UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to 240.14a-12

 

American Eagle Outfitters, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMERICAN EAGLE OUTFITTERS, INC.

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

to be held

 

June 9, 2010

 

and

 

PROXY STATEMENT

American Eagle Outfitters, Inc.

77 Hot Metal Street

Pittsburgh, Pennsylvania 15203

412-432-3300

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 9, 2010

 

April 26, 2010

 

To the Stockholders of

American Eagle Outfitters, Inc.:

 

The 2010 Annual Meeting of Stockholders of American Eagle Outfitters, Inc., a Delaware corporation, will be held at the Company’s offices located at 77 Hot Metal Street, Pittsburgh, Pennsylvania, on Wednesday, June 9, 2010, at 11:00 a.m., local time, for the following purposes:

 

 

We have elected to furnish proxy materials and our Fiscal 2009 Annual Report on Form 10-K (“Annual Report”) to many of our stockholders over the Internet pursuant to the rules of the U.S. Securities and Exchange Commission. On or about April 26, 2010, we mailed to most of our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to gain access to our Proxy Statement and Annual Report and how to vote online. All other stockholders received a copy of the Proxy Statement and Annual Report by mail. The Notice also contains instructions on how you can elect to receive a printed copy of the Proxy Statement and Annual Report, if you only received a Notice by mail.

 

Whether or not you plan to attend the meeting, please vote your shares promptly as outlined in the following Proxy Statement. If you attend the meeting, you may vote in person and your proxy will not be used.

 

By Order of the Board of Directors

 

Neil Bulman, Jr.
Secretary

AMERICAN EAGLE OUTFITTERS, INC.

 

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JUNE 9, 2010

 

This Proxy Statement is being furnished in connection with the solicitation of proxies by the Board of Directors of American Eagle Outfitters, Inc., a Delaware corporation, for use at the Annual Meeting of Stockholders to be held on June 9, 2010, at 11:00 a.m., local time, at the Company’s offices located at 77 Hot Metal Street, Pittsburgh, Pennsylvania and at any adjournment thereof. It is being mailed to the stockholders on or about April 26, 2010. (“We,” “our,” and the “Company” refer to American Eagle Outfitters, Inc.)

 

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

 

Who is entitled to vote?

 

Stockholders of record at the close of business on April 12, 2010, the record date for the Annual Meeting, are entitled to vote at the Annual Meeting. As of the record date, there were 209,345,050 shares of Common Stock, par value $0.01 per share, outstanding and entitled to vote. Each share that you own entitles you to one vote.

 

What am I voting on?

 

There are two matters scheduled for a vote at the Annual Meeting:

 

 

How does the Board recommend I vote on these proposals?

 

The Board of Directors recommends a vote FOR each of the nominees for director listed in this Proxy Statement and FOR the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending January 29, 2011.

 

Why did I receive a Notice of Internet Availability of Proxy Materials?

 

In order to both save money and protect the environment, we have elected to provide access to our proxy materials and Fiscal 2009 Annual Report on Form 10-K (“Annual Report”) on the Internet, instead of mailing the full set of printed proxy materials, in accordance with the rules of the U.S. Securities and Exchange Commission (“SEC”) for the electronic distribution of proxy materials. On or about April 26, 2010, we mailed to most of our stockholders a Notice of Internet Availability of Proxy Materials (the “Notice”) containing instructions on how to gain access to our Proxy Statement and Annual Report and how to vote online. If you received a Notice by mail, you will not receive a printed copy of the proxy materials in the mail unless you request it. Instead, the Notice instructs you on how to obtain and review all of the important information contained in the Proxy Statement and Annual Report. The Notice also instructs you on how you may submit your proxy over the Internet. If you received a Notice by mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting such materials included in the Notice.

How do I vote my shares?

 

If your shares are registered directly in your name (i.e., you are a “registered stockholder”), you received a proxy card along with a printed copy of the proxy materials. You may complete and sign the enclosed proxy card and return it in the pre-paid envelope. Alternatively, you may attend and vote in person at the Annual Meeting.

 

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent (i.e., your shares are held in “street name”), you should receive either a Notice or a voting instruction form along with a Proxy Statement. You should follow the instructions on the Notice or the voting instruction form in order to ensure that your vote is counted. To vote in person at the Annual Meeting, you must obtain a legal proxy from the broker, bank or agent that holds your shares to present at the meeting.

 

Can I change or revoke my proxy?

 

Yes. If you are a registered stockholder, you may revoke your proxy at any time before it is voted by delivering written notice to the Company (Attention: Neil Bulman, Jr., Secretary), by submitting a properly executed proxy bearing a later date or by attending the meeting and voting in person.

 

If your shares are held in street name, you may revoke your proxy by submitting new voting instructions to your broker or, if you have obtained a legal proxy from your broker, by attending the Annual Meeting and voting in person.

 

What constitutes a quorum?

 

A quorum of stockholders is necessary to transact business at the Annual Meeting. A quorum will be present if a majority of the outstanding shares of the Company’s common stock, as of the close of business on the record date, are represented by stockholders present at the meeting or by proxy. At the close of business on the record date, there were 209,345,050 shares of Common Stock outstanding and entitled to vote. Therefore, 104,672,526 shares will be required to be represented by stockholders present at the meeting or by proxy in order to establish a quorum.

 

Abstentions and broker non-votes will count as present in determining whether there is a quorum. Broker non-votes occur when brokers, who hold their customers’ shares in street name, sign and submit proxies for such shares and vote such shares on some matters but not others. This would occur when brokers have not received any instructions from their customers, in which case the brokers, as the holders of record, are permitted to vote on “routine” matters, which include the ratification of the appointment of an independent registered public accounting firm, but not on “non-routine” matters, such as the election of directors. Prior to 2010, the election of directors was considered a routine matter for which brokers were permitted to vote their customers’ shares. Beginning this year, as a result of recent amendments to the New York Stock Exchange rules, brokers are no longer permitted to vote such shares for the election of directors if they have not received instructions from their customers. Therefore, if you do not instruct your broker how to vote on the election of directors this year, your shares will not be counted, and, therefore, we urge you to give voting instructions to your broker on all voting items.

 

What vote is required to approve each proposal?

 

Once a quorum is established, directors in an uncontested election are elected by a majority of the votes cast in respect to that director’s election. In the event of a contested election of directors, directors shall be elected by the vote of a plurality of the votes represented by the shares of Common Stock present at the meeting in person or by proxy. Properly executed proxies marked “Abstain” and broker non-votes are not voted with respect to the nominee or nominees indicated, although they are counted for purposes of determining if a quorum is present.

Appointment of Ernst & Young LLP as our independent registered public accounting firm is ratified by the affirmative vote of a majority of the shares of Common Stock present at the meeting, in person or by proxy.

 

For any other item that is properly submitted to stockholders for approval at the Annual Meeting, an affirmative vote of a majority of the shares of Common Stock voting on the matter is required for approval. For purposes of determining the number of shares of Common Stock voting on a matter, abstentions are counted and will have the effect of a negative vote; broker non-votes are not counted and have no effect on the vote.

 

Who bears the costs of this solicitation?

 

We bear the cost of the solicitation of proxies, including the charges and expenses of brokerage firms and others for forwarding solicitation material to beneficial owners of stock. Our representatives may solicit proxies by mail, telegram, telephone or personal interview. To solicit proxies, we request the assistance of banks, brokerage houses and other custodians, and, upon request, reimburse such organizations for their reasonable expenses in forwarding soliciting materials to beneficial owners and in obtaining authorization for the execution of proxies.

 

Can I nominate someone for election to the Board of Directors?

