Dana TelseyChief Executive Officer212.584.4606dtelsey@telseygroup.com

Executive Summary 3

Macroeconomic Update 5

Retail Industry Trends 7

Consumer Shopping Behavior 14

2012 Retail Outlook 17

TABLE OF CONTENTS

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EXECUTIVE SUMMARY

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Macroeconomic Update.

>The economy is showing signs of stabilization, but the recovery remains slow.

>Focus remains on developments abroad, particularly in Europe.

Retail Industry Trends.

>Traditional retail distribution channels have become less relevant.

>Alternative distribution channels (outlet, international, e-Commerce, home shopping, travel retail) are being explored by retailers.

Consumer Shopping Behavior.

>US consumer remains bifurcated, evidenced by strength in the high- and low-end.

>Consumers continue to gravitate toward promotions, focus on value, and use of mobile technology while shopping.

2012 Retail Outlook.

>2012 will be a challenging year for retailers: 2H12 expected to be stronger than 1H12.

>Differentiation, multi-channel initiatives, speed to market, and an expanded customer demographic focus will be critical to succeed.

EXECUTIVE SUMMARY

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MACROECONOMIC UPDATE

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Dow Jones S&P 500 S&P Retail

2009 % Change 18.8% 23.5% 47.2%

2010 % Change 11.0% 12.8% 23.7%

2011 % Change 5.5% 0.0% 2.9%

YTD 2012 % Change 6.1% 8.3% 9.2%

3.9%3.6% 3.4%

3.0% 2.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

09/30/11 10/31/11 11/30/11 12/31/11 1/31/12

Y-O

-Y G

row

th %

3.1%

2.2%

1.6%1.5% 1.6%

0.0%

1.0%

2.0%

3.0%

4.0%

12/31/10 03/31/11 06/30/11 09/30/11 12/31/11

Y-O

-Y R

ea

l G

row

th %

RE

AL

GD

P

Source: US Bureau of Economic Analysis, US Bureau of Labor Statistics, FactSet.Note: YTD stock price performance as of 2/21/12.

CP

IS

TO

CK

MA

RK

ET

Positive, stabilized growth.

Easing inflationary pressures.

> Recent economic data points suggest some stabilization.

> We expect the health of the US economy and financial markets to be driven by:

Retailers continue to operate in a challenging macroeconomic environment.

– Macro uncertainty in other markets abroad.

– Key indicators of strength domestically (e.g. output, price levels).

ECONOMIC INDICATORS AND MARKET PERFORMANCE: RECENT TRENDS

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RETAIL INDUSTRY TRENDS

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DISTRIBUTION CHANNELS OF

FOCUS FOR RETAILERS

OUTLET CONCEPTS

GLOBALEXPANSION

E-COMMERCE AND MOBILE

TECHNOLOGY

HOME SHOPPING

TRAVEL RETAIL

ALTERNATIVE DISTRIBUTION CHANNELS> Outlet channels have resonated withconsumers focusing on value in their shopping.

> International locations are increasinglysought after by retailers to diversify theirpresence outside the US.

> e-Commerce and mobile technology allowbrowsing and shopping from anywhere atanytime, while also functioning as a marketingtool.

> Home shopping has been a popular channelfor consumers considering the productassortment and increasing value that shoppersare placing on convenience.

> Travel retail continues to represent animportant growth driver of the global luxurygoods sector.

Growth through alternative distribution channels has allowed retailers to build stronger brand awareness than would be possible purely through stores.

ALTERNATIVE DISTRIBUTION CHANNELS

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ALTERNATIVE DISTRIBUTION CHANNELS – OUTLET

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Clearance Model

> Excess and irregular inventory.

> Outside metropolitan areas.

> Largely tourist customer base.

> Different tenants than traditionalmalls.

PAST TODAY

Profitable Distribution Channel

> Made-for-outlet product up to 85% ofmix.

> More seasonally appropriate.

> Closer proximity to well-populatedareas.

> More local repeat shoppers.

> More traditional mall retailers.

Outlets are becoming an increasingly important channel for retailers.

> Most important growth strategy along with e-Commerce for many apparel retailers.

> A margin driving opportunity.

> Largely fashion-oriented apparel and footwear.

