sales per productive hour, average unit retail price, conversion rate, the number of transactions per store, the number of units sold per store and the number of units per transaction, is evaluated by our management in assessing our operational performance.

Inventory turnover - Our management evaluates inventory turnover as a measure of how productively inventory is bought and sold. Inventory turnover is important as it can signal slow moving inventory. This can be critical in determining the need to take markdowns on merchandise.

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

Results of Operations

Overview

In Fiscal 2010, we took action to strategically manage our business in what continued to be a challenging retail environment. During the second quarter, we commenced our corporate profit initiative, aimed at reducing costs, creating efficiencies and improving inventory turns. Additionally, we have strengthened our assortments and realigned talent. We continue to make progress implementing our corporate profit initiatives, and are driving positive changes across the Company, including supply chain and production operations.

Fiscal 2010 net sales of $2.968 billion increased 1% compared to $2.940 billion in Fiscal 2009. Annual comparable store sales decreased 1%, compared to a 4% decline last year. A higher merchandise margin reflected lower markdowns. However, buying, occupancy and warehousing expenses increased as a rate to sales as a result of negative comparable store sales and the impact of new store openings. Total selling, general and administrative expenses decreased 2% due to a combination of lower incentive compensation expense recorded in the year and savings resulting from our corporate profit initiative.

Operating income increased as a percent to net sales to 10.7% for Fiscal 2010 compared to 10.6% for Fiscal 2009.

For Fiscal 2010, income from continuing operations was $181.9 million and includes $24.4 million of realized losses from the sale of investment securities. As a percent to net sales, income from continuing operations was 6.1% during Fiscal 2010 and 7.3% during Fiscal 2009. Fiscal 2010 income from continuing operations per diluted share was $0.90, which includes a $0.12 per diluted share loss from sale of investment securities. Fiscal 2009 income from continuing operations per diluted share was $1.02, which includes $0.11 per diluted share of tax benefits, partially offset by a $0.01 per diluted share loss on sale of investment securities.

We ended Fiscal 2010 with $740.6 million in cash, short-term and long-term investments, a decrease of $155.8 million from last year. During the year, we generated approximately $402.6 million of cash from operations. The cash from operations was offset by $84.3 million of capital expenditures, a $30.0 million repayment of our outstanding notes payable balance, and value returned to shareholders through share repurchases of $216.1 million and dividend payments of $183.2 million.

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


	For the Fiscal Years Ended
	January 29,			January 30,			January 31,
	2011			2010			2009

Net sales		100.0	%		100.0	%		100.0	%
Cost of sales, including certain buying, occupancy and warehousing expenses		60.5			60.1			59.4

Gross profit		39.5			39.9			40.6
Selling, general and administrative expenses		24.0			24.6			23.4
Depreciation and amortization expense		4.8			4.7			4.2

Operating income		10.7			10.6			13.0
Realized loss on sale of investment securities		(0.8	)		(0.1	)		-
Other income (expense), net		0.1			(0.1	)		0.6
Net impairment loss recognized in earnings		(0.1	)		-			(0.8	)

Income before income taxes		9.9			10.4			12.8
Provision for income taxes		3.8			3.1			5.0

Income from continuing operations		6.1			7.3			7.8
Loss from discontinued operations, net of tax		(1.4	)		(1.5	)		(1.7	)

Net income		4.7	%		5.8	%		6.1	%

Our operations are conducted in one reportable segment, which includes our 929 U.S. and Canadian AE retail stores, 148 aerie by American Eagle retail stores, nine 77kids by american eagle retail stores and AEO Direct, as of January 29, 2011.

Comparison of Fiscal 2010 to Fiscal 2009

Net Sales

Total sales increased 1% to $2.968 billion compared to $2.940 billion last year. For Fiscal 2010, comparable stores sales decreased 1% compared to a 4% decrease last year. AE men's and women's comps both declined in the low-single digits compared to Fiscal 2009. A decrease in the number of transactions was driven by lower traffic, partially offset by a slight increase in customer conversion.

Gross Profit

Gross profit decreased slightly to $1.171 billion from $1.173 billion in Fiscal 2009. Gross profit as a percent to net sales decreased by 40 basis points to 39.5% from 39.9% last year. The percentage decrease was attributed to a 50 basis point increase in buying, occupancy and warehousing costs as a percent to net sales, partially offset by a 10 basis point improvement in merchandise margin as a rate to sales.

