Welcome to the American Eagle Outfitters, Inc. fourth quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Judy Meehan, Vice President of Investor Relations. Thank you, Ms. Meehan, you may begin.

Good morning everyone. Joining me today are Jim O'Donnell, Chief Executive Officer and Joan Hilson, Executive Vice President, Chief Financial Officer. If you need a copy of our fourth quarter press release, it is available on our website, www.AE.com. Before we begin I need to remind everyone that during this conference call members of management may make certain forward-looking statements based upon information which represents the company's current expectations or beliefs. The results actually realized may differ materially from those expectations or beliefs based on risk factors included in our quarterly and annual reports filed with the SEC. Now I'll turn the call over to Jim.

Thanks Judy. Good morning everyone. The fourth quarter proved to be an extremely difficult conclusion to an already challenging year. We faced particular softness in our women’s business and a severe drop in consumer spending. The change in demand during the largest sales period of the year drove unplanned, reactive promotions. This put significant pressure on profit margins. As a result, our fourth quarter earnings per share declined 71% with a 16% comp store decline. While this performance was clearly not up to our standards we remained profitable and we completed the year in excellent financial condition. In 2008 we posted a 10.1% operating margin and generated net income of approximately $180 million. With continuing strong cash flow we ended the year with over $470 million in cash and liquid Treasury funds. As we look ahead we will protect earnings by: One, improving sales through stronger assortments across all brands with a clear priority in AE Women’s. Two, aligning inventories more closely with sales trends to reduce mark downs. Three, driving opportunities in sourcing and production to achieve IMU improvement. Four, we will continue to control SG&A expense. First let me address top line sales. Make no mistake; our first priority is delivering trend-right assortments with a strong value proposition in the AE brand, particularly in Women’s. It is absolutely imperative that we instill a dose of innovation to our product and do so quickly. Roger Markfield, as you know is here to challenge and reinvigorate the design, merchandising and trend teams while helping us to hone the AE brand vision overall. He has already begun to implement changes which will become evident as the year progresses. With Roger’s successful history combined with our experienced and talented design and merchant teams we will re-establish our competitive edge. The AE Women’s…

Thanks Jim. Overall fourth quarter sales and earnings were below plan. Fourth quarter EPS was $0.19, excluding the non-cash investment and store impairment charges. This compares to $0.66 per share last year. In response to weak demand we were highly promotional throughout most of November and December. In addition to product specific mark downs we offered a buy one-get one 50% off for most of the holiday season. We were successful in achieving our year-end inventory targets. However, the effect on our merchandise margin was severe causing a 71% earnings decline. Now let’s take a look at the quarter in detail. The 16% comp store sales decline was due to both weak traffic and conversion at the AE brand. Higher promotional activity drove an increase in units per transaction yet caused a lower average unit retail price. The gross margin decline was caused by lower merchandise margin which was [marked] along with IMU pressure. Within the gross margin we also de-leveraged rent primarily due to the comp decline. In early 2008 we began proactively reducing our cost structure with a number of expense initiatives which included the ongoing evaluation of open positions, the consolidation of our supply procurement and across the board budget reductions. These initiatives totaled savings of approximately $50 million and held SG&A growth to 3%. For the quarter SG&A declined $3 million, excluding an asset impairment charge of $6.7 million related to under performing stores. SG&A per square foot declined 11% over last year and was our most efficient rate since 2004. In the quarter we reported an additional other than temporary impairment charge of $3 million related to investment securities. Now turning to the balance sheet, inventory excluding the direct business decreased 8% at cost per foot at the end of the fourth quarter. Our average…

(Operator Instructions) The first question comes from the line of Janet Kloppenberg – JJK Research. Janet Kloppenberg – JJK Research: I am a little bit confused you said inventory was purchased in line with current trends. February comp trend was much better than it has been recently, minus 7% and the fourth quarter was down 15. Maybe you could give us some guidance there about what we should be thinking about? I know you said SG&A would be flat on a dollar basis. I’m wondering if you could talk a little bit about your leverage point there and if you are able to minimize the de-leverage on say a minus 10% comp?

