Opco Missy Report Dec 2010

8/4/2019 Opco Missy Report Dec 2010

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Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research repora result, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. See "Important Disclosures and Certifications" section at the end of this report foimportant disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Keyto Price Target" sections at the end of this report, where applicable.

December 15, 2010

CONSUMER & BUSINESS SERVICES/SPECIALTYRETAILING

Pamela Quintiliano

212 [email protected]

Wandering with Intent in

the Missy SubsectorInitiating on NWY, TLB, ANN, CHS

SUMMARY

In conjunction with our launch of ANN, CHS, NWY and TLB, we have provided aanalysis of the drivers of the consumer overall and of the missy subsector particular. Given common headwinds impacting the group, we have dug into thosto see who is most and least advantaged. We break the report into five sectionscompany descriptions, backgrounds and business practices; manufacturinpressures; the economy; company-specific operating metrics; and investmetheses. The structure of the report gives a framework to understand each companyits crucial issues and key drivers as well as how it stacks up against its competitors

For company-specific in-depth analysis, please refer to our separate companreports, also published today.

KEY POINTS

s The "missy" sector encompasses a broad demographic with perhaps thonly constant its focus on women. Of the names on which we initiate, thtarget customer is 25-65 years old with a household income $50,000-$120,000. NWY caters to the least affluent while TLB and Ann TayloStores (a division of ANN) cater to the most affluent. By age, NWY and ANNLoft division are the youngest; CHS, the oldest. In general, we believe thpromotional cadence will be elevated among retailers focused on middle-incomcustomers, posing additional near-term execution risk at NWY and Loft.

s Female unemployment (25 years+) has traced national moves, albeit at lower level, with the "older woman" (45-54) faring better than the youngeThis benefits CHS and TLB, both of whom coincidentally also cater to a higheincome demographic. This demographic should also benefit from an extensioof the Bush-era tax cuts.

s Elevated cotton costs and China wage inflation provide costing pressurealthough missies better positioned than most. Cotton is a key fabrication foall but NWY, who primarily uses synthetics. Of the remaining, ANN is the bespositioned as it has fabric through 2011 (with an emphasis in 1H), followed bTLB who is locked-in for spring. All four are shifting out of China, although TLhas an early advantage with only 41% sourced in 2009.

s CHS faces the most-difficult comps on both a 1- and 2-year basis anrecently achieved peak 3Q operating margins. Following CHS- ANN, NWand TLB have the most difficult upcoming compares. From an operating margperspective, ANN and TLB have shown recent improvements but are severahundred basis points below prior peak. NWY has also improved, but is stoperating at negative margins.

s Initiating on NWY and TLB with Outperform ratings and on ANN and CHwith Performs.

EQUITY RESEARCH

INDUSTRY UPDATE

Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229


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2

Table of ContentsHot Issue Matrix ................................................................................... 3

Company Descriptions, Background And Best Practices ............... 6

Company Backgrounds ....................................................................... 6

Comparative Pricing Study ............................................................... 10

Loyalty Programs ............................................................................... 11Private Equity ..................................................................................... 12

Manufacturing Pressures .................................................................. 13

Sourcing.............................................................................................. 13

Cotton .................................................................................................. 14

The Economy...................................................................................... 17

Unemployment By State .................................................................... 17

Female Unemployment ...................................................................... 17

Potential Extension Of Unemployment Benefits ............................ 18

Bush Tax Cuts .................................................................................... 19

Consumer Sentiment ......................................................................... 19

Foreclosures....................................................................................... 19Real Personal Consumption ............................................................. 20

Household Net Worth ........................................................................ 21

Debt ..................................................................................................... 22

Savings ............................................................................................... 23

Personal Bankruptcy Filings ............................................................ 23

Fiscal Distress By State .................................................................... 24

Health Insurance Coverage ............................................................... 25

Company-Specific Operating Metrics .............................................. 26

Inventory And Sales Trends ............................................................. 26

Margin Analysis ................................................................................. 27

Comps ................................................................................................. 31Store Count And Longer-Term Growth Opportunity ...................... 32

Direct-To-Consumer .......................................................................... 34

Stock Performance ............................................................................ 34

Short Interest ...................................................................................... 40

Missy Retail: The Players .................................................................. 41

Appendix ............................................................................................. 44

CONSUMER & BUSINESS SERVICES


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Hot Issue Matrix

Exhibit 1. Hot Issue Matrix

"Hot Issue" Matrix

ANN CHS NWY TLBPRIVATE EQUITY

Most Attractive Value X X

GEOGRAPHY

MANUFACTURING

China (>50% exposure) X X XCotton X X

ECONOMY

Fiscal Distress Rankings by State XHealth Insurance Coverage XUnemployment

Highest Levels (+20% Store Base) X XX

COMPANY SPECIFIC OPERATING METRICSQuarterly Comp, Sales and Inventory Trends

YoY Inventory Gains (PSF) (3Q10) X X XInventories Growing Faster Than Sales

Monthly Comps

Easiest Comps 1-Yr Basis X XEasiest Comps 2-Yr Basis X X XMost Difficult Comps 1-Yr Basis X XMost Difficult Comps 2-Yr Basis X

Margin Analysis

Gross Margin (close to or at peak) XOperating Margin (close to or at peak) X

Store Count and SF Growth (+5% Growth Est. for '10)Direct-to-Consumer (+10% CY09 Sales) X

Exposure High Foreclosure States

Missy

Source: Company reports, Company Websites, OPCO Estimates

Our proprietary hot issue matrix highlights the similarities and differences

among the companies we are initiating on today (see separate company

reports). A few of the primary differences that stand out include:

ANN (along with Chicos) has the most difficult upcoming compares

on a 1-year basis, but much easier 2-year comps relative to its 1 year

comps. In the most recent quarter its gross and operating margins

were the closest to their respective peaks at 57.2% and 8.1% vs.

previous peak of 57.3% and 8.1% achieved in 2009 and 2007

respectively.

CHS has the most difficult comparisons on a 1- and 2-year basis and

the greatest exposure to those states with financial distress includinglow health insurance coverage, high unemployment rates, and high

foreclosure rates.

NWY has easy compares on both a 1 and 2 year basis. Additionally

it distinguishes itself among the group as the retailer with the lowest

average retail price across nearly every category.

TLB has the least exposure to China sourcing. Along with NWY it

has the easiest 1- and 2-year compares. While its average price

point in each category is the highest in the group, it does cater to the

highest income consumer.

CONSUMER & BUSINESS SERVICE


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4

The missy sector encompasses a broad universe of demographics with

perhaps the only constant being that it focuses on women. Of the names we

are initiating on today the core age ranges from 25-65, with the sweet spot at

35-54. TLB caters to the most affluent in the segment ($120k+ household

income), while NWY focuses on the least affluent ($50k-$100k household

income).



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This report is a comprehensive study of the Missy subsector and the various

industry-specific and company drivers. We have broken the report into several

sections in an effect to analyze the various moving parts. These include:

Company Descriptions, Backgrounds and Business Practices

Manufacturing Pressures

The Economy

Company-Specific Operating Metrics

Investment Thesis (ANN, CHS, NWY, TLB)



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Company Descriptions, Backgroundand Best Practices

Company Backgrounds

ANN

Exhibit 2. ANN: Key Metrics

Age Income ($)

StoreCount

LT StoreOpportunity

Store ClosureOpportunity International DTC

ANN 907 NA 75-80 NA 10.1%

Ann Taylor Mid 30's $125K-$150K 276 NA NA NA 10.8%

Ann Taylor Factory 92 NA NA NA NA

Loft Low 30's $75K-$100K 506 NA NA NA 9.5%

Loft Outlet 33 NA NA NA NA

% of Sales

*DTC is % of sales from most recent quarter

Source: Company reports and OPCO Estimates

History: Ann Taylor was founded in 1954 by Richard Liebeskind, the son of a

dressmaker. In 1956 he opened the first Ann Taylor store in New Haven, CT.Ann Taylor was the name of a best-selling dress style that Liebeskinds father

had given to him as a present. The Ann Taylor design was intended to to

personify the well-dressed woman. In 1977, Liebskind sold his stores to

Garfinckel, Brooks Brothers, Miller Rhodes Corporation and in 1981 Allied

Stores acquired Garfinckel. Ann Taylor quickly became the most profitable

division of all Allied retailers, surpassing Brooks Brothers and Bonwit Teller. In

1987, during the LBO boom, the Campeau Corporation ($153M in revenue)

implemented a hostile takeover of Allied Stores ($4.1B in revenue) after

securing $3B in credit. Separately, Campeau initiated another hostile takeover

of Federated for $6.6B in April 1988. In October 1988, in need of fresh capital

and under the pressure of debt requirements, Campeau sold Ann Taylor to

Merrill Lynch Capital Partners and former Lord & Taylor Chairman Joseph

Brooks for $430M. In 1991, the company went public.

Core Concepts and Customer: Ann Taylor, Inc operates two distinct

concepts, Ann Taylor Stores (ATS) and Loft. As of October 31, 2010 the

company operated 907 stores in 46 states, including 276 ATS stores, 92 ATS

factory outlets, 506 Loft stores and 33 Loft outlets. ATS (25% FY09 sales)

caters to the fashion conscious, professional woman. She is a working mom

in her mid-30s with an average HH income of $125K-$150K. Loft Stores (51%

FY09 sales) caters to a more casual customer. She is in her low 30s with an

average HH income of $75K-$100K. In the most recent quarter, Lofts average

transaction value and average unit retail were 25% and 29% below ATS but

the Loft shopper came into the store significantly more often (an average of

3x/month).

Sales Breakdown: Year-to-date, the company has generated $1.465B in

sales, with Ann Taylor representing $628.8M or 43% and Loft netting the other

$836.1M or 57%. Within Ann Taylor, the stores, factory outlets and e-

commerce site represent 58%, 32% and 10% of the divisions sales for totals of

$362M, $62.4M, and $204.4M respectively. Within Loft, the stores, outlets and

e-commerce site represent 86%, 8% and 6% of total Loft sales or $719.4M,

$66.6M, $50.2M respectively.

Growth Opportunity: While the company hasnt identified its long-term store

goals, it recently announced that it expects to open an additional 35 Loft

Outlets and 5 Ann Taylor Outlets in FY11 on a base of 92 and 33.



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Primary Competitors: Key competitors include Talbots, Chicos, The Gap,

Nordstrom, Macys, and the Limited.

Management: Kay Krill is the Chief Executive Officer of Ann Taylor. She has

held this role since 2005 and has been President since 2004. Previously Ms.

Krill was President of Loft since 2001. Christine Beauchamp has served as

President of the Ann Taylor Stores division since August 2008. Previously she

was CEO/President of Victorias Secret. Gary Muto joined the company in

November 2008 as the President of its Loft Division. Previously since 2001, heheld various senior level positions at Gap Inc. including President of Banana

Republic, Gap North America, and Forth & Towne.

