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Slide 1: Making waves……..work
Slide 2: Dana Telsey Senior Managing Director and Head of Retail Group Bear, Stearns & Co., Inc.
Slide 3: OVERVIEW OF THE RETAIL INDUSTRY March 22, 2004 Dana L. Telsey Senior Managing Director Bear, Stearns & Co. Inc. 212-272-6052, dtelsey@bear.com q Bear Stearns does and seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please read the important disclosure and certification information at the end of this report.
Slide 4: Dana L. Telsey (212) 272-6052 TABLE OF CONTENTS Page 2004 Retail Outlook Retail Industry Overview The Seasons of Retailing Ingredients of Retail Success Demographics The Retail Landscape Retail Formats Is Mass Marketing Dead? Specialty Apparel Department Stores/Discounters Luxury Goods Generation Y Retailers Hard Lines Drug Stores/Grocery Stores/Bookstores Overview of the Retail Industry 3 6 9 11 13 15 18 24 27 30 33 37 45 48
Slide 5: Dana L. Telsey (212) 272-6052 2004 RETAIL OUTLOOK Overview of the Retail Industry
Slide 6: Dana L. Telsey (212) 272-6052 2004 OUTLOOK The economy should remain strong. BSC Chief Market Economist John Ryding expects GDP growth of 5.1% in 1Q04 and 4.7% in calendar 2004, fueled by both stronger business investment and less robust, but still solid consumer spending. Consumer confidence has wavered. After strong increases in December and January, consumer confidence has wavered in February and March. High-end retailers showing strength, while lower-end retailers are waiting for wallets to open. High-end retailers demonstrated notable sales gains as the economy and stock market accelerated. The prospects for lower-end retailers are more tied to the labor market, which is recovering slower than the equity market. This suggests that discounters and mass merchants could see upside with increases in jobs data. The labor market is firming. The gradual improvement in the labor market is expected to accelerate in 2004. More employment translates into higher disposable income and spending. Forward indicators of labor market activity have gained traction: the average work week has increased, average claims have trended lower, and temporary help is growing. Overview of the Retail Industry
Slide 7: Dana L. Telsey (212) 272-6052 2004 OUTLOOK Retailers continue to plan lean inventory levels. Our channel checks indicate that U.S. retailers are squarely focused on remaining “lean and mean,” which bodes well for margins. Price deflation persists. Retailers continue to face price deflation, highlighting the importance of effective inventory management. Apparel prices have declined for four consecutive months, following increases of 0.5% and 0.2% in September and October, respectively; prices were down 1.6% over the past twelve months in February. First-half of 2004 presents easier same-store sales comparisons. In 1H03, retail comps averaged 2.0%. In 2H03, retail comps averaged 4.6%. Retailers expected to announce firm 2004 financial/operating objectives upon release of 4Q03 EPS. Budgets for remodeling of existing and opening of new stores and investments in systems are underway. Retailers have excess cash and little debt. Retail stocks could see gains in 1Q04, if historical trading patterns persist. On average, the BSC Retail Composite has increased approximately 6.0% and 8.2% in 1Q and 4Q since 1990; while, the S&P 500 has only risen 1.8% and 6.8% in 1Q and 4Q, respectively. During 2Q and 3Q, the BSC Retail Composite on average has gained 2.6% and lost 3.9%, compared to the S&P 500, which has increased 3.4% and has decreased 2.4%, respectively. 7 Overview of the Retail Industry
Slide 8: Dana L. Telsey (212) 272-6052 RETAIL INDUSTRY OVERVIEW Overview of the Retail Industry
Slide 9: Dana L. Telsey (212) 272-6052 RETAIL INDUSTRY OVERVIEW Same-Store Sales and the Economy Appear Poised For Improvement.  Top line trends should benefit from tax refunds in 1H04 and more full price selling given lean inventory levels.  Retailers have favorable comparisons in early 2004 that become more challenging post-Easter.  The consumer outlook is brighter given the better mood (war fears LY), improving employment backdrop, and rising stock market. What Will Drive the Top Line in 2004? A Lucky Handful Can Count on Square Footage Growth.  In an environment where same-store sales have been inconsistent, retailers who have room for unit expansion have an edge in realizing revenue growth (but watch those sales productivity levels!).  