Deborah Weinswig

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See Appendix A-1 for Analyst Certification and
Important Disclosures
Retail Panel Discussion
CFA Society of Minnesota
Deborah Weinswig Citi Investment
Research 212-816-1860 deborah.weinswig_at_citi.com

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Published 6/23/2009
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Overview

1. Macro Outlook - Page 3
2. Sector Outlook - Page 5
3. Holiday 2009 Outlook - Page 12
4. A Historical Perspective - Page 13
5. Long / Short Ideas - Page 14

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I. Macro Outlook Consumers Hunker Down During
Recession
The deteriorated economic landscape from 2008,
continues into 2009
Unemployment

• Unemployment reached 9.8 in September, the
  highest monthly rate in 26 years.
• Consumers have increased their level of savings
  due to uncertainty of their job and income.
• With less jobs, delinquencies on personal loans
  have risen substantially, especially in 2009.

4.9 in 12/07 9.8 in 9/09 6.2 Monthly Avg.
Savings Rate
Personal Loan Delinquency Rate
1.4 in 12/07 3.0 in 8/09 7.0 Monthly Avg.
2.2 in 12/07 3.5 in 3/09 3.0 Monthly Avg.
Source Bureau of Labor Statistics, Haver, Citi
Investment Research
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but has recently shown early signs of
stabilization.
I. Macro Outlook Consumers Hunker Down During
Recession
Housing Turnover

• Housing turnover rose for the second consecutive
  month in August, which may indicate an inflection
  point has occurred.
• In August, food deflation increased sequentially
  and for the second time since October of 2002.
  Food deflation could continue into 2010.
• Expectations for consumer demand look promising
  for the back half of 2009 and through 2010.

Consumer Demand (YOY Change)
Food Disinflation / Deflation
Source Citi Investment Research, National
Association of Realtors, United States Dept. of
Agriculture
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II. Sector Outlook Tailwinds
2008 Private Label and Exclusives as a of Sales
Tailwind 1 Private Label Penetration

• Private label products are gaining acceptance,
  given their low prices, improving product quality
  that is often comparable to national brands, and
  by better marketing efforts.
• Retailers are increasing their focus on private
  label as a way to differentiate their offering
  from the competition as well as expand margins.

2008 / 2009 Sales Weighted SSS
Tailwind 2 Easy Compares

• In 2H09, the Broadlines retailers are cycling
  relatively easy SSS comparisons. In 2010, SSS
  comparisons will be even more favorable, given
  retailers paltry performance in 2009 thus far.
• If consumer spending stabilizes or improves this
  year, retailers should benefit from a weak sales
  performance in 2H08.

Source Citi Investment Research, Company Reports
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II. Sector Outlook Tailwinds
Tailwind 3 Retail Industry Consolidation

• Several major retailers filed for bankruptcy in
  2008, including Goodys, Mervyns, Boscovs, and
  Linens-N-Things, and many also announced plans to
  close a sizable portion of their stores.
  Notably, Linens-N-Things will close almost 35 of
  their stores.
• Most notably in 2009, Gottschalks, Fortunoff,
  Filenes Basement, and Eddie Bauer have all filed
  for bankruptcy.

• We expect continued retail consolidation this
  year to benefit the remaining players, both from
  a market share and real estate perspective.
• The demise of value-oriented retailers such as
  Goodys, Mervyns, and Boscovs has left market
  share up for grabs and we believe J.C. Penney and
  Kohls will end up benefiting the most.
• The increasing glut of vacant retail real estate
  resulting from retail bankruptcies, store base
  rationalization, and over building also provides
  opportunities for surviving retailers to secure
  deals with attractive terms.

Source Website
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II. Sector Outlook Tailwinds
Tailwind 4 Comeback in Fashion

• There are signs of the beginning of a comeback in
  fashion. As shown below, there are a few new hot
  items, as womens apparel has begun to
  strengthen. Consumers will not be able to shop
  their closets for these items which should drive
  traffic to the malls.

