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Store fixtureS:looking for opportunities in 2007 and beyond…

Private Markets research Summer 2007

Store fixtureS:looking for opportunities in 2007 and beyond...

store fixtures: looking for opportunities in 2007 and beyond...

introduction 2

Brand is King 3

the British are Coming! the British are Coming! 7

Making old New Again: incubating New retail Brands 12

Going Green a Growing reality 16

the emergence of the “Prosumer” 20

Conclusion 23

statistical snapshot

Statistical Snapshot 24

Comp store sales tracker

Comp Store Sales tracker 25

retail Capex Monitor

retail Capex Monitor 26

private Capital Markets update

recent Market Activity 28

lincoln international

Contact information 31

Table of Contents

2 lincoln international o P P o r t u N i t i e S 2007 & Beyond Summer 2007

Despite mixed headlines, our clients and industry contacts

feel that the market is still healthy.

introduction

“The outlook for retail just got a little cloudier. The one-two punch of the meltdown in the sub-prime mortgage sector coupled with slower than expected retail sales growth has some economists wondering where the retail sector is going…” Retail Traffic, April 1, 2007

Key economic data is mixed. the consumer is far too leveraged. A declining housing market is tightening confidence and keeping shoppers away from the malls. retailers are starting to reign in store build schedules in anticipation of a slowdown. Based on the grim headlines that seem all too common recently, one would infer that demand for store fixtures has started to wane. Based on our conversations with participants throughout the industry, at this point this inference would be incorrect. While there continues to be talk of growing caution and conservatism among retailers, the majority of our clients and contacts throughout the marketplace continue to benefit from new store openings, ongoing refurbishment initiatives and new customer wins.

While manufacturers and investors alike should clearly anticipate a downturn in retail at some point over the next couple of years, we continue to believe that there are plenty of reasons for optimism despite the mixed macroeconomic outlook. regardless of the day-to-day statistics that are driving debt and equity markets, consumers are continuing to demand a differentiated shopping experience; aged stores still need to be refurbished and remerchandised; retailers need to optimize the efficiency of expensive sales floor and backroom real estate. All of these factors continue to benefit participants in the store fixtures industry.

We have identified a number of trends and growth drivers that we believe will drive demand for store fixtures in 2007 and beyond, including the ongoing migration of branded consumer product companies into the retail sector; the arrival of high-profile foreign retailers in the u.S. marketplace; the specialty retail ‘incubator’ concept that is becoming more commonplace; the green revolution in retail that is being spearheaded by Wal-Mart and others; and the emergence of the ‘Prosumer’ in the wholesale sector. the purpose of this report is to discuss each of these trends in detail and to define the likely implications for store fixtures suppliers.

Store Fixtures: Looking for Opportunities in 2007 and Beyond...

Several compelling growth opportunities

should drive the market forward in

coming years.

3lincoln international o P P o r t u N i t i e S 2007 & BeyondSummer 2007

brand is king

“Stores aren’t only sales points, they are our eyes and ears...” Antonio Arbil, Senior Executive, Zara

in a retail environment in which consumers are confronted with a seemingly endless number of product choices, some branded consumer products companies have chosen to establish a dedicated retail footprint. Having tired of seeing their products placed next to those of a competitor or private label brands; of lacking control over in-store pricing decisions and promotional displays; and not having direct touch points with the consumer, these companies decided that controlling the retail channel provides a number of tangible benefits and, if done successfully, significantly strengthens their brand. opening retail stores allows these companies to create a welcoming environment that is best suited to market their products, to control and optimize the customer shopping experience and, ultimately, to enhance brand identity and customer loyalty. While we realize that some consumer brands have had dedicated retail stores for many years (Coach serves as an outstanding example), it is our view that this trend has been gaining significant momentum in recent years due to some high profile success stories.

“The stores have been super successful and a real contributor to Apple’s success. It’s bringing a whole new generation of customers to Apple and the Mac, and that’s really important to us...” Steve Jobs, CEO, Apple

industry observers often joke that electronics stores are candy stores for adults, but consumer electronics manufacturers are taking this assertion very seriously. Capitalizing upon the consumer’s need to test a product before making a costly purchase and the natural appeal of playing with the newest gadget, manufacturers of computers, audio/video devices and cell phones are offering their own sandbox for people to play in. these stores are built around the company’s products, facilitate the consumer education process and provide a comfortable, home-like environment to prompt the purchase impulse. Several consumer electronics companies have determined that it is much more effective to exhibit advanced product capabilities in a store environment created and controlled by the manufacturer and to staff it with representatives who are trained to have detailed knowledge on the latest offerings. Consequently, brand-specific electronics stores appear to be on the rise and, if their initial success continues, they may be more than just a showcase but an important component of the overall brand strategy.

And migration into retail is a key element of that strategy.

Taking control of the brand is a strategic imperative for many successful consumer products companies...


Case Study #1– Apple: Apple has been one of the industry’s biggest success stories, evolving from a single-product personal computer manufacturer to a multi-faceted consumer brand. Since opening its first retail store in 2001, the company has not looked back on its decision. their well-conceived store design and exceptional consumer focus is a major reason for the success of these stores. Anyone who has been to an Apple store can attest to the fact that the environment they have created coincides with the company’s corporate image. the aesthetically simplistic, spacious, and welcoming stores are an extension of what the company markets to consumers through their tV commercials and print ads. in many respects, Apple has successfully replicated the Starbucks model – creating an environment in which the consumer feels comfortable ‘hanging out’ and spending time in addition to money. they can freely use and test Apple’s latest product offerings, surf the web and sit in for product tutorials. the visual displays and fixturing reflect the design of the products themselves – modern, clean, simple, and efficient. Currently, the company has plans to open 35 to 40 new stores in fiscal 2007, along with renovating older stores.

“The look, of course, allows you to be comfortable in the environment. Most people, when they are in an overskewed [sic] environment, freeze. They can’t make a decision...” Dennis Syracuse, SVP, Consumer Retail Sales, Sony

Case Study #2 – Sony Style: Another consumer electronics company that has been delving into retail stores is Sony through the creation of its mall-based Sony Style retail concept. following Apple’s success, Sony is focused on reaping the same benefits by offering its range of products from its own network of retail stores. With its broad selection of electronics, video and music products, the store layout and design resembles that of a comfortable home. Divisions in the 5,000 to 6,000 square foot store’s layout create the appearance of rooms, whether it is a living room to watch television or a small home office to do work on a Sony Vaio. Couches are situated around a home theater system, allowing customers to watch the latest Sony Pictures entertainment movie on a wall-mounted plasma screen television. Small computer workstations are also situated throughout the store, revealing the connectivity of Sony’s products. Similar to Apple, the stores allow consumers to test the products and learn about functionality within a comfortable and aesthetically pleasing environment. the stores are configured to allow for easy navigation with strollers – reflecting the fact that Sony is trying

Apple is developing into an outstanding

retail success story...