CHS

Exhibit 3. CHS: Key Metrics

Age Income ($)

StoreCount

LT StoreOpportunity


CHS 1144 1900-2040 NA NA 7.7%

Chico's Stores 46-64 $100k+ 598 675-700 NA NA NA

Chico's Outlets 60 100-120 NA NA NA

WH/BM Stores 35-45 $100K+ 344 450-475 NA NA NAWH/BM Outlets 20 100-125 NA NA NA

Soma 35-64 $75K+ 114 500-540 NA NA NA

Soma Outlets 8 75-85 NA NA NA

% of Sales



History: Chicos was founded in 1983 by Marvin and Helene Gralnick on

Sanibel Island, Florida as a small boutique selling cotton sweaters and

Mexican folk art. In 1987, the first Chicos franchise was opened and in 1993

the company went public. After initially retiring in 1993, the Gralnicks came

back to the company in 1994 as Marvin Gralnick replaced Jeff Zwick as CEO.

In 2003, the company acquired The White House, owner of White House/Black

Market for $90M in cash and stock. At the time there were 103 WH/BM

stores. In 2004, Chicos opened its first 10 Soma boutiques dedicated to the

undergarment business. The Gralnicks again retired from the company in

2006.

Core Concepts and Customer: CHS is a specialty retailer with three core

concepts for women; Chicos, White House Black Market (WH/BM) and Soma

Intimates as well as outlet divisions for all. As of October 31, 2010 the

company operated 1,144 stores in 48 states including today 598 Chicos

boutiques, 60 Chicos outlets, 344 White House/Black Market stores, 20 White

House/Black Market outlets, 114 Soma boutiques and 8 Soma outlets.

The core Chicos brand caters to the 35+ year old woman with the edit point at

52 years old offering them a combination of comfort and fashion. White

House Black Market (WH/BM) is a more fashion forward clothing and

accessory store primarily offering black and white along with an accent color,and caters to the 25+ year old woman. Soma Intimates offers undergarments

(sleepwear and loungewear) to the 35-64 year old who has aged out of

Victorias Secret and is primarily shopping department stores. Approximately

78% of the core customer for both Chicos and WH/BM customers is described

as having an income level above the U.S. median. Somas core customer has

an average income of $75,000.

Sales Breakdown: Year-to-date the company has generated $1.43B in

sales, with the Chicos division (including Soma) producing $994M or 70% of

total sales and the WH/BM division accounting $436M or 30% of total sales.

YTD, DTC accounted for $90.3M or 6.3% of total sales.



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Growth Opportunity: Longer-term, the company has indicated that it believes

it can operate 1900-2040 locations under its current concepts from 1,144 today

including 675-700 Chicos boutiques from a base of 596, 100-120 Chicos

outlets on a base of 60, 450-475 White House/Black Market stores from a base

of 344, 100-125 White House/Black Market outlets from a base of 20, 500-540

Soma boutiques from a base of 114 and 75-85 Soma outlets from a base of 8.

Management: David Dyer has served as President and CEO of the company

since January 2009 and a director since 2007. Formerly, he wasPresident/CEO of Tommy Hilfiger Corporation and Lands End. Donna Colaco

is the Brand President of White-House/Black Market since 2007. Prior to this

position Ms. Colaco held various other positions with the company. Cynthia

Murray has served as Brand President-Chicos since 2009. Prior to this

position, Ms. Murray served as Exec. Vice President and Chief Merchant of

State Stores.

Primary Competitors: Key competitors of the Chicos Brand include Ann

Taylor, Christopher & Banks, Gap, Talbots as well as department stores

including Bloomingdales, Macys, Nordstroms and Saks Fifth Avenue.

WH/BMs competition includes Ann Taylor, Banana Republic, New York and

Co. as well as Macys, Nordstrom, and Saks. Somas direct competition is

Victorias Secret as well as the department stores listed above.

NWY

Exhibit 4. NWY: Key Metrics

Age Income ($)

StoreCount

LT StoreOpportunity


NWY 25-45 $50K-$100K 579 NA ~23 by YE NA NA

New York & Co. Boutiques 556 NA NA NA NA

New York & Co. Outlets 23 75 NA NA NA

% of Sales



History: NWY was founded as Lerner in 1918 by Samuel Lerner and HaroldLane. The company was acquired by Rapid-American in the 1960s and in

1985 Limited Brands acquired 798 Lerner stores for $297M. It operated as a

subsidiary of Limited Brands from 1985-2002 and In 2002, the chain was sold

to as New York and Co. to an investor team including outgoing CEO Richard

Crystal and Bear Stearns Merchant Partners (now Irving Place Capital) for

$153M. The company went public in 2004. In 2005, NWY bought Boston

based Jasmine Sola, an upscale womens chain for $30M or $2M/store for 15

stores. The company closed the division in 2007.

Core Concepts and Customer: NWY offers casual and wear-to-work apparel

and accessories under the New York & Company brand. As of October 31,

2010 the company operated 579 stores in 43 states, with the plan to end FY10

with 552-560 stores. NWYs core customer is a fashion conscious, value

sensitive working mom between the ages of 25-45 (edit point 32) with an

average household income of $50,000-$100,000.

Sales breakdown: Year-to-date the company has generated $718.5M in

sales. The sole division, New York & Company, accounts for 100% of total

sales. The company does not break out its online or outlet sales.

Growth Opportunity: The company sees the long-term potential of its outlet

concept to grow to 75 stores from the current 23. NWY also plans to

rationalize its store base to 552-560 by the end of the year.



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Management: Richard Crystal currently serves as Chairman and CEO of the

company. He was named President/CEO in 1996 and Chairman in 2004.

Previously Mr. Crystal served as Chairman/CEO of Aeropostale (while it was

still partnered with R.H. Macy/Federated). On April 29, 2010, the company

announced that Mr. Crystal will retire from the company when his employment

agreement expires in February 2011. Gregory Scott will succeed Mr. Crystal

and as such been named President as of June, 2010. Previously, he served

as CEO of Bebe Stores; President of Aden B. (WTSLA) Kevin Finnegan is the

Executive Vice President of Global Sales. He has held this position since April

2009 after joining the company in 2001 as the executive Vice President,

National Sales Leader.

Primary Competitors: On the higher-end, NWY is competing with Ann Taylor,

Banana Republic, Club Monaco, Express, J Crew, The Limited and Zara. In

the moderate to lower-end, it is competing with Ann Taylor Loft, Forever 21,

H&M, JC Penney, Kohls, Old Navy, Target and Wal*Mart. Research has

suggested that customers shopping in the value space are not as loyal to

specific brandsthis creates an opportunity for NWY but also forces it to stay

on its toes

TLB

Exhibit 5. TLB: Key Metrics

Age Income ($)

StoreCount

LT StoreOpportunity


TLB ~55 >$120K 584 NA 75-100 BY FY13 ~3% 19.0%

Talbots 536 NA NA NA NA

Talbots Upscale Outlets 27 100 NA NA NA

Talbots Upscale Outlets 21 NA NA NA NA

% of Sales



History: TLB was founded in 1947 by Rudolf and Nancy Talbot. Theyopened their first store in Hingham, Mass near Boston and in 1948 began their

direct mail business. With $8M in annual revenues, the Talbots sold their retailand catalog business to General Mills in 1973. Between 1973 and 1980 the

company expanded from 20 to 126. In 1988, General Mills decided to divest

its entire specialty retail division to focus purely on its food business. At this

time, Talbots was producing $350M in annual revenues with nearly 40%

generated from the catalog. After receiving a number of bids, General Mills

ended up selling Talbots (along with Eddie Bauer) to JUSCO Co., Ltd. (now

ON Co., Ltd.), a Japanese retailer. By 1989, with its new owners, TLB

branched out into international operations with a sourcing office in Hong Kong

and Canadian retail operations in 1991. By late 1993, the parent company

announced its plan to take the company public. In November 1993 with 313

stores in 44 states, the company went public, with the parent retaining a 67%

stake.

Core Concepts and Customer: The companys core businesses include its

signature Talbots (Misses) line, Talbots Petites (54 and under), Talbots

Woman, Womans Petites (fuller figures) and Talbots Accessories & Shoes.

The merchandise is classified as mature work and casual wear. Talbots core

customer is a 54-year old well-educated woman, who is active in her

community and has a household income greater than $120k. TLB operates its

business through retail and direct marketing (internet and catalogue) outlets.

As of October 31, 2010, TLB operated 584 stores.



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Sales Breakdown: Year-to-date, TLB has produced $920.5M in revenue with

81.5% or $750.5M derived from the stores, while 18.5% or $170M came from

the marketing segment. The company does not break out its online sales.

Growth Opportunity: While the company has not identified a long term store

count goal, it sees the potential to grow its outlet business to 60 stores from its

current 25, while closing 75-100 stores in its core division by 2013.

Management: Trudy Sullivan has served as President/CEO since August2007. Prior to this position, she was President of Liz Claiborne from January

2006 until July 2007. Michael Scarpa serves as the COO/CFO. Mr. Scarpa

has served as COO since December 2008 and CFO since January 2009.

Previously, he was COO of Liz Claiborne from January 2007 to November

2008. Michael Smaldone has worked as Chief Creative Officer since

December 2007. Previously, he served as the Senior VP of Design for Ann

Taylor Stores from September 2009 until December 2007.

Primary Competitors: Ann Taylor, Chicos and Limited Brands are Talbots

most direct competition in the specialty retailer space. In terms of department

stores, Macys and Nordstrom also represent affordable luxury, albeit to both

genders.

Comparative Pricing Study

We took an inventory of what ANN, CHS, NWY, TLB were selling on their

website. Excluding sale items, we took the median price of all offered in the

following categories: Pants; shirts/blouses; blazers; sweaters, dresses,

intimates and swimwear.

As shown in Exhibit 6, TLBs merchandise is the most expensive in the

group, while NWYs is the least expensive and typically provides further

discounts in-store at check out. Additionally, the disparity in price between

Ann Taylor and Loft is seemingly greater than that of Chicos to WhiteHouse/Black Market.

