Greetings, ladies and gentlemen, and welcome to the American Eagle Outfittersthird quarter earnings conference call. (Operator Instructions) It is now mypleasure to introduce your host, Ms. Judy Meehan, Vice President of InvestorRelations. Thank you, Ms. Meehan. You may begin.

Good morning, everyone. Joining me today are Jim O’Donnell,Chief Executive Officer; Susan McGalla, President, Chief Merchandising Officer;and Joan Hilson, Executive Vice President and Chief Financial Officer, AEBrand. If you need a copy of our third quarter press release, it is availableon our website, AE.com. Before we begin, I need to remind everyone that during thisconference call, members of management will make certain forward-lookingstatements based on information which represents the company’s currentexpectations or beliefs. The results actually realized may differ materiallyfrom those expectations or beliefs based on risk factors included in ourquarterly and annual reports filed with the SEC. Now, I will turn the call over to Jim.

Thanks, Judy. Good morning, everyone and thank you forjoining us. Our third quarter was noteworthy on several fronts. We deliveredstrong operating margin while continuing to progress on our long-term growthplans. I am very proud of the American Eagle team. We navigated well through achallenging quarter and proved that our disciplines are in place to driveconsistent results. Importantly, we also identified a number of opportunitiesfor 2008. Now, looking ahead, growth and profit expansion continue tobe a major focus and priority for American Eagle Outfitters. We’ll achievegrowth by building our portfolio of brands into market leading businesses,maintaining discipline in strategic real estate expansion, as well as creatingworld class e-commerce for our customers. At the same time, we’re committed to delivering continuedstrong profit performance by applying our extremely high standards ofoperational excellence across all aspects of our business. The third quarterwas an example of this, enabling us to deliver an operating margin of 20.3%,even though sales were below our original plan. Over the past several years, we have built in significantcost improvements, processes, procedures, and technologies, which had and willcontinue to drive leading operating margins. We are improving every aspect of our business, takingadvantage of our scale as we grow while diligently ensuring that each growthinitiative is backed by sound financial planning and a healthy return oninvestment. Key operational initiatives underway include a globalsourcing strategy which will support our brands over the long-term. It willenable us to deliver high quality merchandise in the most cost-effective andefficient manner. We are implementing new technologies and tools which enhanceprofitability and improve customer experience. Examples include productallocation tools and a new point of sale system currently rolling out acrossour chain. These enhancements help us sell more product to morecustomers through faster check-out, real-time inventory visibility, and readyaccess to customer information across the enterprise. As for growth opportunities,…

Thanks, Jim and hi, everybody. The third quarter had severalhighlights that point to the strength of our brand and the success that liesahead, yet at the same time there were challenges on a number of levels. We’veidentified the areas of opportunity, made changes where appropriate, and we aremoving forward in the right direction. Speaking for myself and other key leaders across thecompany, we’re more confident than ever about this corporation and its abilityto deliver strong performance both in the near and long-term. The AE brand continues to be our top priority as the engineof this company. The brand continued to inspire loyalty and maintained a strongemotional connection with our 15- to 25-year old customer. Now, let me talk about the Q3 highlights. Denim as adestination AE category is a brand-defining part of our business. We continueto maintain and grow our market share by offering customers continuous newnessin terms of style, fit, fashion and wash. The latest NPD data shows that the AE brand continues tohold the number one denim market share position. In addition, we increased marketshare from 14% to 18% during back to school compared to last year. As a brand,we are all committed to maniacal focus, inspiration and execution around AEjeans. Next, I am happy to talk about the AE men’s business. Thiscontinues to perform very well due to on-trend collections and powerful keyitems that the AE guy wants to buy and wear every day. The business is up inthe high single digits overall in Q3 and we continue to gain market share inkey destination categories. Shorts were particularly strong in Q3, along with otheremerging categories like sport shirts and graphics, which reinforce theimportance of wear now during this time period. I’m extremely proud of ourmen’s team and their accomplishments. Moving on to women’s, we continue to be…

