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ANF+AEO Concept Stores Irrelevant in Big Picture as Core Business Units Control Focus

March 30, 2009

Analysis of:Abercrombie, American Eagle May Close Concept Stores | www.bloomberg.com

The potential of Martin+Osa and Ruehl closings would have a positive effect on the AEO and ANF share prices although much of the impact has already been priced in. Both businesses are unimportant given the bigger stakes in turning around the core business concepts in an environment where the customer has moved towards unbranded looks. ANF impaired 1/3 of its Ruehl stores with its 4Q08 results and is giving the concept more time to find an audience with the latest floor sets which are somewhat more differentiated from A&F than in the past. These stores could be easily transformed into Gilly Hicks which offer lingerie and at home wear for teens and young adults, an underserved market. M+O has never found an audience although it received high marks for the store's aesthetics. AEO is focusing its efforts on a turnaround of the core business led by the return of former CEO Roger Markfield. In addition, it is launching a kids concept on line this year and in stores in 2010.

Look Beyond (30%) February Comps for Value in ANF

March 5, 2009

Analysis of:Abercrombie & Fitch clothed in green | www.marketwatch.com

Expect 09 EPS (35%) to $2 vs $3.25 due to negative comps and big SG&A drag related to flagship openings; 1Q EPS could be negative. ANF has a clean balance sheet w/$5.80 in cash/sh, 5% L/T debt/equity; project $2.60/sh in 09 FCF, should help support ANF’s valuation through downturn. 1-Sales. Expect comps to stay negative through 2009 given weak demand, lack of newness in women’s, too narrow assortments, lack of promotions in a very promotional mall and cyclical fashion shift towards anti-fashion apparel (ie, URBN, BKE, Am.Apparel) vs logoed. 2- SGM&A drag of ~ $27M in 2009 for flagship pre-opening expense in NY/Soho (Hollister), Tokyo & Milan (A&F) will pressure EPS without offsetting revenues until 2H09. Other SGM&A well controlled w/variable expenses managed weekly. ANF’s IMU should improve given excess capacity overseas which should help protect merchandise margins. Inventory content clean even though levels look high due to renewed emphasis on size integrity in basics.

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