 

Yes, for election at next year’s Annual Meeting. You may do so by delivering to the Corporate Secretary, no earlier than March 11, 2011 and no later than April 8, 2011, a notice stating: (i) the name and address of the stockholder who intends to make the nomination; (ii) the name, age, business address and, if known, residence address of each nominee; (iii) the principal occupation or employment of each nominee; (iv) the number of shares of stock of the Company that are beneficially owned by each nominee and the nominating stockholder; and (v) the other information specified in Article Tenth (b) of our Certificate of Incorporation. Our Certificate of Incorporation is available on our website at www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance, Other Governance Documents.”

 

Additionally, you may recommend a nominee for consideration by our Nominating and Corporate Governance Committee (the “Nominating Committee”). Recommendations should be submitted to our Nominating Committee in accordance with the procedures described below under the “Nominating Committee” section.

 

May I submit a stockholder proposal for next year’s Annual Meeting?

 

Yes. Stockholder proposals to be included in the proxy statement for the 2011 Annual Meeting of Stockholders must be received by the Company (addressed to the attention of the Secretary) by December 28, 2010. We may omit from the proxy statement and form of proxy any proposals that are not received by the Secretary by December 28, 2010. Any stockholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 for presentation at our 2011 Annual Meeting will be considered untimely for purposes of Rule 14a-4 and 14a-5 under the Securities Exchange Act of 1934 if notice thereof is received before March 11, 2011 or after April 8, 2011. To be submitted at the meeting, any such proposal must be a proper subject for stockholder action under the laws of the State of Delaware, and must otherwise conform to applicable requirements of the proxy rules of the SEC.

 

SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

 

The following table shows, as of March 15, 2010, certain information with regard to the beneficial ownership of our Common Stock by: (i) each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company’s directors; (iii) each executive officer named in the summary compensation table below; and (iv) all directors and executive officers as a group.

 

 

 

 

PROPOSAL ONE: ELECTION OF DIRECTORS

 

General

 

The Board of Directors 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 of Directors fixed the size of the board at nine directors and nominated three candidates, all of whom are currently directors of the Company, to be elected as Class III directors at the Annual Meeting. Class III directors serve for three-year terms ending at the 2013 annual meeting, or when their successors are duly elected and qualified. The terms of the remaining Class I and Class II directors expire at the annual meetings to be held in 2011 and 2012, respectively. Any director over age 72 shall not be eligible for re-election.

 

Each of the nominees has consented to be named as a nominee. If any nominee should become unavailable to serve, the Board of Directors may decrease the number of directors pursuant to 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 of Directors. The Board has no reason to believe that any nominee will be unavailable or, if elected, unable to serve.

 

Certain information regarding each nominee and incumbent director is set forth below as of April 1, 2010, including age, principal occupation, and a brief description of business experience and directorships held with other public corporations during at least the last five years.

 

The Board of Directors recommends that the stockholders vote “FOR” each of the following nominees for Class III Director:

 

Alan T. Kane, age 68, has been a Director of the Company since January 2007. Mr. Kane served as Dean of the School of Business and Technology at the Fashion Institute of Technology from 2005 to 2008. Mr. Kane also initiated and developed the retailing program at the Columbia University Graduate School of Business and served as a Professor of Retailing from 1997 to 2007. Before joining the faculty at Columbia, Mr. Kane spent 28 years in the retailing industry with Federated Department Stores, The May Company, Grossman’s Inc. and a privately held retailer. He holds a BS from The Wharton School of the University of Pennsylvania and a MBA from Harvard Business School. Mr. Kane has extensive knowledge of the retail industry gained from his comprehensive academic background and retail leadership experience, and this knowledge is vital to the Board.

 

Other Public Company Board Service: Mr. Kane also serves on the Board of Directors of Circuit City Stores, Inc. Mr. Kane was formerly on the Board of Directors of Bluefly, Inc., an off-price internet company that sells designer clothing, from 2002 to 2006 and served as the non-executive Chairman of the Board from 2004 to 2006.

 

Cary D. McMillan, age 52, has been a Director of the Company since June 2007. He 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, 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 Corporation. Prior thereto, Mr. McMillan served as an audit partner with Arthur Andersen LLP. He holds a BS from the University of Illinois and is a Certified Public Accountant. Mr. McMillan brings to the Board demonstrated leadership abilities as a Chief Executive Officer and an understanding of business, both domestically and internationally. His experience as a former audit partner also provides him with extensive knowledge of financial and accounting issues. Furthermore, Mr. McMillan’s service on other public boards also provides knowledge of best practices.

 

Other Public Company Board Service: Mr. McMillan also serves on the Board of Directors of McDonald’s Corporation and Hewitt Associates, Inc. Mr. McMillan was formerly on the Board of Directors of Sara Lee Corporation from 2000 to 2004.

James V. O’Donnell, age 69, has served as Chief Executive Officer of the Company since November 2003 and prior thereto as Co-Chief Executive Officer of the Company since December 2002 and as Chief Operating Officer for the Company since December 2000. Mr. O’Donnell became a member of the Board in December 2000. Prior to joining the Company, since December 1999, he served as President and Chief Operating Officer of Lyte, Inc., a retail technology services company. From 1997 to 2000, Mr. O’Donnell served as Director of Merchant Banking for Colmen Capital Advisors, Inc., and as a Project Consultant for the C. Everett Koop Foundation. From 1992 to 1997, Mr. O’Donnell was an owner and Chief Executive Officer of Computer Aided Systems, Inc. From 1980 to 1992, Mr. O’Donnell held various executive positions at The Gap Inc., and from 1987 to 1992, he was Executive Vice President. From 1989 to 1992, he served as Chief Operating Officer of The Gap Inc. Mr. O’Donnell holds a BS from Villanova University. He is also a member of the Board of Trustees of Villanova University. Mr. O’Donnell’s day to day leadership as Chief Executive Officer of the Company provides him with intimate knowledge of our operations. His extensive knowledge and understanding of our business and the retail industry is invaluable to the Board.

 

Other Public Company Board Service: Mr. O’Donnell was formerly on the Board of Directors of The Gap Inc. from 1987 to 1992.

 

The following Class I Directors have been previously elected to terms that expire as of the 2011 Annual Meeting:

 

Michael G. Jesselson, age 58, has served as a Director of the Company since November 1997. Mr. Jesselson is President of Jesselson Capital Corporation, a private investment corporation headquartered in New York City. He also serves on the Board of Directors of a number of nonprofit institutions. Mr. Jesselson provides investment expertise to the Board and as one of the Company’s longest-serving non-employee Directors, he also brings an important historical company view to the Board of Directors.

 

Roger S. Markfield, age 68, has served as Vice Chairman, Executive Creative Director of the Company since February 2009 and as a Director since March 1999. From February 2007 to February 2009, Mr. Markfield served as a non-executive officer employee of the Company. Prior to February 2007, he served the Company as Vice-Chairman since November 2003, as President from February 1995 to February 2006, and as Co-Chief Executive Officer of the Company from December 2002 to November 2003. Mr. Markfield also served the Company and its predecessors as Chief Merchandising Officer from February 1995 to December 2002 and as Executive Vice President of Merchandising from May 1993 to February 1995. Prior to joining the Company, he served as Executive Vice President-General Merchandising Manager for the Limited Division of The Limited, Incorporated, a large national specialty retailer, from May 1992 to April 1993. From 1969 to 1976 and from 1979 to 1992, he was employed by R.H. Macy & Co., a national retailer operating department and specialty stores, as a Buyer in Boys’ Wear rising to the office of President of Corporate Buying-Men’s. From 1976 to 1979, Mr. Markfield served as Senior Vice President of Merchandising and Marketing for the Gap Stores, Inc. Mr. Markfield’s experience as Executive Creative Director of the Company gives him unique insights into the Company’s challenges, opportunities and operations. He has a deep understanding of the needs and desires of our customers and brings a long history of relevant retail executive experience to the Board.

