Judy Meehan - IR Jim O’Donnell - CEO Susan McGalla - President, Chief Merchandising Officer, AE Brand Joan Hilson - CFO

Adrienne Tennant - Friedman, Billings, Ramsey Jennifer Black - Jennifer Black & Associates Janet Kloppenburg - JJK Research Dana Cohen - Banc of America Securities Lorraine Maikis - Merrill Lynch Jeff Klinefelter - Piper Jaffray Jeff Black - Lehman Brothers Margaret Mager - Goldman Sachs Robin Murchison - SunTrust Robinson Humphrey John Morris - Wachovia Securities Dana Telsey - Telsey Advisory Group Randal Konic - Bear Stearns Richard Jaffe - Stifel Nicolaus Marni Shapiro - RetailTracker David Glick - Buckingham Research Group Holly Guthrie - Janney Montgomery Scott

Good morning. My name is Stacy and I will be your conference operator today. At this time, I would like to welcome everyone to American Eagle Outfitters Third Quarter 2006 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Meehan, you may begin your conference.

Good morning, everybody. Thank you for joining us today. With me from management are Jim O’Donnell, Chief Executive Officer; Susan McGalla, President, Chief Merchandising Officer, AE Brand, and Joan Hilson, Chief Financial Officer, AE Brand. If you need a copy of our third quarter press release, it is available on our website, ae.com or you can call Aaron on 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’d like to introduce our CEO, Jim O’Donnell. Jim O’Donnell: Thank you, Judy. Good morning everyone. American Eagle delivered strong sales and earnings growth in the third quarter exceeding our expectations. We achieved a record third quarter EPS of $0.66, 40% higher than last year. This was our 11th consecutive quarter of record sales and earnings. And our best ever third quarter operating margin. Our consistent execution stems from the significant investments we made in the areas of design, tech sourcing and production. Our strong customer connection and attention and detail across our organization remain intact and we will continue to drive our future performance. We announced this morning that our Board of Directors has authorized a three-for-two split and declared a quarterly dividend. We also repurchased 2 million shares of our stock during the third quarter. We have made significant progress on our key growth initiatives; aerie, Destination AE, ae.com, real estate and MARTIN + OSA. Our new intimate sub-brand "aerie by American Eagle" launched during the quarter contributed to our sales and profit margin, and Susan will give you additional color during her presentation. ae.com grew 43% in the quarter reflecting improved traffic and conversion, which drove high profitability. MARTIN + OSA, our new lifestyle brand, created for 25-to 40-year olds, launched in September. While the concept is still in its infancy, we confirmed that the brand's demographics and the concept are right on target. We have addressed our customers' reactions and are making refinements in merchandise assortments under the direction of Interim President, Roger Markfield. We are on track to have five stores operating in time for the holidays and plan to open 15 stores next year. The entire MARTIN + OSA team is energized, passionate and aligned in our plans to realize the potential of this new lifestyle brand. Our real estate strategy continues to contribute to the growth of our core AE brand. In the third quarter, we opened 19 stores and completed 9 renovations. We are on schedule to open a total of 46 AE stores this year and complete 65 renovations. We are also testing 3 aerie standalone stores this year. Our total square footage will increase by 8% this year. Looking forward to 2007, we expect approximately 8% total square footage growth, which includes approximately 45 new and 50 renovated American Eagle stores, as I mentioned earlier and 15 new MARTIN + OSA. New AE stores continue to perform extremely well with sales productivity over 90% of mature stores, producing a first year ROI of over 70%. Renovated stores are experiencing a 38% lift in sales and a 53% increase in profitability, generating a first year ROI of 41%. We are progressing with the expansion of our Ottawa, Kansas distribution centre and we expect to have the project completed by May of '07. The DC expansion will enhance our operating efficiency and is central to our plans for supporting future growth especially in the areas such as ae.com, aerie and MARTIN + OSA. Building on our overall strong results we are pursuing further operational improvements in a number of areas. We continue to refine our use of new systems such as markdown optimization. Also this quarter we implemented a size profiling initiative, which will improve customer satisfaction to further drive operating margin. In sourcing and production, we are installing technology, which provides greater visibility and efficiencies in managing logistics. Next year, we are launching a new point-of-sale system across the chain designed to drive store productivity as well as to enable a more personalized shopping experience. We are also focused on tightening our expense management and have opportunities in the areas of supply procurement and service purchase. Thanks. And now I will turn the call over to Susan.

Thanks Jim. Good morning everybody. I'm really pleased with the third quarter performance, which reflects our ongoing commitment and passion for driving the best customer connection. We are absolutely focused on consistently delivering strong quality and relevant trends and value offering. This is our unique competitive edge and it's what sets us apart from our competition. Destination AE, that's our initiative to capture market share in certain categories, progressed in the third quarter. We were well positioned with the brand in key back-to-school and fall businesses. We experienced strong results in targeted categories including jeans, knit tops, fleece, graphic T-shirts, sweaters, intimates guys underwear and footwear. In the third quarter, our girls business achieved comp in the positive low double digit and guys rose in the low teens. Going after leading market share positions and brand defining categories will remain a major initiative. As we look ahead toward spring and summer season, new fashion trends continue to unfold and that presents the exciting opportunities in under-developed categories for us. Contributing to an exciting quarter was the successful launch of our first sub-brand aerie by American Eagle. We supported this launch with a window presence at our lease line in every AE store and a strong web experience on ae.com. Additionally, we introduced aerie to our customers through unique marketing campaigns including aerie Tuesdays on CW and our aerie Artists Music series. This included in-store events as well as exclusive content on ae.com and aerie.com. aerie was favorably received by our girls and (inaudible) was well expected by the guys. We experienced ongoing momentum in our apparel business during this launch and continue to see aerie is truly incremental to the AE brand. Undies, bras and dorm wear, all achieved strong performance contributing to both sales and earnings. Moving into 2007, we will continue to build upon the initial success of aerie with strong collections, targeted marketing and a branded in-store environment. We are currently evaluating a variety of aerie store formats including two new standalone locations. We will open our third aerie standalone store just in time for thanksgiving. Our AE holiday collection arrived in stores several weeks ago and we are pleased with the initial customer reception, and while it's still early in the season we feel that we are on target with our important key item categories. With similar timing to last year, our holiday two floor set arrives next week just ahead of thanksgiving. This year we've added more newness with the strong definition AE message as well as our focus on gift giving. Creating a true lifestyle experience and the best shopping on ae.com continues to be a priority for us. This holiday we've launched an interactive holiday gift guide offering customers the ability to see the most wished-for item as well as shop by trend, stylish selected outfit and by price. We feel that fourth quarter will continue the momentum we've enjoyed all year and we look forward to the freshness and newness of spring. Our spring transition collection arrives in stores on December 24. Thanks everybody and now I will turn the call over to Joan.

