AEO INC. P R O X Y R E P O R T 2 0 2 0
Our purpose is to show the world that there’s REAL power in the optimism of youth.

We are AMERICAN EAGLE Our purpose is to enable self-expression & individuality. Our brand is a platform for creativity. This is what makes us unique. #AExME is our collaboration with our customers and you. It’s a place to share your style, your creativity, and your story. We want the people who wear our clothes to make them their own. #AExME
Aerie The Aerie mission is to empower all women to love their real selves. We make products that feel REAL good. We celebrate body positivity — all bodies should be happy and free of retouching. We stand for inclusivity and real representation. Every woman should see herself in Aerie. We are a community that celebrates one another. Because we show up stronger, together.
Let the real you shine.™

 

April 22, 2020

Dear Fellow Stockholders,

As I write this letter, we are experiencing an unprecedented global health pandemic that has materially impacted our people, our businesses, and our communities. Due to health concerns related to COVID-19, we have temporarily closed our corporate offices and 1,000+ store locations in North America. We have consulted with medical professionals, and implemented new sanitization, cleaning, and health protocols for our distribution centers so that they can safely remain operational. Perhaps most importantly, we are working tirelessly to ensure that when we are able to return to our store and office locations, we will do so by putting PEOPLE first, with the health of our associates and customers as our top priority. I have been inspired by how the AEO community has come together during this difficult time in our history to diligently and passionately protect the welfare of our associates and our customers, while also effectively managing business continuity to ensure we will have a bright future.

While we could have never predicted the extreme circumstances we now find ourselves facing, the strategic initiatives that have guided us in recent years will allow us to emerge as a stronger company once this pandemic is behind us. We entered 2020 with a strong cash position and two of the most recognized and beloved brands in specialty retail, American Eagle and Aerie. Our investments in merchandise innovation, omni-channel capabilities, supply chain, and inventory rationalization are allowing us to be agile in a time of disruption, when the ability to quickly reduce or move inventory between locations is of paramount importance. Our culture of caring and optimism is allowing us to pull together, provide support to others, and find new ways to move forward in a time of uncertainty.

Looking back specifically at the past year, some Fiscal 2019 highlights include:

 

•

Strong Merchandise Drives Sales Growth and Customer Gains: Our compelling merchandise strategies, including apparel choices in Aerie and new sizes and fabrications in AE jeans, allowed us to deliver sales improvements in each quarter of the year, reaching a record of $4.3 billion in revenue, an increase of 7% over the prior year. In fact, we marked 20 consecutive quarters of comparable sales growth. We gained market share in both American Eagle and Aerie, and we experienced positive traffic to our stores, outperforming mall averages. While our bottom line results fell short of our expectations, our current priorities revolve around product improvements, reductions in choice counts, and inventory optimization to ensure we drive profits as well as sales going forward.

 

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Aerie Continues Record Breaking Momentum and Becomes a Market Leader for Intimates and Feel-Good Apparel: Our emerging Aerie brand continued to demonstrate incredible momentum in Fiscal 2019, marking its place as one of the fastest growing and most exciting brands in specialty retail. Comparable sales increased 20% and the brand has delivered 21 straight quarters of double-digit growth. Aerie also controlled promotions, resulting in improved flow-through of its solid top-line results. We see tremendous runway ahead for this brand, as it continues to capture the love of customers through comfortable quality merchandise, positive messaging, and empowering marketing.

 

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AE Jeans Outperform, While AE X Me Becomes a Platform for Individuality and Optimism: Another powerful growth vehicle for our company is our AE jeans business. In Fiscal 2019, we marked our 26th consecutive quarter of record sales for AE jeans. The category was strong across genders in each quarter of the year, demonstrating remarkable consistency. American Eagle brand dresses, skirts, fleece, sweatshirts, and accessories also grew in Fiscal 2019 relative to last year. Even with softness in certain men’s and women’s tops categories, these strengths enabled American Eagle to deliver growth in comparable sales and record annual revenue in Fiscal 2019. The AE X ME marketing campaign has continued to resonate with our customers, allowing them to collaborate with us to showcase their individuality and youthful optimism, which we believe is more important than ever given the current environment.

 

 

•

Inventory Rationalization Becomes a Priority as our Supply Chain Innovation Work Continues: Through rigorous hindsight immediately following the 2019 holiday season, we identified opportunities to narrow our product choices while improving our inventory processes and supply chain speed. We prioritized an inventory rationalization strategy that will enable us to have the right merchandise in the right locations, when and where the customer wants it, all at a lower cost to the company. This bolsters our belief that we will not only navigate this current period of uncertainty, but also see improved performance when conditions normalize.

 

•

Focus on Omni-Channel Retail: AEO’s focus on omni-channel retail continued to deliver returns in Fiscal 2019, with positive sales, traffic, and transaction growth across channels. Digital revenue increased at a double-digit rate, led by mobile and app sales. Customer growth was also strong across brands, as our retention and re-engagement rates improved through the year. Investments we made in Fiscal 2019 to our digital channels and supply chain infrastructure are paying off today, as this channel continues to operate and build momentum despite a difficult macro environment.

 

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Strong Company Culture is a Differentiator: At AEO we care about each other, and we take care of our AEO family. This past year, we launched well-being programs for our associates, including providing resources focused on the importance of mental and physical health, financial planning, and family and work life balance. We presented training on technology that enabled associates to work from home if they chose to do so. We also launched new communication tools so that we could contact our associates more frequently and through a myriad of ways, including video messaging and a new rewards and recognition app. These efforts are clearly benefitting us today, as our teams face the necessity of integrating their professional and personal lives in ways we never envisioned. Through the AEO Foundation, we created a mechanism for associates to give back to their colleagues in need, through monetary donations or by dedicating time or needed supplies. We are now able to mobilize our helping arm of the AEO Foundation to give back to associates impacted by COVID-19 and provide personal protective equipment to our associates and communities in need.

 

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We Care About our World: In addition to delivering strong business performance, at AEO we take our responsibility as a corporate citizen very seriously. Building a better world is consistent with our values and corporate culture. In Fiscal 2019, we made significant progress in the Environmental, Social and Governance (ESG) arena. We have been an industry leader in our sustainability efforts and during the year unveiled key environmental goals, which included carbon neutrality in our owned and operated facilities by 2030 and a 60% reduction in carbon emissions by 2040. We furthered inclusion and diversity initiatives, and committed to supporting causes that empower young people and make a REAL difference in our communities. In Fiscal 2019, AEO, our brands and our customers had a record year in charitable giving, donating over $6 million dollars to philanthropic causes. Now, since the pandemic began, we have been true to who we are and have continued to give back, including in-kind donations of product, meals and gift cards to shelters and health care providers, donations of protective equipment and supplies to first responders in our local communities, and direct financial support to charities to help those impacted by the pandemic.

In summary, our purpose is to show the world there is REAL power in the optimism of youth. This strong north star, along with our core values—PEOPLE, PASSION, INNOVATION, INTEGRITY, and TEAMWORK—have served as the solid and steady foundations for all of our actions as we manage through the challenges of the COVID-19 pandemic. I am grateful for the resilience, creativity and talent of our teams. Because of our work in 2019 and prior years, and the amazing agility that our teams have shown in 2020, I have every confidence that when the crisis ends and our stores re-open, AEO Inc. will be ready to serve our associates, customers, and communities stronger than ever, with purpose and optimism toward the future.

 

 

 

Jay L. Schottenstein

Executive Chairman of the Board and Chief Executive Officer

 

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Meeting Time and Date: 11:00 a.m., Eastern Daylight Savings Time on Thursday, June 4, 2020   Virtual Meeting Location: Due to concerns relating to the coronavirus outbreak (COVID-19), and to support the health and well-being of our stockholders, American Eagle Outfitters, Inc. will have a virtual-only meeting of stockholders in 2020 (the “2020 Annual Meeting”), conducted exclusively via live audiocast at http://www.viewproxy.com/ae/2020/VM. There will not be a physical location for the 2020 Annual Meeting, and you will not be able to attend the meeting in person. See below for important information.
To Our Stockholders:						Vote Your Shares Right Away
American Eagle Outfitters, Inc. will hold our 2020 Annual Meeting on Thursday, June 4, 2020. Stockholders will be asked to vote upon the following proposals:   1.   The election of Sujatha Chandrasekaran and Jay L. Schottenstein as Class I directors to serve until the 2023 Annual Meeting of Stockholders;   2.   The ratification of the selection of Ernst & Young LLP (“EY”) as our independent registered public accounting firm for Fiscal 2020;   3.   The approval of the Company’s 2020 Stock Award and Incentive Plan;   4.   A non-binding advisory vote by stockholders of the Fiscal 2019 compensation of our named executive officers; and   5.   Such other business as may properly come before the meeting or any adjournment or postponement thereof.   The Board of Directors is soliciting proxies to be used at the 2020 Annual Meeting. Stockholders are being notified of the Proxy Statement and the form of proxy beginning April 22, 2020.   IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON JUNE 4, 2020:   On April 22, 2020, we will first release a Notice of Internet Availability of Proxy Materials containing instructions on how to gain access, free of charge, to our Proxy Statement and Annual Report for the fiscal year ended February 1, 2020 (the “Annual Report”) and how to vote online.   To be admitted to the 2020 Annual Meeting at http://www.viewproxy.com/ae/2020/VM you must enter the control number on your proxy card, voting instruction form or Notice of Internet Availability you previously received. Whether or not you plan to attend the virtual 2020 Annual Meeting, we encourage you to vote and submit your proxy in advance of the meeting by one of the methods described to the right on this page. You also may vote online and examine our stockholder list during the 2020 Annual Meeting by following the instructions provided on the meeting website during the 2020 Annual Meeting. To vote at the meeting, visit http://www.viewproxy.com/ae/2020/VM. For more information, please see page 73.   By order of the Board of Directors,     Jennifer B. Stoecklein Corporate Secretary April 22, 2020						HOW TO VOTE   Your vote is important. You are eligible to vote if you were a stockholder of record at the close of business on April 8, 2020.   Please read the Proxy Statement and vote right away using any of the following methods.   STOCKHOLDERS OF RECORD
						Vote by Internet		www.AALvote.com/AEO
						Vote by Telephone		1 (866) 804-9616
						Vote by Mail		Mail your signed proxy card
						BENEFICIAL STOCKHOLDERS   If you are a beneficial owner, you will receive instructions from your bank, broker or other nominee that you must follow in order for your shares to be voted. Many of these institutions offer telephone and online voting.

 

 

Table of Contents

 

PROXY SUMMARY			6
PROPOSAL ONE: ELECTION OF DIRECTORS			16
General			16
CORPORATE GOVERNANCE			22
The Role of the Board			22
Board Oversight of Risk Management			22
Director Selection and Nominations			23
Director Independence			25
Board Leadership Structure			25
Board Practices			26
Board Committees			27
Stockholder Outreach			29
Communications with the Board			29
Director Attendance			29
Related Party Transactions			30
Director Compensation			31
PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			32
REPORT OF THE AUDIT COMMITTEE			32
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES			33
PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN			34
PROPOSAL FOUR: ADVISORY APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS			45
COMPENSATION DISCUSSION AND ANALYSIS			46
COMPENSATION COMMITTEE REPORT			60

 

COMPENSATION TABLES AND RELATED INFORMATION			61
General			61
Summary Compensation Table			61
Grants of Plan-Based Awards – Fiscal 2019			63
Outstanding Equity Awards at Fiscal 2019 Year – End			64
Option Exercises and Stock Vested – Fiscal 2019			66
Nonqualified Deferred Compensation			66
Post-Employment Compensation			66
CEO Pay Ratio			69

 

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OWNERSHIP OF OUR SHARES			71
Stock Ownership Requirements			72
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING			73
SUBMISSION OF DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS			76
Can I nominate someone for election to the Board?			76
May I submit a stockholder proposal for next year’s Annual Meeting?			76
OTHER MATTERS			77
HOUSEHOLDING			77
ADDITIONAL INFORMATION			77
APPENDIX A AMERICAN EAGLE OUTFITTERS, INC. 2020 STOCK AWARD AND INCENTIVE PLAN			A-1
APPENDIX B DESCRIPTION AND RECONCILIATION OF NON-GAAP MEASURES			B-1

 

 

PROXY SUMMARY

This summary highlights information contained in this Proxy Statement. It does not contain all of the information that you should consider. You should read the entire Proxy Statement carefully before voting. Please see “Information about this Proxy Statement and the Annual Meeting” beginning on page 73 for important information about proxy materials, voting, the virtual annual meeting, Company documents, and communications.

This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors (the “Board”) of American Eagle Outfitters, Inc., a Delaware corporation, for use at the Annual Meeting of Stockholders to be held on June 4, 2020, at 11:00 a.m., Eastern Daylight Savings time, and at any adjournment or postponement thereof. It is first being mailed or released to the stockholders on April 22, 2020. (“We,” “our,” “AEO,” “us” and the “Company” refer to American Eagle Outfitters, Inc.) References throughout this Proxy Statement to “Fiscal 2019” refer to our fiscal year ended February 1, 2020.

We will hold a virtual Annual Meeting of Stockholders. Stockholders may participate online by logging onto http://www.viewproxy.com/ae/2020/VM. There will not be a physical meeting location, and you will not be able to attend the meeting in person. Please see page 73 for important information.

 

2020 Annual Meeting of Stockholders
		June 4, 2020 11:00 a.m., Eastern Daylight Savings Time				Virtual Meeting Location http://www.viewproxy.com/ae/2020/VM

 

Voting Matters
Your vote is very important to us and our business. Please cast your vote immediately on all of the proposals to ensure that your shares are represented.
		Board Recommendation		For More Information		Votes Required for Approval		Impact of Abstentions		Impact of Broker Non-Votes
PROPOSAL 1 — Election of Class I Directors		FOR		See page 16		Majority of the votes cast		None		None
The two Class I Director nominees possess the necessary qualifications and range of experience and expertise to provide effective oversight and advice to management
PROPOSAL 2 — Ratify the appointment of EY as independent registered public accounting firm for Fiscal 2020		FOR		See page 32		Majority of the shares of common stock present at the meeting, in person or by proxy, and entitled to vote		None		Not applicable, as brokers have discretion to vote on Proposal 2
The Board’s Audit Committee has approved the appointment of E&Y as the Company’s independent auditor for Fiscal 2020. As a matter of good corporate governance, stockholders are being asked to ratify the Audit Committee’s selection of EY
PROPOSAL 3 — Approval of the 2020 Stock Award and Incentive Plan		FOR		See page 34		Majority of the votes cast		Treated as a vote AGAINST		None
The 2020 Stock Award and Incentive Plan will increase the number of authorized shares available for granting of awards and includes other changes to reflect best practices and current applicable law
PROPOSAL 4 —Advisory Approval of Named Executive Officer Compensation for Fiscal 2019		FOR		See page 45		Majority of the shares of common stock present at the meeting, in person or by proxy, and entitled to vote		None		None
The Company’s executive compensation programs are designed to create a direct link between stockholders interests and those of management, with incentives specifically tailored to the achievement of financial, operational, and stock performance goals

 

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PROXY STATEMENT SUMMARY

 

Forward-Looking Statements and Website Information

 

This Proxy Statement contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), including in our CEO’s letter to our stockholders and our Compensation Discussion and Analysis, which represent our expectations or beliefs concerning future events, including the impact of COVID-19 on customer sentiment and our business profitability, store openings, inventory and supply chain improvements, merchandise innovation and product focused marketing, customer engagement, brand growth, new technologies, and improved customer experiences. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” “would,” or other words of similar meaning. These forward-looking statements rely on assumptions and involve risks and uncertainties, many of which are beyond our control, including, but not limited to, factors detailed herein and under Part I, “Item 1A. Risk Factors” and in other sections of our most recent Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission (“SEC”).

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on our forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and, except as required by law, we undertake no duty to update or revise any forward-looking statement.

This document includes several website addresses. These website addresses are intended to provide inactive, textual references only. The information on these websites is not part of this Proxy Statement.