Leggings Often worn with solid color skirt and
belt
Graphic Tees Art deco landscapes to famous faces
Skinny Jeans Snug fit through the legs with small
leg opening
Lace Details Can be found on intimate or formal
items
Boots Knee-highs or ankle boots
Colors for Fall 2009 Purple/berries, Blue
(cobalt to navy to light blue), and neutrals
(black, grey, white).
Source Doneger Group, Fashion Trendsetter,
Company Websites, and Citi Investment Research
and Analysis.
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II. Sector Outlook Tailwinds
Tailwind 5 Resurgence of D-I-Y
Scratch Cooking As a way to save money, more and
more consumers are cooking at home vs. going out
to a restaurant.
Cooking Classes Some grocers have started to
offer cooking classes in their stores to teach
consumers how to save money and eat healthy by
cooking meals at home.
How To Clinics Home Depot offers in-store
clinics for customers and has awarded over
187,000 product knowledge certifications to its
associates.
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II. Sector Outlook Tailwinds
Tailwind 6 Retailers Adapt to Current
Environment
Convenience CVS offers Minute Clinics inside
stores
Retailtainment Target stores feature a One Spot
area near the entrance where customers can find
bargains for only 1
Shopping Experience Stores have removed clutter,
improved signage, and provide better help due to
less turnover with store associates.
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II. Sector Outlook Headwinds
Headwind 1 Consumers Intensely Focused on Price

• Consumers have become trained to shop
  promotions, and it will take time for retailers
  to get the consumer to buy at full-price again.
  We believe that this will be particularly
  challenging for high-end retailers like JWN and
  SKS.

• Price, especially on consumables, has become an
  increasingly important driver for the consumers.
  They are looking for value and shop where the
  lowest prices are. We believe this is why
  traffic has been increasing at the clubs,
  discount stores, and discount department stores.

Source Citi Investment Research and Analysis,
Company Reports.
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II. Sector Outlook Headwinds
Headwind 2 Not Enough Inventory

• In 2008, as consumers reigned in their spending,
  inventories built up and retailers were forced to
  heavily discount many items to make room for
  Spring items and new merchandise.
• As a result, retailers have drastically reduced
  their inventories and plan on chasing inventory,
  at least in part. If sales are more robust than
  expected, this could result in lost sales.

Inventory / Sales Ratio

• With slowing sales in December of 2008,
  retailers inventory to sales ratio reached 1.39,
  the highest level since mid-2003.
• Retailers have since adjusted their purchasing
  strategies and are now operating at 1.32 times
  inventory to sales.

Source Citi Investment Research and Analysis,
Company Reports.
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III. Holiday 2009 Outlook

• We believe retailers plan to promote Holiday
  merchandise earlier this year vs. last year, in
  order to benefit from the increasing amount of
  early holiday shoppers, and given the possibility
  of another poor Holiday sales performance this
  year.
• During Holiday 2008, 40 of consumers starting
  their shopping before November, which was up from
  34 in 2007 (according to the NRF). From recent
  store checks in the NY/Metro area, we have seen
  retailers set for the Holidays earlier than in
  years past.

Number of Black Friday Weekend Shoppers (Thursday
Sunday)

• We expect 2009 Holiday sales for retailers
  under our coverage to be 0 to 1.
• 2008 Holiday Sales were 441.97 billion, a
  (-3.4) decline from 2007 (according to the NRF)

• Our proprietary survey of 1,050 consumers,
  showed that 51 plan to spend less this year than
  last year on total Holiday purchases, and 41
  plan on spending the same.
• Price was the number one reason cited when
  choosing where to shop this year. In addition,
  85 of respondents plan on visiting a discount
  store (such as Wal-Mart, Target, or K-Mart) to do
  their Holiday shopping this year.

Source Citi Investment Research and Analysis,
National Retail Federation
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IV. A Historic Perspective
History has shown that the SP bottoms four
months before GDP

Source Citi Investment Research and Analysis
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V. Long / Short Ideas

• Long Ideas
• CVS (1M)
• Flawless retail business execution
• Additional upside to the LDG business in 2009
• Retail/PBM model to continue to gain traction and
  drive strong results and market share gains into
  2010
• Home Depot (1M)
• Favorable long-term outlook of the home
  improvement industry despite near-term weakness
• Comparable store sales growth are beginning to
  show signs of life
• Improved sales and margin initiatives over the
  next several years will drive earnings
  performance
• J.C. Penney (1H)
• Well-positioned to gain market share due to
  retail bankruptcies
• Strategic initiatives to drive EBIT margin
  improvement
• Gross margin to benefit from private label and
  exclusive brand growth, improved inventory flow,
  and product cost deflation.
• Short Ideas
• SWY (3H)
• Currently facing food deflation, that may
  continue through 2010, which could mute most of
  the gross margin improvements expected from SWY's
  private label and Lifestyle store initiatives.
• Fierce competition from the discounters and
  clubs, which could lead to further pricing
  pressure.
• Revenue from the Blackhawk business may be weak
  as a result of consumers cutting back on
  discretionary purchases.

Source Citi Investment Research and Analysis
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