December 5th, 2019

Students: Kai Zhang, Charlotte Wang, Carter Goman

American Eagle Outfitters (AEO): LONG

2 Year Price Target: $26 (88% total return)

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American Eagle (AEO)

Source: Company data, Bloomberg

• American Eagle is a retail brand of men's and women's casual apparel, footwear, outerwear, and accessories. The Company's products include jeans, khakis, t-shirts, sweaters, bras, underwear and hoodies.

• AEO mostly caters to young customers in their teens or twenties

• AEO has two main store brands: American Eagle (~1000) and Aerie (~130 standalone & ~150 side-by-side)

BUY now for 80%+ return in 2 years (Target Price $26)

Current snapshot ($mm)

Sector Consumer

Industry Softline Retail

Price as of 11/20/2019 $14.45

% 52-week high 59%

Market cap $2,442

+ Debt $0

- Cash ($317)

Enterprise value $2,124

Revenue $4,326

% growth 7%

EBITDA $541

% margin 13%

EPS $1.60

PE ratio 9.0x

Dividend $0.55

% dvd yield 3.8%

FCF Yield (Levered) 9.2%

2020E op. stats and valuation ($mm)

1-year stock price vs. S&P

$8

$13

$18

$23

$28

11/23 2/21 5/22 8/20 11/18

AEO S&P (indexed)+18%

-26%

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Background

Sentiment, and one-time headwinds

Source: Bloomberg

“Retail apocalypse”

Retail sector in 2019 = The perfect storm

Cold weather in May Forever 21 bankruptcy

1-year retail performance has lagged vs. S&P

▪ Colder weather in 2Q yoy

▪ Lower comps

▪ Markdowns, impact margin

and inventory

▪ AEO Mgmt did not quantify impact

▪ Precedence suggests 200 – 400

bps headwind to comps.

(Aeropostale’s liquidation in

2016)

▪ Refreshed woes at retailors

▪ Stock underperformance,

driven by vanishing mall

traffic, macro risks and tariffs

1-year retail performance vs. S&P 500, Indexed

Note: Retail peer group includes 8 US retailers, including AEO, LB, GPS, GES, TPR, LULU, ANF, RL

80%

90%

100%

110%

120%

Nov/2018 Feb/2019 May/2019 Aug/2019 Nov/2019

Retail peers S&P 500+18%

-12%

(-22% if exc'l LULU)

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Investment Thesis

• Aerie – an underappreciated growth story• Rest of AE: steady growth on strong execution

Current price provides great opportunity for entrance

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Growth

Margin• Margin contraction transitory; fears unjustified• Margin is the result, not the cause!

Thesis 1. Growth not done yet

Current price provides great opportunity for entrance

www.ae.com

Growth drivers Current situation Near-term drivers

▪ ~1000 physical stores

▪ 2% same-store sales growth

▪ Curvy Jeans

▪ New Product lines, inc’l the MOOD

collection

▪ ~130 standalone stores

▪ ~160 side-by-side stores (w/ AE)

▪ 3-5% sss growth (physical store)

▪ >20% overall sales growth

▪ Penetration into American Eagle

physical stores

▪ Standalone expansions in virgin ZIP

codes

▪ Aerie digital growing @ 30%+

▪ American digital growing @ 5%

▪ Benefiting from “showroom effect”

of physical stores opening,

especially for Aerie

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Thesis 1. Growth not done yet (continued)

Breakdown of 5-Year (F2019A to F2024E) growth forecast

Total Revenue 5Y CAGR: 6%

Aerie Digital 5Y CAGR: 20% (Aerie physical pf 19% + “Digital Halo” of 1%)

Aerie Physical 5Y CAGR: 19% (16% store count increase + 3% comps)

AE Physical 5Y CAGR: 1.5% (1.5% comps + 0% increase in store count)

AE Digital 5Y CAGR: 5% ( Primarily driven by increased penetration)

Aerie will be a $1.6 bn business!(vs $2bn LT target)