Buying, occupancy and warehousing expenses increased as a rate to sales as a result of negative comparable store sales and the impact of new store openings. Share-based payment expense included in gross profit decreased to approximately $8.4 million compared to $11.6 million 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. Other retailers 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.

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Selling, General and Administrative Expenses

Selling, general and administrative expense decreased 2% to $713.2 million compared to $725.3 million last year. The decrease was due to a combination of reduced incentive compensation expense recorded in the year, as well as the net savings resulting from our corporate profit initiative.

Share-based payment expense included in selling, general and administrative expense decreased to approximately $17.1 million compared to $23.0 million late year.

Depreciation and Amortization Expense

Depreciation and amortization expense increased 2% to $140.5 million from $137.8 million last year. This increase is primarily due to a greater property and equipment base driven by our level of capital expenditures. As a percent to net sales, depreciation and amortization expense increased to 4.8% from 4.7% due to the increased expense as well as the impact of the comparable store sales decline.

Other Income (Expense), Net

Other income (expense), net increased to $3.5 million from $(2.3) million last year, due primarily to a non-cash, non-operating foreign currency loss related to holding U.S. dollars in our Canadian subsidiary in anticipation of repatriation recorded last year.

Realized Loss on Sale of Investment Securities

The realized loss on sale of investment securities was $24.4 million, or approximately $0.12 per diluted share, for Fiscal 2010. This compares to a loss of $2.7 million, or $0.01 per diluted share, last year.

The loss in Fiscal 2010 was primarily due to the liquidation of 95% of our Auction Rate Security ("ARS") investment portfolio. Our ARS investment portfolio was originally purchased as highly liquid short-term instruments. Due to the deterioration of the ARS market and ARS investments experiencing failed auctions or long-term auction resets, our ARS investment portfolio was subsequently classified as long-term, with a weighted average contractual maturity of approximately 26 years. This liquidation allowed us to convert substantially our entire ARS investment portfolio to short-term liquid assets, with total cash proceeds of $149.6 million plus accrued interest and a net realized loss of $24.2 million for the liquidation.

Additionally, in the first half of Fiscal 2010, we liquidated $28.1 million of ARS investments for proceeds of $27.9 million and a total realized loss of $0.2 million.

Net Impairment Loss Recognized in Earnings

Net impairment loss recognized in earnings relating to our investment securities was $1.2 million for Fiscal 2010, compared to $0.9 million for Fiscal 2009.

Provision for Income Taxes

The effective income tax rate from continuing operations increased to approximately 38.3% in Fiscal 2010 from 29.9% in Fiscal 2009. The lower effective income tax rate in Fiscal 2009 was primarily the result of the tax benefit associated with the repatriation of foreign earnings from Canada as well as federal and state income tax settlements and other changes in income tax reserves. Additionally, the Fiscal 2010 effective income tax rate was higher due to losses on the sale of certain ARS investments in which no income tax benefit was recognized. The repatriation of foreign earnings from Canada in Fiscal 2009 was a discrete event and has not changed the Company's intention to indefinitely reinvest the earnings of our Canadian subsidiaries to the extent not repatriated.

Refer to Note 13 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.

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Income From Continuing Operations

Income from continuing operations for Fiscal 2010 was $181.9 million, or $0.90 per diluted share, and includes a $0.12 per diluted share loss from the sale of investment securities related to our ARS liquidation as discussed above. Income from continuing operations for Fiscal 2009 was $213.4 million, or $1.02 per diluted share, and includes $0.11 per diluted share of tax benefits and a $0.01 per diluted share realized loss on the sale of investment securities.

Loss from Discontinued Operations

We completed the closure of M+O stores and its related e-commerce operations during Fiscal 2010. Accordingly, the after-tax operating results and closure charges appear in Loss from Discontinued Operations on the Consolidated Statements of Operations for all periods presented. Loss from Discontinued Operations, net of tax, was $41.3 million and $44.4 million for Fiscal 2010 and Fiscal 2009, respectively. The Loss from Discontinued Operations for Fiscal 2010 includes pre-tax closure charges of $43.4 million. Included in the pre-tax charges were $15.4 million of lease-related items, $7.6 million for severance and other employee-related charges, $2.4 million in inventory charges and a non-cash asset impairment charge of $18.0 million.

