Zacks Small Cap Institutional Research



|American Eagle Outfitters, Inc. |(AEOS-NASDAQ) |$30.82 |

Note: All new or revised material since the last update is highlighted.

Reason for Report: January comps update and Previous Edition: January 17, 2007

4Q06 EPS guidance revised.

Overview

Based in Pittsburgh, Pennsylvania, American Eagle Outfitters Inc. (AEOS) is a specialty retailer of casual apparel, accessories, and footwear for men and women between the ages of 15 and 25. American Eagle Outfitters together with its subsidiaries engages in the design and marketing of casual clothing. The company’s collection includes jeans, cargo pants, and graphic T-shirts, as well as an assortment of accessories, outerwear, and footwear, under American Eagle Outfitters and AE brand names. American Eagle Outfitters currently operates 834 American Eagle stores in 50 states, the District of Columbia and Puerto Rico, and 72 American Eagle (AE) stores in Canada. AE also operates via its web business, which offers additional sizes and styles of favorite AE merchandise. The company’s website address is . Its fiscal year ends on January 31. All references are made to the fiscal year.

According to analysts, 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 the |Limited room for meaningful margin improvement |

|intimates’ collection, entry into new international markets, and launch|Difficult comps and margin comparisons, and high inventory level suggest|

|of a new retail concept will drive earnings over the long term. |difficulty in recording near-term gains |

|Improved merchandise |Increased competition from other retailers |

|Opportunities to drive incremental sales through several growth |Investments in several initiatives could result in high SG&A expense |

|initiatives, better inventory management, and improvement in direct |without immediate corresponding benefit to the topline |

|business |AEOS's primary competitors - ANF and PSUN - are managing inventory |

|Acceleration in square footage growth |aggressively, heightening the risk of increased markdowns |

|Impressive same-store sales increase expected | |

|Solid brand acceptance and incremental store remodels are expected to | |

|further drive store productivity. | |

|Strong full price momentum will continue into the Holidays. | |

Recent Events

On February 7, 2007, AEOS announced January 2007 (a five-week period ended February 3, 2007) sales of $207.1 million as compared to the January 2006 (a four-week period ended January 28, 2006) sales of $130.0 million, and raised the 4Q06 EPS guidance.

On February 6, 2007, AEOS announced that it has been cleared to file an application to list its common stock on the New York Stock Exchange (NYSE). The company anticipates that, subject to NYSE approval, its common stock would begin trading on the NYSE under the symbol ’AEO’ on March 8, 2007.

On January 25, 2007, AEOS announced the appointment of Alan Kane to the company's Board of Directors to serve as a Class III director effective immediately until the next annual meeting of stockholders.

On January 03, 2007, AEOS announced total sales of $522.4 million, up 20% y-o-y, for the month ended December 30, 2006.

Revenue

| Revenue ($ in Millions) |

|Positive |14.3%↑ |

|Neutral |78.6%↓ |

|Negative |7.12↓ |

|Digest High |$41.00 ↑ |

|Digest Low |$27.00↑ |

|Avg. Target Price |$33.49↑ |

Of the 28 analysts providing a rating on the stock, 4 are positive, 22 are neutral, and 2 are negative. The target prices range from $27 (12.39% downside the current price) (Citigroup) to $41 (33.03% upside from the current price) (AG Edwards). The average target price is $33.49 (8.66% upside from the current price). Most analysts have used the P/E method to arrive at the target price. The range of P/E multiples used by analysts varies from 14x to 19x.

Potential risks to price target include company-specific problems such as fashion risk and other merchandising issues including inventory; economic risks, including declines in consumer spending; and stock market risk.

Capital Structure/Solvency/Cash Flow/Governance/Other

On January 11, 2007, AEOS announced that it will open at least 15 standalone stores in 2007 for its new intimates apparel sub-brand, aerie by American Eagle.

One firm (SIG) believes that the roll out sets the stage to not only grow the brand strategy, but may expand the market reach to a slightly older shopper, while mitigating the risk of alienating male consumers within the core AE brand format.

Another firm (Wall Street Strategies) believes that the acceleration of standalone aerie stores indicates management confidence in the brand’s long-term potential.

However, one firm (Friedman, Billings) feels that these stores would not have any material impact on comps, square-footage growth, or EPS until FY09 or beyond.

