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American Eagle Outfitters Inc

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					American Eagle
 Outfitters, Inc.
         (AEO)
    Presented April 26, 2007
Investment Managers

  Jessica   Boghosian
     jboghos2@uiuc.edu

     Ashley   Qiao
      fqiao2@uiuc.edu
          Presentation Outline
   The Company
       Company Overview
       Store Expansion
       Business Risks
   RCMP Position
       Role in Portfolio
       Correlation Matrix
   Comparable Analysis
       Competitors
       1&5 Year Comparables
       Ratio Analysis
   DCF Analysis
       Assumptions
       DCF Model
       Sensitivity Analysis
   Recommendation
           Company Overview
   American Eagle Outfitters was founded in 1972 and
    is headquartered in Warrendale, Pennsylvania.
   In 1977 and 2001, the first American and Canadian
    stores were opened, respectively.
   As of February, 2007, AEO operated 911 stores in
    Canada and the U.S.
   Designs, markets, and sells its own brand of
    laidback, current clothing targeting 15 to 25 year-
    olds.
     Sells jeans, graphic Ts, accessories, outerwear, footwear,
      basics, and swimwear.
     Provides high-quality merchandise at affordable prices.
   Distributes merchandise via e-commerce in 41
    countries.
           Merchandise Groups
                          FY 2006   FY 2005   FY 2004
  Men’s apparel and
    accessories            35%       35%       34%
  Women’s apparel,
accessories & intimates    60%       60%       61%
Footwear – men’s and
      women’s              5%        5%        5%

       Total              100%      100%      100%
             Company Overview
   In 2006, American Eagle launched its new
    aerieTM intimates sub-brand.
     This collection sells dormwear and intimates including
      bras, undies, camis, hoodies, robes, boxers, and
      sweats for girls.
   In the fall of 2006, American Eagle introduced
    MARTIN +OSA.
     Encompasses    a new sportswear concept targeting
      25-40 year old men and women which sells apparel,
      accessories, and footwear for sports.
             Store Expansion
 In fiscal 2006, total store based increased
  by 5% and gross square footage
  increased by 8%.
 Currently targeting the western and
  southwestern U.S., with these regions
  accounting for 66% of store openings in
  2006
     50%   of AEO store base is in these regions
                      Store Expansion
   In Fiscal 2007, AEO plans to open 45-50 new
    stores, 15 aerie stores, and 12 MARTIN + OSA
    stores. Square footage growth is expected to be
    10%.
                    Fiscal 2002   Fiscal 2003   Fiscal 2004   Fiscal 2005   Fiscal 2006
Stores at beg. of
per.                   678           753           805           846           869
Stores opened
during per.             79            59            50            36            50
Stores closed
during per.             (4)           (7)           (9)          (13)           (8)
Total stores at
end of per.            753           805           846           869           911
                  Business Risks
    Changing consumer preferences and
    fashion trends
     The  specialty retail apparel business
      fluctuates according to changes in the
      economy and customer preferences, dictated
      by fashion and season.
          Retail must be ordered well in advance of the selling season.
     Changes   in fashion trends could lead to lower
      sales, excess inventories and higher
      markdowns, which could negatively affect
      AEO’s financial condition.
                   Business Risks
   Current level of sales and earnings growth
     The 12th consecutive quarters of record high
      sales and earnings was recorded in the 4th
      quarter of Fiscal 2006. Gross margin &
      operating margin rates are near historic highs.
          “It is difficult to maintain this level of
           performance and to continue to reach higher
           levels.”
               AEO has in place growth initiatives to increase earnings
                by at least 15% per year long-term.
                                                            Business Risks
                  The success of American Eagle operations depends
                   significantly on discretionary consumer spending
                                                                  Personal Consumption Expenditures
                                                                          (Clothing & Shoes)
                                Expenditure (In Billions)