SELECTED INTERNATIONAL GROWTH RETAILERS

International expansion is the next frontier for retailers to support long-term sales and earnings growth.

> Global expansion is particularly important given the slow growth prospects in the US, inflationary pressures, and domestic footprint saturation.

> Benefits: top-line growth, gross margin expansion, diversification, and economies of scale.

> Challenges: product execution risk, varying labor laws, and talent / infrastructure investments.

ALTERNATIVE DISTRIBUTION CHANNELS – INTERNATIONAL

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$157$176

$197$218

$240$259

$279

11%

13%12%

10% 10%

8% 8%

$0

$50

$100

$150

$200

$250

$300

2009 2010 2011E 2012E 2013E 2014E 2015E

US

On

lin

e S

ale

s (

$ i

n b

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on

s)

0%

2%

4%

6%

8%

10%

12%

14%

% C

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US Online Sales % Change

HISTORICAL AND PROJECTED E-COMMERCE GROWTH

Source: Forrester Market Research.

US online sales expected to grow to $279 billion in 2015 from $157 billion in 2009.

> Requires investment in human and financial capital.

> Discounters, dollar stores, and grocery retailers less threatened.

ALTERNATIVE DISTRIBUTION CHANNELS – E-COMMERCE

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% EXCLUSIVE MERCHANDISE ASSORTMENT

>

>

RETAILER % EXCLUSIVE OF TOTAL

> 75%

> 70%

MAINSTREAM DESIGNERS

The home shopping channel offers consumers and brands many advantages.

Home shopping retailers are well-positioned in the current environment to meet consumers’ demands and take share of total US retail sales.

> Exclusive merchandise.

> A diverse product assortment.

> Beyond just shopping.

> Efforts to reach a new demographic.

ALTERNATIVE DISTRIBUTION CHANNELS – HOME SHOPPING

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Travel retail continues to represent an important growth driver of global luxury goods.

GLOBAL LUXURY BRANDS FOCUSED ON TRAVEL RETAIL

> Mainland Chinese tourists expected to drive growth (90 million tourists over the next 3 – 4 years).

> Flocking to other parts of Asia (Hong Kong, Macau, and Singapore) and Europe (London and Paris) to buy high-end goods.

> “Winners” will be those with strong global brand cachet and an established presence in key gateway cities worldwide.

ALTERNATIVE DISTRIBUTION CHANNELS – TRAVEL RETAIL

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CONSUMER SHOPPING BEHAVIOR

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HISTORICAL QUARTERLY SAME-STORE SALES BY TIER

Source: Company filings, TAG Research.

We continue to see a bifurcated consumer during the recovery.

Average Same-Store Sales

(15%)

(10%)

(5%)

0%

5%

10%

15%

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

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3Q

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4Q

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1Q

11

2Q

11

3Q

11

Av

era

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Co

mp

High End Consumer Moderate Consumer Low End Consumer

High End

Moderate

Low End

> Improving labor market should accelerate consumer spending at low-end.

BIFURCATED CONSUMER

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Promotional activity continues to drive traffic.

> Deepness of discounts and square footage allocated to clearance remains elevated in specialty stores and department stores.

Consumers are more focused on value versus price.

> Robust traffic at off-price retailers (e.g. Ross Stores, TJMaxx).

> “Treasure Hunt” that gained momentum during the recession and early stages of the recovery still appeals to consumers today.

Mobile technology continues to be leveraged, allowing consumers to shop anywhere.

> “Opt in” to receive location-based marketing updates on new arrivals and promotions.

> Mobile wallets allowing sales terminals to take orders and call for sales associates, scour for exclusive offers, and store personal information.

CONSUMER SHOPPING TRENDS

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2012 RETAIL OUTLOOK

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esFollowing cash accumulation during the downturn, retailers are looking to grow their footprints in the near-term.

2012 OUTLOOK BY SECTOR

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STORE AND SQUARE FOOTAGE GROWTH ACROSS SECTORS

Source: Company filings, TAG estimates.Note: Data is sorted by 2012E store growth.

