Real Client Managed Portfolios Memorandum s1

REAL CLIENT MANAGED PORTFOLIOS MEMORANDUM

TO: Real Client Managed Portfolios Spring 2009 Class FROM: Shivam Khanna, Brandon McArthur, Bobby Schuster, Gana Raman SUBJECT: American Eagle Outfitters, Inc. Investment Recommendation DATE: April 2nd, 2009

Company Overview American Eagle Outfitters, Inc (AEO), through its subsidiaries, is a leading designer, marketer, and retailer of clothing and accessories. The company operates American Eagle Outfitters, aerie, Martin + OSA and 77kids in over 1000 stores in both the U.S. and Canada and ships their brands to more than 60 countries worldwide.

Current Position American Eagle’s shares were bought several times in transaction history from 1999 to 2000, resulting in a position of 1000 shares. AEO underwent a stock split 3 times: in 2001, 2005, and 2006, respectively. RCMP sold 600 and then 700 shares in 2005, sold 400 shares in Nov 06 and 450 shares in Nov 07. On December 3, 2008, 1000 shares were added to RCMP. The portfolio currently holds 2500 shares, trading at $12.61 as of April 1, 2009 for an unrealized gain of $14,617.20.

Auction Rate Securities and Liquidity In 2005 and 2006, American Eagle began purchasing marketable securities because it had a large amount of cash on its balance sheet. The company made net purchases of $311 million and $437 million in auction rate securities in 2005 and 2006, respectively. In 2007, the company made net sales of short term and long term investments of $354 million. In 2008, the company sold $393.6million worth of auction rate securities and the proceeds from this sale were put in more liquid money-market accounts. Through this sale, American Eagle has greatly reduced its exposure to the ARS market for short term investment but still has exposure in the ARS market through its long term investments. Going forward, if America Eagle is able to exit this market, it would be left with a strong liquid cash position which can be used for expansion purposes.

Recommendation We recommend holding the current position, which stands at 2,500 shares. Using conservative assumptions, the DCF model values AEO at a range between $9.37 and $11.45. The current market price1 is $12.61, which is a 10% to 25% premium to the model. The multiples analysis values AEO between $15 and $17, which is a 16% to 26% premium to the current market price. While certain valuation measures may prompt a buy recommendation, AEO currently makes up approximately 7.5% of the RCMP portfolio, second only to KMB’s 8% holding. Shaky consumer confidence does not justify more exposure to an already-battered retail industry. With that said, AEO remains a strong company with a light debt load and an ability to generate ample cash flows.

1 As of April 2, 2009