John from Bucks County, PA

A Conversation with American Eagle's Judy Meehan

James,

Thank you. Also read your recent report on AEO.

I own a block at 21 and a block at 16. Have traded a couple times in the 17 to 18 range.

I feel AEO is an interseting value play and in my mind worth $30 in 2009 or 2010. Could certainly trade down to $12 or $13 in the near term, though.

Here are some current headwinds against AEO:weak consumer discretionary spending in 2008 and probably 2009; possible saturation of store locations, slowing the earnings growth rate, which Wall Street generally doesn't like, even if balance sheet is prisitine and ROE is high; particular weakness in women's apparel; contraction of margins by a few points due to Chinese inflation and eventual yuan revaluation; Martin + Osa not clicking and burining through some cash; the ARS lockup..

I think the biggest headwinds are the consumer discretionary softness and the Wall street perception that AEO is now mature, has saturated all the good store locations and will expeience a slow growth rate.

All this being said, I still sense the value here. No debt and strong free cash flow. I believe the ARS situation will right itself within 24 months at 80 cents to a full 100 cents on the dollar.

I'd like to see AEO continue to be a strong buyer of its own stock. If not in 2008, at PEs this low, then when? I believe AEO is earning 3% to 4% on the locked-up ARS and can borrow against this.

I am a simpleton, but if AEO cold borrow against the ARS at 7%, earn 3% to 4% on the ARS, then buy shares which save AEO 2% dividend...well..maybe that could establish a net borowing of less than 2%...something like that. Cheap source of money to buy a very depressed stock.

thanks again.