American Eagle Outfitters

1. American Eagle Outfitters Olamide Esan Ron Yang Michael Lavin Andy Gaur Kuralay Seitalina Akrati Johari Presented on October 29, 2009

2. Deliverable Outline • Company Overview • Business Strategy • Assumptions • Valuation • Client Portfolio • Recommendation

3. Company Overview • Engages 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 • AEO has branched out from its 15 to 27 year old customer segment in order to diversify and enhance the company's scope and scale. During 2006, AEO launched its sub-brands: aerie (lingerie) and Martin + OSA (sportswear) to target a broader customer base. • Aerie (lingerie) • MARTIN + OSA (Sportswear line targeting 28-40 year old women and men) • 77 Kids (New Children’s apparel Brand) • Management meets expectations well. http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-reportsannual( Accessed on October 15, 2009)

4. Business Strategy • Capstone strategy- • provide affordable clothing, accessories, and personal care products that are of high quality and fashionable for kids, adults, and several demographics in-between. • Primary growth strategies- • focus on real estate, effective branding and innovative new lines, e-commerce, and procurement. The real estate strategy is two-fold in that American Eagle continues to open new stores-though this has slowed down due to the economy, and they are re-modeling (creating more square footage) their stores to enhance the customer experience. • Through this strategy/business model American Eagle has been successful in gaining quality brand recognition and plans to reinforce their customer connection and increase focus on identifying emerging fashionable trends. http://phx.corporate-ir.net/phoenix.zhtml?c=81256&p=irol-reportsannual( Accessed on October 15, 2009)

5. As of January 31, 2009, American Eagle operated 1,098 stores in the United States and Canada including 954 American Eagle Outfitters stores 116 Aerie stand-alone stores 28 Martin + OSA stores Opened 122 stores in 2008 vs 28 new stores in 2009 The company plans to remodel 25-35 stores to 7,000 sq.f. in 2009 either within the existing location or by upgrading the store location within the mall Square Footage Growth 3% http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

6. http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

7. Macro Economic Outlook • Negative conditions in global credit markets and auction rate securities (ARS). • Impacts AEO’s ability to liquidate its ARS holdings. • Global recession • High unemployment and decline in discretionary consumer spending • Highly volatile energy prices • Interest rate risk • Foreign exchange rate risk • Government / Regulation • Disruption of imports affects merchandise sourcing. http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

8. Industry Analysis • US apparel retail industry accounts for 30% of global apparel retail industry’s value with a compound annual growth rate of 4.4% from 2004 – 2008. • Generated total revenues of $307.5 billion in 2008, a growth of 3.8% • Womenswear sales is leading segment with $162 billion in total revenues and 52.7% of industry revenues. • Menswear generated $98.2 billion in 2008 and 31.9% of industry revenues. • Due to economic downturn, the performance of the industry is forecast to decelerate, with an anticipated CAGR of 3.6% for the five-year period 2008-2013. http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

9. Comparative Descriptions • American Eagle- has branched out from its 15 to 27 year old customer segment in order to diversify and enhance the company's scope and scale. aerie (lingerie) and Martin + OSA (sportswear) to target a broader customer base. In order to enter new markets, the company has also entered into a partnership with an international retail operator (Alshaya) to open stores in the Middle East. This decision has the added benefit of reducing the effects of U.S. economic cycles on the company's bottom line. • Alshaya will open American Eagle Outfitter stores in the Middle East, with the first one set to open in early 2010. The franchise will require no capital investment from AEO and will be operated primarily by Alshaya, however the deal promises substantial revenues for the company, which is attempting to target young, wealthy consumers in that region. • Abercrombie & Fitch- sells its clothing and accessories at a price premium. In addition, unlike almost every one of its competitors, the company has not engaged in "sales" (i.e., price discounting), which helps retain its image and keep its profit margins high. However, as the American economy entered a recession in 2008 which has continued into 2009 the company has found itself reassessing its pricing strategy and considering lowering average unit price in its stores. • Aeropostale- business model relies heavily on sales and promotions, something that AEO is trying to move away from in order to keep margins high. • The Gap Inc.- providing stylish clothes at affordable prices has been made more difficult due to the proliferation of fast fashion brands such as Zara, which specialize in trendier, more fashion-forward clothing which is more attractive to young consumers than Gap's affordable basics. http://www.wikinvest.com/ (Accessed October 15, 2009)