Sector Y-O-Y STORE GROWTH % Y-O-Y SQUARE FOOTAGE GROWTH %

2010A 2011A/E 2012E 2010A 2011A/E 2012E

Off-Price Average 4.6% 3.8% 5.7% 4.1% 2.4% 5.7%

Specialty Apparel Average 7.4% 3.9% 5.3% 4.3% 7.8% 5.2%

Luxury Average 1.7% 3.3% 5.2% 2.1% 4.7% 5.2%

Footwear Average -3.2% -1.5% 4.9% -3.3% -0.9% 4.9%

Discounters Average 4.1% 6.1% 4.7% 3.6% 4.8% 4.7%

Department Stores Average 1.8% 2.6% 3.2% 0.3% 1.3% 2.7%

Supermarkets Average 1.0% 1.4% 2.4% 1.3% 1.5% 2.0%

Hardlines Average 1.5% 2.1% 2.3% 1.6% 1.1% 2.3%

> Off-Price growth – expectations for continued consumer focus on value.

> Specialty apparel growth – needed to display newness and differentiatedmerchandise.

> Luxury growth – selected retailers remain focused on wallet share of high-endconsumers.

> Sephora at J.C. Penney.

> Simply Vera at Kohl’s.

> Miraculous Bra at Victoria’s Secret.

> Yoga classes at lululemon.

> Free alterations at Buckle.

> Apple at Target.

Top-line gains, excluding price increases, depend on either creating a “want” or filling a need.

DIFFERENTIATION CREATES DEMAND

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Retailers leveraging more than one channel (e.g. multi-channel retailers) are well-positioned.

MULTI-CHANNEL RETAILERS WINS

> Several touch points to a customer demographic allows more opportunitiesto complete transactions and build better brand recognition.

COSMETICS & LUXURY

SPECIALTY RETAIL

DEPARTMENT STORES

HARDLINES & DISCOUNTERS

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NEED FOR SPEED – FAST FASHION IS EXPANDING

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Competitive dynamics in retail creates the “need for speed”.

CURRENT

> 6 – 9 months lead time.

> Huge inventory risk.

> Inability to meet fickle consumer needs.

FUTURE

> Minimized markdowns, improvement in lost sales, differentiation among competitors.

> Retailers following in the steps of Forever 21, H&M, Zara, etc.

Enhanced inventory management systems

More insight into consumer / fashion trends.

> Aéropostale > American Eagle > J. Crew> Gymboree

Retailers are increasingly broadening their definitions of “target customer demographic” to capitalize on a growing children’s population.

– Casual clothing and accessories focusing on elementary school kids 7 – 12 years-old.

– Offers trend-right merchandise at compelling values.

– On-trend, high-quality clothing and accessories for children 2 – 10 years-old.

– Focuses on great fit, value, and style.

– Apparel and accessories for toddlers through size 14.

– Reflects same style and quality of J. Crew brand.

– Wholesome, age-appropriate fashion for newborns through size 14.

– Stores reflect an upscale store experience at value prices (25 – 30% lower than Gymboree).

TARGETING NEW CUSTOMERS

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INDUSTRY OBSOLESENCE

While once rare, there is an increasing number of examples where technology has dis-intermediated brands, companies, and industries.

> While we have highlighted specificbrands and companies, the impact oftechnology extends much broader andhas impacted entire industries.

> Book stores.

> CD’s and movies.

> Film stores.

> Video rental.

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The retail landscape remains split among solid operators and those experiencing challenges.

“WINNERS” “CHALLENGED”

> Investing in people, stores, and brand.

> Innovating products and service.

> Growing product expansion and extension, new concepts, and financial rewards.

> Increased Turnover.

> Sameness.

> Reduced Investment.

> Declining Financial Results.

®

A BIFURCATED RETAIL LANDSCAPE

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IMPORTANT DISCLOSURES

Telsey Advisory Group LLC (TAG), is an investment bank and broker dealer registered with the US Securities and Exchange Commission and a member of FINRA and the SIPC. It prepares and distributes research and engages in trade execution and investment banking services.

This material has been provided for informational purposes only and is not a solicitation or offer of any security or investment service.

© 2012. All rights reserved by Telsey Advisory Group. Telsey Advisory Group and its logo are registered trademarks of Telsey Advisory Group LLC.

ADDENDUM

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