And other competitors are

taking notice.


to appeal to women, a demographic that is not typically as comfortable shopping in traditional consumer electronics stores. Sony currently operates 40 stores throughout the u.S. and plans to expand this store base.

“It’s our way to better connect with the consumer...” Mark Parker, CEO, Nike

Case Study #3 – Nike: A pioneer in the retail migration strategy, Nike is the branded apparel company that continues to make aggressive moves and expansion into the retail channel. Nike’s retail strategy is focused on promoting a consumer lifestyle rather than just a product. Nike management recently announced plans to roll out an additional 100 branded Nike stores over the next three years. this growth will be incremental to Nike’s other captive retail brands, including Cole Haan and Converse, and will differ significantly from the large format Nike town stores found in tourist centers across the country. the majority of these stores are slated to be mall-based and are part of Nike’s plan to reach $23 billion in sales by 2011. of this total, management expects that retail will account for as much as $3.5 billion. Analysts expect that, in the long run, Nike will have between 500 and 1,000 stores globally. Similar to Apple and Sony, Nike’s retail strategy is focused on controlling the manner in which the company’s products and brand are positioned and presented to the consumer. the layout of the stores will emphasize the various activities that Nike customers engage in, such as running and basketball, rather than being separated by the traditional categories of footwear, apparel and equipment. through the creation of sectionalized areas in the stores, Nike’s store configuration will make it easier for consumers to find what they need in a timely fashion.

“Running its own stores would allow Nike to improve brand presentation, get quick feedback on hits and misses, capture the entire vertical product margin, and create an exciting environment for shoppers to regularly experience the brand’s latest innovations and fashions...” Omar Saad, Analyst, Credit Suisse

Nike plans an aggressive roll-out of mall-based stores in coming years.

Consumer products Companies with growing retail footprints

selected Companies & store Counts

Coach 227

Nike 212

Apple 170

Aveda 134

Nautica 110

Guess, inc. 100

L’oreal 100

Puma 91

Levi Strauss 85

timberland 81


other consumer electronics and apparel companies, including Garmin and true religion, are using dedicated retail stores to broaden their brand identities. Similarly, product manufacturers in a wide range of verticals are also continuing to pursue direct retail strategies. Large cosmetics companies, including estee Lauder, Shiseido, elizabeth Arden and L’oreal, began to implement this approach in the late 1990s and continue to roll out new boxes.

it is our view that branded consumer products companies establishing and expanding their direct retail footprint will continue to represent a compelling growth opportunity for the store fixtures industry in coming years. there are several reasons for this view.

first, senior executives at the companies discussed (and many others) have spoken openly about the importance of retail to their near and long-term growth strategies. Success will be measured by the pace of store openings and the financial contribution of retail to revenue and earnings. Accordingly, we would expect that the pace of investment will continue to accelerate for the foreseeable future.

Second, we believe that the success of Apple and others in the retail space will drive more branded consumer products companies to pursue a similar path. Garmin serves as an outstanding example. While senior management at the leading manufacturer of GPS systems has said that the company does not have immediate plans to expand retail beyond its marquee store on Chicago’s Michigan Avenue, company officials have stated that a chain may be rolled out if this store performs as well as expected. following in the footsteps of Nike, there is ongoing speculation that high-profile athletic apparel maker under Armour may also be considering a retail launch. oxford industries, which is enjoying continued success with its popular tommy Bahama stores, is rolling out retail stores for its Ben Sherman clothing line

and plans to have sixteen locations in place within the next couple of years. Success begets success and branded consumer products manufacturers are realizing that direct access to the consumer represents an attractive and sustainable competitive advantage and brand building tool.

finally, we believe that many of these companies may actually accelerate the pace of store openings when the economy weakens. traditional retailers, which are valued by Wall Street based on comp store sales growth, are not

A weak economy may not slow the trend.

Many consumer products companies

have made retail a cornerstone of their

growth strategy.

Consumer products Companies with retail growth potential

Company names

under Armour

Bratz

Merrell

Juicy Couture

Lenovo

Hurley

Sean John

The strategy is being adopted in a

broad range of consumer categories.


typically rewarded for growth from new store openings unless existing stores are performing well. Accordingly, these retailers often cut back new store openings in a weak economic environment and focus on improving the performance of existing stores. Consumer products companies, on the other hand, are viewed quite differently and are valued based upon revenue and earnings growth. to the extent that their core business slows, we believe that analysts will reward them for growth in their retail operations even if all of that growth is being driven by new store openings.

Branded consumer products companies with a retail focus represent a profitable opportunity for store fixtures manufacturers. While fixtures pricing will always be a key issue in this industry, branded consumer products companies understand the importance of image much better than most. Accordingly, we would assert that the aesthetics, quality and customization of store fixtures will take priority over price as purchase decisions are being made. Since the products and brand are the stars of the store, fixturing and layout will need to be functional without being obtrusive and, at the same time, create an environment that enhances the consumer experience, encouraging lengthy visits. Creativity and the ability to work collaboratively with visual and store design teams will be a key determinant of success for store fixtures providers.

the british are Coming! the british are Coming!

“What we need to deliver is a type of shopping that is more convenient and all-around better value than people have available to them today…” Sir Terry Leahy, CEO, Tesco on U.S. expansion plans

though corporate globalization is often viewed in terms of China and india these days, there are a growing number of foreign retailers who have set their sights on the lucrative u.S. marketplace. these retailers have found success in their current markets and are now seeking growth opportunities abroad. the u.S. has become their target because these retailers are looking to reach a higher-end demographic that is fashionably and environmentally conscious. Some retailers have taken a more cautious approach and are looking to slowly test the u.S. market before an aggressive expansion, while others have planned a full-on attack. regardless of the strategies, the u.S. consumer can expect to see some unfamiliar names gracing the entry way of retail stores in coming months and years.

Our impression is that price may not be the primary factor in their fixtures purchase process.

Many foreign retailers are looking towards America as a primary growth driver.