 

Other Public Company Board Service: Mr. Markfield also serves on the Board of Directors of DSW, Inc.

 

Jay L. Schottenstein, age 55, has served as Chairman of the Company and its predecessors since March 1992. He served the Company as Chief Executive Officer from March 1992 until December 2002 and prior to that time, he served 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 Schottenstein Stores Corporation (“SSC”), a private company, since March 1992 and as President 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. He has also served as Chairman since March 1992 and as Chief Executive Officer from July 1999 through December 2000 and from April 1991 through July 1997 of Retail Ventures, Inc. (“RVI”), a company traded on the New York Stock Exchange. Mr. Schottenstein also served as Chief Executive Officer from March 2005 to April 2009 and as Chairman of the Board since March 2005 of DSW, Inc., a company traded on the New York Stock Exchange.

He has also served as an officer and director of various other corporations owned or controlled by members of his family since 1976. Jay L. Schottenstein is the brother-in-law of Jon P. Diamond. As the Company’s former Chief Executive Officer, Mr. Schottenstein is familiar with all aspects of the Company including its management, operations and financial requirements. He brings extensive knowledge and understanding of our business and the retail industry to the Board.

 

Other Public Company Board Service: Mr. Schottenstein also serves on the Board of RVI and DSW, Inc.

 

The following Class II Directors have been previously elected to terms that expire as of the 2012 Annual Meeting:

 

Janice E. Page, age 61, has served as a Director of the Company since June 2004. Prior to her retirement in 1997, Ms. Page spent 27 years in retailing holding numerous merchandising, marketing and operating positions with Sears Roebuck & Company, including Group Vice President from 1992 to 1997. Ms. Page is currently a private investor. She holds a BA from Pennsylvania State University. Ms. Page has extensive knowledge of the retail industry and her service on other public company boards allows her to provide the Board of Directors with a variety of perspectives on corporate governance issues.

 

Other Public Company Board Service: Ms. Page also serves as a Director and Compensation Committee Chair of R.G. Barry Corporation, a company which develops and markets footwear. She was formerly on the Board and served as Compensation Committee Chair of Kellwood Company from 2000 to 2008 and served as Trustee of Glimcher Realty Trust from 2001 to 2004.

 

J. Thomas Presby, age 70, has been a Director of the Company since December 2005. Mr. Presby has used his business experience and professional qualifications to forge a second career of essentially full-time board service since he retired in 2002 as a partner in Deloitte Touche Tohmatsu. At Deloitte he held numerous positions in the United States and abroad, including the posts of Deputy Chairman and Chief Operating Officer. He also serves as a Director and Audit Committee Chair of First Solar, Inc., Invesco Ltd., Tiffany & Co. and World Fuel Services, Inc. As Mr. Presby has no significant business activities other than board service, he is available full time to fulfill his board responsibilities. He is a Certified Public Accountant and a holder of the NACD Certificate of Director Education. He holds a BSEE from Rutgers University and a MBA from Carnegie Mellon University. The Board has determined that Mr. Presby’s simultaneous service on five audit committees will not impair his ability to effectively serve on the Company’s Audit Committee. Mr. Presby provides expertise in public company accounting, disclosure and financial system management to the Board and more specifically to the Audit Committee. He also brings substantial board leadership experience.

 

Other Public Company Board Service: As previously mentioned, Mr. Presby also serves as a Director and Audit Committee Chair of First Solar, Inc., Invesco Ltd., Tiffany & Co. and World Fuel Services, Inc. He was also formerly a Director and Audit Committee Chair of TurboChef Technologies.

 

Gerald E. Wedren, age 73, has been a Director of the Company since November 1997. Mr. Wedren has served as President of Craig Capital Co., a Washington D.C. based merger and acquisition firm since 1973. Mr. Wedren was President of G.E.W. Inc., an owner of fast food restaurants, from 1981 to 1988. Mr. Wedren holds a BBA and a JD from Case Western Reserve University. Mr. Wedren brings entrepreneurial and venture development experience to the Board and as one of the Company’s longest-serving non-employee Directors, he brings an important historical company view to the Board of Directors.

 

Other Public Company Board Service: Mr. Wedren also serves on the Board of Directors of Encompass Group, Inc. and Westaff, Inc.

 

INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

Board Meetings

 

During the fiscal year ended January 30, 2010 (“Fiscal 2009”), the Board of Directors met six times. During Fiscal 2009, all members of the Board of Directors attended 75% or more of the total number of meetings of the Board and of the committees of the Board on which they served. It is the expectation of the Company that all incumbent directors attend the Annual Meeting of Stockholders. All incumbent members of the Board of Directors were present at our 2009 Annual Meeting except for Mr. Schottenstein, who was out of the country on business, including business for the Company.

 

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 are not employees of the Company as well as Mr. Schottenstein, who is considered a part-time employee of the Company. In addition, the Company pays attorneys fees related to the preparation and filing of director stock ownership forms with the SEC. The Company also reimburses travel expenses to attend Board and committee meetings and director continuing education expenses.

 

Fiscal 2009 Director Compensation (1)

 

 

 

 

Until June 2005, non-employee directors received an automatic quarterly grant of options to purchase shares of common stock. At January 30, 2010, the aggregate number of option awards outstanding was: Mr. Jesselson—2,813 shares; Ms. Page—14,063 shares; and Mr. Wedren—25,313 shares. Mr. Schottenstein also received various stock option awards prior to June 2005, as determined by the Compensation Committee, and awards for 990,000 shares remained outstanding at January 30, 2010.

 

In June 2005, the Board of Directors determined that each director should own common stock of the Company and established the following ownership guidelines. Within three years of joining the Board or the implementation of the ownership guidelines, each director must hold stock of the Company worth at least four times the current annual cash base retainer amount, or currently $220,000. The following forms of equity interests in the Company count towards the stock ownership requirement: shares purchased on the open market; shares obtained through stock option exercise; shares held as deferred stock units; shares held in benefit plans; shares held in trust for the economic benefit of the director or spouse or dependent children of the director; and shares owned jointly or separately by the spouse or dependent children of the director. Stock options do not count towards the stock ownership requirement.

 

Leadership Structure

 

Since 2002, the positions of Chairman of the Board and Chief Executive Officer have been held by two different persons. Mr. O’Donnell is the Company’s Chief Executive Officer while the Board is led by our Chairman, Mr. Schottenstein. Mr. Schottenstein is the former Chief Executive Officer of the Company and has significant experience in our industry and with the Company, which experience provides our Board with significant leadership advantages. The Company has also established a Lead Independent Director position. The Lead Independent Director is appointed by the Independent Directors annually. Mr. Jesselson was appointed as the Company’s Lead Independent Director for Fiscal 2009. The Lead Independent Director is responsible for:

 

 

The Lead Independent Director also has the authority to call meetings of the Non-Management or Independent Directors, and if requested by major stockholders, is available, if appropriate, for consultation and direct communication. We believe that this leadership structure provides our Board with the greatest depth of leadership and experience, while also providing balance for the direction of the Company.

 

Meetings of Non-Management and Independent Directors

 

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

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 of Directors and are available on the Company’s website at www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance.”

 

The Board has determined that the following directors who are members of each of the standing committees are independent as defined in the applicable rules of the New York Stock Exchange:

 

 

In particular, the Board has determined that none of these directors have relationships that would cause them not to be independent under the specific criteria of Section 303A.02 of the NYSE Listed Company Manual.

