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 21, 2011

 

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 21, 2011

 

April 29, 2011

 

To the Stockholders of

American Eagle Outfitters, Inc.:

 

The 2011 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 Tuesday, June 21, 2011, at 11:00 a.m., local time, for the following purposes:

 

 

We have elected to furnish proxy materials and our Fiscal 2010 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 29, 2011, 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

 

Cornelius Bulman, Jr.
Corporate Secretary

AMERICAN EAGLE OUTFITTERS, INC.

 

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
JUNE 21, 2011

 

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, (the “Board”) for use at the Annual Meeting of Stockholders to be held on June 21, 2011, 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 29, 2011. (“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 25, 2011, the record date for the Annual Meeting, are entitled to vote at the Annual Meeting. As of the record date, there were 194,870,958 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 is the purpose of the Annual Meeting?

 

Stockholders will be asked to vote on the following matters at the Annual Meeting:

 

 

How does the Board recommend I vote on these proposals?

 

The Board of Directors recommends a vote:

 

 

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 2010 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 29, 2011, 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: Cornelius Bulman, Jr., Corporate 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 194,870,958 shares of Common Stock outstanding and entitled to vote. Therefore, 97,435,480 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; the advisory vote on the compensation of our named executive officers; or the advisory vote on the frequency of future stockholder advisory votes on the compensation of our named executive officers. Therefore, if you do not instruct your broker how to vote on certain proposals, your shares will not be counted for those proposals, and, therefore, we urge you to give voting instructions to your broker on all voting items.

 

What vote is required to approve each proposal?

 

 

 

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 24, 2012 and no later than April 23, 2012, 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 http://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 2012 Annual Meeting of Stockholders must be received by the Company (addressed to the attention of the Corporate Secretary) by December 31, 2011. We may omit from the proxy statement and form of proxy any proposals that are not received by the Corporate Secretary by December 31, 2011. Any stockholder proposal submitted outside the processes of Rule 14a-8 under the Securities Exchange Act of 1934 for presentation at our 2012 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 24, 2012 or after April 23, 2012. 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 April 1, 2011, 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 eight directors and nominated three candidates, all of whom are currently directors of the Company, to be elected as Class I directors at the Annual Meeting. Class I directors serve for three-year terms ending at the 2014 annual meeting, or when their successors are duly elected and qualified. The terms of the remaining Class II and Class III directors expire at the annual meetings to be held in 2012 and 2013, 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, 2011, 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 I Director:

 

Michael G. Jesselson, age 59, 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 69, 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 56, 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. 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 Directors 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 62, 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, and as a Director and Nominating and Governance Committee Chair of Hampshire Group, Limited, a developer and marketer of men’s and women’s sweaters and sportswear. 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.

 

Gerald E. Wedren, age 74, 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. He was formerly on the Board of Westaff, Inc. from 2007 to 2010.

 

The following Class III Directors have been previously elected to terms that expire as of the 2013 Annual Meeting:

 

Thomas R. Ketteler, age 68, has been a Director of the Company since February 2011. Prior to his retirement from SSC in 2005, Mr. Ketteler served as Chief Operating Officer 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 currently provides consulting services to SSC and served as a consultant to the Company’s Board from 2003 until June 2010. Mr. Ketteler provides expertise in financial and accounting issues and his historical experience with the Company is invaluable to the Board.

 

Other Public Company Board Service: Mr. Ketteler previously served on the Company’s Board from 1994 to 2003 and currently serves on the Board of Directors and as Audit Committee Chair of Encompass Group, Inc.

 

Cary D. McMillan, age 53, 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. Mr. McMillan was formerly on the Board of Directors of Hewitt Associates, Inc. from 2002 to 2010 and Sara Lee Corporation from 2000 to 2004.

 

James V. O’Donnell, age 70, 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.