Case Study #4 – Tesco plc: one such retailer is tesco plc, the British grocery giant. tesco plans to open a chain of convenience stores under the name Fresh & Easy Neighborhood Market in the u.S. the first stores are slated to open in Phoenix, Los Angeles, Las Vegas and San Diego in mid-to-late 2007. the approximate size of each store will be 10,000 square feet. A recent press release detailed the company’s plan to open 100 stores by february of 2008. though this number may first appear lofty, it seems very achievable following tesco’s recent announcement that it has more than tripled its startup investment for launching the stores from $40 million to $131 million. Moreover, management has stated that they plan to invest as much as $500 million a year as the concept rolls-out nationally. tesco is also building an 820,000 square foot distribution center in riverside, CA, which will be capable of serving 1,000 locations.

tesco is looking to create a ‘local market’ as opposed to a traditional convenience store, housing products in a store that is one third of the size of a typical full-size grocery store and providing organic foods, including ready-to-eat meals. fresh & easy will emphasize healthy foods that are affordable and available to all, even those in inner cities, a market which is still relatively untapped. though details of the store’s design and layout are limited and being guarded as a secret, one can expect a rather uncluttered store environment that allows easy access and broad aisles along with an environmentally conscious theme. Sir terry Leahy, tesco’s Ceo, has stated that the company will look to create more energy efficient stores with a lower carbon footprint than most competitors, using more sustainable products and providing more visibility into the company’s actions and its impact on the

environment. this green image can bode well for tesco, especially in the California market, where environmental issues are a growing concern.

indeed, tesco has made a significant effort to understand the behavior and characteristics of the American consumer before launching its entry into the u.S. they performed an extensive two year study, which included spending time at the homes of consumers and having them keep a diary detailing their shopping and living habits. tesco also developed a mock store in which potential customers have tested out its concept. Considering tesco’s size and their success internationally, it is hard to not take tesco seriously

Not surprisingly, Tesco has done

its homework in advance of entering

the U.S. market.

tesco - summary financial data

tesCo plC ($ in Millions)

Market Capitalization $69,090

total enterprise Value (“teV”) 78,518

LtM

revenue $85,120

eBitDA 6,621

teV / LtM

revenue 0.9x

eBitDA 11.9

* Market capitalization, enterprise value data and currency

conversion calculated on 6/26/2007.an

Tesco may invest up to half a billion

dollars annually in the U.S.


and see fresh & easy as a formidable new competitor in the grocery and convenience store market.

“The coming of Tesco represents not only a new player but one that is [an] accomplished retail entity with the ability to attack this market in a meaningful fashion over the long term…” Patricia Baker, Analyst, Merrill Lynch

Case Study #5 – UNIQLO: uNiQLo is a well-regarded Japanese retailer that is currently establishing a foothold in the u.S. it is a subsidiary of fast retailing Co., Ltd., which operates 770 stores worldwide. the company is in the apparel business and is known for providing high-quality basics at reasonable prices. its product line is set to compete against those of domestic retailers such as Gap and J.Crew. the company currently has five stores in the u.S., three in New Jersey and two in New York, including its flagship store in Soho. its stores have an average size of approximately 10,000 square feet, while its flagship store boasts a floor space of 36,000 square feet. uNiQLo has plans to open 30 stores within the next three years as part of its ambitious plan to reach $1 billion in u.S. sales by 2011.

Similar to its Japanese stores, uNiQLo aims for the modern look, making extensive use of wood and metal fixturing throughout the store. Much of the coloring in the store comes from its clothes, where every offering comes in multiple tones. for its Soho store, the company stressed creating a “functional beauty,” in which the design and appeal of the retail space was conducive to its main function of selling clothes. Conversations with store staff revealed that uNiQLo still relies heavily on vendors and firms in tokyo when building a store in the u.S.

“We don’t intend to stop until we become the world’s #1 casual apparel company...” Tadashi Yanai, Chairman, Fast Retailing / UNIQLO

fast retailing Co. ltd. - summary financial data

fast retailing Co. ltd.($ in Millions)



LtM

revenue $4,134

eBit 570

teV / LtM

revenue 1.5x

eBit 10.8


conversion calculated on 6/26/2007.


Case Study #6 – Zara (Inditex): one of the more notable of the european apparel retailers to come to America is Spain’s Zara. it opened its first store in 1989 in New York City. Zara currently has 24 stores in the united States and plans to add roughly eight to ten stores per year to reach a goal of 50 by 2009. Geographically, Zara will have a focus primarily on the east and West Coasts. Despite having a presence in America for more than a decade, Zara is still a relatively new retail brand for most consumers. the company has taken a slow and steady approach to the competitive u.S. market, progressively introducing itself to fashion conscious shoppers. this is a sharp contrast to its business model, which involves turning out new styles every two weeks in its shops, offering as many as 12,000 different items

a year. An analysis of the number of stores since 1998, however, shows an important trend. While the original model was to open one or two new stores per year, the company is accelerating this pace materially and added six new stores in 2006. Still, given the momentum of foreign competitors such as H&M (see below), it is realistic to expect that Zara may look towards a more aggressive expansion in the u.S.

“Our stores are our main information channel, since they are our interface with our customers...” H&M 2006 Annual Report

Case Study #7 – Hennes & Mauritz: While Zara may have been cautious in its expansion into the u.S., Hennes & Mauritz – otherwise known as H&M – has stormed into America. After some costly real estate mistakes in the early days, H&M has created a splash in each market it has entered. its high-profile store openings are characterized by large crowds and long lines. At the end of 2006, H&M operated 114 stores throughout the u.S. and added 23 stores in 2006 alone. Some analysts estimate that H&M’s longer term goal is to have as many as 600

H&M - summary financial data

Hennes & MauritZ ab ($ in Millions)



LtM

revenue $10,622

eBitDA 2,739

teV / LtM

revenue 4.4x

eBitDA 17.1



Zara seems to be accelerating the pace

of store openings.

inditex - summary financial data

inditeX s.a. ($ in Millions)



LtM

revenue $11,023

eBitDA 2,315

teV / LtM

revenue 3.2x

eBitDA 15.3




stores nationwide. Most of the stores to date have been built on the east Coast and in the Chicago area, but the company is also expanding out West. H&M opened stores in Los Angeles this past year and has others slated for the California market. H&M has set a standard for its stores to be constantly welcoming, inviting and attractive. the process of designing the stores and creating the store environment for a new campaign are handled centrally through cooperation between the visual, marketing and purchasing deparements. the new store environment is then created and communicated to H&M’s various stores worldwide.

these case studies are nowhere near a representative sample of foreign retailers that continue to look toward the united States for growth. Mango (Spanish apparel retailer); Lululemon Athletica (trendy Canadian yoga-fashion concept); famima!! (a Japanese convenience store chain); replay Blue Jeans (italian high-end denim); topshop (u.K.-based fast fashion concept); and oilily (Netherlands-based retailer of women’s and children’s fashions) are also on the list of companies that are aggressively targeting the world’s largest and most lucrative consumer market.