Exhibit 6. Opco Survey of Online Prices by Company (December 2010)

Pants Shirts/Blouses Blazers Sweaters Dresses Intimates Swimwear

ANN

Ann Taylor $98.00 $78.00 $208.00 $88.00 $228.00 $35.00 NMLoft 69.50 44.50 138.00 59.50 89.50 NM NM

CHSC HS 79.00 89.00 119.00 99.00 89.00 NM NM

WH/BM 88.00 88.00 150.00 88.00 150.00 NM 36.00

Soma 50.00 50.00 70.00 60.00 69.00 40.00 100.00

NWY 30.00 40.00 60.00 40.00 70.00 NM NMTLB 120.00 109.00 220.00 129.00 200.00 NM NM

Source: Company websites;Oppenheimer & Co. Inc



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Loyalty Programs

ANN launched a loyalty program in October 2008 with co-branded or private

label credit cards and style reward certificates specific to either Loft or Ann

Taylor. The co-branded cards can be used wherever credit cards are

accepted. In addition to point accumulation for rewards there are also special

exclusive discount programs throughout the year.

CHS cites its Passport Club/The Black Book card as its best customers. As a

group as in 2Q10 it was up 3% vs. last year. Chicos and Somas Passport

Club affords members a 5% discount once they spend a total of $500 over a

predetermined time frame. WH/BM has the same program, but the threshold

is $300.

NWY launched its NY&C Rewards credit card with MasterCard in July 2010.

Platinum members spend $400 in one calendar year and get exclusive savings

such as $20 discounts on each $200 spent, birthday coupons, and free

shipping. NWY previously had a different loyalty program that it launched in

2007, which had ~3 million members. The purpose of revamping the program

was to tie into their proprietary charge business to get incremental sales. In

addition to its loyalty program, NWY also offers 15% on all purchase when you

show an AAA membership card.

TLB has the highest penetration of private label credit card usage at 49.2% of

sales as of 2009, up from 46% in 2008, and 28% in 2000. TLB has three

levels; Red, platinum, black. You receive points 0.5 points per each dollar

spend regardless of method of payment, 1.0 for each dollar spent on a TLB

credit card, and 1.25 points for each dollar spent on a TLB credit card once

you spend $1000 on the card. As of June 2009, there were 2M members and

the data shows they spend 80% more and twice as frequently as the average

customer.

Exhibit 7. Customer Loyalty Programs

Name Spend Needed Member Benefits Commentary

ANN Enhanced Credit Card Auto-enrolled w ith "Enhanced CC" Choice of private label or co-branded card Launched 10/2008

Points earned on purchases at any brand

Co-Branded cards earn points on purchases at other merchants

Style Rew ard Certificate

CHS

Chico's Passport Club $500 5% off on all apparel/accessory purchases Best Customer, +3% in 2Q10

Soma Passport Club $500 5% off on all apparel/accessory purchases

WH/BH The Black Book $300 5% off on all apparel/accessory purchases

NWY Y&C Rewards Credit Card- Platinum Spend $400 in one Calendar Yr $20 discount card w ith every $200 spend Launched in July 2010

Birthday Coupon (25%),

4 exclusive savings passes/year

Free Shipping w ith $125 purchase

NY &C Rew ards Credit Car d- Blac k A pply for CC $10 dis count card w ith every $200 spend

Birthday Coupon (15%),

2 exclusive savings passes/year

Free Shipping w ith $125 purchase

TLB Classic Aw ards 500 points Receive $25 appreciation aw ard (expire 1 year from issuance) Cards represent 49.2% of sales

Red Not required to have TLB CC Receive 0.5 point for $1 spend (regardless of method of payment) (46% in 2008) (28% in 2000)

Platinum Auto enrolled when open TLB CC Receive 1.0 point for $1 spend (Have to use TLB CC)

Black $1000 on TLB CC Receive 1.25 point for $1/spend (Have to use TLB CC) As of 6/09, 2M members,

they spend 80% more

and twice as frequently Source: Company reports and OPCO Estimates



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12

Private Equity

With the recent private equity acquisitions of JCG and GYMB there has

been a great deal of speculation regarding which companies could be

next. The conversation runs the gamut, including those retailers operating at

peak margins as well as those that fit into a turnaround mold. Given the recent

flurry of activity we would not exclude anyone from the discussion, yet we do

believe that some make more sense economically than others.

Using an EV/EBITDA valuation metric (Exhibit 8), ANN and CHS appear to

be the most attractively valued, representing a discount to recent

transactions. ANN is trading at 6.2x, 6.0x and 5.3x TTM, FY10E and FY11E

EV/EBITDA while CHS is trading at 6.2x, 6.1x and 5.2x. Both have clean

balance sheets, although CHS cash position is more favorable at $506M vs.

ANN at $223M.

Management willingness to stay on board. Given that senior management

has stayed on at GYMB and plans to stay on post-privatization at JCG, we

thought it would be helpful to also evaluate management tenure and equity

stake across all four names. Kay Krill, CEO of ANN, has been with the

company for 16 years. She owns 0.85% of all outstanding stock, the highest

among any officer of any of these four names. (excluding outgoing NWY CEORichard Crystal)

Exhibit 8. EV/EBITDA vs. Recent Buyouts in Specialty Retail

TTM 2010E 2011E Debt/

EV TTM 2010E 2011E EV/EBITDA EV/EBITDA EV/EBITDA Cash 2011E EBITDA

ANN $1,330.0 $214.2 $222.6 $252.0 6.2x 6.0x 5.3x $223.6 0.0x

CHS 1690.0 272.6 278.8 326.4 6.2x 6.1x 5.2x 505.6 0.0x

NWY 226.4 (12.3) (17.8) 43.8 NA NA 5.2x 22.5 0.4x

TLB 638.6 147.4 128.2 162.9 11.7x 5.0x 3.9x 4.7 0.2x

Recent Retail DealsGYMB 1607.0 216.7 220.2 241.1 8.1x 8.9x 8.1x 176.8 0.0x

JCG 2473.0 315.9 287.7 314.4 7.9x 8.5x 7.4x 311.7 0.0x

EBITDA




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Manufacturing Pressures

Sourcing

Thus far in 2010, labor costs in China have increased 8-12% for most U.S.

customers and since labor translates into 25% of the cost of a garment,

this is a significant increase. Labor costs have increased from a series of

work stoppages in which workers protested for higher pay and better working

conditions. This has led to China to enact a series of labor laws. One of the

primary reasons products from apparel to electronics are sourced in China is

its relatively low labor costs. Going forward, with these costs on the rise,

China may have less of a competitive advantage to other countries in terms of

production.

As of the end of fiscal year 2009, the majority of merchandise is still

produced in China with ANN at 50%, CHS at 66%, NWY at 61% and TLB at

41%.

In 2009, CHS and TLB entered into agreements with sourcing agencies to

reduce their dependency on China and achieve greater economies of

scale.

CHS entered into a non-exclusive relationship with the Connor Group,

the second largest sourcing service company in the world. The

Connor group has 35 offices with 1,400 employees in 20 countries

throughout the globe. The purpose of this agreement was to

consolidate and centralize the sourcing operations of all three brands

into one. Previously, each brand had its own internal sourcing team.

China sources accounted for approximately 66% merchandise

purchases in 2009 compared to approximately 58% in the prior fiscal

year. Despite this increase, the company has made a conscious effort

to move sourcing out of China and into other regions in the upcoming

years.

TLB entered into a strategic partnership with Li & Fung, a Hong-Kong

based global goods exporter, to serve as the exclusive global apparel

sourcing agent for nearly the entire Talbots collection with the

exception of swimwear, intimate apparel, footwear, jewelry, handbags

and accessories for which it will serve as a non-exclusive agent. Prior

to the agreement, TLB had operated its own Hong Kong and India

sourcing offices. Li & Fung is the worlds largest exporter with $16.7B

in revenue, 35,000 employees and a network of 80 offices in 40

countries. The partnership has allowed the company to leverage Li &

Fungs global network. Reflecting its new relationship, as of October

2010, TLB has consolidated its sourcing footprint to 69 vendors and

144 factories from 232 vendors and 487 factories in 2008. Going

forward, the company intends to reduce its dependence on

Asia/China. By 2013 Asia, the Mediterranean, and the Americas

should represent 60%, 30% and 10% of the sourcing volume,

according to the company. That compares to 2009, when ~76% was

sourced from and the balance sourced between other regions.



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14

Cotton

Fabric typically represents ~40% of the cost of manufacturing a garment.

The labor is ~25%, import tariffs ~20% and the remaining 15% goes to trim,

packaging, freight and commissions. As fabric is the most expensive

component of an item, cotton price movement obviously has a tremendous

effect on sourcing costs.

YTD, cotton prices have accelerated steadily, reaching a 140-year high of$1.57/pound on November 10th up from $0.77 on January 1

st. The price

increase has been attributed to poor weather and an increase in demand in

China, the worlds largest producer and importer. Additionally, floods in

Pakistan and Indias restrictive export policies have reduced much of the

worlds inventories.

Since reaching the all-time high in November, the cotton rally has taken a

breather, dropping 7% to $1.46 as of December 3- The recent selloff, which

is in line with other commodities, is attributed to worries that Chinas efforts to

slow its economy (to prevent inflation) will hamper raw-materials demand

growth.

Cotton prices are generally a leading indicator of retailers total grossprofit. In February 2008 when cotton prices increased 28.5% yoy, the 6-9

month period following that saw gross profit declines in the group in the 20%-

30% range. In April 2009 cotton prices declined ~40%. Approximately 6

months later the composite gross profits of ANN, CHS, NWY and TLB

increased by 50%. Currently, we are experiencing not only tremendous YoY

increases in cotton (89% in October), but still close to peak prices despite a

recent pullback (please see further commentary below). As a result, there will

likely be gross profit deterioration in 2011. However, we do caution that this is

an industry-wide phenomenonnot missy specificand companies are

planning their businesses accordingly to reflect the headwinds. However, given

a still struggling consumer who has become accustomed to heavy promotional

activity, we believe the ability to pass on costs will become more limited.



15/60

Exhibit 9. YoY Change in Cotton Prices, Composite Gross Profit, and

Clothing/Accessory Sales

-40%

-20%

0%

20%

40%

60%

80%

100%

Jan-07

Ap

r-07

Ju

l-07

Oc

t-07

Jan-08

Ap

r-08

Ju

l-08

Oc

t-08

Jan-09

Ap

r-09

Ju

l-09

Oc

t-09

Jan-10

Ap

r-10

Ju

l-10

O c

t 1 0

Yo

YChange

Cotton Prices Composite Change in Gross Profit Clothing and Accessories Sales

Source: National Cotton Council of America

We believe that Missy retailers are well-positioned to survive the

escalating cotton costs better than other sub-sectors including teens and

children, given the formers less emphasis on cotton fabrications and a

broader assortment. Among the group CHS and TLB have the most exposure

and are thus the most at risk. NWY has more synthetic fabrications while

ANN has fabric in position through the majority of FY11.

Longer-term, w believe that escalating cotton prices and the problems in

China, Pakistan as well as Indias restrictive cotton export policy issuehave caused companies to look for both new production countries as

well as alternate fabrications. The other regions that manufacturers are

exploring include Bangladesh, Indonesia, Bahrain, Jordan, Morocco, and Sri

Lanka. However, immediate production from these areas should not be

expected, as it takes time to build an infrastructure.