 

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

 

The following sets forth Committee memberships as of the date of this proxy statement:

 

 

X = Member

 

XX = Committee Chair

 

 

Audit Committee

 

The primary function of the Audit Committee is to assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2) the qualifications, performance and independence of the independent registered public accounting firm, (3) the performance of the internal auditors, and (4) the Company’s compliance with regulatory and legal requirements. The Audit Committee also reviews and approves the terms of any new related party agreements. The Audit Committee met eleven times in Fiscal 2009.

 

The Board has determined that Mr. Presby and Mr. McMillan qualify as “audit committee financial experts” as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

Compensation Committee

 

The 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 things, the Committee reviews, recommends and approves salaries and other compensation of executive officers and administers the Company’s stock award and incentive plans (including reviewing, recommending and approving stock award grants to executive officers). The Compensation Committee met nine times in Fiscal 2009.

 

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 and other corporate governance matters. The Nominating Committee met five times in Fiscal 2009. The Nominating Committee developed and reviews each year the Company’s Corporate Governance Guidelines, which were adopted by the Board and are available on our website at www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance.”

 

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 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 development of the Company’s business, including issues of diversity and experience in different substantive areas such as retail operations, marketing, technology, distribution, real estate 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.

 

Candidates may come to the attention of the 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. In the past, the Nominating Committee has retained the services of a search firm to assist in identifying and evaluating qualified director candidates.

 

The Committee will consider the recommendations of stockholders regarding potential director candidates. In order for stockholder recommendations regarding possible candidates for director to be considered by the Nominating Committee:

 

 

Board Oversight of Risk Management

 

The Board has allocated responsibilities for overseeing risk associated with the Company’s business among the Board as a whole and the Committees of the Board. In performing its risk oversight function, the Board:

 

 

The Board also regularly reviews information regarding the Company’s financial, operational and strategic risks. The full Board receives quarterly updates from management’s Risk Management Committee which is responsible for identifying, quantifying and assisting leaders across the Company in mitigating risks. Each of the Board’s Committees also oversees the management of Company risks that fall within the Committee’s areas of responsibility. In performing this function, each Committee has full access to management, as well as the ability to engage advisors. As set forth in its charter, the Audit Committee is responsible for discussing with management the Company’s major financial risk exposures and the steps management has taken to monitor and control those exposures. The Audit Committee gives updates to the Board at its regular meetings, including updates on financial and information technology risks. The Audit Committee also meets privately with the Company’s independent auditors, the internal auditors and the Chief Financial Officer quarterly. As set forth in its charter, the Compensation Committee oversees the Company’s risk management related to employee compensation plans and arrangements. The Nominating and Corporate Governance Committee manages risks associated with the independence of the Board of Directors and the Company’s corporate social responsibility program. While each committee is responsible for overseeing the management of those risk areas, the entire Board of Directors is also regularly informed through committee reports.

 

Compensation Committee Interlocks and Insider Participation

 

During Fiscal 2009, the members of the Compensation Committee included Messrs. McMillan (Chairman), Kane, Presby, Wedren and Ms. Page. None of the current or former members of the Compensation Committee are present or former officers of the Company or its subsidiaries or have affiliates that are parties to agreements with the Company.

Communications with the Board

 

The Board provides a process for all interested parties to send communications to the non-management members of the Board. That process is described on the Company’s website at www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance, Board of Directors.”

 

Corporate Governance Information

 

The Company’s corporate governance materials, including our corporate governance guidelines, the charters of our audit, compensation and nominating committees and our Code of Ethics that applies to all of our directors, officers (including the Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Controller) and employees may be found on the Company’s website at www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance.” Any amendments or waivers to our code of ethics will also be available on our website. A copy of the corporate governance materials is also available in print to any stockholder who requests it.

 

EXECUTIVE OFFICERS

 

The following persons are executive officers of the Company. For information regarding officers who are also directors, see “Election of Directors.” The officers of the Company are elected annually by the Board and serve at the pleasure of the Board.

 

Thomas A. DiDonato, age 51, has served the Company as Executive Vice President of Human Resources since July 2005. Prior to joining the Company, Mr. DiDonato served the H.J. Heinz Company as Chief People Officer from September 2004 to July 2005, as Vice President of Global Leadership and Development for the Heinz World Headquarters from December 2003 to September 2004 and prior thereto as Vice President of Human Resources for Heinz North America since July 2001. From 1997 to 2001, Mr. DiDonato served as Senior Vice President of Human Resources for Merck-Medco Managed Care LLC. Prior to that time, Mr. DiDonato held various Vice President level positions with Pepsico from 1990 to 1997 and with Philip Morris Companies, Inc. from 1982 to 1990.

 

Joan Holstein Hilson, age 50, has served the Company as Executive Vice President, Chief Financial Officer, since April 2009 and as Principal Financial and Accounting Officer since April 2006. Prior thereto, Ms. Hilson served as Executive Vice President, Chief Financial Officer, AE Brand, since April 2006 and as Senior Vice President, Finance from September 2005 to April 2006. Prior to joining the Company, Ms. Hilson held various positions at the Victoria’s Secret Stores division of Limited Brands, Inc., including Executive Vice President and Chief Financial Officer from July 2002 to August 2005, Vice President of Planning and Allocation from April 1997 to June 2002, Vice President of Finance from February 1996 to March 1997 and Vice President of Financial Planning from August 1995 to January 1996. Prior to that time, Ms. Hilson held various other management level positions with Limited Brands, Inc. from April 1993 to July 1995. Ms. Hilson held various finance management positions at Sterling Jewelers, Inc. from August 1985 to January 1993 and prior thereto she worked as a Certified Public Accountant at the accounting firm Coopers & Lybrand.

 

Joseph E. Kerin, age 64, has served the Company as Executive Vice President, Supply Chain and Real Estate since April 2009. Prior thereto, he served the Company and its predecessors as Executive Vice President of Store Operations since November 2007 and from January 1991 to March 2006. From March 2006 to November 2007, he served as Executive Vice President of Store Operations and Real Estate. Prior to that time, he held various positions with the Company’s predecessors, including Senior Vice President-Store Operations from October 1987 to October 1988, Vice President-General Manager Store Operations from February 1979 to October 1987, General Manager Store Operations from November 1975 to February 1979, and Regional/District Manager of the Silverman’s Division from October 1972 to November 1975. Mr. Kerin also serves as President of the American Eagle Outfitters Foundation.

 

LeAnn Nealz, age 53, has served the Company as Executive Vice President and Chief Design Officer since May 2004. Prior to joining the Company, Ms. Nealz served as Senior Vice President-Design of GapKids and babyGap from March 2002 to April 2004. From May 2000 to March 2002, she was a consultant for Esprit. From June 1997 to April 2000, Ms. Nealz was Vice President-Creative Director of Nine West Group Inc. and President, creator and owner of Le Havlin Piro. From 1996 to September 1997 she was one of the creators of Theory. From 1993 to 1996 Ms. Nealz acted as the Senior Vice President of Design and Marketing for Pepe Jeans. From 1989 to 1993 Ms. Nealz served as both men’s and women’s Senior Design Director at Banana Republic. Prior to that time, Ms. Nealz held several positions, including Design Director of CK Jeans and Calvin Klein Sport as well as the Creative Director for Guess Jeans.