We believe that these foreign retailers represent an attractive market opportunity for domestic store fixtures manufacturers for two primary reasons. first, many of these companies have made it clear that the u.S. will represent a significant percentage of their global store base within a decade. Given that most have relatively limited store counts at this point, the implication is that the pace of new store openings will likely accelerate in coming years.

Second, a natural consequence of the influx of foreign retailers will be increased competition. Not only are these new players going to be building their own stores, but existing players may have to seriously consider renovating their own stores in response. the best example would be tesco. Depending on the success of its stores, traditional grocery retailers and convenience store operators may have to revamp their existing stores or introduce new concepts to remain competitive. even Wal-Mart has made its concerns clear and has gone so far as to hire a former international managing director of tesco, David Wild, to develop a counter attack to the fresh & easy stores. the response may come in the form of developing a similar concept or adapting the existing Wal-Mart design. Wal-Mart may consider a reconfiguration of their Neighbourhood Markets concept to counter the threat of fresh & easy.

The list of foreign retailers looking to the U.S. for growth is long and growing.

The competitive pressures that foreign retailers create may lead to a wave of new store builds and refurbs.


Dealing with these retailers is not without difficulty. unlike branded consumer products companies that are migrating into retail, we believe that foreign retailers are more likely to cut back their growth plans in a period of economic uncertainty. History is full of foreign retailers who have entered the u.S. market and retreated soon after due to difficult market conditions. Additionally, conversations with sources throughout the industry reflect the difficulties that u.S.-based fixtures suppliers can experience when dealing with foreign retailers. Given that many of these retailers maintain a very small corporate staff in the u.S., key operating and purchasing decisions are often made at the foreign headquarters. When fixtures suppliers find themselves dealing with both low-level local operating staff and design and procurement executives in europe or Asia, decision-making and communication slows accordingly. finally, foreign retailers may still have difficulty adapting their visual design strategies for the u.S. market. fixtures manufacturers may struggle to understand the unique sensitivities that foreign retailers may have. Strong communication, which can be difficult under normal circumstances, will be a key determinant of success.

Making old new again: incubating new retail brands

“Abercrombie & Fitch used Hollister for a growth vehicle for several years. They recognize that [the concept] will eventually be tapped out or they’ll no longer be able to grow in an organic or meaningful way and they’re looking for their next vehicle...” Mary Brett Whitfield, Retail Forward

the most difficult challenge for successful retailers is staying relevant to the consumer in an era of short attention spans and condensed fashion cycles. retail history is littered with examples of retailers who developed a terrific concept, rolled it out broadly to the marketplace, expanded the store base and then quickly fell out of favor with the customer base. Gap is perhaps the highest profile example of this phenomenon in recent memory. the greater the ‘fashion’ aspect of the product offerings, the shorter this life cycle can be if creative merchandising begins to falter.

A related issue that today’s retailers must address relates to saturation and cannibalization of the store base. Many retailers have saturated the marketplace by building too many stores and concentrating them too close together. New stores begin to steal (cannibalize) business from other nearby

Staying relevant to the consumer is an

ongoing challenge in the retail industry.

Despite the opportunities, dealing with foreign retailers

can be challenging.


locations and the marginal revenue and profitability of new locations begins to decline. in an era of big-box stores this problem has become widespread and has impacted retailers in a variety of categories.

Driven by the intense scrutiny of Wall Street analysts and investors, retailers are in a quandary. they need to record consistent and attractive rates of growth but, in doing so, risk overexposing their concept or suffering from cannibalization. Many have pursued an interesting path to address this issue. retailers are making use of their unique insights into the consumer to develop and ‘incubate’ new retail concepts that drive growth without degrading the existing brand or undermining the overall profitability of the store base.

“One Thousand Steps will enable us to leverage our brand management skills in what we believe is an underserved market. This new concept gives us an exciting growth vehicle that adds a new and distinct customer base to our business. Combined with our existing PacSun and d.e.m.o. businesses, we will have the opportunity to achieve significant sales and profit growth in the future…” Seth Johnson, CEO, Pacific Sunwear

Case Study #8 – One Thousand Steps by Pacific Sunwear: in searching for a new growth opportunity, Pacific Sunwear decided to take aim at a specific product line: footwear for consumers in the 18 to 24 cohort. Since opening its first stores in April 2006, the new concept – one thousand Steps – has already expanded to nine locations in California, New York and florida. the stores are 2,500 square feet in size and are mall-based. the merchandise includes branded, fashionable, casual footwear and related accessories. Analysts have projected that PacSun will open as many as 50 new stores by the end of this year and ultimately expand to between 600 and 800 locations nationwide.

in designing the stores, PacSun moved away from the beach-like atmosphere of their existing stores and aimed to give the shoe stores the ‘look and feel’ of a Melrose boutique. the stores display library-style ladders, faux wood-grain cabinets and mirrored surfaces. PacSun believes that this sophisticated look is a key differentiator from the many other footwear retailers found in most malls. the store design also illustrates that this concept is targeted at an older demographic and those looking for a more upscale offering – very different from PacSun’s traditional customer

Analysts believe there is potential for 600+ Thousand Steps stores.

Retailers are looking for growth but risk ‘tiring’ the core brand or cannibalizing existing stores.


base. the company has also found ways to better utilize its space and make service more efficient. the stores make use of high density sliding cabinet fixtures to store shoes, allowing for 65% of the inventory to be kept on the sales floor. this allows sales representatives to focus on servicing customers rather than having to go to the backroom to search for a specific shoe.