Below please find company-specific commentary on sourcing challenges

and elevated cotton prices. As a reference, most retailers within the

missy space, as well as the broader specialty universe, have indicated

escalating pressures as they look to F2H11.

ANN: But we have a number of strategies underway in the business that give us someoptimism that we will be able to successfully navigate through this crisis. First, as itrelates to advanced commitments, consistent with the fist half activity, we are makingmeaningful commitments on a significant portion of our key core fabrics. Second thing iswe are aggressively looking at opportunities to procure off peak production. That's astrategy that we have historically utilized within the factory outlet channel and we arerapidly expanding that across the full price channels. Third, strong vendor partnerships. Icannot emphasize that enough. It's a tremendous benefit to us as we manage throughthese challenges. And then also just value engineering the product where it makessense. We have our designers and our merchants on the ground in Asia working directlywith our vendors and our factories, and we continue to strengthen our raw materials trimstaff in Asia to ensure that we have flawless execution in this area. From a costingperspective, while we know the situation is clearly more challenging than we've seen, we



16/60

16

believe we are approaching this in the right way and that we are doing everything in ourpower to mitigate the costing pressures for the back half of 2011.

Source: Ann Taylor Stores Q3 2010 Earnings Conference Call.

CHS: Much has been reported about the escalating prices for cotton and the labor costincreases in China. Cotton prices, though recently easing somewhat, have more thandoubled compared to last year and labor costs in China have risen 8% to 12% this year.While we source substantial quantities of product from China, our experience reflectsthat only 30% of our piece goods are made from cotton and that the labor component is

only about 20% of the cost of one of our garments. These points do not diminish theimpact of higher sourcing costs, but give them the appropriate dimension against abackdrop of increasing concern.

Source: Chicos FAS, Inc Q3 2010 Earnings Conference Call.

NWY: Clearly costs are increasing on both the raw materials and labor side of theequation. At this point, we believe it is important to convey value to our customer, and itis not our intention to raise our overall retail for the spring season. We are working tomitigate these pressures by leveraging our long-term relationships with our key mills andfactories. We benefit from having a flexible sourcing base, and a strong ability to work inand out of fabrication to preserve cost, which will help mitigate some of these pressures.With advanced planning, we have made early commitments to base fabrics, which helpease some of the cost pressures for the early part of fiscal 2011.

Source: New York and Company Q3 2010 Earnings Conference Call.

TLB: Before I share with you our key strategies, we recognize that we are facing somestrong economic headwinds, whether it's rising cotton prices, labor shortages in China,currency reevaluation in Asia and in Europe and freight rate rising; all factors thatinfluence the cost of our product.

Source: Talbots Investor Meeting October 5, 2010.

In September, Chinese officials agreed to have a more open dialogue

with the United States regarding the easing of container constraints.

Maritime shipping accounts for more than 90% of all U.S. foreign trade and

China produces 95% of the worlds containers. The United States needs to

upgrade its ports to keep pace with Chinas shipping infrastructure, which is

among the worlds most modern facilities. Even with inflated prices, ship

owners lost a combined $20B in 2009 from slowdown of trade and the

reduction of ocean shipping.



17/60

The Economy

Unemployment by State

CHS has the most exposure to the five states with the highest level of

unemployment at 25.4% of total store base followed by ANN (22.2%), NWY

(19.3%), TLB (17.4%). All have very high store counts in CA relative to theirbases. CHS has greater than 20% of its store base concentrated in Florida and

California alone.

Exhibit 10. States with Highest Unemployment Rates

Highest Unemployment Rate

Nevada 14.2 1.6 1.5 0.7 0.7

Michigan 12.8 2.0 2.2 2.3 3.0

California 12.4 9.5 11.7 9.5 6.6

Florida 11.9 8.4 9.5 6.3 6.4

Rhode Island 11.4 0.7 0.5 0.5 0.7

Total 22.2 25.4 19.3 17.4

Source: Bureau of Labor Statistics

Exposure to states with improving and low unemployment is minimal. At

5% of its store base, NWY is the most exposed to the states including North

Dakota, South Dakota, Nebraska, New Hampshire and Vermont. ANN, CHS

and TLB have 1.2%, 0.9% and 2.3% of their store base in these states.

Exhibit 11. States with Greatest Improvement in Employment (Rolling 12

months)

BP Improvement ANN CHS NWY TLB

Most Improvement (Rolling 12 months)

Nevada 130.0 1.6 1.5 0.7 0.7

Colorado 90.0 2.0 2.1 1.0 1.6

Utah 90.0 0.4 0.8 0.3 0.3

Louisiana 80.0 1.3 1.5 1.6 1.6

Montana 70.0 1.7 1.9 2.1 1.4

Total 7.0 7.8 5.7 5.6


Exhibit 12. States with Lowest Unemployment Rates

Unemployment Rate (%) ANN CHS NWY TLB

Lowest Unemployment RateNorth Dakota 3.8 0.0 0.0 0.0 0.2

South Dakota 4.5 0.1 0.1 0.2 0.2

Nebraska 4.7 0.6 0.6 0.7 0.5

New Hampshire 5.4 0.3 0.2 0.5 1.2

Vermont 5.7 0.2 0.1 3.6 0.2

Total 1.2 0.9 5.0 2.3

% Store Base/State


Female Unemployment

Since 2000, the female 25+ year old unemployment rate has mimicked the

national unemployment rate, albeit at a consistently lower level (~80% of



18/60

18

the national rate) and sales have been inversely correlated. The previous

peak in unemployment for the 25+ group of 4.8% occurred during the

2001/2002 recession. In 4Q01, despite an unweighted 16% increase in square

footage, total revenue only increased 1.6%. Jumping ahead, as both the 25+

and national unemployment rate bottomed in late 2006, ANN, CHS, NWY and

Talbots composite revenues hit a new all time high in 4Q06 of over $2B.

Exhibit 13. National Unemployment Rate vs. 25+ Woman,

ANN/CHS/NWY/TLB Total Sales

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

TotalS

ales($)

0

500

1000

1500

2000

2500

Unemploy

mentRate(%)

National Unemployment Rate 25 and Older Women ANN, CHS, NWY, TLB Total Sales


Within the 25-54 year-old group, there is a direct correlation between awomans age and unemployment rate with older women having a lower

rate. The 45-54 year old segment has consistently had the lowest

unemployment rate (currently 6.8%), while the 25-34 year old segment has

had the highest unemployment rate of the (9.0%). This benefits those retailers

who cater to an older customer base including CHS and TLB. Coincidentally,

this is also a woman who may no longer have children at home and therefore

may have a higher level of discretionary spend when the product supports it.

Potential Extension of Unemployment Benefits

On December 6, President Obama announced a tentative deal to extendthe Bush-era tax cuts that were due to expire at the end of the year,

through 2012, as well as extend unemployment benefits until the end of

2011.

The uncertainty surrounding the extension of unemployment benefits

and the Bush tax cuts remains a central issue for the lame duck

Congress. Unemployment benefits recently provided up to 99 weeks of aid

for more than two million unemployed workers. However, the two million

number included 800,000 workers under a separate state-federal program

(currently 100% federally funded) whose benefits began to lapse as of



19/60

December 1. Additionally, the other 1.2 million Americans could lose aid by

the end of December if an extension is not officially granted.

Bush Tax Cuts

A typical Bush tax cut for a median family of four amounted to about

$2,200 in savings. The typical missy customer has a household income

greater than the median suggesting a greater tax savings. Additionally, the

proposed tax cut included a payroll tax holiday, deducting 2% off the currentpercentage paid for social security benefits from 6.2% to 4.2%. A household

with $50,000 in W-2 income would save an additional $1,000. However,

theres still a chance that these tax cuts will not be renewed and marginal

income tax returns will return to the higher pre-Bush days. As a result, the

missy customer would be directly affected.

Consumer Sentiment

The preliminary Consumer Sentiment Index numbers for December 2010

are 74.2, up from last months 71.6. Sentiment also is at the highest level

since its June 2010, 3 year peak of 76.0. We believe the average consumer

has adjusted to the new economic reality. Improved optimism from the

employment situation as well as retailers deep discounts for the holiday aretwo contributing factors. While these numbers are an improvement, they are

still well off the highs experienced in 2007. The high, albeit stabilized,

unemployment rate, combined the uncertain macro environment, has

contributed to the consumers wariness.

Exhibit 14. Consumer Sentiment

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

Jan Feb Mar Apr May Jun Jul Au g Sep Oct N ov Dec

200 7 200 8 200 9 201 0

Source: The University of Michigan's Institute for Social Research

ForeclosuresWhile the year-over-year incidence of foreclosures is declining, the

number is misleading as many banks are delaying the foreclosure

process and allowing delinquent owners to stay in their homes longer.

This may result in a reversion to increased YoY rates later this year as

unemployment remains elevated and as government refinancing initiatives fail,

which they could.

Foreclosure rates still remain elevated, with CHS having the most store

exposure (36.6%) to the top ten states with the highest incident per

household. ANN closely follows with 32.3%. Although still significant, NWY



20/60

20

and TLB have fewer locations in the troubled states at 28.6% and 26.0%

respectively.

Exhibit 15. Foreclosures

ANN Ann Loft CHS Chs Wh/Bm Soma NWY TLB

United States 371 (0.2)%

Nevada 69 1.7 1.6 1.1 0.4 1.4 0.7 0.5 0.2 0.7 0.7Florida 148 0.7 8.3 3.2 5.1 9.6 5.1 3.0 1.4 6.3 6.4

Arizona 159 0.3 1.8 0.8 1.0 2.3 1.3 0.7 0.4 1.7 1.4

California 178 0.3 9.4 3.5 5.9 11.8 6.8 3.8 1.2 9.5 6.6

Idaho 204 0.3 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2

Michigan 208 (1.4) 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0

Utah 244 0.8 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3

Georgia 287 (0.1) 3.8 1.7 2.1 3.7 1.8 1.3 0.5 3.5 4.3

Hawaii 317 (0.7) 0.2 0.2 0.0 0.5 0.2 0.4 0.0 0.0 0.0

Illinois 333 (0.9) 4.5 1.6 3.0 4.1 2.1 1.4 0.5 4.3 3.1

32.3 13.2 19.1 36.6 20.1 12.1 4.4 28.6 26.0

http://www.statehealthfacts.org

As of September 2010

YoY Change

(%)

% Store Base in StateForeclosure Rate

(1/every X housing

Real Personal Consumption

While real personal consumption expenditures, including all goods,

tapered into negative territory during 2H08 and most of 2009, it has

rebounded in 2010 with a strong 2.3% yoy growth in October 2010.