Thanks, Susan. Even though sales came in below our originalplans, we delivered a 20.3% operating margin for the third quarter. Keycontributors were controlled expenses and disciplined inventory management,along with the technology and processes currently in place. Now, let me take you through some of the key points of thequarter. Comparable store sales were up 2% versus a 13% increase for the sameperiod last year. The AE brand comp performance was driven by an increase intraffic while maintaining a conversion rate consistent with last year. With a lower average unit retail price, we achieved strongunit sales during the quarter. This enabled us to enter the fourth quarter witha balanced mix of holiday and clearance inventory. In fact, clearance inventoryrepresents a lower percentage of our total inventory compared to last year. Turning to gross margins, our rate of 47.4% was a decreaseof 210 basis points. Within merchandise margins, we continued to benefit fromsourcing initiatives that resulted in lower product and transportation costs.This benefit helped to lessen the impact of increased markdowns. Also, buying, occupancy, and warehousing costs increased 110basis points. This was primarily due to rent related to new stores. We are opening60 new stores during the second half of the year versus 32 last year. As it relates to selling, general and administrativeexpenses, it was a very well-managed quarter. We leveraged 110 basis points.Total dollars grew at a rate of 2%, compared to a 7% growth in sales. Totalcompensation, professional fees and supplies were lower as a percent of sales.On a rate basis, advertising increased due to a planned shift in timing ofmarketing events. As relates to sales, essentially all other operating expenseswere nearly flat to last year. This reflects our response to businessperformance during the quarter, while at the same time we invested in newconcepts and opened 46 new stores.…

Thanks, Joan. While sales were below our plan for thequarter, I am very proud of the way the American Eagle team managed throughthis environment. We demonstrated flexibility in response to changingconditions. We are well-positioned for future growth and we are committed todelivering strong profit performance. And now we’ll be happy to take a few questions.

(Operator Instructions) Our first question comes from Jeff Black withLehman Brothers. Please state your question.

Thanks. Good afternoon. I thought that was a verywell-managed quarter, as you said. Turning to the IMU, can you tell us how muchIMU benefited the third quarter and how much benefit you’re getting thus farthis year? And really, can you just talk about what you are doing in terms ofglobal sourcing and where we are on the IMU curve? It would seem we could seesome more benefits from that in the coming years. Thanks.

Lower product costs really are what drove our IMUimprovement up for the quarter and that was really driven by our sourcingstrategy, which is around moving to new factories, as well as favorabletransportation costs. So we continue to see modest IMU improvement go forward.That’s what we will build our operating models around but we will continue todrive for as much as we can in that area. We feel very good about the supplychain initiatives that Jim spoke about in his prepared remarks and thosecontinue to be in the forefront and will continue to help us through 2008 andsupport our long-term growth.

Thank you. Our next question comes from Todd Slater withLazard Capital Markets. Please state your question.

Thanks very much and good morning. Could you talk a littlebit more about your international strategy, just in terms of what type ofstrategy you plan to use? Whether it’s going to be capital intensive build ityourself, or more of a capital light joint venture or license type of activity?

Sure. Right now, the model we’re looking at is to mitigateas much risk as possible. Therefore, we are looking more towards a jointventure with a partner or partners, depending on the destination country. Rightat this particular time, we’ve had a number of conversations with specificpeople who have a real and genuine interest in partnering with American Eagle.They are very excited about the brand and what it could bring into theirmarketplaces. And we are finalizing actually those conversations as wellas the modeling of the financial venture and I’ll have more to say probably theearly part of next year. But we’re moving along in a very concise and positivemanner but also, we’re dotting the I’s and crossing the T’s. International has a ring to it. We think we can participatein that arena but I am also being somewhat cautious.

Thank you. Our next question comes from Michelle Clark withMorgan Stanley. Please state your question.

Thank you and good morning, everyone. First question is whichmerchandise categories in particular are you experiencing above planned levelsof markdown? And then the second question, you mention being able to leverageSG&A off of a lower comp base in 2008. Can you give us a sense of what youexpect the leverage point to be? Thank you.

Okay, Michelle. As it relates to merchandise categories thatare experiencing above plan markdowns, first of all, the best thing I can tellyou is that we are pleased. We are doing a lot of volume in the women’sbusiness. We are very pleased with the gift-ability of the women’s assortmentand the response we had to that over the Thanksgiving weekend, but we also takecare of issues and we’ll make sure that we monitor and run the Decemberbusiness along the way that we like to run our business, which isstrategically, according to the plan, and if we need to move through a few ofthe tops categories a little bit more aggressively, we will do that. Buthonestly, we have a good game plan for the month of December and we will managethat week to week, as is our discipline.

