1. American Eagle outfitters Presented by : Linden Lu Yanlei Xu Gleb Zarkh Mohamed Ibrahim 11-14-2007

2. Presentation Outline :

Company overview

Industry and competitors

RCMP position and historical transactions

Macro economic view

Firm risks and growth model

Valuation

• • Assumptions

• • DCF

• • Multiple valuation

Recommendation

3. Company Overview

American Eagle Outfitters is one of leading apparel retailers in US

• Design, market, and sell own brand of laidback

• • Casual clothing including Jeans, Graphic Ts, accessories, footwear, outwear, basics

• targeting age: 15-25

• Sell to US (1977), Canada (2001) and 41 foreign countries

• Venues: Primarily Mall-based, limited stand-alone and internet sales

In 2006: introduced 2 new brands

• • • Martin+OSAas a separate brand targeting age 25-40

• • • Aerieas a sub brand selling intimates for women

As of Aug 07 it operated 928 stores

• 919 AE stores in US and Canada (including 5Aerie )

• 9 Martin+OSA

4. Company Overview Cont.

Revenue sources

• Traditional AE stores

• New store opening (Matin+OSA,Aerie )

• E-commerce (mainly to overseas customers)

Merchandise Mix (2006)

• Mens apparel (35%)

• Womens apparel, accessories, intimates (60%)

• Footwear for men and women (5%)

• Slightly shifts to womens apparel from mens apparel

Economy and Consumer inspired growth

5. Retail Apparel Industry

Including retail stores and e-commerce is highly competitive: quality, fashion, service, selection and price

Porters Five Force

• Entry of New Competitors: moderate

• Threat of substitutes: high

• Bargaining power of buyers: moderate

• Bargaining power of suppliers: low

• Rivalry among existing competitors: high

6. Competition

Competition: individual and chain specialty stores, as well as the casual apparel and footwear departments of department stores and discount retailers

Key Competitors:

• Abercrombie & Fitch: 20 year old, high price

• Aeropostale: younger teens, low-mid price

• GAP: 20-30, mid-high price

• American Eagle: 20 year old, mid price

7. Transaction History

December 10, 1999

• BOT 200 shares at $44.00

January 10, 2000

• BOT 200 shares at $27.00

May 3, 2000

• BOT 600 shares at $15.63

February 23, 2001

• 3-2 split

March 8 th , 2005

• 2-1 split

April 25 th , 2005

• SLD 600 shares at $26.28

November 16 th , 2005

• SLD 700 shares at $23.33

November 7 th2006

• SLD 400 shares at $39.19

December 28 th , 2006

• 3-2 Split

8. RCMP position:

Currently own 1,950 shares of AEO, trading at $22 as of Nov 12 th , 2007 for an unrealized gain of $32,710 or 321.04%.

AEO represents 11.2% of the portfolio

9. Correlation matrix 1.00 -0.11 -0.61 -0.55 0.80 -0.18 0.40 -0.02 0.10 0.28 0.31 DFS 1.00 -0.17 0.09 -0.05 0.24 -0.02 -0.15 0.08 0.13 0.06 WAG 1.00 0.04 0.46 0.00 0.38 0.18 0.41 0.21 0.11 SRZ 1.00 -0.12 -0.01 0.08 -0.06 -0.02 0.11 -0.13 SRCL 1.00 0.03 0.55 0.21 0.32 0.41 0.16 MVSN 1.00 0.31 0.08 0.48 0.10 0.36 KMB 1.00 0.12 0.40 0.38 0.22 JKHY 1.00 0.28 -0.03 0.30 FR 1.00 0.20 0.38 CPRT 1.00 -0.03 AEO 1 AEE DFS WAG SRZ SRCL MVSN KMB JKHY FR CPRT AEO AEE 10. Macro Economic outlook 2007

Weakest level since October 2005 (After Hurricane Katrina)

3 consecutive declines sum to -15% from July's 6 year high.

Housing recession,the financial (sub prime) mess and higher oil prices are all contributing.

11. Slowdown in 2008 ARMs Reset in 2008 Price of Oil Price of Corn 12. Business risk

Consumers preferences

• The ability to satisfy customers demand and changing preferences is a primary source of business risk.

• Changes in fashion trends could lead to lower sales, excess inventories and higher markdowns, which could negatively affect AEO.

13. Business risk

Seasonality :

• The fourth and third quarters have historically provided 60% net sales &65% of net income Due to the year-end holiday season and back-to-school selling season.

• The recent credit crunch , higher oil prices would affect the consumer spending, thus affect over all sales for 2007

14. Growth model

AEO growth model depends on

• • • Growth from new store openings

• • • Comparable sales growth

• • • E-commerce

For the new store openings

• • AEO is looking for opportunities of growth in its 2 new brands specially the Aerie Brand

• • They believe that there is strong growth potential in the intimates market .

48 51 57 60 58 49 Total 22 25 30 30 20 3 Aerie 16 14 12 10 10 5 Martin+Osa 10 12 15 20 28 41 Traditional AE stores2011E 2010E 2009E 2008E 2007E 2006 New stores 15. Growth model

Based on our view of the economy we expect a slow down in growth of sales by AEO specially in 2008.

Refer to excel sheet for further explanation of the growth model

16. DCF valuation

WACC Calculations:

Beta 1.21

Equity 100%

WACC 12.47

17. Key assumptions

Revenue Growth Rate

2007 2008 2009 2010 2011

15.91% 11.46% 13.96% 13.16% 12.63%

Capital Expenditures

2007 2008 2009 2010 2011

250 120 120 125 130

Depreciation/Amortization

2007 2008 2009 2010 2011

98.8 116.0 126.8 138.1 149.8

DCF valuation 18. DCF valuation

Cost Of Goods Sold

2007 2008 2009 2010 2011

54.5% 55% 55% 55% 55%

SG&A

2007 2008 2009 2010 2011

23.89% 23.89% 23.89% 23.89% 23.89%

Terminal Growth Rate 4%

Key assumptions 19. DCF Valuation

DCF yields stock price $19.74

Sensitivity Analysis

20. Multiple Valuation: 36 4 1.4 15 Multiple Used 36.02 4.91 1.15 16.17 Industry 37.79 4.35 1.82 15.59 Abercrombie 33.27 2.95 0.97 20.47 GAP 18.27 5.36 1.23 15.4 Aeropostale 38.22 3.4 1.56 11.9 American Eagle Price to FCF Price/Book Price/Sales P/E Company IMPLIED PRICE: $23- $25 21. Recommendation

Sell 450 shares atMarket price

Market price is $22 as of 12 thNov 07

• • Why sell ?

• • • DCF shows slightly overvalued although it was based on optimistic assumptions

• • • • Relatively low beta

• • • • Growth from new store openings and e commerce.

• • Why not all the position?

• • • Multiple valuation shows undervalued

• • • The stocks return converge towards the industry mean return

• • • Diversification benefits

22. Recommendation 23. Recommendation 24. Sources

Briefing.com

http://www.conference-board.org/economics/ ConsumerConfidence . cfm

http://www. bubbleinfo .com/statistics-2007/