 

INFORMATION CONCERNING THE BOARD OF DIRECTORS

 

Board Meetings

 

During the fiscal year ended January 29, 2011 (“Fiscal 2010”), the Board of Directors met seven times. During Fiscal 2010, 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 2010 Annual Meeting, except for Mr. Wedren.

 

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. 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 2010 Director Compensation (1)

 

 

 

 

Until June 2005, non-employee directors received an automatic quarterly grant of options to purchase shares of common stock. At January 29, 2011, the aggregate number of option awards outstanding was: Mr. Jesselson—2,903 shares; Ms. Page—14,515 shares; and Mr. Wedren—26,127 shares. Mr. Schottenstein also received various stock option awards prior to June 2005, as determined by the Compensation Committee, and awards for 325,167 shares remained outstanding at January 29, 2011.

 

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 2010. The Lead Independent Director is responsible for:

 

 

The Lead Independent Director also has the authority to call meetings of the 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 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 lead the discussion.

 

Director Independence

 

The Board has determined that the following directors 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:

 

 

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 http://www.ae.com under the links “About AEO Inc., AE Investment Info, Corporate Governance.”

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 ten times during Fiscal 2010.

 

The Board has determined that Mr. Ketteler 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 Compensation 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 eight times during Fiscal 2010.

 

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 six times during Fiscal 2010. 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 http://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 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 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 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. In the past, the Nominating Committee has retained the services of a search firm to assist in identifying and evaluating qualified director candidates.

 

The Nominating 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 auditor, the internal auditor 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 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 2010 and currently, the members of the Compensation Committee have included Messrs. Wedren (Chairman), Kane, Ketteler, McMillan, Presby 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 independent members of the Board. That process is described on the Company’s website at http://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 http://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 as of the date of this proxy statement. 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 52, 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.

 

Fredrick W. Grover, age 60, has served the Company as Executive Vice President of Brand Merchandising, Marketing and AE Direct since April 2011. Prior thereto, Mr. Grover served the Company as Executive Vice President of Brand Marketing and AE Direct since April 2009, as Executive Vice President of AE Direct from December 2004 to April 2009 and as President of Bluenotes from January 2003 to December 2004. From 2001 to 2003, Mr. Grover served the Company as Senior Vice President of Merchandising and from 1992 to 2001 he served the Company as Vice President, General Merchandising Manager. Prior to that time, Mr. Grover held various retail positions with the Company starting as an Assistant Store Manager in 1978 and rising to the position of Divisional Merchandising Manager in 1988.

 

Joan Holstein Hilson, age 51, 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 with Coopers & Lybrand.

 

Dennis R. Parodi, age 59, 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 37, 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 2010, with the exception of one late Form 4 filing for each of Messrs. DiDonato, Fiore, Kane and Markfield, all reporting persons complied with applicable filing requirements.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This Compensation Discussion and Analysis describes the compensation philosophy, objectives, policies and practices with respect to our named executive officers (the “NEOs”). For Fiscal 2010, our NEOs were our (1) Chief Executive Officer; (2) Vice Chairman and Executive Creative Director; (3) Executive Vice President, Supply Chain and Real Estate; (4) Executive Vice President and Chief Financial Officer; (5) Executive Vice President and Chief Design Officer; (6) Executive Vice President—Brand Marketing & AEO Direct; and (7) Executive Vice President—Store Operations. The Executive Vice President, Supply Chain and Real Estate ended his employment with the Company on November 30, 2010 but is deemed to be a NEO for Fiscal 2010 because of the level of his total compensation and because he served as an executive officer during the year. The Executive Vice President and Chief Design Officer resigned effective October 27, 2010 but is deemed to be a NEO for Fiscal 2010 because of the level of her total compensation and because she served as an executive officer during the year.

