Valuation Final Project

VALUATION Lorenzo Ceretti, Michele Prencipe, Siddharth Choraria, Shih-Han (Jeff) Wu

12/13/2010

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Contents 1. Executive summary ................................................................................................................................................................................................................................. 3

2. Companies Overviews ............................................................................................................................................................................................................................. 4

3. Intrinsic Valuation ................................................................................................................................................................................................................................... 5

Summary ...................................................................................................................................................................................................................................... 5

Pegasystems ................................................................................................................................................................................................................................. 5

SNAI .............................................................................................................................................................................................................................................. 9

Aeropostale ................................................................................................................................................................................................................................ 12

Cadence ...................................................................................................................................................................................................................................... 14

4. Relative Valuation ................................................................................................................................................................................................................................. 17

Summary .................................................................................................................................................................................................................................... 17

Pegasystems ............................................................................................................................................................................................................................... 17

SNAI ............................................................................................................................................................................................................................................ 19

Aeropostale ................................................................................................................................................................................................................................ 20

Cadence ...................................................................................................................................................................................................................................... 22

5. Valuing Equity as an Option ............................................................................................................................................................................................................... 24

Cadence ...................................................................................................................................................................................................................................... 24

6. Final Recommendation ....................................................................................................................................................................................................................... 25

Pegasystems ............................................................................................................................................................................................................................... 25

SNAI ............................................................................................................................................................................................................................................ 25

Aeropostale ................................................................................................................................................................................................................................ 25

Cadence ...................................................................................................................................................................................................................................... 25

Appendix ........................................................................................................................................................................................................................................................... 26

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1. Executive summary

Pegasystems: according to the various valuation methodologies used, the Company looks fairly priced by the market. Given our $32 per share target price vs. $35 per share current trading, we suggest to sell the stock and invest in an undervalued one to benefit from potential capital gains.

SNAI: The stock is currently trading at €2.6 compared with the intrinsic valuation of $2.2 and the sector relative valuation of €2.5. SNAI seems to be overvalued and we recommend a sell rating. In particular, we recommend to sell the stock due to the potential risks and uncertainties related to SNAI new product offering for slot machines (for further details, see section “Sensitivity Analysis” of SNAI DCF model).

Aeropostale: according to the various valuation methodologies used, the Company looks undervalued by the market. Given our $41 per share target price vs. $24.5 per share current trading, we suggest to buy the stock. Due to short term concerns given the departure of Co-CEO, Mindy Meads, the company’s shares have been under short term pressure. However, in Thomas Johnson, CEO and long-time visionary, Julian Geigher, Chairman, the company has solid management and an enviable track of positive same store sales throughout the recession. We also included in the appendix two LBO’s done as precedent transactions and multiples paid by TPG and Bain Capital respectively.

Cadence: The valuation result indicates the company is fair valued. In our DCF and comparable regression analysis, it appears to us that the company is undervalued by 6.01% and 11.53%; by contrast, in multiple valuation and market regression analysis, we see the company is overvalued by 2.19% and 5.03%. Cadence has experienced net loss over the past two years, and is now gradually moving itself toward recovery. Therefore, due to the mix of valuation result, we suggest to hold the stock given its upside potential and limited downside risk.

DCF Valuation Relative Valuation

Company Currency Share price Model Value Delta Model Value Delta Recommendation

Pegasystems $ 35.0 FCFF 31.7 (9.56%) EV/EBITDA 34.1 (2.79%) SELL

SNAI € 2.6 FCFF 2.2 (18.16%) EV/EBITDA 2.5 (6.41%) SELL

Aeropostale $ 24.5 FCFF 40.94 67.1% EV/SALES 43.7 78.4% BUY

Cadence $ 8.2 FCFF 8.7 6.01% EV/EBITDA 8.8 6.76% HOLD

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2. Companies Overviews

Company Name Company Descriptions

Pegasystems develops, markets, licenses, and supports software to automate business processes. The Company’s software enables organizations to build, deploy, and change enterprise applications by directly capturing business objectives, automating programming, and automating work. It also allows organizations to unify business rules with business processes in the software and automating the creation of system documentation. The Company provides implementation, consulting, training and technical support services to its customers. It also maintains alliances with systems integrators and technology consulting firms that also provide consulting services to its customers.

SNAI core businesses are the collection and acceptance of bets on sports and horse racing and the operation of slot machines and skill games through a distribution network of betting shops and its online platform. SNAI distribution network is one of the largest in Italy, comprising approximately 3,500 betting shops and corners operating throughout the country (600 betting shops, 2,900 betting corners) and 850 third parties sport and horse concessions. In addition, SNAI manages a network of over 36,000 slot machines of which approximately 7,300 are located within its betting shops and corners. The company is currently traded on the Milan stock exchange and operates four main divisions:

- Sport Betting (market share: 34%) - Horse Betting (market share: 56%) and Horse track management (SNAI owns 3 of the most important tracks in Italy) - Slot Machines (market share: 8%) - Skill Games: mainly online poker and cash games (market share: 6%)

Aeropostale, Inc. operates as a mall-based specialty retailer of casual apparel and accessories. It designs, markets, and sells merchandise principally targeting 14 to 17 year-old young women and men. The company offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, and outerwear, as well as accessories, including sunglasses, belts, socks, and hats. It also offers casual clothing and accessories focusing on elementary school children between the ages of 7 and 12. In addition, the company sells its products through its e-commerce Website, aeropostale.com. As of July 2010, the company operated 948 Aeropostale stores, 35 P.S. stores and franchise agreements in UAE. Aeropostale, Inc. was founded in 1987 and is headquartered in New York, New York.

Cadence Design Systems, Inc. (Cadence) develops electronic design automation (EDA), software and hardware. The Company licenses software, sells or leases hardware technology and provides engineering and education services worldwide to help manage and accelerate electronics product development processes. Its customers use its products and services to design and develop complex integrated circuits (ICs) and electronics systems.

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3. Intrinsic Valuation

Summary

Pegasystems

Assumptions

Pegasystems top line has been growing at a CAGR equal to 29.2% for the last 5 years. At the same time, the company has been able to increase its profitability (EBITDA margin) from 4.1% in 2005 to 17.1% in 2009. The growth has been mainly been supported by major investments in research and development, which accounted for approximately 15% to 20% of sales depending on the years.

On April 2010, Pegasystems acquired the entire share capital of Chordiant Software, a developer of customer relationship management software, for $5 per share in cash, or a total value of $154.2m. The acquisition pushed further the growth of the company but, at the same time, was disruptive for Pegasystems’ profitability and involved significant transactions costs. As a matter of fact, for the nine months ended 30 September 2010, Pegasystems revenues increased 29% to $247.3m, while net loss totaled $1.2m, vs. an income of $25.9m in the previous year. Revenues reflect higher income from software license, increased income from professional services and higher maintenance revenue. Net loss reflects an increase in selling & marketing expense, higher research & development expense and an increase in general & administrative expense. Net loss also reflects the

DCF Pegasystems SNAI Aeropostale Cadence

Currency $ € $ $Share price 35.03 2.64 24.5 8.21

Model FCFF FCFF FCFF FCFFType of growth High Stable High High Lenght of plan 10 Years 10 Years 5 years 5 YearsStable growth 2.00% 2.00% 3.50% 2.50%

Target price 31.7 2.2 40.94 8.7 Delta (9.56%) (18.16%) 67.1% 6.01%Recommendation SELL SELL BUY HOLD

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major impact related to the acquisition of Chordiant Software, which impacted Pegasystems income statement with additional extraordinary costs of circa $10m (operating figures have been adjusted accordingly).