Business Highlights from Fiscal 2019

 

Fiscal 2019 represented our fifth consecutive year of positive comparable sales and we achieved a record $4.3 billion in annual revenue. American Eagle and Aerie captured market share, led by traffic and transaction growth across channels, highlighting the strength of each brand. While we are proud to report strong sales growth in our business, we did not achieve our profitability goals. Some product and fashion misses within the AE Brand resulted in an increase in markdowns to ensure we ended Fiscal 2019 with clean inventories, starting fresh for Fiscal 2020. The result of these actions was net income per diluted share of $1.12, compared to $1.47 last year. On an adjusted basis, net income per diluted share of $1.48 this year was flat to $1.48 last year⁽¹⁾.

Key operating highlights included:

 

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Continued Sales and Brand Momentum. In Fiscal 2019, AEO posted record revenues of $4.3 billion, rising 7% over the previous year. Consolidated comparable sales rose 3% for Fiscal 2019, driven by positive traffic and transactions across brands and channels, which compared to an 8% increase last year. American Eagle comparable sales were up slightly to last year and Aerie posted comparable sales growth of 20%. This growth in total revenue across both brands is a testament to American Eagle and Aerie’s brand strength among our target customers.

 

Revenue		Comparable Sales(1) Growth

 

*	Compounded annual growth rate

(1)	See Appendix B of this Proxy Statement for additional detail on comparable sales, adjusted results and other important information regarding the use of non-GAAP or adjusted measures.

 

PROXY STATEMENT SUMMARY

 

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Challenges in Profit Flow-Through. While Aerie margins improved in Fiscal 2019, demand for certain American Eagle tops did not meet expectations and resulted in higher-than-planned markdowns to clear through inventory, particularly during the holiday period. As a consequence, adjusted operating income(1) of $314 million in Fiscal 2019 declined relative to the prior year.

 

Adjusted Operating Income(1)

*        Compounded annual growth rate

 

•

Strong Balance Sheet and Commitment to Cash Returns. We ended Fiscal 2019 with $417 million in cash and short-term investments and no debt, despite investing $210 million in capital expenditures and returning a combined $205 million to stockholders through cash dividends and share repurchases. Operating and Free Cash Flow(1) remained strong during the year, delivering $415 million and $204 million, respectively.

Operating and Free Cash Flow⁽¹⁾

 

 

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Shareholder Returns Versus Peers. Our Fiscal 2019 total shareholder return (“TSR”) was approximately -29%, slightly below our peer group median. Our three-year TSR of 9% and five-year TSR of 21% were each significantly above the peer group median.

TSR

 

        

 

(1)	See Appendix B of this Proxy Statement for additional detail on comparable sales, adjusted results and other important information regarding the use of non-GAAP or adjusted measures.

 

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PROXY STATEMENT SUMMARY

 

Corporate Governance Highlights

 

We are committed to values of effective corporate governance and the highest ethical standards, which we believe promote the long-term interests of our Company and maximize stockholder value, while strengthening Board and management accountability. We continuously review governance practices and consider adoption of best practice principles. Key areas of our governance framework include the following. This framework is described in more detail in our Corporate Governance Guidelines and Code of Ethics, which can be found in the Corporate Governance section of investors.ae.com.

 

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Highly Talented, Skilled Board of Directors. Our Board embodies a broad and diverse set of experiences, qualifications, attributes, and skills that are vital to the success of our Company. Our directors’ skills, qualifications, and viewpoints strengthen the Board’s ability to carry out its oversight role on behalf of our stockholders. See the table on page 24 for a summary of the range of skills and experiences that each director brings to the Board, and which we find to be relevant to our business.

 

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All Directors Are Independent, Except Our CEO. The Board is composed of eight directors with only one non-independent director, our CEO.

 

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Independent Committees. All Board committees are composed of independent directors.

 

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Robust Lead Independent Director Role. Our current Lead Independent Director, Mr. Spiegel, has substantial duties specifically documented in our Corporate Governance Guidelines, including presiding over meetings of our independent directors, providing input on materials sent to the Board, and approving Board meeting schedules to ensure there is sufficient time for Board discussion and deliberation.

 

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Protections Against Director Overboarding. The Board appreciates that serving on a public board of directors is a significant responsibility and time commitment. To this end, the Board has approved a policy in our Corporate Governance Guidelines to review and limit the number of public company boards on which our directors may serve. Directors who are full-time employees of other companies generally may not serve on more than two public company boards (including our Board) at one time, and directors who are retired from full-time employment generally may not serve on more than four public company boards (including our Board) at one time unless otherwise determined by the Nominating, Governance and Corporate Social Responsibility Committee (the “Nominating Committee”). Our CEO may not serve on more than one other public company board unless otherwise determined by the Nominating Committee.

 

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Diversity. Three of our eight directors, representing nearly 40% of our Board, are diverse in terms of gender and/or ethnicity.

 

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Board Refreshment and Tenure Policy. Our Corporate Governance Guidelines include a mechanism for the Board to refresh its members over time. We maintain a director retirement policy under which no director may be appointed or nominated to a new term if he or she would be age 78 or older at the time of election, unless otherwise determined by the Board.

 

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Robust Director Evaluation Process. We conduct self-assessments of the Board and its Committees annually. The Board believes it is important to assess both its overall performance and the performance of its Committees, and to solicit and act upon feedback received, where appropriate. As part of the Board’s self-assessment process, directors consider various topics related to Board composition, structure, effectiveness, and responsibilities, as well as the overall mix of director skills, experience and backgrounds.

 

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Annual Review of Committee Charters and Corporate Governance Guidelines. We continuously review governance practices and consider adoption of best practice principles.

 

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Human Capital Management Oversight by Board and Committees. Our Board plays an important role in the oversight of talent and culture at AEO and devotes time each quarter to receiving updates from management on culture, including both internal and external benchmarking of employee engagement, turnover, retention, and recruiting metrics as well as progress on inclusion and diversity, talent development, leadership, and succession planning initiatives.

 

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Meaningful Stock Ownership Requirements. We maintain stock ownership guidelines that are applicable to our directors and executives. Our non-employee directors must, within five years of joining the Board, hold Company stock worth at least five times their annual cash retainer. In the case of our CEO, the stock ownership guideline is six times his base salary and, in the case of our other named executive officers, the guideline is three times their respective base salaries.

 

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Director Elections by Majority Vote with Resignation Policy. In an uncontested election, our directors are elected by a majority of votes cast and, if a director does not receive a majority of votes cast, he or she must promptly tender his or her resignation to the Board (with the Board determining whether to accept or reject such resignation).

 

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Prohibition on Hedging or Pledging Company Stock. We maintain “no hedging” and “no pledging” policies that generally prohibit directors and employees from engaging in hedging or pledging transactions with respect to our stock.

 

PROXY STATEMENT SUMMARY

 

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Ongoing Stockholder Engagement. We welcome feedback and value regular dialogue with our stockholders. In Fiscal 2019, the Company continued to have extensive stockholder engagement. On a regular basis, we invite stockholders to visit with senior management. We expect to continue such discussions prior to the 2020 Annual Meeting and, as a matter of policy and practice, foster, and encourage engagement with our stockholders on an ongoing basis.

 

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Summary of Director Skills. Our directors bring to our Board a wide variety of skills, qualifications and viewpoints that strengthen the Board’s ability to carry out its oversight role on behalf of our stockholders. See the table on page 24 for a summary of the range of skills and experiences that each director brings to the Board, and which we find to be relevant to our business.

Snapshot of Director Experience and Diversity

 

Name		Age		Director Since		Occupation		Independent		Current Committee Memberships
Sujatha Chandrasekaran		52		2018		Senior Executive Vice President, Chief Digital and Information Officer, CommonSpirit Health		Yes		•   AC •   CC •   NC
Deborah A. Henretta		58		2019		Retired Group President, P&G Global Beauty		Yes		•   AC •   CC •   NC
Thomas R. Ketteler		77		2011		Retired Chief Operating Officer of Schottenstein Stores Corp. (“SSC”)		Yes		•   AC •   CC •   NC
Cary D. McMillan		62		2007		Chief Executive Officer of True Partners Consulting, LLC		Yes		•   AC •   CC† •   NC
Janice E. Page		71		2004		Retired Group Vice President of Sears Roebuck & Company		Yes		•   AC •   NC† •   CC
David M. Sable		66		2013		Non-Executive Chairman, WPP plc		Yes		•   AC •   CC •   NC
Jay L. Schottenstein		65		1992		Chief Executive Officer		No		—
Noel J. Spiegel*		72		2011		Retired partner at Deloitte & Touche, LLP		Yes		•   AC† •   CC •   NC

AC Audit Committee

CC Compensation Committee

NC Nominating, Governance and Corporate Social Responsibility Committee

† Committee Chair

* Lead Independent Director

 

Gender Distribution		Tenure of Independent Directors		Age Distribution of Independent Directors

 

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PROXY STATEMENT SUMMARY

 

Corporate Citizenship Highlights from Fiscal 2019

 

AEO is committed to good corporate citizenship, and we aim to forge a path that balances principles and profit. An integral component of our Company culture is driving positive change without compromising who we are: a REAL brand that our customers and associates can understand and are proud to support. Our purpose is to show the world there is REAL power in the optimism of youth. Throughout Fiscal 2019, we continued a strong emphasis on sustainability, philanthropy, and associate engagement, consistent with AEO’s REAL culture.

 

Human Capital Management		Charitable Giving		Sustainability
Adopt programs and policies that aim to improve the well-being and livelihoods of our most valued resource – our people		Strengthen our local communities through financial support, community engagement, and volunteer service		Set environmental goals, monitor our performance, and measure our progress toward improving our environmental footprint

Human Capital Management

 

The vitality of AEO resides in people. Our people come first. We believe that a truly diverse workplace is the result of an inclusive culture. It’s about more than simply bringing together people who are different, it’s about celebrating what makes us REAL. We value and respect different backgrounds, unique talents and eclectic tastes; they				AEO celebrates the diversity of one through the inclusion of many. Come in, be you.

strengthen our ability to succeed. We care about our associates: we empower them, we reward them, and we help them develop both professionally and personally. We aim to give back generously to the communities where we work and play. From hiring the best talent, to inclusion and diversity initiatives, and through career development, compensation, and wellness, we are committed to creating programs and resources that enhance our workplace environment, our associate experience, and retain and engage our most valuable resource: our people. As of the date of this proxy statement, as we and the world struggle with the COVID-19 pandemic, our values and commitments remain critical to us, and we are endeavoring to identify and execute on ways to express and manifest these values during and after the crisis.

Our initiatives during Fiscal 2019 included:

 

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Associate Development. Our global talent management strategy enables us to help associates reach their full potential. In Fiscal 2019, we continued our efforts to connect our associates with resources that support their individual development and enable them to create an inclusive environment for all. We launched a leadership development series based on needs identified in executive succession planning and promoted online and live workshops on a wide range of functional topics. Our focus on development has supported a consistent internal promotion rate over the last three years, and a decline in voluntary turnover at the corporate level.

 

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Compensation. Ensuring that our talented team is rewarded for performance is a key priority. We invest significant time and resources in establishing compensation programs that are both competitive and equitable. During Fiscal 2019, we evaluated our positions for market competitiveness and made adjustments when necessary with the goal of ensuring the retention of top talent and continuation of equitable pay practices. We focused on ensuring a competitive store management compensation structure and made investments in this critical area of the business.

 

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Commitment to Equal Employment Opportunity and Inclusion. At AEO, we believe that a truly diverse workplace is the result of an inclusive culture. Creating an environment where everyone feels respected and empowered is more than just a statement; we live this as part of our values. Our Inclusion and Diversity efforts fall into three primary pillars: hiring, culture, and development, each of which has a task force comprised of associates across the organization. We believe that all associates play a very important role in helping AEO be a place where people can thrive and contribute in meaningful ways.

 

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In Fiscal 2019, we created the Inclusion and Diversity Alliance comprised of associates at all levels that are passionate about AEO and helping AEO achieve its Inclusion and Diversity mission. We curated a playlist of Inclusion and Diversity training for our associates, managers, and teams, and we supported individual and team development by offering various tools and coaching experiences which are designed to help our associates raise their self-awareness, appreciate the differences of others, and improve collaboration overall.

 

Ø

AEO has also built strong partnerships with several organizations that promote inclusion and whose support aligns with our values. During Fiscal 2019, AEO partnered with the Anti-Defamation League to provide interactive training programs in our corporate offices.

 

PROXY STATEMENT SUMMARY

 

•

Employee Well-Being Programs. Our well-being programs focus on physical, emotional, social, and financial health. We partner with vendors to provide the following: health coaching for chronic condition and disease management, pre-diabetes management programs; gym discounts; onsite health coaches at the U.S.-based distribution centers; fertility management and parenting programs; incentive-based programs for smoking cessation, nutrition, stress management, physical activities, and caregiver support; complimentary expert second opinions, medical decision support, and claims advocacy; medical and behavioral telehealth benefits; and employee assistance programs that include emotional/mental health programs supporting work-life balance. We also provide wealth planning and financial well-being programs for our associates, as well as support groups and programs for new parents. In Fiscal 2019, we focused on rolling out programs and guidelines to support REAL balance, i.e. integrating work life and home life, which are now being utilized as we work remotely while are offices are closed for safety reasons during the pandemic.

Our Board plays an important role in the oversight of talent and culture at AEO and devotes time each quarter to receiving updates from Management on culture, including talent development, retention, and recruiting initiatives, inclusion and diversity, leadership and succession planning, and employee feedback.

A note on the impact of COVID-19

On April 2, 2020, we announced that we had made the difficult decision to impose temporary furloughs of store, field, and corporate associates beginning April 5, 2020, largely reflecting the continued uncertainty around the duration of store closures due to societal health concerns related to COVID-19. In light of this decision and its impact on our associates, we also announced the following actions:

 

Ø

Providing furloughed associates with benefits and funding of 100% of the health premiums for eligible employees impacted by these measures, through at least April 2020.

 

Ø

The funding and establishment of a relief fund through the AEO Foundation for associates who may be experiencing economic distress caused by a COVID-19 diagnosis.

 

Ø

The establishment of an online associate resource center, which will allow easy access to contacts, benefits information as well as state unemployment resources.

Charitable Giving

We are committed to showing the world that there is REAL power in the optimism of youth by supporting causes that empower youth and rolling up our sleeves to make a REAL difference in our communities.

In 1999, we established the American Eagle Outfitters Foundation (“AEO Foundation”) to maximize the impact of our efforts and to formalize our commitment to giving back. AEO Foundation board members and officers consist of associates across the organization who bring a wealth of knowledge and experience on charitable giving. Cary McMillan, a member of the AEO Board of Directors also joined the AEO Foundation Board in Fiscal 2019. Management provides updates quarterly to the Nominating Committee on various philanthropic topics and activities involving AEO and the AEO Foundation including national charity partnerships, customer engagement activations, major community initiatives, and associate activities.

In Fiscal 2019, AEO, the AEO Foundation, and our customers had a record year in charitable giving by donating more than $6.2 million to causes that are important to us. Aerie continued to promote body acceptance as well as health and wellness among its customers through partnerships with the National Eating Disorders Association, Bright Pink, and a new collaboration with Special Olympics’ Global Week of Inclusion. American Eagle empowered its customers to support causes they care about including the environment, equality, and homeless youth. AE supported Earth Day by launching a denim recycling program and by partnering with One Tree Planted to plant 155,000 trees. For Pride, AE supported LGBTQ youth by making the largest donation in It Gets Better’s history to help amplify stories of hope and encouragement around the globe. During the holiday season, AE and Aerie partnered with Delivering Good to support homeless and underprivileged youth. Our contribution of $1.5 million will enable Delivering Good to provide $20 million in goods to young people in need. We know that we have a responsibility to lead by example, which is why we believe we must do our part to create positive change in the world.

AEO will continue donating to its customers and communities to support them through the current global health crisis, including monetary donations as well as in-kind donations of personal protective equipment, meals, and gift cards to medical workers and others affected by COVID-19.