Refer to Note 14 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O.

Net Income

Net income decreased to $140.6 million in Fiscal 2010 from $169.0 million in Fiscal 2009. As a percent to net sales, net income was 4.7% and 5.8% for Fiscal 2010 and Fiscal 2009, respectively. Net income per diluted share was $0.70 compared to $0.81 last year. The decrease in net income was attributable to the factors noted above.

Comparison of Fiscal 2009 to Fiscal 2008

Net Sales

Fiscal 2009 net sales were $2.940 billion compared to $2.949 billion in Fiscal 2008. Fiscal 2009 results included an increase in our conversion rate driven primarily by strong holiday sales. For Fiscal 2009, comparable store sales declined in the mid-single digits for both the AE Brand women's and men's business compared to Fiscal 2008.

Gross Profit

Gross profit decreased 2% to $1.173 billion from $1.197 billion in Fiscal 2008. Gross profit as a percent to net sales decreased by 70 basis points to 39.9% from 40.6% in Fiscal 2008. The percentage decrease was attributed to a 140 basis point increase in buying, occupancy and warehousing costs as a percent to net sales, partially offset by a 70 basis point increase in the merchandise margin rate as a percent to net sales. Merchandise margin increased for Fiscal 2009 due primarily to decreased markdowns.

Buying, occupancy and warehousing expenses increased 140 basis points as a percent to net sales. This was primarily due to a 120 basis point increase in rent as a percent to net sales, driven by new store openings. Share-based payment expense included in gross profit increased to approximately $11.6 million in Fiscal 2009 compared to $5.7 million in Fiscal 2008.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 5% to $725.3 million from $690.8 million. As a percent to net sales, selling, general and administrative expenses increased by 120 basis points to 24.6% from 23.4% in Fiscal 2008.

The higher rate in Fiscal 2009 is primarily due to an increase in incentive compensation of 100 basis points partially offset by improvement in advertising and travel expenses. Share-based payment expense included in selling, general and administrative expenses increased to approximately $23.0 million in Fiscal 2009 compared to $13.0 million in Fiscal 2008.

Depreciation and Amortization Expense

Depreciation and amortization expense increased 11% to $137.8 million from $123.6 million in Fiscal 2008. This increase is primarily due to a greater property and equipment base driven by our level of capital expenditures. As a percent to net sales, depreciation and amortization expense increased to 4.7% from 4.2% due to the increased expense as well as the impact of the comparable store sales decline.

Other (Expense) Income, Net

Other (expense) income, net decreased to $(2.3) million from $18.9 million, due primarily to lower interest income, driven by decreased interest rates and a lower investment balance. Additionally, a non-cash, non-operating foreign currency loss related to holding U.S. dollars in our Canadian subsidiary in anticipation of repatriation was recorded in Fiscal 2009.

Realized Loss on Sale of Investment Securities

The realized loss on sale of investment securities was $2.7 million for Fiscal 2009. This compares to a loss of $1.1 million for Fiscal 2008.

Net Impairment Loss Recognized in Earnings

Net impairment loss recognized in earnings relating to our investment securities was $0.9 million for Fiscal 2009, compared to $22.9 million for Fiscal 2008.

Provision for Income Taxes

The effective income tax rate from continuing operations decreased to approximately 29.9% in Fiscal 2009 from 39.1% in Fiscal 2008. The decrease in the effective income tax rate was primarily the result of the tax benefit associated with the repatriation of foreign earnings from Canada as well as federal and state income tax settlements and other changes in income tax reserves. Additionally, the effective income tax rate was higher in Fiscal 2008 primarily as a result of the impairment charge recorded in connection with the valuation of certain ARS and auction rate preferred securities ("ARPS") in which no income tax benefit was recognized. The repatriation of foreign earnings from Canada in Fiscal 2009 was a discrete event and has not changed the Company's intention to indefinitely reinvest the earnings of our Canadian subsidiaries to the extent not repatriated.

Refer to Note 13 to the Consolidated Financial Statements for additional information regarding our accounting for income taxes.