 

Executive Summary

 

During Fiscal 2010, the Company and the specialty retail industry faced many challenges. The economic climate of rising fuel prices, raw material cost increases, high unemployment and housing and credit crises continued to lead consumers to be discriminating with their discretionary income. This led us to focus on operational practices and expenses such as pricing strategies, promotional activity, production, inventory management, distribution and non-merchandise procurement. When reviewing the results for the year, the Compensation Committee considers the economy’s impact on the financial and operational performance of the Company as well as executive leadership’s efforts to drive the Company strategy affecting top and bottom-line growth. Review of year-end results and associated pay decisions incorporate current-year, past and expected performance from the Company, including all brands and lines of business. For Fiscal 2010, achievement of the performance goals was affected by both external and internal factors, resulting in performance that fell below the Board-approved annual operating plan but consistent with threshold goals under the variable incentive plans. Threshold goals establish the minimum acceptable level of performance against the established performance objectives. This resulted in earn-outs under the performance-based compensation elements for Fiscal 2010 that were below the targeted award opportunity for the NEOs.

 

For Fiscal 2010, NEO compensation was driven by the Company’s financial results, as measured by Net Income and Comparable Store Sales as described in more detail below in the “Fiscal 2010 Performance Metrics” section. Net Income excludes (1) extraordinary charge(s); and/or (2) any accruals for restructuring programs, merger integration costs, or merger transaction costs; and/or (3) other unusual or infrequent items (whether gains or losses); and/or (4) asset impairment charges; and/or (5) discontinued operations (“Adjusted Net Income”). Comparable Store Sales is a measure of sales growth for stores that have been open for more than one year. The goals were intended to drive growth in all brands while also recognizing the difficult economic environment that began in 2008 and continued throughout 2010. As described herein, our Adjusted Net Income results achieved threshold-level performance. Accordingly, this resulted in a payout equal to 25% of the target annual incentive bonus and failure of the full restricted stock units award for the fiscal year to vest. All performance awards were based on pre-established goals and discretion was not exercised in determining NEO earnings.

The objectives and framework of our executive compensation program in Fiscal 2010 remained relatively consistent with those of Fiscal 2009. The overall philosophy of our executive compensation program is to attract highly skilled, performance-oriented executives and to motivate them to achieve outstanding results through appropriate means. Our plan is guided by four core principles: Performance; Competitiveness; Affordability; and Simplicity. Executive compensation is delivered to our NEOs primarily through three elements:

 

 

Working within our principles, these elements enable the Company to offer a competitive total annual compensation opportunity in which realized pay and costs are highly sensitive to the degree to which key operational performance objectives are attained. The compensation for our NEOs is carefully balanced to provide a mix of cash and equity-based awards and focused on both annual and long-term performance to ensure that executives are rewarded for, and held accountable for, achievement of both annual and long-term financial and strategic objectives.

 

We regularly review our programs to ensure alignment with our principles, the competitive environment and corporate governance best practices. Our overall program aligns with recognized corporate governance best practices, including: a long-term performance-based goal; share ownership requirements; exclusion of gross-ups on taxable benefits; executive payment for personal use of the Company aircraft; and change in control and retirement benefit provisions that are modest in relation to many of our peers. Changes were made to the design of the overall compensation program in Fiscal 2009. During Fiscal 2010, the Compensation Committee made additional adjustments in support of the Company’s long-standing policy of employing a program with a balanced mix of cash and equity focused on annual and long-term performance measurement and metrics that are key drivers of sustainable shareholder value creation over time. The overall program is intended to ensure that management is held accountable for long-term results and does not pursue overly risky business strategies in order to maximize short-term compensation payouts. Following an extensive executive compensation analysis and benchmark project during Fiscal 2010, we implemented additional changes effective for Fiscal 2011. Details of these plan design changes are discussed below in the “Compensation Program Changes” section.

