Brandon McArthurShivam KhannaBobby SchusterGanapati Raman

Company Overview Industry OverviewGrowth StrategySWOTAuction Rate SecuritiesFinancial Projections

Engage in the design, marketing, and sale of clothing in the United States and Canada

Product Line: Jeans, Graphic Ts, accessories, outerwear, footwear, basics, and swimwear

Target Market: Males and Females Ages 15-25 Operate in Both U.S since 1977 and Canada

since 2001 Aerie

New Intimates line opened in 2006, available at most AE stores as well as online

MARTIN + OSA Line opened in 2006 targeting 28-40 year old women

and men 77 Kids

New Children’s apparel Brand launched online in 2008 and available in stores in 2010

Net Sales are down 2.2% in the last year.

Comparable Store Sales (stores opened in the last 53 weeks) are down 10%.

Net Profit Margins are down about 7% 13% (2007) to 6% (2008)

AEO sold $393.6M of Auction Rate Securities in 2008.

100,000 stores in clothing retail Not including shoe and jewelry stores

Highly concentrated 50 largest companies account for 65% of sales

Competition Large retailers, wholesalers, and internet

retailers Demand driven by personal income and

fashion trends Labor intensive

Average annual sales per worker: 130,000

Highest unemployment has consumers slashing discretionary spending on clothing

Top Competitors Abercrombie & Fitch

▪ UBS AG analyst expects ANF to close Ruehl concept by EOY (not announced by ANF)

The Gap

AEO concept, Martin + Osa, sales up 30% in 2008 probably due to promotions AEO expected to forecasts opening 28 new

American Eagle and aerie concepts, no Martin + Osa

AEO suing Citi for auction rate securities Claims to have been “lured” in to buying

$258 million while the market for these securities was falling

$100 invested starting in 2004

Fiscal 2008 goals: Open 80 stand alone aerie stores Open 40 new AE stores Open 15 Martin + OSA stores

Fiscal 2008 Actual: Opened 77 stand alone aerie stores Opened 34 new AE stoes Opened 9 Martin + OSA sores

As of January 31, 2009: 954 American Eagle Outfitters stores in the United

States and Canada 116 aerie stand-alone stores 28 MARTIN + OSA stores.  

• The threat of substitute products• There are several substitutes for American Eagle clothing.

However, the propensity for buyers to substitute are not as high.

• The threat of the entry of new competitors • The barriers of entry are not high. However, AEO has a strong

Brand Recognition which makes its threat to new competitors lower.

• The intensity of competitive rivalry • There are competitive rivalries among stores and the possibility

for new companies to add too the rivalries, but because of AEO’s strong brand name the probability of new, competitive rivalries is low.

• The bargaining power of customers • Customers have high bargaining power because there are

several substitutes to the products that American Eagle provides, although generally at higher prices.

• The bargaining power of suppliers • AEO deals mainly with mainly with one supplier, but does

not have any exclusive contracts and has access to other suppliers

•Brand Identity/Leading Brand•Better positioned Pricing Strategy in

weak economies to comparables

Strengths Weaknesses

Opportunities• Growth in stores• 77Kids• Martin + OSA•Aerie•Flagship Store In Times Square

Threats•Continuance in poor consumer confidence•Significant Write-Downs from ARS• Introduction of more competitors• Becoming out of favor -“Fashion is Fad”•Customs Regulation

•Cyclical business model (Seasonality)• Affected by weak economy• Poor consumer confidence

Auction rate securities are long-term debt instruments with interest rates reset through periodic short-term auctions.

Holders of ARS can either sell into the auctions; bid based on a desired interest rate or hold and accept the reset rate.

If there are insufficient buyers, then the auction fails and holders are unable to liquidate their investment through the auction.

The result of a failed auction is that the ARS continues to pay interest in accordance with its terms; however, liquidity for holders is limited until there is a successful auction or until such time as another market for ARS develops.