AE ended the quarter with approximately $903 million in cash, approximately $6.00 in cash per share. Capex at year-end 2006 is expected to total $215 million, given projects such as the new Pittsburgh headquarters set to open in 2007, an addition to its Kansas City DC, and new concepts like M+O and aerie stores to open. Capex expected to be around $200 million in 2007. AE is pledged to using excess cash to return value to shareholders, and has a stock repurchase plan in place (2.0 million shares repurchased during 3Q06 for $76.3 million) and pays a dividend. Additionally, AEOS also announced a three-for two stock splits that will be distributed to shareholders on December 18, 2006.

During the quarter, the company completed the repurchase of 2.0 million shares of common stock for approximately $76.3 million.

The company made progress in several of its key growth strategies during the quarter, including the following developments:

In September, the company successfully launched aerie by American Eagle, its first sub-brand. The new intimates brand received strong customer acceptance. Undies, bras and dorm-wear all achieved strong performance, contributing to both sales and earnings. The company is currently evaluating a variety of aerie store formats, including two new standalone locations.

Also in September, American Eagle launched its new retail concept, MARTIN+OSA. While still in the early stage of development, management is confident that the brand concept targeting 25 to 40 year olds presents a meaningful growth opportunity. The company will have five MARTIN+OSA stores open in time for the holidays and plans to open 15 stores next year.

The company's real estate expansion plans continued. During the third quarter, American Eagle opened 19 new AE stores and remodeled nine stores, and is on track to complete 46 new AE store openings and 65 renovations this year. Together with five new MARTIN+OSA stores, total gross square footage is expected to increase 8% this year.

In coming quarters, American Eagle will increasingly focus on the All-Access Pass loyalty program that rewards its best customers for purchases online or in stores (or both). The AE All-Access program increases the level of the reward as customers spend more money.

At a recent ICR XChaange conference, AEOS stated that it expects square footage growth of 8% in 2007, which would include 50 new stores (including the 15 aerie stores announced) and 40 remodels. Management also indicated that new store ROI in 2006 was 70% and remodels averaged a 38% comp store increase with improved sales per square foot. Management believes that aerie, currently $100 million in volume, can reach $500 million in the next 3-5 years.

One analyst (Morgan Keegan) believes that the aerie concept is positive for the company, but is concerned that its roll out would decrease existing AE sales as management continues to expect a 200-300 basis points comps lift from aerie. The analyst is less optimistic about MARTIN+OSA due to its minimal traffic, excessive markdowns and disappointing results, and so questions the viability of the concept. It further suspects that management would be forced to change MARTIN+OSA’s focus or completely shutdown the concept, and thus believes the Third Concept would become a critical square footage growth driver.

Another analyst (AG Edwards) believes that the company has a strong financial position as it remains a strong generator of free cash flow, which provides AEOS with the flexibility to growth through acquisitions.

Another analyst (SIG) believes as AEOS is operating with an exceedingly strong financial position, and has no long-term debt, its more than $800 million or roughly $3.50 per share in cash will primarily be used for repurchasing the 1.1 million shares remaining under its authorization. This, the analyst considers a positive factor for the company.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long-Term Growth

Long-term growth rate provided by analysts ranges from 8% (Citigroup) to 20% (D.A. Davidson, Cowen). The Digest average is 14.1%.

American Eagle Outfitters Inc. is focused on several initiatives to achieve profitable growth in the long term. In addition to providing increased newness to existing stores, the company is expanding its intimate’s collection, entering international markets. The company has opened the new retail concept, MARTIN+OSA. Management believes MARTIN+OSA stores will reach breakeven after 3 - 4 years.

Another firm (Stifel Nicolaus) believes the launch of aerie is a natural brand extension, capitalizing on the company's proven intimate apparel success over the past several years. It also believes aerie will leverage the American Eagle brand and expand its relationship with existing customers. It believes the intimate apparel expansion this fall will drive incremental sales of high-margin merchandise in coming quarters. The company will expand intimates shops within existing American Eagle stores, add intimates-only locations adjacent to AE stores and build three select stand-alone aerie stores in premier shopping malls. Within the next 5 years, it believes this initiative could generate $1 billion in incremental sales.

The brokerage firm continues to believe that the AE All-Access Pass loyalty program has fueled incremental sales and profit gains by reaching new customers and at the same time strengthening the relationship with existing customers. The loyalty program is a strategic initiative that the company has undertaken to focus on long-term customer relationships instead of price promotional couponing, which erodes margins unnecessarily.

Upcoming Events

On March 7, 2007, the company is expected to announce 4Q06 earnings.