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2,544 2,754

846

1,096 362

866

284

709

$4,036

$5,425

F2019 A F2024 E

7%

9%

21%

63%

100%

100%

13%

16%

20%

51%

Thesis 2. Margin: the result, not the cause

Revenue growth has historically been a leading indicator for margin

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%Revenue growth

Operating margin

American Eagle growth vs. margin▪ Graph: Margin trends historically

lagged ~6months compared to

revenue growth

▪ Retail profitability is highly

dependent on volume

▪ Fixed investment recouped through

accurate sales projections

▪ Inventory turnover ~2.0 months,

equivalent to 1 to 2 batches per Qtr

▪ [5-6 months] design investment

prior to sales means high operating

leverage, only if sales target is

achieved

▪ Little room for adjustment in the

middle of the seasonInvestors should focus on revenue growth as a

leading indicator of operating margin expansion

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Valuation

AEO: Current price attractive compared to both historical and peers’ range

Source: Company data, Bloomberg

Current price at low end of 5-year historical range, despite of ample growth potentials

0.0x

5.0x

10.0x

15.0x

20.0x

25.0x

30.0x

11/1/2014 5/1/2015 11/1/2015 5/1/2016 11/1/2016 5/1/2017 11/1/2017 5/1/2018 11/1/2018 5/1/2019 11/1/2019

Mean + SD: 20.2x

Mean - SD: 11.0x

Mean = 15.6x

Current: 9.0x, 5-ile%

Valuation also attractive compared to retail peers, even of lower growth

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Net Debt / Dividend '20 EBITDACompany (Brands) EBITDA yield margin % '19A-'20E '20E-'21E 2020E 2021E 2020E 2021E 2020E 2021E

American Eagle (AE, Aerie) $14.5 59% $2.4 -0.6x 3.8% 12.2% 7% 4% 9.2% 11.3% 4.0x 3.9x 9.0x 9.1xGap, Inc (GAP, Old Navy, Banana Republic) $16.3 52% $6.1 -0.1x 6.0% 9.6% -2% 0% 11.4% 9.8% 3.8x 3.9x 9.3x 9.3x

Guess $17.2 71% $1.1 0.8x 2.6% 8.0% 4% 4% - - 6.0x 5.7x 12.9x 10.5xL Brands (Vic' Skrt, PINK, B&BWs) $15.9 46% $4.4 2.5x 7.6% 14.1% -1% 2% 14.2% 15.6% 4.9x 4.9x 6.6x 6.5xTapestry (Coach, SW, Kate Spade) $26.1 64% $7.2 0.7x 5.2% 19.6% 1% 3% 11.0% 11.9% 6.7x 6.4x 10.3x 9.6xAbercrombie & Fitch $15.9 52% $1.0 -1.0x 5.0% 6.9% 1% 2% 2.2% 4.3% 3.0x 2.6x 21.4x 12.2xLululemon $217.0 99% $28.3 -0.6x 0.0% 25.6% 18% 15% 1.5% 2.3% 27.8x 24.0x 45.7x 38.4xRalph Lauren $106.9 80% $8.0 -1.1x 2.6% 16.1% 1% 3% 6.1% 8.9% 6.7x 6.4x 13.9x 12.6x

Zara 27.3 € 95% 85 € -0.9x - 26.8% 7% 6% 5.6% 5.9% 10.4x 9.9x 22.3x 21.0xH&M SEK 180 86% SEK 298 0.2x - 11.9% 11% 5% 4.3% 5.1% 10.9x 10.2x 22.7x 20.9x

Average 4.1% 15.1% 4.7% 4.4% 7.3% 8.3% 8.4x 7.8x 17.4x 15.0x

Median 4.4% 13.1% 2.5% 3.5% 6.1% 8.9% 6.4x 6.1x 13.4x 11.3x

P/EPrice

% 52 wk

high

Mkt cap

(bn)

EV/EBITDAFCF YieldSales Growth

Valuation Summary

Buy now for >80% total returns in 2 years

Price target calculation

DCF method FCF Yield method PE method

WACC 8.6% Target dvd yield 7.0% Target multiple 14.0x

Terminal UFCF growth 1.5% 3Y CAGR (F21 to F24) 5.5% 3Y CAGR (F21 to F24) 5.8%

DCF valuation $29.00 FCF yield valuation $23.00 PE valuation $25.00

Weight 33% 33% 33%

Price target $26.00

Current price $14.45

Potential upside 80%

Current dividend $0.55

Dividend yield 3.8%

Potential total return (plus 2 years of dvd) 88%

Date 11/20/19

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Environmental, Social, and Governance

The Strengths and Opportunities in each of the three aspects

Source: FactSet, SEC, Company Responsibility Report12

Aspects Strengths Opportunities

▪ Responsible sourcing and manufacturing

▪ Energy and water conservationEnvironmental

Social

Governance

▪ Brand built on equality and inclusiveness

▪ Women well-ness

▪ Balanced mix of board: 50% female

▪ Reasonable pay and incentive metrics▪ LT pay on ROIC?

