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American Eagle Outfitters

American Eagle Outfitters. November 30 th , 2004. Introduction. We currently own 1,500 shares of American Eagle and purchased shares on three separate dates: 300 shares on 12/10/99 at $29.33 300 shares on 3/10/00 at $18 900 shares on 5/3/00 at $10.4167 Total cost of position – $23,575

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American Eagle Outfitters

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  1. American Eagle Outfitters November 30th, 2004

  2. Introduction • We currently own 1,500 shares of American Eagle and purchased shares on three separate dates: • 300 shares on 12/10/99 at $29.33 • 300 shares on 3/10/00 at $18 • 900 shares on 5/3/00 at $10.4167 • Total cost of position – $23,575 • Market value of position - $63,765 for a gain of $40,190 as of 11/29/04 market close of $42.51 • Recommendation is to hold

  3. Relevant Financial Statistics • 52 Week Range: $14.80 - $44.59 • Market Cap: 3.12B • P/E: 31.01 • EPS (ttm): $1.371 • Dividend: $.24 • Dividend Yield: 0.55%

  4. Brief Background • Lifestyle retailer that designs, markets, and sells casual clothing for 15 to 25 year olds • Distribution • Stores • E-Commerce Business • Catalogs • Products • Jeans and Cargo Pants • Graphic T-shirts • Accessories • Outerwear • Footwear

  5. Brief Background (cont’d) • Formerly operated the Bluenotes/Thriftys specialty apparel chain in Canada • Recently agreed to sell Bluenotes to a private company controlled by Michael Gold, owner of Canadian retailer YM Inc. • As of fiscal 2003, American Eagle Outfitters operated 805 American Eagle Outfitters stores in the United States and Canada • AE opened 43 new stores in the United States during fiscal 2003

  6. Macroeconomic Review • AE operates in the services sector and the retail (apparel) industry • Competitors include The Limited, The Gap, Abercrombie & Fitch, Pacific Sunwear, Aeropostale and The Buckle • Fashions at all these retailers are subject to short-term fads as well as long-term trends

  7. Stock Market Prospects • Entering the holiday season • Walmart revised November sales estimates downward recently which negatively affected the entail retail sector • However, AE posted strong results Thursday, November 11th • Quarterly • Sales up 35% over last year's third quarter, • Gross margins increased from 38% to 47%, • Year-to-date • Sales climbed 26% • Gross margins averaged 43.5%

  8. Stock Market Prospects (cont’d)

  9. Stock Market Prospects (cont’d)

  10. Stock Market Prospects (cont’d)

  11. Stock Market Prospects (cont’d)

  12. Company Strategy • Code of Ethics • American Eagle Outfitters, Inc. is built based on trust, honesty and integrity. These virtues are our most important assets • 2003 Annual Report • Challenging year overall, yet the company “emerged stronger and more efficient”

  13. Company Strategy (cont’d) • Significant changes in 2003 • Improved merchandising, design, store operations, and marketing • Added new creative talent • Streamlined and upgraded processes • Reconnected with core customers

  14. Company Strategy (cont’d) • 2004 – Looking forward • Enthusiastic about the opportunity for sales and earnings growth • Return to the level of sales productivity and profitability that the company and its brands were built to generate • Improve merchandise assortments to provide a clear and focused point of view at target customers

  15. Company Strategy (cont’d) • In the fall of 2003, AE conducted the most extensive research in company history • Conducted over 3,000 in-depth, face-to-face interviews • Made adjustments based on the research and business improved measurably in the end of the year • “Compelling merchandise assortments combined with the power of the American Eagle brand will be our winning formula in 2004 and beyond.”

  16. EPS Sensitivity • Healthy EPS growth at 15% revenue growth, which is the Yahoo and Bloomberg estimate for the next five years • Margin estimates are also not aggressive in the model

  17. Free Cash Flow Calculation • Above is a free cash flow sensitivity analysis for various levels of revenue growth • Note the +/- 10% range

  18. Combined Sensitivity • Low P/E = 15 • Industry P/E = 25 • Current P/E in Market = 31 • Wide range of prices when revenue growth and P/Es are sensitized • Low revenue growth caps the price • The current P/E of 31 may not be sustainable but solid revenue growth and growth in EPS should compensate

  19. Considerations • Add to position • Downsides • Volatile industry that is very dependent on the overall health of the economy and consumer spending • Short-term fashions, which revenue growth depends on, are difficult, if not impossible, to predict • Already significantly exposed to American Eagle as well as the fashion retail sector • Sell • Downsides • Recent guidance is very positive • If AE is able to grow at the expected rates, there is still solid growth left in the stock

  20. Recommendation • Hold 1500 shares of American Eagle • AE has been a successful purchase and appears to be competing very well • Must reassess AE after the critical holiday season to see if it met estimates and continued to provide positive guidance for the next year

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