Reiterating Under Perform Rating on AEO Following Earnings

"We are reiterating our Under Perform rating on American Eagle as we think AEO faces headwinds in 2008 due to increased competition, difficult SSS (same-store sales) and peak margin comparisons in a challenging macro environment. Though at ~10.4x our FY08 reduced EPS estimate of $1.73, AEO is trading at a discount to the sector average of ~15x, AEO is trading above its long term organic growth rate of 8% to 10%, given limited square footage growth opportunities and what we think could be a difficult 2008 with negative SSS and earnings growth. Hence, we see another potential 11%-15% downside from current valuations to 9x our lowered FY08 estimate of $1.73, or $15-$16 a share."

"We think the biggest threat to earnings growth is continued traffic declines due to a tough macro environment, merchandise misses, and stronger competition from better product at value-oriented teen retailer Aeropostale (ARO-Buy), which we think is taking share in B and C malls as ARO benefits from the trade-down customer who is noticing the improved assortment."