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U.S. Department of Commerce, Bureau of Economic Analysis
             Business Risks
   Growth through the development of new
    brands
     MARTIN   + OSA and aerie by American Eagle
      were launched in FY 2006.
       Ability to succeed in these new brands requires
        significant expenditures and management attention.
       These new brands are subject to risks of customer
        acceptance, competition, product differentiation,
        and the ability to obtain suitable sites for new
        stores.
                 Business Risks
   Seasonality
     The  fourth and third quarters have historically
      provided a large portion of net sales & income
      to American Eagle due to the year-end
      holiday season and back-to-school selling
      season, respectively.
     60% of sales and 65% of income are
      accounted for in these quarters.
          Any factors affecting the performance in these
           quarters can have adverse financial effects.
             Transaction History
   December 10, 1999         March 8th, 2005
     BOT  200 shares at        2-1   split
      $44.00
   January 10, 2000          April 25th, 2005
     BOT  200 shares at        SLD 600 shares at
      $27.00                     $26.28
   May 3, 2000               November 16th, 2005
     BOT  600 shares at        SLD 700 shares at
      $15.63                     $23.33
   February 23, 2001         December 28th, 2006
     3-2   split               3-2   Split
                  RCMP Position
       Currently own 1,950 shares of AEO, trading at
        $29.93 as of April 25th, 2007 for an unrealized
        gain of $48,174.36 or 472.80%.

                                             Market Portfolio

   American Eagle                           7%   6%
                                                                  AEE
                                                                  AEO

    Outfitters accounts            5%
                                        7%
                                                         19%
                                                                  CPRT
                                                                  FR
                                                                  JKHY
    for 19% of our                2%

                                  10%
                                                                  JPM
                                                                  KMB
                                                             8%
    portfolio.                      6%
                                                                  MS
                                                                  MVSN
                                                       13%        SRCL
                                         14%      3%              SRZ
                                                                  WAG
                          Correlation Matrix
         AEE        AEO        CPRT       FR            JK H Y      JPM       KM B       MS       M V SN      SR C L      SR Z       W AG
AEE        1 .0 0
AEO       -0 .0 8     1 .0 0
CPRT       0 .3 5     0 .2 1     1 .0 0
FR         0 .4 9    -0 .0 2     0 .3 6        1 .0 0
JK H Y     0 .1 7     0 .4 0     0 .3 8        0 .2 1      1 .0 0
JPM        0 .3 2     0 .4 7     0 .4 5        0 .1 5      0 .5 5    1 .0 0
KM B       0 .3 0     0 .0 8     0 .4 7        0 .1 4      0 .3 1    0 .2 2     1 .0 0
MS         0 .1 7     0 .5 0     0 .3 9        0 .1 1      0 .4 6    0 .6 8     0 .1 5   1 .0 0
M V SN     0 .2 1     0 .4 4     0 .3 3        0 .2 0      0 .5 7    0 .5 1     0 .0 6   0 .5 7      1 .0 0
SR C L    -0 .2 5     0 .1 3    -0 .0 8    -0 .0 3         0 .0 9    0 .0 4    -0 .0 7   0 .0 6     -0 .1 1      1 .0 0
SR Z       0 .1 4     0 .2 1     0 .4 3        0 .2 0      0 .4 0    0 .4 0     0 .0 1   0 .4 8      0 .5 0      0 .0 7     1 .0 0
W AG       0 .0 7     0 .0 9     0 .1 1    -0 .1 8         0 .0 2    0 .1 6     0 .2 6   0 .1 8     -0 .0 7      0 .0 7    -0 .1 7    1 .0 0
                Competition
   The retail apparel industry, including retail
    stores and e-commerce, is highly
    competitive.
                 Competitors
   Who
     Abercrombie  & Fitch, Co. (ANF)
     Aeropostale Inc. (ARO)
     Gap Inc. (GPS)
   Why
     Industry Specific
     Similar Size
     Similar Target Market
5-Year Comparables
1-Year Comparables
                          Ratio Analysis
                  American
                                   Abercrombie                Aeropostale
                    Eagle                          Gap Inc.                 Industry
                                   & Fitch, Inc.                  Inc.
                Outfitters, Inc.

Market Cap          6.59B             7.27B        15.17B       2.21B        1.11B

P/E                 17.65             18.07         19.98       21.58        20.03

Profit Margin      13.86%            12.72%        4.88%        7.55%       3.78%

Operating
Margin
                   21.22%            19.83%        7.36%       12.29%       10.63%

ROE                30.11%            35.18%        14.68%      35.73%       16.76%

Price/Sales          2.37              2.18         0.96         1.56        1.50

Current Ratio        2.60              2.14         2.21         2.42        2.30

Payout Ratio       16.00%            15.00%        34.00%        N/A        17.02%
                                     Ratio Analysis
                                         DuPont Breakdown
                    FY                         2001        2002        2003        2004        2005      2006