Womens clothing experienced the greatest decrease, of 9% in June 2009.

However, during much of 2010, womens/girls clothing has improved more

strongly than both total expenditures as and the entire goods category. In

October 2010, womens/girls clothing increased by 6.6% to $170B.

Exhibit 16. YoY Change in Personal Consumption Expenditures, Goods,

Services

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2007-Jan

2007-Mar

2007-May

2007-Ju

l

2007-Sep

2007-Nov

2008-Jan

2008-Mar

2008-May

2008-Ju

l

2008-Sep

2008-Nov

2009-Jan

2009-Mar

2009-May

2009-Ju

l

2009-Sep

2009-Nov

2010-Jan

2010-Mar

2010-May

2010-Ju

l

2010-Sep

%Change(YoY)

Personal consumpt ion expenditures Goods Women's /Girl's Clothing

Source: Bureau of Economic Analysis



21/60

Household Net Worth

After plummeting by nearly 20% in 2008, total household net worth

increased 4.3% to $53.6B in 2009. YTD trends have continued to improve,

although on an actual dollar basis, household net worth of $53.6B is still

significantly below its previous peak of $64.1B achieved in 2006. Between

December 2007 and October 2008, the net worth of an average American

hosuehold decreased by 22.8% from the combined impact of weak housing

prices and a faltering stock market. Specficially, wealthier and older

households (ages 55-64) were those whose net worth took the biggest hit.

Stripping out second homes and equity in businesses, average net worth

diminished by only 12%. The 55-64 year old group made up a disproportinate

number of business owners and second home owners. As housing prices

have stablized nationally, and the S&P has returned ~10% YTD, the average

American is seeing a boost in net worth. Those with a healthy exposure to the

equity markets in traditonal taxable accounts and retirement accounts have

seen the greatest rebound.

Exhibit 17. Household Net Worth

$-

$10,000.00

$20,000.00

$30,000.00

$40,000.00

$50,000.00

$60,000.00

$70,000.00

2004 2005 2006 2007 2008 2009

TotalNetWorth(Billions)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

YoY%Change

Net Worth: Households/Nonprofi t Organizations YoY % Change




22/60

22

Debt

In 3Q07, consumers spent an all-time high of 14.0% of their disposable income

on debt service payments (including mortgage and consumer credit). Since

3Q07, consumers have begun to deleverage and in 2Q10, 12.1% of

disposable income went to debt service, the lowest figure since 1Q00. As

lenders have tightened borrowing restrictions and as stock portfolios went

south in 2008-2009, consumers have begun to borrow less and pay back more

quickly. Since 1Q09, there have been year-over-year declines in the total

household mortgage balance and consumer debt outstanding.

Exhibit 18. Debt Service as a Percentage of Disposable Income

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

1Q2000

3Q2000

1Q2001

3Q2001

1Q2002

3Q2002

1Q2003

3Q2003

1Q2004

3Q2004

1Q2005

3Q2005

1Q2006

3Q2006

1Q2007

3Q2007

1Q2008

3Q2008

1Q2009

3Q2009

1Q2010

(%)De

btServ

ice

/Disposa

bleIncome

DSR Source: Bureau of Economic Analysis

Exhibit 19. YoY Percent Change in Household Debt, Mortgage Balance,

Consumer Credit

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10Y

oY%Ch

ange

Change in Household DebtChange in Household Mortgage BalanceChange in Household Consumer Credit Balance




23/60

Savings

The second quarter of 2009 saw Americans save the highest percentage

of their disposable income (7.2%) since 1992. This was clearly a response

to the global economic meltdown and the fear from the broader stock market

index reaching multiyear lows in March 2009. Although the savings rate has

decelerated since its peak, it still stands at the 5.8% level, aside from its recent

peak it is higher than any other time this century.

Exhibit 20. Household Savings Rate

0

1

2

3

4

5

6

7

8

2000-I

2000-III

2001-I

2001-III

2002-I

2002-III

2003-I

2003-III

2004-I

2004-III

2005-I

2005-III

2006-I

2006-III

2007-I

2007-III

2008-I

2008-III

2009-I

2009-III

2010-I

2010-III

%o

fDisposab

lePersona

lIncome

(DPI)

Personal saving Rate, (% of Disposable Personal Income, DPI) Source: Bureau of Economic Analysis

Personal Bankruptcy Filings

While bankruptcy filings have increased steadily since 2007, the rate of the

increase has decelerated sequentially from a 36.9% yoy gain in 2Q09 to a

6.7% gain in 3Q10.

Exhibit 21. Non-business Bankruptcy Filings

0.0

50,000.0100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

350,000.0

400,000.0

450,000.0

1st

Quarter

2nd

Quarter

3rd

Quarter

4th

Quarter

1st

Quarter

2nd

Quarter

3rd

Quarter

4th

Quarter

1st

Quarter

2nd

Quarter

3rd

Quarter

4th

Quarter

1st

Quarter

2nd

Quarter

3rd

Quarter

2007 2008 2009 2010

Total Non-Business Bankruptcy Fil ings % Change

Source: American Bankruptcy Institute



24/60

24

Fiscal Distress By State

The Fiscal Distress Measure takes into account the number of foreclosures,

levels of unemployment and food stamp participation by state. According to the

most recent composite, which takes into account March and April numbers, the

five most distressed states are NV, FL, UT, ID and CO.

CHS (14.0%) and ANN (12.5%) have the most significant

exposure to the fiscally distressed states. NWY (8.3%) and TLB(9.2%) also have legitimate exposure.

Exhibit 22. Fiscal Distress by State

Rank Across

Sep-10 Rank Rate 09 /10 Change Chg Rank Partic 08/10 Chg Rank Al l Measures ANN ANN LOFT CHS CH S WH/ BM So ma NWY TLB

US Total 371 NA 9.8% (0.2)% NA 17.0% NA NAAL 1352 42 8.9 (1.8) 51 13.4 36 48 1.3% 0.4% 0.9% 1.4% 0.8% 0.4% 0.3% 2.1% 1.6%

AK 1038 37 7.8 (0.5) 32 (tie) 16.3 27 (tie) 37 (tie) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

AZ 159 3 9.7 0.3 12 (tie) 13.9 35 9 (tie) 1.8 0.8 1.0 2.3 1.3 0.7 0.4 1.7 1.4

AR 581 20 7.7 0.2 15 (tie) 9.8 44 27 (tie) 0.4 0.1 0.3 0.7 0.5 0.2 0.0 0.7 0.5CA 178 4 12.4 0.3 12 (tie) 18.5 18 6 9.4 3.5 5.9 11.8 6.8 3.8 1.2 9.5 6.6

CO 357 12 8.2 0.5 5 (tie) 21.4 12 5 2.0 0.9 1.1 2.1 1.2 0.7 0.2 1.0 1.6

CT 695 26 9.1 0.5 5 (tie) 25.5 6 7 2.3 1.0 1.3 1.8 1.0 0.6 0.2 1.4 3.0

DE 643 22 8.4 0.0 17 (tie) 23.0 10 8 0.3 0.2 0.1 0.4 0.2 0.2 0.1 0.2 0.5

DC 923 31 9.8 (1.3) 47 (tie) 16.6 25 41 0.8 0.4 0.3 0.3 0.1 0.2 0.0 0.0 0.2

FL 148 2 11.9 0.7 4 26.1 5 2 8.3 3.2 5.1 9.6 5.1 3.0 1.4 6.3 6.4

GA 287 8 10.0 (0.1) 22 18.2 20 9 (tie) 3.8 1.7 2.1 3.7 1.8 1.3 0.5 3.5 4.3

HI 317 9 6.3 (0.7) 38 (tie) 16.4 26 23 0.2 0.2 0.0 0.5 0.2 0.4 0.0 0.0 0.0

ID 204 5 9.0 0.3 12 (tie) 38.8 1 3 (tie) 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2

IL 333 10 9.9 (0.9) 41 (tie) 10.9 41 33 (tie) 4.5 1.6 3.0 4.1 2.1 1 .4 0.5 4.3 3.1

IN 541 17 10.1 0.0 17 (tie) 14.4 32 (tie) 19 1.4 0.4 1.0 1.5 1.1 0.4 0.0 1.7 1.6

IA 1176 40 6.8 0.4 9 (tie) 12.4 40 31 (tie) 0.3 0.1 0.2 0.5 0.4 0.1 0.1 0.5 0.9

KS 1336 41 6.6 (0.4) 27 (tie) 18.4 19 30 0.7 0.4 0.2 0.8 0.4 0.3 0.1 0.3 0.9

KY 1019 36 10.1 (0.7) 38 (tie) 8.9 48 47 0.8 0.3 0.4 1.2 0.6 0.4 0.2 1.2 1.4

LA 932 32 7.8 0.5 5 (tie) 10.7 42 27 (tie) 1.3 0.4 0.9 1.5 0.9 0.4 0.2 1.6 1.6

ME 2415 45 7.7 (0.4) 27 (tie) 10.6 43 45 (tie) 0.1 0.0 0.1 0.2 0.1 0 .0 0.1 0.2 0.7

MD 620 21 7.5 0.2 15 (tie) 20.4 15 12 2.3 0.9 1.4 3.0 1.8 0.9 0.3 2.6 2.1

MA 676 23 8.4 (0.6) 36 (tie) 13.2 37 37 (tie) 4.2 1.9 2.3 2.8 1.7 1.1 0.0 2.1 4.5

MI 208 6 13.0 (1.4) 49 (tie) 19.3 16 21 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0

MN 690 24 (tie) 7.0 (0.9) 41 (tie) 18.7 17 29 1.6 0.8 0.8 1.8 1.2 0.4 0.2 1.9 1.9

MS 2418 46 9.8 (0.2) 23 (tie) 9.2 46 45 (tie) 0.6 0.2 0.3 0.3 0.2 0.1 0.0 1.0 0.5

MO 705 27 9.3 (0.4) 27 (tie) 9.0 47 40 1.7 0.7 1.0 1.9 1.2 0.5 0.2 2.1 1.4

MT 1163 39 7.4 0.9 2 16.7 24 16 (tie) 0.0 0.0 0.0 0.2 0.2 0.0 0.0 0.0 0.0

NE 2368 44 4.6 (0.2) 23 (tie) 16.3 27 (tie) 35 0.6 0.2 0.3 0.5 0.4 0.2 0.0 0.7 0.5

NV 69 1 14.4 1.7 1 30.0 2 1 1.6 1.1 0.4 1.4 0.7 0.5 0.2 0.7 0.7

NH 690 24 (tie) 5.5 (1.2) 45 (tie) 23.2 8 (tie) 26 0.3 0.2 0.1 0.3 0.3 0.0 0 .0 0.5 1.2

