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:Open 80 stand alone aerie storesOpen 40 new AE storesOpen 15 Martin + OSA storesRemodel 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 priceAeropostale: younger teens, low-mid priceGAP: 20-30, mid-high priceAmerican Eagle: 20 year old, mid price

Retail Risks

Consumer preferencesChanges 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 marketsAEO: $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•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 maturityTrading 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 Margins2003 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 AnalysisROE 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 9.44 10.00 5.10 7.72

Multiple Analysis

Earning per share 1.62

Sales per share 15

Book value per share 6.89

diluted shares (Mn) 220,280

AEO

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 9.44 10.00 5.10 7.72

Football ChartImplied price$11.00~13.00

Valuation: Earnings

Period EPS Estimate EPS Actual

Q1 2007 $0.35 $0.35

Q2 2007 $0.36 $0.37

Q3 2007 $0.45 $0.45

Q4 2007 $0.66 $0.66

Q1 2008 $0.19 $0.21

Q2 2008 $0.28 $0.29

Q3 2008 $0.30 $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 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 8March 8thth, 2005, 2005• 2-1 split2-1 split

• April 25April 25thth, 2005, 2005• SLD 600 shares at $26.28SLD 600 shares at $26.28

• November 16November 16thth, 2005, 2005• SLD 700 shares at $23.33SLD 700 shares at $23.33

• November 7November 7thth 2006 2006• SLD 400 shares at $39.19SLD 400 shares at $39.19

• December 28December 28thth, 2006, 2006• 3-2 Split3-2 Split

• November 2007November 2007• SLD 450 shares at $22SLD 450 shares at $22

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.