Making waves……..

work
 Dana Telsey
Senior Managing Director
and Head of Retail Group
Bear, Stearns & Co., Inc.
 OVERVIEW OF THE RETAIL
INDUSTRY
March 22, 2004

Dana L. Telsey
Senior Managing Director Bear, Stearns & Co. Inc.
●

212-272-6052, dtelsey@bear.com
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.
 Dana L. Telsey (212) 272-6052

TABLE OF CONTENTS

Page
2004 Retail Outlook 3
Retail Industry Overview 6
The Seasons of Retailing 9
Ingredients of Retail Success 11
Demographics 13
The Retail Landscape 15
Retail Formats 18
Is Mass Marketing Dead? 24
Specialty Apparel 27
Department Stores/Discounters 30
Luxury Goods 33
Generation Y Retailers 37
Hard Lines 45
Drug Stores/Grocery Stores/Bookstores 48

Overview of the Retail Industry

 Dana L. Telsey (212) 272-6052

2004 RETAIL OUTLOOK

Overview of the Retail Industry

 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

 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

 Dana L. Telsey (212) 272-6052

RETAIL INDUSTRY OVERVIEW

Overview of the Retail Industry

 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

 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

 Dana L. Telsey (212) 272-6052

THE SEASONS OF RETAILING

Overview of the Retail Industry

 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

 Dana L. Telsey (212) 272-6052

INGREDIENTS OF RETAIL SUCCESS

Overview of the Retail Industry

 Dana L. Telsey (212) 272-6052

INGREDIENTS OF
INGREDIENTS OFRETAIL
RETAILSUCCESS
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

 Dana L. Telsey (212) 272-6052

DEMOGRAPHICS

Overview of the Retail Industry

 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%

GenY(age8-25) Population Millennials (age0-7) Population

76.0
Male 37,304,350 Male 13,794,202
25.5%
74.0
Female 35,556,701 Female 13,187,426
GenYTotal 72,861,050 Millennials Total 26,981,628
72.0
25.0%
Tween(age8-12) Population GenX(age26-37) Population
70.0 Male 12,371,056 Male 23,188,689
Female 11,795,557 Female 23,340,828
68.0 24.5%
TweenTotal 24,166,613 GenX Total 46,529,517
66.0
Teen(age13-19) Population BabyBoomer(age38-55) Population
24.0%
64.0 Male 14,888,886 Male 37,193,341
Female 14,110,351 Female 38,235,444
62.0 TeenTotal 28,999,236 Baby Boomer Total 75,428,785
23.5%

60.0
Post-Teen(age20-25) Population Matures (age>55) Population
Male 10,154,310 Male 28,159,380
58.0 23.0%
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
Female 9,553,177 Female 35,286,780
Post-Teen Total 19,707,487 Matures Total 63,446,160
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

 Dana L. Telsey (212) 272-6052

THE RETAIL LANDSCAPE

Overview of the Retail Industry

 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

 Dana L. Telsey (212) 272-6052

THE RETAIL LANDSCAPE…A FIVE-YEAR


OUTLOOK
Department S tores/Discounters
Costco Wholesale Corporation - Merchandise expertise and customer focus drives comps and high membership renewal rates.

Federat ed 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 whic h 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 hom e entertainment needs.

Bed Bat h & Beyond Inc. - Decentralized model allows store managers to tailor assortm ents to local tastes and demands, driving traffic.

Lowe's Companies, Inc. - Core c ompetency 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, suc h as applianc es.

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, c atalog, and internet).

Main Contender: Kinkos.

Overview of the Retail Industry

 Dana L. Telsey (212) 272-6052

RETAIL FORMATS

Overview of the Retail Industry

 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

 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

 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

 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

 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

 Dana L. Telsey (212) 272-6052

IS MASS MARKETING DEAD?