“The customer really feels connected to the social aspects of their life as they’re shopping... It’s a place where a customer can come in the middle of the afternoon and spend two hours enjoying the music, enjoying our lounge, have an energy drink, look at the art for sale in the store and the music. It’s much more of a complete lifestyle experience…” Lawrence Tanenbaum, President, Metropark

Case Study #9 – Metropark by Hot Topic: Metropark, created by Hot topic in 2004, defines its stores as part club, part street boutique. Metropark currently operates 24 stores with an additional 12 locations planned by the end of this year. the majority of these stores are located on the West Coast, but the company has started to expand the concept nationwide, tapping the texas and New York markets as well. the retailer has set a goal to eventually reach 300 stores. its target customers are those ages 20 to 35, with the company seeking to reach newly employed graduates with disposable income and a need for cutting edge fashion.

the concept of the store was to offer the branded fashions that customers typically purchase in small boutiques and department stores. Similar to H&M and Zara who offer fast fashion, Metropark introduces new merchandise on a regular basis. in terms of store design and layout, Metropark’s design staff took their cues from ‘hang-out spots’ like clubs and upscale restaurants. the store’s walls are covered with colorful artwork, while flat-panel televisions show music videos. on weekends customers are welcomed to listen to a DJ spin records. the 2,700 to 3,200 square foot stores also have a lounge area with a selection of magazines, promoting a place for customers to spend some downtime. Hot topic views Metropark as an exciting new opportunity that will broaden their existing customer base and accelerate overall growth rates.

Store designers have positioned

Metropark as a cool hang-out spot.

Metropark may be rolled out to as many

as 300 locations.


“aerie by American Eagle fits the AE girl’s lifestyle from the inside out. Our customers will love aerie for the same reasons that they love AE sportswear and accessories: excellent fit, value and style…” Susan McGalla, President, American Eagle Outfitters

Case Study #10 – aerie by American Eagle Outfitters: While American eagle has been focused on tweaking its high-profile Martin + osa concept, aerie has been gaining significant momentum in the marketplace. unlike Martin + osa, which is targeted at a different dynamic than traditional Ae stores, aerie is focused on an entirely new product line – loungewear and intimates for females aged 15 to 25. While aerie products are sold in existing Ae stores, they have also been sold in a number of successful standalone locations. the concept’s growing popularity has prompted Ae management to announce a more aggressive roll-out of aerie stores. from three standalone stores currently, management expects to open an additional 15 locations by the end of the year.

While Victoria’s Secret is the leading name in woman’s lingerie, aerie’s merchandising is more focused on comfort and offers not just bras and robes, but also hoodies and sweats that a college female can sport in their classroom or at the neighborhood coffee shop. the stores are currently 2,200 to 2,800 square feet in size, with interiors that are blue and white to create a warm and feminine atmosphere. Ae expects that the concept will appeal to its existing customers and that the brand’s popularity will persuade them to switch from their current brand of intimates.

We strongly believe that the success of these and other incubator concepts will prompt more mature retailers to pursue this strategy. even Gap got in on the game with forth & towne. Despite their plans to shutter the 19 test stores, many believed that forth & towne was an interesting concept that appealed to an entirely new customer base.

this trend has a number of positive implications for store fixtures suppliers. first, we believe that a growing number of retailers will pursue this strategy in coming years as their core concepts mature. Second, many of these concepts are being targeted at a more upscale demographic. Accordingly, many of the stores are being designed with more intricate and expensive fixturing. third, we have always believed that customer concentration is a major liability for many store fixtures manufacturers. Supplying fixtures to incubated retail brands allows suppliers to mitigate this issue. Depending

As some of the nation’s largest retailers mature, we believe that spin-offs will become more common.

Many spin-off concepts are more upscale and make use of more elaborate fixturing.


on how purchasing decisions are being made, one customer can become two when these new retail concepts gain momentum.

overall, we believe that this incubator concept is a positive development for fixtures suppliers. these new retail concepts will allow mature retailers to reinvigorate their growth rates and fixtures manufacturers who can provide creative and cost-effective products in a timely fashion will stand to benefit.

going green a growing reality

“I thought GE was big. But Wal-Mart? Whoa, that’s big…” Alyson Slater, Global Reporting Initiative, on Wal-Mart’s energy efficiency initiatives

As consumers grow increasingly conscious of environmental concerns, many are beginning to factor these concerns into their purchase decisions. Accordingly, it is not surprising that many retailers are responding by implementing a range of environmentally-friendly initiatives. Becoming more sensitive to environmental issues can do much more than just bolster a retailer’s image in the community. in fact, it is now becoming apparent that ‘going green’ can also have a positive impact on the bottom line. the sooner retailers explore and implement environmental alternatives, the better positioned they will be to effectively reduce operating costs and benefit from being eco-friendly.

though still in the early stages, there is growing evidence that retailers are building stores that are more environmentally friendly. Store design and construction teams are beginning to make use of energy efficient equipment and fixtures that are derived from recycled materials. Currently, some of the nation’s largest retailers are leading the charge, using their size, scale and influence over the supply chain to spread the high costs of going green. At least nine of the National retail federation’s “100 biggest retailers,” including Wal-Mart, target, Albertsons and Williams-Sonoma, have taken steps to reduce their impact on the overall environment.

“We all have an opportunity to be more sustainable, but even more, we have a responsibility...” H. Lee Scott, President & CEO, Wal-Mart Stores Inc.

Case Study #11 – Wal-Mart Stores: one retailer making significant strides in the environmental arena is Wal-Mart. Wal-Mart’s Ceo, Lee Scott, has stated that the company plans to build increasingly energy-efficient stores

Retailers are discovering that going

green can enhance branding and profits.


Wal-Mart is exerting its clout on the supply chain to become more green.

over the next couple of years and to use 100% renewable energy. Already, the company has built two concept green stores, one in Aurora, Colorado (November 2005) and one in McKinney, texas (July 2005). the stores are designed to reduce the amount of energy required to operate them and to lower the amount of raw materials used in their construction – utilizing renewable materials whenever possible.

in one of its many experiments at these test stores, Wal-Mart displayed items such as lunch meats, cheese and eggs in enclosed, freezer-like units rather than the traditional open cold cases they typically use. this simple change in the display unit, which in essence is like closing the door to one’s home refrigerator, cut the area’s energy cost by 70%. the success of this experiment is now being implemented in six new “high-efficiency” stores that the company is building. Wal-Mart has also found effective ways to reduce energy costs in its lighting for refrigerators and freezers. in using fixtures that contain light-emitting-diode, 50% less energy was consumed versus traditional fluorescent lights. Wal-Mart also added motion detectors to its freezer units, whose lights dim when no customers are present and use only 37% of the energy typically required. the company is now employing General electric Co. to make enough lights and sensors for 500 of its stores.

in the future, Wal-Mart has set a goal to make existing stores 25% more efficient in seven years and new stores 30% more efficient in four years. they are also using their massive clout in the marketplace to involve others in this new environmental movement. Wal-Mart has already conducted tours and presentations of its two concept stores, sharing its knowledge with fellow retailers such as target, Costco and food Lion, to persuade them to make use of these new technologies.