And with respect to the SG&A leverage for 2008, we, asyou’ll recall, for 2007 our expense base was structured to leverage at a mid,and at some points in the year, a high single digit comp. We expect 2008 tofall below that level and we have deliberate expense initiatives in place to dothat, largely around non-merchandise procurement activities; things likesupplies, packaging, professional fees. And we are very aggressive about thatand that is our strategy in terms of expense management for 2008.

Thank you. Our next question comes from Linda Tsai with MKMPartners. Please state your question.

Yes, good morning. I was wondering, can you give an updateon your tier product strategy as it relates to the current holiday selection?And maybe what areas you saw strength in over the weekend and perhaps where thegreatest opportunities lay going forward? And then just one quick follow-up; for the 135 new stores,can you give the breakout between AE and Aerie stores?

On the breakout, Aerie we right now plan to open a minimumof 70 stores; the American Eagle brand, approximately 45 to 50 stores; andMARTIN + OSA, as I stated earlier, 15 stores. And we’ll remodel 50 AmericanEagle stores in 2008.

And as it relates to our tier product strategy and how thatis reflected in our holiday assortments, a couple of things. I’ll point you toexamples. If you take a look at how we’re running our fleece business, the AEbrand and being a destination for fleece continues to build and have momentum.And what we were able to do if you walked into our stores over the holidayweekend, we were entirely regular priced and what allows us to do that is ourpricing from $29.50 and upwards reflecting value at every single one of thoseprice levels. And so you can see that in our destination categories aswhere we reflect a tiered assortment strategy, we don’t want to become aresorted brand. That’s very important. We’re very selective where we do it andit has been -- I gave you the example in fleece. As you can see what we’ve donein denim over the last several years, it is very, very largely successful forus.

Thank you. Our next question comes from Lauren Levitan withCowen and Company. Please state your question.

Thank you. Good morning. I was hoping you could give us someupdate on the impact of MARTIN + OSA on the EPS in the third quarter and if youare still expecting the same level of drag on earnings in Q4 and how you arethinking about that for ’08. Related to that, at the high-end of the guidanceyou would be below the long-term 15% EPS growth target that you’ve talked abouton an annual basis. I’m curious if investment in MARTIN + OSA and in Concept 4have any impact on that relative to your planning for ’08 and beyond. Thanksvery much.

M+O for the quarter, the third quarter, was a $0.05 losscompared to a $0.04 loss last year. For the fourth quarter, we’re reiteratingguidance on an annual basis of $0.15 to $0.17 loss, which would bring thefourth quarter to $0.05 to $0.07 loss. As we look forward to 2008 for MARTIN + OSA, we expect theloss from MARTIN + OSA to be less than 2007 but given -- I encourage you tothink about the investments and refinements that both Jim and Susan spoke of intheir prepared remarks and we really are excited about that. We’re lookingforward to the -- to seeing those results in the first quarter, at which pointwe can update you with a little more detail on what the M+O guidance will be interms of performance for 2008.

On Concept 4 for 2008, it will be minimal.

Thank you. Our next question comes from David Glick withBuckingham Research Group. Please state your question.

Good morning. Joan, I was wondering if you could give us alittle more color on your Q4 guidance. Should we expect the same relationshipto last year in gross margin and SG&A, kind of a continuation or carry-overof that relationship from Q3 into Q4? Is that the best way to think about it?

Thanks, David, for the question. Q4 guidance, it’s early inthe quarter. That’s the first thing that I want to make sure that we put outthere, and we have a lot of business ahead. With that in mind, the guidancereflects our current trend of the business. As we think about markdowns andSG&A cost, we are giving guidance based on performance from markdowns.Expense is positioned to leverage at a low single digit comp in the fourthquarter, so I think that’s how you should think about it as you look at yourown models in the fourth quarter.

Thank you. Our next question comes from Lorraine Maikis withMerrill Lynch. Please state your question.

Thank you. Good morning. You mentioned a change in thetiming of receipt of inventory. Can you elaborate on why and by how much? And then just a quick second question on the SG&Areduction; was the compensation decline store payroll hours or was that a lowerbonus accrual? Thank you.