The point on inventory is that when we initially bought inventory back in July of 2008 we were buying it at a trend that we saw that that time. The issue is that to deliver the minus 7 trend in February we had to get into some deeper promotions and mark down some of the inventory we purchased. The [back step] that we saw in February as Jim mentioned is that the denim selling was very strong and the response to the assortment was very good. The individual styles, particularly on the girl’s side, we saw a significant lift in the business. So we were able to get through that inventory in February and we will believe that we are on plan to achieve our targets. Janet Kloppenberg – JJK Research: Did you buy inventory down 7% or did you buy it down at something higher? That is the question.

We bought it down something less. Janet Kloppenberg – JJK Research: Something less than down 7?

Yes. Janet Kloppenberg – JJK Research: I’m confused but we’ll do it offline. On the denim sale if you could comment I know you saw improvement in the business but you did run a pretty significant promotion. How do we evaluate whether or not the denim business is actually improving on the women’s side? James O’Donnell: As I stated we were pleased with the response to our denim sales. Sales were driven by a very strong promotion called Jeans under 30. It is the way the jeans sold and what styles sold that we were very pleased with. Really there wasn’t one style in the entire assortment that was weak. It is the first time that women’s denim had comped in 18 months so even though it was promoted if you don’t have the correct jeans it doesn’t matter what price you have the jeans at. It wouldn’t sell. So both men’s and women’s jeans comped in the February time period and it is a strong connect point for us with our consumer. It drove some other business as I mentioned in accessories and some of the women’s knit tops. One month doesn’t make a year and we will watch and see but we are off promotion now and we still see our denim business, both men’s and women’s, to be good. I wouldn’t say it is great but it is good. For the first time we don’t have a jean or two that are just not working. I think right now we are in a very good place and we have to learn from this. I think as we make some modifications going into back to school we are going to be even stronger. Right now we have all the silhouettes that this young man and young woman want.

With respect to your SG&A question, I stated I would expect SG&A for 2009 to be flat. In terms of deeper cost reductions we expect to be able to talk more about that for the back half of the year to drive that number down. What we stated previously in previous conversations and presentations is that we expect to leverage our SG&A costs more towards down low single digit negative comps. We believe that is where we can work ahead. Janet Kloppenberg – JJK Research: On a quarterly basis should we be planning the dollars flat?

We expect to see that for the first half of the year. Yes that is true.

The next question comes from Jeff VanSinderen - B. Riley & Company, Inc. Jeff VanSinderen - B. Riley & Company, Inc.: Just a follow-up to Janet’s question. I know you made some recent changes in the girls merchandise content and parts of that are starting to look better but I think the consolidated comp was still down pretty significantly in February despite the promotions in denim. I am wondering what you think it will take for the girl’s comp to improve on a consolidated basis? What timeframe we should be thinking about and just maybe you can talk a little bit more about your latest initiatives and plans to get the girl’s business turned around since Roger returned?

With respect to the women’s performance in February we were very pleased, as we said, with the denim. We were able to continue to drive denim. We have a new assortment landing in the back to school timeframe. We feel very good about the washes, the fits and the style in that assortment for the girl. We are introducing new fashion in the tops business as we proceed through the spring season but also feel much better about tops for the back to school floor set as well. In the store what you will see is a more frequent black fashion flow of tops. Attached with that is a value offering that we believe we didn’t have previously. We also focused on dresses which have had a very strong response for our girl’s which really speaks to the fashion trend and relevance of the women’s business and we believe that we really positioned and targeted that category and feel that is an opportunity in spring as well. Accessories also, particularly jewelry, is an area that we have seen a strong response from our girls and we continue to grow that category as we move through fiscal 2009.