Square footage growth or unit expansion is typically a more reliable predictor of top-line growth, as store openings are planned up to a year in advance.  Specialty Stores: We currently forecast 2004 square footage growth as follows: ANN 12%, ROST 12%, TJX 8%, TLB 7%. We anticipate essentially flat square footage comparisons at both GPS and LTD in 2004.  Department Stores/Discounters: We currently forecast 2004 square footage growth as follows: KSS 17.3%, WMT 8.4%, COST 6.0%, TGT 7.2%.  Hard Lines: We currently forecast 2004 square footage growth of 11%, 9%, and 9% at BBBY, HD, and WSM, respectively. The Promotional Environment — What is “Full Price”?  Promotional activity has become prevalent and creative in recent years through 2003, with specialty retailers offering shallow discounts, volume pricing deals on key items, and bounce-back promotions to drive sales.  No retailer wants to lose market share or be left holding too much inventory: if it takes discounts to move the merchandise, retailers have demonstrated their willingness to go there.  However, with leaner inventory levels entering 2004, department stores and specialty retailers appear poised to soften their promotional stance, in concert with more favorable consumer demand trends. Overview of the Retail Industry
Slide 10: Dana L. Telsey (212) 272-6052 RETAIL INDUSTRY OVERVIEW The Competitive Environment: It’s A Jungle Out There! Differentiation is essential. Product newness is integral, as department stores become more competitive with new lines available. Mall-based retailers compete with off-the-mall rivals (notably KSS, TGT, and WMT), which has led to continued promotions for specialty apparel retailers. Discounters are also testing mall-based formats. Cash is being invested in store remodels as many specialty retailers have not updated their formats in years. Fewer new mall openings requires retailers to modernize in order to lure mall traffic into their stores. Overview of the Retail Industry
Slide 11: Dana L. Telsey (212) 272-6052 THE SEASONS OF RETAILING Overview of the Retail Industry
Slide 12: Dana L. Telsey (212) 272-6052 THE SEASONS OF RETAILING Spring Season  Typically straddles the first and second quarters of each year (roughly February through May).  Easter usually provides a boost to sales. Summer Season  Typically runs from around May through July, covering the second quarter for retailers.  Generally a low-traffic time of year, with a high level of promotional activity. Back-to-School/Fall Season  August and September are the most important months.  One of the most critical for retailers, as a significant portion of business is generated during this period.  Provides retailers with a key opportunity to increase their share of the teen, ‘tween, and children’s markets. Holiday Season  Begins at the end of October and carries through the fourth quarter ending in January of the following year.  Encompasses Christmas, Halloween, and Hanukkah.  Typically a “make it or break it” time for retailers. Overview of the Retail Industry
Slide 13: Dana L. Telsey (212) 272-6052 INGREDIENTS OF RETAIL SUCCESS Overview of the Retail Industry
Slide 14: Dana L. Telsey (212) 272-6052 INGREDIENTS OF RETAIL SUCCESS SUCCESS Consistent Brand Image. The ability to create a distinct brand identity and to support that image. Merchandising Visionaries. Their creative acumen provides their companies with a significant competitive advantage. An Eye for the Fashion of the Time. Successful retailers are able to quickly translate social trends into product trends. Vertical Integration. Provides more margin cushion in tough economic cycles and heavy promotional pricing periods. Speed to Market. Shorter product cycles are the best way to keep pace with constantly-changing trends. Focus on Customer Service. Training sales associates, in areas such as in-store experience, product knowledge and client relationship management, can add intangible, long-term value to the business. Introduction of New Concepts. Many retailers have developed new platforms for growth by extending their brand into new product categories or new customer sub-segments. Overview of the Retail Industry
Slide 15: Dana L. Telsey (212) 272-6052 DEMOGRAPHICS Overview of the Retail Industry