In terms of SG&A first, lower bonus is clearly a part ofthe leverage of SG&A but what we need to focus on here is the fact thatexpenses grew at 2% versus a 7% increase in sales, and that nearly all other,with the exception of advertising, expenses were nearly flat and that’s whywe’re very pleased with the expense performance for the third quarter. With respect to inventory, our inventory was down 3% on acost-per-foot basis. Compared to our guidance, a large part of that is thetiming of in-transit inventory, which as you know is a point in time inventory.We are also very pleased with the unit sell-through of our third quarterproduct, which really put our clearance inventory in a very strong position andkept our inventories fresh going into the fourth quarter. Those are thecritical components that we’re looking at and we’re very pleased with how ourinventory is positioned and the content of it as we head into the criticalmonth of December.

Thank you. Our next question comes from Paul Lejuez withCredit Suisse. Please state your question.

Hey, guys. Two questions; one, what are the -- maybe justgive us a little more detail about the substantial and critical investments inthe supply chain stores and infrastructure for direct. Did anything go wrong orhave these investments always been expected to need to be made? And second, just to piggy-back on Lorraine’s question on thebonus accrual, was there a one-time catch-up to that accrual? And what do weexpect for the fourth quarter in terms of bonus?

Let me address the expense question. The bonus accrual isbased on where we see our guidance for the year at this time, and so there isno one-time catch-up. It’s based on a pro rata portion of bonus through thispoint of the year.

So was that [running] down all year?

Yes, it has been. And then with respect to the CapEx, Jimmay want to offer some more color on the supply chain initiatives, but clearlyas we look forward in our long range plan, our investments to support our newconcept growth have been front of mind and clearly nothing has gone wrong in orcaused us to elevate because of an issue. So Jim can provide a lot of color interms of supply chain.

Basically, Paul, this is -- what we are realizing today wereinitiatives that were put in place over three years ago, where we made majorinvestments and we had a conscious decision that in order to continue to beproductive and fluid and meet the demands of the specialty apparel business,that we had to make some changes in our methodology as it related to supplychain, transportation, and also receipt flow into our distribution centers. I am pleased to say that we’ve met our objectives, continueto meet them, we’re not finished yet. We are still immersed in this ongoingprocess of supply chain and also in updating our physical distribution centersand also our AE direct service to our consumer where we want to be consideredone of the state-of-the-art businesses and we are moving and investing towardsthose ends.

Thank you. Our next question comes from Janet Kloppenburgwith JJK Research. Please state your question.

Good morning, everyone. Joan, I hate to beat this bonusquestion again, but just wondering if you would have experienced SG&Adeleverage if the bonus outlook had not been reduced. And Jim, if you could just talk a little bit about MARTIN +OSA and maybe point us to some parameters where we could feel more comfortablethat the brand’s performances were improving. And lastly, on the new concept, did you say that it would be-- that its loss would be negligible to earnings next year? Thank you.

Janet, with respect to the bonus, clearly our bonus model isset to -- we’re paid for performance and we had a 2% increase in overallexpenses, so when I spoke about the details of the expense, we had a 2%increase in expenses on a 7% increase in sales. What that means is that we hadvery well-controlled expenses across the board and we were able to react to thebusiness environment pretty much across every line item. They were virtuallyflat with the exception of marketing, which was a deliberate shift. Our expenses are very well-controlled and we’re very proudof the teams and how we are able to continue on that discipline.

We’ll get the Concept 4 question out of the way, Janet. TheConcept 4 will be minimal affect on earnings in 2008. As it relates to MARTIN + OSA, I’ll have Susan address someof the specifics on the merchandise categories but we are, from an operatingand also from a productivity improvement at MARTIN + OSA, we continue to makestrides. I believe that the cost and the build-out of the stores, we havereduced that dramatically in a dollar-per-square foot basis without sacrificingany of the aesthetics. I believe that our expenses are becoming much more inline as it relates to store payroll and also, we’re not adding headcount intoour headquarters operation. We think we have a good team there. They arewell-positioned. They are gaining experience every day and they are affectingsome major adjustments and some major changes in overall how we do business inMARTIN + OSA, from both an operating and from a merchandise and marketing pointof view. Susan, you may want to elaborate a little on some of theproduct improvements.