Wal-Mart has also put the pressure on its diverse supplier base, asking them to reduce the packaging used to ship their products by 5% by 2013. the company insists that it does not plan to increase the burden on these suppliers, but intends to cooperate with them to better achieve the goal of protecting the environment. it would not be a surprise to most if this cooperation were extended to Wal-Mart’s entire vendor list – including companies that provide store fixtures to the store base.

leading ‘green’ Companies in the u.s.

epa national top 25 green power partners

1. PepsiCo

2. Wells fargo & Co.

3. Whole foods Market

4. u.S. Air force

5. Johnson & Johnson

6. u.S. ePA

7. Los Angeles County Sanitation Districts

8. Starbucks

9. DuPont Co.

10. u.S. Department of energy

11. Vail resorts

12. HSBC North America

13. Cisco Systems

14. Staples

15. New York university

16. the World Bank Group

17. university of Pennsylvania

18. iBM Corp.

19. u.S. Department of Veteran Affairs

20. NatureWorks LLC

21. Sprint Nextel

22 Safeway inc.

23. Pennsylvania State university

24. Kohl’s Department Stores

25. Nike inc.* Highlighted rows are companies with retail stores or branches


“Food Lion’s superior energy management strategy is a model so many businesses can follow...Rising energy costs are dominating the headlines today, yet Food Lion is a first-hand example of how smart businesses can, and do, reduce their energy use and costs while protecting the environment...” Kathleen Hogan, Director, Environmental Protection Agency

Case Study #12 – Food Lion: one notable group of retailers that is most aware of environmental considerations are grocery store operators. this is not surprising given that grocery stores have a greater impact on the environment than other retailers due to their energy consumption, employment of refrigeration units and constant generation of trash. one player that has consistently worked to combat these negative effects is food Lion, a subsidiary of the Brussels-based Delhaize Group.

food Lion’s greatest energy-efficiency improvements to date have been in its lighting systems, which earned the company the honor of being named energy Star Partner of the Year by the ePA. one of the more successful steps that the company has taken was the conversion of its store lighting technology from t12s to t8s, which saved the company 40% in terms of reduced wattage. Similar to Wal-Mart’s use of motion detectors, food Lion installed these devices in walk-in coolers, restrooms and backrooms to save on lighting when the respective areas were not occupied. the dramatic increase in cost savings has led to a spectacular return on investment in these lighting systems – total payback on the lighting technology is less than two years.

in our discussions with the company, they have indicated that they continue to push many of their existing vendors to implement environmentally-friendly initiatives. they cooperated with vendors in order to create more energy efficient fixtures and equipment to maintain their existing relations while at the same time achieving their environmental goals. for food Lion, the decision to go green was easy and has allowed the company to bolster profitability and protect the environment at the same time.

“[We are] encouraging our suppliers to push the envelope on products with lesser environmental impacts...” Ron Jarvis, VP of Environmental Innovation, Home Depot

the number of retailers that are increasing their focus on environmental initiatives is growing daily. Home Depot and office Depot are marketing environmentally-friendly products; target and Kohl’s are building stores

Grocery retailers are particularly

concerned about reducing energy

consumption.

Food Lion has worked closely

with its suppliers to design energy-

efficient fixturing.


powered by solar panels; Whole foods Market and rei are implementing the use of sustainable fixtures made from recycled materials; and many others are taking similar steps. We strongly believe that this move toward environmentally-friendly stores will continue to gain momentum and that store fixtures manufacturers who embrace this trend stand to benefit.

it is our view that the opportunity is large and will continue to grow. first, our conversations with retailers and fixtures manufacturers throughout the country indicate that the number of retailers adopting these measures is increasing. the initial success of the nation’s largest retailers in executing their green strategies are evident and other retailers have come to realize the tangible and intangible benefits that result. the result will be an ongoing increase in demand for fixtures that make use of recycled materials and that optimize energy efficiency. Given the current scarcity of fixtures suppliers who are willing and able to provide such products, we believe that a very sizable market opportunity is waiting to be addressed.

Second, we believe that pricing power will favor those fixtures suppliers who are capable of meeting this growing demand. Not only are there a very limited number of suppliers with green product offerings, but many of the products that retailers are demanding also have highly attractive (and readily quantifiable) roi characteristics. this is particularly true for fixtures which allow retailers to reduce energy consumption. in our experience these types of products typically demand a premium and more attractive margin characteristics. this pricing power may be further enhanced if multiple suppliers are able to approach specific opportunities in a collaborative fashion. if retailers are looking for ‘green solutions’ we would propose that shelving manufacturers partner with suppliers of energy-efficient refrigeration units to offer a turnkey product offering. We believe that suppliers could capture an additional premium with such an approach.

third, as more traditional fixtures are commoditized and sourced off-shore, we believe that the green movement will allow innovative fixtures suppliers to build substantial (and sustainable) competitive advantages into their product design. New opportunities for significant innovation are uncommon in this industry. Product design and engineering teams that are encouraged and empowered to think outside of the box have a unique opportunity to differentiate their products in a meaningful way. Given the scarcity of environmentally sensitive products in the marketplace, creative product designs may very well lead to significant market share gains.

Product design capabilities will also drive premium pricing.