We have estimated FY year 2010 as a starting point for our valuation based on the nine months ended 20 September 2020 and analyst consensus on the full year 2010. We have made a number of adjustments to the operating profit and the cash flow to the firm in order to factor in the massive investments that the company has made in research and development and the operating lease costs sustained in 2010. The R&D adjustment is key in order to better understand the reinvestment rate of the Company (we have assumed a life of R&D expenses equal to 5 years on the basis of the available information). The operating lease adjustment has been made in order to be consistent with the capital structure assumptions, where we considered operating lease commitments as debt and calculated their present value by discounting future commitments at each company’s pre-tax cost of debt. We also adjusted the operating profit accordingly by adding back 2010 operating lease expense and subtracting the estimated depreciation of the leased assets. In conclusion we obtained an EBIT of $72.1m in 2010 and an after tax operating profit (ATOP) of $46.8m (tax rate equal to 35%).

Since the company is still in a very high growth phase, we used a 4 stage FCFF model and built up a 10 year business plan: § Stage 1: very high growth - 3 years – 50% growth in ATOP in the first year (consistently with the re-investment rate of the previous year and

analyst expectations), 25% in year 2 and year 3. Below last 5 year historical growth (99% CAGR in EBIT) and in line with analysts’ expectations (to be considered that last year growth has been generated mainly through the acquisition of a competitor) .

§ Stage 2: high growth - 3 years - 15% growth in ATOP. Reducing growth due to increased size and competitive pressure. § Stage 3: stabilization phase - 4 years - from 15% to 2.5%. Stable growth equal to 2.5%. Linearly stabilizing to a stable pace in line with long

term target economic growth.

In terms of adjusted ROIC, we have assumed an improvement in the very high growth phase 2011 - 2013 mainly due to the integration of Chordiant Software and the related synergies and to synergies of scale. As a consequence, we estimated a ROIC of 15% in 2011, 15.5% in 2012 and 16% in 2013, versus 13.7% realized in 2010. We also believe that in the long term the ROIC will tend to converge to the cost of capital; however, given its strong client base and technological competitive advantages, we assumed the company will be able to earn more than the cost of capital in perpetuity (ROIC of 10% vs. WACC of 8%).

Finally, we assumed that the company will slightly change its capital structure since it will have to take on debt to finance the massive re-investment rates supporting the growth in the very high growth and high growth phases. The Company will then progressively de-leverage since the reinvestment rate will decrease in the stabilization phase.

In terms of cost of debt, we have assumed a 100bps spread versus the 10 year US bond based on the company expected synthetic rating in the high and very high growth rata phases. We used a 35% marginal tax rates for all the calculation (effective tax rate equal to 29.2% in 2009).

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DCF Model

The inputs to the 3-Stage FCFF model used to value Pegasystems are summarized below. The intrinsic valuation for the company is $31.7 per share. Given the current price of $35.0 (Dec. 9th, 2010), Pegasystems is correctly values by the market.

Pegasystems VERY HIGH GROWTH PHASE HIGH GROWTH PHASE STABILISATION PHASE

2010E Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Stable

Adj EBIT - ($m) 72.1 108.1 135.1 168.9 194.2 223.3 256.8 287.3 312.5 330.0 338.3 346.8Tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%ATOP - ($m) 46.8 70.3 87.8 109.8 126.2 145.2 166.9 186.8 203.1 214.5 219.9 225.4

ROIC 13.7% 15.0% 15.5% 16.0% 15.1% 14.3% 13.4% 12.6% 11.7% 10.9% 10.0% 10.0%RIR 368.2% 333.3% 161.3% 156.3% 99.1% 105.0% 111.7% 94.5% 74.7% 51.8% 25.0% 25.0%Growth 50.0% 25.0% 25.0% 15.0% 15.0% 15.0% 11.9% 8.8% 5.6% 2.5% 2.5%

Unlevered Beta 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%D/E 1.3% 15.0% 20.0% 15.0% 21.0% 22.0% 23.0% 21.0% 19.0% 17.0% 15.0% 15.0%Levered Beta 1.34 1.46 1.50 1.46 1.51 1.52 1.53 1.51 1.49 1.48 1.46 1.46

Risk Free Rate 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% 2.6%Equity Ris k Premium 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1% 5.1%Cos t of Equity 9.4% 10.0% 10.2% 10.0% 10.2% 10.3% 10.3% 10.2% 10.2% 10.1% 10.0% 10.0%

Spread vs . Treas ury 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Pre-tax Cost of Debt 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%After Tax Cos t of Debt 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

WACC 9.3% 9.0% 8.9% 9.0% 8.9% 8.8% 8.8% 8.9% 8.9% 8.9% 9.0% 9.0%

Discount rate 1.090 1.187 1.293 1.408 1.532 1.667 1.815 1.977 2.153 2.347 2.347FCFF - ($m) (163.9) (53.8) (61.7) 1.2 (7.3) (19.5) 10.3 51.4 103.4 164.9 169.0

Sum of NPV - ($m) 25.0 Market va lue of debt - ($m) 16.6 # of s hare out 37.0Termina l Va lue - ($m) 2,610.3 Value of cas h and equivalents 52.8 Value per s hare - ($) 31.7PV of TV - ($m) 1,112.3 Value of options - ($m) - Current price - ($) 35.0Value of operating assets - ($m) 1,137.2 Market value of equity - ($m) 1,173.4 Premium / (discount) 10.6%

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Sensitivity Analysis

Finally, we have preformed two sensitivity analysis based on three of the variables that we deem to be particularly sensitive for the valuation of the company: (i) stable growth rate, (ii) WACC, (iii) return on invested capital.

The growth rate that we applied over the 10 year business plan would lead to an over $1bn revenue company. Today in the US there are only circa 10 companies operating in the software and information technology industry with such a size. However, we think that by then the market will be pretty stabilized and that it would be difficult to growth more than the economy without major investments or M&A activity. We think that that 2.5% terminal growth rate is reasonable but we have analyzed in the sensitivity below a broader spectrum of possibilities (that would have an impact on the reinvestment rate).

Sensitivity analysis – g vs. LT ROIC – Share price in $ Sensitivity analysis – g vs. WACC – Share price in $

Finally, as far as the ROIC is concerned, in case Pegasystems will be able to maintain a ROIC equal to circa 15% (close to 2009 figure and in line with our assumptions for 2011 - 2013), the value of the company could growth by 11% to circa $35 per share (meaning that it will need to re-invest less to generate the same growth rate). On the other side, in case Pegasystems is not able to beat its long term cost of capital, the value of the share will drop by 4% to circa $31.