Sure. Hey there, Janet. If you come into the store forholiday, I think you’ll find that the merchandise is a very nice step forward,particularly in the women’s product where we really have talked aboutreinforcing femininity, outfitting, and the like and I think the men’s andwomen’s, it’s much better there today than it did a few months ago. But turning our eyes to the spring and summer collections iswhere we feel we made a very, very informed decision as it relates to therepositioning of some of the details of what this brand is all about; 28- to40-year old customer, a 34-year old target, which we again feel, and Imentioned in my comments earlier, is a very, very important opportunity andwhite space in the mall that exists out there today. And I think that you will find the spring and summercollections have moved along in a much more major way to satisfying 100% ofwhat MARTIN + OSA can be. And we’re very pleased about that and as Jim said, Icouldn’t be more proud of how that team has come together and they are reallyworking on bringing this brand to life.

Thank you. Our next question comes from Jennifer Black withJennifer Black & Associates. Please state your question. Jennifer Black -Jennifer Black & Associates: Good morning and I have a couple of questions. I wondered ifyou could talk about what percent of your business is accessories and what kindof opportunity you feel you have going forward. And then, you may have alreadyspoken about this but I wondered when you are going to roll out your portableregisters to all stores. And then, if we are going to see any changes in rawmaterial costs. Thank you.

All right. As it relates to the percent of accessories,depending on the time of year, it fluctuates but it’s right around that 15% ofthe business. And as it relates to the opportunity, I think that if you go outand look at our accessories today, we have some highlights and what I considerto be some low lights. We have a few markdowns in that business but the areas,there are some things doing quite well for holiday that you’ll see out there,regular price really generating a lot of gift-ability and lifestyle extensionaround the AE brand, which is what we’re really excited about that accessoriescan do. As we look forward to next spring and summer, particularlythat summer collection, boy it looks much, much better. It looks very strongbut what I will tell you is we need to continue to work on this assortmentbecause what we have to decide to be a destination category in accessories iswhat we want to own as a brand. And that’s what we’re working on. We’ve broughtin some new talent that has specific experience in the accessory world in bothdesign and merchandising, which we think is going to be a big help for us as wemove forward in an informed way, a much more informed way in this business.

As it relates to the point-of-sale rollout, naturally thistime of the year we’ll not roll out any additional terminals based on not todisrupt our stores during the holiday season. We will pick back up very aggressivelycome January of ’08 and we will roll out as many stores as we can throughoutthe 2008 period with blackout dates for back-to-school and holiday. I wouldanticipate that at least half of the chain, if not greater than, will have thenew point-of-sale systems installed by the end of 2008. And we were cautious in 2007 on our rollout mainly becausethis is new technology, this is state-of-the-art, this is web-based. Therearen’t too many systems that are out there that fall under that particular typeof technology so we wanted to make sure that as we are embarking on a whole newhorizon here that we move forward very cautiously but very expeditiously, andwe feel good now that we are in a good place and we’ll be fairly aggressive inrolling them out in the balance of the chain in 2008 and into 2009. Funny you should ask on raw materials because raw materialsas a category has really been top of mind with us in our overall strategic planfor production and sourcing and we are focusing in very laser like on theentire raw materials area. We feel that there are opportunities there for us tocontinue to be in that arena and gain some cost effectiveness by being in frontof some of the raw material issues, as well as Susan’s driving for more anddifferent types of fabrication that will be more interesting and will hopefullybe more enticing to our customer.

Thank you. Our next question comes from John Morris withWachovia. Please state your question. Mr. Morris, your line is open. Our nextquestion comes from Stephanie Wissink with Piper Jaffray. Please state yourquestion.

Good morning. This is Steph for Jeff Klinefelter. Just acouple of questions; Jim, for you first, if you could just talk about the productivitytrends in your Canadian stores and if you are seeing any sales shift out ofCanada into any U.S. metropolitan markets. And then secondly, what you are learning from MARTIN + OSAin the process, as well as Aerie, as you consider the rollout of Concept 4.Thanks.

