American Eagle American Eagle Outfitters (AEOS)Outfitters (AEOS)

RECOMMENDATION:

BUY

BackgroundBackground• American Eagle Outfitters, Inc. is a specialty retailer of all-American, casual American Eagle Outfitters, Inc. is a specialty retailer of all-American, casual

apparel, accessories, and footwear for men and women between the ages of apparel, accessories, and footwear for men and women between the ages of 16 and 34. The Company designs, markets, and sells its own brand of 16 and 34. The Company designs, markets, and sells its own brand of versatile, relaxed, and timeless classics like AE jeans, khakis, and T-shirts, versatile, relaxed, and timeless classics like AE jeans, khakis, and T-shirts, providing high quality merchandise at affordable prices. The Company providing high quality merchandise at affordable prices. The Company

currently operates 457 stores in 44 states.currently operates 457 stores in 44 states. • American Eagle Outfitters, Inc. (Nasdaq: AEOS - news) today announced American Eagle Outfitters, Inc. (Nasdaq: AEOS - news) today announced total total

salessales for the four fiscal weeks ended October 30, 1999 for the four fiscal weeks ended October 30, 1999 increased 43.1%increased 43.1% to to $59.1 million from $41.3 million for the four week period ended October 31, $59.1 million from $41.3 million for the four week period ended October 31, 1998. 1998. Comparable sales for the 1999 period were up 21.9%Comparable sales for the 1999 period were up 21.9% compared to the compared to the corresponding four week period last year.corresponding four week period last year.

• Sales for the thirty-nine weeks ended October 30, 1999 were $546.7 million Sales for the thirty-nine weeks ended October 30, 1999 were $546.7 million compared to the $374.5 million for the thirty-nine week period last year, an compared to the $374.5 million for the thirty-nine week period last year, an increase of 46.0%. Comparable store sales for the thirty-nine weeks ended increase of 46.0%. Comparable store sales for the thirty-nine weeks ended October 30, 1999 increased 24.5% compared to the corresponding thirty-nine October 30, 1999 increased 24.5% compared to the corresponding thirty-nine week period ended October 31, 1998.week period ended October 31, 1998.

BackgroundBackgroundStockholder Number PercentRetail Ventures, Inc. (2) 6,950,750 14.7%Jay L. Schottenstein (3)(6) 13,098,128 27.7%Geraldine Schottenstein (4) 11,019,744 23.3%Saul Schottenstein (5)(6) 321,878 *George Kolber (6) 341,378 *Ari Deshe (6)(7) 5,375,930 11.4%Jon P. Diamond (6)(8) 2,691,340 5.7%Martin P. Doolan (6) 47,250 *Gilbert W. Harrison (6) 9,450 *Michael G. Jesselson (6) 18,000 *Thomas R. Ketteler (6) 20,250 *John L. Marakas (6) 45,000 *David W. Thompson (6) 91,800 *Gerald E. Wedren (6) 9,000 *Joseph E. Kerin (6) 17,090 *Roger S. Markfield (6) 592,808 1.3%Laura A. Weil (6) 65,550 *All directors and executive officers as a group 22,761,954 48.2%* less than 1%

Institutional holdings:Nicolas-applegate Capital Management 2,260,787 4.9%American Express Financial Corp 1,807,100 3.9%Morgan Stanley Dean Witter 1,381,717 3.0%Pilgram Baxter 1,107,200 2.4%AIM Management Group 1,102,850 2.4%

26,096,000 56.0%

Outstanding 46,600,000

No insider trading No insider trading since June.since June.