 

Dennis R. Parodi, age 58, has served the Company as Executive Vice President, Store Operations since April 2009. Prior thereto, he served the Company as Executive Vice President and Chief Operating Officer, New York Design Center, since February 2006, as Senior Vice President of Real Estate and Construction since May 2004 and as Vice President and Chief Operating Officer, New York Design Center, since March 2003. Prior to joining the Company, Mr. Parodi served as a consultant for Whelan’s International Corporation from January 2002 to March 2003. From February 1983 to December 2001, Mr. Parodi held various positions with GAP, Inc., including Executive Vice President-U.S. Stores & Global Operations from 1998 to 2001, Senior Vice President-Director of Stores from 1993 to 1998, Vice President-Eastern Zone from 1988 to 1993 and Regional Manager from 1983 to 1988.

 

Michael R. Rempell, age 36, has served the Company as Executive Vice President and Chief Operating Officer, New York Design Center, since April 2009. Prior thereto, he served the Company as Senior Vice President and Chief Supply Chain Officer from May 2006 to April 2009, Senior Vice President of Information Technology and Supply Chain from May 2003 to April 2006, Vice President of Supply Chain from April 2002 to May 2003 and Senior Director of AE Direct from February 2000 to April 2002. Prior to joining the Company, Mr. Rempell was an associate with PricewaterhouseCoopers Consulting and Accenture.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors or persons who are beneficial owners of more than ten percent of the Company’s Common Stock (“reporting persons”) to file reports of ownership and changes in ownership with the SEC. Reporting persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms filed by them. Based on its review of the copies of Section 16(a) forms received by it, the Company believes that, during Fiscal 2009, with the exception of one late Form 4 filing for Mr. Rempell, all reporting persons complied with applicable filing requirements.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview

 

This Compensation Discussion and Analysis describes the compensation philosophy, objectives, policies and practices with respect to our named executive officers (the “NEOs”). For Fiscal 2009, our NEOs included our: (1) Chief Executive Officer; (2) Vice Chairman, Executive Creative Director; (3) Executive Vice President and Chief Design Officer; (4) Chief Financial Officer; and (5) Executive Vice President, Supply Chain and Real Estate.

 

Performance-Results

 

For Fiscal 2009, NEO compensation was driven by the Company’s financial results, as measured by Comparable Store Sales (described in more detail in Fiscal 2009 Performance Metrics below). Fiscal 2009 Comparable Store Sales included American Eagle Outfitters, Inc., aerie, MARTIN+OSA, and 77kids. These goals were intended to reflect the need to stabilize the business following the difficult economic environment developing at the end of Fiscal 2008 and early Fiscal 2009. As described herein, our Comparable Store Sales results achieved target-level performance. Accordingly, this resulted in a target-level payout and vesting of Company performance-based compensation for the fiscal year. All performance awards were based on pre-established goals and negative discretion was exercised based on brand and individual performance in determining NEO earnings, specifically the annual incentive bonus earnings and long-term incentive cash program (“LTICP”) contributions.

 

The NEO’s resulting realized compensation based on Fiscal 2009 Company performance reflects the performance-oriented nature of the plan. Earn-outs under the annual incentive bonus plan, LTICP and the restricted stock program were aligned with achievement of target-level Company performance.

 

Role of Our Compensation Committee

 

Our Compensation Committee reviews and approves salaries and other compensation of NEOs and makes awards and other decisions relating to the Company’s 2005 Amended Plan. The Committee also reviews and approves, where applicable, the design of compensation, severance and perquisite programs.

 

Role of Executive Officers in Compensation Decisions

 

Mr. O’Donnell, our Chief Executive Officer, annually reviews the performance of each NEO with the Compensation Committee and makes recommendations with respect to each element of executive

compensation for each NEO, excluding himself. Based in part on these recommendations and other considerations discussed below, the Compensation Committee approves, when appropriate, the annual compensation package of our NEOs. Mr. O’Donnell also reviews and recommends changes to the Company’s peer group, as deemed appropriate, for approval by the Compensation Committee.

 

Variations for NEOs with Employment Agreements

 

The Chief Executive Officer and Vice Chairman, Executive Creative Director are employed pursuant to individual employment agreements. Because these agreements were separately negotiated with the Compensation Committee based on the individual NEO’s circumstances and the criticality of retaining these key leaders, the competitiveness of the overall compensation package compares more favorable to market practice than the target competitive positioning for other NEOs. However, the design and administration of the primary compensation elements are similar to those provided to other NEOs thus aligning our governing philosophy and objectives regarding executive compensation.

 

Compensation Program Objectives

 

The overall objective of our executive compensation program is to attract highly skilled, performance-oriented executives and to motivate them to achieve outstanding results through appropriate means. We focus on the following core principles in structuring an effective compensation program that meets our stated objective:

 

 

Changes Effective for Fiscal 2009

 

In the second half of Fiscal 2008, the Committee instructed its independent consultant to work with the Company’s executive compensation management team to assess the need to make changes to the existing executive compensation program based on internal philosophy/objectives and external market data/practice. As a result, after four years with minimal change, the program was redesigned effective for Fiscal 2009. Our goal was to design a new program that balanced the focus on both our short and long-term financial and strategic goals, while still retaining the performance-based nature of the program, and preserving the original program objectives. The plan design changes are summarized below, with more detail included in the following pages.

 

The design of the new executive compensation program reduced the overall compensation opportunity for our NEOs and accordingly, the degree to which compensation is at risk has also been reduced. Notwithstanding the changes, the program will continue to strive to have a larger portion of our executives total compensation “at risk” based on Company performance than our peer companies. For Fiscal 2009, our Chief Executive Officer had approximately 88% (26% higher than the peer group on average) of his total compensation at risk. The other NEOs had approximately 59.5% (10% higher than the peer group on average) of their total compensation at risk. Elements of our executive compensation program which we consider “at risk” are described under “Compensation Program Elements” below.

 

We also established a performance-based Annual Award Pool (the “Award Pool”) for the NEOs who are subject to Internal Revenue Code Section 162(m) (which do not include the Chief Financial Officer). The Compensation Committee established a Fiscal 2009 performance goal for the Award Pool based on the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). Achievement of the performance goal determines the maximum amount payable as discretionary cash awards or grants of time-based restricted stock awards for Fiscal 2010 to the NEOs. The following maximum award levels were established as a percent of EBITDA, in each case subject to the 2005 Amended Plan maximum of $4 million per person and further subject to the exercise of negative discretion by the Compensation Committee to reduce the maximum award:

 

 

 

 

 

While researching and developing the new program, the Compensation Committee, the Company’s executive compensation management team and the compensation consultant were determined to continue our history of designing a program with the right components, mix, and metrics; one that would limit the possibility that the executive compensation system could encourage management to pursue overly risky business strategies in order to maximize short-term compensation payouts. We strengthened existing and introduced new program elements to distinctly balance between short-term and long-term components and between cash and equity. Additionally, we incorporated multiple performance metrics into our plan design (a change from the single metric used in previous years) which also reduces the Company’s exposure to potentially risky business practices.

 

Compensation Program Elements

 

Our executive compensation program is designed to place a sizeable amount of pay at risk for all executives and this philosophy is intended to cultivate a pay-for-performance environment. Our executive compensation plan design has six key elements:

 

 

 

Two of the elements (Annual Incentive Bonus and LTICP) were entirely “at risk” based on the Company’s performance in Fiscal 2009 and were subject to forfeiture if the Company did not achieve threshold performance goals. Performance Shares are entirely “at risk” and subject to forfeiture if the Company does not achieve threshold performance goals by the close of Fiscal 2011, as described below. At threshold performance, the CEO’s total annual compensation declines by 46% relative to target performance. The NEO’s total annual compensation declines by an average of 33% relative to target performance. Company performance below threshold levels results in forfeiture of all elements of direct compensation other than base salary, RSUs and NSOs. NSOs provide compensation only to the extent that vesting requirements are satisfied and our share price appreciates.