HOW TO AVOID THE

Overview of the Retail Industry

 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

 Dana L. Telsey (212) 272-6052

2002 ADVERTISING EXPENDITURES OF

RETAILERS
M a ll R e t a ile r s : A d v e r t is in g a s a P e r c e n t a g e o f S a le s O f f-T h e -M a ll R e ta ile r s : Ad v e r tis in g a s a P e r c e n ta g e o f
S a le s

5 .0 % 6 .0 % 4 .9 %
4 .1 % 4 .0 % 5 .0 % 3 .8 % 3 .8 %
3 .7 %
4 .0 % 4 .0 %
3 .0 % 2 .2 %
2 .7 % 2 .0 % 1 .2 % 1 .1 % 1 .0 %
3 .0 %
1 .0 %
2 .0 % 0 .0 %

Off-Price
1 .0 %

Broadlines

Electronics
Consumer

Furnishings

Discounters
Superstores

Improvement
Home
Office

Home
0 .0 %
D e p t. S to r e s Lux ury A d u lt R e ta ile r s G e n Y

A v e r a g e = 3 .6 % A ve ra g e = 2 .6 %

Source: Company Report, Bear, Stearns & Co. Estimates

Overview of the Retail Industry

 Dana L. Telsey (212) 272-6052

Specialty Apparel

Overview of the Retail Industry

 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

 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

 Dana L. Telsey (212) 272-6052

Department Stores/Discounters

Overview of the Retail Industry

 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

 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

 Dana L. Telsey (212) 272-6052

Luxury Goods

Overview of the Retail Industry

 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

2003LuxuryGoods Industry
J ewelry &
Sales (in % ofIndustry Home
Watches
Accessories
Categories billions) Sales 7%
5%
Clothing $24.6 28% Wine & Clothing
28%
Fragrances &Cosmetics 21.1 24% Champagne
15%
Shoes &Leather Goods 18.5 21%
Wine &Champagne 13.2 15% Fragrances &
Jewelry &Watches 6.2 7% Shoes & Leather Cosmetics
Goods 24%
Home Accessories 4.4 5% 21%
Total Industry $88.0 100%

Source: Bear, Stearns & Co. Estimates

Overview of the Retail Industry

 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

 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

 Dana L. Telsey (212) 272-6052

Generation Y Retailers

Overview of the Retail Industry

 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

 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

 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 M

(as a % of total dollars spent
Demographic
Source: NPDFashionworld Consumer Information.

Tween (% of Gen Y)
Overview of the Retail Industry
Female (% of tween)
 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

 Dana L. Telsey (212) 272-6052

GUYS & GIRLS

The Gen Y Female Consumer.
 Gen Y females currently represent the largest female
consumer group.

‘Tween Girls.
 The ‘tween girl represents a lucrative opportunity for
retailers.

Teen Girls.
 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

 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

 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

 Dana L. Telsey (212) 272-6052

Hard Lines

Overview of the Retail Industry

 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%.
2003Estimated LongTerm
Sector Sizeof Industry (in $B) GrowthRate

Consumer Electronics $95 5.0%

Home Furnishings $111 4.0%
Home Improvement $390 5.0%
Office Superstores $335 3.0%
PetSupply Superstores $31 5.0%
Video Retailers $25 7.0%

Source: BSC estimates.

Overview of the Retail Industry

 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

 Dana L. Telsey (212) 272-6052

Drug Stores/Grocery
Stores/Bookstores

Overview of the Retail Industry

 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.

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 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.

BOOKSTORES OVERVIEW
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.

GROCERY STORES OVERVIEW

Source: American Booksellers Associatio n; Bureau of the Census, Current Retail Trade Branch

Book Industry Study Group, Inc. New York, NY; U.S. Department of Labor: Bureau o f 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, Ha rrington Associates, LLC, March 8, 2004
U.S. Census Bureau; Bear, Stearns & Co. Inc. Estimates; US Dept of Labor: B ureau of Labor Statistics

Overview of the Retail Industry

 Dana L. Telsey (212) 272-6052

Bear, Stearns & Co. Ratings

Rating Company TKR Current R ating Company TKR Current
$ $
Apparel Consumer Electronics Retailers
(a)
P A nnT aylor Sto res A NN 41.64 O B est B uy C o. Inc. BB Y 47.72
P C harming Shoppes, Inc. C HRS 7.33 U C ircuit C ity Stores Inc. CC 11.11
O Gap Inc. GP S 20.87 P RadioShack C orp. RSH 32.45
(e)
P M en's Wearhouse MW 26.17

O The Limited, Inc. LTD 19.15 Home Furnishings

O R oss Stores, Inc. ROST 29.03 O B ed B ath & B eyond B B BY 39.11
P The Talbots T LB 34.52 P Linens 'n Things LIN 34.52
O The TJ X C o s., Inc. TJ X 23.94 P Rent-A -C enter RC II 31.82