Directors tend to Directors tend to ‘flock’ when ‘flock’ when tradingtrading

BalancBalance e SheetSheet

1997 1998 1999Current assets:Cash and cash equivalents 34326 48359 71940Short-term investments -- -- 13360Merchandise inventory 27117 36278 49688Accounts and note receivable, including related party 3556 7647 8560Prepaid expenses and other 4381 5388 2757Deferred income taxes 4380 4801 8199Total current assets 73760 102473 154504Fixed assets:Fixtures and equipment 23118 25842 36307Leasehold improvements 32671 35978 46996

55789 61820 83303Less: Accumulated depreciation and amortization 21598 23273 29933

34191 38547 53370Other assets 2487 3775 3074Total assets 110438 144795 210948LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable 20430 24606 18551Accrued compensation and payroll taxes 4926 9227 17739Accrued rent 6006 7909 13042Accrued income and other taxes 5478 8738 3208Other liabilities and accrued expenses 2542 3507 7211Total current liabilities 39382 53987 59751Stockholders' equity 71056 90808 151197Total liabilities and stockholders' equity 110438 144795 210948

IndustryCurrent Ratio 1.87 1.90 2.59 1.62Quick Ratio 1.18 1.23 1.75 0.43TD to Equity 55.4% 59.5% 39.5% 46.0%LTD to Equity 0.0% 0.0% 0.0% 31.0%Asset Turnover 2.96 2.80 2.79 2.57A/R Turnover 91.79 53.06 68.64 60.58Inventory Turnover 8.40 7.41 7.11 4.27A/P Turnover 15.25 14.93 26.52Ave Collection Period 3.98 6.88 5.32Ave Inventory holding period 43.48 49.27 51.36Ave credit period 23.94 24.45 13.76CCC 23.51 31.70 42.92Profit Margin 1.8% 4.8% 9.2%ROA 5.4% 13.5% 25.7%ROE 8.3% 21.5% 35.8%

* increasing holding period for inventory is probably due to expansion* Credit period is of some concern

CashCashFlow Flow StatementStatement

1999 1998 1997Operating activities:Net income 54118 19537 5925Adjustments:Depreciation and amortization 8611 7318 6087Loss on impairment and write-off of fixed assets 1467 2292 2067Restricted stock compensation 1336 1214 991Deferred income taxes -2753 -496 -1898Merger costs incurred by Natco 900 -- --Changes in assets and liabilities:Merchandise inventory -13410 -8903 -3723Receivables -913 -2611 2055Prepaid and other 2445 -1578 -400Receivables from officers -- 376 -30Accounts payable -5400 -1657 4018Accrued liabilities 13420 10676 3489Total adjustments 5703 6631 12656Net cash provided by operating activities 59821 26168 18581

Investing activities:Capital expenditures -24919 -12646 -10540Net purchase of short-term investments -13360 -- --Investment in Prophecy, Ltd -- -900 --Proceeds from sale of assets 6 54 5874Net cash used for investing activities -38273 -13492 -4666

Financing activities:Net proceeds from stock options exercised 2033 1357 425Net cash provided by financing activities 2033 1357 425

Net increase in cash and cash equivalents 23581 14033 14340Cash and cash equivalents - beginning of period 48359 34326 19986Cash and cash equivalents - end of period 71940 48359 34326

AssumptionsAssumptionsAssumptions

Net Sales Growth 24.3% 44.8% 24.1%COGS growth 18.1% 31.4%Gross Profit Growth 38.7% 71.2%SG&A expenses growth 17.6% 40.9%Net Income Growth 229.7% 177.0%Tax Rate 39.7% 39.5% 39.5% 39.5%

AssumptionsNet sales 100.0% 100.0% 100.0%Cost of sales 69.7% 66.2% 60.1% 60.0%Gross profit 30.3% 33.8% 39.9% 40.0%Selling, general and administrative expenses 25.7% 24.3% 23.6% 23.5%Depreciation and amortization 1.9% 1.8% 1.5% 1.5%Operating income 2.7% 7.7% 14.8%Interest income, net 0.3% 0.3% 0.4%Income before income taxes 3.0% 8.0% 15.2%Provision for income taxes 1.2% 3.1% 6.0%Net income 1.8% 4.8% 9.2%

Growth/Assumptions for Growth/Assumptions for modelmodel 1994 1995 1996 1997 1998 1999 Growth

