American Eagle Update Presented 10-31-00

James Charehsazen

Mike Delaney

Robert Don

Kerri Lin

Dave Zydek

Recommendation:

Hold

What is AEOS?

Specialty retailer of casual apparel, accessories, and footwear for men and women ages 16-35Design and market a versatile line of timeless and relaxed clothing like jeans, khakis, and T-shirtsOperate in over 45 states nationwide with 519 stores, up from 426 stores same time last yearLocated in mall type settings in high traffic urban settings

GrowthExpanding average store size to 5,500 sq feet up from 4,800 sq feet in 1999Plan to open 43 more stores during fiscal year 2000Purchase of Dylex Thrifts, Braemar, and National Logistics Services for $110 million to expand into the Canadian marketOpening of additional distribution centers and expansion of existing distribution centers which lowered payroll costs by 8% in 1998 and 12% in 1999AE.Com for the holidays

Competitors

Abercrombie & Fitch

Gap Stores

The Buckle

Pacific Sunwear

Comparables

Net sales increased 17% to $209 million from $178.6 millionUnits sold increase of 29.7%, offset by 9.8% decrease in price due to markdownsProfit margin went from 9.5% to 1.3% due to expansion costsSeptember same store sales up 7.4%

Top Down - Apparel Industry

Growth Strategies Industry has consolidated over last few

yearsCompany acquires another in same line of

business to: improve market share increase profitabilityexpand in new direction with new productsnew sources of revenue

Top Down - Apparel Industry

The Internet E-commerce expanding at increasing rate Sales are doubling every year through internet More of a complement than replacement to

existing stores

Economy Increase in interest rates affect consumer

confidence Rising fuel costs causes a rise in utility bills

Consumers reconsider their spending options Merchants have to compete for dollars

Top Down - AEOSReduced leverage on buying and occupancy expenses due to:Weak sell-through of apparel lines Increasing costs of store expansion

Marketing programs are helping to boost brand awarenessOfficial clothier of “Dawson’s Creek” Improvements to Web site & catalogPlans to advertise on certain TV networks

Top Down - AEOS

Company expected to expand store base by 19% in fiscal 2000

Prices well positioned for target marketLower than closest competitors

AEOS StockStock plunge from April 2000 to July 2000 Dramatic, but expected, decrease in earnings for

2nd quarter resulting from poor sales of spring and summer merchandise

Drastic discounts on unsold spring and summer merchandise to make way for strong fall line

Stock surge since July 2000 Very strong back-to-school shopping sales results Stumbles from its competition (Gap and

Abercrombie & Fitch)

Results from Back-to School Sales

 For August, its total sales shot up 29.6%, with same-store sales (or "comps") increasing by a surprisingly strong 9.1%.

 In September, American Eagle's total sales grew by 28.1% to $90 million. Comps increased by 7.4%

CompetitorsGap’s Problems Gap has had several earnings warnings, flubs in

shipments to Old Navy, and an ugly listing of declines in same-store sales have grounded

Young customers have simply been finding more of what they like recently from American Eagle, compared to the Gap and its Old Navy division

Abercrombie & Fitch’s Problems Difficulties with product mix resulting in stocking

merchandise customers didn’t want The cheaper clothes offered by American Eagle

pulled some unhappy Abercrombie shoppers away

Future for American Eagle

Abercrombie has taken steps to fix its merchandising problems, and looks like it is probably headed back the right way now

 Abercrombie lowered the prices of its clothes in an attempt to compete better with alternatives like American Eagle