Slide 16: Dana L. Telsey (212) 272-6052 GEN Y POPULATION GROWTH Gen Y population – large and growing fast!  Gen Y (ages 8- 25), estimated at 72.9 million, is second in size to the baby boomer generation (with approximately 75.4 million people). Teen population (ages 13 - 19) is the largest and fastest growing segment of Gen Y.  Teen population (totaling 29 million) has grown almost twice as fast as the total population.  Teens are expected to reach 35 million by 2010, with the fastest rate of growth (7.5%) projected to continue until 2005.  Majority of teen population growth expected to come from the older (15-19) segment, which has greater earning and spending power. 78.0 26.0% 76.0 25.5% 74.0 Gen Y (age 8-25) Male Female Gen Y Total Tween (age 8-12) Male Female Tween Total Teen (age 13-19) Male Female Teen Total Post-Teen (age 20-25) Male Female Post-Teen Total Population 37,304,350 35,556,701 72,861,050 Population 12,371,056 11,795,557 24,166,613 Population 14,888,886 14,110,351 28,999,236 Population 10,154,310 9,553,177 19,707,487 Millennials (age 0-7) Male Female Millennials Total Gen X (age 26-37) Male Female Gen X Total Baby Boomer (age 38-55) Male Female Baby Boomer Total Matures (age >55) Male Female Matures Total Population 13,794,202 13,187,426 26,981,628 Population 23,188,689 23,340,828 46,529,517 Population 37,193,341 38,235,444 75,428,785 Population 28,159,380 35,286,780 63,446,160 72.0 25.0% 70.0 68.0 24.5% 66.0 24.0% 64.0 62.0 23.5% 60.0 58.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 23.0% Gen Y Pop. (ages 8-25) Gen Y Pop (as % of Total) Source: U.S. Census Bureau, Bureau of Economic Analysis and Bear, Stearns & Co. Inc. estimates. Overview of the Retail Industry
Slide 17: Dana L. Telsey (212) 272-6052 THE RETAIL LANDSCAPE Overview of the Retail Industry
Slide 18: Dana L. Telsey (212) 272-6052 THE RETAIL LANDSCAPE…A FIVE-YEAR OUTLOOK Specialty Apparel  Gap Inc. – Three leading apparel brands in Gap, Old Navy, and Banana Republic with market power. Solid senior management team and strong functional coordination across all three brands.  Limited Brands - Dominant position in the intimate apparel market with Victoria's Secret. Turning around Bath & Body Works: a high margin business with a vast 1,600 store distribution network. The TJX Companies, Inc. - Leading off-price apparel retailer with a large and sophisticated buying organization: competitive advantage. Main Contender: Chico’s.   Luxury  Burberry Group Plc - Growing retail presence in the key U.S. market; expansion of product assortment to include more accessories (which enhances both profitability and brand perception); reinvigoration of the men's business. Coach, Inc. - Continued retail expansion in the U.S. and Japan. Tiffany & Co. – The jewelry market is highly fragmented, and we believe that branded jewelers are very well positioned to take share from local, independent jewelers. Main Contender: Compagnie Financière Richemont SA.    Overview of the Retail Industry
Slide 19: Dana L. Telsey (212) 272-6052 THE RETAIL LANDSCAPE…A FIVE-YEAR OUTLOOK Department Stores/Discounters  Costco Wholesale Corporation - Merchandise expertise and customer focus drives comps and high membership renewal rates.   Federated Department Stores, Inc. - Differentiated merchandise assortment due to successful private brand initiatives. Wal-Mart Stores, Inc. – Wal-Mart will continue to dominate the retailing landscape through its everyday low price strategy which is supported by its world-class distribution and systems network. Main Contender: The May Department Stores Company  Hard Lines  Best Buy Co., Inc. - Customer centricity initiative focused on better understanding the company's best customers and meeting their total home entertainment needs.   Bed Bath & Beyond Inc. - Decentralized model allows store managers to tailor assortments to local tastes and demands, driving traffic. Lowe's Companies, Inc. - Core competency and competitive advantage remain its ongoing departmental resets and line reviews to keep the stores looking fresh and the assortment relevant, even in segments that have exhibited strong growth, such as appliances. PETCO Animal Supplies, Inc. – Strong customer loyalty program allows company to "know its customer"; continuous investment in store base to maintain fresh and relevant shopping experience. Williams-Sonoma, Inc. – WSM’s key competitive advantage is the development and operation of distinguished and well-recognized, vertically integrated brands that are sold through multiple distribution channels (retail, catalog, and internet). Main Contender: Kinkos.   Overview of the Retail Industry 
Slide 20: Dana L. Telsey (212) 272-6052 RETAIL FORMATS Overview of the Retail Industry