Individual Analyst Opinions

POSITIVE RATINGS

Kevin Dann – Buy ($36) – (12/19/06). INVESTMENT SUMMARY: The firm remains bullish on AEOS and believes the company still has significant opportunities for growth, and continues to think AEOS is “the” teen retailer. It also anticipates American Eagle to continue to outperform its competitors due to its stronger merchandise assortments that appeal as much to men as women.

Wall Street Strategies – Buy ($37) – (01/23/07). INVESTMENT SUMMARY: Based on reasonable equity valuation and flawless execution by the management team in an ultra competitive teen apparel marketplace, the firm views AE shares as a top holding in the retail sector in 2007. The firm has reiterated a Buy rating based on the opportunities that the company has to improve upon low-single digit year-ago comps in February and March 2007.

AG Edwards – Buy ($41) – (02/15/07). INVESTMENT SUMMARY: The firm believes that AEOS shares are fairly valued at the current level based on its estimated long-term annual earnings growth of 18%. The firm has upgraded the stock from Hold to Buy with a target price of $41.00. It believes that the current valuation is attractive based on the continuous EPS growth, high ROE, the improvement in technology and product offering by the current management, and others. It further believes the stock deserves a higher valuation based on the significant performance improvement the company has realized over time.

CIBC – Sector Outperformer ($37) – (02/20/07). INVESTMENT SUMMARY: The firm is positive on the stock due to the continuing comps momentum, positive traffic trends and continuing operating margin expansion opportunity. Further, growth in the core brand as well as new growth opportunities in Martin+Osa and aerie would help keep AEOS shares moving higher.

NEUTRAL RATINGS

Caris & Co – Hold – (02/22/07). INVESTMENT SUMMARY: The firm has maintained a Hold rating as it believes that there is limited upside to the stock as the earnings growth potential in 1Q07 and FY07 is going unrecognized by investors.

D.A. Davidson – Neutral ($34) – (02/07/07). INVESTMENT SUMMARY: The firm has maintained its neutral stance on the stock, as it believes that high expectations regarding the strong sales trend is already reflected in the current valuation and there is limited upside to the stock. However, it also believes that AEOS has done a solid job of executing an impressive holiday season, and that the company has ability to continue to generate strong near-term results.

Lazard – Hold – (02/08/07). INVESTMENT SUMMARY: AEOS is executing well and taking market share, but the firm has maintained a Hold rating, as it believes the teen apparel sector will experience increased margin pressure due to the rising supply and flattening teen demographic metrics. It also believes the stock is fairly valued. With limited upside/downside, AEOS presents a balanced risk/reward profile.

SIG – Neutral – (02/08/07). INVESTMENT SUMMARY: Based on December comps, the firm believes that AEOS remains well positioned for continued market share gains. However, it has maintained a Neutral rating on the stock based on challenging comps and margin comparisons heading into 2007.

B. of America – Neutral ($31.33) – (02/08/07). INVESTMENT SUMMARY: The firm feels that the recent sales results of AEOS continue to show the brand’s strong momentum. However, based on the expectations already incorporated in the stock and the margins at peak levels, the firm has maintained a Neutral rating.

Bear Stearns – Peer perform – (02/08/07). INVESTMENT SUMMARY: The firm believes that the stock is top pick for 2007 based on a compelling portfolio, and the talented management team. It opines the current valuation of AEOS is cheap.

Buckingham – Neutral – (03/01/07). INVESTMENT SUMMARY: The firm has maintained its neutral stance on the stock based on increasingly difficult comparisons from a sales and margin perspective, though it continues to believe that the core American Eagle concept would help increase market share, partially aided by the new aerie sub-brand.

Cowen – Neutral – (02/21/07). INVESTMENT SUMMARY: The firm has maintained a Neutral rating as it believes that expectations for additional 4Q06 upside and a continuation of solid momentum heading into 1H07 are already reflected in the current valuation, and looks for a pullback in the share price as an opportunity to become more aggressive on the stock.

Friedman, Billings – Market perform ($31) – (02/08/07). INVESTMENT SUMMARY: The firm believes there is limited upside to an investment in AEOS shares at current levels. It also believes that the company would face tough comparisons in FY07 that will make it difficult to replicate the current fiscal year's business performance. It believes that the guidance increase is insufficient to generate new buying interest and expects range-bound trading in the near term. Therefore, it continues to advice against accumulating AEOS shares and recommends sell off.

