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Retail Industry Perspectives. April 2005. Retail Industry Perspectives. Current Retail Industry Overview. The retail industry has remained strong through 2004 and into 2005 while it has experienced significant changes.

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slide2

Retail Industry Perspectives

Current Retail Industry Overview

  • The retail industry has remained strong through 2004 and into 2005 while it has experienced significant changes.
    • Consolidating in the broadlines and department store industries is the most prominent theme in the current retail environment.
    • Lifting of quota restrictions on imports of apparel from China has changed the retail landscape, lowering prices for many retailers while costing American manufacturers jobs.
    • Growth of major mass merchandisers is reshaping the retail landscape.
    • Blurring of retail strategies as a result of massive retail consolidation.
    • Shifting landscape of the mall industry towards lifestyle centers.
    • Shifting trends in Specialty Retail from the fast growth retailers of the 90’s to generating growth through new concepts.

Consolidation

Lifting Import

Quotas

Success of

The Mass

Merchandiser

Retail Industry

Channel

Blurring

Evolution of

the Mall

Emerging

Concepts in

Specialty Retail

| Wachovia Securities Consumer & Retail Investment Banking

slide3

Retail Industry Perspectives: Consolidation in Retail

Retail Consolidation Driving Scale and Efficiency

Survival of the Biggest & Fittest

  • Industry consolidation remains a major theme in the consumer sector.
    • Proctor & Gamble and Gillete Co. among suppliers,
    • Jones Apparel Group acquisition of Barney’s New York across suppliers and retailers,
    • Kmart Holding and Sears Roebuck across retail channels, and
    • Federated and May within the retail channel.
  • The Department Store Industry has experienced considerable consolidation as well as bankruptcies over the last 15 years.
    • In 1989, there were more than 50 distinct department store companies.
    • Today there are less than 20.
  • The department store share of total U.S. retail sales (excluding auto) has declined to 4.8% in 2004, from 6.6% in 1989.
    • On a per-square-foot basis, department stores nationally posted sales of $140 per square foot in 2004. The industry average for malls was $356 in 2004.

Source: Equity research and Company Reports.

| Wachovia Securities Consumer & Retail Investment Banking

slide4

Retail Industry Perspectives: Import Quotas

Lifting Quotas Will Significantly Impact The Apparel Industry in 2005 and Beyond

2002 U.S. Apparel Imports

  • December 31, 2004 marked the removal of quota restrictions on imports of apparel from China.
    • In January, the U.S. imported more than $1.2 billion in textiles and apparel from China, up from about $701 million one year ago.
    • In the first three months of 2005, Chinese imports of cotton trousers increased 1,500% from one year ago and cotton shirts from China increased 1,257% over the same time period.
  • Fears that China is flooding the world market with cheap textile exports have inflamed tensions between the U.S. and China due to job losses at American manufacturers.
    • Currently U.S. textile companies have lost 17 millls and more than 17,000 jobs.
  • The Commerce Department's Committee for the Implementation of Textile Agreements in April began an investigation to determine whether imports of Chinese textiles and apparel were disrupting the U.S. market.
    • If the investigation finds disruption in the U.S. market, the Committee could impose new import limits on China.
  • Retailers and other U.S. apparel importers who have benefited from the cheaper goods, believe the current wave of Chinese imports is a continuation of a long-standing outsourcing trend

Source: World Trade Organization.

Projected U.S. Apparel Imports After 2005

Source: World Trade Organization.

| Wachovia Securities Consumer & Retail Investment Banking

slide5
Big box retailers dot the landscape of most American towns and cities, however, the discount retail group still has room to grow.

Total retail sales (excluding automobiles) in the U.S. have grown at a compound annual growth rate of 5.3% over the past five years compared to Walmart and Target, which have each grown sales by over 12% annually.

A critical part of growing successfully lies in real estate positioning.

Most of the growth opportunities for major discount chains remain in metro1 markets.

Despite making up 76% of land area of the U.S., rural markets contain only 19% of the population and 15% of income, and therfore, don’t have enough people or income to support big box retailers.

While metro markets represent 85% of U.S. income, they maintain only a 73% share of discount stores versus rural areas.

Retail Industry Perspectives: Discount Retailers

Continued Growth for the Large Mass Merchandisers

Discounter Stores in Rural and Metro Areas

Market Type Share of U.S.

Source: Company documents.