Slide 21: Dana L. Telsey (212) 272-6052 EMERGING RETAIL FORMATS Retailers that cater to their audience’s lifestyle are winning! The feel-good factor is key.  Brite Smile  Jo Malone  Origins Price is important.  A.J. Wright (a division of The TJX Companies Inc.)  dd’s Discounts (a division of Ross Stores, Inc.)  Justice (a division of Too, Inc. )  West Elm (a division of Williams-Sonoma, Inc.) The in-store experience is key. It’s not just about the product anymore.  American Girl Place (a division of Mattel, Inc.)  Build-a-Bear Workshop  Club Libby Lu (a division of Saks Incorporated )  Girl Mania (privately held, California based)  Williams-Sonoma, Inc. Multi-brand and highly differentiated retailers are strong in the teen space.  Anthropologie (a division of Urban Outfitters, Inc.)  Hot Topic, Inc.  Pacific Sunwear of California Inc.  Urban Outfitters, Inc. Online/Multi-channel formats.  Amazon.com  Coach, Inc.  Costco Wholesale Corporation  Ebay  Gap Inc. Overview of the Retail Industry
Slide 22: Dana L. Telsey (212) 272-6052 EMERGING RETAIL FORMATS Online/Multi-channel formats (cont’d)  Target Corporation  Wal-Mart Stores, Inc. The urban trend is expanding.  d.e.m.o (a division of Pacific Sunwear of California, Inc.)  Enyce (a division of Liz Claiborne Inc.)  Phat Farm & Baby Phat (divisions of Kellwood Company)  Sean John  Rocawear The popularity of jewelry is surging.  Debeers  Kieselstein Cord  Tiffany & Co. Catering to the older consumer.  Chico's FAS, Inc.  Eileen Fisher  The Talbots, Inc. Kids and teen furniture.  Bombay Kids (a division of The Bombay Company, Inc.)  Cargokids! (a division of Pier 1 Imports, Inc.)  Ethan Allen Kids (a division of Ethan Allen Interiors Inc.)  Pottery Barn Kids/Teen (a division of Williams-Sonoma, Inc.) Overview of the Retail Industry
Slide 23: Dana L. Telsey (212) 272-6052 EMERGING RETAIL FORMATS Intimate Apparel.  PINK by Victoria’s Secret (a division of Limited Brands)  Soma by Chico’s Catalogs – Maintaining the Momentum. Beginning  American Eagle Outfitters  The Home Depot  Urban Outfitters, Inc.  Williams-Sonoma, Inc. Ending  Abercrombie & Fitch  Target Corporation Overview of the Retail Industry
Slide 24: Dana L. Telsey (212) 272-6052 DECLINING RETAIL FORMATS Location is what matters.  Circuit City Stores, Inc.  Kmart Holding Corporation  Payless ShoeSource, Inc. Proliferation of Giant Discounters.  Footstar (Foot Action)  Mervyn’s  Sears, Roebuck and Co.  Toys "R" Us, Inc Expansion of Gen Y Retailers…..Survival of the fittest. Beginning  Anthropologie (a division of Urban Outfitters, Inc.)  d.e.m.o. (a division of Pacific Sunwear of California, Inc.)  Torrid (a division of Hot Topic, Inc.) Ending  Delia's  Gadzooks  mishmash  Zutopia Brand Maturity: Tired brands typically go downmarket.  Isaac Mizrahi to Target Corporation  Lands’ End to Sears, Roebuck and Co.  Laura Ashley to Kohl’s  Levi Strauss to Target Corporation & Wal-Mart Stores, Inc.  Mossimo to Target Corporation  Structure to Sears, Roebuck and Co.  White Stag to Wal-Mart Stores, Inc. Overview of the Retail Industry
Slide 25: Dana L. Telsey (212) 272-6052 DECLINING RETAIL FORMATS Can a Retail Format come back to life?  Abercrombie & Fitch  Ann Taylor Stores Corporation  Bath & Body Works (a division of Limited Brands)  Burberry Group Plc  Gucci Overview of the Retail Industry
Slide 26: Dana L. Telsey (212) 272-6052 IS MASS MARKETING DEAD? HOW TO AVOID THE Overview of the Retail Industry
Slide 27: Dana L. Telsey (212) 272-6052 IS MASS-MARKETING DEAD? – HOW TO AVOID THE Personalization. Personalizing the message is powerful! Competitive differentiation. Does the consumer recognize the retailer? Retailers are trying new and innovative ways to reach and keep prospective customers! Is the store itself an advertisement? Contests and sweepstakes. TV specials devoted to product. Customer loyalty/bounce-back programs. Shipping discounts on on-line purchases. Targeted emails, but sent infrequently so as not to irritate the recipient to avoid higher unsubscribe rates. Discount coupons and gift certificates in direct mailing vs. catalogs with no additional enticement. Gen Y retailers are sponsoring music and sporting goods events as a means of reaching out to their customers. Overview of the Retail Industry
Slide 28: Dana L. Telsey (212) 272-6052 2002 ADVERTISING EXPENDITURES OF RETAILERS Mall Retailers: Advertising as a Percentage of Sales Off-The-Mall Retailers: Advertising as a Percentage of Sales 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 4.9% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 4.1% 4.0% 3.7% 2.7% 3.8% 3.8% 2.2% 1.2% 1.1% 1.0% Broadlines Consumer Electronics Home Furnishings Office Superstores Discounters Off-Price Dept. Stores Luxury Adult Retailers Gen Y Average = 3.6% Source: Company Report, Bear, Stearns & Co. Estimates Overview of the Retail Industry Home Improvement Average = 2.6%