 

We strategically allocate compensation between short-term and long-term components and between cash and equity in order to maximize executive performance and retention. Long-term compensation and equity awards comprise an increasingly larger proportion of total compensation as position level increases. The portion of total pay attributable to long-term incentive cash and equity compensation increases at successively higher levels of management. This philosophy ensures that executive compensation closely aligns with changes in stockholder value and achievement of performance objectives while also ensuring that executives are held accountable for results relative to position level.

 

Base Salary

 

Base salary provides a baseline compensation level that delivers current cash income to the NEOs and reflects his or her job responsibilities, experience and value to the company. To aid in attracting and retaining high quality executives, salaries for our NEOs are generally targeted at the 75th percentile of our peer group to reflect the Company’s large size relative to the peer group as measured by revenue, the highly competitive approach in recruiting available talent in the apparel industry and the performance-based nature of the other elements of the direct compensation program. Salaries are set at an appropriate level in order to mitigate executives from taking excessive risk to maximize the annual cash incentive as a means to ensure enough cash compensation to meet their living needs. We review base salaries in the last quarter of the fiscal year and increases, where applicable, are typically effective for the beginning of the new fiscal year. Individual salaries range above or below the 75th percentile based on a variety of factors, including position level, executive experience relative to industry peers, individual performance, future potential, leadership qualities and unique skill sets.

 

Annual Incentive Bonus

 

We structure the Annual Incentive Bonus to encourage the achievement of competitive annual performance targets and to recognize and reward short-term Company performance. The Annual Incentive Bonus focuses the executive team on key annual objectives and business drivers that support growth of the Company’s financial position, improvement in overall operations, and increases in stockholder value. We establish an executive’s annual incentive bonus as a percentage of base salary, with increases in target percentages directly related to position level and individual performance. This approach places a proportionately larger percentage of total annual pay at risk for our executives relative to position level and ensures that accountability is directly proportionate to each executive’s role and responsibility. During Fiscal 2009, the target award opportunity for our Chief Executive Officer was equal to 125% of his base salary and the target award opportunities for our other NEOs ranged from 70% to 90% of their respective base salary. Annual Incentive Bonus payouts fluctuate based upon Comparable Store Sales results, with actual payments ranging from 0% of the targeted percentage amount for below threshold performance, to 50% of the targeted percentage amount at threshold performance, to 100% of the targeted percentage amount at target performance, to 200% of the targeted percentage amount if the Company achieves goals that are substantially

above our business plan for the fiscal year. Refer to the “Fiscal 2009 Performance Metrics” section for a description of the Fiscal 2009 Annual Incentive Bonus metrics. Target-level bonuses were earned based on Fiscal 2009 actual Comparable Store Sales of negative four percent (-4%). However, in some instances, including certain NEOs, the Compensation Committee, based on recommendations of the Chief Executive Officer, exercised discretion in reducing the Annual Incentive Bonus earnings to below target-level based on brand and individual performance.

 

Long-term Incentive Cash Plan

 

The LTICP is a performance based variable incentive plan that supports both retention and performance motivation objectives. Target award opportunities under the LTICP are equal to 50% of the participant’s Annual Incentive Bonus target opportunity. Each year, if the goals are achieved, the LTICP awards are credited to notional accounts for participants. For Fiscal 2009, the value of previously earned LTICP accounts was based on a single diversified fund. Effective in April 2009, the Company’s executive management approved the transfer of all LTICP account balances into a minimum fixed rate fund in order to mitigate the market volatility experienced in recent years due to global economic factors. After a three year waiting period from a participant’s first award, the executive begins to receive an annual payout of one-third of their existing account balance. The payments are taxed at distribution to the executive. The Company pays all account balances in full upon an executive’s retirement.

 

LTICP awards are contingent upon the achievement of pre-established annual Company financial goals, which are described below. Annual LTICP awards fluctuate based upon Comparable Store Sales results, with actual awards ranging from 0% of the targeted percentage amount for below threshold performance, to 25% of the targeted percentage amount at threshold performance, to 100% of the targeted percentage amount at target performance, to 200% of the targeted percentage amounts if the Company achieves goals that are substantially above our business plan. For Fiscal 2009, the LTICP awards were earned at above target-level based on actual Comparable Store Sales of negative four percent (-4%). However, discretion was exercised in reducing the LTICP contribution to target-level based on overall Company performance.

 

As a result of the executive compensation plan changes that were implemented for Fiscal 2009, the LTICP was eliminated as a compensation component for our NEOs other than our Chief Executive Officer and Vice Chairman, Executive Creative Director due to contract specifications. In Spring 2009, executives who had received LTICP contributions in previous fiscal years were offered payment of the LTICP account balance equally over two years (April 2009 and Spring 2010), subject to Internal Revenue Code section 409A as applicable, in exchange for a twelve month non-compete and eighteen month non-solicitation agreement. These agreements continued to mitigate the possibility of senior executives entering into direct competition with the Company and protecting the company’s investment in human capital while facilitating the elimination of the LTICP.

 

Equity Awards

 

Equity compensation is designed to align executive compensation with short-term and long-term Company performance. The Company utilizes a combination of time-based RSUs, performance-based RSUs (“PS”), and time-based NSO grants to focus management on corporate performance and sustainable earnings growth. The new overall plan design has a heavier emphasis on restricted stock than on stock options to support our retention and performance objectives and provide a better balance of the risk/reward ratio for our executives while maintaining our commitment to increasing long-term stockholder value. Total equity grant values are pre-determined based upon the framework of the executive compensation plan design.

 

Restricted Stock Awards and Restricted Stock Units: We determine the number of shares of RSAs or RSUs based on the overall dollar value of the award divided by the closing price of our common stock on the grant date. Dividends earned on RSUs are reinvested in additional RSUs and paid out at the time of vesting. Dividends earned on RSAs are paid in cash when dividends are paid on common stock.

RSU awards represent approximately 35% of the value of a NEO’s overall long-term incentive and equity. Annual RSU grants vest proportionately over three years from the grant date assuming continued employment but may accelerate to fully vest in the first year based on achievement of pre-established target annual Comparable Store Sales goals which are described below. The performance acceleration feature of the RSU award is intended to focus participants on achievement of the annual goals. If the annual goals are not achieved, the RSUs serve as a retention tool.

 

Due to contract specifications, our Chief Executive Officer and Vice Chairman, Executive Creative Director were issued RSAs, in lieu of RSUs, that were subject to achievement of pre-established annual Comparable Store Sales goals. If the threshold performance target is not met, the award does not vest and all shares forfeit. Vesting of awards range from 0% of the number of RSAs granted below threshold performance, to 50% of the number of RSAs granted at threshold performance, to 100% of the RSAs granted at target performance.

 

An RSU or RSA award recipient cannot earn more than 100% of the award, and unlike the Annual Incentive Bonus and LTICP, above-target performance does not result in receipt of additional shares of RS. Based on Fiscal 2009 Comparable Store Sales of negative four percent (-4%), 100% of the target RSUs and RSAs granted during Fiscal 2009 were earned and all shares vested.

 

The Chief Executive Officer may exercise discretion in his recommendations to the Compensation Committee with regard to grants of RS for all executives based on brand and individual performance, including the NEOs, other than himself. However, adjustments suggested by Mr. O’Donnell must not result in an expansion of the overall grant value pool under any circumstances. During Fiscal 2009, Mr. O’Donnell recommended adjustments to target awards for some executives but not any of the NEOs. Compensation Committee approval of the individual RS awards is final and no changes are permitted after their approval.