Share price-$ Perpetual growth rate31.7 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%9.0% 30.1 30.3 30.5 30.6 30.8 31.0 31.19.4% 30.3 30.5 30.7 31.0 31.3 31.6 31.99.7% 30.4 30.7 31.0 31.3 31.7 32.2 32.7

10.0% 30.5 30.8 31.2 31.7 32.2 32.7 33.411.7% 30.9 31.6 32.3 33.1 34.1 35.2 36.413.4% 31.3 32.2 33.1 34.2 35.5 37.0 38.715.1% 31.6 32.6 33.7 35.1 36.6 38.4 40.5

LT R

OIC

Share price-$ Perpetual growth rate31.7 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

9.73% 28.0 28.2 28.4 28.6 28.8 29.0 29.29.48% 28.8 29.0 29.3 29.5 29.8 30.1 30.59.23% 29.6 29.9 30.2 30.6 30.9 31.4 31.98.98% 30.5 30.8 31.2 31.7 32.2 32.7 33.48.73% 31.4 31.9 32.3 32.9 33.5 34.2 35.18.48% 32.4 32.9 33.5 34.2 35.0 35.9 36.98.23% 33.5 34.1 34.8 35.6 36.6 37.7 39.0

WAC

C

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SNAI

Assumptions

In the last few years, SNAI has faced opposite market trends with the online segment growing with double-digit rates and the horse betting segment (where the company has a substantial exposure) decreasing sharply. In order to react to these market dynamics, the company is changing its product offering.

As we mentioned the company overview, SNAI operates four different segments: we decided to analyze each segment individually in order to have a better understanding of the potential impacts on the company’s growth, return on capital and operating profitability going forward:

1) Sport Betting: analysts expect the segment to grow 3% over the 2010-2012 period mainly driven by the online channel. However the street consensus is that industry players will increase the payout ratio (amount won by the customer on the single bet) from current 78% to 79.5% due to higher competition in the market. This will have a negative impact on the company return on capital.

2) Horse Betting: despite no substantial change in profitability (payout not expected to change), the segment is suffering from more attractiveness of other games (poker and sport betting in particular) and therefore will be stagnating and slightly declining.

3) Slot Machines: this is the most important segment for the company future growth. In particular the company is replacing its current slot machines network (mentioned hereafter as “old model”) with a new generation of slot machines, called Video Lottery Terminal (“VLT”). The company recently acquired concessions from Italian government to set up app. 6,000 VLT (with total consideration of €75 mln). The new VLT will gradually replace a great portion of the old model machines (ca. 70%) and will greatly impact the company return on capital. The new VLT machines have a much more appealing format, a much broader games offering and are expected to increase substantially the amount of money spent per day by a single customer (called “coin-in”). These slot machines are expected to generate ca. €40 mln of operating profit in 2012 (40% of the company total operating profit in 2012). Analysts are therefore predicting that the impact on the return on capital and company profitably will be significant.

4) Skill Games: the segment is expected to grow very fast, driven by online poker and cash games. However, due to a sharp increase of competition, we assumed no substantial impact on SNAI operating profit

Given the above assumptions, we decide to use a two stage model. - In the first stage (2 years), the company will implement the introduction of the new VLT slot machine, with a sharp increase of ROIC that will

pass from app. 10% in 2010 to 20% in 2012. This will result in a strong growth of the operating profit. In terms of cost of debt, for the 1st stage, we assumed a 15% spread versus the 10 year Euro bond based on synthetic rating method (C rated).

- In the second stage, the company will enter a stable phase, focusing mainly on deleveraging the capital structure and reducing indebtness. We assumed that SNAI will reach after 10 years the D/E industry average equal to of 40%.

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DCF Model

The inputs to the 2-Stage FCFF model used to value SNAI are summarized below. The intrinsic valuation for the company is $2.2 per share implying a discount on current share price (€2.6) of 18.2%.

SNAI New Product (VLT) STABILISATION PHASE (Deleveraging)

2010E Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Stable0 0 0 0 0 0 0 0 0 0 0 00 0 0 0 0 0 0 0 0 0 0 0EBIT - (€m) 29.2 35.6 42.6 44.3 45.8 47.2 48.4 49.3 50.3 51.3 52.4 53.4Tax rate 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3%ATOP - (€m) 19.2 23.4 28.0 29.1 30.1 31.0 31.8 32.4 33.1 33.7 34.4 35.10 0 0 0 0 0 0 0 0 0 0 0ROC 9.5% 15.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%RIR 0.0% 145.6% 97.4% 20.0% 17.5% 15.0% 12.5% 10.0% 10.0% 10.0% 10.0% 10.0%Growth 0.0% 21.8% 19.5% 4.0% 3.5% 3.0% 2.5% 2.0% 2.0% 2.0% 2.0% 2.0%0 0 0 0 0 0 0 0 0 0 0 0Unlevered Beta 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61 0.61Tax Rate 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3% 34.3%D/E 101.5% 101.5% 94.7% 87.8% 81.0% 74.2% 67.3% 60.5% 53.7% 46.8% 40.0% 40.0%Levered Beta 1.02 1.02 1.00 0.97 0.94 0.91 0.89 0.86 0.83 0.80 0.78 0.780 0 0 0 0 0 0 0 0 0 0 0Risk Free Rate 3.0% 3.0%Equity Risk Premium 5.0% 5.0%Country Ris k 0.9% 0.9%Cos t of Equity 9.0% 9.0% 8.8% 8.7% 8.5% 8.3% 8.2% 8.0% 7.9% 7.7% 7.5% 7.5%0 0 0 0 0 0 0 0 0 0 0 0Spread vs . Treas ury 12.0% 12.0% 12.0% 10.0% 10.0% 8.5% 8.5% 5.5% 5.5% 5.3% 5.3% 5.3%Pre-tax Cos t of Debt 15.0% 15.0% 15.0% 13.0% 13.0% 11.5% 11.5% 8.5% 8.5% 8.2% 8.2% 8.2%After Tax Cost of Debt 9.8% 9.8% 9.8% 8.5% 8.5% 7.5% 7.5% 5.6% 5.6% 5.4% 5.4% 5.4%0 0 0 0 0 0 0 0 0 0 0 0WACC 9.4% 9.4% 9.3% 8.6% 8.5% 8.0% 7.9% 7.1% 7.1% 7.0% 6.9% 6.9%0 0 0 0 0 0 0 0 0 0 0 0Discount rate 1.094 1.196 1.299 1.409 1.522 1.643 1.759 1.883 2.014 2.153 2.153FCFF - ($m) (10.7) 0.7 23.3 24.8 26.4 27.8 29.2 29.8 30.4 31.0 31.60 0 0 0 0 0 0 0 0 0 00 0 0 0 0 0Sum of NPV - (€m) 212.7 Market va lue of debt - (€m) 313.0 # of s hare out 116.8Termina l Value - (€m) 642.5 Value of cash and equiva lents 54.4 Value per share - (€) 2.2PV of TV - (€m) 298.4 Value of options - (€m) - Current price - (€) 2.6Value of operating assets - (€m) 511.0 Market value of equity - (€m) 252.4 Premium / (discount) vs. current price -18.2%

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Finally, we have preformed two sensitivity analysis based on three of the variables that we deem to be particularly sensitive for the valuation of the company: (i) stable growth rate, (ii) WACC, (iii) return on invested capital.

