American Eagle Outfitters, Inc.

1
American Eagle Outfitters, Inc.

• (AEO)
• Presented April 26, 2007

2
Investment Managers

• Jessica Boghosian
• jboghos2_at_uiuc.edu
• Ashley Qiao
• fqiao2_at_uiuc.edu

3
Presentation Outline

• The Company
• Company Overview
• Store Expansion
• Business Risks
• RCMP Position
• Role in Portfolio
• Correlation Matrix
• Comparable Analysis
• Competitors
• 15 Year Comparables
• Ratio Analysis
• DCF Analysis
• Assumptions
• DCF Model
• Sensitivity Analysis
• Recommendation

4
The Company
5
Company Overview

• American Eagle Outfitters was founded in 1972 and
  is headquartered in Warrendale, Pennsylvania.
• In 1977 and 2001, the first American and Canadian
  stores were opened, respectively.
• As of February, 2007, AEO operated 911 stores in
  Canada and the U.S.
• Designs, markets, and sells its own brand of
  laidback, current clothing targeting 15 to 25
  year-olds.
• Sells jeans, graphic Ts, accessories, outerwear,
  footwear, basics, and swimwear.
• Provides high-quality merchandise at affordable
  prices.
• Distributes merchandise via e-commerce in 41
  countries.

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Merchandise Groups
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Company Overview

• In 2006, American Eagle launched its new aerieTM
  intimates sub-brand.
• This collection sells dormwear and intimates
  including bras, undies, camis, hoodies, robes,
  boxers, and sweats for girls.
• In the fall of 2006, American Eagle introduced
  MARTIN OSA.
• Encompasses a new sportswear concept targeting
  25-40 year old men and women which sells apparel,
  accessories, and footwear for sports.

8
Store Expansion

• In fiscal 2006, total store based increased by 5
  and gross square footage increased by 8.
• Currently targeting the western and southwestern
  U.S., with these regions accounting for 66 of
  store openings in 2006
• 50 of AEO store base is in these regions

9
Store Expansion

• In Fiscal 2007, AEO plans to open 45-50 new
  stores, 15 aerie stores, and 12 MARTIN OSA
  stores. Square footage growth is expected to be
  10.

10
Business Risks

• Changing consumer preferences and fashion trends
• The specialty retail apparel business fluctuates
  according to changes in the economy and customer
  preferences, dictated by fashion and season.
• Retail must be ordered well in advance of the
  selling season.
• Changes in fashion trends could lead to lower
  sales, excess inventories and higher markdowns,
  which could negatively affect AEOs financial
  condition.

11
Business Risks

• Current level of sales and earnings growth
• The 12th consecutive quarters of record high
  sales and earnings was recorded in the 4th
  quarter of Fiscal 2006. Gross margin operating
  margin rates are near historic highs.
• It is difficult to maintain this level of
  performance and to continue to reach higher
  levels.
• AEO has in place growth initiatives to increase
  earnings by at least 15 per year long-term.

12
Business Risks

• The success of American Eagle operations depends
  significantly on discretionary consumer spending

U.S. Department of Commerce, Bureau of Economic
Analysis
13
Business Risks

• Growth through the development of new brands
• MARTIN OSA and aerie by American Eagle were
  launched in FY 2006.
• Ability to succeed in these new brands requires
  significant expenditures and management
  attention.
• These new brands are subject to risks of customer
  acceptance, competition, product differentiation,
  and the ability to obtain suitable sites for new
  stores.

14
Business Risks

• Seasonality
• The fourth and third quarters have historically
  provided a large portion of net sales income to
  American Eagle due to the year-end holiday season
  and back-to-school selling season, respectively.
• 60 of sales and 65 of income are accounted for
  in these quarters.
• Any factors affecting the performance in these
  quarters can have adverse financial effects.

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RCMP Position
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Transaction History

• December 10, 1999
• BOT 200 shares at 44.00
• January 10, 2000
• BOT 200 shares at 27.00
• May 3, 2000
• BOT 600 shares at 15.63
• February 23, 2001
• 3-2 split

• March 8th, 2005
• 2-1 split
• April 25th, 2005
• SLD 600 shares at 26.28
• November 16th, 2005
• SLD 700 shares at 23.33
• December 28th, 2006
• 3-2 Split

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RCMP Position

• Currently own 1,950 shares of AEO, trading at
  29.93 as of April 25th, 2007 for an unrealized
  gain of 48,174.36 or 472.80.

• American Eagle Outfitters accounts for 19 of our
  portfolio.

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Correlation Matrix
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Comparable Analysis
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Competition

• The retail apparel industry, including retail
  stores and e-commerce, is highly competitive.

FAsHiOn
SeRViCe
QuALiTy
SeLeCTiOn
PRiCe
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Competitors

• Who
• Abercrombie Fitch, Co. (ANF)
• Aeropostale Inc. (ARO)
• Gap Inc. (GPS)
• Why
• Industry Specific
• Similar Size
• Similar Target Market

22
5-Year Comparables
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1-Year Comparables
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Ratio Analysis
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DCF Analysis
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Ratio Analysis DuPont Breakdown
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Assumptions
28
Assumptions
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Discounted Cash Flow
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Discounted Cash Flow
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Sensitivity Analysis
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Recommendation

• HOLD
• Management expects there to be a significant
  amount of success with the launch of their new
  brands, MARTIN OSA and aerie.
• AEO continues to expand their store base, with
  the goal to open 45-50 stores in FY 2007
• Relatively good diversifier against other
  holdings
• HOWEVER
• We expect there to be a significant slow of
  growth in the future. Historically, AEO has
  realized growth rates that are not possible to
  sustain in the long-term.
• THEREFORE
• It is important to watch AEO with a close eye,
  especially to see if the expected success of the
  two new brands is realized. Upon this success,
  we foresee AEO continuing to grow at a relatively
  pleasing rate that will prove profitable to our
  investor.