 

Performance Shares: PS were established as a long-term incentive to replace the LTICP. PS, issued as RSUs, represent 25% of the value of a NEO’s overall long-term incentive/equity. We determine the number of shares of PS based on the overall dollar value of the award divided by the closing price of our common stock on the grant date. Dividends earned on the PS are reinvested in additional RSUs and paid out at the time of vesting based on the number of shares that are earned based on performance.

 

Annual PS grants feature year three performance based vesting. PS vest upon achievement of pre-established annual Earnings Per Share (“EPS”) goals, which are described below. If threshold performance is not met, the award does not vest and all shares are forfeited. Vesting ranges from 0% of the targeted percentage amount for below threshold performance, to 50% of the targeted percentage amount at threshold performance, to 100% of the targeted percentage amount at target performance, to 150% of the targeted percentage amount if the Company achieves the stretch EPS goal. The first grant of PS awarded in March 2009 will vest in Spring 2012 based on the achievement of pre-determined performance goals, assuming continued employment. In the event of termination of employment, executives who signed the Spring 2009 non-compete/non-solicitation agreement, as described earlier, may be eligible to receive a pro-rata portion of their PS if the performance goals are achieved. The pro-rata amount is based on the number of months of service in the performance period as of their separation date.

 

Our Chief Executive Officer and Vice Chairman, Executive Creative Director were not awarded PS for Fiscal 2009 due to contract terms which were negotiated prior to the plan changes taking effect.

 

Mr. O’Donnell may exercise discretion in his recommendations to the Compensation Committee with regard to grants of PS for all executives based on brand and individual performance, including the NEOs, other than himself. However, adjustments suggested by the Chief Executive Officer must not result in an expansion of the overall grant value pool under any circumstances. Compensation Committee approval of the individual PS awards is final and no changes are permitted after their approval.

The table below describes key features of our Restricted Stock & Performance Shares award programs:

 

 

Non-Qualified Stock Options: NSOs represent 40% of the value of an NEO’s overall long-term incentive/equity. We determine the number of shares underlying each NSO grant based on the overall value of the grant using a Black-Scholes option pricing model and the closing price of our common stock on the grant date. In no event will we grant NSOs at an exercise price below the fair market value of our common stock on the date of grant. NSO grants vest proportionally over three years with a seven year term from the grant date, assuming continued employment.

 

For Fiscal 2009, Mr. Markfield was awarded performance-based NSOs that will vest over three years, with a seven year term. The performance-based nature of the grant was established to focus our Vice Chairman, Executive Creative Director on specific areas of the business for Fiscal 2009 and overall Company goals in subsequent years. At the time of grant, the Compensation Committee established annual performance goals for each vesting year: Fiscal 2009 vesting would be measured against individual performance goals while Fiscal 2010 and Fiscal 2011 would be measured against Company performance goals. Upon achievement of the annual pre-determined performance goals for Fiscal 2009, Fiscal 2010, and Fiscal 2011, one third of the original grant would vest each year. Based on Fiscal 2009 performance results, none of the first tranche of the NSO award vested and those options were forfeited.

 

Pursuant to his employment agreement dated January 11, 2010, Mr. O’Donnell received a grant of time-based NSOs in January 2010 that will vest over three years with a seven year term. The aforementioned grant is the first of three annual NSO grants to be awarded to Mr. O’Donnell pursuant to his employment agreement. Subsequent awards will be issued during Fiscal 2011 and Fiscal 2012. Additional information regarding this NSO award will be outlined in the Compensation Discussion & Analysis for Fiscal 2010.

The table below describes key features of our Stock Option award program:

 

 

The Chief Executive Officer may exercise discretion in his recommendations to the Compensation Committee with regard to grants of NSOs for all executives based on brand and individual performance, including the NEOs, other than himself. However, adjustments suggested by the Chief Executive Officer must not result in an expansion of the overall grant value pool under any circumstances. Compensation Committee approval of the individual NSO awards is final and no changes are permitted after their approval.

 

Delegation of Authority: The Compensation Committee delegates authority to the Chief Executive Officer to grant RS, PS and/or NSOs for internal promotions and new hires, subject to an overall dollar value for each award ($200,000 grant date fair value) and for all awards in total ($4,000,000 grant date fair value cumulative cap). No authority is delegated for awards to executive officers.

 

Ownership Requirements: The Company has developed share ownership requirements to establish commonality of interest between management and stockholders and to encourage executives to think and act like owners. By encouraging executives to accumulate a specific level of ownership, the Company’s compensation program ensures that pay remains at risk not only with regard to outstanding awards but also with regard to realized gains. Effective with stock award grants beginning in Fiscal 2006, the Company instituted a requirement for certain senior executives to hold the equivalent value equal to one times their

current salary in Company stock. The Chief Executive Officer has an ownership requirement of five times his current salary and the Vice Chairman, Executive Creative Director has an ownership requirement of three times his current salary. This requirement can be met through various forms of equity: vested stock options; vested restricted stock; Employee Stock Purchase Plan shares; or personal holdings.

 

Until a given executive has satisfied his or her ownership requirement, the executive must hold half of his or her after-tax gains from any sale of grants from Fiscal 2006 and beyond of the Company’s stock. If an executive does not hold half of after-tax gains in Company stock, he or she jeopardizes eligibility for future stock grants or awards.

 

Executive Perquisites

 

Executive perquisites, which are disclosed in the Summary Compensation Table, are not a significant component of our executive compensation program.

 

Fiscal 2009 Performance Metrics

 

In the continued interest of simplicity and focus, for Fiscal 2009, the Compensation Committee chose a single performance metric, Comparable Store Sales, to develop goals for awarding the single year performance-based compensation. Comparable Store Sales is a measure of sales growth for stores that have been open for over a year. Annual Incentive Bonus, LTICP, RSA vesting, and full vesting of the RSUs in the first year are all contingent upon the achievement of specific Comparable Store Sales goals. The long-term, year three performance-based PS goals are developed and measured against EPS. The Compensation Committee has chosen Comparable Store Sales and EPS as the key performance metrics because they reflect the Company’s success in managing its core operations, growing the business and driving sustained increases in profit. We believe that Comparable Store Sales and EPS reflect all aspects of performance, including both growth in revenue, expense control and efficient use of capital while maintaining simplicity in the design and execution of our executive compensation program. Moreover, we feel that these targets encourage management to focus on top line sales and regaining market share, without having operating performance and incentive compensation impacted by the Auction Rate Security market and other uncontrollable external business environment factors. These metrics, and the goals described below, reflect our focus on stabilizing the business during a difficult economic climate, which we are starting to recover from, including the challenges that impacted specialty retail beginning in Fiscal 2008. As part of the plan design for Fiscal 2009, the Compensation Committee had negative discretion on any incentive payments based on overall operating results.

 

Our Compensation Committee establishes performance goals at the beginning of each fiscal year based on a variety of factors, including but not limited to: internal budget; investor expectations; peer results; the Company’s prior year performance; upcoming fiscal year business plan; and strategic initiatives.

 

For Fiscal 2009, the Compensation Committee established the following goals. Except as otherwise noted, the Company measured Comparable Store Sales against prior year realized Comparable Store Sales:

 

 

 

The above targets are aligned with our business strategy and with our status as a growth company. Fiscal 2009 actual Comparable Store Sales was negative four percent (-4%), and, as a result, there were target-level payouts under the Annual Incentive Bonus, Restricted Stock, and LTICP plans.

 

Compensation Benchmarking

 

In addition to many other factors that affect compensation determinations, we take into account the compensation practices of comparable companies in formulating our compensation program. We consider three key factors in choosing the companies that comprise our peer group:

 

 

For Fiscal 2009, the Company used a peer group of specialty retailers consisting of the following component companies. (Note: Company named followed by stock ticker symbol):

 

 

In terms of size, our revenues fall between the median and 75th percentile of the peer group companies and our market capitalization is above the 75th percentile.

