American Eagle outfitters Presented by : Linden Lu Yanlei Xu Yanlei Xu Gleb Zarkh Gleb Zarkh Mohamed Ibrahim Mohamed Ibrahim

Presentation Outline : Company overview Company overview Industry and competitors Industry and competitors RCMP position and historical transactions RCMP position and historical transactions Macro economic view Macro economic view Firm risks and growth model Firm risks and growth model Valuation Valuation Assumptions Assumptions DCF DCF Multiple valuation Multiple valuation Recommendation Recommendation

Company Overview American Eagle Outfitters is one of leading apparel retailers in US American Eagle Outfitters is one of leading apparel retailers in US Design, market, and sell own brand of laidback Design, market, and sell own brand of laidback Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics Casual clothing including Jeans, Graphic T’s, accessories, footwear, outwear, basics targeting age: targeting age: Sell to US (1977), Canada (2001) and 41 foreign countries Sell to US (1977), Canada (2001) and 41 foreign countries Venues: Primarily Mall-based, limited stand-alone and internet sales Venues: Primarily Mall-based, limited stand-alone and internet sales In 2006: introduced 2 new brands In 2006: introduced 2 new brands Martin+OSA as a separate brand targeting age Martin+OSA as a separate brand targeting age Aerie as a sub brand selling intimates for women Aerie as a sub brand selling intimates for women As of Aug 07 it operated 928 stores As of Aug 07 it operated 928 stores 919 AE stores in US and Canada (including 5 Aerie) 919 AE stores in US and Canada (including 5 Aerie) 9 Martin+OSA 9 Martin+OSA

Company Overview Cont. Revenue sources Revenue sources Traditional AE stores Traditional AE stores New store opening (Matin+OSA, Aerie) New store opening (Matin+OSA, Aerie) E-commerce (mainly to overseas customers) E-commerce (mainly to overseas customers) Merchandise Mix (2006) Merchandise Mix (2006) Men’s apparel (35%) Men’s apparel (35%) Women’s apparel, accessories, intimates (60%) Women’s apparel, accessories, intimates (60%) Footwear for men and women (5%) Footwear for men and women (5%) Slightly shifts to women’s apparel from men’s apparel Slightly shifts to women’s apparel from men’s apparel Economy and Consumer inspired growth Economy and Consumer inspired growth

Retail Apparel Industry Including retail stores and e-commerce is highly competitive: quality, fashion, service, selection and price Including retail stores and e-commerce is highly competitive: quality, fashion, service, selection and price Porter’s Five Force Porter’s Five Force Entry of New Competitors: moderate Entry of New Competitors: moderate Threat of substitutes: high Threat of substitutes: high Bargaining power of buyers: moderate Bargaining power of buyers: moderate Bargaining power of suppliers: low Bargaining power of suppliers: low Rivalry among existing competitors: high Rivalry among existing competitors: high

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

Transaction History December 10, 1999 December 10, 1999 BOT 200 shares at $44.00 BOT 200 shares at $44.00 January 10, 2000 January 10, 2000 BOT 200 shares at $27.00 BOT 200 shares at $27.00 May 3, 2000 May 3, 2000 BOT 600 shares at $15.63 BOT 600 shares at $15.63 February 23, 2001 February 23, split 3-2 split March 8 th, 2005 March 8 th, split 2-1 split April 25 th, 2005 April 25 th, 2005 SLD 600 shares at $26.28 SLD 600 shares at $26.28 November 16 th, 2005 November 16 th, 2005 SLD 700 shares at $23.33 SLD 700 shares at $23.33 November 7 th 2006 November 7 th 2006 SLD 400 shares at $39.19 SLD 400 shares at $39.19 December 28 th, 2006 December 28 th, Split 3-2 Split

RCMP position: Currently own 1,950 shares of AEO, trading at $22 as of Nov 12 th, 2007 for an unrealized gain of $32,710 or %. Currently own 1,950 shares of AEO, trading at $22 as of Nov 12 th, 2007 for an unrealized gain of $32,710 or %. AEO represents 11.2% of the portfolio AEO represents 11.2% of the portfolio

Correlation matrix AEEAEOCPRTFRJKHYKMBMVSNSRCLSRZWAGDFS AEE1 AEO CPRT FR JKHY KMB MVSN SRCL SRZ WAG DFS

Macro Economic outlook 2007 Weakest level since October 2005 (After Hurricane Katrina) 3 consecutive declines sum to -15% from July's 6 year high. Housing recession, the financial (sub prime) mess and higher oil prices are all contributing.

Slowdown in 2008 ARMs Reset in 2008 Price of OilPrice of Corn

Business risk Consumer’s preferences Consumer’s preferences The ability to satisfy customers’ demand and changing preferences is a primary source of business risk. The ability to satisfy customers’ demand and changing preferences is a primary source of business risk. Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could negatively affect AEO. Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could negatively affect AEO.

Business risk Seasonality : 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. 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. The recent credit crunch, higher oil prices would affect the consumer spending, thus affect over all sales for 2007 The recent credit crunch, higher oil prices would affect the consumer spending, thus affect over all sales for 2007

Growth model AEO growth model depends on AEO growth model depends on Growth from new store openings Growth from new store openings Comparable sales growth Comparable sales growth E-commerce E-commerce For the new store openings For the new store openings AEO is looking for opportunities of growth in its 2 new brands specially the Aerie Brand AEO is looking for opportunities of growth in its 2 new brands specially the Aerie Brand They believe that there is strong growth potential in the intimates market. They believe that there is strong growth potential in the intimates market. New stores E2008E2009E2010E2011E Traditional AE stores Martin+Osa Aerie Total

Growth model Based on our view of the economy we expect a slow down in growth of sales by AEO specially in Based on our view of the economy we expect a slow down in growth of sales by AEO specially in Refer to excel sheet for further explanation of the growth model Refer to excel sheet for further explanation of the growth model

DCF valuation WACC Calculations: Beta1.21 Equity100% WACC12.47 WACC12.47

Key assumptions Revenue Growth Rate Revenue Growth Rate %11.46%13.96%13.16%12.63% Capital Expenditures Capital Expenditures Depreciation/Amortization Depreciation/Amortization DCF valuation

Cost Of Goods Sold %55%55%55%55% SG&A SG&A %23.89%23.89%23.89%23.89% Terminal Growth Rate4% Terminal Growth Rate4% Key assumptions

DCF Valuation DCF yields stock price $19.74 DCF yields stock price $19.74 Sensitivity Analysis Sensitivity Analysis

Multiple Valuation: CompanyP/EPrice/SalesPrice/Book Price to FCF American Eagle Aeropostale GAP Abercrombie Industry Multiple Used IMPLIED PRICE: $23- $25

Recommendation Sell 450 shares at Market price Sell 450 shares at Market price Market price is $22 as of 12 th Nov 07 Market price is $22 as of 12 th Nov 07 Why sell ? Why sell ? DCF shows slightly overvalued although it was based on optimistic assumptions DCF shows slightly overvalued although it was based on optimistic assumptions Relatively low beta Relatively low beta Growth from new store openings and e commerce. Growth from new store openings and e commerce. Why not all the position? Why not all the position? Multiple valuation shows undervalued Multiple valuation shows undervalued The stock’s return converge towards the industry mean return The stock’s return converge towards the industry mean return Diversification benefits Diversification benefits

Recommendation

Recommendation

Sources Briefing.com Briefing.com board.org/economics/ConsumerConfidenc e.cfm board.org/economics/ConsumerConfidenc e.cfm board.org/economics/ConsumerConfidenc e.cfm board.org/economics/ConsumerConfidenc e.cfm / / / /