 

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PROXY STATEMENT SUMMARY

 

Sustainability

Doing the right thing, continually innovating and caring about the global community is foundational to AEO’s culture. During Fiscal 2019, AEO pledged to accelerate sustainability improvements across our company. Sustainability goals were finalized and announced in September 2019 with recognition that AEO is taking an industry-leading position on climate change. Our goals include a comprehensive plan to be carbon neutral by 2030 with a commitment to water reduction, energy reduction, and the use of more sustainable raw materials as follows:

 

Reduce Water		•  Reduce water use per jean by 30% by 2023 •  Recycle 50% of our total water used in denim laundries by 2023 •  Apply AEO Wastewater Management Standard to 100% of water-intensive factories, mills, and laundries by 2023		Save Energy		•  Achieve carbon neutrality in all of AEO’s owned and operated facilities (offices, stores, distribution centers) and employee business travel by 2030 •  Reduce carbon emissions 40% by 2030 and 60% by 2040 in AEO’s manufacturing from a 2018 base year
Improve Materials		•  “More sustainable” raw materials by 2023 –  All cotton used in products will be 100% more sustainably sourced (We define “more sustainable” cotton as organic, recycled, or a part of the Better Cotton Initiative program) –  Use 50% more sustainable polyester –  Ensure that 100% of viscose is from non-endangered forests and increase sourcing of sustainably produced viscose fibers		Reduce & Reuse		•  Divert from landfills by collecting post-consumer apparel with a goal to increase volume every year •  Recycle 100% of pre-consumer apparel waste by 2020 •  Identify opportunities for waste reduction in plastic packaging •  Reduce labeling and convert all labels to sustainably sourced materials by 2021

We are also committed to responsibly sourcing and creating the products that our customers love to wear. Our Vendor Code of Conduct is based on international labor standards and implemented in all of our manufacturing facilities. We believe that our compliance program focus should be about engagement and capacity building, and not just strictly following the law. We are members of the Accord on Fire and Building Safety in Bangladesh and have worked with our suppliers and factories there to improve safety conditions, and have taken that experience to focus deeply on safety in other countries. We have conducted worker surveys in many of our strategic factories in order to hear from workers directly and understand their needs and concerns and ensure that their voices can also be heard by factory management. Finally, we have invested, with our factories, in the HERproject, a program that focuses on training women on health, financial planning, and gender equality.

In December 2019, the Nominating Committee refreshed its charter to clarify the Committee’s oversight role with respect to the Company’s ESG initiatives and changed its name to the Nominating, Governance and Corporate Social Responsibility Committee.

Sustainability Oversight Structure

 

		Oversight responsibility embedded in the Nominating, Governance and Corporate Social Responsibility Committee charter. The Nominating Committee reports to the full Board of Directors on our ongoing ESG -related activities.   An internal Environmental Sustainability Committee meets quarterly to provide leadership and accountability for the Company’s goals. Executive Co-Sponsors include American Eagle and Aerie Brand Presidents and the EVP – General Counsel.   Sustainability Working Groups meet bi-monthly and are centered around each goal to share ideas and implementation details.

For additional information on AEO’s corporate giving, sustainability efforts and social responsibility initiatives, please visit www.aeo-inc.com/social-responsibility/.

 

PROXY STATEMENT SUMMARY

 

Compensation Highlights from Fiscal 2019

 

We believe that our executive compensation program appropriately aligns the interest of our leaders with our stockholders and contributes to our strong performance. Specific executive compensation highlights include:

 

•

Pay for Performance Focus. 86% of our CEO’s compensation is at risk and subject to performance conditions and changes in shareholder value and “at-risk” in the form of annual and long-term incentive compensation, as demonstrated in the chart below.

 

 

(1)	RSUs are defined as time-based restricted stock units

(2)	NSOs are defined as nonstatutory stock options

(3)	PSUs are defined as performance-based restricted stock units

 

•

Alignment of CEO Pay Relative to Peers. When examining our CEO’s total direct compensation as disclosed in the Summary Compensation Table (“SCT”) relative to our peer group over a three-year period, Mr. Schottenstein’s compensation, shown on the vertical axis, ranks in the 47th percentile, while AEO’s relative TSR performance over the same period was in the 71st percentile.

AEO vs. PEER Group Pay Alignment

3-Year CEO Total Direct Compensation & TSR*

 

 

*	Compensation is measured using 2017-2019 AEO SCT compensation and publicly-available peer SCT compensation (2016-2018).

 

•

Independent Compensation Consultant. The Compensation Committee retained an independent compensation consulting firm, Frederic W. Cook & Co., Inc. (“FW Cook”), to advise on matters related to the CEO’s and other executives’ compensation. FW Cook does not provide any other services to the Company (other than its services for the Compensation Committee).

 

14		|

PROXY STATEMENT SUMMARY

 

•

No Payment of Dividends on Unearned/Unvested Awards. We do not pay dividends or dividend equivalents on unearned and/or unvested equity incentive awards.

 

•

Executive Compensation Clawback Policy. We maintain a clawback policy that generally provides the Compensation Committee with the discretion to seek recovery of performance-based cash and equity compensation paid to an executive officer in connection with an event of misconduct related to: (a) acts in competition with the Company; (b) disclosure of confidential or proprietary information; (c) failure to cooperate with the Company in regard to a legal suit; or (d) restatement of financial statements.

 

•

No Guaranteed Employment or Compensation. We do not maintain employment contracts of defined length with our CEO or other named executives, nor do we provide multi-year guarantees for base salary increases, bonuses, or long-term incentives.

 

•

Double-Trigger Change in Control Benefits and Vesting. In the event of a change in control, our executives, other than Mr. Schottenstein, will only receive benefits if there is a qualifying termination of employment (i.e., double-trigger). Our CEO does not have a change in control agreement with the Company. All of our executives’ equity incentive awards are double-trigger.

 

•

No Change in Control Tax Gross-Ups. We do not provide tax gross-ups on change in control benefits.

 

•

Stock Ownership Guidelines. We have stock ownership guidelines for both the Board of Directors and Management to ensure a commonality of interest with stockholders.

 

•

Anti-hedging and anti-pledging policy. Policies are in place that prohibit both employees and Board members from engaging in these practices.

 

•

Limited perquisites. We provide only limited perquisites.

 

 

 

Historical Say on Pay Votes   We are proud of our consistently high Say on Pay vote outcomes of over 96% since Fiscal 2015. Our Compensation Committee believes the results of last year’s Say on Pay vote affirmed our stockholders’ support of our Company’s executive compensation program. This informed our decision to maintain a consistent overall approach in setting ongoing executive compensation for Fiscal 2019.

 

 

PROPOSAL ONE: ELECTION OF DIRECTORS

General

 

The Board is divided into three classes. Each class of directors is elected for a three-year term. On the recommendation of the Nominating Committee, the Board has fixed the size of the board at eight directors and nominated two candidates, each of whom are currently directors of the Company, to be elected as Class I directors at the 2020 Annual Meeting. If re-elected, the Class I directors will serve for three-year terms ending at the 2023 annual meeting, or when their successors are duly elected and qualified. The terms of the remaining Class II and Class III directors are scheduled to expire at the annual meetings to be held in 2021 and 2022, respectively.

Biographical information regarding each nominee and each incumbent director is set forth below as of April 1, 2020, together with a brief description of each individual’s business experience, skills, and qualifications.

 

 

Jay L. Schottenstein
Age: 65     Director since: March 1992     Executive     Committees: •  None     Current Public Company Directorships: •  Designer Brands Inc.		BACKGROUND Mr. Schottenstein has served as our Chief Executive Officer since December 2015. Prior thereto, he served as our Interim Chief Executive Officer from January 2014 to December 2015. He has served as Chairman of the Board since March 1992. He previously served the Company as Chief Executive Officer from March 1992 until December 2002 and as a Vice President and Director of the Company’s predecessors since 1980. He has also served as Chairman of the Board and Chief Executive Officer of SSC since March 1992 and as President of SSC since 2001. Prior thereto, Mr. Schottenstein served as Vice Chairman of SSC from 1986 to 1992. He has been a Director of SSC since 1982. Mr. Schottenstein also has served since March 2005 as Executive Chairman of the Board of Designer Brands Inc. (f/k/a DSW Inc.) (NYSE:DBI) and formerly served as that company’s Chief Executive Officer from March 2005 to April 2009. He has also served as a member of the Board of Directors for Alberstons Companies Inc. since 2006. He has served as an officer and director of various other entities owned or controlled by members of his family since 1976. He is a graduate of Indiana University.
		SKILLS AND QUALIFICATIONS
		Mr. Schottenstein has deep knowledge and extensive experience with respect to the Company’s operations and the retail industry in general. His knowledge and background in various leadership positions across operations, apparel retail, real estate, brand building and team management provides valuable leadership, vision and in-depth retail expertise to the Board.

 

16		|

PROPOSAL ONE: ELECTION OF DIRECTORS

 

Sujatha Chandrasekaran
Age: 52     Director since: March 2018     Independent     Committees: •  Audit •  Compensation •  Nominating     Current Public Company Directorships: •   Barry Callebaut (listed on the SIX Swiss Exchange)		BACKGROUND Ms. Chandrasekaran has over 25 years of business operations, technology and digital experience in retail and consumer goods in a global context, across customer engagement, marketing, store operations, supply chain and back office. She leads tech and digital transformation at CommonSpirit Health, one of the largest Healthcare systems in the United States. She most recently held the role of head of digital and information technologies at Kimberly-Clark Corporation. She led the company wide digital transformation efforts across business and technology at Kimberly-Clark. Prior to that Ms. Chandrasekaran served as SVP, Chief Technology and Data Officer at Walmart Inc. Ms. Chandrasekaran has also led digital, business transformation and eCommerce at The Timberland Company, PepsiCo and Nestlé SA in C-level global roles.   Ms. Chandrasekaran holds a Bachelor of Engineering degree from University of Madras, India, a Master of Business Systems from Monash University, Melbourne Australia, and an Executive Development Education Certificate from London Business School.
		SKILLS AND QUALIFICATIONS
		With her expertise in enabling profitable growth in global entities, business operations, transformation, digital and technology, Ms. Chandrasekaran brings vast information and digital technology expertise and a wealth of leadership experience in the global retail, eCommerce and consumer industries to the Board. Ms. Chandrasekaran is an industry thought leader in digital business transformation, digital business models and talent transformation. She possesses deep technical expertise in multiple technologies.   Ms. Chandrasekaran was named a 2019 Director to Watch by Directors & Boards magazine. She was also named a Governance Fellow by the National Association of Corporate Directors (“NACD”) in 2018. NACD Fellowship is the highest standard of credentialing for corporate directors based on a comprehensive and continuous program of study that empowers them with the latest boardroom insights, intelligence, and practices. The fellowship was earned as a result of various board of director workshops and a cybersecurity oversight CERT certification.
		PREVIOUS DIRECTORSHIPS
		Ms. Chandrasekaran previously served as a director at Symphony Retail AI with a focus on Data, Analytics, AI for Retail & Consumer Goods.

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

 

Janice E. Page
Age: 71     Director since: June 2004     Independent     Committees: •  Audit •  Compensation •  Nominating (Chair)     Current Public Company Directorships: •  None		BACKGROUND Ms. Page spent 27 years in apparel retailing, holding numerous merchandising, marketing and operating positions with Sears Roebuck & Company (“Sears”), including Group Vice President from 1992 to 1997. While at Sears, Ms. Page launched the direct-to-consumer business and oversaw sporting goods, men’s, women’s and children’s apparel, footwear and accessories, and beauty and fragrances, among other responsibilities. She also serves on the advisory board for the Daveler Entrepreneurship Scholarship of the University of South Florida. She holds a B.A. from Pennsylvania State University.
		SKILLS AND QUALIFICATIONS
		Ms. Page has extensive knowledge of the apparel retail industry and brings to the Board in-depth experience across diverse consumer product categories as well as retail operations. Her service and tenure on public company boards allows her to provide the Board with a variety of perspectives on corporate governance issues.
		PREVIOUS DIRECTORSHIPS
		Ms. Page previously served as a director of R.G. Barry Corporation (2000-2014), Hampshire Group, Limited (2009-2011) and Kellwood Company (2000-2008). Ms. Page also served as Trustee of Glimcher Realty Trust, a real estate investment trust which owns, manages, acquires and develops malls and community shopping centers (2001-2004). She also serves on the advisory board for the Daveler Entrepreneurship Scholarship of the University of South Florida.

 

David M. Sable
Age: 66     Director since: June 2013     Independent     Committees: •  Audit •  Compensation •  Nominating     Current Public Company Directorships: •  None		BACKGROUND Mr. Sable is an author, entrepreneur and social activist. He currently serves as a Senior Advisor to WPP plc, a multinational communications, advertising, public relations, technology, and commerce holding company (“WPP”), mentoring and consulting across the company. Previously he was Chairman of VMLY&R. He propelled Y&R to a top-five global creative firm at Cannes, developed new resources and practices, expanded the global footprint of subsidiary company VML, and ultimately helped unify Y&R and VML into VMLY&R.   Prior to his time at Y&R, Mr. Sable served at Wunderman, Inc., a leading customer relationship manager and digital unit of WPP Group, as Vice Chairman and Chief Operating Officer, from August 2000 to February 2011. Mr. Sable was a Founding Partner and served as Executive Vice President and Chief Marketing Officer of Genesis Direct, Inc., a pioneer digital omni-channel retailer, from June 1996 to September 2000. Mr. Sable serves on the U.S. Fund for United Nations Children’s Fund (UNICEF’s) National Board, is a past Chair of the Ad Council’s Board of Directors, is an executive board member of the United Negro College Fund (UNCF), and sits on the International Board of the Special Olympics. A frequent keynote speaker and author, Mr. Sable is a designated LinkedIn Influencer, where he ranks among the most widely read business leaders in the world.
		SKILLS AND QUALIFICATIONS
		With more than 30 years of experience in digital leadership and marketing communications, Mr. Sable brings to the Board his strategic insight and ability to connect talent across marketing disciplines and geographies.

 

18		|

PROPOSAL ONE: ELECTION OF DIRECTORS

 

Noel J. Spiegel
Age: 72     Director since: June 2011     Independent (Lead Independent Director)		BACKGROUND Mr. Spiegel was a partner at Deloitte & Touche, LLP (“Deloitte”), where he practiced from September 1969 until his retirement in May 2010. In his over 40-year career at Deloitte, he served in numerous management positions, including as Deputy Managing Partner, member of the Executive Committee, Managing Partner of Deloitte’s Transaction Assurance practice, Global Offerings and IFRS practice and Technology, Media and Telecommunications practice (Northeast Region), and as Partner-in-Charge of Audit Operations in Deloitte’s New York Office. Mr. Spiegel holds a B.S. from Long Island University and attended the Advanced Management Program at Harvard Business School.
Committees: •  Audit (Chair) •  Compensation •  Nominating		SKILLS AND QUALIFICATIONS Mr. Spiegel provides expertise in public company accounting, disclosure and financial system management to the Board and, more specifically, to the Audit Committee.
Current Public Company Directorships: •  Radian Group Inc. •  vTv Therapeutics Inc.		PREVIOUS DIRECTORSHIPS Mr. Spiegel previously served as a director at Vringo, Inc. (2013-2016).

