American Eagle Outfitters Inc



| American Eagle Outfitters Inc. |(AEO-NYSE) |$11.16* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q17 Earnings Update

Prev. Ed.: Feb 16, 2017; 3Q16 Earnings Update

Brokers’ Recommendations: Neutral: 46.7% (7 firms); Positive: 40.0% (6); Negative: 13.3% (2) Prev. Ed.: 7; 11;1

Brokers’ Target Price: $14.33 (15 firms) Brokers Avg. Expected Return: 28.4%

*NOTE: Though dated Jul 21, 2017, the share price and broker material are as of Jun 8.

Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table and PMES section. The extra figures in the Valuation table and PMES section come from reports that did not have accompanying spreadsheet models.

Note: We do not have access to ‘Sell’ reports.

Portfolio Manager Executive Summary

American Eagle Outfitters Inc. (AEO) is a retail company that engages in designing, marketing, and selling clothing in the U.S. and Canada. The company offers jeans and graphic T-shirts as well as accessories, outerwear, footwear, basics and swimwear under American Eagle (AE) and Aerie brand names, targeting primarily 15 to 25 year olds.

Of the 15 firms covering the stock, six provided positive ratings and seven assigned neutral ratings, while two firms rendered negative rating to the stock.

The outlook of the firms on American Eagle is dealt with in the following paragraphs:

Neutral or equivalent outlook (46.6%; 7/15 firms): While the firms are impressed with American Eagle’s tactics of significantly curtailing its expenses, closing underperforming stores, focusing on growth of profitable channels and moving products swiftly to the markets, they believe that the company’s turnaround depends on improvement of its merchandise. Nevertheless, they observe that the company has sound long-term prospects given its reputation as a fashion retailer for teenagers and collegiate consumers.

Additionally, these firms are confident of the company’s growth on the back of its supply chain efficiencies, fleet optimization, reduced input expenses and its international growth opportunities. However, the firms are somewhat cautious of the retail competitive landscape, which may hamper the company’s performance.

Positive or equivalent outlook (40.0%; 6/15 firms): These firms observe that American Eagle has a solid brand lineup and a strong balance sheet. They believe the company offers the right mix of assortments which strengthens its brand awareness. The company appears to be focused on higher margin merchandise in order to increase profitability in the long term.

Further, the positive firms believe that American Eagle has solid growth potential backed by its product innovation and positive consumer feedback. Moreover, the firms notice that several opportunities lie ahead of the company to drive growth through its eCommerce and aerie lines of businesses. They remain optimistic about the company’s aerie transition strategy, which aims at switching assortments from apparel to lingerie, while shutting its underperforming stand-alone aerie stores and focusing on introducing side-by-side and shop-in-shop locations alongside growing eCommerce.

The firms believe that the company is on the right track to execute its core strategies with various initiatives to streamline business and capitalize on ROI. Further, the firms are confident about the long-term growth of the company’s top line and margins, based on increased product flow, eCommerce, and multiplication of global stores. They believe that a combination of cost-control measures, share buybacks and dividend programs will assist in hedging the shortcomings.

July 21, 2017

Overview

According to the firms, investors should make an investment decision based on their assessment of the following issues:

|Key Positive Arguments |Key Negative Arguments |

|The company’s focus on several initiatives like expansion of its |Sales and earnings could be negatively impacted if American Eagle |

|intimates collection, entry into new international markets, and launch |misinterprets fashion trends for its target customers or fails to provide |

|of a new retail concept will drive earnings over the long term. |merchandise assortments that appeal to them. |

|Solid brand acceptance and incremental store remodels are expected to |Input costs remain volatile, which may have a negative impact on margins. |

|further drive store productivity. |Increased competition from other retailers. |

|Management’s focus on current fashion trends with a view to generate |Investments in several initiatives could result in high SG&A (Selling, general|

|higher returns for its stakeholders in the long run. |and administrative) expense without an immediate corresponding benefit to the |

|The company’s focus on the “aerie” stores as they have the potential to|top line. |

|accelerate growth in the long run. |American Eagle's primary competitor, Abercrombie & Fitch, is aggressively |

|Management’s aim to expand globally through eCommerce initiatives. |managing inventories, heightening the risk of increased markdowns. |

Based in Pittsburgh, PA, American Eagle is a specialty retailer of casual apparel, accessories, and footwear for men and women between the age group of 15 and 25 years. American Eagle, together with its subsidiaries, engages in designing and marketing of casual clothing. The company’s assortment includes jeans, cargo pants, and graphic T-shirts, along with a variety of accessories, outerwear, and footwear.

American Eagle operates over 1,000 stores in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom. Moreover, the company has over 160 international stores operated by licensees. It also sells products through its websites and , which offers additional sizes and styles of AE merchandise across 81 countries.

American Eagle currently operates under the AE Brand, Aerie by American Eagle and an online retailing channel – AEO Direct.