ARS are generally callable at any time by the issuer. Auctions continue to be held as scheduled until the ARS matures or until it is called.

Recorded a net temporary impairment of $35.3 million ($21.8 million, net of tax).

•   Level 1  — Quoted prices in active markets for identical assets or liabilities. Quoted current market prices are readily available.     •   Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities  •   Level 3 — Unobservable inputs (i.e. projections, estimates, interpretations, etc.) that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities..

Have borrowing agreements with two separate financial institutions under which we may borrow an aggregate of $350.0 million.

$150.0 million can be used for demand letter of credit facilities and $100.0 million can be used for demand line borrowings.

As of January 31, 2009, we had outstanding demand letters of credit of $57.3 million and demand line borrowings of $75.0 million.

The demand line facilities comprising the $100.0 million borrowing capacity expire on April 22, 2009. Currently working with our lenders to renew

these facilities or to obtain committed credit lines of a comparable amount.

(In USD Thousands) Actual Estimates2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Net sales 1,519,968 1,881,241 2,309,371 2,794,409 3,055,419 2,988,866 2,839,423 2,782,634 2,921,766 3,272,378 3,763,235 % growth 23.8% 22.8% 21.0% 9.3% -2.2% -5.0% -2.0% 5.0% 12.0% 15.0%

Cost of sales 965,716 1,003,433 1,235,620 1,453,980 1,632,281 1,814,765 1,566,413 1,535,085 1,611,839 1,805,260 2,076,049 % of total sales 63.5% 53.3% 53.5% 52.0% 53.4% 55.2% 55.2% 55.2% 55.2% 55.2% 55.2%Gross profit 554,252 877,808 1,073,751 1,340,429 1,423,138 1,174,101 1,273,010 1,247,549 1,309,927 1,467,118 1,687,186 % margin 36.5% 46.7% 46.5% 48.0% 46.6% 39.3% 44.8% 44.8% 44.8% 44.8% 44.8%

SGA 379,289 446,829 538,091 665,606 715,180 740,742 681,534 667,904 701,299 785,455 903,273 % of total sales 25.0% 23.8% 23.3% 23.8% 23.4% 24.8% 24.0% 24.0% 24.0% 24.0% 24.0%

Depr / Amort 56,281 68,273 74,578 88,033 109,203 131,219 154,626 165,412 179,973 197,230 217,723 % of PPE 12.1% 11.0% 11.2% 10.3% 10.0% 10.1% 10.8% 10.8% 10.8% 10.8% 10.8%

Goodwill impairment loss 14,118 0 0 0 0 0 0 0 0 0 0

Operating income (loss) 104,564 362,706 461,082 586,790 598,755 302,140 436,849 414,233 428,655 484,433 566,190

Other income, net 2,021 4,129 15,885 42,277 37,626 17,790 17,478 16,574 17,151 19,382 22,653 % operating income 1.9% 1.1% 3.4% 7.2% 6.3%

Non-temporary impairment 22,889 2,289 2,289 2,289 2,289 2,289

EBT 106,585 366,835 476,967 629,067 636,381 297,041 0 452,038 428,518 443,517 501,527 586,555

Income taxes 46,585 142,603 183,256 241,708 236,362 117,980 178,017 168,754 174,661 197,506 230,990 % of EBT 43.7% 38.9% 38.4% 38.4% 37.1% 39.7% 39.4% 39.4% 39.4% 39.4% 39.4%

Income from cont ops 60,000 224,232 293,711 387,359 400,019 179,061 274,022 259,764 268,856 304,021 355,564

Net income 60,000 213,343 294,153 387,359 400,019 179,061 274,022 259,764 268,856 304,021 355,564

Income Statement

(In USD Thousands) Actual Estimates2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Operating activities:Net income 213,343 294,153 387,359 400,019 179,061 274,022 259,764 268,856 304,021 355,564

Adjustments to reconcile net income: Depreciation and amortization 68,273 74,578 88,033 109,203 133,141 154,626 165,412 179,973 197,230 217,723 Other adjustments to net income 38,278 61,212 15,552 28,440 73,654 49,048 48,067 50,470 56,527 65,006