Net sales 199,688 296,563 340,323 326,404 405,713 587,600 24.1%Cost of sales 135,328 205,186 249,415 227,648 268,746 353,089 Gross profit 64,360 91,377 90,908 98,756 136,967 234,511 SG&A expenses 48,757 74,378 82,679 83,810 98,529 138,847 Loss on sale of outlets - - 3,081 Depreciation and amortization 3,651 4,956 6,221 6,087 7,318 8,611 Operating income 11,952 12,043 (1,073) 8,859 31,120 87,053 Interest income, net 716 797 1,366 973 1,158 2,436 Income before income taxes 11,236 11,246 (2,439) 9,832 32,278 89,489 Provision for income taxes (962) 4,481 (1,105) 3,907 12,741 35,371 Net income 12,198 6,765 (1,334) 5,925 19,537 54,118 34.7%# of shares 10000 10000 9964 43899 44181 45281

1.22 0.68 (0.13) 0.13 0.44 1.20 Shareholder equity 65782 63796 71056 90808 151197

Sales growth 48.5% 14.8% -4.1% 24.3% 44.8%EPS growth -44.5% -119.7% -544.2% 229.7% 177.0%ROE 10.3% -2.1% 8.3% 21.5% 35.8% 14.8%

Proforma Income Proforma Income StatementStatement 1 YE 02/01/97 1 YE 01/31/98 1 YE 01/30/99 1/30/2000

Net sales 326404 405713 587600 729168Cost of sales 227648 268746 353089 437501Gross profit 98756 136967 234511 291667Selling, general and administrative expenses 83810 98529 138847 171355Depreciation and amortization 6087 7318 8611 10938Operating income 8859 31120 87053 109375Interest income, net 973 1158 2436Income before income taxes 9832 32278 89489 109375Provision for income taxes 3907 12741 35371 43203Net income 5925 19537 54118 66172

Basic earnings per common share 0.13 0.44 1.2 1.46Diluted earnings per common share 0.13 0.43 1.13 1.38Value Line 0.13 0.43 1.13 1.55Weighted average common shares outstanding - basic 43899 44181 45281 45281Weighted average common shares outstanding - diluted 45388 45633 47952 47952AEOS historic P/E = 42 5.46 18.48 50.40 61.38

1/30/2001 1/30/2002 1/30/2003 1/30/2004 1/30/2005 1/30/2006 1/30/2007 1/30/2008 1/30/2009904844 1122845 1393367 1729066 2145644 2662585 3304072 4100110 5087934542906 673707 836020 1037440 1287386 1597551 1982443 2460066 3052760361938 449138 557347 691626 858257 1065034 1321629 1640044 2035173212638 263868 327441 406331 504226 625708 776457 963526 119566413573 16843 20901 25936 32185 39939 49561 61502 76319

135727 168427 209005 259360 321847 399388 495611 615016 763190

135727 168427 209005 259360 321847 399388 495611 615016 76319053612 66529 82557 102447 127129 157758 195766 242931 30146082115 101898 126448 156913 194717 241630 299845 372085 461730

1.81 2.25 2.79 3.47 4.30 5.34 6.62 8.22 10.201.71 2.13 2.64 3.27 4.06 5.04 6.25 7.76 9.631.90

45281 45281 45281 45281 45281 45281 45281 45281 4528147952 47952 47952 47952 47952 47952 47952 47952 4795276.16 94.51 117.29 145.54 180.61 224.12 278.12 345.12 428.27

Historic (34.7%) Sustainable (14.8%)Sales (24.1%)Current (AEOS) Historical (AEOS)Current (Industry)Historical (Industry)1999 1.20 1.20 1.20 43.20 50.32 30.00 36.01 2000 1.62 1.38 1.46 58.20 67.78 40.41 48.51 2001 2.18 1.58 1.81 78.40 91.31 54.44 65.35 2002 2.93 1.81 2.25 105.61 123.01 73.34 88.04 2003 3.95 2.08 2.79 142.27 165.71 98.80 118.60 2004 5.32 2.39 3.47 191.66 223.23 133.10 159.77 2005 7.17 2.74 4.30 258.19 300.73 179.30 215.23 2006 9.66 3.15 5.34 347.82 405.12 241.54 289.95 2007 13.02 3.61 6.62 468.56 545.75 325.39 390.60 2008 17.53 4.15 8.22 631.22 735.19 438.35 526.19 2009 23.62 4.76 10.20 850.33 990.40 590.51 708.85

