At this time I would like to welcome everyone to the American Eagle Outfitters' fourth quarter earnings call. (Operator Instructions) I will now turn the call over to Ms. Judy Meehan. Please go ahead, ma'am. Judy Meehan: Thank you, Dennis. Good morning, everybody. Thank you for joining us today. With me from management are Jim O'Donnell, Chief Executive Officer; Susan McGalla, President and Chief Merchandising Officer; and Joan Hilson, Executive Vice President, Chief Financial Officer, AE Brand. If you need a copy of our fourth quarter press release it is available on our website, AE.com, or you can call Aaron at 724-779-6076. Before we begin, I need to remind everyone that during this conference call, members of management will make certain forward-looking statements based upon information which represents the company's current expectations or beliefs. 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 would like to introduce our CEO, Jim O'Donnell. Jim O’Donnell: Thank you Judy. Good morning and thank you all for joining us. For American Eagle Outfitters, 2006 was a remarkable year. It was a year in which the core functions of our business worked together at a new level. But more importantly it, showed us a glimpse of what our company has yet to achieve. In 2006, we increased profitability and drove higher margins, at the same time we invested in growth; growth within our core brand, as well as the launch of aerie and MARTIN + OSA. The fourth quarter marked our 12th consecutive quarter of record sales and earnings, with earnings rising per share 40% to $0.66. For the fiscal year 2006, EPS grew 35% to $1.70 and we achieved a record operating margin of 21%.…

Your first question will come from Dana Cohen - Banc of America Securities. Dana Cohen - Banc of America Securities: Congratulations on a great year. Can you talk a little bit more about what you are seeing in the profitability and the metrics of the aerie standalones, and just remind me how many there are? At the base business, obviously operating margins are tremendous. Where do they go from here? Where do you see the opportunity in sort of gross margin SG&A? Joan Hilson: Dana, I will take the second one first and then Susan will address the aerie question that you have. As you noted, we are very pleased with our performance in 2006. Yes, we did have very strong operating margins, but as Jim noted and Susan as well, we do have opportunity. We didn't do everything right in 2006, so we see that we have opportunity on the top line. We are committed to continued growth in IMU, and positioning our markdowns at a realistic level so that we can continue to make fashion right investments in our inventory. As I mentioned we have several SG&A initiatives that are on deck for '07. We have opportunities in supply procurement as well as evaluating our store payroll model and our management complement within our stores. As I noted, we are committed to that 15%, a minimum of 15% EPS growth. Dana Cohen - Banc of America Securities: What would you need in terms of comp to lever for the year? Joan Hilson: We look at the margin and we deliver that minimum EPS, and we don't really comment at the top line in terms of the comp performance. Dana Cohen - Banc of America Securities: No. I meant the leverage points. Where do you get leverage? Joan Hilson:…

Your next question comes from Kimberly Greenberger - Citigroup. Kimberly Greenberger - Citigroup: Good morning. Joan, I was hoping you could talk to us a little bit about the gross margin rate, a nice improvement from last year. In the first three quarters of '06, you were meeting or beating your prior peak gross margins and in the fourth quarter, it looks like you are about 140 basis points off from your prior peak gross margins. Maybe you could give us some color on what the drags were in gross margin. Secondarily with inventory per square foot here up 13%, and you guys expecting it to remain in the low teens, I would imagine you are probably not planning comps at that level. Do you think it's prudent to run inventory levels above where your sales plans are? Thanks. Joan Hilson: Thanks for the questions, Kimberly. With respect to the gross margin in the fourth quarter, we are very pleased with the performance that we had, a 160 basis point improvement. We were very pleased with the sell-throughs in the assortments. As we look through our opportunities for next year, Susan spoke to those in her prepared remarks, so we know that we have some opportunity there. What I will tell you in terms of the combination of our businesses between MARTIN + OSA and the AE Brand, there was some drag related to the MARTIN + OSA, and Jim spoke to some of the opportunities in the assortment there. With respect to our inventory position, we are investing in aerie, and as Susan mentioned in her comments, the launch of the aerie bra, the new bra that was introduced in March. So we are prepared for inventory investments for the bra, and your expanded dorm-wear collection. We are very comfortable with the inventory, it's balanced, it is focused in key categories, and very targeted. Kimberly Greenberger - Citigroup: Thank you.

