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Issues with the Balance Sheet

• Over half of their short-term liquidity ($372M) is locked up in auction-rate securities. While management stated that cash on hand is more than enough to fund operations through the spring, the seasonal pick-up toward the back end of the year could strain resources.
• The company disclosed opening and drawing down a $75M credit facility subsequent to FY 2008, meaning the company is not debt-free, as is often asserted when browsing internet research on the stock.
• Balance sheet lacks “hard” assets:
  • About one-third of their $1.9B in assets is investments.
  • Over 80% of property, plant & equipment (PPE) consists of leasehold improvements and fixtures. My estimate is ~$535M of PPE ($626M) as of the 2007 10K filing falls into this category.
  • While there is no doubt that these improvements provide value for the company as an ongoing-concern, they provide little backstop when valuing the company on a non-ongoing basis.
  • For example, if business were to deteriorate considerably, it is doubtful that the company would be able to monetize its capitalized leasehold improvement assets to raise cash. In fact, it may even have to

write down unplanned store closings.

• American Eagle is committed to an aggressive capex program ($250 - $275M) even as their business trends are declining markedly.