Great questions. As far as Canada, Canada has and continuesto be very, very productive for us. We actually run a higher dollar per squarefoot in Canada than we do in the U.S. We are continuing to see that rate of growthin 2007 and we anticipate a very successful 2008. We have really gained in market share in Canada since weintroduced the brand there a number of years ago and we are very excited aboutour positioning there. We currently have about 75 stores. We’re going to beopening up a few Aerie stores up there. We opened our very first one up thereabout a month ago and it’s been very successful. So we see upside in Canada. As far as the Canadian spend here in the United States, verylittle -- very little. And it’s not like Canadians are flocking to the U.S. totake advantage of the weak dollar versus the Canadian dollar, so I anticipatemost of the shopping in Canada will probably be done in Canada. As it relates to MARTIN + OSA and Concept 4, the investmentsthat we are making, we have a very sound, definitive operating plan andfinancial plan for both of these enterprises and MARTIN + OSA is a businessthat’s up and running right now. It’s no longer a concept that’s a vision. Weknow what we have, we know where we want to go, and we are working diligentlytowards to achieve those ends. As Susan stated earlier, we feel that spring and summer of2008 will be a direct indicator as to the directional plan for M+O. Is it goingto be the end all, is it the final day of M+O in spring and summer? No, no --but we actually feel very strongly that it will be the first indication ofwhere this brand is going to be positioned with this 28- to 40-year oldconsumer and we feel really good about it. We have the benefit of having seenthe product and what it looks like and we’ve talked to enough people, whetherthey are external focus groups and even some people in our industry, and wefeel good about it. We don’t want to be overly confident but we are staying thecourse. As it relates to Concept 4, Concept 4 is being built toleverage to the maximum against the American Eagle brand and we feel that wecan take advantage of some of the initiatives that we have in place that willsupport the new Concept 4. But Concept 4 is not going to be some version of theAmerican Eagle. This is going to be unique and we feel it is going to bespecial and we are all very, very excited about it and I will be speaking to itvery early next year and be giving specifics and additional color, and I’mlooking forward to doing it.

Thank you. Our next question comes from John Morris withWachovia. Please state your question.

Good morning. Can you hear me?

Yeah, we hear you.

Okay. This is Eddie for John. Sorry about the mishapearlier. Susan, can you talk about your position in knits so far in Q4? I knowyou mentioned delivering improvements for the spring and summer season but as Irecall, I think there’s opportunity this year versus last year in sweaters.

Okay, I’m happy to talk about that. We actually had a verynice sweater year last year and we are up against those numbers. And I willtell you over the holiday weekend, again we were very pleased with how thewomen’s sweaters performed in terms of gift-ability and key item impact as youcame into the brand. As it relates to the positioning in knits, I think we aredoing fine now. I think there are some areas that have taken a very, very nicestep forward. What we are doing in the cami and tank business has been quitestrong in Q3 and moving into Q4. We in a lot of ways want to own the firstlayer for our girl and are moving along nicely toward that goal, and it’s beena nice volume plus. As it relates to the t-shirt side of the business, quitehonestly we see a ton of opportunity there as we move into spring and summerand I think that the way we balance, and this will be the AE brand way ofinterpreting knits, is a balanced assortment. We want to have their favoritekey item essentials -- that is the t-shirt that they grab for because they loveit the most, it’s the softest and it holds up the best to the test of time,along with great interpretive fashion for the brand and that is what I feel ourteam has done such a good job with on the spring and summer collections.

Okay, great. Thanks. Good luck for holiday.

We’ll take one more question.

Thank you. Our final question comes from Christine Chen withNeedham & Company. Please state your question. ChristineChen - Needham & Co. :

I’ll take that. First of all, when we open up an Aeriestandalone, what we do is we have a strategic presentation and assortmentadjustment that we do in the core AE brand. So the core AE brand stores will stillrepresent Aerie because we certainly like the synergy between American Eagleand Aerie, but it is an edited assortment and I will tell you that just aboutin every case when we open a standalone brand, the incrementality of Aerie isthere and the incrementality of both brands together is certainly there. So weare very pleased with our strategy and how it’s performing.

Okay, great. Thank you for listening and participating inthe call today. Please remember we’ll be announcing November sales nextWednesday, December 5th, and we look forward to talking to you again soon.Thank you.

Thank you. Ladies and gentlemen, this concludes today’steleconference. Thank you all for your participation. All parties maydisconnect now.