NM 577 19 9.4 (0.4) 27 (tie) 26.6 4 9 (tie) 0.3 0.1 0.2 0.7 0.4 0 .2 0.1 0.3 0.3

NJ 992 35 8.2 0.4 9 (tie) 20.7 14 14 5.2 2.2 3.0 4.3 2.4 1.5 0.4 5.4 4.2

NY 2175 43 8.3 (0.5) 32 (tie) 14.6 31 44 7.4 3.0 4.4 3.7 2.4 1.2 0.1 9.9 4.9

NC 984 34 9.6 (1.3) 47 (tie) 17.1 23 42 2.5 0.9 1.7 2.8 1.6 0.8 0.4 3.0 4.7

ND 5802 50 3.7 (0.6) 36 (tie) 8.0 50 50 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.2 0.2

OH 388 13 10.0 (0.7) 38 (tie) 12.8 38 31 (tie) 3.2 1.4 1.8 2.7 1.5 1 .0 0.2 4.3 3.8

OK 794 29 6.9 0.0 17 (tie) 15.7 29 25 0.6 0.2 0.3 0.8 0.4 0.4 0.0 0.7 0.9

OR 352 11 10.6 (0.4) 27 (tie) 14.3 34 22 1.1 0.3 0.8 1.6 0.9 0.6 0.1 0.0 0.9

PA 950 33 9.0 0.4 9 (tie) 14.4 32 (tie) 24 4.9 1.9 3.0 4.2 2.5 1 .4 0.3 6.1 5.7

RI 874 30 11.5 (0.5) 32 (tie) 27.8 3 16 (tie) 0.7 0.2 0.4 0.4 0.3 0 .1 0.1 0.5 0.7

SC 509 15 11.0 (1.2) 45 (tie) 12.5 39 39 1.7 0.8 0.9 1.7 1.1 0.5 0.1 1.9 2.8

SD 4576 48 4.4 (0.3) 26 18.0 21 36 0.1 0.0 0.1 0.1 0.1 0.0 0.0 0.2 0.2

TN 1080 38 9.4 (1.4) 49 (tie) 9.6 45 49 2.0 0.9 1.1 2.1 1.3 0.5 0.3 2.6 2.3TX 752 28 8.1 0.0 17 (tie) 25.2 7 13 7.8 3.7 4.1 9.0 5.0 2.7 1.3 8.3 6.8

UT 244 7 7.5 0.8 3 23.2 8 (tie) 3 (tie) 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3

VT 10780 51 5.8 (1.0) 43 (tie) 8.4 49 51 0.2 0.1 0.1 0.1 0.1 0.0 0.0 3.6 0.2

VA 556 18 6.8 0.0 17 (tie) 15.1 30 16 (tie) 3.7 1.4 2.2 2.6 1.9 0.5 0.2 0.0 3.3

WA 493 14 9.0 (0.2) 23 (tie) 17.6 22 15 1.8 0.6 1.2 1.8 1.2 0.5 0.1 0.5 1.2

WV 5540 49 9.2 0.5 5 (tie) 6.7 51 43 0.1 0.0 0.1 0.2 0.2 0.0 0.0 0.7 0.7

WI 525 16 7.8 (1.0) 43 (tie) 22.7 11 20 1.0 0.6 0.4 1.2 0.6 0.4 0.1 1.2 1.2WY 2933 47 6.8 (0.5) 32 (tie) 21.3 13 33 (tie) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Exposure to the Five Most Distressed States: 12.5 5.5 7.0 14.0 7.6 4.7 1.8 8.3 9 .2

Source: statehealthfacts.org, RealtyTrac, Bureau of Labor Statistics, Department of Agriculture and company reports

Foreclosures Unemployment Food Stamp Participation % Store Base in State



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Health Insurance Coverage

Another topic that is heavily in the news is healthcare reform. As it relates to

the companies within our universe, the states with the highest percentage of

uninsured residents are TX, NM, FL, AZ and NV.

Those with the most exposure in the largest uninsured states

include CHS (26.7)% and ANN (24.6)%. NWY and TLB are onlyslightly behind at 22.4% and 19.4% of their store bases respectively.

Exhibit 23. Health Insurance Facts by State

Employer Individual Medicaid Medicare Other Public Uninsured ANN Ann Loft CHS CHS Wh/Bm Soma NWY TLB

US Total 49.0% 4.6% 15.6% 12.4% 1.2% 16.7%

AL 50.8 2.7 16.3 14.8 NSD 14.4 1.3% 0.4% 0.9% 1.4% 0.8% 0.4% 0.3% 2.1% 1.6%

AK 51.4 3.5 12.4 7.7 5.8 19.2 0.0 0.0 0.0 0. 0 0.0 0.0 0.0 0.0 0.0

AZ 44.2 5.1 19.0 11.1 1.1 19.6 1.8 0.8 1.0 2. 3 1.3 0.7 0.4 1.7 1.4

AR 43.6 4.3 16.2 15.1 2.1 18.6 0.4 0.1 0.3 0. 7 0.5 0.2 0.0 0.7 0.5

CA 46.6 5.9 17.9 9.5 0.7 19.3 9.4 3.5 5.9 11. 8 6.8 3.8 1.2 9.5 6.6

CO 54.9 6.4 10.5 9.9 2.6 15.7 2.0 0.9 1.1 2. 1 1.2 0.7 0.2 1.0 1.6

CT 59.7 4.4 10.7 13.8 NSD 11.0 2.3 1.0 1.3 1.8 1.0 0.6 0.2 1.4 3.0

DE 54.6 3.8 13.9 14.7 NSD 12.2 0.3 0.2 0.1 0.4 0.2 0.2 0.1 0.2 0.5

DC 51.8 5.7 21.4 9.6 NSD 11.2 0.8 0.4 0.3 0.3 0.1 0.2 0.0 0.0 0.2

FL 44.0 5.0 11.6 16.4 1.7 21.3 8.3 3.2 5.1 9. 6 5.1 3.0 1.4 6.3 6.4

GA 52.2 3.9 13.0 9.4 2.2 19.3 3.8 1.7 2.1 3. 7 1.8 1.3 0.5 3.5 4.3HI 56.5 3.3 14.4 14.7 3.0 8.2 0.2 0.2 0.0 0. 5 0.2 0.4 0.0 0.0 0.0

ID 51.5 7.5 12.5 12.2 NSD 15.4 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.2

