American Eagle Outfitters

November 30th, 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 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

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%

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

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

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

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%

Stock Market Prospects (cont’d)

Stock Market Prospects (cont’d)

Stock Market Prospects (cont’d)

Stock Market Prospects (cont’d)

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”

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

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

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.”

EPS Sensitivity

2004 2005 2006 2007 2008EPS at 5% Revenue Growth 1.11 1.19 1.28 1.38 1.48EPS at 15% Revenue Growth 1.27 1.55 1.88 2.25 2.68EPS at 20% Revenue Growth 1.35 1.75 2.22 2.79 3.47

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

Free Cash Flow Calculation

FCF Price Summary -10% Estimate +10%5% Revenue Growth $31.99 $35.54 $39.0915% Revenue Growth $46.72 $51.92 $57.1120% Revenue Growth $56.24 $62.49 $68.74

Above is a free cash flow sensitivity analysis for various levels of revenue growth

Note the +/- 10% range

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

2004 2005 2006 2007 2008Price at Low Revenue Growth / Low P/E $16.85 $18.16 $19.54 $20.99 $22.51Price at Moderate Revenue Growth / Low P/E $19.35 $23.66 $28.62 $34.32 $40.88Price at Aggressive Revenue Growth / Low P/E $20.60 $26.60 $33.80 $42.44 $52.80Price at Low Revenue Growth / Industry P/E $23.59 $25.43 $27.35 $29.38 $31.51Price at Moderate Revenue Growth / Industry P/E $27.09 $33.13 $40.07 $48.05 $57.23Price at Aggressive Revenue Growth / Industry P/E $28.84 $37.24 $47.32 $59.41 $73.93Price at Low Revenue Growth / Current P/E $34.82 $37.53 $40.38 $43.37 $46.51Price at Moderate Revenue Growth / Current P/E $39.99 $48.90 $59.15 $70.93 $84.49Price at Aggressive Revenue Growth / Current P/E $42.57 $54.97 $69.85 $87.70 $109.13

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

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