High Low Current (AEOS) Historical (AEOS)Current (Industry)Historical (Industry)1997 68.27 13.89 1999 43.20 50.32 30.00 36.01 1998 77.70 17.61 2000 49.58 57.75 34.43 41.33 1999 48.02 26.09 2001 56.90 66.27 39.51 47.43

Average 64.66 19.20 2002 65.30 76.06 45.35 54.44 P/E ratio 41.93 2003 74.95 87.29 52.05 62.48 P/E ratio (current) 36 2004 86.02 100.19 59.73 71.70 Industry 47.84 12.18 2005 98.72 114.98 68.56 82.29 P/E ratio 30.01 2006 113.30 131.96 78.68 94.45 P/E ratio (current) 25 2007 130.03 151.45 90.30 108.39

2008 149.23 173.81 103.63 124.40 Purchase price 44 2009 171.27 199.48 118.94 142.77 Best ($990) 36.5%Worst ($119) 10.5%Average ($427) 25.5% Current (AEOS) Historical (AEOS)Current (Industry)Historical (Industry)

1999 43.20 50.32 30.00 36.01 2000 52.61 61.27 36.53 43.86 2001 65.28 76.04 45.34 54.42 2002 81.01 94.36 56.26 67.53 2003 100.53 117.09 69.81 83.80 2004 124.75 145.30 86.63 103.99 2005 154.81 180.31 107.50 129.05 2006 192.10 223.75 133.41 160.14 2007 238.39 277.65 165.55 198.72 2008 295.82 344.55 205.43 246.60 2009 367.09 427.56 254.92 306.01

EPS (sales 24.1%) * P/E (as stated below)

EPS

P/E

EPS (historic 34.7%) * P/E (as stated below)

EPS (sustainable 14.8%) * P/E (as stated below)

Security Market Line:Security Market Line:Beta 1.65 1998 10 1999 44Rf 0.0512 Year end 30 200.0% 2000 61 38.6%Rm 0.11 1999 44 46.7% 2001 76 24.6%E(R) 14.8% Actual return 109.8% Expected return 31.4%

Dupont analysis:Dupont analysis:

ROE NI/Pretax NI Pretax NI/Sales Sales/Assets Assets/Equity1999 35.8% 0.6047 0.1523 2.7855 1.39521998 12.9% 0.6053 0.0796 2.8020 0.95771997 3.9% 0.6026 0.0301 2.9555 1.5542

Firm Ratios and Firm Ratios and ComparisonsComparisonsYahoo Pick

AEOS GPS LTD Chico's FAS AEOS Industry P/E 25 31 19 25 25 24.53P/Sales 2.75 2.89 0.9 2.46 2.75 1.94P/Book 9.4 14.59 4.27 7.06 9.4 11.29P/CF 24.25 22.28 13.17 20.76 24.25 17.19Sales - 1yr 41.76 34.47 2.1 41.08 41.76 20.73Sales - 5yrs 24.09 22.4 5.23 17.91 24.09 18.98EPS - 1yr 76.95 48.32 -79.47 101.71 76.95 33.87EPS - 5yrs 45.02 27.75 50.55 12.03 45.02 30.13Current Ratio 1.2 1.21 1.63 3.39 1.2 1.62TD to Equity 0 0.5 0.5 0.13 0 0.46Gross Margin 40.78 41.64 33.14 58.13 40.78 37.9Oper Margin 15.95 15.17 7.82 15.59 15.95 12.63Profit Margin 9.9 9.35 3.9 9.68 9.9 7.59ROA 32.17 23.62 8.83 23.9 32.17 20.22ROE 45.39 58.46 18.13 34.94 45.39 45.96

P/E 2 3 1 2P/Sales 3 4 1 2P/Book 3 4 1 2P/CF 4 3 1 2Sales - 1yr 1 3 4 2Sales - 5yrs 1 2 4 3EPS - 1yr 2 3 4 1EPS - 5yrs 2 3 1 4Current Ratio 4 3 2 1TD to Equity 1 3 3 2Gross Margin 3 2 4 1Oper Margin 1 3 4 2Profit Margin 1 3 4 2ROA 1 3 4 2ROE 2 1 4 3