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

 

Deborah A. Henretta
Age: 58     Director since: February 2019     Independent     Committees: •  Audit •  Compensation •  Nominating     Current Public Company Directorships: •  Corning, Inc. •  Meritage Homes Corporation •  NiSource, Inc.		BACKGROUND Ms. Henretta has over 30 years of business leadership experience across both developed and developing markets, as well as expertise in brand building, marketing, philanthropic program development and government relations. She joined Procter & Gamble (“P&G”) in 1985. In 2005, she was appointed President of P&G’s business in Association of Southeast Asian Nations, Australia and India. She was appointed group president, P&G Asia in 2007, group president of P&G Global Beauty Sector in June 2013, and group president of P&G E-Business in February 2015. She retired from P&G in June 2015.   Ms. Henretta was a member of Singapore’s Economic Development Board (“EDB”) from 2007 to 2013. She contributed to the growth strategies for Singapore, and was selected to serve on the EDB’s Economic Strategies Committee between 2009 and 2011. In 2008, she received a U.S. State Department appointment to the Asia-Pacific Economic Cooperation’s Business Advisory Council. In 2011, she was appointed chair of this 21-economy council, becoming the first woman to hold the position. In that role, she advised top government officials, including former President Barack Obama and former Secretary of State Hillary Clinton.   Ms. Henretta currently is a partner at G100 Companies, a position she has held since 2015, where she assisted in establishing a Board Excellence program that provides director education on board oversight and governance responsibilities, including the areas of digital transformation and cyber security, as well as a partnership program for New Director Training. She holds a master’s degree in advertising research from Syracuse University and a B.A. in communications from St. Bonaventure.
		SKILLS AND QUALIFICATIONS
		Ms. Henretta has significant experience in business leadership and global and international operations. She is skilled in brand building, marketing and emerging market management. She also brings significant knowledge of digital transformation and cyber security to the Board.
		PREVIOUS DIRECTORSHIPS
		Ms. Henretta previously served as a director of Staples, Inc. (2016-2017).

 

Thomas R. Ketteler
Age: 77     Director since: February 2011     Independent     Committees: •  Audit •  Compensation •  Nominating     Current Public Company Directorships: •  None		BACKGROUND Prior to his retirement from SSC, a private company, in 2005, Mr. Ketteler served as Chief Operating Officer of SSC (since 1995), as Executive Vice President of Finance and Treasurer (from 1981), and as a Director (since 1985). Prior to SSC, he was a partner in the firm of Alexander Grant and Company, Certified Public Accountants. Mr. Ketteler served as a consultant to the Board from 2003 until June 2010. He holds a B.A. in Accounting from Thomas More College and is a Certified Public Accountant (“CPA”).
		SKILLS AND QUALIFICATIONS
		Mr. Ketteler provides expertise, including through his background as a CPA and experience holding several executive-level positions, in financial and accounting issues and his historical experience with the Company is invaluable to the Board.
		PREVIOUS DIRECTORSHIPS
		Mr. Ketteler previously served on the Board of Encompass Group, Inc. (2007-2011).

 

20		|

PROPOSAL ONE: ELECTION OF DIRECTORS

 

Cary D. McMillan
Age: 62     Director since: June 2007     Independent     Committees: •  Audit •  Compensation (Chair) •  Nominating     Current Public Company Directorships: •  Hyatt Corporation		BACKGROUND Mr. McMillan has served as Chief Executive Officer of True Partners Consulting, LLC, a professional services firm providing tax and other financial services, since December 2005. From October 2001 to April 2004, he was the Chief Executive Officer of Sara Lee Branded Apparel. Mr. McMillan served as Executive Vice President of Sara Lee Corporation (“Sara Lee”), a branded consumer packaged goods company, from January 2000 to April 2004. From November 1999 to December 2001, he served as Chief Financial and Administrative Officer of Sara Lee. Prior thereto, Mr. McMillan served as an audit partner with Arthur Andersen LLP. Mr. McMillan holds a B.S. from the University of Illinois and is a CPA.
		SKILLS AND QUALIFICATIONS
		Mr. McMillan brings to the Board demonstrated leadership abilities as a Chief Executive Officer and a deep understanding of business, both domestically and internationally. His experience as a former audit partner and CPA also provides him with extensive knowledge of financial and accounting issues. Furthermore, Mr. McMillan’s current and prior service on other public boards provides the Board with a diversified knowledge of best corporate governance and compensation practices. Mr. McMillan also serves on the AEO Foundation Board and brings a wealth of philanthropic experience to the position.
		PREVIOUS DIRECTORSHIPS
		Mr. McMillan previously served as a director of McDonald’s Corporation (2003-2015), Hewitt Associates, Inc. (2002-2010), and Sara Lee Corporation (2000-2004).

Each of the nominees has consented to be named as a nominee. If any nominee should become unavailable to serve, the Board may decrease the number of directors pursuant to our Amended and Restated Bylaws (the “Bylaws”) or may designate a substitute nominee. In that case, the persons named as proxies will vote for the substitute nominee designated by the Board. The Board has no reason to believe that any nominee will be unavailable or, if elected, unable to serve.

 

 

CORPORATE GOVERNANCE

The following section discusses the Company’s corporate governance, including the role of the Board and its Committees. Additional information regarding corporate governance, including our Corporate Governance Guidelines, the charters of our Audit, Compensation, and Nominating Committees and our Code of Ethics, which applies to all of our directors, officers (including the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and employees, may be found on our Investors website at investors.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 available in print to any stockholder upon request.

The Role of the Board

 

The Board is responsible for overseeing management, which is, in turn, responsible for the operations of the Company. The Board’s primary areas of focus are strategy, risk management, corporate governance and compliance, as well as evaluating management and guiding changes as circumstances warrant. In many of these areas, significant responsibilities are delegated to the Board’s Committees, which are responsible for reporting to the Board on their activities and actions. Please refer to “Board Committees” for additional information on our Committees.

 

Board Oversight of Risk Management

 

The Board as a whole has the responsibility for risk oversight and management, with a focus on the most significant risks facing the Company, including strategic, competitive, economic, operational, financial, legal, regulatory, compliance, and reputational risks. In addition, Board Committees oversee and review risk areas that are particularly relevant to their respective areas of responsibility and oversight. The risk oversight responsibility of the Board and its Committees is supported by our management reporting processes, which are designed to provide visibility to the Board to those Company personnel responsible for risk assessment, including our management-led Enterprise Risk Management Committee, and information about management’s identification, assessment, and mitigation strategies for critical risks. The Company’s Enterprise Risk Management Committee is chaired by the Chief Financial Officer and composed of all members of our executive leadership team, as well as other key financial control representatives. The Board receives a quarterly Enterprise Risk Management risk report from the Chief Financial Officer during routine board meetings.

 

22		|

CORPORATE GOVERNANCE

 

The Board
•  Assesses major risks facing the Company and reviews options for risk mitigation with the assistance of management and the Board Committees   •  Monitors risks that have been delegated to a particular Committee through regular reports provided by the respective Board Committees
Audit Committee		Compensation Committee		Nominating Committee
•  Assesses major financial risk exposures and steps taken by management to address the same •  Responsible for the review and assessment of information technology and cybersecurity risk exposures and the steps taken to monitor and control those exposures •  Reviews risks identified during the internal and external auditors’ risk assessment procedures		•  Oversees risk management related to employee compensation plans and arrangements •  Assesses whether the Company’s compensation plans and practices may incentivize excessive risk-taking and the relationship between risk management policies and compensation •  The Compensation Committee has determined that the risks arising from the Company’s plans and policies are not reasonably likely to have a material adverse effect on the Company		•  Manages risks associated with corporate governance policies and practices •  Reviews any risks and exposures relating to director and executive succession planning •  Oversees risk management related to the Company’s governance, and social responsibility and sustainability programs

Director Selection and Nominations

 

The Nominating Committee periodically reviews the appropriate size of the Board, whether any vacancies are expected due to retirement or otherwise, and the need for particular expertise on the Board. In evaluating and determining whether to recommend a candidate to the Board, the Nominating Committee reviews the appropriate skills and characteristics required of Board members in the context of the background of existing members and in light of the perceived needs for the future growth of our business. This includes a review of issues of diversity in background and experience in different substantive areas such as retail operations, marketing, technology, distribution, mergers and acquisitions, and finance. The Board seeks the best director candidates based on the skills and characteristics required without regard to race, color, national origin, religion, disability, marital status, age, sexual orientation, gender, gender identity and expression, or any other basis protected by federal, state, or local law. In 2019, the Nominating Committee formalized its diversity focus by approving new Corporate Governance Guidelines mandating that any search that the Nominating Committee engages for a new director must include women and minority candidates in the pool from which the Nominating Committee selects director candidates; the Nominating Committee will review the efficacy of this focus on a going-forward basis. Board diversity is valued and provides many benefits, including creativity, variety in approaches to problem solving, and the ability to work effectively in our various markets. We also value a Board that reflects the diverse makeup of our associate and customer base.

 

CORPORATE GOVERNANCE

 

Director Skills and Qualifications

The Nominating Committee believes that the current members of the Board collectively have the level and balance of skills, experience, diversity, and character to execute the Board’s responsibilities. The table below is a summary of the range of skills and experiences that each director brings to the Board, each of which we find to be relevant to our business. Because it is a summary, it does not include all of the skills, experiences, and qualifications that each director offers, and the fact that a particular experience, skill, or qualification is not listed does not mean that a director does not possess it. All of our directors exhibit high integrity, an appreciation for diversity of background and thought, innovative thinking, a proven record of success, and deep knowledge of corporate governance requirements and best practices.

 

Attributes, Experience and Skills

Jay L. Schottenstein

Sujatha Chandrasekaran

Deborah A.            Henretta

Thomas R.     Ketteler

Cary D. McMillan

Janice E.      Page

David M.     Sable

Noel J.        Spiegel

Leadership Experience

✓

✓

✓

✓

✓

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Retail Industry Experience

✓

✓

✓

✓

✓

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✓

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Financial Literacy

✓

✓

✓

✓

✓

✓

✓

✓

Audit Committee Financial Expertise

✓

✓

✓

Risk Management Experience

✓

✓

✓

✓

✓

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✓

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International Experience

✓

✓

✓

✓

✓

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Marketing and Consumer Insight

✓

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✓

✓

Technology and Digital Expertise

✓

✓

✓

✓

✓

Real Estate Experience

✓

✓

✓

Crisis Management Experience

✓

✓

✓

✓

Mergers and Acquisitions Experience

✓

✓

✓

✓

✓

✓

✓

✓

Corporate Social Responsibility Experience

✓

✓

✓

✓

✓

Other Public Company Board Service

✓

✓

✓

✓

✓

✓

✓

Director Tenure

The Nominating Committee and the Board believe it is important for the Board to be “refreshed” by adding new directors from time to time, balanced against the importance of having directors who have a deep, historical experience, and institutional knowledge of the Company, its strategies and market opportunities and challenges. The Nominating Committee and the Board also believe that our long-serving directors bring critical skills and a historical perspective to the Board, which are highly relevant in a cyclical business such as retail. In addition, the Nominating Committee and the Board believe that longer-serving directors have a deep knowledge and understanding of our business, balanced against the fresh information and perspectives brought by our newer directors. We maintain a director retirement policy under which no director may be appointed or nominated to a new term if he or she would be age 78 or older at the time of election, unless otherwise determined by the Board.

Director Nominations

Candidates may come to the attention of the Nominating Committee from a variety of sources, including current Board members, stockholders and management. All candidates are reviewed in the same manner, regardless of the source of the recommendation. The Nominating Committee has retained the services of a search firm in the past to assist in identifying and evaluating qualified director candidates. The Nominating Committee will consider the recommendations of stockholders regarding potential director candidates. See “Submission of Nominations and Proposals for the 2021 Annual Meeting” for information regarding the submission of director nominee recommendations.

 

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CORPORATE GOVERNANCE

 

Director Independence

 

Our Board is 88% independent and such independent oversight bolsters our success. Our Board has determined that each of the following non-employee directors qualifies as “independent” in accordance with the listing requirements of the NYSE and applicable SEC rules:

 

Sujatha Chandrasekaran

Deborah A. Henretta

Thomas R. Ketteler

Cary D. McMillan

Janice E. Page

David M. Sable

Noel J. Spiegel

In particular, the Board affirmatively determined that none of these directors had relationships that would cause them not to be independent under the specific criteria of Section 303A.02 of the NYSE Listed Company Manual. The Board also determined that each member of the Audit Committee meets the heightened independence standards required for audit committee members under the NYSE listing standards and applicable SEC rules, and considered the additional factors under the NYSE listing standards relating to members of the Compensation Committee before determining that each member of the Compensation Committee is independent.

In making these determinations, the Board took into account all factors and circumstances that it considered relevant, including the following:

 

•

Whether the director is currently, or at any time during the last three years was, an employee of the Company or any of its subsidiaries;

 

•

Whether any immediate family member of the director is currently, or at any time during the last three years was, an executive officer of the Company or any of its subsidiaries;

 

•

Whether the director is an employee or any immediate family member of the director is an executive officer of a company that has made payments to, or received payments from, the Company or any of its subsidiaries for property or services in an amount that is in excess of the greater of $1 million, or 2% of such other company’s consolidated fiscal gross revenues in the current year or any of the past three fiscal years;

 

•

Whether the director is an executive officer of a charitable organization that received contributions from the Company or any of its subsidiaries in the past three years in an amount that exceeds the greater of $1 million, or 2% of the charitable organization’s consolidated gross revenues;

 

•

Whether the director or any of the director’s immediate family members is, or has been in the past three years, employed by a company that has or had, during the same period, an executive officer of the Company on its compensation committee;

 

•

Whether the director or any of the director’s immediate family members is, or has been in the past three years, a partner or employee of the Company’s independent registered public accounting firm; and

 

•

Whether the director or any of the director’s immediate family members accepted any payment from the Company or any of its subsidiaries in excess of $120,000 during the current fiscal year or any of the past three fiscal years, other than compensation for Board or Board committee service and pension or other forms of deferred compensation for prior service.

Mr. Schottenstein is not independent because he is an executive officer of the Company. See “Related Party Transactions” for information regarding our policy on related party transactions and transactions with affiliates of Mr.  Schottenstein, who is our sole employee director.

Board Leadership Structure

 

The current leadership structure of our Board consists of a combined Executive Chairman and Chief Executive Officer position that is held by Mr. Schottenstein and a Lead Independent Director appointed annually by the independent directors. The Board

 

CORPORATE GOVERNANCE

 

has determined that combining the positions of Executive Chairman and Chief Executive Officer is most appropriate for the Company at this time. Having Mr. Schottenstein in this combined position provides unified leadership and direction to the Company and strengthens his ability to develop and implement strategic initiatives. His duties include presiding over meetings of the Board, setting meeting agendas and schedules of the Board in collaboration with the Lead Independent Director, and providing strategic insight and guidance to the Board. Our Board believes that the current Board composition, along with an emphasis on Board independence, provides effective independent oversight of management. Mr. Spiegel served as our Lead Independent Director for Fiscal 2019.

Our Corporate Governance Guidelines establish robust and well-defined duties for our Lead Independent Director. Our Board’s support of the current leadership structure is premised on these duties being transparently disclosed, comprehensive in nature, and actively exercised. The Lead Independent Director is responsible for:

 

•

Presiding over the meetings of independent directors;

 

•

Serving as a liaison between the Chair and independent directors;

 

•

Having input on information sent to the Board;

 

•

Collaborating with the Chair on meeting agendas for the Board; and

 

•

Approving meeting schedules to ensure that there is sufficient time for discussion of all agenda items.

The Lead Independent Director also has the authority to call meetings of the independent directors, and, if requested by major stockholders, is available, when appropriate, for consultation and direct communication with our stockholders. We believe that this leadership structure provides our Board with the greatest depth of leadership and experience, while also providing independent oversight of the Company.

Board Practices

 

Meetings of Independent Directors

The Board’s policy is to have the independent directors meet separately in executive session in connection with each regularly scheduled Board meeting (at least four times annually). During each meeting of the independent directors, the Lead Independent Director will preside and lead the discussion.

Self-Assessments

We annually evaluate the performance of the Board and its Committees. The Board believes it is important to assess both its overall performance and the performance of its Committees, and to solicit and act upon feedback received, where appropriate. As part of the Board’s self-assessment process, directors consider various topics related to Board composition, structure, effectiveness, and responsibilities, as well as the overall mix of director skills, experience, and backgrounds.

Director Education/Orientation

Our Board believes that director education is vital to the ability of directors to fulfill their roles, and supports Board members in their continuous learning. The Board encourages directors to participate annually in external continuing director education programs, and we reimburse directors for their expenses associated with this participation. Our directors also attend professional development forums and industry-leading conferences convened by the NACD, external accounting firms, and retail/brand organizations focused on topics that are relevant to their duties as a director. Continuing director education is also provided during Board meetings and other Board discussions as part of the formal meetings, and as stand-alone information sessions outside of meetings. Each year, we hold a two-day educational program covering topics such as business developments and strategy, developments in corporate governance, evolving retail trends, and fiduciary duties. During Fiscal 2019, our Board participated in roundtable discussions with our advisors on topics including governance matters, executive compensation, regulatory developments, and workplace culture and anti-harassment. The Board also participated in learning opportunities with management on numerous subjects, including those related to our stockholder engagement activities, regulatory developments, technology, crisis management, and cybersecurity matters.