Thanks Susan and good morning everyone. Our third quarter results were driven by strong comp store sales, well-managed inventories and an improved gross margin. Looking specifically at the third quarter, total sales increased 20% to 696.3 million. Comparable store sales increased 13%, up against a 14% increase last year. Third quarter sales reflected positive store traffic trends, higher transactions and a strong full-priced business. The number of transactions per store increase in the mid-single-digits and units sold per store were up in the low-double-digits. Our average transaction value increased in the high-single-digits, driven by a high-single-digit increase in units per transaction and a higher AUR. Our AUR increased in the low-single-digits due to less promotional activity. All geographic regions comped positively in the third quarter as follows. High-teens in Canada and the Northeast, mid teens in the Midwest, low-double-digits in the Mid Atlantic and Southwest regions, high-single-digit Southeast and mid-single-digits in the West. Our gross margin improved 280 basis points from 46.4% to a record 49.2%, a lower markdown rate compared to last year and a higher IMU led to a 250 basis point increase in merchandise margin. Another 30 basis points of gross margin improvement resulted from the leveraging of buying, occupancy and warehousing costs, driven primarily by rent. SG&A as a percent of sales was 24.4% compared to 23.7% in the third quarter last year. Included in SG&A was stock option expense of approximately 30 basis points, which was not incurred last year. We also absorbed incremental expenses related to MARTIN + OSA of approximately 30 basis points. Other expenses that caused de-leveraging included a one-time severance charge and an investment in higher quality branded packaging to support the AE brand and the launch of aerie. Additionally all those store payroll leveraged overall, we've experience higher costs associated with the launch of the new aerie sub-brand. We achieved expense leverage most notably in marketing. Our operating margin increased 240 basis points from 19.5% to 21.9%, a record third quarter raise. Other income for the quarter increased to $9.1 million as a result of higher investment balance and yields compared last year. Our third quarter effective tax rate was approximately 38% similar to last year. Looking ahead to the fourth quarter, we expect our effective tax rates to approximate 37%. Fully diluted earnings per share increased 40% to $0.66 versus $0.47 last year. Moving now to the balance sheet, total cash and investments increased $224 million to $904 million at quarter end. Capital expenditures in the quarter were $58 million and year-to-date totaled $162 million. For the year, we continue to expect capital expenditures of approximately $215 million. This includes new and renovated stores, our new Pittsburgh headquarters, a new data center, as well as our expanded DC. At the end of the third quarter, total merchandise inventories were $349 million, an increase of $46 million compared to last year. Inventory per square foot at costs increased 2% from a year ago. We are comfortable with our quarter-end inventory position. Looking ahead to the end of the fourth quarter, we expect inventory to be up in the high single digits on a cost per foot basis. At this time, we expect our fourth quarter earnings per share to be in the range of $0.94 to $0.96 per share. This compares to earnings of $0.71 per share last year. Our fourth quarter guidance includes stock option expense of approximately $0.01 per share not included last year, and for the year we expect stock option expense to total approximately $0.05 per share. As we look forward to the fourth quarter and into 2007, we are well positioned to continue our strong performance through a clear merchandising vision and rigorous operating discipline. Over the long term, we are committed to sustaining strong operating margin and achieving our goal of growing earnings per share at least 15%. And now I would like to open the call for questions.

(Operator Instructions). Your first question comes from Adrienne Tennant with Friedman, Billings, Ramsey. Adrienne Tennant - Friedman, Billings, Ramsey: Good morning. Congratulations on a great quarter.

Thank you. Adrienne Tennant - Friedman, Billings, Ramsey: Couple of questions for Joan, can you give the dollar amount of the severance spend and then can you give fiscal '07 CapEx, expected CapEx? And then for Susan, can you talk about promotional plans for the fourth quarter, any distortion in category that you are seeing strengthened and then the advertising and marketing spend? Thanks.

Okay, this is Joan and I'll start off Adrienne. Our CapEx for 2007 is expected to be in the 200 million range as we continue to invest in our growth for the future and further investment in our headquarters, our distribution facility, and performance center for AE Direct, which is -- are the most notable investments there. With respect to the severance charge, I can't comment on the exact amount there, but as I noted in my comments that it is part of the de-leverage point that we experienced in SG&A. Adrienne Tennant - Friedman, Billings, Ramsey: Okay. And just as a follow-up, can you -- when did you start to see the margin pressure from MARTIN + OSA, when do we anniversary that?

As we think about MARTIN + OSA for the fourth quarter of this year, we look to $0.04 in the third quarter as I mentioned versus $0.02 last year and in the fourth quarter, we expect it to be roughly the same, slightly higher and as we look at the year, it’s a cost of $0.13 or $0.14 for the year and as we move forward we will continue to see some incremental pressure on our EPS in 2007. Adrienne Tennant - Friedman, Billings, Ramsey: Great, thank you.

Okay, Adrienne, moving on to some of your marketing questions. First of all, as it relates the advertising and marketing spend, in the third quarter we were actually below last year because we didn’t anniversary our MTV commercial. So we were actually below and we are committed for fourth quarter and on the go forward to be at or below our marketing spend as a percent of sales. Okay and moving onto kind of our fourth quarter promotional plans first of all we are very proud and committed to a strong message at our lease line and in our windows, and I think you will see right now if you come into our store very strong, very cohesive lifestyle message for the brand which will continue. When we move into the thanksgiving and to the December time period the lifestyle commitment will continue as well as an underlying value message that is part of our competitive edge. In addition though as it relates to advertising, we continue to pull back on couponing, it continues into the fourth quarter of this year. We had money cards that we used to run that have been pulled back almost to nothing, and we continued to pull back on additional money card promotion that we had last year that we are not anniversarying in addition as a continued commitment to our All-Access program which we just are very proud of the results in the progress with our loyalty program. Adrienne Tennant - Friedman, Billings, Ramsey: Okay, and what was the percent of sales and marketing for the year?