P Tuesday M orning TUES 33.09

Teen Retailers P Williams-Sonoma WSM 33.61
P A bercrombie & Fitch (e) ANF 31.18

P A merican E agle (e) AEOS 25.4 Home Improvement

O Hot Topic HOTT 25.51 P Home Depo t HD 36.99

P P acific Sunwear P SUN 23.14 O Lowe's LOW 54.84

P To o Inc. (e) TOO 18.72

Office Superstores
Footwear P Office Depot ODP 17.86
P Genesco GC O 21.66 O Staples SP LS 25.19

Luxury Goods P et Supply Superstores

P B ulgari S.p.A. (in Euro) B ULG.M I 6.71 O P ETC O P ETC 29.25

O B urberry Group (b) (In GB P ) B RB Y.L 3.52 O P ETsM A RT P ETM 25.65

(c )
O C oach, Inc C OH 40.67

P Gucci Group (in Euro) GC C I.A S 69.00 Video R etailers

U Hermes Int'l (in Euro) HR M S.P A 156.20 P B lockbuster Inc. B BI 18.07

P LVMH (in Euro) LVM H.P A 58.00 U Hollywood Ent. HLYW 10.89
P R ichemont Group (in SF r) C FR .VX 32.40 O Movie Gallery MOVI 19.32

O Tiffany & C ompany (d) TIF 38.30

Department Stores/B roadlines

P C ostco Wholesale C orporation C OST 37.35
O Dollar General C o rporatio n DG 19.19
P Family Dollar Stores, Inc. FDO 34.18
O Federated Department Stores, Inc. FD 50.46
O J . C . P enney C o mpany, Inc. J CP 33.95
O Nordstrom, Inc. J WN 37.65
P Ko hl's C orporatio n KSS 50.03
O The M ay Department Stores C ompany
MAY 32.90
U Sears, Ro ebuck and C o. S 44.48
O Target C orpo ration TGT 44.89
O Wal-M art Stores, Inc. WMT 58.95
*Stocks priced 3/18/04

Legend: O=Outperform, P=Peer Perform, U=Under perform Source: Bear, Stearns & Co.

Overview of the Retail Industry

 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. If you are a recipient of this publication in the United States, orders in any securities referred to herein should be placed with Bear, Stearns & Co. Inc. This report has been approved for publication in the United Kingdom
by Bear, Stearns International Limited, which is regulated by the United Kingdom Financial Services Authority. Private Customers in the U.K. should contact their Bear, Stearns International Limited representatives about the investments concerned. This report is
distributed in Hong Kong by Bear Stearns Asia Limited, which is regulated by the Securities and Futures Commission of Hong Kong. Additional information is available upon request.
Bear Stearns and its employees, officers, and directors deal as principal in transactions involving the securities referred to herein (or options or other instruments related thereto), including transactions contrary to any recommendations contained herein. Bear Stearns and
its employees may also have engaged in transactions with issuers identified herein.
This publication does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained herein may not be suitable for all investors. Although the information contained in the subject report has been obtained
from sources we believe to be reliable, its accuracy and completeness cannot be guaranteed. This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice. Bear Stearns and its affiliated companies
and employees shall have no obligation to update or amend any information contained herein.
This publication is being furnished to you for informational purposes only and on the condition that it will not form a primary basis for any investment decision. Each investor must make its own determination of the appropriateness of an investment in any securities
referred to herein based on the legal, tax, and accounting considerations applicable to such investor and its own investment strategy. By virtue of this publication, none of Bear Stearns or any of its employees shall be responsible for any investment decision. This report
may not be reproduced, distributed, or published without the prior consent of Bear Stearns. @ 2004. All rights reserved by Bear Stearns.
This report may discuss numerous securities, some of which may not be qualified for sale in certain states and may therefore not be offered to investors in such states.
NOTE TO ACCOUNT EXECUTIVES: For securities that are not listed on the NYSE, AMEX, or Nasdaq National Market System, check the Compliance page of the Bear Stearns Intranet site for State Blue Sky data prior to soliciting or accepting orders from clients.
Bear, Stearns & Co. 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

Overview of the Retail Industry