All new directors also participate in our director orientation program during their first six months on our Board. The Board believes that it is important for each newly elected director to have an understanding of our Company, the specialty retail industry, and his or her duties as a director. We provide this initial information through a combination of reference materials, formal meetings with

 

26		|

CORPORATE GOVERNANCE

 

business leaders and tours of our facilities/store locations. The orientation program is designed to familiarize new directors with the Company’s businesses, strategies and challenges. We believe this on-boarding approach over the first six months of Board service, coupled with participation in regular Board and committee meetings, provides new directors with a strong foundation in our Company’s businesses, connects directors with members of management with whom they will interact and oversee, and accelerates their effectiveness to engage fully in Board deliberations.

Board Committees

 

The Board has a standing Audit Committee, a standing Compensation Committee and a standing Nominating Committee. These Committees are governed by written charters, which were approved by the Board and are available on our Investors website at investors.ae.com.

The following sets forth Committee memberships as of the date of this Proxy Statement.

 

Director		Audit Committee		Compensation Committee		Nominating Committee
Jay L. Schottenstein, Executive Chairman of the Board and Chief Executive Officer		—		—		—
Sujatha Chandrasekaran
Deborah A. Henretta
Thomas R. Ketteler
Cary D. McMillan
Janice E. Page
David M. Sable
Noel J. Spiegel, Lead Independent Director

 

= Member

= Committee Chair

= Audit Committee Financial Expert

 

 

CORPORATE GOVERNANCE

 

		Board Committee Responsibilities
						Responsibilities		Committee Members		Meetings in Fiscal 2019
		AUDIT COMMITTEE				The primary function of the Audit Committee is to assist the Board with oversight of:   •  the integrity of the financial statements;   •  the qualifications, performance and independence of the independent registered public accounting firm;   •  the performance of the internal audit function; and   •  our compliance with regulatory and legal requirements, including the financial reporting and disclosure process.   The Audit Committee also reviews, approves, and monitors the terms of any new related party transactions, as required, in accordance with the policy developed and approved by the Audit Committee.   The Board has determined that each member of the Audit Committee meets all applicable independence and financial literacy requirements under the NYSE listing standards.		Sujatha Chandrasekaran   Deborah A. Henretta   Thomas R. Ketteler *   Cary D. McMillan *   Janice E. Page   David M. Sable   Noel J. Spiegel (Chair)*   * Audit Committee financial experts		9
		COMPENSATION COMMITTEE				The primary function of the Compensation Committee is to aid the Board in meeting its responsibilities with regard to oversight and determination of executive compensation. Among other matters, the Compensation Committee:   •  reviews, recommends, and approves salaries and other compensation of executive officers; and   •  administers our stock award and incentive plans (including reviewing, recommending, and approving stock award grants to executive officers).   The Compensation Committee has the authority to retain a compensation consultant after taking into consideration all factors relevant to the adviser’s independence from management, including those specified in Section 303A.05(c) of the NYSE Listed Company Manual.   The Compensation Committee has the authority to delegate its authority to subcommittees, including subcommittees consisting solely of one or more persons, other Board members, and/or officers. Additionally, the Compensation Committee may delegate to the CEO the authority to review and grant equity awards to employees who are not executive officers.   All members of the Compensation Committee are independent under applicable NYSE listing standards.		Sujatha Chandrasekaran   Deborah A. Henretta   Thomas R. Ketteler   Cary D. McMillan (Chair)   Janice E. Page   David M. Sable   Noel J. Spiegel		9

 

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CORPORATE GOVERNANCE

 

		Board Committee Responsibilities
						Responsibilities		Committee Members		Meetings in Fiscal 2019
		NOMINATING COMMITTEE				The function of the Nominating Committee is to aid the Board in meeting its responsibilities with regard to:   •  the organization and operation of the Board;   •  selection of nominees for election to the Board;   •  the evaluation of Board procedures and performance; and   •  social corporate responsibility, sustainability, and other corporate governance matters.   The Nominating Committee developed and reviews annually our Corporate Governance Guidelines, which were adopted by the Board and are available under the ”Corporate Governance” section of our website at investors.ae.com.   All members of the Nominating Committee are independent under NYSE listing standards.		Sujatha Chandrasekaran   Deborah A. Henretta   Thomas R. Ketteler   Cary D. McMillan   Janice E. Page (Chair)   David M. Sable   Noel J. Spiegel		5

Stockholder Outreach

 

We welcome feedback and value regular dialogue with our stockholders. In Fiscal 2019, the Company continued to have extensive engagement with our stockholders. On a regular basis, we invite stockholders to visit with senior management. We also participate in numerous investor conferences and events, during which we meet with current and prospective stockholders. These meetings are generally focused on Company performance and our long-term strategic initiatives, aimed at driving growth and stockholder returns. The content of these discussions were reported to the Board, and management and the Board discussed comments and business insights provided by these stockholders. We expect to continue such discussions prior to the 2020 Annual Meeting and, as a matter of policy and practice, foster and encourage engagement with our stockholders on an ongoing basis.

Communications with the Board

 

The Board provides a process for stockholders and all interested parties to send communications to the independent members of the Board, as described on our Investors website at investors.ae.com.

Stockholders wishing to communicate with the Board may send an email to boardofdirectors@ae.com or write to: American Eagle Outfitters, Inc. at our principal executive offices located at 77 Hot Metal Street, Pittsburgh, PA 15203, c/o the Corporate Secretary. Communications intended for a specific director or directors (such as the Lead Independent Director or independent directors) should be addressed to his, her or their attention c/o the Corporate Secretary at this address. Communications received from stockholders are provided directly to Board members following receipt of the communications (other than spam, junk mail, mass mailings, solicitations, resumes, job inquiries, or other matters unrelated to the Company).

Director Attendance

 

During Fiscal 2019, the Board met six times and each member of the Board attended no fewer than 75% of the total number of meetings of the Board and of the Board Committee(s) on which such director served for the period of such service. It is our expectation, but not a requirement, that all current directors attend the Annual Meeting of Stockholders. All members of the Board attended our 2019 Annual Meeting.

 

CORPORATE GOVERNANCE

 

Related Party Transactions

 

We have a Related Party Transaction Policy (the “Policy”) to allow us to identify, document, and properly disclose related party transactions. The Policy applies to our directors and executive officers, as well as all associates who have authority to enter into commitments on behalf of the Company. Under the Policy, a related party transaction is any transaction to which we or any of our subsidiaries is a participant and in which a related party has a direct or indirect material interest. Examples of transactions include the purchase or sale of goods, the provision of services, the rental of property, or the licensing of intellectual property rights. Additionally, the following constitute related party transactions: (1) transactions where a related party or a member of such related party’s immediate family is a supplier of goods or services, owns or is employed by a business that supplies us; (2) the employment of a member of such related party’s immediate family by us; or (3) an applicable related party’s service on the board of directors of a business that supplies goods or services to us. Certain related party transactions must be approved in advance by the Audit Committee if they involve a significant stockholder, director, or executive officer. All other related party transactions must be disclosed in writing to, and approved in advance by, our General Counsel and our Chief Financial Officer. Each quarter, each individual covered by the Policy is required to certify that any related party transaction has been fully and accurately disclosed in our filings with the SEC.

In the ordinary course of business, we have entered into agreements with affiliates of Jay L. Schottenstein, our Executive Chairman of the Board and Chief Executive Officer. We believe that each of these agreements is on terms at least as favorable to us as could be obtained in an arm’s length transaction with an unaffiliated third party. The material terms of these transactions are described below. In each case, the transaction was approved in advance by the Audit Committee in accordance with our Policy.

Leases

During Fiscal 2016, we entered into a store lease for an AE flagship store in Las Vegas with SG Island Plaza LLC (“SG Island Plaza”), an entity in which an affiliate of Mr. Schottenstein has a 25% interest. Pursuant to that lease, we incurred rent and other expenses of approximately $2.8 million during Fiscal 2019. In addition to these charges, we also may incur an annual payment equal to a percentage of the applicable store’s gross sales in excess of specified thresholds. The Company did not incur any such percentage rent payments related to this lease in Fiscal 2019. The lease expires in September 2027.

In April 2018, we entered into a store lease for an Aerie store in Las Vegas with SG Island Plaza. Pursuant to that lease, we incurred rent and other expenses of approximately $1.7 million during Fiscal 2019. In addition to these charges, we also may incur an annual payment equal to a percentage of the applicable store’s gross sales in excess of specified thresholds. The Company did not incur any such percentage rent payments related to this lease in Fiscal 2019. The lease expires in January 2029.

Agreement for Media Services

The Company has an agreement with Retail Entertainment Design, LLC (“R.E.D.”) for in-store music program services. A majority of R.E.D. is owned by Jubilee-RED LLC, which is indirectly owned by trusts for which Mr. Schottenstein serves as trustee. Mr. Schottenstein does not receive any remuneration for serving as trustee of the trusts. Payments by the Company to R.E.D. during Fiscal 2019 under the agreements totaled approximately $0.8 million.

TACKMA Inventory Purchase

During Fiscal 2019, the Company entered into transactions with TACKMA LLC for the purchase of American Eagle inventory totaling $0.9 million. TACKMA is indirectly owned by a trust benefitting Jeffrey Schottenstein, Mr. Schottenstein’s son.

Green Growth Brands Merchandise Agreement

The Company entered into transactions with Green Growth Brands LLC (“GGB”) in Fiscal 2019 for the purchase of American Eagle and Aerie health and beauty product inventory totaling $3.7 million. An affiliate of Mr. Schottenstein owns approximately 20% of GGB.

 

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CORPORATE GOVERNANCE

 

Director Compensation

 

Directors who are employees of the Company do not receive additional compensation for serving as directors. The table below sets forth the compensation for directors who were not employees of the Company during Fiscal 2019. In addition, we pay attorneys’ fees related to the preparation and filing of director stock ownership forms with the SEC. We also reimburse travel expenses to attend Board and Committee meetings and director continuing education expenses. The Compensation Committee is charged with reviewing and making recommendations to the Board regarding director compensation. In making its recommendations, the Compensation Committee considers the overall size of the Board, the significant time committed by each of our directors to the performance of their duties, as well as peer data and input from the Compensation Committee’s independent compensation consultant. In the past, the Compensation Committee has engaged FW Cook to conduct comprehensive reviews and competitive assessments of the Company’s non-employee director compensation program. The Board did not make any changes to its director compensation program during Fiscal 2019.

 

Fiscal 2019 Director Compensation(1)
		Fees Earned or Paid in Cash(2)					Stock Awards(3)					Total
Sujatha Chandrasekaran				$113,333				$	150,000				$	263,333
Deborah A. Henretta				$110,027				$	144,167				$	254,194
Thomas R. Ketteler				$130,000				$	150,000				$	280,000
Cary D. McMillan				$155,000				$	150,000				$	305,000
Janice E. Page				$150,000				$	150,000				$	300,000
David M. Sable				$110,833				$	150,000				$	260,833
Noel J. Spiegel				$225,000				$	150,000				$	375,000

 

(1)	Fiscal 2019 refers to the 52-week period ended February 1, 2020.

 

(2)	Amounts represent fees earned or paid during Fiscal 2019. The table below sets forth the annual director cash fees, which are payable in installments on the first business day of each calendar quarter.

 

 

The Board has a per meeting fee of $2,500 for any Board and/or Committee meetings attended by a non-employee director in excess of the planned number of meetings for the fiscal year. The additional meeting fees are payable quarterly following the end of the previous quarter.

 

(3)

Amounts include stock awards granted in Fiscal 2019 valued on the date of grant. Non-employee directors receive an automatic, fully-vested stock grant of a number of shares equal in value to $37,500 based on the closing sale price per share of our stock on the first day of each calendar quarter under our 2017 Stock Award and Incentive Plan, as Amended and Restated, effective March 14, 2018 (the “2017 Plan”). Directors may defer receipt of up to 100% of the shares payable under the quarterly stock grant in the form of share units. Messrs. Ketteler, McMillan, Sable, and Spiegel and Ms. Henretta elected to defer their quarterly share retainers during calendar years 2019 and 2020.

 

See “Ownership of Our Shares” for information about stock ownership guidelines applicable to our Board.

Compensation of Executive Chairman of the Board

Jay L. Schottenstein, our Chief Executive Officer, also serves as our Executive Chairman of the Board and does not receive additional compensation for this role. Mr. Schottenstein’s Fiscal 2019 compensation is set forth under the section titled “Compensation Tables and Related Information.”

 

 

PROPOSAL TWO: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has appointed Ernst & Young LLP (“EY”) as our independent registered public accounting firm for the fiscal year ending January 30, 2021. Although stockholder ratification is not required by our bylaws or otherwise, the Board believes it is advisable to provide stockholders an opportunity to ratify this selection and is submitting the selection of EY to our stockholders for ratification as a matter of good corporate practice. In the event the stockholders do not ratify the appointment of EY, the Audit Committee will reconsider its appointment. In addition, even if the stockholders ratify the appointment of EY, the Audit Committee may, in its discretion, appoint a different independent registered public accounting firm at any time during the year if the Audit Committee determines that a change is in the best interest of the Company.

Representatives of EY are expected to be present at the 2020 Annual Meeting to respond to appropriate questions and to make a statement if such representatives so desire.

 

REPORT OF THE AUDIT COMMITTEE

The Audit Committee oversees our financial reporting process on behalf of the Board. Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited consolidated financial statements included in the Annual Report as of and for the year ended February 1, 2020 with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements.

The Audit Committee reviewed and discussed with the independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited consolidated financial statements with generally accepted accounting principles, its judgments as to the quality, not just acceptability, of our accounting principles and such other matters as are required to be discussed relating to the conduct of the audit under the auditing standards of the Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 1301 (Communications with Audit Committees). In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by the PCAOB and has discussed with the independent registered public accounting firm its independence from management and the Company, including the matters in the written disclosures required by Rule 3526 of the PCAOB, Communication with Audit Committees Concerning Independence, and considered the compatibility of nonaudit services with the firm’s independence.

The Audit Committee discussed with our internal auditors and our independent registered public accounting firm the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and the independent registered public accounting firm, with and without management present, to discuss the results of their examinations, their evaluations of our internal controls, and the overall quality of our financial reporting. The Audit Committee also carried out the additional responsibilities and duties as outlined in its charter.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board that the audited consolidated financial statements be included in the Annual Report on Form 10-K as of and for the year ended February 1, 2020 for filing with the Securities and Exchange Commission.

This report is not soliciting material, is not deemed to be filed with the SEC, and is not to be incorporated by reference in any filing of the Company under the Securities Act, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

This report has been furnished by the Audit Committee of the Board of Directors.

 

 

 

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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES

During Fiscal 2019, EY served as our independent registered public accounting firm and, in that capacity, rendered an unqualified opinion on our consolidated financial statements as of and for the year ended February 1, 2020.

The following table sets forth the aggregate fees billed to us by our independent registered public accounting firm in each of the last two fiscal years:

 

Description of Fees		Fiscal 2019				Fiscal 2018
Audit Fees		$	1,881,500			$	1,698,800
Audit-Related Fees			26,250				26,250
Tax Fees			467,434				381,487
All Other Fees			4,000				2,000
Total Fees		$	2,379,184			$	2,108,537

“Audit Fees” include fees billed for professional services rendered in connection with (1) the audit of our consolidated financial statements, including the audit of our internal control over financial reporting, and the review of our interim consolidated financial statements included in quarterly reports; (2) statutory audits of foreign subsidiaries; and (3) services that generally only the independent registered public accounting firm can reasonably be expected to provide, including comfort letters, consents, assistance with the review of registration statements filed with the SEC and consultation regarding financial accounting and/or reporting standards. “Audit-Related Fees” include fees billed for audits of the Company’s employee benefit plan. “Tax Fees” primarily include fees billed related to federal, state, and local tax compliance and consulting. “All Other Fees” include fees billed for accounting research software.

