American Eagle Outfitters, Inc.

By, Pratik Kamdar Rajani Meka Raj Dhawle Patil Shih-Wei Huang
Presented April 5, 2011

RCMP Portfolio
Currently, Portfolio holds 2000 shares
1500 shares are held, remaining from three different purchases beginning in December 1999, at the split adjusted price of $5.23 per share. Currently, the position has an unrealized gain of 203% as on 3rd April, 2011 Multiple sales of these three original purchases have been made since then, each producing sizable capital gains 500 shares were bought at the price of $9.07 per share on 3rd Dec. 2008. Currently, the position has an unrealized gain of 75% as on 3rd April 2011 At present, AEO represents 28% of our portfolio holdings by Market Value

The Company
An American clothing and accessories retailer based in Pittsburg, PA Sells its merchandise through stand-alone stores in malls and online through www.ae.com

Key Facts:
Founded in 1977 Headquarters: Pittsburg, PA Currently operates 1086 stores in US & Canada; Avg. store size-4700 selling sq.ft. CEO: James V. O'Donnell Employs around 39,900 people Stock trades on NYSE under symbol AEO

Recent News:
On 9th March 2011, Company CEO James V. ODonnell expressed his intention to retire. Search for New CEO is on Recent Speculation regarding Company being an attractive LBO target; Reason: Company posted negative comparable sales growth during quarter fiscal 2010 but still cash rich On 31st July 2010, Completed Closure of its brand M+0; Reason: brand was not achieving performance levels commensurate with investments.

History
1977-Funded by Mark & Jerry Silverman as a subsidiary of Retail Ventures, Inc., which operated Silvermans Menswear 1989- Bothers sold other businesses & decided to focus only on AEO 1991-Schottensteins, 50% owner in AEO bought out remaining 50% interest from Silverman family 2001-Opened AEOs 1st Canadian Store 1994- Company went Public 2006-Company launched new brand M+O for Adults and Aerie for Women 2008-Launched new brand 77Kids for children 2010-Closed M+O; Opened first International Store in Dubai, UAE

What it Does & How?

Garment Manufactures AEO Headquarters

AEO Distribution Centre

AEO Stores

AEO Designers

Business Segments
AE
Apparels & Accessories for Men & Women aged 15-25; Total 929 stores across US & Canada

aerie AE Direct
Sells All Merchandise Online; Ships to 76 Countries worldwide

AEO, Inc.
77Kids

Apparel & Intimates Collection for college going Girls; 148 Stores across US & Canada

Clothing & Accessories for Babies & Kids aged 0-10 years ; 9 Stores across US & Canada

Management Outlook
Company expects an improvement in sales on the basis of solid product line up, continued cost cuts & better managed Inventory Company Expects to Mitigate Rising Product Costs with Targeted Reduction in Mark-downs, Selective Price Increases & On-going Cost Savings Internal Development of New Brands

Expansions Overseas though Franchise route while keeping an eye on Acquisition Opportunities

Growth Strategy:
International Expansion: The company is entering into Multiple Franchise Agreements to open Series of AE Stores at International Locations: Year 2009 2010 2011 Party Alshaya Trading Co. Dickson Concepts Ltd. Sumikin Bussan Co. & Fox Wizel Ltd. Region Middle East, North Africa, Eastern Europe China, Macau (commences 2011) Japan, Israel (commences 2012)

* No Capital/ Operational Involvement Opening New Stores: Depending on Geography and Demographics Remodel Old Stores to Current Store Format to Offer Unique Shopping Experience Strengthen e-commerce Operation Cut Costs & Manage Inventory

Key Performance Indicators

Comparable Store Sells: Provides measure of Sales Growth for Stores open more than a Year Net Sales Per Average Square Feet: Provides Measure of Store Productivity and Operational Efficiency Inventory Turnover: Measure how Productively Inventory is Bought & Sold. Slow Moving Inventory affects Profitability Gross Profit: Provides Measure of whether or not Company is optimizing the Price & Inventory Levels to Achieve Optimal Sales Levels Sufficient Cash Levels

Recent Financial Performance

Fiscal Year ended Jan 29th 2011

Net Sales were up 1% over 2009 figures

Annual Comparable Store Sales were down 1% over comparable figure in 2009
Net Income (from Cont. Operations) was 6% against 7% of Sales in 2009owed to loss from selling Inv. Securities