Total assets over                            672,721     741,339     932,414    1,328,926   1,605,649 1,987,484
Total equity                                 496,792     571,590     637,377      963,486   1,155,552 1,417,312

                    =Equity multiplier           1.35        1.30        1.46        1.38       1.39       1.40

Sales over                                  1,371,899   1,382,923   1,435,436   1,881,241   2,309,371 2,794,409
Total assets                                  672,721     741,339     932,414   1,328,926   1,605,649 1,987,484

                    =Total asset turnover        2.04        1.87        1.54        1.42       1.44       1.41

Net income over                               147,370     141,469     119,587     281,616     368,731   387,359
Sales                                       1,371,899   1,382,923   1,435,436   1,881,241   2,309,371 2,794,409

                    =Profit margin            10.74%      10.23%       8.33%      14.97%      15.97%    13.86%

EM*TAT*PM           =Return on equity         29.66%      24.75%      18.76%      29.23%      31.91%    27.33%
                                                     Assumptions
                                              1             2             3             4             5             6              7           8         9        10        11         12
                                    FY 2000       FY 2001       FY 2002       FY 2003       FY 2004       FY 2005       FY 2006        FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E
Income Statement
Sales
% y/y comp sales                         5.80%       2.30%        -4.30%        -6.60%        21.40%        15.50%         12.00%            7%        4%       3%        3%          3%

% y/y new store sales                    0.00%      23.16%         5.10%        10.40%         9.66%         7.26%          9.00%         6.00%     5.00%     4.00%     4.00%      4.00%

Expenses

COGS as % sales                       47.32%        48.56%        49.85%        50.09%        43.56%        44.22%         44.52%        46.00%    46.00%    45.00%   45.00%      45.00%

Stores, beginning of period                466         554            678          753           805            846            869          911       948       984      1014       1039
Rent expense per store open               222         204            159          162           177            190            190           190       190       190       190        190

Advertising expense as % sales           3.32%       3.30%         3.21%         3.12%         2.20%         2.32%          1.61%         2.50%     2.50%     2.50%     2.50%      2.50%

SG&A as % sales                       22.25%        21.66%        19.91%        20.64%        20.12%        20.07%         23.82%           22%       21%      20%       20%         20%

                                    13%
% dep. & ammort as % property and equipment           13%           16%           20%           18%           22%             18%           18%       18%      18%       15%         15%

y/y growth in other net income             0%         -56%          -13%          -17%         105%          285%            166%            3%        3%       3%        3%          3%

Total deferred tax as % total tax         -8%         14%           12%           25%            -9%            2%                4%         5%        6%       7%        7%          7%

Provision for tax as % inc. before tax    34%         30%           29%           27%           33%           33%             32%           31%       30%      29%       29%         29%
                                                     Assumptions
                                               1             2             3             4             5             6              7           8         9        10        11         12
                                    FY 2000        FY 2001       FY 2002       FY 2003       FY 2004       FY 2005       FY 2006        FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E
Balance Sheet
Assets
                                   24.57%
Cash and equivalents as % total assets               26.82%        26.24%        14.70%        16.51%         8.13%          3.01%         6.00%     6.00%     6.00%     6.00%      6.00%

                                      2.55%
Marketable equity securities as % sales               3.29%         3.40%        13.98%        19.68%        26.89%         27.46%        26.46%    25.46%    24.46%   22.46%      19.46%

Inventory as % sales                         8%         7%            9%            8%            9%            9%                 9%         8%        9%       8%        7%          7%

Acts rec. as % sales                         3%         1%            1%            2%            1%            1%                 0%         0%        0%       0%        0%          0%

Prepaid expenses as % total expenses         2%         2%            3%            2%            2%            2%                 2%         2%        2%       2%        2%          2%

L-T investments y/y increase                   0             0             0             0      247%           73%             73%           63%       53%      48%       45%         43%

Liabilities
Accounts payable as % expenses             4.55%      3.36%         4.32%         5.74%         7.51%         7.85%          7.75%         7.80%     7.90%     8.00%     8.10%      8.10%

Accrued compensation as % of expenses3%                 2%            1%            1%            2%            3%                 3%         3%        3%       4%        4%          4%

Accrued rent % y/y increase                    0       32%            -4%          43%           11%           16%             10%           10%       10%      10%       10%         10%

Accrued taxes as % total tax expense        50%        38%           21%           55%           24%           24%             36%           36%       36%      36%       36%         36%