IL 54.7 4.5 14.5 11.8 0.6 13.9 4.5 1.6 3.0 4. 1 2.1 1.4 0.5 4.3 3.1

IN 54.0 3.2 15.0 13.9 NSD 13.2 1.4 0.4 1.0 1.5 1.1 0.4 0.0 1.7 1.6

IA 57.1 6.4 12.9 12.3 0.9 10.5 0.3 0.1 0.2 0. 5 0.4 0.1 0.1 0.5 0.9

KS 54.9 6.3 11.1 12.7 2.3 12.8 0.7 0.4 0.2 0. 8 0.4 0.3 0.1 0.3 0.9

KY 48.8 3.8 16.7 13.7 0.9 16.1 0.8 0.3 0.4 1. 2 0.6 0.4 0.2 1.2 1.4

LA 47.4 4.9 16.1 12.9 NSD 18.0 1.3 0.4 0.9 1.5 0.9 0.4 0.2 1.6 1.6

ME 48.4 3.9 21.5 13.9 2.0 10.3 0.1 0.0 0.1 0. 2 0.1 0.0 0.1 0.2 0.7

MD 60.3 4.4 10.2 10.9 1.1 13.1 2.3 0.9 1.4 3. 0 1.8 0.9 0.3 2.6 2.1

MA 59.3 3.3 18.7 13.4 NSD 5.0 4.2 1.9 2.3 2.8 1.7 1.1 0.0 2.1 4.5

MI 54.8 4.1 14.5 13.5 NSD 12.7 2.0 0.8 1.2 2.1 1.5 0.4 0.2 2.3 3.0

MN 58.1 5.7 13.9 12.7 0.8 8.7 1.6 0.8 0.8 1. 8 1.2 0.4 0.2 1.9 1.9

MS 41.6 4.1 22.2 12.9 1.4 17.8 0.6 0.2 0.3 0. 3 0.2 0.1 0.0 1.0 0.5

MO 52.0 5.0 13.8 14.0 1.2 14.0 1.7 0.7 1.0 1. 9 1.2 0.5 0.2 2.1 1.4

MT 46.5 7.8 11.8 15.8 2.4 15.8 0.0 0.0 0.0 0. 2 0.2 0.0 0.0 0.0 0.0

NE 55.7 6.7 11.3 12.8 1.7 11.7 0.6 0.2 0.3 0. 5 0.4 0.2 0.0 0.7 0.5

NV 55.1 3.7 9.3 10.6 1.3 19.9 1.6 1.1 0.4 1. 4 0.7 0.5 0.2 0.7 0.7

NH 63.2 4.4 7.8 13.5 0.8 10.4 0.3 0.2 0.1 0. 3 0.3 0.0 0.0 0.5 1.2

NJ 58.8 3.4 10.4 12.2 NSD 15.0 0.3 0.1 0.2 0.7 0.4 0.2 0.1 0.3 0.3

NM 40.0 3.8 18.7 12.0 2.7 22.8 5.2 2.2 3.0 4. 3 2.4 1.5 0.4 5.4 4.2

NY 48.5 3.9 20.7 12.1 NSD 14.4 7.4 3.0 4.4 3.7 2.4 1.2 0.1 9.9 4.9

NC 48.6 4.8 14.3 13.4 2.1 16.8 2.5 0.9 1.7 2. 8 1.6 0.8 0.4 3.0 4.7

ND 56.4 9.3 8.8 12.7 1.4 11.3 0.0 0.0 0.0 0. 1 0.1 0.0 0.0 0.2 0.2

OH 54.5 4.4 13.4 14.1 0.7 12.9 3.2 1.4 1.8 2. 7 1.5 1.0 0.2 4.3 3.8

OK 48.0 4.1 14.7 14.8 2.2 16.2 0.6 0.2 0.3 0. 8 0.4 0.4 0.0 0.7 0.9

OR 51.0 5.5 12.1 13.6 NSD 17.0 1.1 0.3 0.8 1.6 0.9 0.6 0.1 0.0 0.9

PA 55.1 4.7 14.5 14.6 NSD 10.7 4.9 1.9 3.0 4.2 2.5 1.4 0.3 6.1 5.7

RI 53.4 4.3 16.4 13.2 NSD 12.1 0.7 0.2 0.4 0.4 0.3 0.1 0.1 0.5 0.7

SC 49.6 3.9 13.2 15.0 1.8 16.4 1.7 0.8 0.9 1. 7 1.1 0.5 0.1 1.9 2.8

SD 51.2 7.1 12.2 14.4 2.1 13.1 0.1 0.0 0.1 0. 1 0.1 0.0 0.0 0.2 0.2

TN 46.2 5.0 16.9 14.0 2.5 15.3 2.0 0.9 1.1 2. 1 1.3 0.5 0.3 2.6 2.3

TX 44.3 3.8 15.1 9.7 1.4 25.7 7.8 3.7 4.1 9. 0 5.0 2.7 1.3 8.3 6.8

UT 62.2 6.3 8.2 8.4 NSD 14.1 0.4 0.2 0.2 0.8 0.5 0.3 0.0 0.3 0.3

VT 51.9 3.6 20.6 13.4 NSD 9.6 0.2 0.1 0.1 0.1 0.1 0.0 0.0 3.6 0.2

VA 57.6 4.4 9.6 12.0 3.5 12.9 3.7 1.4 2.2 2. 6 1.9 0.5 0.2 0.0 3.3

W A 53.5 5.6 14.4 11.3 2.5 12.8 1.8 0.6 1.2 1. 8 1.2 0.5 0.1 0.5 1.2

WV 47.5 2.1 15.6 19.2 NSD 14.6 0.1 0.0 0.1 0.2 0.2 0.0 0.0 0.7 0.7

WI 56.6 4.8 14.5 13.9 NSD 9.6 1.0 0.6 0.4 1.2 0.6 0.4 0.1 1.2 1.2

W Y 53.1 6.5 10.9 12.4 2.3 14.8 0.0 0.0 0.0 0. 0 0.0 0.0 0.0 0.0 0.0

Exposure to States with Highest Level Uninsured: 24.6 11.0 13.6 26.7 14.5 8.5 3.7 22.4 19.4

Source: US Census Bureau and statehealthfacts.org

NSD - Not sufficent Data

% Store Base in State



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26

Company-Specific OperatingMetrics

Due to various company-specific factors, in 2007, results among the missy

sector began to deteriorate ahead of the overall specialty retail universe. As

the missy retailers struggled to improve business strategies and assortments,,

the economy collapsed around them. By their nature, missy retailers do not

have as strong a replenishment cycle as other retailers, and this customer

traditionally stops spending on herself first. Combined with recent loss of

personal wealth due to declines in household income, retirement plans and

property values- businesses have taken a long time to recover.

Inventory and Sales Trends

As of the most recent quarter, the majority of this group is rebuilding

inventory to more normalized levels. ANN (+12.7% vs. -20.8% LY), CHS

(+5.4% vs. -14.9%) and TLB (+12.7% vs. -21%) are rationalizing their

inventory after double digit declines last year NWY, however, maintained

flattish growth on top of a 8.7% increase last year reflecting disappointing sales

expectations.

Exhibit 24. Sales/PSF and Inventory P/SF Analysis

Comp

% $ % Chg $ % Chg

ANN 11.7 95.3 22.2 43.4 12.7

CHS 3.1 176.8 8.7 64.8 5.4

NWY 3.6 75.1 8.5 35.5 (0.5)

TLB (7.1) 75.6 (4.6) 57.6 12.7

Comp Comp

% $ % Chg $ % Chg % $ % Chg $ % Chg

ANN 6.1 91.3 6.1 34.4 8.3 ANN (13.7) 78.0 (18.5) 38.5 (20.8)

CHS 6.4 173.8 12.6 54.5 8.3 CHS 12.8 162.6 11.4 61.4 (14.9)

NWY (1.8) 76.0 1.3 28.7 8.7 NWY (8.4) 69.2 (6.4) 35.6 (23.9)

TLB (1.4) 78.5 (1.0) 40.8 (9.0) TLB (15.9) 79.3 (11.0) 51.1 (21.0)

Comp Comp

% $ % Chg $ % Chg % $ % Chg $ % Chg

ANN 14.1 89.0 14.1 37.5 (2.3) ANN (22.5) 86.0 (12.2) 31.0 (27.9)

CHS 14.9 182.5 15.2 60.4 7.2 CHS 1.3 154.4 (0.6) 50.3 (10.1)

NWY 2.9 74.0 4.2 41.6 11.5 NWY (16.4) 75.0 (14.2) 26.4 (9.6)

TLB 2.4 80.3 0.0 49.0 (18.0) TLB (24.9) 79.1 (21.0) 44.9 (29.0)

Comp Comp

% $ % Chg $ % Chg % $ % Chg $ % Chg

ANN (0.6) 86.6 (2.4) 31.6 0.0 ANN (30.7) 78.0 (28.4) 38.5 (16.0)

CHS 14.6 154.7 14.4 52.9 3.7 CHS (3.2) 158.4 (1.6) 56.3 (13.2)

NWY (7.7) 93.3 (5.4) 27.3 (14.0) NWY (15.0) 71.0 (12.0) 37.4 4.5

TLB (7.2) 81.4 (1.0) 44.4 (29.9) TLB (26.9) 80.1 (9.0) 59.6 (37.0)

3Q10

Sales per Sq Ft Inventory Per Foot

Inventory Per FootSales per Sq Ft

1Q09

2Q10


Sales per Sq Ft

Inventory Per FootSales per Sq Ft

Inventory Per Foot

1Q10

4Q09


Inventory Per Foot

3Q09

Sales per Sq Ft

2Q09

Source: Company reports and Oppenheimer & Co. Inc. estimates.



27/60

Looking ahead, recent commentary suggests that management teams, in

general, seem comfortable managing their respective inventory

positions. ANN expects to end the year with inventory up mid-single digits

(MSD) on a per square foot basis vs. flat LY with the Ann Taylor brand slightly

above that metric, to support a projected double digit comp increase vs. (7.3)%

LY and Loft is expected to be slightly below to support a projected up low

single digit (LSD) comp vs. 2.1% LY. CHS is also planning its inventory at a

rate 3%-5% below comps of +LSD. NWY expects inventory to be flat at the

end of the year. TLB, too, is comfortable with its ability to control inventory

with a flat to +LSD inventory increase reflecting a comp of (3.5)-(2).

Margin Analysis

Coinciding with the drop in comps, gross and operating margins and

SG&A strongly delevered in 2008 and 2009.The bottom fell out in 4Q08 with

average gross margin of ANN, CHS, NWY and TLB diminishing by 1,030 bps

and SG&A increasing by 730 bps. Among them, TLB was the worst hit with a

1,510 bp decrease in gross margin and a 1,280 increase in SG&A. A year

later, in 4Q09, the companies recouped nearly all the lost SG&A and an

additional 400 bps in gross margin. This was achieved by the average nameoperating on -17% inventory/psf and rationalizing store expenses including

total payroll and headcount. Although these operating metrics did show

significant improvement, comparable-store sales remained flat. In 2010, this

group has continued to manage its business with a reduction in inventories;;

however, a lower top line does continue to be lower. Each of these names has

experienced SG&A leverage in each quarter of 2010, save NWYs 2Q (+910

bps) TLBs 3Q (+340 bps). Otherwise, the group has been able to leverage

stronger comps and manage store expenses more effectively.

What caused the decline in gross and operating margins from peak?

ANN lost 1,300 bps in gross margin in 4Q08, declining to 35.7%, reflecting

a -24.5% comp and aggressive merchandise markdowns. During the

same period, ANN reported operating income inclusive all charges of($439.1M), resulting in the significantly negative operating margin of

(90.8)%. Operating income was significantly impacted by non-cash

charges associated with goodwill, impairment, and other restructuring

charges associated with the companies restructuring program. Excluding

these charges, operating margin was (19.8)%.

CHSs 4Q07 gross margin declined to 47.7%, or 660 bps below the prior

year period. This was mostly isolated to Chico's front line stores, where

merchandise margin deteriorated between 600-680 bps due to higher

markdowns. This reflected not only a 320 bp decline in gross margin, but a

510 bp increase in SG&A to 61.2%. WH/BMs merchandise margin was

pressured from lower initial markups (IMUs) and slightly higher

markdowns while Chicos experienced greater buying costs. The rise in

SG&A was from deleverage in operating expenses due to a (13.0)%

comp.

NWY's 4Q07 gross margin declined 520 bps to 28.6%, 280 bps of which

was from merchandise margin and the balance from buying and

occupancy on a lower comp. NWYs worst operating margin performance

occurred in 2Q10, when a 1440 bps decline in gross margin was



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28

combined with 910 bps of SG&A deleverage from restructuring charges

related to the shuttering of a test accessory concept. Increased

unplanned promotions resulted in a 1370 bps decline in merchandise

margins, combined with 70 bps of deleverage from a (1.8)% comp.

TLBs gross margin deteriorated by 1510 bps to 14.6% in 4Q08, 960 bps

of which was due to increased markdowns and unplanned promotions with

another 440 bps from deleveraging of occupancy costs due to an (24.6)%

comp. During the same period, TLB posted a (30.8)% operating margin

reflecting a 1,280 bp increase in SG&A from asset impairments as well as

$7.6M of restructuring charges related to the companys downsizing.

Exhibit 25. Gross Margin, SG&A, Operating Margin

Gross Margin

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

ANN 53.6% 50.6% 56.1% 48.7% 53.2% 52.4% 48.8% 35.7% 55.5% 52.4% 57.3% 52.5% 59.4% 55.0% 57.2%

(310) (360) (60) 110 (40) 180 (730) (1300) 230 (0) 850 1680 390 270 (10)

CHS 61.7% 57.7% 58.3% 47.7% 55.9% 52.7% 53.6% 44.4% 56.8% 55.0% 57.6% 54.6% 58.5% 55.7% 57.0%

20 (250) (140) (630) (590) (510) (470) (320) 100 240 400 1020 160 70 (60)

NWY 29.0% 27.6% 29.7% 28.6% 31.1% 29.9% 25.3% 18.8% 25.3% 22.6% 25.3% 26.8% 24.7% 8.2% 27.9%(60) (90) (350) (520) 210 230 (440) (990) (580) (730) 10 800 (60) (1440) 260

TLB 38.2% 28.5% 34.2% 29.7% 40.5% 29.5% 31.6% 14.6% 31.0% 27.7% 39.9% 35.3% 43.6% 34.9% 42.7%

(120) (160) (270) (120) 230 100 (270) (1510) (950) (180) 840 2070 1260 720 280

SG&A


ANN 45.0% 42.3% 44.6% 45.6% 45.6% 44.0% 48.3% 54.9% 55.9% 51.1% 53.2% 51.5% 51.2% 48.7% 49.0%

(20) (70) (110) 300 60 170 370 920 1030 710 490 (340) (470) (240) (430)