Cash Decreased by $155.8 million to $740.6 million

Overall Results were affected by Loss Recognized from Closure of M+O & Selling Investment Securities Company Paid a Quarterly Dividend of $0.11 per share and Special Dividend of $0.50 per share in Fiscal 2010 Repurchased 15.5 million shares in fiscal 2010. New Store openings were Funded by Operating Cash Flows

Recent Stock Performance

Source: finance.yahoo.com

SWOT Analysis
Strengths: Weaknesses: Affordability Fickle Customer Base/Low Solid Geographical Presence Pricing Power No Financial Leverage, High Excessive Dependence on Operating Cash Flow One Supplier Good Product Assortment Seasonality Slow Moving Inventory Opportunities: International Expansion Internal Development of New Brands Economic Recovery Risks: Cotton Prices Inventory Risk due to Misidentification of Trends Economic Condition and Growth Discretionary Spending Failure of New Brand Offerings

MARKET OVERVIEW
MARKET VALUE: The global apparel retail industry grew by 2.1% in 2009 to reach a value of $1,078.2 billion. MARKET VALUE FORECAST: In 2014, the global apparel retail industry is forecast to have a value of $1,222.7 billion, an increase of 13.4% since 2009. MARKET SEGMENTATION: Women's wear is the largest segment of the global apparel retail industry, accounting for 51.3% of the Industrys total value. GEOGRAPHIC SEGMENTATION: The Americas account for 35.7% of the global apparel retail industry value.

MARKET RIVALRY: Despite the current global economic downturn, the apparel retail industry continues to grow at a healthy rate and this, coupled with the absence of switching costs for consumers and great product differentiation, means that rivalry within the industry is no more than moderate.
http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

Historic Growth
TABLE 1: Global Apparel Industry Value :$ billion Year $billion % Growth

2005
2006 2007 2008 2009 CAGR 2005-09

954.1
1003.4 1040.8 1056.0 1078.2 5.2 3.7 1.5 2.1 3.1

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

Historic Growth

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

Key Revenue Driver

Consumer Sentiment Index
Higher the consumer confidence higher is the spending on retail on clothing.

Number of Youth Disposable Household Income

Segmentation by Age

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

Forecasted Growth

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

Forecasted Growth

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

MARKET SEGMENTATION

http://www.ibisworld.com/search/default.aspx?st=american+eagle+outfitters&srtid=0

PORTERS FIVE FORCE MODEL

Rivalry among competitors (High) Low entry barriers Extensive price competition Bargaining Power of Buyers (Moderate) Individual consumers High Product differentiation Price Sensitive Retailers cannot forward integrate

Bargaining power of Suppliers(low) Liberization of trade. Industry is mostly labor intensive Low switching cost for retailers

PORTERS FIVE FORCE MODEL

Threat of New Entrants ( Low to Moderate)
Setting up single store does not require large capital outlay. It might trigger a price war with players with multiple stores and brands. Economies of scale

Threat of New Substitutes(Low)

Signifier of socio economic class Substitutes for apparel retail include buying directly from manufacturers, which is facilitated by the growth of online sales. Home-made and custom-made (couture) clothing are also niche alternatives to retail of ready-made clothes

Sales Per Square Feet

American Eagle 2010 2011 Abercrombie and Fitch 2010 2011 GAP 2009 2010 Aeropostale 2009 2010

$422

$420

$339

$390

$365

$383

572

624

Same Store Sales Growth

American Eagle (%)
2010 2011

Abercrombie and Fitch(%)

2010 2011

GAP (%)
2009 2010

Aeropostale (%)
2009 2010

-4

-1

-23

-3

10

Competitors
Abercrombie and Fitch, Inc (Ticker: ANF) Presence in North America, Europe and Asia
FY 2010 Revenue : 3.47B

Aeropostale, Inc (Ticker: ARO) Presence only in North America

FY 2010 Revenue: 2.40B

Urban Outfitters (Ticker: URBN) Core operating location: US

FY 2010 Revenue: 2.27B

Gap, Ins (Ticker: GPS)

Presence in United States, Canada, the United Kingdom, France, Ireland, and Japan. FY 2010 Revenue: $14.66B

