American Eagle Outfitters (NYSE: AEO) Executive Summary and Recommendation

Investment Managers:Richie Hartz, Yongxiang Mao, and Kaidi Wang

November 15, 2012

Company Overview

American Eagle Outfitters (AEO) is a retailer that designs, markets, and sells apparel in the United States and Canada, and online at ae.com. The company functions in three key market segments – American Eagle, aerie by American Eagle, and 77kids by American Eagle. Through the Company’s family of brands, it offers clothing, accessories and personal care products. Its online business, AEO Direct, ships to 77 countries worldwide. As of January 28, 2012, the Company operated 1,090 stores in the United States and Canada under the American Eagle Outfitters, aerie and 77kids brands. AEO Direct is its e-commerce operations, ae.com, aerie.com and 77kids.com. During the fiscal year ended December 31, 2011, the Company opened 33 new stores, which consisted of 11 AE stores, 10 aerie stores and 12 77kids stores. As of December 31, 2011, it operated in all 50 states, Puerto Rico and Canada. During fiscal 2011, the Company remodeled and refurbished a total of 106 AE stores. In late 2012, management announced that 77kids would be phased out of American Eagle’s business model.

Macroeconomic and Industry Overview

The apparel retail industry has enjoyed a successful quarter of growth, with numerous companies such as Abercrombie and Fitch, the Gap, and Francesca’s beating analyst estimates on both revenue and earnings. As the domestic economy recovers, we expect real disposable income to increase, and for apparel retail sales to strengthen more consistently in the future.

Financial Analysis, Projection, and Valuation

American Eagle has increasingly stable gross profit margins and EBIT margins. Following the closure of 77kids, we expect these margins to improve, consistent with management’s expectations. Discounted cash flow valuation generates a value of just under $20, while the multiples analysis implies a value of around $21.

Recommendation

The RCMP investment management team recommends a hold for American Eagle. The company reported positive quarterly results on November 26th, issuing solid revenue guidance moving forward. Expect a strong sales quarter during the holiday season, as has been the trend for American Eagle in the past.