The positive supply & demand dynamic for green fixtures translates into pricing power.


finally, we believe that an entirely new business opportunity lies ahead for innovative store fixtures providers who approach this green trend in the correct way. Since we first published research on the store fixtures industry in the summer of 2005 we have asserted that for players to succeed over the long-term they must reposition themselves as service providers who can manufacture as opposed to manufacturers who offer some services. retailers are looking for help in addition to product. there is a great deal of confusion and uncertainty in the marketplace as store design and construction teams struggle to understand which products are compliant with rapidly-evolving environmental standards; which systems are most efficient in terms of optimizing energy consumption and minimizing harmful emissions; and where to purchase all of the above. While we understand that third party design firms will ultimately step in and provide retailers with guidance, we also believe that forward-looking fixtures suppliers have a window of opportunity to offer a range of environmentally-focused, value-added services.

the emergence of the ‘prosumer’

“Whether the customer is a large professional contractor or a weekend warrior, you save time buying at a clean and well-organized store…” Marc Bowers, CEO, Grun Co., a supplier of equipment to construction contractors

Despite his critics on Wall Street and throughout the retail industry, Bob Nardelli really got something right. Despite the reported moves by Home Depot to divest its Home Depot Supply operations, we believe that the company’s aggressive moves into the professional contractor sector had a great deal of strategic merit and highlight a very important point for fixtures suppliers to consider. Professional contractors are consumers too...

the industrial supply industry is a $400+ billion market in the united States and services professional contractors, homebuilders, municipalities and maintenance professionals. Despite the consolidation strategies of some of the larger competitors in the industry (including Home Depot / Hughes Supply and

selected industrial supply distributors

Company names

1. Wolseley (ferguson)

2. W.W. Grainger

3. Home Depot Supply / Hughes Supply

4. Applied industrial

5. fastenal

6. MSC industrial Direct

7. interline Brands

8. red Man Pipe & Supply

9. f.W. Webb

10. Motion industries

And retailers looking for direction

represent a substantial service

opportunity.


Wolseley / ferguson Supply, among countless others), the market remains highly fragmented and is characterized by small and mid-sized operations. there are literally thousands of locations scattered throughout the country.

the layout of the average industrial supply center has changed little over the decades. often located in suburban industrial or office parks, the centers are usually configured in the same manner. A customer enters through a glass door and approaches a counter. the customer places his order with an employee at the counter, who then proceeds to walk back through a large storage area to pick the requested products from industrial racking systems. once the products have been retrieved, the transaction is settled and the customer leaves. the centers often have the look and feel that is similar to that of an automotive repair shop – cluttered, poorly lit, little ventilation and, more often than not, a lot of dust and grime. in addition to poor aesthetics, the common counter configuration found throughout the industry is highly inefficient.

Case Study #13 - Horizon Irrigation: Based in Phoenix, Arizona, Horizon is a well-regarded distributor of irrigation and landscape supplies throughout the Western united States. A subsidiary of Pool Corporation Group, Horizon has a long-standing reputation in the industry for its forward-looking perspective on serving the professional contractor. Horizon operates 58 stores in 10 states.

We have highlighted Horizon because the company has been very proactive in recognizing that professional contractors are like any other consumer and prefer to deal with supply centers that are configured as stores rather than industrial warehouses. We have visited more than 30 irrigation and landscape supply centers and have found Horizon to be ahead of the pack in this regard. Horizon locations are very different from typical supply centers. the most significant difference is that they have moved away from the counter configuration. rather than placing an order at the front of the store with employees who then retrieve the items in the warehouse, contractors are free to browse and choose items themselves. this reduces physical labor, decreases costs and allows them to focus on more value-added customer service. it also allows the contractor to browse, increasing the probability that the customer will purchase items he may not have originally intended to buy. Moreover, this layout is much more time efficient. Contractors typically enter the store with a laundry list of required items. With the open concept of a Horizon store, a contractor who forgets

The industrial supply industry is a $400+ billion market.

Despite its small size, Horizon has redefined the shopping experience for professional contractors.


something simply returns to the aisle and picks up the overlooked item. in a traditional supply center the contractor would have to reenter the line and wait for the counter staff. this process is inconvenient and time consuming – there is nothing more dear to a contractor than his time.

in addition to a more traditional retail layout, Horizon stores are very well-presented relative to the old industrial supply center template. the stores are bright, fixturing is functional but visually appealing and a far cry from the steel racking that has been the norm in the industry. Many of the fixtures that are commonly found within a true retail environment can now be found in Horizon stores. While the products may be geared towards professional contractors, the environment is on par with any nice, clean and well-organized retail store in the suburbs.

the success of Horizon reflects an accurate underpinning of Home Depot’s strategy in the industrial supply sector. industrial supply is slowly evolving into a traditional retail operating model. Dusty warehouses are being replaced by well-lit stores with wide aisles and creative point-of-purchase displays. As we witnessed in the parking lot of Horizon’s Menlo Park, California location, pickup trucks park alongside BMWs as contractors and weekend warriors shop side by side. Nardelli learned that all customers – contractors and consumers alike – will gravitate toward stores that are well-organized and visually appealing. Similar to retailers, industrial suppliers understand that they need to differentiate themselves from competitors and pricing is only one technique. enhancing the quality of the shopping experience for their customers is becoming a top priority. We have seen a number of industrial suppliers begin to emulate the Horizon store model and expect more to follow-suit as their success becomes increasingly evident.

it is our belief that this enormous market segment will represent a compelling growth opportunity for store fixtures manufacturers in coming years. the transition discussed will be gradual, but given the massive number of industrial supply centers and the competitive nature of the marketplace we believe that this evolution is inevitable. fixtures suppliers should ensure that their sales teams begin to identify potential customers in the category and develop relationships which, in the long-term, will become very valuable.

We believe that many industrial

supply companies will be following Horizon’s lead...

And fixtures suppliers should take note.

Industrial supply will ultimately

evolve into a more traditional retail

operating model.


Conclusion

the headlines are clearly mixed. retailers are certainly more cautious than they were a year ago. the industry will have to deal with a downturn at some point soon. We strongly believe, however, that the opportunities discussed in this report will provide a basis for growth for years to come. retail is defined by several truths. While the retail industry will always be cyclical, it is also incredibly dynamic and resilient. innovative entrepreneurs will always be introducing creative new concepts that appeal to the pocketbook. established retailers will strive to reinvent themselves and redefine the way consumers buy merchandise. foreign retailers will continue to look to the u.S. for growth. these factors, combined with the others discussed above, should give fixtures suppliers a high degree of confidence that, despite the potential for volatility, the long-term outlook for the industry is very positive.