The next question comes from Jennifer Black – Jennifer Black and Assoc. Jennifer Black – Jennifer Black and Assoc. : Just a follow-up to Jeff’s question on dresses, I wonder if we could see the same amount of depth for back to school? I mean the dresses look fantastic. Then I have one other question. James O’Donnell: I’ll put the merchant hat on. We made a major commitment as you could tell in dresses. We went from approximately six to eight customer choices to over 40 customer choices for spring of 2009. It proved to be a very good decision and the results have been very gratifying. As we move forward dresses will continue to play an important role but there is also some trend information that is leading us into other categories that will complement dresses that I would rather not elaborate on right now but one thing I failed to mention and I think it is important for everyone to hear, is that even prior to Roger connecting with us we made major investments in out trend teams with heavy emphasis on identifying new styles that are marketable especially for women relevant. That is what we are seeing now. Dresses, by the way, the print dresses are one of the indicators that came from the trend teams’ call out. Even on the solids but some of the silhouettes that are in the current assortment initially weren’t in it so we really developed some new trend information. We are continuing along those lines especially for women’s with very heavy emphasis on identifying trends, nuances and product, the big challenge I put out for the design and merchant teams which Roger is leading is that is to differentiate ourselves away from the competition. We need to be different and be…

The next question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co. Adrienne Tennant - Friedman, Billings, Ramsey & Co.: Could you talk about the IMU? You said there was some cost pressure last year. What was that due to? When you said we should start to see IMU improve do you mean stabilize in the second quarter or actually the cost pressure will be alleviated? Then I have a follow-up. James O’Donnell: First of all on IMU pressure of last year much of that revolved around raw materials. Price of cotton was up. We also incurred additional expense in transportation due to fuel surcharges. The fuel surcharges have been eliminated. The competitive cost of raw material is much more competitive now. Also it is our repositioning in our factor base that is going to be an enabler for us to improve, not stabilize, but improve our overall IMU’s. You won’t see that probably until the second half of the year because we started making these improvements in the fourth quarter of 2008 and they will take hold from back to school through the balance of the year. We are taking key categories whether it is denim, whether it is knits and we are negotiating some favorable costs from our suppliers and we should have higher IMU’s and hopefully we can pass some of it on to our consumers with some quality value pricing. Adrienne Tennant - Friedman, Billings, Ramsey & Co.: Will your price points remain relatively the same or are you going to give half of it back to consumers? James O’Donnell: Price points will remain the same but you will see it probably more in what Joan mentioned in these targeted promotions we are going to run which will be very competitive but we will be able to mitigate our profit erosion encountered in 2008. Adrienne Tennant - Friedman, Billings, Ramsey & Co.: On the merchandise margin are you willing to actually give us the rate for the fourth quarter and the year just so we have a point of reference to go forward?

We don’t typically do that. Largely the drop in the fourth quarter merch margin was related to mark downs. Adrienne Tennant - Friedman, Billings, Ramsey & Co.: On EPS impact of Aerie and Martin + OSA full year? James O’Donnell: Let me answer this in two parts. First of all up through September of 2008 we had established a benchmark for Martin + OSA to produce on a rolling 12 month, $340-350 a square foot. That was the target we had assigned to the brand and which we felt that if we moved towards reaching that objective we would be headed in the right direction. Through September we were on trend. From October on we experienced tremendous difficult and profit erosion in Martin + OSA, most of it due to promotions and liquidations of inventory. That is where some of the 30% comp came from. So in order to answer your question we originally had it targeted around $0.15 and it came in at $0.21 loss. Adrienne Tennant - Friedman, Billings, Ramsey & Co.: For Aerie?

Aerie as a brand, which is the way we manage Aerie, is accretive. We don’t disclose the EPS related to Aerie specifically but Aerie as a brand is accretive.

The next question comes from Jeff Black - Barclays Capital.

