American Eagle Update Presented James Charehsazen Mike Delaney Robert Don Kerri Lin Dave Zydek Recommendation: Hold

What is AEOS? Specialty retailer of casual apparel, accessories, and footwear for men and women ages Design and market a versatile line of timeless and relaxed clothing like jeans, khakis, and T- shirts Operate in over 45 states nationwide with 519 stores, up from 426 stores same time last year Located in mall type settings in high traffic urban settings

Growth Expanding average store size to 5,500 sq feet up from 4,800 sq feet in 1999 Plan to open 43 more stores during fiscal year 2000 Purchase of Dylex Thrifts, Braemar, and National Logistics Services for $110 million to expand into the Canadian market Opening of additional distribution centers and expansion of existing distribution centers which lowered payroll costs by 8% in 1998 and 12% in 1999 AE.Com for the holidays

Competitors Abercrombie & Fitch Gap Stores The Buckle Pacific Sunwear

Comparables Net sales increased 17% to $209 million from $178.6 million Units sold increase of 29.7%, offset by 9.8% decrease in price due to markdowns Profit margin went from 9.5% to 1.3% due to expansion costs September same store sales up 7.4%

Top Down - Apparel Industry Growth Strategies Industry has consolidated over last few years Company acquires another in same line of business to: improve market share increase profitability expand in new direction with new products new sources of revenue

Top Down - Apparel Industry The Internet E-commerce expanding at increasing rate Sales are doubling every year through internet More of a complement than replacement to existing stores Economy Increase in interest rates affect consumer confidence Rising fuel costs causes a rise in utility bills Consumers reconsider their spending options Merchants have to compete for dollars

Top Down - AEOS Reduced leverage on buying and occupancy expenses due to: Weak sell-through of apparel lines Increasing costs of store expansion Marketing programs are helping to boost brand awareness Official clothier of “Dawson’s Creek” Improvements to Web site & catalog Plans to advertise on certain TV networks

Top Down - AEOS Company expected to expand store base by 19% in fiscal 2000 Prices well positioned for target market Lower than closest competitors

AEOS Stock Stock plunge from April 2000 to July 2000 Dramatic, but expected, decrease in earnings for 2nd quarter resulting from poor sales of spring and summer merchandise Drastic discounts on unsold spring and summer merchandise to make way for strong fall line Stock surge since July 2000 Very strong back-to-school shopping sales results Stumbles from its competition (Gap and Abercrombie & Fitch)

Results from Back-to School Sales  For August, its total sales shot up 29.6%, with same-store sales (or "comps") increasing by a surprisingly strong 9.1%.  In September, American Eagle's total sales grew by 28.1% to $90 million. Comps increased by 7.4%

Competitors Gap’s Problems Gap has had several earnings warnings, flubs in shipments to Old Navy, and an ugly listing of declines in same-store sales have grounded Young customers have simply been finding more of what they like recently from American Eagle, compared to the Gap and its Old Navy division Abercrombie & Fitch’s Problems Difficulties with product mix resulting in stocking merchandise customers didn’t want The cheaper clothes offered by American Eagle pulled some unhappy Abercrombie shoppers away

Future for American Eagle  Abercrombie has taken steps to fix its merchandising problems, and looks like it is probably headed back the right way now  Abercrombie lowered the prices of its clothes in an attempt to compete better with alternatives like American Eagle