 

Compensation Program Changes

 

The following compensation program changes were adopted for Fiscal 2011 as a result of the Company’s continuing effort to adhere to corporate governance best practices:

 

 

 

The following adjustments were made for Fiscal 2010 to further align the interests of our NEO’s with the long-term interests of our stockholders as well as to focus operational strategies and performance on two key metrics:

 

 

As described in the Fiscal 2009 Compensation Discussion & Analysis, the executive compensation program was redesigned for Fiscal 2009 with the following changes:

 

 

Overview

 

Role of Our Compensation Committee

 

Our Compensation Committee reviews and approves annual base salaries and other compensation of our NEOs and makes awards and other decisions relating to the Company’s 2005 Amended Plan. The Compensation Committee also reviews and approves, where applicable, others aspects of executive compensation. Furthermore, the Compensation Committee reviews and approves changes to the Company’s compensation peer group, as deemed appropriate, taking into consideration suggestions made by Mr. O’Donnell.

 

Role of Executive Officers in Compensation Decisions

 

Mr. O’Donnell annually reviews the performance of each NEO with the Compensation Committee and makes recommendations with respect to each element of executive compensation for the NEOs, excluding himself. Mr. O’Donnell considers brand and individual performance in his recommendations to the Compensation Committee with regard to grants of equity for all executives including the NEOs. However, adjustments suggested by Mr. O’Donnell must not result in an expansion of the overall grant value pools

under any circumstances. The Compensation Committee makes the final determination of individual equity awards taking into consideration Mr. O’Donnell’s recommendations. During Fiscal 2010, Mr. O’Donnell did not recommend adjustments to target awards for any executives including the NEOs.

 

Role of Compensation Consultants

 

The Compensation Committee has the authority under the Compensation Committee Charter to retain outside consultants or advisors to assist the Compensation Committee. In accordance with this authority, the Compensation Committee retained the services of Frederic W. Cook & Co., Inc. as its primary outside independent compensation consultant to advise 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 Compensation Committee. The Compensation Committee has sole authority to terminate the relationship. Representatives of Frederic W. Cook & Co., Inc. attended four of the eight Compensation Committee meetings during Fiscal 2010. 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.

 

For Fiscal 2010, the Compensation Committee primarily engaged consultants from Frederic W. Cook & Co. to provide guidance and insights related to the executive compensation analysis and benchmark project, changes to the executive compensation program for Fiscal 2011 and review and adjustment of the Chief Executive Officer’s compensation package for Fiscal 2011.

 

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 Compensation Committee in its deliberations.

 

Compensation Program Objectives

 

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

 

 

 

Compensation Program Elements

 

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

 

 

The Annual Incentive Bonus was entirely “at risk” based on the Company’s performance during Fiscal 2010 and therefore subject to forfeiture if the Company did not achieve threshold performance goals. Performance Shares are also entirely “at risk” and subject to forfeiture if the Company does not achieve threshold performance goals by the close of Fiscal 2012, as described below. At threshold performance, the Chief Executive Officer’s total annual compensation declines by 37% relative to target performance. The other NEOs’ total annual compensation declines by an average of 36% 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.

 

Our compensation program is intended to ensure that a similar or larger portion of our executives’ total compensation is “at risk” and varies based on Company performance than our peer companies. For Fiscal 2010, our Chief Executive Officer had approximately 63% of his total compensation at risk and the remaining NEOs had approximately 55% of their total compensation at risk. Elements of our executive compensation program which we consider “at risk” are described further below in the “Compensation Program Elements” section.

 

The portion of total pay attributable to long-term incentive compensation 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 and paid on average at the 75^th percentile of our peer group to reflect the Company’s large size relative to the peer group as measured by annual 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 75^th 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 shareholder 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 2010, the target award opportunity for our Chief Executive Officer was equal to 130% of his base salary and the target award opportunities for our other NEOs ranged from 60% to 100% of their respective base salary. Annual Incentive Bonus payouts fluctuate based upon Adjusted Net Income and Comparable Store Sales results, with actual payments 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 amount if the Company achieves goals that are substantially above our business plan for the fiscal year (the “Compensation Goals”). Refer to the “Fiscal 2010 Performance Metrics” section below for a description of the Fiscal 2010 Annual Incentive Bonus metrics. During Fiscal 2010, threshold-level bonuses (25%) were earned based on Adjusted Net Income of $209 million.