Janney Montgomery – Neutral – (02/08/07). INVESTMENT SUMMARY: The firm has maintained a Neutral rating on AEOS based on the slowing comps and tougher margin comparisons since January. Longer term, the firm expects AEOS to achieve a three-year average annual growth rate of 15% and believes $34 would be a fair value for the stock.

J.P Morgan – Neutral – (02/13/07). INVESTMENT SUMMARY: The firm has maintained a Neutral rating based on its belief that comparisons would get tougher for the rest of the year. It believes for the stock to move higher from current levels.

Lehman – Equal weight ($32) – (02/28/07). INVESTMENT SUMMARY: The firm thinks aerie’s rollout, store remodels, and compelling product assortments can help accelerate comps in the near term, offset by investments in the MARTIN+OSA brand as well as stock options expense.

Morgan Keegan – Market perform – (02/06/07). INVESTMENT SUMMARY: The firm has reinitiated coverage on AEOS with a Market perform rating based on its belief that the shares might not appreciate further from current levels given combination of peak margins, valuation above historical norms, and square footage growth concerns though there are chances for some increase in the stock price given the strong pace of comps growth.

Pacific Growth – Neutral – (01/04/07). INVESTMENT SUMMARY: The firm feels that the early spring merchandise at AEOS is trendy, and that AEOS is likely to exhibit strong SSS momentum in 4Q06. However, it believes that AEOS shares are fairly valued at current levels as the all the good news is already reflected in the stock price.

Piper Jaffray – Market perform ($30) – (02/09/07). INVESTMENT SUMMARY: The firm has maintained its neutral stance on AEOS shares. It believes that though AEOS had completed one of its most successful growth years in its recent history and investments in the core business have yielded strong results, the current valuation of AEOS shares fairly reflects its strong sales and peak margin trends, new concepts are largely unproven, and square footage growth is moderating at core AE.

RBC Cap. – Sector perform ($32) – (02/09/07). INVESTMENT SUMMARY: The firm has maintained its neutral stance based on the belief that there would be limited share price appreciation from these levels though it expects strong comps and earnings growth.

Stifel Nicolaus – Hold – (01/23/07). INVESTMENT SUMMARY: The firm believes AEOS is a great company with a strong brand, excellent presence in the marketplace and attractive prospects for improvement in 4Q06 (the firm estimates at least 30% EPS growth) and 30% estimated EPS growth for the year. However, in the long term, the firm believes the opportunity for sales and earnings growth will moderate significantly.

Suntr. RH. – Neutral – (02/08/07). INVESTMENT SUMMARY: The firm believes Aerie continues to prove to be a strong sub-brand for AEOS. The merchandise has been readily accepted by the customer base and is flexible enough to work successfully as a standalone concept or a store-within-store. Its presence cements the AE brand in its view.

UnionBankSwitz. – Neutral ($35) – (03/01/07). INVESTMENT SUMMARY: The firm has maintained a Neutral rating based on its belief that most of the upside potential is already priced into the stock, and square footage growth is slowing and long-term initiatives are unproven. However, the firm is encouraged by new concepts like aerie.

Wachovia – Market perform – (01/12/07). INVESTMENT SUMMARY: The firm has maintained a Neutral rating as it believes that AEOS shares are currently fairly valued.

NEGATIVE RATINGS

Citigroup – Sell ($27) – (02/09/07). INVESTMENT SUMMARY: The firm has rated the shares of American Eagle Outfitters Sell. It believes the stock is likely to trade within a range as solid merchandise execution and comps are offset by limited square footage growth and modest operating margin expansion opportunities. Over the longer term, it believes the company will be challenged to sustain its operating margin at the 2006 peak rate of 20.9% as the launch of the company’s new MARTIN +OSA concept lifts expenses.

Thomas Weisel – Underweight ($32) – (02/09/07). INVESTMENT SUMMARY: The firm has rated the shares of American Eagle Outfitters Underweight with a target price of $32.00. The firm believes that the intermediate-term risks make it risky to take long positions in the stock, which includes risk associated with customer reaction to new assortments, increased competition, new ventures, management departures, and the company’s ability to find attractive retail locations.

DROPPED COVERAGE

Prudential– (03/02/07): The firm dropped coverage on AEOS due to the departure of the analyst covering the company.

Research Associate: Khushboo Gupta

Reviewed By:

Copy Editor: Joyoti D.

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March 1, 2007

Research Associate: Khushboo Gupta, M. Fin.

Editor: Nachiket Moghe, CFA

Zacks Research Digest

Sr.Ed.: Ian Madsen, CFA, imadsen@; 1-800-767-3771,x417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

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