Following on that question on Aerie, what is your assessment of this? We built it out really fast over the past couple of years but how are sales per square foot trending versus where you want them to be? What about margins versus the chain and any color on four wall profit you could give us would be helpful. James O’Donnell: On the stand alones, I assume that is what we want to address, we will have approximately 132 by year’s end. From all indications we have, how we closed this past year and early trends we are moving in a very positive direction both in top line sales as well as conversion into bottom line profitability. We expect the stand alone stores to reduce the losses dramatically from 2008 and we should have a major contribution to the overall corporation EPS. We are pleased. I think we are on to a brand that has a strong connection with the consumer. All of our feedback we have gotten from our customers either informally or formally has all been very, very positive. Really we limit ourselves by a narrower assortment than we would like to have had. We are now taking and building on this assortment so there will be more of a selection for this young lady to choose from and there will also be more newness coming in more often. I prefer not to talk about the margin at this particular point because it is still evolving. Right now we expect to have a major improvement both in top line and bottom line sales.

In Martin + OSA you are moving ahead with this what looks like five figure losses. I mean when do we draw the line on that? James O’Donnell: Martin + OSA has a very definitive, very realistic goal for loss reduction in 2009. Failure to meet that objective which I will be monitoring very closely throughout this year I would say we should have a clear view by third quarter of 2009 and if dramatic improvement doesn’t take place at that time then I’ll have to make a decision.

The next question comes from Michelle Clark – Morgan Stanley. Michelle Clark – Morgan Stanley: The Martin + OSA EPS impact you expected for 2009? Second question I was wondering if you can update us on sales trends thus far in March? Has the February momentum continued? Lastly, if you could discuss rents. You de-levered on rent expense in Q4. Any opportunity to take that down and lever that in 2009?

The first question with M and O for 2009 as Jim said we are expecting major reduction in the losses for M and O in 2009. At this point given it is so early in the year we are not going to comment on a specific EPS target. With respect to the sales trends in March we are going to hold comment on that at this time as well. Here is why. We just came off a very strong promotion related to denim. We only really have a full week under our belt. We have moved to a new promotion so we will hold comment on that. Also, keep in mind as I am sure you are aware the shift of Easter from March to April also affects the March trends so we actually prefer to think of our business as a combination of those two months which is the most reflective of a trend. With respect to rent in 2009 as we look forward we really see that we need a minimum of a mid single digit comp to leverage our rent. So given the comments that we have made forecasting a negative comp trend at this time I would not expect to see rent leverage in 2009. Michelle Clark – Morgan Stanley: Is there an opportunity to reduce your rent expense? Are you renegotiating with the landlords? James O’Donnell: You don’t renegotiate. Once you have a binding agreement you have to stick to that agreement. What we are doing as we have done on an ongoing basis as our renewals come up normally our rent period is 10 years and average anywhere between 25-40 renewals a year based on our calendar and how we opened up new stores throughout a given period of time. We have always negotiated very competitive rents. Are we negotiating harder than we did in the past? I don’t know what harder means but yes I think the deals we have been negotiating on for 2009 on our renewal and remodeled stores are very, very competitive. The few new stores that we are opening we have 100% of those stores have some sort of an allowance either in rent abatement or tenant allowance and they are rather substantial. So we are getting it from two sides from both the allowance side and also we are getting more competitive dollar per square foot rates. I would expect that to continue.

The next question comes from Christine Chen - Needham & Company, LLC. Christine Chen - Needham & Company, LLC: I wanted to ask if you could help us quantify the impact of the shift of Easter out of March into April and how the shift is affecting the timing of your floor sets and planned promotions. I’m wondering if your guidance for Q1 assumes the continuation of February same store sales trends.

The shift of Easter from March to April we have been commenting that is roughly 500 basis points shift. The thing to remember when you think about that is the April month is a smaller month than March so it doesn’t necessarily translate comp for comp if you will. As we think about the Q1 guidance we gave keep in mind February, and this speaks a little bit to Janet’s earlier question, February was about a very strong denim promotion and grabbing market share. It was a denim assortment we are very proud of at an under $30 price point. So that in large part drove a big piece of that comp although we see trends improving overall. So I would not assume that a minus 7 comp for March and April is what is our thinking for the quarter guidance. Christine Chen - Needham & Company, LLC: And the timing of floor sets and planned promotions as a result of Easter?