Slide 29: Dana L. Telsey (212) 272-6052 Specialty Apparel Overview of the Retail Industry
Slide 30: Dana L. Telsey (212) 272-6052 2004 SPECIALTY APPAREL OUTLOOK The Fundamentals Remain Strong. Specialty retailers have been upgrading the fashion and quality elements of their assortments to compete more effectively with apparel offerings from discount retailers. Will The Gains Realized in 2003 Continue in 2004? We Think So… Specialty apparel retailers appreciated 33% in 2003 versus the broader market gain of 26%. Strong performance may continue in 1H04, as favorable comparisons can translate into sizeable double digit earnings growth, on average. Overview of the Retail Industry
Slide 31: Dana L. Telsey (212) 272-6052 RECENT TRENDS IN SPECIALTY APPAREL Maturation of Store Base. “400/800 Rule”: when retailers expand beyond the superb 400 malls and 800 strip centers in the U.S., same-store sales typically decelerate. Heavy Promotional Activity and Tight Inventory Management. Use of aggressive markdowns to keep inventory levels clean. “Squeezing the Middle” with Vigilant Expense Management. To mitigate the impact of lackluster same-store sales, companies have focused on keeping tight control over expenses. This should facilitate operating leverage should sales trends accelerate in 2004. “Home is Where the Heart Is.” Since September 11th 2001, consumers have demonstrated a “cocooning” instinct. Consumers Are Increasingly Price Sensitive. We believe that consumers will remain highly price sensitive, favoring off-price or discount retailers. Specialty stores and department stores have been escalating the fashion and quality of their assortments to present shoppers with a more alluring value proposition. Overview of the Retail Industry
Slide 32: Dana L. Telsey (212) 272-6052 Department Stores/Discounters Overview of the Retail Industry
Slide 33: Dana L. Telsey (212) 272-6052 DISCOUNTERS OUTLOOK Discounters are benefiting from the migration to “Off-the-Mall” formats. Topline growth through square footage expansion and positive same-store sales. Upcoming same-stores sales comparisons ease. DEPARTMENT STORE OUTLOOK Leveraged to a same-store sales recovery. Restructuring of underperforming assets. Overview of the Retail Industry
Slide 34: Dana L. Telsey (212) 272-6052 DISCOUNTERS ISSUES A shallow jobs recovery could hurt middle to lower income households ability to spend. Execution of square footage expansion. Competition may drive gross margins down, while healthcare costs continue to escalate. DEPARTMENT STORE ISSUES Spending by higher income households has improved, but middle income households remain cautious. Department stores are in secular decline, dependence on comp sales recovery. Execution risk – numerous turnarounds underway. Overview of the Retail Industry
Slide 35: Dana L. Telsey (212) 272-6052 Luxury Goods Overview of the Retail Industry
Slide 36: Dana L. Telsey (212) 272-6052 LUXURY GOODS MARKET OVERVIEW INDUSTRY SIZE $88 billion market that has grown at a ten-year CAGR of 6% Industry growth from 1998-2001 was about 8%, driven by strong equity markets and the emergence from the Asian Crisis Given current macroeconomic concerns, we estimate that the market should grow at a rate of 3%-5% annually over the next three-to-five years, slightly below its historical long term growth trend 2003 Luxury Goods Industry Sales (in % of Industry Categories billions) Sales Clothing $24.6 28% Fragrances & Cosmetics 21.1 24% Shoes & Leather Goods 18.5 21% Wine & Champagne 13.2 15% Jewelry & Watches 6.2 7% Home Accessories 4.4 5% Total Industry $88.0 100% Source: Bear, Stearns & Co. Estimates Je w e lry & Wa tc h e s 7% Win e & Ch a m p a g n e 15 % Ho m e Ac c e s s o rie s 5% Clo th in g 28% Sh o e s & Le a th e r Go o d s 2 1% Fra g ra n c e s & Co s m e tic s 2 4% Overview of the Retail Industry
Slide 37: Dana L. Telsey (212) 272-6052 LUXURY GOODS OUTLOOK A global macroeconomic recovery appears to be underway. News flow regarding sales growth trends should be positive. An unfavorable currency environment persists. The recent outperformance of luxury goods stocks likely reflects their early-cycle characteristics. Enviable characteristics. Over the long term, industry fundamentals remain strong. Expectations for 2004 generally remain modest. Overview of the Retail Industry