 

Equity Awards

 

Equity compensation is designed to align executive compensation with long-term Company performance. The Company utilizes a combination of time-based RSUs, performance-based RSUs and time-based NSO grants to focus management on corporate performance and sustainable earnings growth. The overall plan design has a heavier emphasis on restricted stock units 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.

 

During Fiscal 2010, Mr. O’Donnell did not recommend adjustments to target awards for any executives including the NEOs.

 

Restricted Stock Units (RSUs): We determine the number of RSUs based on the overall dollar value of the award divided by the closing price of our common stock on the grant date. Dividend equivalents on RSUs are reinvested in additional RSUs and paid to the extent the RSUs vest.

 

RSU awards represent approximately 35% of the value of a NEO’s overall equity awards. 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 (on the Compensation Committee certification date) based on achievement of a pre-established target annual Net Income goal which is described below. The performance acceleration feature of the RSU award is intended to focus participants on achievement of the annual goals and is a distinctive feature of the Company’s compensation plan to enhance recruitment and retention. If the annual goals are not achieved, the RSUs serve as a retention tool.

An RSU award recipient cannot earn more than 100% of the award and, unlike the Annual Incentive Bonus, above-target performance does not result in receipt of additional shares of RSUs. Based on Fiscal 2010 Adjusted Net Income of $209 million, 33.33% of the target RSUs granted during Fiscal 2010 were earned and vested. The remaining units will vest proportionately in 2012 and 2013 on the anniversary of the grant date.

 

Performance Shares (PS): PS were established as a long-term incentive to replace the LTICP. PS, issued as RSUs, represent approximately 25% of the value of a NEO’s overall long-term incentive/equity. We determine the number of PS based on the overall dollar value of the award divided by the closing price of our common stock on the grant date. Dividend equivalents on the PS are reinvested in additional RSUs and paid out to the extent the RSUs vest.

 

Annual PS grants feature year three performance based vesting. PS vest upon achievement of pre-established Earnings per Share (“EPS”) goals as further described below. If threshold performance is not met, the award does not vest and all shares are forfeited. Vesting ranges from 0% of the target amount for below threshold performance, to 50% of the target amount at threshold performance, to 100% of the target amount at target performance, to 150% of the target amount if the Company achieves goals that are substantially above our business plan for the performance period. In the event of termination of employment, executives who signed a RSU Confidentiality, Non-Solicitation, Non-Competition and Intellectual Property agreement, 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 days of service in the performance period as of their separation date.

 

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

 

 

Non-Qualified Stock Options (NSO): NSOs represent approximately 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 proportionately 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 proportionately 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 2010 performance results, 100% of the second tranche of the NSO award vested.

 

The table below describes key features of our NSO award program:

 

 

Delegation of Authority: The Compensation Committee delegates authority to the Chief Executive Officer to grant RSU, 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 for awards issued on any date). 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, including the NEOs, 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 ($8.5 million) and the Vice Chairman, Executive Creative Director has an ownership requirement of three times his current salary ($2.85 million). Ownership requirements are adjusted for increases in annual salary as necessary. 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. The Chief Executive Officer considers compliance with the ownership requirements when recommending annual equity awards for the executives, including the NEOs, to the Compensation Committee. 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.

 

Annual Award Pool

 

We established a performance-based Annual Award Pool (the “Award Pool”) for NEOs who are subject to Internal Revenue Code Section 162(m) (not including the Chief Financial Officer). At the beginning of each fiscal year, the Compensation Committee establishes annual performance goals for the Award Pool based on the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the respective year. Achievement of the performance goal determines the maximum amount payable as cash awards and/or grants of time-based restricted stock awards to the NEOs. The following maximum award levels were established during Fiscal 2010 as a percent of EBITDA, in each case subject to the 2005 Amended Plan maximum of $5 million per person and further subject to the exercise of negative discretion by the Compensation Committee to reduce the maximum award:

 

 

 

 

 

During Fiscal 2010 and Fiscal 2011, the Company granted time-based RSUs to the NEOs pursuant to the Award Pools based on the achievement of the respective Fiscal 2009 and Fiscal 2010 performance goals. There have been no awards of cash incentives to NEOs under the Award Pools.