31 43 42 31

Value Line Picks

Sophocles' Point System

• CBS: One of my top picks is American Eagle Outfitters. That stock has come down quite severely over CBS: One of my top picks is American Eagle Outfitters. That stock has come down quite severely over the last few weeks but their sales have been consistently the strongest amongst all the companies I the last few weeks but their sales have been consistently the strongest amongst all the companies I cover. Same store sales have been in the 20s and 30s on top of some very strong numbers a year ago cover. Same store sales have been in the 20s and 30s on top of some very strong numbers a year ago so clearly it is a company that is building a strong brand. There is really no reason for the so clearly it is a company that is building a strong brand. There is really no reason for the decline in the stock. Earnings growth has been very strong -- they're going to report earnings on decline in the stock. Earnings growth has been very strong -- they're going to report earnings on Wednesday of next week and I expect a very strong third quarter report. I think the outlook is very Wednesday of next week and I expect a very strong third quarter report. I think the outlook is very

positive for the fourth quarter.positive for the fourth quarter. • Robertson Stephens Managing Director and Senior Specialty Retailing Analyst Janet Joseph Robertson Stephens Managing Director and Senior Specialty Retailing Analyst Janet Joseph

Kloppenburg, a 1999 Wall Street Journal All-Star Analyst, today raised estimates and reiterated her Buy Kloppenburg, a 1999 Wall Street Journal All-Star Analyst, today raised estimates and reiterated her Buy rating on American Eagle Outfitters ``We believe the stock should appreciate back up to the 25 times rating on American Eagle Outfitters ``We believe the stock should appreciate back up to the 25 times level on our fiscal 2000 earnings-per-share estimate over the near-term, and long-term, should level on our fiscal 2000 earnings-per-share estimate over the near-term, and long-term, should appreciate in tandem with further and significant earnings upside revisions,'' said Kloppenburg. appreciate in tandem with further and significant earnings upside revisions,'' said Kloppenburg. ``Shares of American Eagle are currently trading at 21.7 times our new and potentially conservative ``Shares of American Eagle are currently trading at 21.7 times our new and potentially conservative fiscal 2000 estimate and represent a highly compelling investment relative to: 1. the 50 percent fiscal 2000 estimate and represent a highly compelling investment relative to: 1. the 50 percent earnings growth the company has achieved in each of the past nine quarters and 2. the likelihood for earnings growth the company has achieved in each of the past nine quarters and 2. the likelihood for

further earnings upside throughout the remainder of fiscal 1999.``further earnings upside throughout the remainder of fiscal 1999.`` • Expected growth of 25% over the next five years. My estimate was 24.1% Yahoo sees 2000 P/E of 25Expected growth of 25% over the next five years. My estimate was 24.1% Yahoo sees 2000 P/E of 25

• Recommendations: 7 strong buys, 5 moderate buys, 1 hold and 1 strong sellRecommendations: 7 strong buys, 5 moderate buys, 1 hold and 1 strong sell

SummarySummary• Consistently increasing EPS since going public a few years Consistently increasing EPS since going public a few years

ago beating analysts estimates. This has occurred over ago beating analysts estimates. This has occurred over past 4 quarterspast 4 quarters

• Overall performing better than industry and peers with Overall performing better than industry and peers with higher marginshigher margins

• Firm has an excellent website in place for online shoppingFirm has an excellent website in place for online shopping

• Stock Price trading at P/E = 36 (below its historic average Stock Price trading at P/E = 36 (below its historic average of 42) of 42)

• Next two quarters are expected to be strong forNext two quarters are expected to be strong forthe industrythe industry

• Recent stock jump 36 to 44 mayRecent stock jump 36 to 44 mayindicate insider leakage due toindicate insider leakage due toWednesday’s earnings announcementWednesday’s earnings announcement

RECOMMENDATION:

BUY