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Adjusting For The “New Normal” Consumption

Jeff KlinefelterSenior Research Analyst612-303-5537jeffrey.p.klinefelter@pjc.com

October 2009

2

Disclosures for universe of: Jeff Klinefelter

1. I or a household member have a financial interest in the securities of the following companies: none

2. I or a household member is an officer, director, or advisory board member of the following companies: none

3. I have received compensation within the past 12 months from the following companies : none

4. Piper Jaffray or its affiliates beneficially own 1% or more of any class of common equities of the following companies: none

5. The following companies have been investment banking clients of Piper Jaffray during the past 12 months: none

6. Piper Jaffray expects to have the following companies as investment banking clients within the next three months: none

7. Other material conflicts of interest for Jeff Klinefelter or Piper Jaffray regarding companies in my universe for which I am aware include: none

8. Piper Jaffray received non-investment banking securities-related compensation from the following companies during the past 12 months: none

9. Piper Jaffray makes a market in the securities of the following companies, and will buy and sell the securities of these companies on a principal basis:

CROX, CTRN, DECK, HOTT, ICON, PSUN, ROST, VLCM, WTSLA, ZUMZ

10. Piper Jaffray usually provides bids and offers for the securities of the following companies and will, from time to time, buy and sell the securities of these companies on a principal basis: ANF, ARO, AEO, GCO, GES, GPS, JCG, JCP, KSS, PVH, RL, TGT, UA, VFC, WRC, ZQKa

3

CONTENTS

Economic SynopsisRetail Sales

Consumer Thesis – “The New Normal”EmploymentHousingPersonal Savings Rates

Sector ThemesChannel ConsolidationInventory ControlPricing DynamicsSourcing Deflation

Recent Teen Survey Results For Fashion Spending

4

ECONOMIC SYNOPSIS – THE CONSUMPTION DILEMMA

• U.S. economy dependent on consumption, personal consumption expenditures (PCE) represent approx 70% of the $14.2 trillion annual GDP

• Trends improving, real GDP growth negative 5 of past 6 quarters, but initial FQ2 estimate down only 0.7%

• Real PCE of approx $10 trillion annually has trended negative in 4 of past 6 quarters with initial FQ2 estimate down 0.9%

• Retail sales represent approx 45% of PCE or $4.5 trillion; trended negatively last 11 months and have declined by an average of 9.6% during this time

• Clothing/Accessories have been negative for 12 consecutive months and have averaged an 8% decline during this time

Source: Bureau of Economic Analysis

5

RETAIL SALES TRENDS – EASING COMPARISONS

• Significant change in consumer behavior; first negative months going back to 1988

• Retail represents 45% of PCE; Retail sales have declined 10.3% YTD

RETAIL AND FOOD SERVICES SALES Y/Y CHANGE - UNADJUSTED

-15%

-10%

-5%

0%

5%

10%

15%

Jan-

93

Jul-9

3

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Avg. 4.5%

Source: Census Bureau

6

CONSUMER INVESTMENT THESIS – THE “NEW NORMAL”

Changes in critical economic measures; Looking for inflections in key statistics

Employment – A pivotal leg in the consumer’s ability to support consumption

• Initial unemployment claims – Y/Y change in unadjusted claims has marked the end of recessions in prior cycles

Housing – Declines in the consumer’s largest asset is impacting confidence• Wealth Effect – Every $1,000 of home price depreciation is ~$3.6B impact on

PCE

Personal Savings Rate – A derivative of many variables, but will directly impact PCE

• Impact On PCE – 1% increase reduces consumption by ~$100B; Currently

Source: Piper Jaffray & Co.

7

CRITICAL ECONOMIC MEASURES - EMPLOYMENT

• Peak year-over-year change in initial unemployment claims has typically marked the end of recessionary periods

• Y-o-Y changes peaked the week of March 7th at +88%, near the trough of the S&P 500 index

INITIAL UNEMPLOYMENT CLAIMS - ROLLING 4 WEEK AVERAGE Y/Y CHG - NSA

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Source: Bureau of Labor Statistics

8

CRITICAL ECONOMIC MEASURES - EMPLOYMENTY/Y $ CHANGE - COMPENSATION OF EMPLOYEES VS. PCE

-$400

-$300

-$200

-$100

$0

$100

$200

$300

$400

$500

$600

$700

COMPENSATION OF EMPLOYEES PCE

CORRELATION: .95

Source: Federal Reserve, BEA

Y/Y $ change in compensation is highly correlated w/ PCE $ growth; Not surprising, but stagnant wages and fewer jobs, will make robust economic growth difficult

9

CRITICAL ECONOMIC MEASURES - HOUSING

CASE-SHILLER 10-CITY INDEX

0

50

100

150

200

250

Down 13.0% for JUL Y/Y

3.5% annual growth, 11.5% below current

Source: S&P Case-Shiller Index

10

CRITICAL ECONOMIC MEASURES - HOUSING

• Every $1000s in home price decline is roughly $3.6B in lost PCE, that said, Case Shiller index has been positive for 3 consecutive months after 34 months of sequential declines

$'s % $0.02 $0.03 $0.04 $0.05 $0.06 $0.07 $0.08 $0.09 $0.1012 -6% $12 $20 $28 $36 $44 $52 $60 $68 $7614 -7% $14 $23 $33 $42 $51 $61 $70 $79 $8916 -8% $16 $27 $37 $48 $59 $69 $80 $91 $10118 -9% $18 $30 $42 $54 $66 $78 $90 $102 $11420 -10% $20 $33 $47 $60 $73 $87 $100 $113 $12722 -11% $22 $37 $51 $66 $81 $95 $110 $125 $13924 -12% $24 $40 $56 $72 $88 $104 $120 $136 $15226 -13% $26 $43 $61 $78 $95 $113 $130 $147 $16528 -14% $28 $47 $65 $84 $103 $121 $140 $159 $177

Source: National Center for Real Estate Research; Dollars in BillionsEvery $1000s in home price decline is $3.6B in lost personal consumption expenditures.Assumes for every $1 of home price appreciation that 5.5 cents is spent on personal consumption.It also assumes that 80% of the gain in annual increased consumption comes in Yr 1.