Income from Continuing Operations

Income from continuing operations for Fiscal 2009 was $213.4 million, or $1.02 per diluted share, and includes $0.11 per diluted share of tax benefits partially offset by a $0.01 per diluted share realized loss on the sale of investment securities. Income from continuing operations for Fiscal 2008 was $230.0 million, or $1.11 per diluted share, and includes $0.11 per diluted share net investment impairment loss recognized in earnings.

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Loss on Discontinued Operations

We completed the closure of M+O stores and related e-commerce operations during Fiscal 2010. Accordingly, the after-tax operating results and closure charges appear in Loss from Discontinued Operations on the Consolidated Statements of Operations for all periods presented. Loss from Discontinued Operations, net of tax, was $44.4 million and $50.9 million for Fiscal 2009 and Fiscal 2008, respectively. The Loss from Discontinued Operations included asset impairment charges of $18.0 million and $6.7 million for Fiscal 2009 and Fiscal 2008, respectively.

Refer to Note 14 to the Consolidated Financial Statements for additional information regarding the discontinued operations of M+O.

Net Income

Net income decreased to $169.0 million in Fiscal 2009 from $179.1 million in Fiscal 2008. As a percent to net sales, net income was 5.8% and 6.1% for Fiscal 2009 and Fiscal 2008, respectively. Net income per diluted share was $0.81 compared to $0.86 last year. The decrease in net income was attributable to the factors noted above.

Fiscal 2011 Outlook

Looking ahead to Fiscal 2011, we have numerous opportunities and are enthusiastic about our long-term growth plans. We are continuing to strengthen assortments, achieve expense efficiencies and challenge all areas of the business to produce additional savings. However, we face numerous headwinds, which include rising product costs primarily in the second half of the year. Our strategies to mitigate rising product costs include a targeted reduction in markdowns, selective price increases and on-going expense savings. We believe that our current cash holdings and cash generated from operations in Fiscal 2011 will be sufficient to fund anticipated capital expenditures and working capital requirements.

Fair Value Measurements

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

Financial Instruments

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes 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 for identical assets or liabilities.

	•	Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•	Level 3 - Unobservable inputs (i.e., projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of January 29, 2011, we held certain assets that are required to be measured at fair value on a recurring basis. These include cash equivalents and short and long-term investments, including ARS.

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In accordance with ASC 820, the following table represents the fair value hierarchy for our financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of January 29, 2011:


	Fair Value Measurements at January 29, 2011
				Quoted Market
				Prices in Active						Significant
				Markets for			Significant Other			Unobservable
				Identical Assets			Observable Inputs			Inputs
	Carrying Amount			(Level 1)			(Level 2)			(Level 3)
	(In thousands)

Cash and cash equivalents
Cash	$	122,578		$	122,578		$	-		$	-
Commercial paper		40,884			40,884			-			-
Corporate bonds		3,695			3,695			-			-
Treasury bills		102,996			102,996			-			-
Money-market		397,440			397,440			-			-

Total cash and cash equivalents	$	667,593		$	667,593		$	-		$	-
Short-term investments
Term deposits	$	63,402		$	63,402		$	-		$	-
State and local government ARS		3,700			-			-			3,700

Total short-term investments	$	67,102		$	63,402		$	-		$	3,700
Long-term investments
State and local government ARS	$	5,500		$	-		$	-		$	5,500
ARS Call Option		415			-			-			415

Total long-term investments	$	5,915		$	-		$	-		$	5,915

Total	$	740,610		$	730,995		$	-		$	9,615

Percent to total		100.0	%		98.7	%		-	%		1.3	%

We used a discounted cash flow ("DCF") model to value our Level 3 investments. For Fiscal 2010, the assumptions in our model included different recovery periods, ranging from five to 17 months, depending on the type of security, and discount factors for yield of 0.2% and illiquidity of 0.5%. These assumptions are subjective. They are based on our current judgment and our view of current market conditions. The use of different assumptions would result in a different valuation. For example, an increase in the recovery period by one year would reduce the fair value of our investment in ARS by approximately $0.2 million. An increase to the discount rate and illiquidity premium of 100 basis points would reduce the estimated fair value of our investment in auction rate securities by approximately $0.2 million.