10. Comparative Performance • American Eagle Outfitters- For the twenty six weeks ended 1 August 2009, revenues decreased 4% to $1.27B. Net income decreased 51% to $50.5M. Revenues reflect a decrease in comparable store sales. Net income also reflects a rise in cost of sales, including certain buying, occupancy & warehousing expenses, lower gross profit margin, an increase in depreciation & amortization expenses and the presence of other expenses vs. an income. AEO is revamping existing stores to improve operating efficiency. Additionally, analysts forecast greater inventory control contributing to lower costs and greater operating margins in the medium term. • Aeropostale, Inc.- For the twenty-six weeks ended 1 August 2009, Aeropostale, Inc.'s revenues increased 21% to $861M. Net income increased 82% to $70.3M. Revenues reflect an increase in same store sales. Net income also reflects an increase in gross margins. • Abercrombie & Fitch Co.- revenues decreased 23% to $1.26B. Revenues reflect a decrease in sales of Abercrombie & Fitch brand and lower sales of Abercrombie & Hollister brand. Net loss reflects a decline in the gross profit margins, higher stores & distribution expenses and a decline in the interest income, net. • The Gap Inc.- For the twenty six weeks ended 1 August 2009 revenues decreased 7% to $6.37B. Net income decreased 7% to $443M. Revenues reflect a decrease in sale volumes. Net income reflects decreased interest income and lower operating gross margins. http://www.wikinvest.com/ (Accessed October 15, 2009)

11. Sales per square foot http://www.wikinvest.com/ (Accessed October 15, 2009)

12. 1 Year Stock Performance http://www.google.com/finance?q=aeo (Accessed October 23, 2009)

13. 5 Year Stock Performance http://www.google.com/finance?q=aeo (Accessed October 23, 2009)

14. DCF Assumptions

15. DCF Calculation

16. Sensitivity Analysis

17. Monte Carlo/Tornado chart

18. Multiples Valuation http://finance.yahoo.com/ (Accessed October 24, 2009)

19. Multiples Valuation (Continued) Current Share Price: $18.82 American Eagle Outfitters http://finance.yahoo.com/ (Accessed October 24, 2009)

20. Football Chart

21. Triangulation

22. Correlation

23. Client Portfolio

24. Recommendation • Hold current position – 2,500 shares • DCF values AEO between $17 - $20 • AEO currently trading at $17.66 • (Within the range of DCF on low end) • Multiples analysis puts AEO between $15-$30 • AEO already ~ 14.3% of portfolio • Remains a strong company with a light debt load and an ability to generate ample cash flows.

25. Appendix Information • Porter’s Five Forces • Auction Rate Securities

26. Porter’s Five Forces • Larger companies can take advantage of economies of scale, strong purchasing power, and strong brand names and engage in price wars. • Due to numerous players, each company has to continue reinventing itself by keeping ahead of consumer trends, and cultivating and maintaining customer loyalty. • Companies have to focus on efficiencies and inventory control. INTENSE RIVALRY Large number of buyers weakens buyer power, but negligible switching costs strengthens it.  MODERATE THREAT • Clothing is a necessity. • Counterfeit clothing adversely affects revenues. •  LOW THREAT • Entry does not require large capital outlay. • Readily available distribution channels. • Narrow profit margins due to high costs of materials, shipping and labor may deter entrants. •  LOW to MODERATE THREAT • Many competitive suppliers. • Larger buyers purchase significant quantities and are in a position to dictate supplier prices. • Fairly low buyer switching costs and buyers can easily switch suppliers. •  LOW THREAT http://globalbb.onesource.com/web/Reports/ReportMain.aspx?KeyID=191491&Process=CP&FtrID=UNIFIEDSUMMARY (Accessed October 15, 2009)

27. Auction Rate Securities • 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.