American Eagle Outfitters conducts regular factory inspections throughout our supply chain to ensure that suppliers comply with the expectations laid out in our Vendor Code of Conduct in addition to local laws and regulations. These extensive inspections include a review of the safety of the workplace, the status of working hours and wage compliance and the overall treatment of the workers in the factory through interviews and observation. Prior to beginning any production, all prospective factories must be reviewed against our Code. Those who are unwilling or unable to comply are not awarded contracts with American Eagle Outfitters.

Once a factory is approved for production it is included in our annual inspection cycle. To conduct these inspections we rely on a team of passionate individuals – both American Eagle Outfitters employees and trusted third-party auditors – spread out around the world. Our team members and approved third parties are dedicated to improving the lives of workers and provide us with ongoing and updated information on factory conditions.

During apparel factory evaluations, we identify ways to continually improve working conditions. When we do find a noncompliance issue, our first step is to work with the factory management to identify root causes and the actions needed for remediation. This clear and collaborative approach benefits factory workers in addition to strengthening the ongoing relationships that make up our supply chain. However, when factories have been unwilling or unable to make changes to remedy critical issues, we’ve taken steps up to and including ending our business relationship with the factory.

We monitor our supply chain performance on an ongoing basis by measuring and analyzing key metrics collected during factory inspections. In FY 2011, we worked with 207 apparel factories at some point throughout the year. Of those factories, 179 received at least one inspection by our internal teams or our third-party partners. Of the remaining factories, 26 were only active sourcing partners for part of the year. In FY 2012, we worked with 176 apparel factories. Of those factories, 130 received at least one inspection. 42 of the factories that were not audited were not active partners for the whole year. This increase in partial-year factories can be attributed to business needs surrounding the closure of our 77kids brand.

The information we collect during factory inspections is used to chart the performance and progress of our existing suppliers. We rely on a careful annual review of this information to chart our performance monitoring efforts and contribute to internal discussions with Sourcing teams regarding allocation of American Eagle Outfitters products.

The number of factories with fire, emergency and work floor health & safety issues has declined somewhat in each of our sourcing regions, but there is still a lot of work to do. We have been working closely with particularly challenged factories to help them put better processes in place to ensure that health & safety measures are given additional and ongoing attention. We also help to educate workers about the importance of these topics. Our goal is to be able to report continued progress in future years.

The ability of workers to have their voices heard is very important to our core values. Still, freedom of association issues (including interference with the functioning of a union and not following the terms of a collective bargaining agreement) remain a challenge in many countries, and we believe that our data does not accurately depict the extent of this systematic problem. This is due in part to countries where freedom of association is unlawful and therefore difficult to assess. However, this does not mean that the issues are far from our minds. We engage with brands, NGOs and other stakeholders throughout the year to confront country-specific issues. We continue to work with factories to encourage better overall management/worker dialogue where our internal auditors and third-party partners identify a need.

Hours of work continues to be a complex issue. The violations in our Hours of Work chart include working over the allowed 60 hours a week, not providing at least one rest day per week and not keeping complete time records. Factories that fall into this category had at least one hours-related finding. We are currently working to help our suppliers improve their productivity and management systems to better react to production challenges. We take a long-term approach to working with factories on these issues and look to see progressive improvement over time to achieve real change and sustainable results.

Existing penalties have helped significantly reduce underage labor in our industry, but they are not yet universally formalized or enforced; American Eagle Outfitters maintains an active watch to ensure protection of young people all over the world. If a young worker is found to be under the legal working age, we require that the factory enact a remediation plan that involves immediate action and ongoing monitoring of the adolescent.

This includes ending the employment relationship straightaway, settling outstanding wages, understanding the child’s background and needs and continuing compensation at a minimum wage on a monthly basis until he or she reaches the minimum working age. Documentation and monitoring of each case must be sent to our supply chain team to ensure any factory that encounters this issue takes the appropriate, required steps to resolve it swiftly.

Management cooperation refers to transparency issues encountered during audits, including hiding information necessary to the audit, use of double books and not giving auditors access to every area of the factory or to workers for interviews. We take these issues very seriously – a factory that is not transparent with us is put on probation status and must be completely transparent before the status can be lifted.

Factories that were counted in the Wage violation category had at least one wage-related noncompliance, which could include non-payment of minimum wage, issues with overtime payment, incomplete payment records and delayed payment of wages. Again, we are currently implementing programs to help our factories overcome these wage issues, which can often be addressed through increased productivity and more efficient production planning.

In 2013, we adopted a new policy to prevent unauthorized subcontracting of our products. Our suppliers are now required to disclose all subcontractors and have them set up officially in our sourcing system for approval. The use of non-declared subcontractors will be subject to penalty up to and including termination of the business relationship.

In 2013, we adopted a new policy to prevent unauthorized subcontracting for our products.

Sustainable change in factories comes from honest, open communication. We support programs that foster safe, constructive dialogue between American Eagle Outfitters, factory management and workers.

In May 2011, American Eagle Outfitters joined with INFACT Global Partners and the Fair Labor Association (FLA) to develop a human resources training program for our Chinese suppliers. This program created a production plan that reduced working hours and increased workers’ wages while maintaining factory productivity levels. In addition to this plan, American Eagle Outfitters, INFACT and FLA worked together to build a channel for workers to safely raise any issues within their factories.

In February 2012, American Eagle Outfitters also partnered with Sumerra, an environmental safety and health management company, and Openview Source Limited, a compliance solutions consultant, to conduct an additional training program for our Chinese suppliers. This training included an overview of new legal requirements for workers’ health and employer resources for maintaining a safe environment for all workers. Training also covered the occupational health requirements within each factory and necessary safety equipment needed on-site.

In 2014, we’ll work with local advisors in South Asia to launch a program establishing a two-way channel of communication between factory management and workers. This open channel will be a means to discuss and resolve reported workplace grievances and empower workers to voice their concerns about issues that arise. We’ll conduct ongoing training to ensure that everyone feels confident their concerns are addressed with equal importance, regardless of their position in the factory.

The chart below shows non-compliances identified in our approved supplier bases during annual inspections in FY 2011 and 2012. Our goal is continuous improvement in the performance of our suppliers and the chart reflects the progress made as well as the work that remains.