The fair value of the ARS Call Option described in Note 3 to the Consolidated Financial Statements was also estimated using a discounted cash flow model. The model considered potential changes in yields for securities with similar characteristics to the underlying ARS and evaluated possible future refinancing opportunities of the issuers of the ARS. The analysis then assessed the likelihood that the options would be exercisable as a result of the underlying ARS being redeemed or traded in a secondary market at an amount greater than the exercise price prior to the end of the option term. Future changes in the fair values of the ARS Call Option will be recorded within the Consolidated Statements of Operations.

Refer to Notes 3 and 4 to the Consolidated Financial Statements for additional information on our investment securities, including a description of the securities and a discussion of the uncertainties relating to their liquidity.

Liquidity and Capital Resources

Our uses of cash are generally for working capital, the construction of new stores and remodeling of existing stores, information technology upgrades, distribution center improvements and expansion, the purchase of both short and long-term investments, the repurchase of common stock and the payment of dividends. Historically, these

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uses of cash have been funded with cash flow from operations and existing cash on hand. Additionally, our uses of cash include the development of aerie by American Eagle and 77kids by american eagle. We expect to be able to fund our future cash requirements through current cash holdings as well as cash generated from operations. In the future, we expect that our uses of cash will also include further development of aerie by American Eagle and 77kids by american eagle.

Our growth strategy includes internally developing new brands and the possibility of further international expansion or acquisitions. We periodically consider and evaluate these options to support future growth. In the event we do pursue such options, we could require additional equity or debt financing. There can be no assurance that we would be successful in closing any potential transaction, or that any endeavor we undertake would increase our profitability.

The following sets forth certain measures of our liquidity:


	January 29,		January 30,
	2011		2010

Working Capital (in 000's)	$	786,573	$	758,075
Current Ratio		3.03		2.85

The increase in our working capital and current ratio as of January 29, 2011, compared to January 30, 2010, is primarily related to the combined increase in cash and cash equivalents and short-term investments as a result of cash generated from operations as well as the liquidation of long-term investments, partially offset by share repurchases, cash dividends paid and capital expenditures. Additionally, current liabilities are lower due to the repayment of our outstanding notes payable balance in Fiscal 2010 and a lower accrued compensation balance this year.

Cash Flows from Operating Activities of Continuing Operations

Net cash provided by operating activities totaled $402.6 million during Fiscal 2010 compared to $400.3 million during Fiscal 2009 and $345.1 million during Fiscal 2008. Our major source of cash from operations was merchandise sales. Our primary outflows of cash from operations were for operational costs.

The increase in net cash provided by operating activities of $2.3 million in Fiscal 2010 was driven by an increase in income from continuing operations adjusted for non-cash items and a reduction in inventory levels. This was partially offset by a decrease in accrued compensation due to the payment of incentive compensation accrued during Fiscal 2009, as well as an increase in prepaid expenses due to the timing of payments.

Cash Flows from Investing Activities of Continuing Operations

Investing activities for Fiscal 2010 included $177.5 million of proceeds from the sale of investments classified as available for sale, partially offset by $84.3 million used for capital expenditures and $62.8 million for the purchase of short-term investments. Investing activities for Fiscal 2009 included $127.1 million for capital expenditures, partially offset by $80.4 million from the sale of investments classified as available-for-sale. Investing activities for Fiscal 2008 primarily included $393.6 million from the net sale of investments classified as available-for-sale, partially offset by $243.6 million for capital expenditures.

Cash Flows from Financing Activities of Continuing Operations

During Fiscal 2010, cash used for financing activities resulted primarily from $216.1 million for the repurchase of 15.5 million shares as part of our publicly announced repurchase program, $183.2 million for the payment of dividends, $30.0 million for the full repayment of our demand line borrowings and $18.0 million for the repurchase of common stock from employees for the payment of taxes in connection with the vesting of share-based payments. During Fiscal 2009, cash used for financing activities resulted primarily from $83.0 million used for the payment of dividends and the partial repayment of $45.0 million in borrowings against our demand line of credit. During Fiscal 2008, cash used for financing activities resulted primarily from $82.4 million used for the payment of dividends partially offset by $75.0 million in borrowings against our demand line of credit.

ASC 718 requires that cash flows resulting from the benefits of tax deductions in excess of recognized compensation cost for share-based payments be classified as financing cash flows. Accordingly, for Fiscal 2010,

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Fiscal 2009 and 2008, the excess tax benefit from share-based payments of $12.5 million, $2.8 million and $0.7 million, respectively, are classified as financing cash flows.