The Audit Committee has adopted a policy that requires pre-approval of all audit services and permitted non-audit services to be performed by the independent registered public accounting firm, subject to the de minimis exceptions for non-audit services as described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee prior to the completion of the audit. The Audit Committee may form and delegate the authority to grant pre-approvals of audit and permitted non-audit services to subcommittees consisting of one or more members when it deems appropriate, provided that decisions of such subcommittee shall be presented to the full Audit Committee at its next scheduled meeting. All audit and non-audit services provided to the Company by EY during Fiscal 2019 were pre-approved by the Audit Committee in accordance with such policy.

 

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

Background and Summary of 2020 Plan

At the 2020 Annual Meeting, stockholders will be asked to approve the adoption of the American Eagle Outfitters, Inc. 2020 Stock Award and Incentive Plan (the “2020 Plan”) to serve as the successor to the 2017 Stock Award and Incentive Plan, as amended (the “2017 Plan”). The Board believes that equity awards are a critical part of our compensation program and that the 2017 Plan and its predecessor, the 2014 Stock Award and Incentive Plan (together, the “Prior Plans”), have been effective in attracting and retaining employees, non-employee directors, and consultants of outstanding ability. Our compensation philosophy emphasizes equity-based awards because they align the interests of our executive officers, directors, and key employees with those of our stockholders, encourage long-term retention, and incentivize long-term value creation. To enable the Company to continue offering meaningful equity-based incentives to key employees, non-employee directors, and consultants, the Board believes that it is both necessary and appropriate to increase the number of shares available for these purposes.

As a result, on April 13, 2020, our Board, on the recommendation of the Compensation Committee, unanimously approved and adopted the 2020 Plan, subject to stockholder approval. If approved by stockholders at the 2020 Annual Meeting, the 2020 Plan will be effective upon such approval (the “Effective Date”). If approved by stockholders, the 2020 Plan will replace the 2017 Plan, and no further awards will be made under the 2017 Plan after the Effective Date. However, each outstanding award under the Prior Plans, as applicable, will remain outstanding under the applicable plan and will continue to be governed under its terms and any applicable award agreement. If the 2020 Plan is not approved by the Company’s stockholders, the 2017 Plan will remain in effect as it existed immediately prior to the 2020 Annual Meeting, and awards may continue to be made thereunder until the 2017 Plan terminates or is superseded.

The Board believes that the 2020 Plan will promote the interests of stockholders and is consistent with principles of good corporate governance, including:

 

✓

Reserve Shares for Future Equity Awards. The 2020 Plan will reserve a sufficient number of shares to enable us to grant equity awards, which is a critical component of our compensation program that is designed to attract, motivate, and retain employees, including our executive officers, non-employee directors, and consultants, whom we expect will contribute to our financial success.

 

✓

Independent Committee. The 2020 Plan will be administered by our Compensation Committee, which is composed entirely of independent directors who meet NYSE standards for independence.

 

✓

No Discounted Options or SARs. All options and stock appreciation rights (“SARs”) awarded under the 2020 Plan must have an exercise or base price that is not less than the fair market value of a share of common stock on the date of grant.

 

✓

Limits on Non-Employee Director Awards. The 2020 Plan contains a limit on the aggregate value of equity awards that may be made, together with any cash fees that may be paid, to non-employee directors in a year.

 

✓

Minimum Vesting. Under the 2020 Plan, awards generally may not vest in less than one year from the date of grant, subject to certain exceptions discussed below.

 

✓

No Repricing. The 2020 Plan prohibits any repricing of options and SARs or cash buyouts of underwater options and SARs, unless approved by stockholders or in connection with a corporate transaction involving the Company.

 

✓

No Liberal Share Recycling of Options or SARs. Shares underlying options and SARS issued under the 2020 Plan will not be recycled into the share pool under the 2020 Plan if they are withheld in payment of the exercise price of the award or to satisfy tax withholding obligations in respect of the such awards.

 

✓

Restrictions on Dividends and Dividend Equivalents. The 2020 Plan prohibits participants from receiving current dividends or dividend equivalents that are paid before the underlying award vests and is paid.

 

✓

Performance Awards. Under the 2020 Plan, the Compensation Committee may grant performance-based awards to ensure alignment between the interests of award recipients with those of our stockholders.

 

✓

Clawback Policy. Awards under the 2020 Plan will be subject to clawback under any Company clawback policy or as required by law.

 

✓

No Tax Gross-Ups. The 2020 Plan does not provide for tax gross-ups with respect to awards.

 

34		|

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Determination of Shares To Be Available for Issuance

 

Increase in Share Pool

The aggregate number of shares of the Company’s common stock that may be issued under the 2020 Plan is (i) 10,200,000 shares, plus (ii) any shares that remain available for issuance under the 2017 Plan as of the Effective Date, plus (iii) any Returning Shares (as defined below), subject to proportionate adjustment in the event of stock splits and similar events. Such shares may be used for all forms of awards under the 2020 Plan and also may be used to settle awards outstanding under the 2017 Plan, to the extent shares are not available under the 2017 Plan.

When deciding on the number of shares to be available for awards under the 2020 Plan, the Board considered a number of factors, including the number of shares available under the 2017 Plan, the number of shares needed for future awards, a dilution analysis, and the current and future accounting expenses associated with our equity award practices.

Based on our current equity award practices, the Board estimates that the authorized shares under the 2020 Plan may be sufficient to provide us with an opportunity to grant equity awards for approximately three to five years, in amounts determined appropriate by the Compensation Committee, which will administer the 2020 Plan (as discussed below). This is only an estimate, and circumstances could cause the share reserve to be used more quickly or more slowly. These circumstances include, but are not limited to, the future price of shares of our common stock, the mix of cash, options and full value awards provided as long-term incentive compensation, grant amounts provided by our competitors, payout of performance-based awards in excess of target in the event of superior performance, hiring activity, and promotions during the next few years.

Overhang as of February 1, 2020

The following table sets forth certain information as of February 1, 2020, unless otherwise noted, with respect to the Company’s equity compensation plans:

 

Stock Options/SARs Outstanding		2,583,662
Weighted-Average Exercise Price of Outstanding Stock Options/SARs		$18.18
Weighted-Average Remaining Term of Outstanding Stock Options/SARS		4.9 years
Total Stock-Settled Full-Value Awards Outstanding		4,334,089
Remaining shares available for grant under the 2017 Plan*		3,685,676
Additional shares being requested under the 2020 Plan		10,200,000
Basic common shares outstanding as of the record date (April 8, 2020)		165,500,429

 

*

For reference purposes, the remaining shares available for grant under the 2017 Plan is denoted as of February 1, 2020. The number of shares to be rolled-over into the 2020 Plan will be equal to the actual number of shares which remain available for grant under the 2017 Plan as of the Effective Date. Upon stockholder approval of the 2020 Plan, no further awards will be made under the 2017 Plan or any Prior Plans.

Dilution Analysis

Our Board recognizes the impact of dilution on our stockholders and has evaluated this share request carefully in the context of the need to motivate, retain, and ensure that our leadership team and key employees are focused on our strategic priorities. The total fully-diluted overhang as of February 1, 2020, would be 11.1%. In this context, fully-diluted overhang is calculated as the sum of grants outstanding and shares available for future awards (numerator) divided by the sum of the numerator and basic common shares outstanding, with all data effective as of February 1, 2020. The Board believes that this number of shares of common stock represents a reasonable amount of potential equity dilution, which will allow us to continue awarding the equity awards that are vital to our equity compensation program.

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Burn Rate

The table below sets forth the following information regarding the awards granted under the 2017 Plan: (i) the burn rate for each of the last three calendar years and (ii) the average burn rate over the last three calendar years. The burn rate for a year has been calculated as follows:

 

All Stock Options Granted in the Applicable Year		÷		Weighted Average Number of Shares of Common Stock Outstanding for the Applicable Year
+
All Full Value Awards Granted in the Applicable Year (time-based awards valued when granted and performance-based awards valued when earned/vested)

 

Burn Rate
Award Type		2019				2018				2017				3-Yr. Avg.
A) Stock Options Granted			807,000				715,000				1,055,000
B) Restricted Stock Granted			1,261,000				971,000				1,497,000
C) Performance Shares Earned			245,000				930,000				957,000
D) Total Full-Value Shares (Performance Shares Earned)			1,506,000				1,901,000				2,454,000
E) Total Grants (Performance Shares Earned)			2,313,000				2,616,000				3,509,000
F) Wgt. Avg. Shares Outstanding			169,711,000				176,476,000				177,938,000
Burn Rate % (performance shares earned) (E ÷ F)			1.36%				1.48%				1.97%				1.61%

The Board believes that our compensation program, and particularly the granting of equity awards, allows us to align the interests of eligible participants who are selected to receive awards with those of our stockholders. The 2020 Plan is designed to enable us to formulate and implement a compensation program that will attract, motivate and retain executive officers and other key employees, non-employee directors, and consultants who we expect will contribute to our financial success. The Board believes that awards granted pursuant to the 2020 Plan are a vital component of our compensation program and, accordingly, that it is important that an appropriate number of shares of stock be authorized for issuance under the 2020 Plan.

Description of the Amended Plan

A copy of the 2020 Plan is attached to this Proxy Statement as Appendix A. The following description of certain features of the 2020 Plan is qualified in its entirety by reference to the full text of the 2020 Plan.

Purpose

The purpose of the 2020 Plan is to aid the Company in attracting, retaining, motivating, and rewarding eligible employees, non-employee directors, and consultants. The 2020 Plan aims to provide for equitable and competitive compensation opportunities, recognize individual contributions, reward achievement of Company goals, and promote the creation of long-term value for stockholders.

Plan Administration

The 2020 Plan will be administered by the Compensation Committee (for purposes of this Proposal No. 3, the “Committee”) or such other committee of the Board as may be designated by the Board to administer the 2020 Plan. Each member of such Committee must be a “non-employee director” as defined in Rule 16b-3 under the Exchange Act, and an independent director under the NYSE listing standards. The full Board may perform any function of the Committee except to the extent limited by NYSE rules, in which case the term Committee refers to the Board.

The Committee has the authority under the 2020 Plan to (i) select eligible persons to become participants; (ii) grant awards; (iii) determine the type and number of awards, the dates on which awards may be exercised and on which the risk of forfeiture or

 

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deferral or restricted period relating to awards will lapse or terminate, the acceleration of any such dates, the expiration date of any award, whether, to what extent, and under what circumstances an award may be settled, or the exercise price of an award may be paid, in cash, shares of common stock, other awards, or other property, and other terms and conditions of, and all other matters relating to, awards; (iv) prescribe award agreements and rules and regulations for the administration of the 2020 Plan and, in each case, applicable amendments; (v) construe and interpret the 2020 Plan and award agreements and correct defects, supply omissions or reconcile inconsistencies; and (vi) make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the 2020 Plan. Decisions of the Committee with respect to the administration and interpretation of the 2020 Plan will be final, conclusive, and binding.

Authorized Shares

The aggregate number of shares of the Company’s common stock that may be issued under the 2020 Plan is (i) 10,200,000 shares, plus (ii) any shares that are available for issuance under the 2017 Plan as of the Effective Date, plus (iii) any Returning Shares (as defined below), subject to proportionate adjustment in the event of stock splits and similar events.

Shares of common stock to be issued under the 2020 Plan may be authorized but unissued shares of our common stock or previously-issued shares acquired by the Company. As of March 30, 2020, the closing price of a share of our common stock was $8.15.

Share Counting Provisions

Each share underlying stock-settled awards will count as one share against the aggregate number of shares available for issuance under the 2020 Plan. For purposes of share counting, the number of shares to which an award relates will be counted against the aggregate share reserve at the grant date of the award, unless such number of shares cannot be determined at that time, in which case the number of shares actually distributed pursuant to the award shall be counted against the share reserve at the time of distribution. Awards related to or retroactively added to, or granted in tandem with, substituted for or converted into, other awards will be counted or not counted against the share reserve in accordance with procedures adopted by the Committee or its designee so as to ensure appropriate counting, but to avoid double counting.

Shares subject to awards, or outstanding awards under a Prior Plan, that terminate or expire unexercised, or are canceled, forfeited or lapse for any reason, and shares underlying awards that are ultimately settled in cash or property other than shares (collectively, “Returning Shares”), will again become available for future grants of awards under the 2020 Plan. Under the 2020 Plan, the following shares will not be used to replenish the plan share reserve: (i) shares delivered by the participant or withheld from an award to pay the exercise price of an award, (ii) shares delivered or withheld for the purpose of satisfying a tax withholding obligation relating to an option or SAR, (iii) shares not issued or delivered as a result of the net settlement of an outstanding option or SAR, and (iv) shares repurchased on the open market with the proceeds of option exercises. No awards may be granted under the 2020 Plan after the Company’s annual meeting of stockholders in 2030.

Eligibility

The Committee selects participants from among the employees, non-employee directors, and consultants of the Company and its affiliates. As of March 30, 2020, approximately 400 employees and seven non-employee directors would be eligible to participate in the 2020 Plan. Based upon Company practice, we do not currently expect to grant equity awards to consultants under the 2020 Plan. As of March 30, 2020, 369 employees, seven non-employee directors, and two consultants held awards granted under the Prior Plans. Because our executive officers and non-employee directors are eligible to receive awards under the 2020 Plan, they may be deemed to have a personal interest in the approval of this Proposal 3.

Limitations on Awards to Non-Employee Directors

Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares subject to awards granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during the fiscal year in respect of such director’s service as a member of the Board during such year (including service as a member or chair of any committees of the Board), cannot exceed $750,000 in total value (calculating the value of any such awards based on the grant date fair value of such awards for financial reporting purposes). The Committee may make exceptions to this limit for a non-executive chair of the Board or, in extraordinary circumstances, for other individual non-employee directors, as the Committee may determine in its discretion, provided that the non-employee director receiving such additional compensation may not participate in the decision to award such compensation.

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Types of Awards

The 2020 Plan provides for grants of options, SARs, restricted stock, restricted stock units, and other awards convertible into or otherwise based on shares of our stock. Any award may be granted as a performance-based award. Dividend equivalents may also be provided in connection with an award under the 2020 Plan, other than with respect to options or SARs. Such dividend equivalents will be subject to the same vesting terms as applied to the original award to which it relates.

 

•

Stock options provide the holder with the option to purchase shares of Company common stock and may be designated under the Code as nonstatutory stock options (which may be granted to all participants) or incentive stock options (which may be granted to officers and employees, but not to non-employee directors). The exercise price of an option cannot be less than the fair market value of a share of common stock on the grant date, and the term of an option cannot exceed 10 years from the date of grant.

 

•

SARs give the holder the right to receive the difference (payable in cash or stock, as specified in the award agreement) between the fair market value per share of Company common stock on the date of exercise over the base price of the award. The base price of a SAR cannot be less than the fair market value of a share of common stock on the grant date, and the term of a SAR cannot exceed 10 years from the date of grant.

 

•

Restricted stock is subject to restrictions on transferability and subject to forfeiture on terms set by the Committee.

 

•

Restricted stock units represent the right to receive shares of common stock (or an equivalent value in cash or other property, as specified in the award agreement) at a designated time in the future (i.e., following the end of a specified restricted period).

 

•

Performance-based awards represent restricted stock, restricted stock units, or other awards that provide the holder with right to receive cash, shares of common stock or other property, or any combination thereof, based on the achievement, or the level of achievement, of one or more performance goals during a specified performance period, as established by the Committee.

 

•

Awards in lieu of obligations. The Committee may grant stock as a bonus, or grant awards in lieu of other obligations of the Company to pay cash or deliver other property under the 2020 Plan or other plans or compensatory arrangements, subject to terms as established by the Committee.

 

•

Dividend equivalents entitle the participant to payments (or an equivalent value payable in stock or other property) equal to any dividends paid on the shares underlying an award other than a stock option or SAR. No dividends or dividends equivalents may be paid before the underlying award vests.