Unredeemed value cards as % sales 1.20%               1.28%         1.65%         1.80%         1.74%         1.86%          1.95%         1.95%     1.95%     1.95%     1.95%      1.95%

                                              9%
Other liabilities as % other current liabilities        5%            7%            7%            6%            4%                 4%         4%        4%       4%        4%          4%

Deferred lease credits as % rent expense0%              0%            0%            8%            7%            7%                 7%         7%        7%       7%        7%          7%

Other non-current liabilities y/y growth     0%         4%          333%          209%           37%           13%             14%           14%       14%      14%       14%         14%

Equity
Total shareholder equity y/y growth          0%        35%           15%           12%           51%           20%             23%           23%       23%      23%       22%         21%
              Discounted Cash Flow
Step 1: Forecast FCF

                                        FY 2007 E          FY 2008 E         FY 2009 E        FY 2010 E         FY 2011 E

        Net Sales                             2,986,409        3,109,691         3,206,997         3,318,541        3,422,441

        Less:       Operating Costs           2,389,466        2,465,466         2,482,930         2,541,270        2,611,466
                    Taxes Paid                  208,936          214,353           227,475           242,790          252,875
                    Net Investment             (200,000)        (160,000)         (150,000)         (130,000)        (100,000)
                    Δ Working Capital          (150,644)        (217,409)         (329,280)         (420,691)        (521,703)
                    = FCF                       338,651          487,280           675,872           825,172          979,804


Step 2: Calculate WACC

        we=             100%            ke=                            16%                    β=                            1.73
        wd=                 0           kd=                                                   Tax=                        38%
                                                                                              MRP=                      6.50%
                                                                                              rf=                        4.6%
            Discounted Cash Flow
Step 3: Calculate Enterprise Value

        L-T Growth Rate=           4%
        WACC=                     16%
                                                    1               2                  3               4               5
                                        FY 2007 E       FY 2008 E        FY 2009 E         FY 2010 E       FY 2011 E

                  FCF                       338,651           487,280            675,872        825,172          979,804
                  Terminal                                                                                     8,602,754
                  =PV FVF                   252,347           313,435            375,280        395,510        4,592,985

                  Total Equity Value=                       5,929,557


Step 4: Subtract L-T Debt and Divide by Shares Outstanding


                  Total Equity Value=                       5,929,557
        Less:     L-T Debt                                           0
                  =Firm intrinsic value                     5,929,557
        Over:     Common shares outstanding                   221,284

                                                                         + 10%             $      29.48
        =Value per common share                               $26.80
                                                                         - 10%             $      24.12
             Sensitivity Analysis
                                     Long-term growth rate
             2.00%   2.50%   3.00%    3.50%    4.00%   4.50%   5.00%   5.50%   6.00%
       12%   34.98   36.46   38.11    39.95    42.02   44.36   47.04   50.14   53.74
       13%   31.31   32.49   33.78    35.21    36.80   38.57   40.57   42.83   45.42
       14%   28.26   29.21   30.24    31.38    32.63   34.01   35.54   37.25   39.18
WACC




       15%   25.68   26.46   27.30    28.22    29.22   30.32   31.52   32.85   34.33
       16%   23.48   24.12   24.82    25.57   26.39    27.28   28.24   29.30   30.46
       17%   21.58   22.12   22.70    23.33    24.00   24.73   25.51   26.37   27.30
       18%   19.92   20.38   20.87    21.40    21.96   22.56   23.21   23.92   24.68
       19%   18.46   18.86   19.27    19.72    20.19   20.70   21.24   21.83   22.46
       20%   17.17   17.51   17.87    18.25    18.65   19.08   19.54   20.04   20.56
                Recommendation
 HOLD
       Management expects there to be a significant amount of success
        with the launch of their new brands, MARTIN + OSA and aerie.
       AEO continues to expand their store base, with the goal to open
        45-50 stores in FY 2007
       Relatively good diversifier against other holdings
   HOWEVER
       We expect there to be a significant slow of growth in the future.
        Historically, AEO has realized growth rates that are not possible
        to sustain in the long-term.
   THEREFORE
       It is important to watch AEO with a close eye, especially to see if
        the expected success of the two new brands is realized. Upon
        this success, we foresee AEO continuing to grow at a relatively
        pleasing rate that will prove profitable to our investor.

				
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