Capital Expenditures

Fiscal 2010 capital expenditures were $84.3 million, compared to $127.1 million in Fiscal 2009. Fiscal 2010 expenditures included $56.2 million related to investments in our AE stores, including 34 new AE, aerie and 77kids stores in the United States and Canada, 18 remodeled stores, and fixtures and visual investments. Additionally, we continued to support our infrastructure growth by investing in home office projects including the construction of our corporate headquarters in Pittsburgh, Pennsylvania ($2.9 million), the expansion and improvement of our distribution centers ($14.0 million) and information technology ($11.2 million).

For Fiscal 2011, we will continue with our reduced spending plan. We expect capital expenditures to be in the range of $90.0 million to $100.0 million with approximately half of the amount relating to store growth and renovation.

Credit Facilities

The Company has borrowing agreements with four separate financial institutions under which it may borrow an aggregate of $310.0 million United States dollars ("USD") and $25.0 million Canadian dollars ("CAD"). Of this amount, $200.0 million USD can be used for letters of credit issuances, $50.0 million USD and $25.0 million CAD can be used for demand line borrowings and the remaining $60.0 million USD can be used for either letters of credit or demand line borrowings at the Company's discretion.

The letters of credit facilities of $150.0 million USD and $50.0 million USD expire November 1, 2011 and May 27, 2011, respectively. The $50.0 million USD and $25.0 million CAD demand lines expire on April 20, 2011 and December 13, 2011, respectively. The remaining $60.0 million USD facility expires on May 22, 2011.

As of January 29, 2011, we had outstanding letters of credit of $30.0 million USD and no demand line borrowings.

The availability of any future borrowings is subject to acceptance by the respective financial institutions. The average borrowing rate on the demand line for outstanding borrowings during Fiscal 2010 was 2.1%.

Stock Repurchases

During Fiscal 2007, our Board authorized a total of 60.0 million shares of our common stock for repurchase under our share repurchase program with expiration dates extending into Fiscal 2010. We repurchased 18.7 million shares during Fiscal 2007 and the authorization related to 11.3 million shares expired in Fiscal 2009. At the beginning of Fiscal 2010, the Company had 30.0 million shares remaining authorized for repurchase.

During Fiscal 2010, we repurchased 15.5 million shares as part of our publicly announced repurchase programs for approximately $216.1 million, at a weighted average price of $13.94 per share. As of January 29, 2011, we had 14.5 million shares remaining authorized for repurchase. These shares may be repurchased at our discretion. Our Board extended the current remaining share repurchase authorization through February 2, 2013. We did not repurchase any common stock as part of our publicly announced repurchase program during Fiscal 2009 or Fiscal 2008.

During Fiscal 2010 and Fiscal 2009, we repurchased approximately 1.0 million and 18,000 shares, respectively, from certain employees at market prices totaling $18.0 million and $0.2 million, respectively. These shares were repurchased for the payment of taxes, not in excess of the minimum statutory withholding requirements, in connection with the vesting of share-based payments, as permitted under the 2005 Stock Award and Incentive Plan, as amended.

The aforementioned share repurchases have been recorded as treasury stock.

Dividends

During the fourth quarter of Fiscal 2010, our Board declared and paid a $0.50 per share special cash dividend along with a regular quarterly cash dividend of $0.11 per share. An $0.11 per share dividend was paid during both

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the second and third quarters of Fiscal 2010. A $0.10 per share dividend was paid during the first quarter of Fiscal 2010 and each quarter of Fiscal 2009. Subsequent to the fourth quarter of Fiscal 2010, our Board declared a quarterly cash dividend of $0.11 per share, payable on April 8, 2011, to stockholders of record at the close of business on March 28, 2011. The payment of future dividends is at the discretion of our Board and is based on future earnings, cash flow, financial condition, capital requirements, changes in U.S. taxation and other relevant factors. It is anticipated that any future dividends paid will be declared on a quarterly basis.