Sensitivity analysis – g vs. LT ROIC – Share price in EUR Sensitivity analysis – g vs. WACC – Share price in EUR

As we mentioned before, the final recommendation on this stock is deeply linked to the expectations regarding the introduction of the new VLT slot machines. Consequently, the expected growth of the return on capital will depend on how well these machines will perform, both in terms of how appealing VLT machines will be to costumers and what will be the pay-out set by industry players. The increase of profitability in our DCF model seems already quite aggressive based on analysts’ consensus. Analysts currently assume that the coin-in (money bet per day by a single costumer) of the VLT will be 500€ per day versus the current value of 220€ per day of the old model.

Given the substantial impact of VLT machines (and related uncertainty), we believe that our recommendation based on the intrinsic value method will be SELL.

Share price Perpetual growth rate2.2 1.0% 1.5% 2.0% 2.5% 3.0%

14.0% 1.72 1.84 1.98 2.16 2.38

17.0% 1.78 1.92 2.09 2.29 2.55

20.0% 1.83 1.98 2.16 2.38 2.66

23.0% 1.86 2.02 2.22 2.46 2.75

26.0% 1.89 2.06 2.26 2.51 2.82

LT R

OIC

Share price Perpetual growth rate2.2 1.0% 1.5% 2.0% 2.5% 3.0%

4.9% 2.96 3.37 3.91 4.68 5.85

5.9% 2.28 2.51 2.81 3.20 3.71

6.9% 1.83 1.98 2.16 2.38 2.66

7.9% 1.50 1.61 1.73 1.87 2.04

8.9% 1.26 1.34 1.42 1.52 1.63

LT W

ACC

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Aeropostale

Assumptions

Aeropostale is a US specialty retailer that targets the teen fashion retail market. The growth of the company comes from new store openings, same store sales performance, international franchise business and the new P.S. segment for kids. Furthermore, online sales account for ~5% of revenues - this will drive growth (and operating leverage) in the future. The company boasts the highest sales productivity per square foot with over over 170 stores at $800/sq ft and an average of $624/sq ft for its ~950 stores.

Aeropostale top line has been growing at a CAGR equal to 16% for the last 5 years. At the same time, the company has been able to expand EBITDA margins from 13.1% in 2006 to 19.6% in 2010. From 2007 to 2010, the company grew sales per sq ft from $543 to $624. Recently, the shares have been under pressure due to near term comparable stores sales and departure of Co-CEO Meads. In our growth assumptions, we have incorporated the company’s reinvestment rate and high return on capital and thus started out with 13.5% growth and steadily tapering off to 3% in the terminal year.

Furthermore, as retailers have off balance sheet operating leases obligations, we have made a number of adjustments to the operating profit and the cash flow to the firm. Converting the operating lease obligations to debt, we estimate a present value of leases of ~$510m. The cost of debt assumed is 6.5% based on retail sector debt market comparables from Factset and speaking to debt syndicate financing professionals at investment banks.

Since the company has over 950 stores in the US, we can expect a high growth phase for the next five years coming mainly from the P.S. segment (kids), international franchise and online sales. We use a 2 stage FCFF model as per the below assumptions:

§ Stage 1: high growth – 5 years – 13.57% growth the first year (consistently with the re-investment rate of the previous year and analyst expectations), 11.5% in year 3 and 7.2% in year 4 and 3.00% in year 5.

§ Stage 2: stabilization phase - Stable growth equal to 3.0%. Linearly stabilizing to a stable pace in line with long term target economic growth.

It is worth noting that the company boasts a strong balance sheet, and has engaged in share buyback and insider buying over the last year which we also believe demonstrates convinction in the company’s undervalued share price. On November 2010 this month, the company increased the share repurchase program by $300MM increasing the total to $1.15Bn. During the first twenty- six weeks of 2010, the Company repurchased 1.4MM shares for $39.5MM, as compared to repurchases of 0.6MM shares for $13.5MM during the first twenty- six weeks of 2009.

In terms of ROIC, the company boasts a high ROIC of 44% due to its low $ per unit cost and smaller stores compared to peers. We have been conservative and assumed that in the long term growth slows down and the ROIC will tend to converge to the cost of capital.

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DCF Model

The inputs to the FCFF model used to value Aeropostale are summarized below. The intrinsic valuation for the company is $37.98 per share.

Aeropostale Current 1 2 3 4 5 Terminal Expected Growth Rate 13.57% 13.57% 11.45% 7.23% 3.00% Cumulated Growth 113.57% 128.98% 143.75% 154.14% 158.77% Reinvestment Rate 30.75% 30.75% 33.17% 38.01% 42.86% EBIT * (1 - tax rate) $264 $299 $340 $379 $406 $419 $431.18 - (CapEx-Depreciation) $21 $82 $93 $115 $147 $176 $180.57 -Chg. Working Capital $60 $10 $11 $11 $8 $3 $4.22 Free Cashflow to Firm $183 $207 $236 $253 $252 $239 $246.39 Cost of Capital 8.14% 8.14% 8.24% 8.42% 8.61% Cumulated Cost of Capital 1.0814 1.1695 1.2659 1.3725 1.4907

Present Value $192 $201 $200 $184 $160

Growth Rate in Stable Phase = 3.00% Reinvestment Rate in Stable Phase = 42.86% FCFF in Stable Phase = $246.39 Cost of Equity in Stable Phase = 9.12% Equity/ (Equity + Debt) = 90.00% AT Cost of Debt in Stable Phase = 4.03% Cost of Capital in Stable Phase = 8.61% Value at the end of growth phase = $4,391.13

Valuation

Present Value of FCFF in high growth phase = $937.25 Present Value of Terminal Value of Firm = $2,945.65 Value of operating assets of the firm = $3,882.90 Value of Cash, Marketable Securities & Non-operating assets = $239.50 Value of Firm = $4,122.40 Market Value of outstanding debt = $510.50 Market Value of Equity = $3,611.90 Value of Equity in Options = $9.04 Value of Equity in Common Stock = $3,602.87 Market Value of Equity/share = $40.94

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Finally, we have preformed sensitivity analysis based on stable growth rate and WACC that we deem to be sensitive for the valuation of the company

Perpetual growth rate WACC 1.00% 1.50% 2.00% 2.50% 3.00% 3.50%

7.50% $37.79 $40.29 $43.24 $46.79 $51.12 $56.54 8.00% $34.86 $36.95 $39.39 $42.28 $45.75 $49.98 8.50% $32.32 $34.09 $36.14 $38.53 $41.35 $44.73 9.00% $30.10 $31.62 $33.35 $35.35 $37.68 $40.44 9.50% $28.14 $29.45 $30.93 $32.62 $34.58 $36.86 10.00% $26.40 $27.53 $28.81 $30.26 $31.92 $33.83

Cadence

Assumptions

Despite its outstanding growth in 2006 and 2007, Cadence experienced net loss in its last two reporting periods (2008 and 2009), due to significant shrink from the top-line. In 2008 and 2009, revenue dropped by 35.7% and 17.9%, respectively, and EBITDA margin slide from 27.2% in 2007 to -3.4% and 0.1%. Over the same period, the gross profit margin remained at the level around 80%. However, the firm seems regain its past momentum. The revenue over that last twelve months has grown 5.5% comparing to that in 2009. And the consensus-estimated EBITDA margin in 2012 will trend back to historical average (25%).