Slide 38: Dana L. Telsey (212) 272-6052 LUXURY GOODS EMERGING TRENDS IN THE MARKETPLACE Connoisseurship. Quality Trumps Quantity. Special Services. Custom-Made Merchandise. Designer Hotels. Overview of the Retail Industry
Slide 39: Dana L. Telsey (212) 272-6052 Generation Y Retailers Overview of the Retail Industry
Slide 40: Dana L. Telsey (212) 272-6052 GEN Y 2004 OUTLOOK Target demographic that is one of the most recession resilient and least impacted by macro issues. A growing population with spending power and an appetite for cool brands and styles. FY04 sales outlook – easy comparisons provide momentum to current results. How low can prices go? New concepts provide growth opportunities. Overview of the Retail Industry
Slide 41: Dana L. Telsey (212) 272-6052 GEN Y ISSUES More concepts and stores make oversaturation a growing concern. Key players faced an ongoing trend of negative comparable store sales declines in 2003… Sales trends are now headed north in 2004 – will it last? Teen unemployment is higher than the overall U.S. rate of unemployment. Overview of the Retail Industry
Slide 42: Dana L. Telsey (212) 272-6052 THE GENERATION Y CONSUMER There are many different types of Gen Y consumers, and the various distinctions are important. sex (male/female) age category (‘tween, teen, and college/20-something) personality (leader or follower) style (classic, goth/punk, prep, surfer/skater) special sizes (the plus-size market) Gen Y Dollar Volume Market Share in Apparel Spending (by Age and Sex) (as a % of total dollars spent on apparel) Demographic 2003 2002 Tween (% of Gen Y) 19% 20% Female (% of tween) 58% 59% Male (% of tween) 42% 41% Teen (% of Gen Y) Female (% of teen) Male (% of teen) Post Teen/College (% of Gen Y) Female (% of post teen/college) Male (% of post teen/college) Total Gen Y Female (% of Gen Y) Male (% of Gen Y) 48% 64% 36% 36% 64% 36% 63% 37% 48% 64% 36% 35% 62% 38% 62% 38% 2001 22% 55% 45% 49% 62% 38% 32% 64% 36% 61% 39% Source: NPDFashionworld Consumer Information. Overview of the Retail Industry
Slide 43: Dana L. Telsey (212) 272-6052 WHERE DOES TODAY’S GEN Y CONSUMER SHOP? Discounters are gaining favor. Department stores are still a favorite destination. Specialty apparel stores earn high marks for their cool in-store experience and brand status. According to Cotton Inc.’s Lifestyle Monitor, most teen females buy clothes from specialty stores. Overview of the Retail Industry
Slide 44: Dana L. Telsey (212) 272-6052 GUYS & GIRLS The Gen Y Female Consumer.  ‘Tween Girls. Gen Y females currently represent the largest female consumer group.  Teen Girls. The ‘tween girl represents a lucrative opportunity for retailers.  Most teen girls are trend savvy – it is not just the clothes and accessories, but the whole look that the teen girl aspires to define. Post-Teen/College Girls.  According to STS Market Research, females (ages 20 to 24) spent $3.3B in 2003 on “casual sportswear” (including most apparel, excluding outerwear, innerwear, socks, shoes and accessories). Overview of the Retail Industry
Slide 45: Dana L. Telsey (212) 272-6052 GUYS & GIRLS The Male Gen Y Consumer. We estimate that annual sales for the Gen Y male apparel market continues to trail behind the female Gen Y apparel market by at least 25%. While guys tend to prioritize fashion to a lesser degree than girls, fashion and the ‘right look’ is still important to them. Styles that were once considered too trendy for guys – like low rise jeans – have made their way into the male Gen Yer’s wardrobe. What are the fashion items on the typical guy’s list? Cargo pants, graphic tees, hooded sweatshirts, jeans, novelty button-down shirts, retro sneakers. What are male Gen Y consumers spending their money on? Video retailers, electronic and music stores, and athletic/sporting goods stores. Overview of the Retail Industry
Slide 46: Dana L. Telsey (212) 272-6052 GEN Y IDOLS – THE INFLUENCES Today’s Gen Y consumer is always on the hunt for the latest and coolest look and items, whether it is apparel, accessories, a cell phone, or a hair style – Image is everything and brands are key! What are the main influences on Gen Y fashion? Who are their favorite celebrities? What television shows do they like to watch? What music do they like to listen to? What beauty/fashion magazines do they like most? Allure, Cosmo Girl, Cosmopolitan, Elle Girl, GamePro, Glamour, Maxim, People, Seventeen, Sports Illustrated, Teen People, US Weekly, Vibe, Vogue, and YM. Interestingly, Cosmopolitan has a higher readership among teen girls than “CosmoGirl,” the magazine created for their target demo – clearly, teen girls strive to look and act older. Overview of the Retail Industry