Stock Price Movements

2006 Jan 01 - 2011 Apr 01

Source: http://www.google.com/finance

Key Ratios of Retailers

Inventory and A/R Management
Receivables Turnover Receivables Days Sales Inventories Turnover Inventories Days Sales 1/31/2009 80.35 4.54 6.03 60.58 1/30/2010 77.17 4.73 5.69 64.19 1/29/2011 83.13 4.39 5.72 63.76 Industry 32.93 11.08 4.46 81.84

Operational Asst Utilization

1/31/2009 Net Sales/Working Capital Net Sales/Net Plant&Equip Net Sales/Current Assets Net Sales/Total Assets 5.63 3.98 3.19 1.50 1/30/2010 3.88 4.12 2.52 1.38 1/29/2011 3.77 4.61 2.53 1.58

Source: http://globalbb.onesource.com/homepage.aspx

Ratio Comparisons
ANF Receivables Turnover Receivables Days Sales Inventories Turnover Inventories Days Sales 40.29 9.06 3.61 101.16

with

Competitors
URBN 62.48 5.84 6.43 56.72 GPS 5.67 64.41 AEO 83.13 4.39 5.72 63.76

Inventory and A/R Management

ARO 136.09 2.68 10.46 34.89

Operational Asset Utilization

ANF Net Sales/Working Capital Net Sales/Net Plant&Equip Net Sales/Current Assets Net Sales/Total Assets 8.01 5.72 3.74 2.08 ARO 9.47 8.02 5.11 3.05 URBN 3.83 3.88 2.84 1.27 GPS 8.01 5.72 3.74 2.08 AEO 3.77 4.61 2.53 1.58

Source: http://globalbb.onesource.com/homepage.aspx

Other Ratio Comparisons

Other Ratio Comparables
ANF ARO URBN GPS

Operating Margin
Net Margin ROA

8.15%
4.33% 6.12%

16.11%
9.64% 30.64%

18.21%
12.00% 15.11%

13.42%
8.21% 16.35%

AEO 10.65% 6.13% 9.06% 12.42% 101.71% 1.15

Industry 14.49% 9.11% 14.81% 28.29% 19.60% N/A

ROE 8.08% 53.36% Payout Ratio 42.00% N/A PEG Ratio(5 yr expected) 1.08 0.84

20.16% N/A 0.89

26.84% 21.00% 1.15

Source: http://globalbb.onesource.com/homepage.aspx

Float Number
ANF Shares Outstanding Float 87.25 86.1 ARO 87.46 86.6 URBN 164.41 127.7 GPS 606 526.73 AEO 194.69 172.02

% Available for 98.68% 99.02% 77.67% 86.92% 88.36% Trading

Source: http://finance.yahoo.com

DuPont Analysis with Competitors

Tax Burden*Interest Burden*Operating Profit Margin*Asset Turnover*Leverage = ROE
2008 ANF ARO URBN GPS AEO 0.63*1.02*0.21*1.44*1.70=33.01% 0.62*1.03*0.13*3.09*2.02=50.73% 0.68*1.04*0.15*1.32*1.49=20.93% 0.62*1.07*0.08*2.01*1.66=18.35% 0.63*1.06*0.20*1.64*1.35=28.99% 2009 0.60*1.02*0.14*1.22*1.64=17.79% 0.60*1.00*0.13*2.87*2.38=54.09% 0.64*1.03*0.16*1.38*1.39=20.91% 0.61*1.02*0.11*1.92*1.75=22.33% 0.61*1.05*0.12*1.50*1.43=16.70% 2010 0.66*1.01*0.04*1.04*1.54=4.30% 0.60*1.00*0.17*2.81*2.01=58.13% 0.64*1.02*0.17*1.18*1.39=18.71% 0.61*1.00*0.13*1.78*1.72=23.76% 0.70*0.98*0.11*1.38*1.43=14.26% 2011 0.66*0.99*0.07*1.18*1.59=8.08% 0.60*1.00*0.16*3.05*1.81=53.35% 0.65*1.01*0.18*1.27*1.32=20.16% 0.61*1.01*0.13*2.08*1.58=26.84% 0.62*0.93*0.11*1.58*1.28=12.42%

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2008 2009 2010 2011

ANF ARO URBN GPS AEO

Source: http://globalbb.onesource.com/homepage.aspx

Comparable Approach
Market Cap ($mm) Diluted Book Value EPS Per Share ($/Share) Revenue Per Share EV ($mm) EBITDA ($mm)

Company Name

Ticker

Price

American Eagles Outfitters, Inc Abercrombie and Fitch Aeropostale, Inc Gap, Inc

AEO

3,080

15.84

0.7

6.95

14.8

2410

462.81

ANF ARO GPS

5,220 2,120

59.7 24.31

1.67 2.49

21.67 4.95

39.39 26.18

2310 1,900

506.21 442.67

Urban Outfitters, Inc URBN

4,970
13,650

30.24
22.71

1.6
1.88

8.58
6.73

13.63
23.06

4820
1,168

514.01
253

Source: http://globalbb.onesource.com/homepage.aspx

Comparable Approach (Con.)