CHS 45.3% 44.5% 52.7% 56.0% 51.8% 50.7% 54.0% 61.2% 51.5% 49.3% 49.4% 48.6% 47.0% 45.5% 47.8%

400 450 890 920 650 620 130 510 (30) ( 140) (460) (1250) (450) (380) (170)

NWY 25.7% 24.6% 26.7% 23.4% 26.9% 25.0% 30.5% 25.2% 28.9% 25.8% 29.9% 25.0% 28.4% 34.9% 29.6%

10 30 (40) 50 110 40 390 190 210 80 (60) (20) (60) 910 (30)

TLB 34.4% 30.7% 35.7% 30.1% 31.4% 31.6% 35.6% 42.9% 36.2% 31.1% 32.1% 31.1% 33.7% 31.0% 35.5%

100 60 250 50 (300) 90 (10) 1280 480 (50) (350) (1180) (250) (20) 340

Operating Margin


ANN 8.6% 8.3% 11.1% 3.0% 7.6% 7.9% (3.8)% (90.8)% (0.6)% (5 .4)% 0.6% 0.3% 8.1% 6.2% 8.1%

(280) (290) (20) (200) (100) (50) (1490) NM (820) (1320) 440 NM 880 1150 750 CHS 16.5 13.2 5.6 (8.4) 4.1 1.9 (0.4) (16.7) 5.3 5.7 8.1 6.0 11.4 10.2 9.1

(380) (710) (1030) (1550) (1240) (1130) (600) (840) 120 380 860 2270 610 450 100

NWY 3.3 3.0 3.0 5.3 4.2 4.9 (5.3) (6.4) (3.7) (3.2) (4.8) 1.8 (3.7) (27.1) (1.7)

(70) (130) (310) (560) 100 190 (830) (1170) (790) (810) 50 820 0 (2400) 310

TLB 3.8 (2.1) (1.5) (1.4) 7.8 (2.9) (5.1) (30.7) (7.3) (4.4) 7.2 1.4 0.9 2.9 6.6

(220) (220) (520) (270) 400 (80) (360) (2930) (1500) (140) 1240 3220 820 730 (60)

2007 2010

2007 2008 2009

2007 2008 2010

2010

2008 2009

2009


When further analyzing GM bp change from healthy/peak 2007 levels to

2009, those with the most significant reduction in inventories had the

greatest improvement in gross margin. While obviously other factors play

into results, we find the correlation interesting nonetheless. ANNs gross

margin actually operated 70 bp above its prior peak because the company

ended 2009 with -31.7% inventory/sf compared to 2007. TLB reduced its

inventory by 40.8% over the same period and its gross margin was 70 bp

below its peak. CHSs and NWYs inventory/sf reduction was less significant at

(11.8)% and (12.6)%, respectively. As a result, CHSs gross margin fell 270

bps below peak gross margins while NWY operated at 360 bps below its peak

gross margins.



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Exhibit 26. Correlation Inventory/SF and Gross Margins

4 Q0 7 4 Q08 4 Q09 2008 Change 2 009 Change 20 07- 200 9 Change

4Q 2009 BP off

Peak GrossMargins

ANN $46.3 $31.6 $31.6 (31.7)% 0.0% (31.7)% 70.0

CHS 60.0 51.0 52.9 (15.0) 3.7 (11.8)% (270.0)

NWY 31.2 31.8 27.3 1.9 (14.2) (12.5)% (360.0)

TLB 75.0 64.6 44.4 (13.9) (31.3) (40.8)% (70.0)

Source: Company reports and OPCO EstimatesIn F1H10, ANN and TLB operated above peak gross margins while CHS

and NWY were both below. Reflecting a strong full price business resulting

in a significantly higher AUR (average unit retail prices) and DPT (dollars per

transaction), ANNS 3Q margins were 10 bps below its 2006 peak or 57.2%.

In 3Q, CHSs gross margin deteriorated 60 bps or 270 bps below its 2006

peak to 57%. This was due to an increased level of promotions to clear old

inventory partially offset by improvement merchandise margin in the outlets as

well as improved DTC penetration. NWYs 27.9% GM in 3Q was 530 bps

below its 2006 peak of 33.2%. Due to weak comp sales and merchandise

misses, NWY has operated far below 2006s level since then. TLBs gross

margin expanded to 42.7% vs. last years peak of 39.9%, a 280 bps increase.

Merchandise margin drove the bulk of the results with a 160 bp increase (300bp increase in IMU) and 120 bp leverage from buying and occupancy.

ANNs 3Q operating margin at 8.1% was 300 bps off its peak of 11.1%. While

SG&A decreased by 430 bps to 49.0%, it was still 440 bps above 3Q07s

44.6%

CHS experienced a 3Q operating margin of 9.1% or 680 bps below its 2006

peak of 15.9%. While SG&A decreased 170 bps in the quarter to 47.8% it is

still far below 2006s 43.8%. NWY reported a (1.7)% operating margin in 3Q,

780 bps below its 2006 6.1% peak. While SG&A actually leveraged 30 bps to

29.6% in 3Q it is still 250 bps above 2006s 27.1% level. TLB posted a 6.6%

operating margin, a 60 bps decrease from last years peak 7.2% margin.

SG&A costs increased as a percent of increased to 35.5% from 32.1% due toan increased marketing spend and the reinstatement of employee-based

compensation plans.



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Exhibit 27. Peak vs. FY Gross and Operating Margins

Peak/ Peak/FY3Q10 Prev Peak Year BP Off Peak FY3Q10 Prev Peak Year BP Off Peak

ANN 57.2 57.3 2009 (10) ANN 8.1 11.1 2007 (300)CHS 57.0 59.7 2006 (270) CHS 9.1 15.9 2006 (680)NWY 27.9 33.2 2006 (530) NWY (1.7) 6.1 2006 (780)TLB 42.7 39.9 2009 280 TLB 6.6 7.2 2009 (60)


ANN 55.0 54.2 2006 80 ANN 6.2 11.2 2006 (500)

CHS 55.7 60.3 2006 (460) CHS 10.2 20.3 2006 (1010)NWY 8.2 29.9 2008 (2170) NWY (27.1) 4.9 2008 (3200)TLB 34.9 30.1 2006 480 TLB 2.9 0.1 2006 280


ANN 59.4 55.5 2009 390 ANN 8.1 8.6 2007 (50)CHS 58.5 61.6 2006 (310) CHS 11.4 20.3 2006 (890)

NWY 24.7 31.1 2008 (640) NWY (3.7) 4.2 2008 (790)TLB 43.6 40.5 2008 310 TLB 0.9 7.8 2008 (690)

Peak/ Peak/FY09 Prev Peak Year BP Off Peak FY09 Prev Peak Year BP Off Peak

ANN 54.4 53.7 2006 70 ANN (1.3) 9.6 2006 (1090)CHS 56.0 58.7 2006 (270) CHS 6.3 15.7 2006 (940)

NWY 25.1 28.7 2007 (360) NWY (2.1) 3.8 2007 (590)TLB 33.5 34.2 2006 (70) TLB (0.7) 2.7 2006 (340)

Gross Margins Operating Margins

Operating MarginsGross Margins






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Comps

The unweighted average comp of ANN, CHS, NWY, TLB declined

sequentially for 8 consecutive quarters beginning in 1Q07 (-1.7%)

through 2Q09 (-19.0%).

Exhibit 28. Comps

Comps

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

ANN (3.3)% (6.2)% (0.4)% (3.2)% (4.3)% (10.8)% (19.4)% (24.5)% (30.7)% (22.5)% (13.0)% (0.6)% 14.1% 6.1% 11.7%

CHS (1.6) (5.6) (9.3) (15.7) (17.5) (15.9) (13.4) (13.0) (3.2) 1.3 12.8 14.6 14.9 6.4 3.1

NWY (0.7) 4.9 (4.8) (3.5) (6.6) (2.2) (14.0) (10.9) (15.0) (16.4) (8.4) (7.7) 2.9 (1.8) 3.6

TLB (1.2) (4.8) (7.9) (6.0) (9.8) (12.0) (13.9) (24.6) (26.9) (24.9) (15.9) (7.2) 2.4 (1.4) (7.1)

20102007 2008 2009


Comps remain relatively easy in 4Q with the exception of CHS. In

FY4Q09, ANN, NWY and TLB posted (0.6)%, (7.7)% and (7.2)% comps

against (24.5)%, (10.9)%, (24.5)% respectively. CHS, the outlier, posted

strong double digit gain of 14.6% compared to (13)% the year before.

When evaluating comps on a 1-year basis, going forward, ANN and CHShave the most difficult comparisons in 4Q10 and into 2011 of (0.6%),

14.1%, 6.1%, 11.7% and 14.6%, 14.9%, 6.4%, 3.1% while NWY and TLB have

the easiest compares.

Exhibit 29. 1-Year Comps

FY4Q09 FY1Q10 FY2Q10 FY3Q10

ANN (0.6)% 14.1% 6.1% 11.7%

Ann Taylor (7.3) 16.4 15.2 21.9

Loft 2.1 12.5 0.0 4.5

Chico's 14.6 14.9 6.4 3.1

CHS 11.6 14.8 4.3 1.5

WH/BM 21.2 15.3 11.2 7.1

NWY (7.7) 2.9 (1.8) 3.6

TLB (7.2) 2.4 (1.4) (7.1)


Shifting to a 2-year basis, TLB has the easiest comparisons at (31.8) in

4Q while sequentially only getting slightly more difficult at (23.0) in 3Q.

CHS has by far the most difficult comparisons as the only name in the

group who actually goes against positive 2-year comps in 4Q10 and into

FY11.



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Exhibit 30. 2-Year Comps

FY4Q09 FY1Q10 FY2Q10 FY3Q10

ANN (25.1)% (16.1)% (16.3)% (1.3)%

Ann Taylor (36.7) (21.2) (15.2) 3.5

Loft (19.8) (11.2) (15.6) (4.0)

Chico's 1.6 11.7 7.7 15.9

CHS (5.8) 8.8 4.7 13.7WH/BM 16.2 19.5 14.9 21.5

NWY (12.1) (12.1) (18.2) (4.8)

TLB (31.8) (24.5) (26.3) (23.0)


Store Count and Longer-Term Growth Opportunity

Throughout the downturn, this subsectors overall square footage

blueprint has remained relatively in tact. Since FY1Q08 through FY3Q10,

the average name has both a flattish store base growth and square footage

blueprint change. We attribute this to the continual shuttering of

underperforming stores equally opposing cheap and accessible real estate.

Going forward, we anticipate an ongoing opportunistic rationalization of real

estate combined right-sizing of existing locations and selective new store

growth primarily in recently introduced concepts.

ANN plans to expand its Ann Taylor and Loft Outlet concepts with 5 and

35 new store openings identified for FY2Q11, respectively. The company

expects these stores to gene

Opco Missy Report Dec 2010

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