John from Bucks County, PA

American Eagle Outfitters: Impressive Company, Tough Market

About Auction Rate Securites (ARS) with AEO -- Today Citigroup made an announcment where it will begin to settle the ARS issues, with other financial institutions following suit soon. Last I looked, I beleive AEO had about three hundred million dollarsocked up here. If this logjam breaks, one would think some additonal value would unlock for AEO.

I am long the shares and just bought some today at $13.70. I can see the shares testing $12.00 again, but with a little patience, the shares could also more than double in the next 24 months and beyond.

A little help from the economy (say late 2009 and beyond), a little product mix refining and perhaps throwing in the towel on Martin+ Osa...and we could see this stock gain momentum.

If the ARS problem unlocks soon, perhaps managment could use the freed up cash buy in shares at these firesale prices.

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.

American Eagle Outfitters' Wings May Be Falling Off

All valid points. Some thoughts:

1). AEO could be a classic value play, but may go lower before finding a bottom. Women's apparel is very soft now for all. Denim may be flat for awhile -- or at least looking for new leadership in style. Consumer spending can be expected to remain subdued through 2008.

2). AEO has no long-term debt, yet still has an extremely robust ROE. Is cash about 800 million with about half of that tied up in the auction rate securites? Is that about $4.00 per share? Wow! I think the auction-rate issue will clear within a year or so. Having no debt in a soft environment sure is nice.

3). Will unsuccessful new store concepts rollouts wastefully burn through a few hundred million dollars before plugs are pulled or will the concepts succeeed? Don't know the answer here. Shareholders must hope that mgmt. remains rational here.

4). Will profit margins shrink due to consumer softness, weak dollar, Chinese inflation...yes, one would expect this, which will impact ROE. IS this already built into the price...mostly, it seems so.

5). Could AEO morph into a slower growth company with a great dividend.? Might happen, but Wall Street doesn't like these kind sof companies. Sure throws off a lot of cash.

6). Near-term valuation -- Maybe trading in a $13 to $20 range, depending on quarterly eanings. I have a block at average cost of $18. Would nibble again in the next few months if I see 15.

7). longer-term valuation -- $2.00 of earnings and a 16 PE could mean $32...if AEO can exceute. Could very well happen with three years

8). Does my 12 year-old daughter like this store? Very much so. She also likes ANF with Hollister. She tells me AEO offers better pricing, particulary on jeans. The kids like both AEO and ANF. The embroidered brand-lettering and the printed logogs give them that sense of belonging. My duaghter tells me AEO offers better fit to more body types than Hollister.

So there you have it. Yes, some negatives in the overall apparel market and with the company. Positives are the cash, lack of any debt, great ROE, share buy-back program, low p.e, great brand-loyalty from the kids.

Good company to watch.