We are very pleased actually with the timing of Easter. It really speaks to the strength of our assortment in terms of shorts and our offering of dresses that Jim spoke to earlier. So we think that is positive. James O’Donnell: One of the things we are doing is besides our traditional floor set cadence we are following more newness ongoing so every two weeks we have new product flowing into our stores. So combined with the cadence of our traditional floor set calendar we have added a new wrinkle and a new element there that is early signs that are very positive. I think the floor set cadence is important but this newness and ability to have new product deemed to be more versatile is really a key element to we think driving our top line and hopefully translates to bottom line profitability.

The next question comes from Michelle Tan – Goldman Sachs. Michelle Tan – Goldman Sachs: On the depreciation why was it up so much in the fourth quarter? Another one on the auction rate securities, any further color on kind of timeline for the chunk that you still have outstanding? The last is on product. On the denim promotion it seemed like you really struck a nice chord by running that event at a time when maybe other people weren’t quite as focused on that particular category. Is that more of a strategy going forward as well or was that a unique opportunity in denim?

I will start with the depreciation. That is really about timing and as it relates to our DC’s, the timing of our new store openings and essentially that is the lion’s share of it. As we look forward to 2009 we would expect depreciation to increase roughly 5-10% as a way to think about that. That will move a little bit based on the timing of when stores actually open and so forth. With respect to auction rate securities, we have seen some small clearing in the fourth quarter and as you can see in our release we have written down primarily our investment security type holdings which are preferred shares and we have marked those to market essentially. In terms of timing we don’t have any further information at this time as to when things will actually clear but we feel very good about the fact that we ended the year with $470 million in liquid cash and feel that we are in a strong financial position and in good health with respect to our cash position. James O’Donnell: As it relates to your denim question, the timing was two fold. One is that we wanted to take a category we felt very good about and get it out there with the promotional incentive to see what the consumer response would be. What would come from that is number one we would naturally be able to gauge selling but also even now react to some of what we know to be the likes of the consumer as we look at our purchases for our back to school which are very critical to that season. This whole strategy that we have not just with denim but with key categories that are central to the American Eagle brand is a strategy that we are going to pursue throughout the year. The timing is very proprietary. I can only tell you we will have these promotions out there that are going to be very timely. It is when the young person wants to not only buy it but want to wear it. So it will be very time sensitive but also it is very product sensitive and price sensitive. Michelle Tan – Goldman Sachs: Just to clarify, the D&A increase is that separate from the SG&A being flat?

Yes.

The next question comes from Paul Lejuez - Credit Suisse.

Can you share with us the number of American Eagle stores you have located in A, B and C centers and how should we think about sales productivity levels in each? I’m wondering where in 2008 did you see the largest decreases? In the A, B or C? James O’Donnell: Right now we have the percentage of B’s outweigh the other two categories but between the B’s and the A’s they are very close. It is C’s we have very, very few. The most productive in dollars per square foot are A’s and naturally the C’s are the least productive. From a profitability the B’s are the most profitable.

What is the gap on the productivity though between A’s and B’s or B’s and C’s? James O’Donnell: The B’s are the most productive from a profitability standpoint. The A’s, as you can well imagine the rents run a little bit higher and that is the delta between the two.

I mean the sales productivity though, the gap between them? James O’Donnell: On dollars per square foot?

Yes. James O’Donnell: They are not that great. They are pretty close.

Yes they are pretty close and to Jim’s point very few C’s and under 10% of our chain is in C malls. The B’s run closer to 50% and the A’s are just shy of that. So it is a very strong, the types of malls we are in and the productivity gap isn’t that wide. However, the B’s in terms of the economic equation with rent actually drive higher profitability.

Where did you see the big fall off in 2008? Did you see a larger fall off in the A centers? James O’Donnell: No, it was pretty consistent across the board unfortunately.

The next question comes from Kimberly Greenberger – Citigroup.