Slide 47: Dana L. Telsey (212) 272-6052 Hard Lines Overview of the Retail Industry
Slide 48: Dana L. Telsey (212) 272-6052 INDUSTRY SIZES AND GROWTH RATES Estimated growth rates are relatively low in the largest industries.  The Home Improvement and Office Superstores industries are the largest Hard Lines sectors. Both are estimated to growth approximately 3.0% over the next three years.  The Video Retailing industry is the smallest sector, but has the strongest estimated three-year growth rate of 7.0%. Sector Consumer Electronics Home Furnishings Home Improvement Office Superstores Pet Supply Superstores Video Retailers 2003 Estimated Size of Industry (in $B) $95 $111 $390 $335 $31 $25 Long Term Growth Rate 5.0% 4.0% 5.0% 3.0% 5.0% 7.0% Source: BSC estimates. Overview of the Retail Industry
Slide 49: Dana L. Telsey (212) 272-6052 INDUSTRY OVERVIEW Consumer Electronics: Consumer demand for digital products have led to increased sales momentum. Home Furnishings: Consumers continue to invest in their homes. Home Improvement: Housing market activity remains at high levels, but the pace of mortgage refinancing has slowed considerably this year. Office Superstores: The office superstores made a conscious decision over a year ago to focus more on the business customer, and less on the average individual consumer. Merchandise assortments have been shifted appropriately. Pet Supply Superstores Growing services businesses at the pet superstores retailers drive top line gains and margin enhancement. In addition, both retailers have enjoyed a beneficial gross margin impact from the ongoing product mix shift away from lower-margin food products and towards higher-margin supplies, services and accessories. Video Retailers: We anticipate movie rentals will be down mid-to-high single digits vs. the year-earlier period, which benefited from blockbuster titles such as Sweet Home Alabama and My Big Fat Greek Wedding. Overview of the Retail Industry
Slide 50: Dana L. Telsey (212) 272-6052 Drug Stores/Grocery Stores/Bookstores Overview of the Retail Industry
Slide 51: Dana L. Telsey (212) 272-6052 DRUG STORES OVERVIEW There are more than 35,000 drug stores nationwide which are operated by traditional chain pharmacy companies, supermarkets and mass merchants. In addition, there are another nearly 20,000 independent pharmacies. 2002 sales for all traditional drug stores (chain & independents) were $153.0 billion and are estimated at $165.0 billion for 2003. In 2003, 8.90% of all single copy magazine purchases were sold at drug stores. BOOKSTORES OVERVIEW According to Book Industry Trends 2003, Domestic Consumer expenditures on all books are expected to reach $43 billion by the year 2007. Overall preliminary 2003 bookstore retail sales reached $16.2B, up 5.6% from $15.8B in ’02. In 2003, 12.43% of all single copy magazine purchases were sold at bookstores. GROCERY STORES OVERVIEW Grocery stores ranked among the largest industries in 2002, providing 2.5 million wage and salary jobs. In 2002, there were about 86,000 grocery stores throughout the Nation. 2002 grocery store sales were $443.3 billion and are estimated at $456.6 billion for 2003. In 2003, 42.75% of all single copy magazine purchases were sold at supermarkets/grocery stores followed by discount stores, bookstores and drugstores.  More than half of all supermarket magazine sales are purchased from the checkout display. Source: American Booksellers Association; Bureau of the Census, Current Retail Trade Branch Book Industry Study Group, Inc. New York, NY; U.S. Department of Labor: Bureau of Labor Statistics Grocery Store Headquarters; ”Front-End Focus” study by Dechert-Hampe/Masterfoods USA National Association of Chain Drug Stores (NACDS); The NEW Single Copy, Harrington Associates, LLC, March 8, 2004 U.S. Census Bureau; Bear, Stearns & Co. Inc. Estimates; US Dept of Labor: Bureau of Labor Statistics Overview of the Retail Industry