Changes in assets and liabilities: Decrease / (increase) in accts rec (3,612) (2,714) 3,101 (5,875) (9,551) 6,573 698 (1,710) (4,309) (6,033) Decrease / (increase) in inv (17,405) (72,748) (52,905) (22,841) (8,443) 46,314 4,972 (12,182) (30,699) (42,978) Decrease / (increase) in other (29,205) (15,659) 7,817 (1,038) (22,647) 18,160 3,277 (3,502) (10,973) (15,767) Increase / (decrease) in op liab 127,478 119,924 120,075 (42,956) (47,571) 13,358 (9,860) 24,157 60,876 85,226

Total adjustments 183,807 164,593 365,641 64,933 118,583 288,079 212,567 237,206 268,652 303,176

Total cash flows from operations 397,150 458,746 753,000 464,952 297,644 562,101 472,331 506,062 572,673 658,741

Investing activities:Capital expenditures (97,288) (81,545) (225,939) (250,407) (265,335) (135,000) (100,000) (135,000) (160,000) (190,000)Investment activities (178,392) (311,519) (425,182) 353,068 343,724

Total cash flows from investments (275,680) (393,064) (651,121) 102,661 78,389 (135,000) (100,000) (135,000) (160,000) (190,000)

Financing activities:Payments on note payable (2,655) (745) (3,020) (1,912) (2,177) (15,000) (15,000) (15,000) (15,000) (15,000)Proceeds from note payable 0 0 2,025 0 75,000 0 0 0 0 0Repurchase of common stock 0 (161,008) (146,485) (438,291) (3,432) 0 0 0 0 0Repurchase common stock-employees 0 (10,487) (7,635) (12,310) 0 0 0 0 0 0Cash dividends paid -8,709 -42,070 -61,455 -80,612 (82,394) (86,448) (86,448) (86,448) (86,448) (86,448)

Total cash flows from financing 29,262 -166,112 -168,695 -513,786 (8,511) (101,448) (101,448) (101,448) (101,448) (101,448)

Net increase (decrease) in cash 150,732 -100,430 -66,816 53,827 367,522 325,653 270,883 269,614 311,225 367,293

Cash Flow Statement

(In USD Thousands) Actual Estimates2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Current assets: Cash & cash equivalents 251,324 275,061 130,529 59,737 116,061 473,342 636,819 811,141 977,709 1,101,115 1,308,928 % of total assets 29.1% 21.3% 8.1% 3.0% 6.2% 24.1% 31.0% 35.2% 37.6% 37.2% 38.5% % of total sales 16.5% 14.6% 5.7% 2.1% 3.8% 15.8%

Short-term investments 86,488 314,546 620,989 767,376 503,878 10,511 10,175 11,845 13,703 80,317 94,664 % of total assets 10.0% 24.3% 38.7% 38.6% 27.0% 0.5% 1.0% 1.0% 1.0% 5.0% 5.0%

Merchandise inventory 120,586 137,991 210,739 263,644 286,485 294,928 248,614 243,642 255,824 286,523 329,501 % of COGS 12.5% 13.8% 17.1% 18.1% 17.6% 16.3% 15.9% 15.9% 15.9% 15.9% 15.9%

Accounts receivable 22,820 26,432 29,146 26,045 31,920 41,471 34,898 34,200 35,910 40,219 46,252 % of total sales 1.5% 1.4% 1.3% 0.9% 1.0% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%

Total current assets 525,623 827,640 1,080,672 1,198,254 1,020,834 925,389 1,017,482 1,184,528 1,370,348 1,606,348 1,893,287

PPE 278,689 353,213 345,518 481,645 625,568 740,240 810,951 867,517 943,882 1,034,388 1,141,864 % of total assets 32.2% 27.3% 21.5% 24.2% 33.5% 37.7% 39.5% 37.6% 36.3% 34.9% 33.5% % of total sales 18.3% 18.8% 15.0% 17.2% 20.5% 24.8% 28.6% 31.2% 32.3% 31.6% 30.3%