We will be below the 3% number. Adrienne Tennant - Friedman, Billings, Ramsey: Below 3% okay great job and good luck.

Sure. Adrienne Tennant - Friedman, Billings, Ramsey: Thanks.

Your next question comes from Jennifer Black with Jennifer Black & Associates. Jennifer Black - Jennifer Black & Associates: Good morning and let me add my congratulations.

Thanks. Jennifer Black - Jennifer Black & Associates: I just have a few questions. I wondered if you could talk a little bit about your price points, your strategy. I have noticed in our market you had a hot selling item and you about a week later raised prices. That would be my first question.

Okay Jennifer yes we did see that and I will tell you, we don’t do very much of that and really don’t like to do it. But when we have a time -- when we hit a fashion category and I think what you are referring to is some of our fur trend items that we were way below market and what we try to do is when we cant get any more of something like that and we are way below market, we try to catch it within the first week of sales and make that adjustments. Jennifer Black - Jennifer Black & Associates: Okay, great. My second question, I was curious to know the get gift at AE, are you monitoring what people click on, whether its by price, by outfit, do you watch that kind of thing on ae.com?

Do you know, it’s a very good question, you are asking Jennifer and that’s really the future of where we are headed in terms of understanding our customers' behaviors as they go online because not only is it good for us because we can give them what they are asking for but we also can inform back to our other customers about hot selling items, hot selling categories which is of particular interest in our demographics. Kids like to know what other kids are into. So related to baby steps of that, I think, Kathy Savitt, our Chief Marketing Officer, with Fred Grover who runs our r ae.com business are really -- just that's the beginning steps of what you'll see from us in the future. Jennifer Black - Jennifer Black & Associates: Okay, great. And then my last question is your aerie customer, does your aerie customer purchase pink, it seems like there would be an overlap and I wondered if you could talk a little bit who your aerie customer is and if you can quantify the add-on sale as far as being an incremental sale?

Okay, first of all our aerie girl is the same -- are same America Eagle girl, and we are committed to that, its really extending her lifestyle, giving her a part of her wardrobe that she can't get from the main brand but it is absolutely the same girl and we are committed to understanding her and her needs on that side of the business. Is she aware of pink, absolutely she is aware of pink and they are a terrific competitor out there. And then Joan do you want to handle the incremental part of aerie?

Yeah, Jennifer the way we think about that. We need to get a full year under our belt to understand the seasonality of the aerie business for us, at which point, we can really comment on the contribution. But, what we do know is, that’s not cannibalizing the rest of the assortment. And that it is truly incremental. Jennifer Black - Jennifer Black & Associates: Okay alright. Thank you so much and good luck.

Thanks Jennifer.

Your next question comes from Janet Kloppenburg with JJK Research. Janet Kloppenburg - JJK Research: Good morning everyone and congratulations.

Thank you Janet. Janet Kloppenburg - JJK Research: A couple of questions. Joan I was wondering if you could talk a little bit about the outlook for SG&A leverage in the fourth quarter. I know that MARTIN + OSA will still be putting pressure on the business but the sales volume will be higher. And Susan I was wondering if you could talk a little bit about aerie and your ability to expand the business, in other words expand the classifications or the categories that you offer under the brand. And on the transition line that comes in December 24, I am wondering if the wear now focus will be greater than it was last year so that the customer doesn't get hit with some more products in January. And lastly for Jim, if you could just talk a little bit about the refinements being made in MARTIN + OSA, and when you think that will help the sales ramp there to begin to improve? Thank you.

Hi Janet. I'll start that, it's Joan. Janet Kloppenburg - JJK Research: Hi Joan.

Hi there. With respect to the fourth quarter, given what we know today the expense for the fourth quarter will require a lot of double-digit comp to leverage. And as you mentioned, we are making investments in our growth strategies, which include aerie and MARTIN + OSA, and as we look at those strategies we are fine-tuning our store payroll model as I mentioned in the fourth quarter, and continue to evaluate, as Jim mentioned in his comments, supplies procurement as well as services purchase. So, we continue to score those opportunities, but that’s the expense base that I see in 4Q. Janet Kloppenburg - JJK Research: Okay, thank you.

Okay, Janet, and as it relates to aerie and its assortments; first of all, pleased as we are with our launch of this sub-brand, there is so much work to do. I mean we with a full component of the assortment now out there, under the aerie sub-brand we have -- while we have momentum in underwear, bras and dorm wear, we have so many things that are on our list that we want to improve upon and evolve and develop. In addition, in terms of expanding that experience, we'll be looking at an investment and a development of some categories like accessories, personal care, I don’t want to say much about those things, but you will see things drop into the assortment throughout the year, next year to make that experience. I think even more exciting for a girl when she comes in. And then as it relates to our transition assortment, we have with that transition assortment -- that’s for us quite honestly is -- we are committed again. Being in the heads of our customer that when I had [thought] about that, is we understand they have money in their pockets from Christmas, and they're coming in to return things they don’t like for things they do like, and hopefully, the things they do like were from our brand and they’re coming back. But, what we do is we want to offer them things that are top of mind for them and important for them, and they are very aware now for the time period. I actually think in the past couple of years we’ve done a better and better job of that, and we continue to be committed to improving that. But again, it's not just spring, maybe through a little bit of color, a little bit of trend, but again it’s the things they want to wear in January and February that we deliver to them on December 24th. Janet Kloppenburg - JJK Research: And Susan, I just researched your assortments going forward. I know there's a lot of newness coming for spring '07, I'm wondering -- and especially in bottoms, I think -- I am wondering what you see -- how you see denim fitting into these business next year, will it be a growth category or just a real strong stable core business?