 

•

Other stock-based awards may be granted under the 2020 Plan, which are denominated or payable in, valued in whole or in part by reference to, or otherwise based on shares of our common stock. Cash awards also may be granted under the 2020 Plan.

Minimum Vesting Requirement

The Committee has the authority to determine the vesting schedule applicable to each award. Awards granted under the 2020 Plan will include vesting schedules under which no portion of the award will vest earlier than one year from the date of grant, other than (i) substitute awards granted in connection with awards that are assumed, converted or substituted pursuant to a merger, acquisition or similar transaction; (ii) shares delivered in lieu of fully vested cash obligations; (iii) awards to non-employee directors that vest on earlier of the one-year anniversary of the date of grant and the next annual meeting of stockholders that is at least 50 weeks after the immediately preceding year’s annual meeting; and (iv) any additional awards, up to a maximum of 5% of the available share reserve authorized for issuance under the 2020 Plan (subject to adjustment). The Compensation Committee has discretion to provide for accelerated exercisability or vesting of any award, including in cases of termination of service, death, disability or a change in control, in the terms of the award agreement or otherwise.

No Repricing

Except in connection with an equitable adjustment or a change in control, without the prior approval of the Company’s stockholders, no option or SAR may be amended to reduce the exercise price or base price, as applicable, below the exercise or base price as of the date the option or SAR was granted. In addition, and except in connection with an equitable adjustment or a change in control, without the prior approval of the Company’s stockholders, no option or SAR may be cancelled or surrendered in exchange for another award or cash when the exercise or base price, as applicable, exceeds the fair market value of one share of stock, and no option or SAR may be granted in exchange for, or in connection with, the cancellation or surrender of an option or SAR having a higher exercise or base price.

 

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PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Termination of Service

The Committee determines the effect of termination of employment or service on an award. Unless otherwise provided by the Committee, except in connection with a change in control, upon a termination of employment all unvested options and SARs will terminate and all other unvested awards will be forfeited.

Performance Criteria

The performance criteria used by the Committee in establishing goals for performance-based awards may consist of one or more criteria as determined by the Committee, including, without limitation:

 

•

Earnings or profitability measures (which include (i) net income; (ii) operating income; (iii) income (loss) per common share from continuing operations, either basic or fully diluted; (iv) net income (loss) per common share, either basic or fully diluted; (v) earnings before interest, taxes, depreciation, and amortization; (vi) earnings before interest and taxes; (vii) any pre-established derivative of revenue (gross, operating, or net); (viii) pre-tax operating income; (ix) inventory turnover or inventory shrinkage; (x) sales growth and volumes; (xi) percentage increase in total net revenue or comparable sales; and (xii) economic profit or value created);

 

•

Expense and efficiency measures (which include (i) gross margins, cost of goods sold, mark-ups or mark-downs; (ii) operating margins; (iii) selling, general and administrative (SG&A) expense; and (iv) other pre-established operating expenses);

 

•

Return measures (which include (i) total stockholder return; (ii) stock price; (iii) return on assets; (iv) return on investment; (v) return on capital; and (vi) return on equity);

 

•

Cash flow measures (which include (i) cash flow; (ii) free cash flow; (iii) cash flow return on investment; and (iv) net cash provided by operations);

 

•

Achievement of balance sheet, income statement, or cash-flow statement objectives;

 

•

Strategic or operational business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic expansion or new concept development goals; cost targets; customer satisfaction; employee satisfaction; human resources goals, including staffing, training and development and succession planning; supervision of litigation and information technology; and goals relating to acquisitions or divestitures of affiliates; and

 

•

Other financial, operational, strategic or individual performance criteria.

Performance criteria may be established on a Company-wide basis or with respect to one or more business units, divisions, or affiliates and may be expressed in absolute terms, or relative to (i) current internal targets or budgets, (ii) past performance of the Company (including the performance of one or more business units, divisions, or affiliates), (iii) performance of one or more peer companies, (iv) performance of a broad market index or an index covering a peer group of companies, or (v) other internal or external measures of the selected performance criteria, including on an individual basis, as appropriate.

Performance criteria that are financial metrics may be determined in accordance with GAAP or financial metrics that are based on, or able to be derived from GAAP, and may be adjusted when established or at any time thereafter to include or exclude any items otherwise includable or excludable under GAAP. Without limiting the generality of the immediately preceding sentence, the determination of performance with respect to a performance criteria may include or exclude (i) items that are unusual in nature and items that are infrequently occurring; (ii) changes in applicable laws, regulations, or accounting principles; (iii) other events such as restructurings, discontinued operations, asset write-downs, significant litigation or claims, judgments or settlements, acquisitions or divestitures, reorganizations or changes in the corporate structure or capital structure of the Company, foreign exchange gains and losses, change in the fiscal year of the Company, business interruption events, unbudgeted capital expenditures, unrealized investment gains and losses, and impairments; or (iv) such other factors as the Committee may determine.

Transferability

In general, awards under the 2020 Plan may not be transferred except by will or by the laws of descent and distribution, unless (for awards other than ISOs) otherwise provided by the Committee in accordance with the terms of the 2020 Plan. For the avoidance of doubt, no awards may be transferred for value or consideration.

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Forfeiture Provisions and Clawback; Hedging and Pledging Policies

The Committee may condition an award (or the right to receive underlying shares, cash or other property) upon the participant’s compliance with non-compete, non-solicit, non-disparagement, and confidentiality provisions.

Awards also are subject to forfeiture in the event that a participant engages in misconduct that causes or partially causes the need for restatement of financial statements that would have resulted in a lower award where the payment was predicated upon the achievement of certain financial results. Awards granted under the 2020 Plan are subject to the terms of the Company’s recoupment, clawback or similar policy as it may be in effect from time to time or as required by law, as well as any other policy of the Company that applies to awards, such as anti-hedging or pledging policies, as they may be in effect from time to time.

Change in Control Provisions

Unless otherwise provided in the award agreement or another operative agreement, the following provisions will apply in the case of a “Change in Control” of the Company (as defined in the 2020 Plan):

With respect to awards assumed by the surviving entity or otherwise equitably converted or substituted in connection with a Change in Control, if within 18 months after the effective date of the Change in Control, a participant’s employment is terminated without “Cause” (as such term is defined in the 2020 Plan), then:

 

•

all of the participant’s outstanding options and SARs will become fully vested and remain exercisable for a period of 90 days (or such longer period as provided in the award agreement) or until the earlier expiration of the original term of the option or SAR;

 

•

all time-based vesting restrictions on the participant’s outstanding awards will lapse as of the date of termination, and payment of such awards will be made within 30 days after the date of the participant’s termination; and

 

•

in the case of a performance-based award, the value of such award will be converted into time-based restricted stock and will vest at the end of the performance period, subject to the provisions set forth immediately above, with the value of the award measured as follows: (i) if 50% or more of the applicable performance period has been completed as of the date of the Change in Control, then the value of such award will be converted into restricted stock based on performance as of the time of the Change in Control (if reasonably determinable); or (ii) if (x) less than 50% of the performance period has been completed as of the date of the Change in Control or (y) performance is not reasonably determinable as of the date of the Change in Control, then the value of such award will be converted into restricted stock based on the award’s target level value.

Upon the occurrence of a change of control in which awards are not assumed by the surviving entity or otherwise equitably converted or substituted in connection with the change of control:

 

•

all outstanding options and SARs will become fully vested and remain exercisable for a period of 90 days (or such longer period as provided in the award agreement) or until the earlier expiration of the original term of the option or SAR, provided that any option or SAR whose exercise price is greater than the current fair market value of the underlying shares may be canceled without payment of any consideration;

 

•

time-based vesting restrictions on outstanding awards will lapse, and payment of such awards will be made at the time of the Change in Control; and

 

•

all performance criteria and other conditions to payment of outstanding performance-based awards will be deemed to be achieved or fulfilled, measured as follows: (i) if 50% or more of the applicable performance period has been completed as of the date of the Change in Control, then the value of such award will be based on performance as of the time of the Change in Control (if reasonably determinable); or (ii) if (x) less than 50% of the performance period has been completed as of the date of the Change in Control or (y) performance is not reasonably determinable as of the date of the Change in Control, then the value of such award will be based on the award’s target level value, and payment of such awards on the applicable basis shall be made or otherwise settled at the time of the Change in Control.

Notwithstanding the foregoing, to the extent required by Code Section 409A, an award will vest on the basis described above but remain payable on the date(s) provided in the underlying award agreements.

Adjustment

In the event of a merger, reorganization, recapitalization, stock dividend, stock split or other change in corporate structure affecting our common stock, the Committee shall make adjustments in the aggregate number and kind of shares reserved for issuance under the 2020 Plan, in the maximum number of shares that may be granted in any calendar year to any participant, in the number, kind and exercise price of shares subject to outstanding awards, and such other adjustments as it may determine to be appropriate to ensure that participants are treated equitably and there is no dilution or enlargement of rights.

 

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PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Amendment and Termination

The Board may amend, suspend or terminate the 2020 Plan at any time, except that no amendment, suspension or termination may be made without the approval of the Company’s stockholders if required by applicable law or stock exchange listing requirement, or if the amendment, alteration or other change materially increases the benefits accruing to participants, increases the number of shares available under the 2020 Plan or, or if the Board in its discretion determines that obtaining such stockholder approval is for any reason advisable. Without the prior approval of the Company’s stockholders, the 2020 Plan may not be amended to permit the repricing of options or SARs, directly or indirectly.

The Committee may amend or terminate outstanding awards; however, such amendments may require the consent of the participant.

Certain Material U.S. Federal Income Tax Consequences

The following is a brief summary of the principal U.S. federal income tax consequences with respect to the Company and 2020 Plan participants, and is based upon an interpretation of present U.S. federal income tax laws, regulations and decisions, all of which are subject to change. This summary is intended for general information only and does not purport to be a complete analysis of all of the potential tax effects of the 2020 Plan, or constitute tax advice to the participants. State, local, and foreign tax consequences are not discussed, and may vary from jurisdiction to jurisdiction. Tax consequences may vary with the identity of the recipients and the method of payment or settlement. The Company does not provide tax advice to participants and each participant should rely on his or her own tax advisers regarding federal income tax treatment under the 2020 Plan. To the extent that any awards under the 2020 Plan are subject to Section 409A of the Code, the following discussion assumes that such awards will be designed to conform to the requirements of Section 409A of the Code and the regulations promulgated thereunder (or an exception thereto). The 2020 Plan is not subject to the protective provisions of the Employee Retirement Income Security Act of 1974 and is not qualified under Section 401(a) of the Code.

Nonstatutory Stock Options

There will be no federal income tax consequences to the optionee or to the Company upon the grant of a nonstatutory stock option under the 2020 Plan. When the optionee exercises a nonstatutory stock option, however, he or she will recognize ordinary income in an amount equal to the excess of the fair market value of the stock received upon exercise of the stock option at the time of exercise over the exercise price, and the Company will be allowed a corresponding federal income tax deduction, subject to any applicable limitations under Code Section 162(m). Any gain (or loss) that the optionee realizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain (or loss), depending on how long the shares were held. The capital gain (or loss) will be short-term if the option shares are disposed of within one year after the nonstatutory stock option is exercised, and long-term if the option shares are disposed of more than 12 months as of the sale date.

Incentive Stock Options

Options issued under the 2020 Plan and designated as incentive stock options are intended to qualify as such under Section 422 of the Code. Under the provisions of Section 422 of the Code and the related regulations promulgated thereunder, there will be no federal income tax consequences to the optionee or to the Company upon the grant or exercise of an incentive stock option (note, however, that the difference between the fair market value of the option shares at the time of exercise and the exercise price will be an item of adjustment for purposes of determining the optionee’s alternative minimum taxable income). If the optionee holds the option shares for the required holding period of at least two years after the date of grant and one year after exercise, the difference between the exercise price and the amount realized upon sale or disposition of the option shares will be long-term capital gain or loss, and the Company will not be entitled to a federal income tax deduction. If the optionee disposes of the option shares in a sale, exchange or other disqualifying disposition before the required holding period ends, in general, he or she will recognize taxable ordinary income in an amount equal to the excess of the fair market value of the option shares at the time of exercise over the exercise price (and capital gain on the excess, if any, of the amount realized on the disqualifying disposition over the fair market value of the shares of common stock at the time of exercise), and the Company generally will be allowed a federal income tax deduction equal to such amount, subject to any applicable limitations under Code Section 162(m). Any gain that the optionee realizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain, depending on how long the optionee held the shares.

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

Stock Appreciation Rights

SARs are treated very similarly to non-statutory stock options for federal tax purposes. A participant receiving a SAR under the 2020 Plan will not recognize income, and the Company will not be allowed a federal income tax deduction, at the time the award is granted. When the participant exercises the SAR, however, he or she will recognize compensation taxable as ordinary income in an amount equal to the excess of the fair market value of stock (or cash) received upon exercise of the SAR at the time of exercise over the exercise price, and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m). If the SAR is paid in stock, then any gain (or loss) that the participant realizes when he or she later sells or disposes of the SAR shares will be short-term or long-term capital gain (or loss), depending on how long the shares were held. The capital gain (or loss) will be short-term if the SAR shares are disposed of within one year after the SAR is exercised, and long-term if the SAR shares were held for more than 12 months after exercise.

Restricted Stock

Unless a participant makes an election to accelerate recognition of the income to the date of grant as described below, a participant will not recognize income, and the Company will not be allowed a federal income tax deduction, at the time a restricted stock award is granted, provided that the restricted stock is nontransferable and has not vested (i.e., is no longer subject to a substantial risk of forfeiture). When the restrictions lapse, the participant will recognize compensation taxable as ordinary income in an amount equal to the fair market value of the vested stock as of that date (less any amount, if any, he or she paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m).

If the participant files an election with the Internal Revenue Service under Code Section 83(b), with adequate notice to the Company, within 30 days after the date of grant of the restricted stock, he or she will recognize ordinary income as of the date of grant, as if the stock was unrestricted, equal to the fair market value of the stock as of that date (less any amount paid for the stock), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m). Any future appreciation in the stock will be taxable to the participant at capital gains rates. However, if the stock is later forfeited, the participant will not be entitled to any deduction, refund or loss for tax purposes with respect to the tax previously paid pursuant to the Code Section 83(b) election.

If an election under Code Section 83(b) has not been made, any dividends received with respect to the restricted stock award prior to the lapse of the restrictions will be treated as additional compensation that is taxable as ordinary income to the participant. The Company will be entitled to a deduction in the same amount and at the same time that the participant recognizes ordinary income. Upon the sale of the vested common stock, the participant will realize short-term or long-term capital gain or loss depending on the holding period. The holding period generally begins when the restriction period expires. If the recipient timely made an election under Code Section 83(b), the holding period commences on the date of the grant.

Restricted Stock Units

A participant will not recognize income, and the Company will not be allowed a federal income tax deduction, at the time of grant of a restricted stock unit. Rather, upon receipt of cash, stock or other property in settlement of a restricted stock unit award, the participant will recognize ordinary income equal to the fair market value of the stock or other property as of that date (less any amount he or she paid for the stock or other property), and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m). If the recipient receives shares of stock upon settlement then, upon disposition of such shares, appreciation or depreciation after the settlement date is treated as either short-term or long-term capital gain, depending on how long the shares have been held.

Performance-Based Awards.

A participant will not recognize income, and the Company will not be allowed a federal income tax deduction, at the time a performance-based award is granted (for example, when the performance goals are established). Upon receipt of cash, stock or other property in settlement of a performance-based award, the participant will recognize ordinary income equal to the cash, stock or other property received, and the Company will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m).

Other Equity-Based Awards and Other Cash Awards

A participant will recognize ordinary income upon receipt of cash pursuant to a cash award and the Company will generally be entitled to a deduction equal to the amount of ordinary income realized by the participant, subject to any applicable limitations

 

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PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

under Code Section 162(m). The federal income tax consequences of other equity-based awards will depend on how the awards are structured. Generally, the Company will be entitled to a deduction with respect to other equity-based awards only to the extent that the recipient realized compensation income in connection with such awards.