Decline in Median Home Value ($1000s)

Housing Wealth Effect - Spending Increases $X/ $1 of Home Value Appreciation

Quantifying the Housing Wealth Effect On Personal Consumption

11

CRITICAL ECONOMIC MEASURES - SAVINGS

• Consumer savings rate increased 220bps since Apr. trough of 0.8%

4.5%

5.9%

4.2%4.0%

3.0%

0%

1%

2%

3%

4%

5%

6%

7%

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb

-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Stimulus benefit

Changing consumer behavior

Source: Bureau of Economic Analysis

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CRITICAL ECONOMIC MEASURES - SAVINGS

PERSONAL SAVINGS RATE - ANNUAL

-5%

0%

5%

10%

15%

20%

25%

30%

Avg. 7%

Source: BEA

Avg. 2.7%

• Since 1993, average personal savings rate is 2.7%.

• Based on preliminary Aug results, the savings rate is now 3.0% up 220bps since Apr ‘08.

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TEEN RETAIL; MASS MERCHANTS; APPAREL & FOOTWEAR BRANDSInvestment Highlights• Channel consolidation; capacity rationalization; intra-channel share

displacement• Gross margins expanding due to price stability and sourcing deflation• Inventory controls in place, inventory per square foot index down 35% from

2001 peak• Changing consumer psychology; sentiment moving to social, local, natural,

authentic over status• Demographic swells favor boomers, young adults, and youth• Fashion cycle; 4 years from prior peak; newness emerging• E-commerce taking a bigger piece of overall spending

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INVENTORY PSF – SPECIALTY CHANNEL

Piper Jaffray Teen's Specialty Apparel Inventory Per Square Foot Index

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70Peak: Jan-01

$66

Trough: Jul-09$43

Source: Company Reports & Piper Jaffray Estimates

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GROSS MARGINS – SPECIALTY CHANNEL

SPECIALTY RETAIL GROSS MARGINS - TTM

25%

27%

29%

31%

33%

35%

37%

39%

41%

43%

45%

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Source: Company Reports and Piper Jaffray Estimates

Trough: 33% Apr-02

Peak: 41.7% Jul-08

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APPAREL IMPORTS BELOW SALES GROWTH

RETAIL APPAREL/ACCESSORIES SALES VS. TOTAL IMPORTED APPAREL DOLLARSROLLING 3MONTH AVERAGE

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

RETAIL APPAREL/ACCESSORIES SALES APPAREL IMPORTSSource: U.S. Commerce Department and Census Bureau

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APPAREL IMPORT PRICES VS. APPAREL CPI

• Lower import costs and consistent pricing creates margin opportunity

COST PER IMPORTED APPAREL UNIT VS. CPI APPAREL UNADJUSTED

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

CPI Y/Y % CHG IN UNIT COSTSource: U.S. Commerce Department and Bureau of Labor Statistics

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FASHION SPENDING –SCHOOL SURVEY

-30%

-20%

-10%

0%

10%

20%

30%

40%

Y/Y

% C

HG

Teen Spending Change RLXSource: Baseline, Piper Jaffray

RLX: .8 Correlation

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FX A HEADWIND FOR U.S. COMPANIES W/ GLOBAL SALES

• Tailwind starts in FQ4 through FQ3 next year

CALENDAR CHG IN FX - MAJOR CURRENCIES

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Q497

Q298

Q498

Q299

Q499

Q200

Q400

Q201

Q401

Q202

Q402

Q203

Q403

Q204

Q404

Q205

Q405

Q206

Q406

Q207

Q407

Q208

Q408

Q209

Q409

Q210

Y/Y

Ch

g U

S $

Source: Federal Reserve Board and Piper Jaffray Ests.

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Jeff Klinefelter Biography

Jeff KlinefelterManaging Director, Senior Research AnalystT: 612-303-1537E: jeffrey.p.klinefelter@pjc.com

Jeff Klinefelter joined Piper Jaffray in 1997 as a research analyst on the consumer team. He follows retail

companies, focusing on specialty retailing, youth/teens; mass merchandising; and apparel and footwear

brands. Klinefelter is nationally recognized for conducting proprietary teen retail research twice each year with

high schools across the country.

Prior to joining the firm, Klinefelter worked for Universal Asset-Based Services, Inc., performing assetEvaluations for commercial lending institutions. He also worked at Target Stores for six years in

variousmerchandising, operations and strategic planning positions, including working in inventory

management formultiple merchandise divisions (including apparel) and managing a staff of merchandise analysts in

one ofthe apparel departments.

Klinefelter has a bachelor's degree from St. Olaf College in Northfield, Minnesota, and a master's degree in

business administration from the University of Minnesota Carlson School of Management.

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Analyst Certification—Jeffrey P. Klinefelter

The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

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