Your next question comes from the line of Bob Buchanan - A.G. Edwards. Bob Buchanan - A.G. Edwards: On some of this technology, the demand forecasting, is that operative now, Joan, at this point in time? In terms of the size profile, Jim, that you mentioned, are you actually doing much now in the way of tailoring assortments by store based on demographic traits? Joan Hilson: With respect to the demand forecasting, Bob, it is an initiative for 2007 that we will be implementing towards the back end of the year, so installation will occur in '07 with really the impact of that in 2008. Jim O’Donnell: Question on the size profiling. The answer to your question in the brief is yes. We actually have for the very first time been able to affect the size ranges by metropolitan market, so and by doing so naturally we have affected to buy accordingly. In the past to identify certain markets and we weren't really equipped to do very much about it, because the buy was not effective. But now we have affected our buy, Susan has been a champion with this with our planning people, so that we are now distributing product out across the United States based on a particular profile by market. Bob Buchanan - A.G. Edwards: That is great. In terms of the graphic T program in women's, any greater people focus, geographical focus, just trying to scour the earth for influences on graphic T-s, as I believe you try to improve that part of the assortment? Susan McGalla: On the graphic T-s there are a couple of situations, what is self-inflicted, and what is happening out there across our space. The graphic T, the overall trend is not with the graphic T business right now. I am going to start there. Across all divisions, really, while it is a big business for us, it wouldn't tell you it's an uptrending business right now. Particularly in women's, which I think is what you are calling out, we have some specific and significant changes that we have made with talent so that our voice coming through these graphic T-s in women's is a little crisper, a little more meaningful, and a little more tied to the brand, and those changes have been made internally. I think you will be seeing in the back half of this year improvements in that business, but I will caution that trend is not with it right now. Bob Buchanan - A.G. Edwards: Thanks a lot.

Your next question comes from John Morris - Wachovia. John Morris - Wachovia Securities: Can you elaborate a little more on your comment about the knits business overall, in terms of why it hasn't been strong? Is that just trend, or is there something more to it? And then maybe help us understand what specific steps you can take or are taking to improve that business, and when we might begin to see those results? Similarly a couple comments along those same lines for the accessories category. Thanks. Susan McGalla: Okay. I would be happy to talk about both of those. They are a passion of ours right now. First of all the knits business, and I want to qualify, because the men's knit business is extremely strong, and absolutely has been a growth driver over the last year, and is continuing in to this year. The knits weakness that I point out -- and I qualify weakness because it's a very big business for us and a profitable one -- but we don't rest unless we are leading in our space. When we put ourselves out there with a destination category that the market share driver, part of the foundation of what we feel that our brand is all about, and we feel women's knits is one of those categories. So while it's big, while it performs at a very decent level in profitability. I am not happy, the teams are not happy with our consistency there. I don't believe that is trends driven, I think that's internal driven. We are running a little bit behind there, and we're not running, you know, as targeted on assortment, collection by collection as we should be. We have made significant changes in merchandising. We have a new GMM lead on our knit part of our merchandising, and we also have a new design director coming in who started actually yesterday for the knit categories. I just think as we have grown this brand, we needed to increase focus in that big of a category for people that were living, eating, and breathing and thinking about women's knits all day long. We have put those resources to that business. I feel really, really positive. If you come in and look right now, I tell you I'm pretty proud of what you see in our Spring 2 collection in knits. Accessories, I think the best way I can describe accessories to you is we want to be to our customer in accessories what we are for them in sportswear. I think that really sums it up for you. I think that we very proud of our initiatives and where we stand in their eyes as a destination in sportswear, and I think accessories has run room. It's such a great lifestyle extension for our brand, and we will also be putting resources, and have put resources to make that happen.

Your next question comes from Jennifer Black - Jennifer Black and Associates. Jennifer Black - Jennifer Black and Associates: Good morning, and let me add my congratulations. I have a few questions. I wonder, first of all, if you could talk about what you think your realistic operating margin goals are over the next five years? Joan Hilson: I will address that, Jennifer. As I mentioned, we are committed to driving that 15% minimum EPS growth, and we are also committed to driving margin improvement through store scenes, through realistic views of markdowns, and again, really focusing on the SG&A expense, driving initiatives there that continue to allow us to invest and grow top lines, and as well as gain efficiencies within our operating expenses. Jennifer Black - Jennifer Black and Associates: So you are not going to really answer it, but I understand. I wanted to know, have you made any enhancements to your AE loyalty program? That is my second question. Susan McGalla: We are about a year in to our AE All-Access program, and I would tell you that we are really pleased with the results and the initial objectives of that, the number one thing is we wanted to develop a relationship with our customers directly. Because the way we were doing it before with all of the couponing and really the names we had on our list to communicate with them were really the parents; we were interested in them, but we want to communicate with the kids directly. Our AE All-Access program, 80% of our list are below 25 years old. Very, very important progress that we have made in that arena. The second part of it is obviously as I mentioned, the couponing is getting away from the non-loyal type of couponing part…