Cadence apparently now is in the recovery phase from the downturn. Therefore, for the purpose to evaluate the company’s ability to generate sustainable cash, we turned to use its normalized earnings and average operating margin over the past five years, and used them as the basis in our projection. Also, since the firm has heavily invested in R&D to maintain its competitiveness in the market, we made the appropriate adjustment on its operating income and book value of assets and equity as well, which later would be used to come up with the ROIC and growth rate.

We used a two stage FCFF model and five year projection to evaluate the company’s intrinsic value.

§ Stage 1: high growth phase- 5 years – 8.96% growth in EBIT, based on ROIC of 12.9% and Reinvestment rate of 69.42%. The expected growth rate is linearly adjusted to 2.5% at the end of year five. The Cost of Capital is estimated to be 9.01%

§ Stage 2: stable growth phase - Stable growth rate equals to 2.5%. Cost of Capital at this stage dropped to 8.07%, which equals to the ROIC, to reflect lower growth prospect.

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In estimating Cost of Debt, we used current effective interest rate of 6.75%, comparing to Risk-free rate of 3.01% adopted, and assume this will be the norm through out both high and stable growth phases. We used a 35% marginal tax rates for all the calculations. In Cost of Equity, we used an historical ERP of 5.08%, and a beta of 1.439 and 1.2 for high grow and stable growth, respectively. Since we believed the firm is now adequately leveraged according to our analysis on its comparable peers, we assume the firm will continue its capital structure with a Debt to Capital ratio of 22.04%.

DCF Model

The two-stage DCF model used to value Cadence is summarized as below. The intrinsic valuation for the company is $8.70 per share. Given the current price of $8.21 (Dec. 3rd, 2010), Cadence seems to be undervalued by the market.


In our estimation, several variables used in calculation hold rooms of discussion. Therefore, we have preformed sensitivity analysis based on two of the variables that we believe to be sensitive for the valuation of the company: (i) stable growth rate, and (ii) WACC.

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If the WACC increases by 0.75% from 9.01% to 9.76%, the value per share will drop by nearly 2.2%, from $8.70 to $8.51.

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4. Relative Valuation

Summary

Pegasystems

Comparables

We have identified 33 companies operating in the software and information technology industry. In particular we broaden the set of comps including companies operating in the following sub-sectors: Supply Chain, Content Management, PLM, ERP, Systems & Network Management, Infrastructure & Tools, Business Intelligence, CRM / Demand Chain, EDA and Semiconductor Software, Enterprise Suite Vendors and others. Most of them are characterized by relatively low capital expenditures and massive investments in research and development. We collected up to date data on theses firms through Capital IQ and Reuters (up to December 9rd). The list of comparables is available in appendix

Relative valuation Pegasystems SNAI Aeropostale Cadence

Current price 35.03 2.64 24.5 8.21Multiple EV/EBITDA EV/EBITDA EV/SALES EV/EBITDA Current value 24.4x 7.0x 0.87x 14.6x

Comparable Regression value 23.7x 6.5x 1.5x 12.7x R sq adj 67.40% 56.65% 79.20% 48.05%Expected price 34.1 2.5 43.7 8.8Delta (%) (2.79%) (6.41%) 78.4% 6.76%Result SELL HOLD BUY HOLD

Market Regression value 8.8x 6.6x 1.7x 11.4x R sq adj 27.70% 24.50% 56.50% 47.10%Expected price 28.7 2.3 49.4 7.8Delta (%) (18.07%) (11.85%) 101.6% (4.51%)Result SELL SELL BUY HOLD

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Choice of multiple

We originally investigated three multiples (PE, EV/EBITDA and EV/Sales). We ran a ‘Comps’ regression for each of these multiples and ultimately chose EV/EBITDA to perform our analysis and valuation since the comps regression was robust in terms of adjusted R2. In running the EV/EBITDA multiple-regression, we initially adjusted all the EBITDA and invested capital values by the research and development expenses. However, we noticed that the R2 of the regression using this value was very low and the predictors were not significant. We therefore took a step back and regressed non adjusted EV/EBITDA multiples. Nonetheless, we incorporated R&D among our predictors by adding the EBITDA / Capex variables with positive statistic results. We analyzed and excluded from the regressions a number of variables since they were (surprisingly) non statistically significant: beta, ROIC, EBITDA margin, tax rate, and reinvestment rate. On the other hand (not surprisingly), EBITDA expected growth is the most relevant predictor. The table below shows the result of the regression.

Valuation relative to Comparables Companies

Substituting the values for Pegasystems in the regression function (EV/EBITDA = 11,6 + 30,8 EBITDA growth - 3,05 R&D / EBITDA) we get to a valuation of the company (firm value) equal to $1,208.6m. In particular we used an EBITDA growth equal to 50% (in line with the growth used in the DCF model) and a R&D / EBITDA equal to 108.8%. Since we are using a non R&D adjusted multiple, in order to be consistent, we obtained the firm value by multiplying the regressed EV/EBITDA multiple by the non adjusted EBITDA for Pegasystems. At the same time the level of R&D il clearly reflected in the regression with our second predictor.

In order to get to the value per share we added back the net cash position as of the nine months ending September 2010 of $52.8m. and divided by the number of shares outstanding (37m). We obtain a value per share equal to $34.1, in line with both our DCF valuation and the current market value.

Valuation relative to market

We used the equation for the US cross sectional regression available on the Damodaran lecture notes (“Value/EBIT Multiples, page 24”).

Predictor Coefficient SE Coeff T P

Constant 11.6050 2.1430 4.9500 0.0000EBITDA growth 30.8300 3.8360 8.0400 0.0000R&D / EBITDA (3.0540) 1.9870 (3.0500) 0.0050

S = 7,50521 R-Sq = 69,4% R-Sq(adj) = 67,4%

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EV/EBITDA= 7.211 + exp g in EPS 5yrs * 0.287 + ROC1 * 11.123 + effective tax rate * (0.110)

Here we get to a regressed multiple of value of 8.8x. This time we decided to multiply it for the R&D adjusted EBITDA since the US market is a much broader space and the R&D adjusted ROI and operating profit give a better sense of the company performance in relation to its re-investment rate. In addition, the regression does not factor in directly R&D investments and we believe they are an essential part of the Pegasystems business model. Our regressed value for the Company is equal to 1,010.3 or $28.7 per share (after net cash position adjustment). Relative to the market, Pegasystems is overvalued by about 22.1%.