AE Brand: Under this brand, the company sells latest fashion apparel and accessories for men and women in the aged between 15 and 25 years, including sweaters, graphic T-shirts, fleece, outerwear and accessories.

Aerie by American Eagle: Launched in 2006, Aerie is a lifestyle brand providing simple and stylish apparel, especially for young girls. The company sells this apparel through its standalone Aerie stores across the United States and Canada, and globally through its online channel, .

AEO Direct: AEO Direct is American Eagle’s online retailing channel, through which the company sells its wide range of apparel and accessories from its different brands. The company merchandises its products through eCommerce websites, and .

More information is available on the company’s website . The company’s fiscal year ends on Jan 31.

July 21, 2017

Long-Term Growth

American Eagle is focused on several initiatives to achieve profitable growth in the long term. In addition to innovating its existing stores, the company is expanding its intimates collection and entering into the international markets.

The firms perceive that strength of the “aerie” division, which has a website of its own, will prove beneficial in the long term. In addition, the direct business continues to exhibit considerable improvement. American Eagle is also targeting improvement of infrastructure and information systems to support long-term growth. The firms believe that the company is continuously taking steps to revitalize the AE brand and recapture market share. Overall, the company is effectively managing the business to prevent further degeneration.

The firms note that American Eagle’s several ongoing initiatives are likely to position the company for a turnaround over the long term. Some of these initiatives are gaining traction, including recent merchandise and marketing improvements, tight inventory controls, reduction in planned promotions, enhanced open-to-buy and ability to chase.

Moreover, American Eagle is striving to develop its omni-channel platform to reach customers in every possible way. Hence, the company has been improving its website as well as mobile app. Backed by these efforts and efficient digital marketing endeavors, the company’s online sales contributed about 26% to its total revenue, up from 19% in the same year-ago period. We believe these plans for omni-channel growth, provide significant opportunities to the company to expand its business and cater to the incredible global demand for its products.

American Eagle is striving to develop its omni-channel platform to reach customers in every possible way. Hence, the company has been improving its website as well as mobile app. Backed by these efforts and efficient digital marketing endeavors, American Eagle’s online sales contributed about 26% to its total revenue, up from 19% in the same year-ago period. We believe these plans for omni-channel growth, provide significant opportunities to the company to expand its business and cater to the incredible global demand for its products.

Simultaneously, the company has adopted an aggressive take on store closures due to soft store and mall traffic trends, as well as stiff competition that has been plaguing the retail space. The company has been closing down stores to combat the decline in sales and higher store operating costs as traffic continues to remain soft. Additionally, it plans to shut down 25–40 stores in fiscal 2017.

Further, the company plans to accelerate store closures going forward. Moreover, it is experimenting with the closure of stores where sales have clearly migrated from brick-and-mortar to online. Notably, American Eagle has about 500 stores’ leases expiring in the next five years, providing opportunities for closing down the less profitable locations. This aggressive approach to store closures has considerably hurt investor sentiments.

July 21, 2017

Target Price/Valuation

|Rating Distribution |

|Positive |40.0% |

|Neutral |46.7% |

|Negative |13.3% |

|Avg. Target Price |$14.33 |

|Digest High |$21.00 |

|Digest Low |$12.00 |

|Firms with Target Price/Total |15/15 |

Risks to the target price include a downtrend in consumer spending, pressure from adverse macroeconomic environment and low levels of consumer confidence. Moreover, fashion trend misses, underperformance of new stores, distribution center disruptions, an overtly promotional selling environment, and a sustained slowdown in consumer spending remain added concerns.

Recent Events

On May 17, 2017, American Eagle reported first-quarter fiscal 2017 results, wherein quarterly adjusted earnings of $0.16 per share declined 27.3% from $0.22 recorded in the prior-year quarter, alongside lagging the Zacks Consensus Estimate by a penny. Total revenue climbed about 2% year over year to $762 million, also surpassing the Zacks Consensus Estimate of $744 million.

Revenue

The Zacks Digest average revenue in 1Q17 increased 1.7% y/y declined 30.6% sequentially to $761.8 million.

Consolidated comparable-store sales (comps) increased 2%, compared with a jump of 6% recorded last year. Brand-wise, comps surged 25% at the company's aerie stores, while it dipped 1% at American Eagle (AE) Total Brand outlets. Notably, this marked aerie brand’s 13th straight quarter of double-digit comps increase, out of which several quarters witnessed growth of over 20%.

Provided below is a summary of total revenue as compiled by Zacks Digest:

|Revenue ($M) |1Q16A |

|Copy Editor |Tuhin Roy |

|Content Ed. |Sumit Singh |

|Lead Analyst |Rajani Lohia |

|QCA |Sumit Singh |

|No. of brokers reported/Total |15/15 |

|brokers | |

|Reason for Update |Earnings |

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July 21, 2017

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