Code Section 409A

Section 409A of the Code (“Section 409A”) applies to compensation that individuals earn in one year but that is not paid until a future year. This is referred to as nonqualified deferred compensation. Section 409A, however, does not apply to qualified plans (such as a Section 401(k) plan) and certain welfare benefits. If deferred compensation covered by Section 409A meets the requirements of Section 409A, then Section 409A has no effect on the individual’s taxes. The compensation is taxed in the same manner as it would be taxed if it were not covered by Section 409A. If a deferred compensation arrangement does not meet the requirements of Section 409A, the compensation is subject to accelerated taxation in the year in which such compensation is no longer subject to a substantial risk of forfeiture and certain additional taxes, interest, and penalties, including a 20% additional income tax. Section 409A has no effect on FICA (Social Security and Medicare) tax.

The 2020 Plan permits the grant of various types of incentive awards, which may or may not be exempt from Section 409A. Restricted stock awards, and stock options and SARs that comply with the terms of the 2020 Plan, are designed to be exempt from the application of Section 409A. Restricted stock units and cash incentive awards granted under the 2020 Plan, whether time-based or performance-based, would be subject to Section 409A unless they are designed to satisfy the short-term deferral exemption from such law. If not exempt, such awards must be specially designed to meet the requirements of Section 409A in order to avoid early taxation, certain additional taxes and/or interest charges. Awards under the 2020 Plan are intended to comply with the requirements of Section 409A or an exception thereto. Notwithstanding, Section 409A may impose upon a participant certain taxes or interest charges for which the participant is responsible. Section 409A does not impose any penalties on the Company and does limit the Company’s deduction with respect to compensation paid to a participant, though the Company does have an obligation to withhold, remit, and report income and related taxes in compliance with the requirements of Section 409A.

Company Deduction

The Company generally may deduct any compensation or ordinary income recognized by the recipient of an award under the 2020 Plan when recognized, subject to the limits of Code Section 162(m). Prior to 2018, Code Section 162(m) imposed a $1 million limit on the amount that a public company may deduct for compensation paid to a company’s chief executive officer or any of the company’s three other most highly compensated executive officers (other than the chief financial officer) who are employed as of the end of the year. This limitation did not apply to compensation that met Code requirements for “qualified performance-based compensation.”

The performance-based compensation exemption, the last day of the year determination date, and the exemption of the chief financial officer from Code Section 162(m)’s deduction limit have all been repealed under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), effective for taxable years beginning after December 31, 2017, such that awards paid under the 2020 Plan to our covered current and former executive officers may not be deductible for such taxable years due to the application of the $1 million deduction limitation. However, under Tax Reform transition relief, compensation provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues to be subject to the performance-based compensation exception.

As in prior years, while deductibility of executive compensation for federal income tax purposes is among the factors the Committee considers when structuring our executive compensation, it is not the sole or primary factor considered. Our Board and the Committee retain the flexibility to authorize compensation that may not be deductible if they believe it is in our best interests.

Consequences of Change of Control

If a change of control of the Company causes awards under the 2020 Plan to accelerate vesting or is deemed to result in the attainment of performance goals, the participants could, in some cases, be considered to have received “excess parachute payments,” which could subject participants to a 20% excise tax on the excess parachute payments and result in a disallowance of the Company’s deductions under Section 280G of the Code.

Tax Withholding

The Company and its affiliates have the right to deduct or withhold, or require a participant to remit to the Company and its affiliates, an amount sufficient to satisfy federal, state, and local taxes (including employment taxes) required by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising as a result of the 2020 Plan.

 

PROPOSAL THREE: APPROVAL OF THE 2020 STOCK AWARD AND INCENTIVE PLAN

 

New Plan Benefits

No awards have been granted under the 2020 Plan. All future awards under the 2020 Plan will be made at the discretion of the Committee and Board, as applicable. Therefore, the benefits and amounts that will be received or allocated under the 2020 Plan in the future are not determinable at this time.

 

Equity Compensation Plan Table

The following table sets forth additional information as of the end of Fiscal 2019 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. 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.

 

		Column (a)		Column (b)		Column (c)
		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by stockholders (1)		2,583,662		$18.18		3,685,676
Equity compensation plans not approved by stockholders (2)		—		—		5,126,690
Total		2,583,662		$18.18		8,812,366

 

(1)	Equity compensation plans approved by stockholders include the 2017 and the 2014 Plans.

 

(2)

Equity compensation plan not approved by stockholders includes the Employee Stock Purchase Plan which was instituted prior to the NYSE listing requirement for stockholder approval of such plans and related to the open market purchase of Company stock by our employees through payroll deductions with a Company match of 15% on contributions up to $100 per payroll period as elected by such participating employees and pursuant to the terms of such plan.

 

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PROPOSAL FOUR: ADVISORY APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

As required by Section 14A of the Exchange Act, we are providing stockholders with an advisory vote on the overall compensation of our named executive officers. In accordance with the results of the stockholder vote at the 2017 Annual Meeting, advisory votes on the overall compensation of our named executive officers are held every year, and there will be another vote on the frequency of the say on pay vote at the 2023 Annual Meeting.

As discussed in the “Compensation Discussion and Analysis” section below, our executive compensation program is based on four core principles: performance, competitiveness, affordability, and transparency. We believe that our program design implements these principles and provides the framework for alignment between executive compensation opportunities and long-term strategic growth. Based on the advisory vote at the 2019 Annual Meeting on our executive compensation program, which was approved by approximately 98% of the votes cast, we are confident that our stockholders agree.

We have an ongoing commitment to ensuring that our executive compensation plans are aligned with our principles and evolve as the industry and business changes. We continue to engage with our stockholders to gain an understanding of their key perspectives on all aspects of the business and the broader industry, including compensation programs. We continue to evaluate and enhance plan design to align with leading practices in executive compensation.

We urge our stockholders to read the following “Compensation Discussion and Analysis” section for information on our executive compensation program.

In summary, we believe that our executive compensation program has provided and continues to provide appropriate incentives and remains responsive to our stockholders’ views. Accordingly, the following resolution will be submitted for a stockholder vote at the 2020 Annual Meeting:

“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, as set forth in the Proxy Statement for the 2020 Annual Meeting.”

As an advisory vote, your vote will not be binding on the Company or the Board. However, our Board and our Compensation Committee value the opinions of our stockholders and to the extent there is any significant vote against the compensation paid to our named executive officers (“NEOs”), we will consider our stockholders’ concerns and the Compensation Committee will evaluate whether any actions are necessary to address those concerns.

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis (“CD&A”) describes our compensation philosophy, objectives, policies, and practices with respect to our NEOs for Fiscal 2019. The following officers comprise our Fiscal 2019 NEOs:

 

•  Jay L. Schottenstein, our Chief Executive Officer (the “CEO”);

•  Robert L. Madore, our Executive Vice President, Chief Financial Officer (the “CFO”);

•  Charles F. Kessler, our Global Brand President, American Eagle (the “Global Brand President, AE”);

•  Jennifer M. Foyle, our Global Brand President, Aerie (the “Global Brand President, Aerie”); and

•  Michael R. Rempell, our Executive Vice President, Chief Operations Officer (the “COO”).

 

This CD&A is organized as follows:

 

 

EXECUTIVE SUMMARY

Fiscal 2019 Business & Leadership Overview

 

Our high-performing management team led AEO to achieve another strong year of top-line results in Fiscal 2019. The AE brand maintained its position as the #1 denim retailer in the nation for women, launching several new product innovations and styles and Aerie posted stellar growth, boasting a 20% annual comparable sales increase for the brand on top of its 29% comparable sales increase from Fiscal 2018. Fiscal 2019 represented our fifth consecutive year of positive comparable sales, resulting in a record $4.3 billion in annual revenue. American Eagle and Aerie captured market share, led by traffic and transaction growth across channels, highlighting the strength of each brand. While we are proud to report strong sales growth in our business, we did not achieve our profitability goals. Some product and fashion misses within the American Eagle brand resulted in an increase in markdowns to ensure we ended Fiscal 2019 with clean inventories, starting fresh for Fiscal 2020. The result of these actions was net income per diluted share of $1.12, compared to $1.47 last year. On an adjusted basis, net income per diluted share of $1.48 this year was flat to $1.48 last year.⁽¹⁾

Key operating highlights included:

Continued Sales Momentum in Fiscal 2019

 

•

In Fiscal 2019, AEO posted record revenue of $4.3 billion, rising 7% over the previous year.

 

•

Consolidated comparable sales rose 3% for Fiscal 2019, driven by positive traffic and transactions across brands and channels, which compared to an 8% increase last year.

 

•

American Eagle comparable sales were up slightly to last year and Aerie posted comparable sales growth of 20%.

 

•

This growth in total revenue across both brands is a testament to American Eagle and Aerie’s brand strength among our target customers.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Revenue		Comparable Sales(1) Growth

 

*	Compounded annual growth rate

Challenges in Profit Flow-Through

 

•

While Aerie margins improved in Fiscal 2019, demand for certain American Eagle tops did not meet expectations and resulted in higher-than-planned markdowns to clear through inventory, particularly during the holiday period.

 

•

As a consequence, adjusted operating income of $314 million in Fiscal 2019 declined relative to the prior year.

 

Adjusted Operating Income(1)

 

*	Compounded annual growth rate

 

(1)	See Appendix B of this Proxy Statement for additional detail on comparable sales, adjusted results, and other important information regarding the use of non-GAAP or adjusted measures.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Strong Balance Sheet and Commitment to Cash Returns

 

•

We ended Fiscal 2019 with $417 million in cash and short-term investments and no debt, despite investing $210 million in capital expenditures and returning a combined $205 million to stockholders through cash dividends and share repurchases.

 

•

Operating and Free Cash Flow remained strong during the year, delivering $415 million and $204 million, respectively.

 

Operating and Free Cash Flow(1)

Shareholder Returns Versus Peers

 

•

Our Fiscal 2019 total shareholder return (“TSR”) was approximately -29%, slightly below our peer group median.

 

•

Our three-year TSR of 9% and five-year TSR of 21% were each significantly above our peer group median.

 

TSR

(1)	See Appendix B of this Proxy Statement for additional detail on comparable sales, adjusted results, and other important information regarding the use of non-GAAP or adjusted measures.

Fiscal 2019 Compensation Takeaways

As in prior years, we continue to believe that our compensation practices align the interests of our executives with those of our stockholders. Although Fiscal 2019 was a year marked by positive achievements in many key areas of the business, overall performance fell short of our expectations. The executive compensation-related decisions made by the Compensation Committee with respect to Fiscal 2019 is further evidence of our commitment to a compensation program that aligns pay with performance. Specifically:

 

•

A significant amount of NEO compensation for Fiscal 2019 was “at risk,” which we believe appropriately incentivizes our NEOs with respect to Company performance;

 

•

A compensation mix heavily weighted towards long-term incentives was designed to focus our NEOs on the achievement of longer term performance goals;

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

•

A zero bonus payout for our NEOs for Fiscal 2019 reflected our performance against rigorous annual incentive goals that were set early in the year;

 

•

A 50% payout of performance-based share units that were granted in Fiscal 2017 and vested at the end of Fiscal 2019; and

 

•

The Compensation Committee determined to modestly increase base salaries for our NEOs, other than our CEO, in light of the NEOs’ increased responsibilities and individual successes during the prior year. For the fourth year in a row, the Compensation Committee made a decision not to increase our CEO’s base salary.

Fiscal 2019 Compensation Program Objectives and Philosophy

 

The overall philosophy of our executive compensation program is to attract and retain highly skilled, performance-oriented executives who live our brand and embody its spirit of authenticity and innovation. Our goal is to incentivize our executives to achieve outstanding results for all stakeholders within the framework of a principles-based compensation program.

We focus on the following core principles in structuring an effective compensation program that meets this stated philosophy:

 

Performance		•  We align executive compensation with the achievement of measurable operational and financial results and increases in stockholder value.   •  Our program includes significant performance-based remuneration that creates a meaningful incentive to achieve challenging performance objectives.   •  Our program features a substantial long-term incentive component, which aligns executive interests with those of our stockholders and serves to retain executive talent through a multi-year vesting schedule.   •  Long-term incentive design that varies actual compensation above or below the targeted compensation opportunity based on the degree to which performance goals and changes in stockholder value are attained over time.
Competitiveness		•  Executive compensation is structured to be competitive relative to a group of retail peers, taking into consideration company size relative to peers and recognizing our emphasis on performance-based compensation.   •  Target total compensation for individual NEOs varies based on a variety of factors, including the executive’s skill set and experience, historic performance, expected future contributions, and the importance of each position to us.
Affordability		•  Our compensation program is designed to limit fixed compensation expense and tie realized compensation costs to the degree to which budgeted financial objectives are attained.   •  We structure our incentive plans to maximize financial efficiency by establishing programs that are intended to be tax deductible (whenever it is reasonably possible to do so while meeting our compensation objectives) and accounting efficient by striving to make performance-based payments aligned with expense.
Transparency		•  We focus on simple, straightforward compensation programs that our associates and stockholders can easily understand.

Our Focus for Fiscal 2020

 

The COVID-19 pandemic has caused us to assess all of our go forward strategies for 2020 with the following immediate goals:

 

✓

Protect Our People: Prioritize the health and safety of our associates and customers as we navigate this crisis.

 

✓

Focus on Liquidity: Ensure AEO has the resources necessary to get through a period of reduced sales caused by mall and store closures and a decrease in consumer spending.

 

✓

Prepare for a New Future: Accelerate initiatives to respond to the changing face of retail using our brand experiences, supply chain innovations, and omni-channel capabilities to meet evolving customer expectations.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

We believe that our brands are well positioned for future growth.

Additional areas of focus for 2020 include:

 

✓

Continuing to fuel AE growth, capitalizing on its leading position in jeans and bottoms and growing brand love through its AEXME collaborative marketing campaigns.

 

✓

Taking Aerie to $1 billion in sales, celebrating female empowerment and body positivity while offering merchandise women feel good about wearing.

 

✓

Providing shopping experiences that our customers love, both in-stores and online, as we continue to invest in omni-channel capabilities, data analytics, and interactive communication that deepens our customers’ relationships with our brands.

 

✓

Keeping it REAL and staying true to our corporate purpose: to show the world that there is REAL power in the optimism of youth.

 

✓

Continuing to create value for all of our stakeholders, including planning, allocation and supply chain initiatives which should enable faster turns and lower markdowns.

Executive Compensation Highlights

 

Our compensation program design provides a framework for aligning executive compensation and our long-term Company objectives and financial performance. We continually review leading practices in corporate governance and executive compensation. As appropriate we consider changes to our program to embrace best practices, remain competitive in our industry, and reinforce the pay-for-performance alignment.

The following table highlights the Company’s practices relating to our executive compensation program.

 

American Eagle Outfitters’ Executive Compensation Checklist

✓    A Compensation Committee composed entirely of independent directors oversees the Company’s executive compensation policies and decisions

✓    The Compensation Committee utilizes an independent compensation consulting firm, FW Cook, which does not provide any other services to the Company

✓    We maintain robust executive stock ownership guidelines (six times base salary for our CEO, and three times base salary for our other NEOs)

✓    We pay for performance. The majority of our NEOs’ total compensation opportunities are performance-based and “at-risk”

✓    Our long-term incentive plan does not allow for the payment of dividends or dividend equivalents on unearned performance-based share unit (“PSU”) awards or unvested restricted stock unit (“RSU”) awards

✓    We do not maintain (i) employment contracts of defined length with our NEOs, or (ii) multi-year guarantees for base salary increases, bonuses, or long-term incentives

✓    We have a robust clawback policy with respect to both cash and equity incentive awards

✓    We maintain a stringent anti-hedging and anti-pledging policy, applicable to all employees and non-employee directors

✓    We provide only limited perquisites

✓    We do not provide tax gross-ups on change-in-control benefits

✓    We have double-trigger cash severance and long-term incentive vesting in the event of a change-in-control

✓    We discourage excessive risk-taking by having our Compensation Committee closely monitor the risks associated with our executive compensation program and individual executive compensation decisions to determine that they do not encourage excessive risk-taking

 

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