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American Eagle

Presented April 5, 2006 by Kevin Cowell and Narayan Subramanian

American Eagle Outfitters is a leading retailer that designs, markets and sells its own brand of laidback, current clothing for 15 to 25 year-olds, providing high-quality merchandise at affordable prices. AE's original collection includes standards like jeans and graphic T's as well as essentials like accessories, outerwear, footwear, basics and swimwear.

798 stores in US and Puerto Rico

71 stores in Canada

Our AEOS Position

Our Original Position: 12/10/1999 – Bought 200 Shares @ $44 3/10/2000 – Bought 200 Shares @ $27 5/3/2000 – Bought 600 Shares @ $15 5/8

Stock Splits 2/23/2001 – 3:2 3/28/2005 – 2:1

Shares Sold: 4/25/2005 – Sold 200 @ $26.28 and 400 @ $26.284 11/16/2005 – Sold 700 @ 23.33

Average Position: Adjusting for Splits and Buying at Different Prices our Position is

equivalent to buying 1700 Shares @ $7.84 on Dec. 10, 1999

Our Position (cont.)

Sold 1300 shares out of 3000 in the past year Diversification of risk

Stock Price = $29.86 a/o March 31, 2006

Current Value of AEOS position is $50,762 out of 294,749 for the Portfolio ~17% of current portfolio

280.97% Gain

Macroeconomic Trends

Increased Energy Costs Causing Inflation Consumer Confidence down from 106.8 to

101.7 Consumers worried about job prospects and short-

term health of economy Increasing Interest Rates

Could Affect Spring Retail Sales Accordingly

Retail Industry Outlook

Predicted 4.7% growth in retail sales for 2006 Down from 6.1% from 2005

Clothing retailers expected to see solid sales growth 4.0 – 5.0% range

* According to National Retail Federation’s 2006 Retail Sales Forecast

Demographic Changes

25-39 age group expected to grow 11% to 67 million people between 2005-2025

15-19 only expected to grow by 6%

New Opportunity for Retailers

Store Openings/Closings

2005 [CapEx = $83 m] 36 Opened 11 Closed 43 Remodeled

2006 (est.) [CapEx = $175] Open 50 Remodel 50 7% increase in sq. footage

Martin + Osa

New stores owned by AE to target the 25-39 year old population

4 Definite locations for Fall 2006 with 2 more stores pending Tysons Corner Center (McLean, VA), Fashion Island (Newport Beach,

CA), NorthPark Center (Dallas, TX) and San Francisco Center Not test stores

Plan on opening 10-17 more stores in 2007

6,500 to 7,500 square feet/store

Possible $1B opportunity per year (about 50% of current Rev)

Long-term goal

Product Life Cycle

AE

M+O

Martin + Osa - Challenges

Very challenging demographic: • Different Tastes• Different Incomes• Already proven difficult for Abercrombie and GAP

Increasing Competition• Abercrombie- Ruehl• GAP- Forth and Towne• Polo- Rugby• Aeropostale- Jimmy’Z• J Crew• Banana Republic

Ruehl by ANF

Failing entry into the 25-35 y.o. niche market Already adjusting their strategy Possibly falling into Gap’s blunders

• Same products, different price tag

Can AE avoid this pitfall?

Aerie by American Eagle

Focuses on bras, panties, and casual dormwear for girls and young women.

“Take girls from the dorm room to the coffee shop.”

Will incorporate the Aerie brand in existing stores through renovations to create a “store within a store.”

Also plan on constructing side-by-side and free-standing stores with about 900-1000 sq. feet per store

Short-term goal

More Expansion

Many online sales going to Japan

AE is considering forming a partnership with an established Japanese retailer 80-100 Stores AE International

530,000 sq foot increase in Kansas distribution center (est. $55M)

AE Stock Prospects

Company Stock Price EPS P/E Forward P/E Mkt. Cap Beta

A & F 57.5 3.66 15.71 11.34 5.40 B 1.44

Aeropostale 28.95 1.37 21.09 15.65 1.57 B 1.62

AE 29.86 1.89 15.77 12.98 4.46 B 1.92

GAP (GPS) 17.69 1.23 14.34 12.46 15.38 B 1.82

PACSUN (PSUN) 22.07 1.67 13.24 10.87 1.64 B 1.14

Cyclical Nature of Industry

Q4 Conference Call

Overall Sales Increased 13.4% in 2005 from 2004 Same-Store Sales up 8%

Margins Down Gross Margin Down 2.97% Op. Margin Down 2.68% Net Margin Down .9%

Margins Decreased Due to Markdowns and Increased Warehousing Costs

Valuation

See Spreadsheet

Intrinsic Value using Discounted Cash Flow Analysis = $24.49 +- 10%

Implied Stock Price Using EPS*P/E = $27.82 +- 10%

Sensitivity Analysis

 

    COGS as a % of Sales  

  52.00% 52.50% 53.00% 53.50% 54.00% 54.50% 55.00%

y/y growth rate of sales

7% $22.98 $22.36 $21.73 $21.10 $20.47 $19.85 $19.22

8% $24.09 $23.43 $22.78 $22.13 $21.47 $20.82 $20.17

9% $25.23 $24.55 $23.87 $23.19 $22.51 $21.83 $21.15

10% $26.40 $25.70 $24.99 $24.28 $23.57 $22.87 $22.16

11% $27.62 $26.88 $26.15 $25.41 $24.68 $23.94 $23.20

12% $28.88 $28.11 $27.34 $26.58 $25.81 $25.05 $24.28

13% $30.17 $29.38 $28.58 $27.78 $26.99 $26.19 $25.40

14% $31.51 $30.68 $29.86 $29.03 $28.20 $27.37 $26.54

15% $32.89 $32.03 $31.17 $30.31 $29.45 $28.59 $27.73

Summary

Martin + Osa Uncertainty Does Market Exist?

Other Ventures: Aerie Intimate Brand AE International

COGS Sensitivity Forecasting Trends and Inventory

Can CAPEX Increases Drive More Sales?

Recommendation

Final Recommendation: HOLD all 1700 shares Too early to determine the impact of Martin + Osa,

Aerie, and AE International on sales

Projects have the potential to become huge growth opportunities and profit drivers in the future

Share price was slightly overvalued using DCF Model and fairly priced using EPS Approach but both techniques did not account for potential sales growth due expansion activities but did take into account increased capital expenditures