Well. I think it's a strong and stable core business that were committed to growing and it's a foundation in the fiber of what this brand is build on and we are very pleased with our progress, momentum and growth in denim for '06 and will be continued to make sure that we are offering or grow on our guide newness in denim is what they put on everyday and that has not changed. Janet Kloppenburg - JJK Research: Great. Thanks and good luck, Susan. Jim? Jim O’Donnell: Yeah. Hi, Janet. Janet Kloppenburg - JJK Research: Hi, Jim. Jim O’Donnell: On the refinements for assortments in Martin + OSA, the three big callouts that we've got back rather the one with consistence in some of our fit in bottoms, both in women's and men's, primarily men's but there were some issues in women. Those issues had been addressed and have been corrected and the customer will feel -- some of that in -- for the holiday assortment and definitely we'll feel it for the spring assortment. And the other was color, like all color in men's and women's that has been addressed and you will see that in the collection for holiday and definitely in the collection for our spring. And last but not least, one of the biggest callouts was the lack of the femininity, if that's the word, to the -- Janet Kloppenburg - JJK Research: Femininity. Jim O’Donnell: Okay. I could depend on you for validation. Janet Kloppenburg - JJK Research: Yes. Yeah, I know -- mistakes -- go ahead. Jim O’Donnell: In our women's collection, that it has been addressed -- it's valid and has been addressed for holiday and will really be seen in our spring collection. Our holiday floor set was just finished down in Tysons Corner. We set that store in order to photograph the presentation in collections, so that we could forward it out to our other stores so that it could be executed next week. The early results on the collection sales wise, have been quite encouraging and we have seen quality selling across all of our major classification, both men’s and women’s. So, just I don't want to get too overly enthusiastic, but right now there has been some early signs from Tysons Corner that the collection was well received, and it does look upbeat. Any of you if you get there, I'll appreciate any feedback you give. Thank you. Janet Kloppenburg - JJK Research: Great news thanks.

Your next question comes from Dana Cohen with Banc of America Securities. Dana Cohen - Banc of America Securities: Hey guys, couple of questions. I just want to understand a little bit more on the SG&A in the third quarter. If I go back to the second quarter call, you said that you could get leverage on a high single digit comp, so I guess what I am trying to understand is other than the severance, what were the buckets of items that came in higher than expectation should de-lever SG&A and then have a couple of things?

Dana, this is Joan. As we navigated the third quarter, obviously, the one-time severance charge is something that occurred, but also you have to keep in mind that stock option expense and MARTIN + OSA costs totaled 60 basis points. So that it did create de-leverage for us as well. Dana Cohen - Banc of America Securities: And that was not in your guidance when you said you could get leverage on a high single digit?

Yes it was. And as we navigated the quarter, we also made a decision to invest in branded shopping bags and understanding the mix of our branded shopping bag versus an everyday. Its something that we are navigating, working towards and evaluating as well as we decided to position higher payroll to support our aerie sub-brand which we know is a very critical initiative for us with the decision that we made as we need to do to drive good business in the quarter. Dana Cohen - Banc of America Securities: Okay. So it would be the one time severance, the branded shopping bags and the higher payroll would be these three buckets of unanticipated post guidance.

Post guidance and a decision that we felt important to drive the business. Dana Cohen - Banc of America Securities: And the leverage point for the fourth quarter?

As I said earlier, the expense base for the fourth quarter would require a low double digit comp to leverage given what we know today Dana. Dana Cohen - Banc of America Securities: Great. And then last question. Just trying to get the math of it, the inventories were up 15% in total, square footage is up 7, just trying to get to the number you gave for inventories per square foot?

Well, when you look at the total inventories Dana we include the ae.com business. So when we quote our number of cost per square foot increase we speak to the retail businesses. Dana Cohen - Banc of America Securities: And the ae.com can account for that big of a differential?

Yes. Dana Cohen - Banc of America Securities: Okay. Perfect. Thank you so much.

Your next question comes from Lorraine Maikis with Merrill Lynch. Lorraine Maikis - Merrill Lynch: Thank you. Good morning. Can you talk about some of your initiatives that are in place to drive the margin expansion and quantify where you see those margins going for next year?

The initiatives for our margin expansion, it's Joan Hilson, include as Jim mentioned we have size profiling that we implemented in the third quarter for allocation, fourth quarter for buying an allocation, which ensures to delivery to the customer what they want in terms of size. We also are driving our marked-on optimization tool to expand margin as well which we are fine-tuning and enhancing to drive opportunity on a geographical basis. As we look towards expenses as I mentioned we have opportunity and supply procurement and services purchase. We have an initiative underway. We have on board a director of procurement to help drive these initiatives particularly in the area of supplies, and we realize that we do have opportunity and it is something that we are very focused on. Lorraine Maikis - Merrill Lynch: And any ballpark estimate of what type of impact we could see in '07 from these initiatives?

Well, as we've said, our goal and our operating plan is structured to deliver a 15% growth in EPS and that’s the targeting goal that we operate to and structure our initiatives for it. Lorraine Maikis - Merrill Lynch: Thank you very much.

Your next question comes from Jeff Klinefelter with Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Yes, congratulations everyone on another great quarter.

Thanks Jeff. Jeff Klinefelter - Piper Jaffray: Couple of just quick questions, one would be on the sourcing side, you guys have made strides in your margin performance and I would anticipate that some of that has been just scale and renewing some of your -- or finding even new sourcing relationships around the world as well as managing markdowns. Can you give us a little bit of a sense, maybe recap the year and looking into '07, calendar '07, what are your opportunities for IMU gains or is it largely going to continue to be sort of system enhanced markdown savings that will drive that gross margin.