Your next question come from the line of Liz Dunn - Thomas Weisel Partners. Liz Dunn - Thomas Weisel Partners: Hi, good morning. Let me add my congratulations. Can you update us on geographic markdowns? I believe on the last conference call you discussed your ability to do that going forward. How is that going? In terms of product tiering are there further opportunities, or do you think we have kind of maximized what we can see, in terms of kind of a good, better, best strategy? Also I'm sorry if I missed it, but how much do you expect MARTIN + OSA to lose in 2007? Thank you. Joan Hilson: With respect to our markdown optimization and our geographic markdowns that is something that as we drive forward in 2007, we are in implementing and improving, enhancing is really the way to think about it, our zone management of markdowns, so it is an enhancement for 2007 for us. With respect to MARTIN + OSA for 2007, we see that in a range of $0.15 to $0.17. Susan McGalla: Liz, to answer your question on product tiering. I actually really like how you said it, because you said it very correctly. You said product tiering. It is not price tiering, it's product tiering. Because as we approach a version of I know what you guys like to call good/better/best, for us it's not good/better/best in price, it is good/better/best in product, because a value equation is paramount for the soul of our brand. It resonates with our customer. What we have done is in a very targeted way on our destination businesses, allowed ourselves to product tier to gain market share and let the designers move in and offer greater innovation in to key categories. So we do see improvement, that can still be gained from that over the next couple of years. We like what it has done to our business. I would tell you with our modest AUR growth that we had last year, I think there is certainly more opportunity there, without becoming in any way shape or form expensive to our customer, we are very excited to pursue and further development that part of our initiative. Liz Dunn - Thomas Weisel Partners: Great. Congratulations again, and good luck.

Your next question comes from the line of Janet Kloppenburg - JJK Research. Janet Kloppenburg - JJK Research: A couple of questions, Susan, if you could comment, just elaborate, perhaps, on your knit comments, the women's knits, how you feel about the assortments this spring? Are they where you want them to be? Do you see them driving comps in this spring season? Secondly for Joan or for Susan, I was wondering with I believe a strong knit business, but of course it's contingent on Susan's answer, and the greater influence of aerie and the mix this year that there could be some opportunity for gross margin expansion, if you could comment on that. I wanted Joan to reiterate, is the loss expectation from MARTIN + OSA larger this year than last? Lastly, if you are looking for at least 15% earnings growth, I was wondering why you came in at that $0.31 number, which is well below 15% earnings growth for the first quarter? Thanks very much. Susan McGalla: Wow, we have a list from you Janet. I will kick this one off with the knits. First of all I would tell you that we are pretty proud when you walk in to our Spring 2 floor set. I think we have a very nice knit assortment, and it is performing well. I will tell I think our edit back in to Spring 1 was not it's best. When we looked at the knit business for February, while we have some decent items in there, the full expression of the assortment was not as well edited for February as what we looked like right now for our full on spring break floor set. Janet Kloppenburg - JJK Research: So you feel that the knits are going to accelerate, the…

Your next question comes from the line of Holly Guthrie - Janney Montgomery Scott. Holly Guthrie - Janney Montgomery Scott: There were a couple of items last spring you were understocked in. I thought shorts was one of them, I was wondering if you feel given the current inventory position, competition is make up for some of those opportunities that you missed last year. My other question was regarding store payroll at aerie. How will that play out for the year? Will store payroll continue to be higher as you roll out aerie? Do you annualize that? Or could we expect something before, you know, perhaps the second half of this year? Susan McGalla: Okay. Holly, I will start with the position in shorts. We are pleased with where the trend is taking us in both men's and women's shorts. The one thing we really like about what is happening with trend is there is newness happening this year. So what is driving the short business this year and what drove it last year actually are different, and we have moved appropriately with those changes in what the brand is offering to our girls and guys. So we are pleased with that. As it relates to an understock position and opportunity versus a year ago, I will tell you the shorts in both men's and women's are growth businesses for us this year. We are pleased with early indications that that will come to fruition. I would tell you also that February was a crazy cold month, so I would tell you that we are pleased with where our inventory sits and we think we are going to be in good shape for the quarter. Joan Hilson: With respect to the store payroll for aerie, it is an investment and it is a commitment to the sub-brand. As we move forward in '07, we will continue to evaluate and finetune the payroll model that relates to aerie, but we are committed to looking at our store payroll matrix for the over AE brand, and funding the aerie investment and continuing to leverage store payroll in the first half. Holly Guthrie - Janney Montgomery Scott: Thank you.