 

Executive Perquisites

 

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

 

Fiscal 2010 Performance Metrics

 

For Fiscal 2010, the Compensation Committee chose two performance metrics to develop goals for awarding the Annual Incentive Bonus and 100% accelerated vesting of the RSUs. The goals, Adjusted Net Income and Comparable Store Sales were equally weighted to reflect their shared importance in the operational success of the business. The Annual Incentive Bonus is contingent upon the achievement of specific Adjusted Net Income and Comparable Store Sales goals while the accelerated vesting of the RSUs in the first year (on the Compensation Committee certification date) is contingent upon the achievement of a specific Adjusted Net Income goal. The long-term, three year performance-based PS goals are developed and measured against EPS. The Compensation Committee has chosen Adjusted Net Income, 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 Adjusted Net Income, Comparable Store Sales and EPS reflect all aspects of performance, including top-line revenue, expense control and efficient use of capital while maintaining simplicity in the design and execution of our

executive compensation program. Moreover, we believe that these targets encourage management to focus on top-line sales and regaining market share, without having performance based compensation impacted by extraordinary, unusual or infrequent items (as more fully described in the definition of Adjusted Net Income above). These metrics and the goals described below reflect our focus on growth while also recognizing the difficult economic climate, including the challenges that impacted specialty retail beginning in 2008. As part of the plan design for Fiscal 2010, the Compensation Committee had negative discretion (i.e., authority to reduce the amount otherwise payable based on achievement of the performance goals) on any incentive payments based on overall operating results. Overall operating results are considered a reflection of leadership’s ability to drive strategy and impact top and bottom-line growth. During Fiscal 2010, the Committee did not exercise negative discretion for any executive awards, including the NEOs.

 

Our Compensation Committee establishes specific performance metrics goals for each performance-based compensation element at the beginning of the respective 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; the upcoming fiscal year business plan; and strategic initiatives.

 

The Compensation Committee established the following goals for Fiscal 2010. Except as otherwise noted, the Company measured Adjusted Net Income and Comparable Store Sales against prior year Adjusted Net Income and Comparable Store Sales (excluding MARTIN+OSA which discontinued operations in Fiscal 2010):

 

 

 

 

The above targets are aligned with our business strategy and with our status as a growth company. Fiscal 2010 Adjusted Net Income and Comparable Store Sales were two-hundred and nine million ($209 million) and negative one percent (-1%) respectively, and as a result there were threshold-level payouts under the Annual Incentive Bonus (based on the Adjusted Net Income) and proportional vesting of RSU’s.

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 2010, the Company used a peer group of specialty retailers consisting of the following component companies. (Note: company name followed by stock ticker symbol in parenthetical):

 

 

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

 

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 2010, there were no changes to the peer group.

 

Timing of Equity Awards

 

Although the Company does not have a formal policy relating to 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 above. The Company makes annual equity grants in the first quarter of the fiscal year. For the past six years, the grant date for restricted stock and RSUs was the Compensation Committee meeting date during which earnings were certified for the prior fiscal year (scheduled approximately one year in advance). The Fiscal 2010 NSOs were also granted on the Compensation Committee meeting date. It is the Company’s intention to continue the practice of setting the equity award grant date on the Compensation Committee meeting date (during which time prior year financial results are certified).

 

Employment Agreements

 

Variations for NEOs with Employment Agreements

 

The Chief Executive Officer and Vice Chairman, Executive Creative Director are employed pursuant to individual employment agreements which were separately negotiated with the Compensation Committee. These individual agreements provide an overall compensation package that may compare more favorably to market practice than the target competitive positioning for other NEOs based on individual circumstances and the criticality of retaining these key leaders. However, the general 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.

