American Eagle Outfitters (AEO) Presented December 2, 2008 Brian Bird Matt Byford Brandon Lee Christina Lu

Overview Company Overview Industry Overview Macroeconomy Financials Valuation RCMP Portfolio Recommendation

Company Overview American Eagle Outfitters a leading apparel retailer in the US Design, market, and sell own brand Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics Targets ages 15-25 Sell to US (1977), Canada (2001) and 41 foreign countries Venues: Primarily mall-based, limited stand-alone and internet sales 2006: introduced 2 new brands Martin+OSA as a separate brand targeting age 25-40 Aerie as a sub brand selling intimates for women 2008: www.77kids.com Targets 2-10 year olds As of Feb 2008 it operated 987 stores 929 AE stores in US and Canada 39 Aerie stand-alone stores 19 Martin+OSA

Growth Strategy Fiscal 2008 goals: 10% expected square footage growth Open 80 stand alone aerie stores Open 40 new AE stores Open 15 Martin + OSA stores Remodel 40-50 existing AE stores 10% expected square footage growth

Industry Overview Competition: individual and chain specialty stores, as well as the casual apparel and footwear departments of department stores and discount retailers Key Competitors: Abercrombie & Fitch: 20 year olds, high price Aeropostale: younger teens, low-mid price GAP: 20-30, mid-high price American Eagle: 20 year old, mid price

Retail Risks Consumer preferences Seasonality Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns Seasonality The fourth and third quarters have historically provided 60% net sales & 65% of net income Due to the year-end holiday season and back-to-school selling season.

Industry Overview

Macro Trends Tight credit markets Retail sector struggling AEO: $300 million tied up in auction rate securities Retail sector struggling Consumer confidence extremely low Opportunity to benefit from cheaper lease agreements in this economic downturn

Macro Trends

SWOT Analysis Strengths Weakness Opportunities Threats Brand Identity/Leading Brand Strong balance sheet Weakness Cyclical business model Affected by weak economy Poor consumer confidence Opportunities Growth in stores 77Kids Martin + Osa Threats Continuance in poor consumer confidence Introduction of more competitors Becoming out of favor

Porter 5 Forces 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 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. The bargaining power of suppliers AEO deals mainly with the textile commodities therefore suppliers it is hard for the supplier to have bargaining power over AEO.

Marketable Securities Three Types: Debt held to maturity Trading Securities Assumed to be held for a short term profit Typically, only financial institutions hold trading securities Available-for-sale securities An intermediate class of securities tied to a specific cash need Ex. AEO purchased available-for-sale securities to finance its repurchase program

Auction Rate Securities A debt security that is sold through a Dutch auction. The auction rate security (ARS) is sold at an interest rate that will clear the market at the lowest yield possible. This ensures that all bidders on an ARS receive the same yield on the debt issue.(source: investopedia.com) In early 2008, the ARS market had grown to over $200 billion, roughly half of it being owned by corporate investors. In February 2008, the auction market failed and most ARS have been frozen since then.

AEO Auction Rate Securities Exposure As of August 2, 2008, AEO had $689.0 million in cash and cash equivalents, short-term investments, and long-term investments. $332.6 million net investments in auction rate securities In the first half of the year, the company experienced failed auctions for 49 ARS issues. During the same time period, the company sold 33 ARS issues at par plus accrued interest at $84.9 million.

Cash Flow Statement: Investing Activities 2005: Net purchases of $311 million in available for sale securities 2006: Net purchases of $437 million in available for sale securities 2007: Net sales of $354 million in available for sale securities

Balance Sheet

Cash Flow Statement

Ratios and Margins 2003 2004 2005 2006 2007 Average % Gross margin 5 yr avg 36.46% 46.66% 46.50% 47.97% 46.58% 44.83% % Operating margin 6.88% 19.28% 19.97% 21.00% 19.60% 17.34% % Net profit margin 3.95% 11.34% 12.74% 13.86% 13.09% 11.00% %ROE - 5 yr avg 9.32% 22.14% 25.45% 27.33% 29.84% 22.82% % ROA - 5 yr avg 6.94% 16.49% 18.32% 19.47% 21.42% 16.53% Current ratio 2.78 3.27 2.99 2.60 2.71 2.87

Dupont Analysis ROE ROA Equity Multiplier 2005 0.25451 0.18318 1.38942 2006 0.27330 = 0.19470 x 1.40370 2007 0.29842 0.21418 1.39331 ROA Profit Margin Asset Turnover 2005 0.18318 0.1274 1.44 2006 0.19470 = 0.1386 x 1.40 2007 0.21418 0.1309 1.64

Multiple Analysis Competitors Market Capital Trailing P/E Forward P/E Price/Sales M/B ANF 1.55B 3.39 6.61 0.51 1.12 GPS 8.20B 8.83 8.49 0.57 2.07 LTD 3.05B 5.26 6.17 0.35 1.48 Trailing P/E Forward P/E Price/Sales M/B High 9.44 11.49 6.94 10.73 Low 14.30 13.75 8.30 14.27 Average 10.00 5.10 7.72

American Eagle Equity Value Using Multiples Multiple Analysis AEO Earning per share 1.62 Sales per share 15 Book value per share 6.89 diluted shares (Mn) 220,280 American Eagle Equity Value Using Multiples   P/E(trailing) P/E(leading) P/S M/B Using Average 9.44 11.49 6.94 10.73 Using High 14.30 13.75 8.30 14.27 Using Low 10.00 5.10 7.72

Football Chart Implied price $11.00~13.00

Valuation: Earnings Period EPS Estimate EPS Actual Q1 2007 $0.35 $0.36 $0.37 Q3 2007 $0.45 Q4 2007 $0.66 Q1 2008 $0.19 $0.21 Q2 2008 $0.28 $0.29 Q3 2008 $0.30 Q4 2008 $0.47 Feb. 2009

DCF: WACC Beta taken from Yahoo! Finance Share price of $8.59 as of mid-day Tuesday, December 2, 2008. Total debt includes $75 million in demand borrowings

DCF: Assumptions: -10% growth in sales. Squeeze margins by increasing cost of sales to 55%.

DCF: DCF Price: $12.14 +/- 10%: $10.93 - $13.36

Sensitivity Analysis:

RCMP Portfolio: Current

RCMP Portfolio: with Recommendation

Correlation

Transaction History BOT 200 shares at $44.00 BOT 200 shares at $27.00 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 November 7th 2006 SLD 400 shares at $39.19 December 28th, 2006 3-2 Split November 2007 SLD 450 shares at $22 31

Current Position Currently own 1500 shares at $8.59 (Mid-day Dec. 2, 2008) Unrealized gain of $5,000 (64%)

Recommendation BUY 1000 Shares of AEO at Market Price Cost of purchase: $8,590, bringing the total position to $21,475. The average cost per share: $6.57 (previously $5.23) The DCF values the company at a range between $10.93 and $13.36. The company is currently trading at about $8.60 (20% to 35% discount to the model). Currently represents about 4.75% of the portfolio. The addition would make AEO 7.60% of the portfolio. Recommend average costing into the position as consumer confidence remains weak.