Strategic recommendations for American Eagle to pursue the tween market as a growth strategy

1. American Eagle Outfitters 2004-2006 Prepared by Andrew Jenkins, Rotman School of Management, University of Toronto 2003

3. AE’s aggressive expansion in overall square footage and number of stores have been the key drivers for Sales and EBITDA growth in the past five years… Source: Annual Report S

4. AE and its major competitors have seen highly positive 5YR Cumulative Average Growth Rates with the exception of The Gap…. S Source: Multex Investor 22.75 30.10 Pac Sun 32.80 25.06 Abercrombie & Fitch -1.31 17.31 The Gap 33.73 29.75 American Eagle EPS Sales Company 5 YR Percentage Growth In

5. Despite growth in Sales, AE has seen declines in ROE and Comparative Store Performance (COMPS)…. C Source: Annual Report

6. AE Gross Margin has also declined despite continued company growth…. C Source: Annual Report

7. AE’s and its major competitors have performed poorly with returns to shareholders over the past five years…. C Source: Annual Reports

8. AE and it’s major competitors have also seen declines in gross margins…. C Source: Annual Reports

9. What must American Eagle do to combat those trends? Q

12. American Eagle is well positioned to face the existing market forces in the Tween market…. AE’s Unique Brand difficult to duplicate AE’s Economies of Scale takes time to achieve Unlikely to launch their own unique brand Large market with large amount of choice Many competitors in the marketplace but AE has desired brand at value prices compared to competitors 2 Suppliers: Low Rivalry: MODERATE Buyers: Strong Substitutes: Low New Entrants: LOW

13. By building on its core strengths in the specialty retail sector, AE will succeed in entering the Tween market…. BRAND = BIGGEST STRENGTH VALUE PRICING ADVANTAGE VS COMPETITORS MARKET POSITION - #3 WITH 28% MARKETSHARE 2

14. AE’s focus on Ladies and Tweens will offset the softness in the men’s business which is also industry-wide. When times are tough, it is women and children first and men last…. INVEST & GROW TWEENS FIX MENSWEAR INVEST & GROW LADIES Mens Ladies Tweens Weak Medium Strong Business Strength Medium High Market Attractiveness Low 2

16. AE’s menswear contribution is declining and Tween merchandise would complement the already growing ladieswear category- a combination responsible for The Gap’s recovery and Abercrombie’s core focus… 3

18. American Eagle must stabilize menswear, invest in and grow Ladies and Tween merchandise and, if successful, consider spinning off Tween focused stores…. PROFIT TIME Horizon 1 Horizon 3 Horizon 2 Stabilize menswear If successful, consider spinning off Tween focused stores as competitors have done Long-term Immediate Short-term Invest in and grow Ladies and Tween merchandise

20. Pursuing the Tween Market will help sustain 6.5% annual growth in Sales for the next three years….

21. Continued cost management at 9% annual growth in COGS will lead to growth in Gross Margin…. 2002-2003 Source: Annual Report

22. Holding SG & A growth at 2.5% will result in EBITDA recovery…. 2002-2003 Source: Annual Report