Context for Changes to Employment Agreements

 

As discussed in detail in the Fiscal 2009 Proxy, the Company entered into negotiations with Mr. Markfield (Fiscal 2008) and Mr. O’Donnell (Fiscal 2009) regarding the terms of their employment agreements with the Company. Mr. Markfield’s final contract was executed on January 13, 2009 (effective for Fiscal 2009) and Mr. O’Donnell’s final contract was executed January 11, 2010 (effective for Fiscal 2010).

 

For Fiscal 2010, the equity compensation components and mix for Mr. O’Donnell and Mr. Markfield were adjusted to align with those of the other NEOs. As a result they were issued RSUs, PS and NSOs, as described above.

 

Severance and Change of Control Payments

 

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 NEO 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 executives non-competition and non-solicitation restrictions, confidentiality obligations and cooperation covenants. For a quantification of these severance and change of control benefits, please refer to the section below entitled “Post-Employment Compensation”.

 

During Fiscal 2009, the Compensation Committee approved a Change in Control (“CIC”) plan which provides for CIC agreements (the “CIC Agreement”) with certain executives, including each of the NEOs. The objectives of the CIC plan are to motivate executives to continue to work for the best interests of the Company and its stockholders in a potential CIC situation. In the event of a CIC, any and all common shares (i.e., options, restricted shares, performance shares or other forms of securities issued by the Company and beneficially owned by the executive) that are unvested, restricted or subject to any similar restriction shall vest and become exercisable, or such restrictions shall lapse. Additionally, the CIC agreement contains double-trigger change in control provisions (i.e., the CIC plan provides severance and other benefits only if the executive’s employment terminates under-limited circumstances within eighteen months following a CIC). The payments and benefits provided for in the CIC plan are separate from and do not modify other active compensation elements as described earlier. Severance and other benefits include but are not limited to: (i) a cash severance amount equal to 1.5 times (2 times for the Chief Executive Officer) the executive’s annual compensation (defined as annual base salary plus target annual incentive bonus); (ii) a target annual incentive bonus prorated based on the CIC date; and (iii) coverage under the Company’s group health insurance for the 12-month (18-month for Chief Executive Officer) period following termination. Executives are not provided with an excise tax gross-up. Executives are subject to confidentiality, 18-month non-solicitation (24-months for Chief Executive Officer), non-disparagement and no-hire restrictions following termination of employment. Prior to receipt of any such payments, the executive is required to execute a general release of the Company in the form attached to the CIC Agreement.

 

Upon the termination of their employment by the Company (for any reason other than “for cause” as defined under their respective employment agreements), the Chief Executive Officer and Vice Chairman, Executive Creative Director are each eligible to receive post-employment cash payments (in addition to other benefits) under the terms of their employment agreements, in recognition of their years of service with the Company and their valuable contributions during their tenure. The Chief Executive Officer will receive a retirement benefit equal to his total cash compensation (annual base salary plus annual incentive bonus) for the highest compensated fiscal year in the seven fiscal years prior to his termination of employment. The Vice Chairman, Executive Creative Director will receive a fixed annual renewal term benefit for three years during which time he will be available to management and the Board of Directors as a consultant.

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 29, 2011 was $89,000 with a tax impact of $34,000 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 (1) Principal Executive Officer; (2) Principal Financial Officer; (3) the three other most highly compensated executive officers who were serving at the end of Fiscal 2010 presented for the periods during which they were an executive officer; (4) Mr. Kerin, who retired from the Company effective November 30, 2010; and (5) Ms. Nealz, who resigned from the Company effective October 27, 2010, 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:

 

 

 

 

 

 

 

 

 

 

In addition to the benefits listed in the table above, the Company also pays attorneys fees related to the preparation and filing of NEO stock ownership forms with the SEC.

 

 

Grants of Plan-Based Awards

 

 

Outstanding Equity Awards at Fiscal Year-End