SNAI

Comparables

We have identifies 34 companies operating in the gaming and betting industry. In particular, our listed comparable companies include players operating in the following segment: Sports betting, Lotteries and lottery technology providers, Online gaming, Equipment manufacturers. As a source for our data, we used Capital IQ database.

Choice of multiple

We originally used as dependent variables PE, EV/EBITDA and EV/Sales multiples, using both last twelve months (“LTM”) and next twelve months (“NTM”) figures. As P/E and EV/SALES multiples reported results with low R-squared, we decided to concentrate on EV/EBITDA LTM and EV/EBITDA NTM. We used as independent variables the several ratios that mostly affect this multiple: expected growth, taxes, depreciation and amortization, reinvestment requirements (CapEx and change in net working capital), cost of capital, namely the comps’ beta.

Among the different regression, eliminating non-significant variables, we decided to use EV/EBITDA NTM against LT expected growth and taxes due to its high R-squared value.


We used Minitab to run a regression against the comparable companies. The resulting regression equation is:

EV/EBITDA NTM = 8.953 - 0.073 * Effective Tax Rate + 0.075 * Long Term Growth in EPS

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Based on the regression equation, the predicted EV/EBITDA NTM multiple for SNAI is 6.51x.

In order to be consistent with our set of data, we computed the EV of SNAI using the book value of debt and we find an actual EV/EBITDA NTM multiple of 6.95x, implying that SNAI is currently overvalued relative to the sector by about 7%.


We used the equation for the European cross sectional regression available at Damodaran website

EV/EBITDA = 13.50 + 11.29 g - 12.59 t - 5.08 (D/C) + 0.35 RIR

Using LTM values, the predicted multiple is 6.6x.

Relative to the overall market, SNAI multiple on a LTM basis is equal to 7.5x, implying that the company is currently over-valued by about 12%.

Aeropostale

Comparables

We have identifies 20 companies operating in the specialty retail sector. In particular we broaden the set of comps including companies operating in the following sub-sectors: Apparel Retail, Discount Retail, Luxury, department Stores and others. These comparables have similar characteristics in terms of capital expenditures, operating leases and target customer profile. The data was compiled from Capital IQ LTM information and the list of comparables is included in the appendix.

Choice of multiple

We explored the feasability of using various multiples include PE, EV/EBITDA, EV/EBITDAR (before rent expense) and EV/Sales. To assist us, we ran a ‘Comps’ regression with Minitab for each of these multiples and ultimately chose EV/Sales to perform our analysis and valuation since the comps


Constant 8.9532 0.6543 13.68 0.0000LT EPS Growth Rate 0.0728 0.0235 3.10 0.0060Tax Rate (0.0753) 0.0194 (3.88) 0.0010

S = 1,40525 R-Sq = 56,5% R-Sq(adj) = 51,7%

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regression was robust in terms of adjusted R2 and significance of the predictors (EBITDAR margin%, Beta and Operating Lease/Sales). Initially, we started with EV/EBITDAR but the significance of the regression was not strong, so we therefore moved to EV/Sales which is a relevant multiple for the retailing sector. While performing the EV/Sales multiple regression, we adjusted for operating lease characteristics and looked closely at EBITDAR numbers across the comparables. We chose EBITDAR margin, Beta and Operating Lease/Sales among our predictors which yielded positive results. We excluded from the regressions a number of variables - ROIC, tax, and reinvestment since they were non-statistically significant.


Substituting the values for Aeropostale in the regression function (EV/SALES = - 1,95 + 14,6 EBITDAR margin + 0,706 Beta - 10,9 OL/Sales), we get to an Enterprise Valuation of $3608.9m. Substituting an EBITDAR margin of 23%, Beta of 1.1 and OL/Sales of .06, we obtained a predicted EV/Sales of 1.6.

In order to get to the value per share we added back the net cash position of $239.5m, and divided by the number of shares outstanding (88m). We obtain a value per share equal to $43.7, in line with both our DCF valuation consistent with our recommendation that the shares are undervalued.


We used the regression equation for the US market available at ‘Damodaran Online’.

0.19 + 11.93 g + 6.40 Operating Margin – 0.93 (Debt/Capital)

Substituting growth estimates based on reinvestment and analyst expectations, operating margin of 13% and Debt/Capital of 0.25, we get to a regressed EV/Sales Multiple of value of 1.7x. In order to get to the value per share we added back the net cash position of $239.5m, and divided by the number of shares outstanding (88m). We obtain a value per share equal to $49.4, also showing that the shares of Aeropostale are undervalued.


Constant (1.950) 0.822 (2.3700) 0.0300EBITDAR margin 14.576 2.248 6.4800 0.0000Beta 0.706 0.278 2.5400 0.0220OL/Sales (10.859) 4.971 (2.2) 0.044S = 0.433280 R-Sq = 82.5% R-Sq(adj) = 79.2%

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Cadence

Comparables

We have identified 47 companies operating in the same sector. Also, in our search of comparables, we relaxed the criteria to broader category of Application software design and development. Those businesses share a similar characteristic that they tend to operate with less capital investment on fixed assets, and instead focus on research and development. We collected latest data of theses firms through Capital IQ and Bloomberg (up to December 3rd). The list of comparables is available in Appendix 4.

Choice of multiple

Considering which multiple could better reflect the value driver of Cadence’s business, we looked at the comparables’ main operating business and capital structure as well. We concluded to use EV/EBITDA instead of P/E and P/S given that the revenue sources and capital structures varied across comparables selected. P/B was also excluded from the consideration because we believed the value of such business is not driven from the balance sheet, but by the investment on the intangibles. In our regression analysis, the R-square is close to 47%, which give us a certain level of confidence about the result, and its ability to explain the independent variable, EV/EBITDA multiple.

The dependant variables we selected are EBITDA growth rate and R&D/forward EBITDA. Even though the EBITDA growth rate shows limited explanatory capability statistically, however, we believed it makes intuitive sense to predict EV/EBITDA multiple because it is the underlying element affecting future EBITDA.


Hence, based on the predicting formula (EV/EBITDA = 7.8993 + 11.4021 * EBITDA growth + 5.5832 * R&D exp./EBITDA), we estimated the EV/EBITBA to be 13.2x, based on forward EBITDA of 8.96% and R&D/EBITDA of 77.43%. The value per share derived from the metric is $9.16, or an 11.53% premium comparing to current market share price. Please note the above regression analysis was done without adjusting R&D expenses, as being done in our intrinsic valuation. If so, it would probably provide us more grounds to explain the relationship better.