 

We evaluate our peer group on an annual basis for relevance and propose changes when appropriate. The Compensation Committee reviews and approves the recommended peer group changes as necessary. For Fiscal 2009, there were no changes to the peer group.

 

Timing of Equity Awards

 

Although the Company does not have a formal policy surrounding the timing of equity awards and the release of material non-public information, the Company does utilize a consistent approach to selecting both the grant dates and the terms of equity awards as described earlier. The Company makes annual equity grants in the first quarter of the fiscal year. For the past five years, the grant date for restricted stock was the Compensation Committee meeting date during which performance goals were certified for the prior fiscal year (scheduled approximately a year in advance). The Fiscal 2009 NSOs were granted on February 2, 2009; an exception to the historical grant timing from the previous four years (the Compensation Committee meeting date during which performance goals were certified for the prior fiscal year). This exception was made to align the grant date for all executives receiving NSOs in Fiscal 2009 based on the execution of the Vice Chairman, Executive Creative Director’s contract. The grant timing exception and individual grant details were reviewed and approved by the Compensation Committee. We do not anticipate this exception to be used for future stock option awards.

Context for Changes to Executive Contracts

 

In Fiscal 2009, the Company entered into negotiations with Mr. O’Donnell regarding the renewal of his contract. The proposals and subsequent negotiations focused on continuing Mr. O’Donnell’s position as the Company’s Chief Executive Officer through Fiscal 2012. The structure and elements of the new contract reflect his seasoned leadership which has guided the Company to industry leading performance and stability during challenging economic times. The Company is also in a critical growth period with the development of our aerie and 77kids brands. Mr. O’Donnell’s track record has proven that he is capable of delivering on the goals, objectives and expectations of our Board of Directors. Additionally, the potential for continued expansion of the Company, either through additional businesses, brands or internationally, will benefit greatly from Mr. O’Donnell’s knowledge and experience. Inherent to his leadership role, it is expected that Mr. O’Donnell will continue to mentor the Company’s executive team during his tenure. Given the nature of the expectations framing the responsibilities and accountabilities of Mr. O’Donnell’s role during the contract term, his total compensation package in the new contract is heavily performance-based. The final contract was executed on January 11, 2010.

 

In Fiscal 2008, the Company entered into negotiations with Mr. Markfield regarding his appointment as Vice Chairman, Executive Creative Director through Fiscal 2011. The Company approached the negotiations with the understanding that Mr. Markfield’s industry knowledge, company history and creative/merchandising expertise would augment and lead our creative direction. Mr. Markfield’s demonstrated innovation and passion for specialty retail, and the Company specifically, has supported our performance and growth. His knowledge and experience will be a key part of meeting the growth and performance expectations of the Board of Directors and stockholders. Additionally, the Company’s ability to continue to expand its portfolio (additional divisions, brands, or internationally) will be based on the strength and continued success of our core brands. Mr. Markfield will also be instrumental in developing the executive leadership within our design, merchandising, and marketing divisions. Given the nature of the expectations framing the responsibilities and accountabilities of Mr. Markfield’s role within the Company during the contract term, his total compensation package in the new contract is substantially performance-based. The final contract was executed on January 13, 2009 and became effective February 1, 2009, coinciding with the beginning of Fiscal 2009.

 

Severance and Change of Control Payments

 

Some of our NEOs are entitled to receive severance payments and other benefits in the event of a change in control of the Company and/or upon the termination of the executive’s employment with the Company under specified circumstances. These arrangements provide essential protections to both the executive and the Company. Agreements providing for severance and change in control payments assist the Company in attracting and retaining qualified executives who could have other job alternatives. At the same time, the applicable agreements preserve valuable Company assets by imposing upon the executive’s non-competition and non-solicitation restrictions, confidentiality obligations, and cooperation covenants. For a description and quantification of these severance and change of control benefits, please refer to the proxy section entitled “Post-Employment Compensation.”

 

During the November 2009 Compensation Committee meeting, the Committee reviewed and approved the implementation of a formal Change in Control (“CIC”) program for certain Executives, including the NEOs. The objectives of the CIC program are to motivate executives to continue to work for the best interests of the company and its stockholders in a potential CIC situation. The CIC program provides severance and other benefits only if the executive’s employment terminates under limited circumstances within eighteen months following a CIC. Executives are not provided an excise tax gross-up but are subject to non-solicitation and no-hire restrictions for a period of time following termination of employment.

 

Role of Compensation Consultants

 

The Compensation Committee has the authority under the Compensation Committee Charter to retain outside consultants or advisors to assist the Committee. In accordance with this authority, the Committee

retained the services of Frederic W. Cook & Co., Inc. as its primary outside independent compensation consultant to advise the committee on all matters related to Chief Executive Officer and other executive compensation. The services provided by Frederic W. Cook & Co., Inc. are subject to a written agreement with the Committee. The Committee has sole authority to terminate the relationship. Representatives of Frederic W. Cook & Co., Inc. attended five of the nine Compensation Committee meetings during Fiscal 2009. Frederic W. Cook & Co., Inc. does not provide any other services to the Company. The Compensation Committee may engage other consultants as needed in order to provide analysis, recommendations or other market data.

 

Under the direction of the Compensation Committee, Frederic W. Cook & Co., Inc. interacts with members of the senior management team to provide insights into market practices and to ensure that management is fully informed with regard to emerging best practices and market trends. This ensures that proposals developed by management align with the marketplace, the Company’s overall compensation objectives, and the objectives of stockholders.

 

Management engages the Hay Group, Inc. as needed to provide market data and analysis with regard to competitive market compensation rates. This data is used as a supplement to that provided to the Compensation Committee by Frederic W. Cook & Co. and to validate and verify the accuracy of data used by the Committee in its deliberations.

 

Tax Matters

 

Section 162(m) of the Internal Revenue Code generally permits a tax deduction to public corporations for compensation over $1,000,000 paid in any fiscal year to a corporation’s Chief Executive Officer and the three other most highly compensated NEOs employed at the end of the year (other than the Chief Financial Officer) only if the compensation qualifies as being performance-based under Section 162(m). The Company endeavors to structure its compensation policies to qualify as performance-based under Section 162(m) whenever it is reasonably possible to do so while meeting our compensation objectives.

 

Nonetheless, from time to time certain non-deductible compensation may be paid and the Board of Directors and the Compensation Committee reserve the authority to award non-deductible compensation in appropriate circumstances. In addition, it is possible that some compensation paid pursuant to certain equity awards that have already been granted may be non-deductible as a result of Section 162(m). The Section 162(m) disallowance for the tax year ended January 2010 was $301,000 with a tax impact of $114,000 at 38%.

 

Additionally, Section 409A of the Internal Revenue Code governs our ability to establish the time and form of payment under our nonqualified deferred compensation arrangements. We believe that we have been operating our nonqualified deferred compensation arrangements in good faith compliance with Section 409A and the guidance available thereunder in effect since January 1, 2005.

 

EXECUTIVE OFFICER COMPENSATION

 

General

 

The following table summarizes the compensation for each of the last three fiscal years of the Company’s Principal Executive Officer, Principal Financial Officer and the three other most highly compensated executive officers ranked by their total compensation as listed in the table below.

 

Summary Compensation Table

 

 

 

The maximum value of the restricted stock awards at the date of grant was as follows:

 

 

 

 

 

 

 

 

 

 

 

Grants of Plan-Based Awards

 

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

Option Exercises and Stock Vested