▪ Mental health

▪ More effort in textile

recycling

Dynamic of apparel retail

Some half-baked takeaways from our team’s long tenure (21 days) of covering apparel retailers. (AKA why we think the street is wrong.)

The unpredictability of retail…

$975

… means we’d need to plan for it

Management

Investors

✓ Stay close to customers

✓ Experiment, small and fast

✓ Long-term mentality; identify

good management teams

ꭗ Overly focused on margin or

working capital.

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Field trips to American Eagle vs GAP

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Jeans vs Jeans – the Grand Showdown

Plus-sized mannequins at AEO: signal of true commitment to its “#REAL” ideal

Easter egg: a story of American Beagle

A reality coming from an April Fool’s Hoax

Source: American Eagle Blog

“American Beagle” -- April Fool’s joke 2014

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Q&A

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Appendix

5-year financial forecast

US$ millions, except per share data Actual

F2019 A F2020 E F2021 E F2022 E F2023 E F2024 E 3Y CAGR 5Y CAGR

Estimates F'19A - F'22E F'19A - F'24E

Revenue 4,036 4,313 4,594 4,876 5,149 5,425 6.5% 6.1%

Growth %, yoy 6.3% 6.9% 6.5% 6.1% 5.6% 5.4%

EBITDA 511 547 585 618 644 667 6.6% 5.5%

Margin % 12.7% 12.7% 12.7% 12.7% 12.5% 12.3%

Growth %, yoy 3.6% 7.2% 6.8% 5.8% 4.2% 3.5%

EBIT 340 366 392 414 428 439 6.7% 5.2%

Margin % 8.4% 8.5% 8.5% 8.5% 8.3% 8.1%

Growth %, yoy 5.2% 7.7% 7.0% 5.6% 3.5% 2.6%

EPS $1.47 $1.59 $1.75 $1.88 $1.98 $2.07 8.5% 7.1%

Net margin % 6.5% 6.4% 6.4% 6.4% 6.2% 6.1%

FCF 242.4 227 269 275 289 299 4.3% 4.3%

Margin % 6.0% 5.3% 5.8% 5.6% 5.6% 5.5%

FCF per share $1.41 $1.31 $1.60 $1.67 $1.78 $1.88 5.8% 5.9%

Growth %, yoy (7.1%) 22.0% 4.4% 6.7% 5.5%

Valuation

PE (Current price to est earnings) 9.8x 9.1x 8.3x 7.7x 7.3x 7.0x

FCF Yield 9% 11% 12% 12% 13%

Estimates Estimates

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Appendix

Analyst estimates vs consensus

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US$ millions, except per share data Actual

F2019 A F2020 E F2021 E F2022 E F2023 E F2024 E 3Y CAGR 5Y CAGR

Consensus vs Estimates

Consensus Revenue - 4,324 4,497 4,659 4,975 - 4.9% -

Growth %, yoy 7.1% 4.0% 3.6% 6.8%

Analyst estimate vs consensus (0.2%) 2.2% 4.7% 3.5%

Consensus EBITDA - 527 539 558 601 - 3.0% -

Margin % 12.2% 12.0% 12.0% 12.1%

Analyst estimate vs consensus 4.0% 8.6% 10.8% 7.2%

Consensus EBIT - 348 355 384 397 - 4.1% -

Margin % 8.1% 7.9% 8.2% 8.0%

Analyst estimate vs consensus 5.2% 10.3% 7.7% 7.8%

Consensus EPS - 1.60 1.59 1.64 1.75 - 3.6% -

Analyst estimate vs consensus (0.8%) 9.9% 14.8% 13.2%

Source: Company data, analyst estimates, Bloomberg consensus

Estimates Estimates

Return on invested capital

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ROIC: industry declining, AEO increasing

AEO maintains upward trend on ROIC while peers’ decline

Note: Peers include two comparable groups: youth-oriented concepts, including GPS, GES and ANF;

underwear / bra comprable, LB

32%

23%

21%

19%

17%15%

14%

29%

15%13%

19% 21%

18%19%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

F2013 F2014 F2015 F2016 F2017 F2018 F2019

AEO

AEO