1 A Metropilitan Statistical Area (MSA) is an are made up of one or more counties with a combined population of at least 50,000 people. MSAs are defined by the Office of Management and Budget.

| Wachovia Securities Consumer & Retail Investment Banking

slide6

Retail Industry Perspectives: Channel Blurring

Broadline Channel and Real Estate Blurring

  • Over the last several years a key trend that has emerged in broadline retailing is channel blurring (expanding into categories previously found only in another channel).
    • Walmart has had the most success in channel blurring, devoting square footage to produce and grocery, a category once held by traditional grocery stores and supermarkets.
    • Dollar stores are also taking market share from traditional supermarkets by adding consumables to their product mix.
    • As retailers have expanded into new categories, customers have become channel neutral.
  • Within the retail industry, real estate strategies are also blurring, much like channel blurring.
    • Large discounters like Walmart, Target and Costco are beginning to open stores in malls, while department stores such as J.C. Penney are adding their own off-the-mall locations.
    • A by-product of department store consolidation is the increased availability of real estate, especially in regional malls.
      • Mall developers have begun to fill old anchor locations with bog-box stores, such as Dick’s Sporting Goods and Bed Bath & Beyond.

| Wachovia Securities Consumer & Retail Investment Banking

slide7

Retail Industry Perspectives: Evolution of the Mall

Apparel Industry Stores Shift to Lifestyle Centers

Shopping Center Evolution

  • The open-air lifestyle center format is emerging in response to shifts in retailing, customer preferences and the desire among community planners to create central gathering places in undistinguished suburban landscapes.
    • Lifestyle centers are bringing back a tradition of Main Street.
    • Suburbanization has left few places where developers can assemble the acreage to build a one million-square-foot mall.
  • Consumer demand for convenience and the slowdown in construction of traditional malls is driving lifestyle centers rapid growth.
    • Lifestyle centers typically contain upscale retailers and restaurants in well-landscaped, open-air settings.
    • Instead of hulking, concrete parking garages, the parking spaces are often right by the stores.
    • The atmosphere is as much about ambience as it is about retail.
    • Centers, traditionally limited to warmer climates, have recently spread to cold-weather cities such as Boston and Cleveland.

Source: USA Today

| Wachovia Securities Consumer & Retail Investment Banking

slide8

Retail Industry Perspectives: Evolution of the Mall

Slowdown of Mall Development

  • The number of lifestyle centers has quickly accelerated, from just 30 in 2002 to approximately 130 in 2005.
    • Between 10 to 20 new centers are slated to open each year for the next two years.
    • In contrast, only 8 new regional malls are expected to open by 2006.
      • It is hard for property developers to find 70 to 80 acres of available land to build regional malls.
      • It takes 5 to 10 years to construct a regional mall with over 200 stores.
  • Throughout each decade there has been a development of choice in the retail industry.
    • In the 1970’s and 1980’s it was the enclosed mall
    • The power centers dominated the 1990’s.
    • Today, it’s lifestyle centers, which are tied to the strong performance of the luxury sector.

| Wachovia Securities Consumer & Retail Investment Banking

slide9

Retail Industry Perspectives: Specialty Retail

Innovation Driving Growth in Specialty Retail

Apparel Store vs. Department Store Sales ($bil)

  • The specialty store channel’s retail dollar sales increased by a 4.1percent annual growth rate as compared to a 0.1 percent decline for discount department stores and a 1.8 percent decline for national chain department stores from 1999 to 2004.
  • Specialty retail is looking to capture greater market share through a multi-channel distribution strategy.
    • Increase use of off mall formats in lifestyle and strip centers.
    • Stand-alone and store-within-store concepts in the mall.
    • Growing penetration of e-commerce and catalogue.
  • Avid use of information systems yielding significant benefits in terms of operational execution.
    • Supply chain, inventory, pricing.
  • Apparel retail stores face pressure to differentiate themselves from competition including:
    • Big-box discount retailers that offer merchandise at lower price points.
    • Department stores who offer a wider variety of brands but lack merchandising innovation.

4.1% CAGR

(0.1%) CAGR

(1.8%) CAGR

Source: U.S. Census Bureau.

2003 Apparel Sales by Channel

Source:NPD Group, Inc.

| Wachovia Securities Consumer & Retail Investment Banking

slide10
The once young and underdeveloped specialty retail segment has changed and is coming closer to saturation.

Square footage growth in the specialty apparel sector has slowed from the heady years of the late 1990s.

In order to continue to sustain growth, specialty retailers are aggressively launching new concepts.

The concepts are in test mode while being public, and therefore scrutiny is more difficult versus the launch of the original chains.

It often takes several years of aggressive growth for the real benefits of these new concepts to significantly impact the parent company.

Opening 50 stores in one year has less impact on a 500 store chain than a base of 300 stores.

Retail Industry Perspectives: Specialty Retail

Looking into the Future

Specialty Retail New Concepts

Source: Company documents.

| Wachovia Securities Consumer & Retail Investment Banking

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