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We used the regression equation for the US market available at ‘Damodaran Online’.

EV/EBITDA= 8.57+ 49.87 * growth rate – 5.08 *(Debt/Capital) – 0.83 * (RIR)1

With 8.96% growth rate, 22.04% Debt to Capital ratio and 67.17% Reinvestment rate, we concluded an EV/EBITDA multiple of 11.4x for Cadence, which gave us a $7.80 value per share. Relative to the market, Cadence was overvalued by 5.03%.

1 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/MReg10.html

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5. Valuing Equity as an Option

Cadence

We used Black-Scholes model and the estimated firm value from our intrinsic valuation to estimate the valuation on Cadence’s common equity. We concluded the equity value per share of Cadence is $8.65, or a 5.4% of premium relative to current market price.

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6. Final Recommendation

Pegasystems

According to our DCF and to the relative valuation against its comparable companies (EV/EBITDA), Pegasystems looks fairly priced or slightly overvalued by the market. According to the relative valuation against the market (EV/EBITDA), the Company looks overvalued. Since the EV/EBITDA multiple varies widely across firms in the market, depending upon how capital intensive the firm is and how much reinvestment is needed to keep the business going and create growth, we tend to give more credit to the Pegasystems specific sector multiple regression. However, since the company’s target price ($32) is slightly below its trading value, we suggest selling the stock and investing in an undervalued one to benefit from potential capital gains.

SNAI

SNAI operates in an industry and a market (Italy) that are driven by good fundamentals with proven strong growth in the past few years and a general consensus of future growth (especially in the online and slot machines segments). However, the change in SNAI product offering for slot machines (introduction of VLT) is the main uncertainty for the future success of the company. Given the potential risks of this challenge and already aggressive assumptions of future increase of profitability, our final recommendation is a SELL rating.

Aeropostale

According to valuation methodologies like the DCF and the relative valuation against its comparable companies (EV/Sales), Aeropostale looks undervalued by the market. We think the short term concerns over same store sales and CO-CEO departure have impacted the share price in the near term. Since the EV/Sales multiple varies across retailers in the market, depending upon how capital intensive the firm is and reinvestment needed to grow, we give more credit to the regression results and DCF. Given the company’s long-term record with positive same store sales growth throughout the recession, we are confident of our target price of $41. The precedent deals done by TPG and Bain Capital confirm our belief too.

Cadence

We believe the company is valued appropriately by the market right now. In our DCF and comparable regression analysis, it appears to us that the company is undervalued by 6.01% and 11.53%; by contrast, in multiple valuation and market regression analysis, we see the company is overvalued by 2.19% and 5.03%, respectively. Cadence has experienced net loss over the past two years, and is now gradually moving itself toward recovery. Therefore, due to the mix of valuation result, we suggest to hold the stock given its upside potential and limited downside risk.

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Appendix

Appendix 1 – Pegasystems - Comparable Companies

Company Primary industry

Ariba Inc. (NasdaqGS:ARBA) Supply Cha inArt Technology Group Inc. (NasdaqGM:ARTG) Content ManagementAutodesk, Inc. (NasdaqGS:ADSK) PLMBlackbaud Inc. (NasdaqGS:BLKB) ERPBMC Software Inc. (NasdaqGS:BMC) Systems & Network ManagementCA Technologies (NasdaqGS:CA) Systems & Network ManagementCadence Des ign Systems Inc. (NasdaqGS:CDNS) Software and information technologyCitri x Systems, Inc. (NasdaqGS:CTXS) Systems & Network ManagementCommVault Systems, Inc. (NasdaqGS:CVLT) Systems & Network ManagementCompuware Corporation (NasdaqGS:CPWR) Infras tructure & ToolsEpicor Software Corporation (NasdaqGS:EPIC) ERPF5 Networks, Inc. (NasdaqGS:FFIV) Systems & Network ManagementFai r Isaac Corp. (NYSE:FICO) Bus iness Intel l igenceInformatica Corporation (NasdaqGS:INFA) Bus iness Intel l igenceInteractive Intel l i gence, Inc. (NasdaqGS:ININ) CRM / Demand ChainJDA Software Group Inc. (NasdaqGS:JDAS) Supply Cha inLawson Software, Inc. (NasdaqGS:LWSN) ERPManhattan Associa tes, Inc. (NasdaqGS:MANH) Supply Cha inMentor Graphics Corp. (NasdaqGS:MENT) EDA and Semiconductor SoftwareMicroStrategy Inc. (NasdaqGS:MSTR) Bus iness Intel l igenceNationa l Ins truments Corporation (NasdaqGS:NATI) EDA and Semiconductor SoftwareNetScout Systems Inc. (NasdaqGS:NTCT) Systems & Network ManagementNovel l Inc. (NasdaqGS:NOVL) Infras tructure & ToolsOpen Text Corp. (NasdaqGS:OTEX) Content ManagementOracle Corp. (NasdaqGS:ORCL) Enterpri se Suite VendorsParametric Technology Corporation (NasdaqGS:PMTC) PLMProgress Software Corp. (NasdaqGS:PRGS) Infras tructure & ToolsQuest Software Inc. (NasdaqGS:QSFT) Systems & Network ManagementRed Hat, Inc. (NYSE:RHT) Infras tructure & ToolsRightnow Technologies Inc. (NasdaqGM:RNOW) CRM / Demand ChainSAP AG (DB:SAP) Enterpri se Suite VendorsSynopsys Inc. (NasdaqGS:SNPS) EDA and Semiconductor SoftwareTessera Technologies Inc. (NasdaqGS:TSRA) EDA and Semiconductor SoftwareTibco Software, Inc. (NasdaqGS:TIBX) Integration

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Appendix 2 – SNAI – Comparable Companies

Company Industry Segment

Ladbrokes PLC (LSE:LAD) Sports bettingLP Hill plc (AIM:LPH)Paddy Pow er plc (ISE:PLS)Players Netw ork (OTCBB:PNTV)Probability Plc (AIM:PBTY)Tabcorp Holdings Ltd. (ASX:TAH)William Hill plc (LSE:WMH)

888 Holdings (LSE:888) Online gamingBet-At-Home.com AG (XTRA:ACX)Betbull Holding SE (DB:0BB)Betsson AB (OM:BETS B)bw in Interactive (WBAG:BWIN)i:FAO AG (XTRA:FAO2)PartyGaming Plc (LSE:PRTY)Redbet Holding Ab (OM:RBET)Sportingbet plc (AIM:SBT)Tipp24 AG (XTRA:TIM)Unibet Group plc (OM:UNIB SDB)

Intralot SA (ATSE:INLOT) Lotteries and lottery technology providersLottomatica Group S.p.A. (CM:LTO)OPAP SA (ATSE:OPAP)Scientif ic Games Corporation (NasdaqGS:SGMS)Tatts Group Limited (ASX:TTS)The Rank Group Plc (LSE:RNK)