Your next question comes from the line of Paul Lejuez - Credit Suisse. Paul Lejuez - Credit Suisse: Just a question on aerie, you said 350 plus by 2012, implies like 70 a year after this year. How should we think about how that ramps over the next few years? What happens to the aerie assortment in the existing American Eagle store in the same mall when a standalone comes? Susan McGalla: That is the million dollar question that you just asked, about what do we do with aerie within our existing stores? We are looking at a lot of different scenarios and you guy know us well, we are very calculated and we like to learn before we move in and make a final call on that and we will be doing that, because I don't think you will see any aerie being pulled out of American Eagle stores within the next two years. But the question is when we ramp-up and start to get a larger amount of stores, we will be looking at some different scenarios of what versions of pulling that out, letting that sub-brand become really a master brand of its own, we are going to be looking at all different ramifications of that. So I can just tell you it's a very good question, one that we are deep in to, and we will be talking to you more about as this brand grows. Jim O’Donnell: On store growth, we set a target of the 350 plus as I mentioned in my comments. You know, is it feasible to do 70 a year in the United States and Canada? The answer is yes, primarily due to the size of the store. We are looking at 3,000 to 3,500 square feet. Those types of stores…

Your next question comes from the line of Rob Wilson - Tiburon Research Group. Rob Wilson - Tiburon Research Group: Could you remind us, are your store remodels when you increase the square footage are they included in your same-store sales calculation? Jim O’Donnell: The answer is no. If they are over 25%, they are not included. It gets included in the 13th month of operation. Rob Wilson - Tiburon Research Group: Okay. Are most of the year remodels greater than 25%? Jim O’Donnell: The answer is yes. In fact we do very few remodels, this past year we did 65 remodels. We probably did 62 of them, where north of 25% increase in square footage. Rob Wilson - Tiburon Research Group: About six months ago you were talking about CapEx this year in '07 being roughly $130 million to $160 million. Now you are talking $240 million, can you help us understand why the change in the last six months? Joan Hilson: Our CapEx view includes where we are today, about half of that relates to stores and it includes aerie, it includes Martin + OSA, and the other half of it relates to our infrastructure projects, the point of sale that Jim mentioned, the completion of our Kansas City distribution center, our headquarters project, so it really relates to the increase in the infrastructure, as well as the increase in the stores. Rob Wilson - Tiburon Research Group: That thinking changed in the last six months? Joan Hilson: Definitely as Jim spoke, that our test of aerie of stores, the three stores that we have there out there, and the incremental stores related to aerie certainly changed in the last six months, as well as some of the increases related to the IT projects we spoke about. So yes. Rob Wilson - Tiburon Research Group: One final question. I think last quarter you told us that if you got a low double-digit comp in Q4 that you could leverage SG&A. How come you didn't leverage SG&A in Q4? Thanks. Joan Hilson: What I mentioned in my prepared remarks is that we had incentive compensation that was incremental to the fourth quarter. It related both to bonus as well as stock options, and we had incremental expenses related to MARTIN + OSA.

Thank you. Your next question comes from Lorraine Maikis - Merrill Lynch. Analyst for Lorraine Maikis - Merrill Lynch: Can you guys talk a little bit about what you expect free cash flow to be, and how you expect to use the cash? Also just how much of your 15% earnings growth target is related to stock repurchases? Thanks. Joan Hilson: I will take that. The free cash flow question, we have just announced that we have authorized a $7 million share repurchase program, and continue with our dividend program, so that is truly a use of cash that we believe returns value to the shareholder. As well as a priority as well we are investing in our growth concept. So we have talked about aerie, we have talked about MARTIN + OSA, and we remain flexible to continue to invest in opportunities for American Eagle Inc. Analyst for Lorraine Maikis - Merrill Lynch: Yes, just how much is related to stock repurchases on the EPS growth? Joan Hilson: The philosophy that we have on our stock repurchase program is we offset a dilution related to stock option exercise. So in fact the 15% EPS growth is neutral. Analyst for Lorraine Maikis - Merrill Lynch: Thanks. Judy Meehan: Dennis, we will take one more question.

Your final question will come from David Glick - Buckingham Research Group. David Glick - Buckingham Research: Can you update us on the status and timing of concept 3. That is not something you mentioned today. Joan, if you could follow up on the stock repurchase. If you could just give us the thought process on the size of the buyback, obviously in your cash position in excess of $1 billion, and your strong free cash flow in '07, there is certainly capacity to do more and still invest in growth. If you could just expand a little bit on your philosophy there. Jim O’Donnell: On concept 3, basically we have just about completed our market research, our brand positioning, the name and a number of other preludes to preparing to put the business plan together. As far as when it will launch, it really hinges right now on MARTIN + OSA. MARTIN + OSA in 2007 is a year where Susan and myself and others are going to be evaluating its strengths, its opportunities, and areas that are in need of change. If we do the kinds of things that we think we are capable of doing, and what the customer has told us through our research, and M&O moves in a direction to meet its hurdles through 2007, we will very diligently start pulling concept 3 in 2008 for potential launch in spring or summer of 2009. David Glick - Buckingham Research: So it's not an either/or MARTIN + OSA or concept 3? Jim O’Donnell: No. Right now the only reason I mentioned it too in conjunction with one another, is I don't want to have our eye on two balls at the same time, I want to have MARTIN + OSA in a much more steady growth…