American Eagle Outfitters

1
American Eagle Outfitters

• Presented December 5, 2002

2
Summary

• Purchasing History
• 300 shares on December 10, 1999 for 29.33
• 300 shares on March 10, 2000 for 18
• 900 shares on May 3, 2000 for 10.42
• Current Trading Price
• Past 30 days has fluctuated between 15.48 and
  20.17
• Todays trading price has fluctuated between
  15.91 and 17.90

3
Summary (cont.)

• Prior reasons for purchasing
• Constant increase in EPS
• Better performance and margins than its peers
• Excellent website for convenient shopping
• P/E ratio below the historic average
• Strength in the industry

4
Specialty Store Retail Industry

• Traditionally .
• Specialty store retails have been more volatile
  than other retail sectors
• Customers are more fashion sensitive than
  department store and discounter store customers

5
Specialty Stores in the Present Economic
Environment

• Recently the shopping environment in this sector
  has been mostly promotionally driven rather than
  due to any underlying strength in the consumer
• Current markdowns in the industry have provided a
  boost to volume and total sales, yet margins are
  suffering

6
What is American Eagle Outfitters?

• Specialty retailer of casual apparel,
  accessories, and footwear for men and women ages
  16-34.
• Vertically-integrated retailer that designs and
  markets a versatile line of timeless and relaxed
  clothing like jeans, khakis and t-shirts.
• Located in urban mall settings.

7
Past Growth

• During fiscal year 2001 AE Outfitters
• Opened 81 new stores in the US, initiating their
  presence in Southern California
• Opened 46 new stores in Canada
• Renovated 40 stores in the US
• Opened a new design center
• Established a network between AE stores for
  improved customer service and store
  communication.
• Ran their first national TV ads during
  back-to-school and holiday seasons

8
Past Growth (cont.)

• AE Outfitters also
• Successfully absorbed their first major
  acquisition and now operates 112
  Bluenotes/Thriftys stores in Canada.
• Bluenotes/Thriftys has a younger more
  urban-inspired teen demographic (ages 12-22)
• Expanded their website AE.com to include expanded
  size ranges, easier checkout and a Wish List
  function
• AE.com was ranked by a third party research firm
  (comScore Networks) as generating the highest
  conversion rate among their direct competitors.

9
Potential Growth

• 2002 plan to open 80 new stores in US and 10
  stores in Canada
• AE has opened 22 new stores in the US this fiscal
  year and 10 in Canada
• Long-term goal is to operate 1,000-1,200 stores
  in the U.S. giving several more years of
  expansion possibilities
• Total stores in operation in the US is now 700

10
Porters 5 Forces

• Bargaining Power of Suppliers LOW
• Vertically Integrated System
• Suppliers are wools, dyes, etc.
• Bargaining Power of Customers LOW
• No one customer is big enough to influence price
• The influence comes from the economy as a whole
• Threat of New Entrants LOW
• Takes a lot of time and capital to build up a
  name brand like AE
• Threat of Substitutes MEDIUM to HIGH
• Other name brands
• Other style of clothing
• Rivalry Between Existing Players - HIGH

11
Net Sales 97-01
12
Gross Profit 97-01
13
Earnings Per Share 97-01
14
Stock Movement
15
Stock Movement (cont.)
16
American Eagle Outfittersin the News

• Citing weak performance in its men's clothing
  line, AE Outfitters same-store sales fell 6.5,
  including a 30.1 decline for their
  Bluenotes/Thriftys chain.
• American Eagle expects a low single-digit decline
  in comparable store sales in December and
  reaffirmed that it expects to post earnings of 56
  cents per share for the fourth quarter. The
  company earned 60 cents per share in last years
  fourth quarter.

17
The Word on the Street

• Lehman Bros Taking down the full-year EPS
  estimate to 1.23 per share, following the
  company's sub-par November sales results. AEOS
  ended the month on a poor note. We expect higher
  promotional activity in December. Maintain
  Equal-weight rating.
• Warburg Dillon Read AEOS' consolidated November
  same store sales declined 6.5, below our
  expectations of a comps decline of 2-4 and
  versus easy year-ago comps of (10). We continue
  to recommend shares of AEOS as we continue to
  believe that opportunity for improvement in
  Spring 2003 is significant.

18
Common-Size Balance Sheet
19
Consolidated Income Statements
20
Competitors
21
DuPont Analysis
American Eagle Outfitters
22
DuPont Analysis (cont.)
American Eagle Outfitters
Abercrombie Fitch
23
Weighted Average Cost of Capital
Terminal WACC used is 16.00
24
Discounted Cash Flow Analysis
25
Recommendation

• On the positive side
• Constant increases in net sales, gross profit and
  EPS
• Better performance and margins than its peers
• Excellent website for convenient shopping
• Growth opportunities created through acquisitions
• On the negative side
• Pressure being put on the industry
• Constant decrease in increases in net sales,
  gross profit and EPS
• Setbacks created by acquisitions
• RECOMMENDATION HOLD