Well, Jeff I think it's a couple of things. First of all we continue to invest in our sourcing organization here, and I think that we have a very strong team that we want to support them to do an even better job because they control so many things about the product. It's not -- we are committed to steady IMU growth. We are not looking for unrealistic increases in IMU, because we are so committed to giving a value equation with a great price, great product. We put a lot into our product and our teams out there, our merchandising, design and sourcing teams, they negotiate quality as well as price. So that's why we are very careful about modeling this very conservative IMU growth. But I think that what we are excited about in our investment and sourcing is just the quality and value of the product and also getting ourselves prepared for 1, 3, and 5 years down the road with our destination businesses and what that means to our global sourcing structure, and we are preparing for all of those things. And then just to mention on markdowns, our job is to buy the best product with controlled inventories and controlled markdowns and we are very pleased with how our business is operating right now on that front. Jeff Klinefelter - Piper Jaffray: Okay so in anticipation of potentially some of the good quotas again coming off for good, in theory in China and largely having a lot of denim having been produced in Mexico.

Right. Jeff Klinefelter - Piper Jaffray: Historically do you have -- do you kind of see the opportunities for big departments or big product lines to change the sourcing structure?

That’s our job to look for opportunities. So we will continue to do that but we will also continue to invest in the product. So really again what we are focused on what we are delivering to our customers that they are pretty wild by the offering and price we offer it on. So we come at it from both ways. But that’s our job to look for opportunities. Jeff Klinefelter - Piper Jaffray: Okay. Great. And just one last final for you would be -- in terms of back-to-school season just generally speaking what's been kind of the biggest merchandise success as far as you are concerned, a pleasant surprise, anything in terms of new styles you have introduced stand out?

I think really on two fronts, I think our commitment to denim and the performance -- so solid performance of the denim business, I wouldn’t tell you that’s a surprise, but I can -- I just can tell you how proud I am of the teams and what we delivered in terms of design, the way we have merchandised and the way that we've marketed to, basically a 90% plus newness factor in our men to women's denims. So, that’s like a top of the radar screen, but the other thing is I am very pleased with the emergence of its weather trend in the business and what that looks to be contributing on the growth and the guide side of the business. Jeff Klinefelter - Piper Jaffray: Okay, great. Thank you. Good luck with the holidays.

Thank you.

Your next question comes from Jeff Black with Lehman Brothers.

Hello, Jeff. Jeff, are you there?

Mr. Black your line is open. Jeff Black - Lehman Brothers: Yeah, sorry about that. On the SG&A and focusing on -- as we look into next year, is it reasonable, Joan, to expect a lower hurdle rate for SG&A leverage than the rate you outlined in 4Q or -- as we look at things, did the packaging investments to the store investments really make that a higher hurdle rate? Thanks.

Thanks for the question, Jeff. We are very disciplined in our expense management, and our annual plans are structured to leverage at a mid single-digit comp. So -- within each quarter, we will make appropriate business decisions, which may make the leverage point higher in any given quarter; however, I want to address the fact that we are structured in our operating plan to 15% EPS growth or goal, that I talked about earlier, to leverage at a mid single digit comp in 2007. Jeff Black - Lehman Brothers: Great. Thanks for the clarification. I appreciate it.

Our next question comes from Margaret Mager with Goldman Sachs. Margaret Mager - Goldman Sachs: Hi. Congratulations, another big quarter. And can you talk about the pricing, charging in terms of your tiering and just talk us through what's going on there? Is there any movement away from the lowest prices as you see your consumer favoring the more value-added product?

Okay Margaret. First of all our pricing strategy is very similar to a year ago. We continue to be committed to the value equation, and I would tell you that what we do is at the opening price point we are committed to not stepping away from that. However we do readdress quarter-by-quarter, season-by-season, if we want to shift where that value is delivered and offered to our customers. So we are just -- I get crazy about last year hiatus and we have to make sure that we all have a fresh eye on where we are now and where we want to move in the future. So, we're always re-looking at that. And then I would tell you the other thing as you know our core is happening out there. The next two tiers of pricing -- I mean the goal is to make ourselves very accessible to the customer, offer value and in a fact trade them up to other offerings in our assortment that our design team just does as amazing job of offering terrific detailed on-trend offerings. And so that philosophy has a change, but we are always readdressing how we deliver it. Margaret Mager - Goldman Sachs: With improving AURs come more from tiering, pricing and moving up the consumer, were just from lower markdowns year-over-year? And then I have two other small questions, any cost inflation that you would know in cost of goods at all that you could [weigh] with us? And then on your occupancy costs in your stores, what is the leverage math there? How does that works? Thanks.

Okay, Margaret, as it relates to AUR, it's really both of those things. I mean you have got a -- it all comes down if you have the right item and the right assortment out there to the customers and we are not positioned as the promotional brand. We are positioned as a value brand and the whole idea again is getting them (inaudible) making that accessible and minimizing markdown. So, with both of those things that you start contribute to that. And as it relate to cost inflation that we are really not seeing that on the cost line.

And with respect to the [math], it's a mid-single digit leverage point. Margaret Mager - Goldman Sachs: Okay, thanks guys and good look during holidays.

Thank you.

Your next question comes from Robin Murchison with SunTrust Robinson Humphrey. Robin Murchison - SunTrust Robinson Humphrey: Actually my questions have been answered. Thank you very much and congratulations.

Thanks, Robin.

Your next question comes from John Morris, Wachovia Securities. John Morris - Wachovia Securities: Thanks. Good morning everyone, congratulations. So the question, I guess about holiday, you have touched on it a little bit more, I wanted to get a little bit more clarification, Susan, on the opportunity versus last year. I think you talked a little about this sort of business, but where do you see the opportunity compared to last year in terms of the merchandising and then I have an inventory question for Joan?

Okay. First of all, would you like me to e-mail you a list because -- John Morris - Wachovia Securities: Yes. That will be nice.