I wanted to know if you could talk about Roger’s impact on design and merchandising? When do you expect to have his impact on the merchandising effort reflected in the assortment in store? I presume it will take a little longer to have his impact reflected in the design effort. But if you could just give us some idea on timing. Secondarily, if you could help quantify some of the transaction metrics you cited earlier Joan, the decline in AUR for example, the increase in UPT, etc.? That would be helpful. James O’Donnell: On Roger, Roger has been and continues to work on back to school which we pretty much put to bed and he was very much involved in the overall back to school assortment you will see launched in July. His input will be seen then and naturally for holiday and going forward. He has questioned and we have made some small tweaks but nothing really significant for summer but some of the call outs he has where we have been able to implement we have. The Roger Markfield [infor mater] will be starting with back to school.

To the quantification of some of the metrics our AUR was down low doubles. Our UPT’s were up low double and the way to think about that is the transactions essentially, the drop in transaction is what essentially drove the comp decline.

The next question comes from Stacey Pack – SP Research. Stacey Pack – SP Research: First of all did you buy the denim for the under $30 promotion so you could make the same margin you had been during good times or will you be able to do that with the improvement you expect in sourcing in the back half? Can you comment on your experience or your success you have seen with the most recent email campaigns across the businesses? Third, you said you see things improving overall. You were commenting about denim, etc. Can you just comment on exactly what categories comped positively in February? James O’Donnell: In regard to denim pricing, when we decided to run the under $30 promotion we bought the inventory with that in mind, that we were going to have a major promotion in all jeans under $30. The cost thing, we did have some cost benefits. Not as dramatic as the cost benefits we hope to see for back to school and holiday. So we had slight margin improvements over how we promoted it from a year ago in 2008 but they are not to the level where I feel they should be which will be in the back half of the year. They were purchased with the promotion in mind and we were able to mitigate some of the erosion and maintain margin.

With respect to the email campaigns, there are a couple of things we have done. One is our loyalty program which is our AE All Access Pass and that continues to be a very successful campaign for us and very profitable. Some of the other promotions, and this is what I was speaking to in my prepared remarks, are things that we are evaluating in terms of profitability and in conjunction with the strong value promotion we have in the store. So we would seek to eliminate some of those less profitable campaigns and leverage the store promotion to really drive the top line and profitability for the business. Your question, I believe, was I believe what positively comped in February other than denim. What I would tell you is that in the men’s business we saw a very strong comp in our knits as well as in women’s and outwear for men. In women’s we saw clearly skirts, dresses and our accessory business to be very strong for us. We feel that is a good turn in trends during the month of February. Stacey Pack – SP Research: So dresses and accessories also comped positive?

That is correct.

The final question comes from Richard Jaffe - Stifel Nicolaus & Company, Inc. Richard Jaffe - Stifel Nicolaus & Company, Inc. : I guess looking forward the real estate discussion has been in depth but I’m wondering how you see the portfolio sourced today and how much larger they can be. Are you thinking of Aerie as a different concept, more of a say side by side store or free standing, and longer term how much bigger can Aerie and American Eagle be? James O’Donnell: We have a very strong portfolio and we continue to evaluate it. I would say that as far as the American Eagle brand there are very few new store opportunities in North America for American Eagle. I think what we would be seeing now is any new stores would probably be offset by store closings in certain markets. We are looking at the American Eagle brand portfolio as it relates to where our stores are positioned. Where is our market strength? We will continue to maintain that and if we have had some market erosion for whatever reason like a change in demographic, change in economic conditions and so forth we have to take a look at it and say how many locations do we really want to have in those particular markets. There will still be some new opportunities that will arise, probably more in a lifestyle type of environment. I don’t see a tremendous amount of new store net growth in the American Eagle brand in North America. As it relates to Aerie though Aerie right now is positioned not to be side by side but to be stand alone. They are going to run in the range of 4,000 to 4,500 square feet. We think that is the optimal size for the…

Thanks everyone for joining us today. Our next announcement will be March sales on Thursday, April 9. Have a great day.

Ladies and gentlemen this concludes today’s teleconference. All parties may disconnect now. Thank you.