Long-term investments 24,357 84,416 145,774 251,644 165,810 251,007 180,636 202,604 228,360 260,435 299,182 % of total assets 2.8% 6.5% 9.1% 12.7% 8.9% 12.8%

Total assets 865,071 1,293,659 1,605,649 1,987,484 1,867,680 1,963,706 2,054,968 2,304,872 2,597,885 2,962,783 3,403,573

Balance Sheet

Beta: 1.08 (Bloomberg, Yahoo, Google)

Rf: 4%Risk Premium: 6%Capm Ke: 10.48%Average ROE (10 years): 17.92%Ke: 15%

Kd: 2.9%Tax Rate: 39%Debt/ TV: 2.8%Equity/TV: 97.2%WACC: 14.92%

Sum of Present Value's 2,236,441Less Debt 75,000Intrinsic Value 2,161,441# Shares Outstanding 207,582Intrinsic Value per share $10.41 -/+ 10% $9.37 / $11.45

AEO

Market Cap: $2.5b

Current Ratio: 2.3 Profit Margins:

6% EBIT Margins:

10.3% ROE: 13.03% ROA: 10.08% Payout Ratio:

29% 52 week decline:

-33% EPS: 0.86 Cash: 483.85 QoQ Rev change:

-9%

ANF

• Market Cap: $2.13b• Current Ratio: 2.4• Profit Margins: 7.6%• EBIT Margins: 13%• ROE: 15.72%• ROA: 10.6%• Payout Ratio: 23%• 52 week decline: -69%• EPS: 3.05• Cash: $522m• QoQ Rev change: -19%

GPS

• Market Cap: $9.55b• Current Ratio: 1.85• Profit Margins: 6.6%• EBIT Margins: 10.69%• ROE: 22.23%• ROA: 12.6%• Payout Ratio: 25%• 52 week decline: -37%• EPS: 1.35• Cash: $1.72b• QoQ Rev change: -

13%

Industry

• Market Cap: $381M• Current Ratio:• Profit Margins:• EBIT Margins: 2.08%• ROE:• ROA:• Payout Ratio:• 52 week decline:• EPS: 0.43• Cash: • QoQ Rev change: -

4%

Implied AEO Share Price Using Peer Multiples

Trailing P/E Forward P/E Price/Sales Price/BookHigh $25.82 $21.68 $21.56 $17.71Low $14.85 $20.63 $9.18 $8.37Average $19.44 $21.22 $13.31 $13.50

AEO Implied AEO Share Price Using Peer Multiples

Earnings per share $1.82Sales per share 14.57Book value per share 6.86Diluted shares (mm) 2,203

AEO Football Chart

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00

Trailing P/E

Forw ard P/E

Price/Sales

Price/Book

Multiples AnalysisCompany Ticker 4/1/09 Stock Price Market Cap Trailing P/E Forward P/E Price/Sales Price/Book

Abercrombie & Fitch Co. ANF $24.27 2.17B 8.18 11.76 0.63 1.22The Gap Inc. GPS $13.73 9.23B 9.71 11.36 0.63 2.10Urban Outfitters, Inc. URBN $15.38 2.78B 14.22 11.94 1.48 2.58

High 14.22 11.94 1.48 2.58Low 8.18 11.36 0.63 1.22Average 10.70 11.69 0.91 1.97

American Eagle Outfitters AEO $12.61 2.65B 14.88 14.76 0.88 1.87

Recommendation

• Hold current position – 2,500 shares

• DCF values AEO between $9.37 - $11.45

• AEO currently trading at $12.61

(10% - 25% premium to DCF)

• Multiples analysis puts AEO between $15 - $17

(16% - 26% premium to market)

• AEO already ~ 7.5% of portfolio

• Shaky consumer confidence