Aristocrat Leisure Ltd. (ASX:ALL) Equipment manufacturersBally Technologies, Inc. (NYSE:BYI)Boyd Gaming Corp. (NYSE:BYD)Carnival plc (LSE:CCL)Codere, S.A. (CATS:CDR)GVC Holdings PLC (AIM:GVC)International Game Technology (NYSE:IGT)PokerTek, Inc. (NasdaqCM:PTEK)Sportech plc (LSE:SPO)WMS Industries Inc. (NYSE:WMS)

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Appendix 3 – Aeropostale

Comparable Companies

Company Market Cap Total EV Cash & ST LTM Revenue Gross Profit LTM EBITDA FWD EBITDA LTM EBIT

Ann Taylor 1,552.86 1,334.04 223.6 1,934.1 1,084.2 213.8 213.8 116.0 J Crew 2,800.99 2,489.29 311.7 1,711.3 772.8 320.8 353.8 271.1 Childrens Place 1,373.06 1,202.54 170.5 1,683.7 661.5 199.2 194.4 135.5 Dress Barn 2,063.88 1,724.95 364.6 2,683.8 1,412.7 350.8 422.0 273.5 Gap 13,196.45 11,542.45 1,654.0 14,536.0 5,893.0 2,629.0 2,723.6 1,976.0 Limited Brands 10,173.29 11,439.29 1,300.0 9,220.3 3,940.9 1,555.8 1,555.8 1,159.8 Foot Locker 2,993.76 2,589.76 541.0 4,982.0 2,117.0 322.0 481.7 217.0 Men's Wearhours 1,314.11 1,175.0 197.8 2,017.8 864.6 187.3 228.5 108.9 Buckle 1,806.46 1,641.98 164.5 921.2 454.3 228.9 228.9 201.0 Chicos 2,191.62 1,686.07 505.6 1,865.7 1,053.9 269.6 334.6 175.4 Urban Outfitters 6,102.44 5,598.81 503.6 2,194.2 917.2 504.1 504.1 412.5 American Eagle 3,019.47 2,384.99 634.5 3,057.5 1,186.1 413.9 483.4 258.8 Guess 4,419.29 3,989.94 469.0 2,372.4 1,049.2 457.0 495.4 391.6 Collective Brands 1,304.97 1,690.77 358.3 3,343.6 1,204.7 337.5 366.5 197.9 Abercrombie & Fitch 4,917.63 4,381.08 618.2 3,255.4 2,075.7 450.7 569.2 223.7 Ralph Lauren 10,741.08 10,089.98 936.3 5,266.4 3,113.2 1,020.7 1,134.0 836.5 Bebe 520.96 364.33 156.6 506.1 200.4 24.7 47.4 (0.5) Coach 17,018.2 16,340.37 712.0 3,757.9 2,759.7 1,338.2 1,338.2 1,212.6 Express 1,705.82 1,990.43 81.8 1,831.2 808.1 258.9 258.9 193.2 Aeropostale 2,144.68 1,905.22 239.5 2,362.3 1,033.3 462.5 477.3 408.2

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Precedent Transactions for Aeropostale

The specialty retail sector has attracted recent leveraged buyouts by private equity firms. Two notable LBO’s done in the last three months include Gymboree and J Crew. It is worth noting the multiples paid by Bain Capital and TPG respectively for the below $1.6Bn and $3Bn buyouts. Applying the average 1. 6x EV/Sales, or 7.7-8.3 EV/EBITDA, 10x EV/EBIT and a 8x EV/EBITDAR (before rent expense), we get a stock price of $42-$50. Given the entire compan was taken private, the private equity firms have had to pay a premium to acquire the company.

Gymboree - Bain EV/Sales EV/EBITDA EV/EBIT EV/EBITDAR 2,327.40 470.3 417.5 570.5

Multiple 1.6 7.7 9.9 8.1 Enterprise Valuation 3723.84 3621.31 4133.25 4621.05 Cash+ST 297.5 297.5 297.5 297.5 -Debt 0 0 0 0

4021.3 3918.8 4430.8 4918.6 Shares 92.5 92.5 92.5 92.5 Value per share 43.5 42.4 47.9 53.2

J Crew - TPG EV/Sales EV/EBITDA EV/EBIT EV/EBITDAR Multiple 1.6 8.3 10.0 7.7 Enterprise Valuation 3672.1 3903.5 4155.0 4376.0 Cash+ST 297.5 297.5 297.5 297.5 -Debt 0.0 0.0 0.0 0.0 Entperpise Valuation 3969.6 4201.0 4452.5 4673.5 Shares 92.5 92.5 92.5 92.5 Value per share 42.9 45.4 48.1 50.5

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Historical Multiples for Aeropostale

Historical Multiples 2003 2004 2005 2006 2007 2008 2009 Nov-29-2010 TEV/ Revenue 1.2x 1.7x 1.4x 1.1x 1.2x 1.1x 1.0x 0.9x TEV/ EBITDA 9.7x 12.6x 9.1x 8.7x 8.7x 7.1x 6.0x 4.7x TEV/ EBIT 11.2x 14.4x 10.3x 10.2x 10.3x 8.3x 7.0x 5.2x P/Normalized EPS 20.9x 25.6x 18.5x 18.5x 18.4x 14.9x 12.5x 10.6x P/BV 5.8x 8.0x 6.4x 5.6x 6.3x 8.2x 5.7x 5.4x TEV/Unlevered FCF 34.9x 58.1x 25.3x 29.3x 18.0x 21.6x 13.6x 8.1x

Profitability 2003 2004 2005 2006 2007 2008 2009 LTM Return on Assets % NA 20.8% 23.8% 18.6% 19.1% 23.9% 26.9% 32.0% Return on Capital % NA 35.1% 40.1% 32.4% 34.7% 51.3% 57.0% 56.3% Return on Equity % NA 34.6% 39.7% 32.1% 35.7% 50.7% 54.1% 53.5% Return on Common Equity % NA 0.0% 0.0% 32.1% 35.7% 50.7% 54.1% 53.5% Margin Analysis Gross Margin % 36.0% 37.6% 39.3% 36.2% 38.3% 41.0% 40.9% 44.5% SG&A Margin % 26.5% 25.6% 25.2% 24.9% 26.6% 27.8% 27.6% 26.6% EBITDA Margin % 10.9% 13.7% 15.8% 13.1% 13.8% 15.3% 15.6% 20.2% EBITA Margin % 9.5% 12.0% 14.1% 11.2% 11.7% 13.1% 13.4% 17.9% EBIT Margin % 9.5% 12.0% 14.1% 11.2% 11.7% 13.1% 13.4% 17.9% Net Income Margin % 5.7% 7.4% 8.7% 7.0% 7.5% 8.1% 7.9% 10.7% Levered Free Cash Flow Margin % NA 4.1% 6.6% 5.4% 8.6% 4.3% 5.5% 10.9% Unlevered Free Cash Flow Margin % NA 4.1% 6.6% 5.4% 8.6% 4.3% 5.5% 10.9%

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Appendix 4 – Cadence

Documents

Valuation Final Project