Right. I mean that’s the way we are wired in. I think that it's, probably -- we were at 2005 results I think our shining moment wasn't fourth quarter of last year and we really got deep to get in specifics of what we thought we could do better. So the three things that I'll mention to you that are kind of high flying -- first of all is, I think it's no secret that with us being an outdoor, very active inspired lifestyle for us to kind of miss our target on sweaters last year was a biggest disappointment. And we were committed from a design merchandising and marketing standpoint to improve upon that and while it is, I want to preface again, still early, we haven't gone on to that all-important dream Friday yet, but we are pretty pleased with where the first few weeks are leading us. The other thing is I will tell you in the accessory businesses last year. I thought that we did not capitalize on things that were giftable and easy purchases whether it's desirable for the kids or whether it was easy for the parents to pickup his guests. We thought we could do a lot better job of that. So there is a couple of things, which really lead into my third point and that's we want to be the gift-giving destination. When you think of Destination AE, it's really a product-based strategy but our marketing strategy that supports that is a destination of gift giving. And we again thought that last year whether it was in stores on ae.com, we could have done a better job of delivering that message. So all three of those things were the big opportunities for this fourth quarter. John Morris - Wachovia Securities: Okay. That's helpful. And then, I guess for Joan on inventory -- I guess finishing up Q3 here you are up kind of low-single-digits on a per square foot basis and I think you've said in your plan to be Q4, checking that number up to be high-single and -- with that kind of acceleration what's the thought process, I mean clearly the demand is there. So I don't think we are overly concerned but what's the thought process in that acceleration if we're reading it that way as well as how that then translates to next year in planning for the spring season and your initial thoughts there. Looking back over this year you are already up mid-to-high single digits and so with that inventory plan question. Thanks.

Okay, so let me see if I can address that. Let me stress that we're -- we feel very comfortable with our inventory position, up low single digits at the end of the third quarter. What I'd like to remind you is by going into the fourth quarter last year we were heavier than we would have liked to be, so the 2% or low single digit comp reflects that, but Susan mentioned we have more news arriving with our holiday two assortment and we feel very good about our flow of inventories, how it went through the fourth quarter and as we look at the guidance for the end of the fourth quarter we feel very good about the balance and focus of that assortment and believe that we can continue to leverage our flow and trigger strategy to optimize sales in the first quarter. John Morris - Wachovia Securities: Let me just see if I understand that correctly. In terms of this year versus last year in terms of floor sets, remind for us is it comparable or are you adding?

It's Joan Hilson, if we -- like for example the floor sets, the most of the holidays two floor sets were selling before thanksgiving. The timing is the same as last year but the amount of newness in that floor set is larger this year. John Morris - Wachovia Securities: Got you and then after that what's the counter looked like in line flows this year versus last year?

No major timing changes. John Morris - Wachovia Securities: Okay, great thanks. Good luck for holiday.

Thanks.

Your next question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Good morning everyone and congratulation.

Thanks Dana. Dana Telsey - Telsey Advisory Group: Can you talk a little bit about the pricing opportunities going forward that you see and also the timing and magnitude of any of the systems benefits whether its from size profiling, basic replenishment or the mark down optimization. Thank you.

Okay Dana when you are talking about pricing opportunities can you be more specific on what you are looking for? Dana Telsey - Telsey Advisory Group: Do you see any ability for any of your higher price points to get higher or do you see any mix in the middle of any adjustments there?

Well, I'll give you an example for our example in our denim business. Well, it was asked earlier in the call, we committed to those value price opening prices and we opened our denim business, 29.50. But I would tell you this year we are a bit less reliant on 29.50 as we evolve the customer up in to our 39.50, 49.50 and 59.50 price points. So I mean that's really the goal of that strategy and we will continue to improve upon that as we move in to the future but again it doesn't matter at what price point value has to be there and so we won't charge things that are unrealistic for certain categories. So the embellishment, the details that our design team puts in to it, they all have to be there and then they command a certain price. Dana Telsey - Telsey Advisory Group: And on the system side?

Yeah Dana it's Joan Hilson. And what I would share with you is that the size profiling, the markdown optimization and the inventory disciplines that we've all referred to are the key components of margin expansion for us, and in terms of quantification as we go through our year we were buying with those disciplines, we're executing our distribution stores, the size level in a more finite way and more precise way. And all those things collectively combined are, I believe, a product of what you are seeing in our strong results this quarter. Dana Telsey - Telsey Advisory Group: Thank you very much.

Your next question comes from Randal Konic with Bear Stearns. Randal Konic - Bear Stearns: Good morning. Just some quick questions for Joan, just a clarification on MARTIN + OSA, I believe you said for the year its going to be a drag of $0.13 to $0.14, was the plan approximately $0.12 heading into next year, would you see that costs or that drain going down? And then secondly, as you just think about probably margins for next year in 2007, it looks like '06 margins will reach or operating margins will reach above 21%. Do you think those are sustainable margins for '07 and if so, do you see gross margin increases and SG&A leverage or you are going to see one versus the other help that margin line?

Okay great. With respect to MARTIN + OSA, we expect the costs to be roughly $0.13 to $0.14 on an annual basis that’s why we upped from the $0.12 that we reported earlier. And as we look forward into '07, we would see that MARTIN + OSA be an incremental EPS that we drained that we would have to absorb in our '07 operating framework, which we are prepared to do and is a part of the operating plan that I mentioned in terms of driving to that 15% EPS growth as an operating goal. So, that’s all part of the thinking. As we look forward into '07, with respect to sustaining operating margins we have our growth initiatives that certainly drive the top-line for us and it's our big six, which include things that Susan mentioned like Destination AE, ae.com, the aerie sub-brand, MARTIN + OSA. So these are part of our top line growth drivers and then in terms of margin expansion, we will continue to leverage the size profiling in the markdown optimization, the strong inventory disciplines on top of the disciplines that we put in place to deliver on trend assortments that Susan talked about in terms of fit and coordination of design and merchandising team as well as our focus groups. And then with respect to SG&A, Jim mentioned that as well as that we will drive initiatives that bring us opportunity in our SG&A with respect to procurements, supplies, as well as services purchase and then continuing to refine and evaluate our store payroll model. So, we believe in that 15% goal that we can continue to stay in these high operating margins. Randal Konic - Bear Stearns: Okay. So, just quick clarity, to sustain the 15%, the Martin + OSA will it loose more than $0.13 or $0.14 next year or less?

More. Randal Konic - Bear Stearns: More?

It will loose more than that. Randal Konic - Bear Stearns: Got it. All right. Thank you.