Slide 52: Dana L. Telsey (212) 272-6052 Bear, Stearns & Co. Ratings Ra tin g Co m p a n y TK R Cu rre n t $ Ap p a re l P P O P O O P O A n nT a ylo r S t o re s (a ) Ra tin g Co m p a n y TK R Curre n t $ Co n s um e r Ele c tro n ic s Re ta ile rs ANN C HR S GP S (e) 4 1.6 4 7 .3 3 2 0 .8 7 2 6 .17 19 .15 2 9 .0 3 3 4 .5 2 2 3 .9 4 O U P B e s t B uy C o . Inc . C irc u it C it y S t o re s In c . R a d io S h a c k C o rp. BBY CC RS H 4 7 .7 2 11.11 3 2 .4 5 C h a rm in g S h o p pe s , In c . G a p In c . M e n 's We a rho u s e T he L im it e d , In c . R o s s S t o re s , Inc . T he T a lb o t s T he T J X C o s ., In c . MW LT D R OS T T LB TJX Ho m e Fu rn is h in g s O P P P B e d B a t h & B e yo n d L ine n s 'n T h ing s R e n t -A -C e nt e r T u e s d a y M o rn ing Willia m s - S o n o m a BBBY L IN R C II T UE S WS M 3 9 .11 3 4 .5 2 3 1.8 2 3 3 .0 9 3 3 .6 1 T e e n Re ta ile rs P P O P P A b e rc ro m b ie & F it c h A m e ric a n E a g le H o t T o p ic P a c if ic S u n we a r Too In c . ( e ) (e ) (e ) P ANF A E OS HO T T P S UN T OO 3 1.18 2 5 .4 2 5 .5 1 2 3 .14 18 .7 2 P O Ho m e I p ro v e m e n t m H o m e D e po t L o we 's HD LOW 3 6 .9 9 5 4 .8 4 Offic e Sup e rs to re s Fo o tw e a r P G e ne s c o GCO 2 1.6 6 P O O f f ic e D e p o t S t a ple s ODP S P LS 17 .8 6 2 5 .19 Luxu ry Go o d s P O O P U P P O B u lg a ri S .p .A . (in E uro ) B u rb e rry G ro u p ( b ) (In G B P ) C o a c h , In c ( c ) G u c c i G ro up (in E u ro ) H e rm e s In t 'l (in E u ro ) L V M H (in E u ro ) R ic h e m o n t G ro up (in S F r) T if f a n y & C o m p a n y ( d) B UL G .M I B R B Y .L C OH G C C I.A S H R M S .P A L V M H .P A C F R .V X T IF 6 .7 1 3 .5 2 4 0 .6 7 6 9 .0 0 15 6 .2 0 5 8 .0 0 3 2 .4 0 3 8 .3 0 P U O O O Pe t Su p p ly Sup e rs to re s P ETCO P E Ts MA RT P ETC P ETM 2 9 .2 5 2 5 .6 5 Vid e o Re ta ile rs B lo c kb u s t e r Inc . H o llywo o d E n t . M o v ie G a lle ry BBI HL Y W MOVI 18 .0 7 10 .8 9 19 .3 2 De p a rtm e n t Sto re s /Bro a d lin e s P O P O O O P O U O O C o s t c o Wh o le s a le C o rpo ra t io n D o lla r G e ne ra l C o rp o ra t io n F a m ily D o lla r S t o re s , In c . C OS T DG F DO 3 7 .3 5 19 .19 3 4 .18 5 0 .4 6 3 3 .9 5 3 7 .6 5 5 0 .0 3 3 2 .9 0 4 4 .4 8 4 4 .8 9 5 8 .9 5 F e d e ra t e d D e p a rt m e nt S t o re s , Inc . F D J . C . P e nn e y C o m p a n y, Inc . N o rd s t ro m , In c . K o hl's C o rp o ra t io n JCP J WN KS S T he M a y D e p a rt m e n t S t o re s C o m p a ny Y MA S e a rs , R o e b uc k a n d C o . T a rg e t C o rpo ra t io n Wa l-M a rt S t o re s , Inc . S TGT WM T *S t o c k s p ric e d 3 /18 /0 4 Legend: O=Outperform, P=Peer Perform, U=Under perform Overview of the Retail Industry Source: Bear, Stearns & Co.
Slide 53: Dana L. Telsey (212) 272-6052 DISCLOSURE INFORMATION Disclosures The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Signature(s) Dana L. Telsey This report has been prepared by Bear, Stearns & Co. Inc., Bear, Stearns International Limited or Bear Stearns Asia Limited (together with their affiliates, "Bear Stearns"), as indicated on the cover page hereof. This report has been adopted and approved for distribution in the United States by Bear, Stearns & Co. Inc. 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Equity Research Rating System: Ratings for Stocks (vs. analyst coverage universe): Outperform (O) - Stock is projected to outperform analyst's industry coverage universe over the next 12 months. Peer Perform (P) - Stock is projected to perform approximately in line with analyst's industry coverage universe over the next 12 months. Underperform (U) - Stock is projected to underperform analyst's industry coverage universe over the next 12 months. Ratings for Sectors (vs. regional broader market index): Market Overweight (MO) - Expect the industry to perform better than the primary market index for the region over the next 12 months. Market Weight (MW) - Expect the industry to perform approximately in line with the primary market index for the region over the next 12 months. Market Underweight (MU) - Expect the industry to underperform the primary market index for the region over the next 12 months. FOR INDUSTRY COVERAGE DATA, PLEASE CONTACT YOUR ACCOUNT EXECUTIVE OR VISIT www.BEARSTEARNS.com Bear, Stearns & Co. Ratings Distribution as of December 31, 2003: Percentage of BSC universe with this rating / Percentage of these companies which were BSC investment banking clients in the last 12 months. Outperform (Buy): 34.3 / 17.6 Peer Perform (Neutral): 49.6 / 10.4 Underperform (Sell): 16.0 / 5.7 The costs and expenses of Equity Research, including the compensation of the analyst(s) that prepared this report, are paid out of the Firm's total revenues, a portion of which is generated through investment banking activities. For important disclosure information regarding the companies in this report, please contact your registered representative at 1-888-473-3819, or write to Lyndsay Marano, Equity Research Compliance, Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, NY 10179. Overview of the Retail Industry
Slide 54: Overview of the Retail Industry