Obligations and Commitments

Disclosure about Contractual Obligations

The following table summarizes our significant contractual obligations as of January 29, 2011:


	Payments Due by Period
			Less than		1-3		3-5		More than
	Total		1 Year		Years		Years		5 Years
	(In thousands)

Operating Leases(1)	$	1,773,240	$	243,798	$	453,360	$	388,995	$	687,087
Unrecognized tax benefits(2)		38,671		-		-		-		38,671
Purchase Obligations(3)		457,398		436,103		12,340		3,547		5,408

Total Contractual Obligations	$	2,269,309	$	679,901	$	465,700	$	392,542	$	731,166


(1)		Operating lease obligations consist primarily of future minimum lease commitments related to store operating leases (Refer to Note 9 to the Consolidated Financial Statements). Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated.

(2)		The amount of unrecognized tax benefits as of January 29, 2011 was $38.7 million, including approximately $7.6 million of accrued interest and penalties. Unrecognized tax benefits are positions taken or expected to be taken on an income tax return that may result in additional payments to tax authorities. The Company does not anticipate that any significant unrecognized tax benefits will be realized within one year. Accordingly, the balance of the unrecognized tax benefits are included in the "More than 5 Years" column as we are not able to reasonably estimate the timing of the potential future payments.

(3)		Purchase obligations primarily include binding commitments to purchase merchandise inventory, as well as other legally binding commitments, made in the normal course of business that are enforceable and specify all significant terms. Included in the above purchase obligations are inventory commitments guaranteed by outstanding letters of credit, as shown in the table below.

Disclosure about Commercial Commitments

The following table summarizes our significant commercial commitments as of January 29, 2011:


	Amount of Commitment Expiration Per Period
	Total								More
	Amount		Less than		1-3		3-5		than
	Committed		1 Year		Years		Years		5 Years
	(In thousands)

Letters of Credit(1)	$	29,981	$	29,981		-		-		-

Total Commercial Commitments	$	29,981	$	29,981		-		-		-


(1)		Letters of credit represent commitments, guaranteed by a bank, to pay vendors for merchandise, as well as other commitments, upon presentation of documents demonstrating that the merchandise has shipped.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

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Recent Accounting Pronouncements

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

Certain Relationships and Related Party Transactions

Refer to Part III, Item 13 of this Form 10-K for information regarding related party transactions.

Impact of Inflation/Deflation

We do not believe that inflation has had a significant effect on our net sales or our profitability. However, substantial increases in costs, including the price of raw materials, labor, energy and other inputs to the manufacture of our merchandise, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and profitability.


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.

Interest Rate Risk

Our earnings are affected by changes in market interest rates as a result of our short and long-term investments. If our Fiscal 2010 average yield rate decreases by 10% in Fiscal 2011, our income before taxes will decrease by approximately $0.2 million. Comparatively, if our Fiscal 2009 average yield rate had decreased by 10% in Fiscal 2010, our income before taxes would have decreased by approximately $0.2 million. These amounts are determined by considering the impact of the hypothetical yield rates on our cash, short-term and long-term investment balances and assumes no change in our investment structure.

Foreign Exchange Rate Risk

We are exposed to the impact of foreign exchange rate risk primarily through our Canadian operations where the functional currency is the Canadian dollar. We do not utilize hedging instruments to mitigate foreign currency exchange risks. We believe our foreign currency translation risk is minimal as a hypothetical 10% change in the Canadian foreign exchange rate would not materially affect our results of operations or cash flows.

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ITEM 8.	*FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.*

Index to Consolidated Financial Statements


Report of Independent Registered Public Accounting Firm			33
Consolidated Balance Sheets			34
Consolidated Statements of Operations			35
Consolidated Statements of Comprehensive Income			36
Consolidated Statements of Stockholders' Equity			37
Consolidated Statements of Cash Flows			38
Notes to Consolidated Financial Statements			39

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

American Eagle Outfitters, Inc.

We have audited the accompanying consolidated balance sheets of American Eagle Outfitters, Inc. (the Company) as of January 29, 2011 and January 30, 2010, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended January 29, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Eagle Outfitters, Inc. at January 29, 2011 and January 30, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 29, 2011, 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), American Eagle Outfitters, Inc.'s internal control over financial reporting as of January 29, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2011 expressed an unqualified opinion.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

March 11, 2011

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AMERICAN EAGLE OUTFITTERS, INC.

CONSOLIDATED BALANCE SHEETS

American Eagle Outfitters Inc (AEO) SEC Annual Report (10-K) for 2011

Form 10-K

American Eagle Outfitters, Inc.