Company Name American Eagles Outfitters, Inc Abercrombie and Fitch Ticker AEO ANF P/E 22.63 35.75 P/B 2.28 2.75 P/S 1.07 1.52 EV/EBITDA 5.21 4.56

Aeropostale, Inc
Urban Outfitters, Inc Gap, Inc Average Multiple Triangulation P/E P/B P/S DCF Value Price 13.4 25.31 20.95 15.49

ARO
URBN GPS

9.76
18.90 12.08 19.12

4.91
3.52 3.37 3.64

0.93
2.22 0.98 1.41

4.29
9.38 4.62 5.71

Weight 0.20 0.05 0.05 0.70

Weighted price 2.68 1.27 1.05 10.84 $15.83

Ave P/E* EPS(AEO) Ave P/B* BPS(AEO) Ave P/S*RPS(AEO)

13.39 25.31 20.95

Triangulated Value

Source: http://globalbb.onesource.com/homepage.aspx

Discounted Cash Flow Results

1/29/2012 Net Income D&A Capex Changes in NWC Cash Flow Terminal Value Free Cash Flow Enterprise Value Net Debt Outstanding Shares Outstanding 261.67 $3,098.00 0 199.98 286.51 308.71 324.41 210.51 148.93 (90.00) (7.77) 261.67 1/29/2013 229.45 162.33 (96.19) (9.09) 286.51 1/29/2014 245.51 173.70 (102.80) (7.70) 308.71 1/29/2015 257.79 182.38 (109.87) (5.89) 324.41 1/29/2016 265.52 187.85 (117.42) (3.71) 332.24 3644.42 3976.66

Discount Rate Terminal Growth Rate

12.39% 3.00%

Share Price

$15.49

Sensitivity Analysis
Terminal Growth Rate

Discount Factor
15.49 2% 2.5% 3% 3.5% 4% 4.5% 11% 11.50% 16.7 17.4 18.2 19.1 20.2 21.4 15.8 16.4 17.1 17.9 18.8 19.8 12% 12.39% 15.0 15.6 16.2 16.9 17.6 18.5 14.4 14.9 15.5 16.1 16.8 17.6 12.5% 13.00% 14.3 14.8 15.3 15.9 16.6 17.4 13.6 14.0 14.5 15.1 15.7 16.3 13.5% 13.0 13.4 13.8 14.3 14.8 15.4 14.0% 12.4 12.8 13.2 13.6 14.1 14.6

DuPont Analysis
2009 2010 2011 2012 2013 2014
200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 2009 2010 2011

Tax Interest Burdan Burden 0.61 0.93 0.7 0.98 0.62 0.93 0.62 1.00 0.62 1.00 0.62 1.00

DuPont Analysis

Operating Asset Levera Profit Margin Turnover ge ROE 0.11 1.58 1.28 16.70% 0.11 1.38 1.43 14.26% 0.11 1.58 1.28 12.42% 0.11 1.55 1.43 14.88% 0.11 1.55 1.42 14.80% 0.11 1.53 1.41 14.41%
Tax Burdan Interest Burden Operating Profit Margin Asset Turnover Leverage 2012 2013 2014

Source: http://globalbb.onesource.com/homepage.aspx

Recommendation
DCF Valuation Range: $13.08- $19.45 with Base case share price at $15.49 Triangulated Value at : $15.83 Current Market Price: $16.22 Sell 500 shares @ current market price

Current Portfolio Allocation

6.33%
17.70% 27.51%
AEO DO JKHY

MCD

14.08%

MOS

10.03% 11.37%

WAG WFR

12.98%

Unrealized Gains
210.42% 78.83%
Recommendation
Sell 500 shares

Initial Position 500 shares @ $9.07 1500 shares @ $5.23