Your next question comes from Richard Jaffe with Stifel Nicolaus. Richard Jaffe - Stifel Nicolaus: Thanks very much guys and congregations really as you said a record breaking quarter. Just a quick question on '07 plans for store openings and store renovations and then if you could talk a little bit about the gift card, both initiatives to get the consumer to spend in your outlook for the cadence or redemption this year versus others? Thank you. Jim O’Donnell: 2007, Richard, new stores approximately 45, renovation at this point would be minimum of 50. Richard Jaffe - Stifel Nicolaus: And in terms of the gift card as a focus of your energies and how you see that playing out in terms of redemptions in the fourth quarter versus the first quarter and perhaps the second?

Okay. Well, first of all -- if we are going to be a gift giving destination there needs to an underlying focus certainly on gift cards and that we are really approaching that from two ways because we have seen very nice, steady, healthy increases in our gift card business and that continues and it really comes from two levels. One is just the strength of the brand makes that gift card very desirable, but the other thing as I think our marketing team has just done an excellent job, innovating gift cards to make them very desirable because there is a lot of time, that's just a pick up item and we know that and we are really trying to make them more exciting, more creative, because there really is a point of delight in gift giving for our customers. So I think when you come in, you not only see gift cards in our store right now, but when you come in for the Thanksgiving Holiday, you will see an evolution of creativity and that gift card I think makes them even more exciting. The other thing I will tell you as it relates to redemption, believe it or not, it’s a pretty consistent redemption. So, it really -- it’s the -- redemption is in proportion to how a gift card sales growth has occurred on the finance. So, we pretty much know what to expect on the back head. Richard Jaffe - Stifel Nicolaus: Can you give us a sense of the cadence or redemption on those cards?

I mean -- go ahead, Joan. Roughly 50% of that occurs in the month of December and then another 30 to 40 in January. So -- primarily most of it is redeemed before the end of the year with some carry over into the following near. Richard Jaffe - Stifel Nicolaus: Got it. Thanks very much.

Thank you

Your next question comes from Marni Shapiro with the [RetailTracker]. Marni Shapiro - RetailTracker: Hey guys, congratulation. Believe it or not, I actually have some questions. Can you tell me a little bit on the square footage of the renovated stores, you talked about 50 renovations for net year? Of those renovations, how many are expansions and what's the average increase for the expansion? And could you talk a little bit about, in aerie, you have quite a range of products running from panties and bras up to hoodies and sweats. So could you talk a little bit about the breakdown of the assortments that you consider aerie, the average price points, and are you seeing any difference in the basket of aerie products versus a typical Eagle basket? Jim O’Donnell: Hey Marni on the renovations, of the 50 that we expect to do in our 2007, I would expect that all 50 would be expanded to invariant degrees. We don’t have a specific formula, it's all driven by productivity of the store and also of the shopping center. But we average about 25 to 40% increase in square footage when we expand a store, which would also incorporate our aerie expansion or some of the format that Susan spoke about. So hopefully that answers your question there. Marni Shapiro - RetailTracker: Yes.

Okay and other relates to the aerie assortment. I'll speak a bit generally about it because we are still going through the evolving and changing and readdressing, where that positioning is going to be. Particularly as I mentioned earlier as we move into additional classifications in categories like accessories, like personal care, but where that fits right now is, believe it or not, pretty much 50-50 between the underwear and bra, and the very innerwear part of the assortment and then our dorm wear, which we've really talked to our girl to take her from our dorm wear into the coffee shop. So it's really indoor/outdoor use there on the dorm wear side of the business. But one thing that we're really pleased about with that balance assortment is the growth of the bra business. Bras are currently in over 500 of our doors and as we have been taking to about all year we have tested it early in the spring, met with great results, we launch it in over 500 stores for the fall time period and we are very pleased with the growth and momentum what bras are bringing to a balance making aerie a truly balanced intimate assortment. The other thing that bras do -- dorm wear does that some of the categories will be investing and at least what it will do is giving us a nice average in our retail, so we have things working on those sides, first of all some of those categories driving are bit higher AUR, which certainly is lower than the American Eagle business, but I think very good as it relates to our expectations. But when you talk about what's in their basket, the AE brands, the girls basket for the AE brand or the basket for aerie, the UPTs are slightly higher because of the multiples that are driven through the underwear business and we like that quite a bit. Marni Shapiro - RetailTracker: Excellent, that's what I would expect. And I have noticed in some of the stores you have expanded the aerie footprint even within the existing store. Can you talk a little bit about, is there a section in store that’s getting squeezed or are you just increasing the density in that store?

Well, a couple of things. We are already devaluating how we can make our products the best productive that they can be, so we have made some tweaks with the sportswear assortment but very little. What we really did was we were not prior to aerie coming on the scene, maximizing some of these large boxes for the future and that's what aerie is doing, it’s allowing us to take these, 6000, 6500, 7000 square foot boxes and creating a true shop and shop environment which I will say by the way one of our initiative for next year is where we do have their shop and shop environment, we want to make that environment, that experience even a little more special. So stay tuned for that. Marni Shapiro - RetailTracker: And then just two more follow ups also. Once sort of related to aerie, I have noticed some of the men’s I guess you call it sleep and dorm is expanded, so if you can just talk about any opportunity there, based on what you've seen coming out of aerie. And then if you can also talk about in the stores, you guys have done a good job over the yeas with things like footwear and accessories, belts, jewelry and most recently the personal care, which seems to be selling very well. Just any kind of color you can give around those ancillary items going into holiday?

Okay. Couple of things, first of all the men's dorm wear it's a nice complement to what happens when we have shop and shop for aerie but honestly we are having so much fun with that business. Its fun, I think our design team just does a great job with some novelty in those categories and again it drives really the gift giving initiative for the brand on the guys side. So we like it quite a bit and we're -- we have a lot of fun with that business. Marni Shapiro - RetailTracker: Is it more of a first quarter thing then for you guys versus -- it could be in store, beats up for the first quarter?

Yeah. I would say that's accurate. Marni Shapiro - RetailTracker: Okay. Thanks.

And the other thing is -- as it relates to footwear and accessories, that's again and edge that we have. I think we create and we deliver our true lifestyle destination and some of the innovation and fun and dynamic part of our assortment adds up with what we do in footwear and accessories. I mean -- I think again what we do in Flip Flop, I think we are truly a destination in the mall for Flip Flop. And then some of the other footwear you are seeing for the fourth quarter again drive that gift giving message. So anyway -- so I think it's really something that rounds on our assortment delivered to lifestyle. Marni Shapiro - RetailTracker: Great. Thank guys. Good luck for holiday. Jim O’Donnell: Thanks.

Your next question comes from David Glick with Buckingham Research Group. David Glick - Buckingham Research Group: Good morning and congratulations. Susan, just a little more follow-up on aerie. I was wondering if you could give us a little more color on the store formats you are looking at for next year and some of the smaller stores have a broader offering perhaps some of the classification like, bras will that be extended into some of the classifications like bras, would that be extended into some of the smaller stores and in general, what are the key learning points from aerie this year from the launch that you will apply to next year?

Okay. First of all, [brassiere alluding] to is a pretty multi talent real estate approach to aerie. At the beginning of the year, we had no stand-alone locations. For our underwear, wear we will have three. At the beginning of the year, side by side locations we had six. We are going to have 16 by year end. I would tell you those specific four-walled boxes of aerie environment it's still too early to tell. Jim and I are and with Joan are slicing and dicing all the information, really looking at the performance and as we move into the first quarter of next year that’s going to be a very big initiative for us to figure out how that is going to complement the growth of aerie and the future of area. The other locations that you see when you talk about where we have pretty small -- I mean every store has aerie in it. So they have at least two tables and a fixture to at least deliver a piece of that lifestyle that is on a square footage by square footage basis. We get as much aerie into the box, it make sense for that size of box. David Glick - Buckingham Research Group: So that's not changing?

No we continue to revisit the store sizes, the way that those assortments are delivered in shop-in- shop environments, and as I mentioned a few minutes ago we will continue to improve upon that next year. David Glick - Buckingham Research Group: Okay. And just one more quick question for Jim in terms of concept three, are you currently making any infrastructure investments in that business that would be a part of the SG&A perhaps higher than people expected for the quarter or is that not material at that point and any update on the announcement of what concept three will be? And what's the timing? Jim O’Donnell: Good question, David. It is immaterial. We are doing some research work and we've commissioned a third party to assist us just evaluating the space that we think that I’d like to venture into, but the incremental expense that we've allocated towards it is minimal. I would anticipate that if all goes according to our plan, we could have announcement sometime around the second half of next year. This is all predicated on the results of MARTIN + OSA. MARTIN + OSA looks to be meeting all of our hurdle rates that we'll probably move forward rather quickly on the next concept. If MARTIN + OSA is not meeting its hurdle rates, I will probably not move forward as quickly although that we feel very strong about this third concept that it could be a tremendous addition to our overall branding of American Eagle. David Glick - Buckingham Research Group: So those expenses would not start to appear in the P&L probably till '08, if all goes -- Jim O’Donnell: It will appear probably in late '07 and then ramp up significantly in '08. David Glick - Buckingham Research Group: Great. Thanks, it's very helpful.

Stacy, we will take one more question.

Your last question comes from Holly Guthrie with Janney Montgomery Scott. Holly Guthrie - Janney Montgomery Scott: Thank you. And let me add my congratulations, good quarter. Two marketing questions; first, as you anniversaried the AE All-Access Pass based on the information that you have learned in the data that you have gathered over the year. Did you make any changes to the program? And then also a marketing question, what do we have until - forward to for Q4 as far as events and programs? I know you are focusing on gift giving. I think you had a program, not promotional last year, but I think it was some sort of volunteer type program that I think went over really well with the kids. I was just wondering if you are doing any venture programs. And then two questions for Joan. First, tax rate for the fourth quarter 37%, what are the factors that are driving that down as compared to the 40%, which was in Q4 last year and then how should we think about some of those drivers and the impact on tax rate going forward and then also payables were up a little bit, I was just wondering if Joan could talk about those? Thank you.

Okay. First, Holly, on the All-Access Pass, we're really quite pleased with this program. We are a little over a year into this program and the number of -- it has really done two major things for us. Number one, it has given us that ability to have a direct customer connection with our cash customer that we didn’t have visibility to before. 70% of our members are under the age of 25, and I don’t have to tell you how valuable that is for us with the 15- to 25-year old demographic that we play in. So that has the absolutely most valuable part of that program. The second piece of that program is as you've seen us pull off dramatically off of the couponing side of the business. We have very little couponing happening in the business, very little money cards happening in our business today, and All-Access Pass has allowed us to invest appropriately in a way that we spend our mark down into building a customer connection rather than couponing for a one-time quick hit that don't do anything for the future of the brand. So what we do in terms of changes in evolutions to All-Access Pass is really the way that we are using that connection with our customer, in a way that we are communicating with the girl and the guy. Okay, so that’s All-Access. As it relates to gift giving towards to the fourth quarter and what are we doing to support that. Our "aerie Tuesdays on the CW" continue into the second week of December. So we are very pleased with the exposure and the support that things like that will do for our aerie business. The other thing is there are gross root events that we will continue to do whether it's our advertising that we do out on college campuses for the football games, whether it's best customer events, we really pulled back, our friends and family events for us that we did just last Sunday, really is a benefit to our customers now. It's not meant to be a top line driving event anymore and what we are doing is taking those efforts in investing them into best customer events and again that's increased dialogue that increased investment in communicating with our customers. So those are the types of changes that we are making into our market expense. Then with respect to payables, it really is a timing issue in terms of the timing of draws on our letters of credit. And then as we look at the effect of cash rate year-over-year relates to the dividend repatriation of our foreign earnings last year and an increase in tax free investments. Holly Guthrie - Janney Montgomery Scott: Great thank you.

And we have reached our allotted time for the question-and-answer session. Ms. Meehan do you have any closing remarks? Jim O’Donnell: I'd like to -- this is Jim O'Donnell, I would like to thank everyone for joining us today and to reiterate across our entire company. We are well positioned for the holiday season, strong and consistent message across merchandizing and marketing and store operations. We would like to wish you all happy holiday season and we look forward to speaking to you all soon. Thanks again bye now.

This concludes today's American Eagle Outfitter's Third quarter 2006 conference call. You may now disconnect.