Statistical Snapshot

CONSUMER CONFIDENCEUniversity of Michigan Index of Consumer Sentiment

Twenty-Four Months Ended May, 2007

50

65

80

95

110

125

MayFebNovAugMayFebNovAug

Source: University of Michigan

HISTORICAL STEEL PRICESProducer Price Index - Steel Mill ProductsTwenty-Four Months Ended April, 2007

Ind

ex B

ase

= 8

200

Source: Bureau of Labor Statistics2006 2007

120

140

160

180

200

AprJanOctJulAprJanOctJul2005 2006

RETAIL CAPITAL EXPENDITURESFifty Top U.S. Retailers

Trailing Twelve Months Data

Source: SEC Filings, Lincoln International

200

215

230

245

260

275

AprMarFebJanDecNovOctSepAugJulJunMay

HISTORICAL MONTHLY RETAIL SALESTwelve Months Ending April 30,

$ in

Bill

ions

Source: Census Bureau, Excl. Auto & Auto Parts

Through 4/30/2007 Through 4/30/2006

0

10

20

30

40

50

AprOctAprOctAprOctAprOctApr

$ in

Bill

ions

Including Wal-Mart Excluding Wal-Mart

HISTORICAL LUMBER PRICESProducer Price Index - Lumber & Wood Products

Twenty-Four Months Ended April, 2007

Ind

ex B

ase

= 8

200

Source: Bureau of Labor Statistics

150

170

190

210

230

250

AprJanOctJulAprJanOctJul

HISTORICAL ENERGY PRICESProducer Price Index - Fuel & Related Products & Power

Twenty-Four Months Ended April, 2007

Source: Bureau of Labor Statistics

Ind

ex B

ase

= 8

200

110

130

150

170

190

210

AprJanOctJulAprJanOctJul

2005 2006 20072004

2005 2007

2005 2006 2007 2005 2006 2007

2003


Company name May-07 apr-07 Mar-07 feb-07 Jan-07 dec-06 nov-06 oct-06 sep-06Specialty Apparel / Goods 2.8% -7.2% 7.4% 0.4% 1.2% 0.7% 1.3% 1.9% 7.0%Abercrombie & Fitch -5.0% -15.0% 7.0% -6.0% -6.0% -1.0% -3.0% -3.0% 10.0%Aeropostale 1.9% -14.0% 15.9% 2.3% 5.4% 1.7% 1.0% 5.6% 8.5%American Eagle Outfitters 5.0% -10.0% 20.0% 6.0% 17.0% 13.0% 14.0% 8.0% 19.0%AnnTaylor Stores -4.6% -12.8% 6.1% -2.9% -10.2% -5.3% -4.3% -0.5% 5.8%Bebe Stores -3.0% -9.0% 0.1% -2.2% 0.8% 4.0% 5.8% 8.2% 15.3%The Buckle 8.8% 1.8% 10.7% 4.5% 7.8% 3.6% 4.2% 1.7% 8.7%Cato Corp. 2.0% -21.0% 7.0% 0.0% -7.0% -6.0% -6.0% -5.0% 3.0%Chico’s -2.9% -7.3% 5.2% -4.3% -3.5% -2.0% -0.4% -4.1% 2.1%The Children’s Place 4.0% -2.0% 7.0% 5.0% 3.0% 5.0% 12.0% 10.0% 20.0%Christopher Banks 4.0% -12.0% 0.0% -13.0% -4.0% -7.0% -8.0% -3.0% 9.0%Deb Shops Inc. 0.2% -4.7% 6.5% -2.0% -3.9% -7.5% -9.5% -10.0% 6.8%Dress Barn 10.0% -6.0% 12.0% 0.0% 8.0% 5.0% 4.0% 5.0% 13.0%Gap -3.0% -16.0% 6.0% -4.0% 0.0% -8.0% -8.0% -7.0% -3.0%Hot Topic -6.1% -9.1% 3.4% -2.7% -6.6% -5.5% -4.3% -7.2% -7.3%Jos. A Bank Clothiers 13.5% 7.3% 1.4% 2.8% -4.7% 1.4% 9.6% 8.4% 2.7%Limited Brands 2.0% -1.0% 8.0% 3.0% 11.0% 4.0% 12.0% 9.0% 12.0%Mothers Work -3.6% -14.8% 3.6% -4.7% -6.0% -0.3% -1.0% -5.2% 10.6%Neiman Marcus Group 5.0% 1.0% 10.2% 6.7% 11.3% 7.1% 2.9% 7.2% 7.9%Nordstrom 6.3% 3.1% 15.0% 9.1% 11.0% 9.0% 5.4% 10.7% 13.4%New York & Co. NA -11.4% 4.5% 2.7% 2.3% 3.2% -2.8% -2.5% 2.3%Pacific Sunwear 6.4% -16.5% 14.1% -5.7% -7.7% -3.2% -3.8% -7.1% -2.4%Ross Stores 1.0% -7.0% 6.0% 1.0% 2.0% 2.0% 5.0% 3.0% 6.0%Saks Inc. 37.5% 11.7% 10.1% 24.7% 11.4% 11.1% 7.2% 9.2% 10.0%TJX Cos. 5.0% -1.0% 6.0% 2.0% 4.0% 6.0% 3.0% 5.0% 9.0%United Retail Group 4.0% -8.0% 11.0% -4.0% 2.0% -2.0% 3.0% 6.0% 9.0%Wet Seal Inc. 1.9% -9.6% 10.9% 5.0% 3.6% 1.3% 5.5% 7.5% 5.8%Wilsons Leather Experts -25.0% -20.0% -16.8% -24.7% -20.0% -23.1% -19.1% -13.5% -15.5%Zumiez, Inc. 11.2% 3.0% 17.0% 12.4% 13.0% 11.5% 12.1% 15.9% 14.9%General Merchandise 1.3% -5.9% 4.5% 3.6% 1.8% 0.9% 0.4% -0.9% 3.5%BJ’s Wholesale 4.1% -2.1% 3.1% 3.0% 3.5% 0.6% 0.6% -0.7% -0.9%Bon-Ton Stores -5.3% -13.4% -3.8% 14.6% 6.4% -5.8% -10.5% -9.7% 0.2%Costco 7.0% 7.0% 6.0% 4.0% 2.0% 9.0% 5.0% 4.0% 4.0%Cost-U-Less 3.7% 3.8% 4.0% 3.0% -1.2% 4.0% 3.6% 2.5% 6.7%Dillard’s -2.0% -14.0% 6.0% -9.0% -3.0% -5.0% -3.0% -5.0% 0.0%Dollar General 4.1% -2.4% 5.5% 4.9% 6.8% 7.1% 2.2% 1.9% 0.5%Duckwall-ALCO 0.0% -5.3% 8.5% 1.5% 5.2% 4.2% 7.3% 3.9% 7.3%Family Dollar 2.5% -4.9% 5.8% -0.5% 0.1% 1.2% 2.5% 1.0% 2.2%Fred’s 0.2% -2.5% 4.4% 3.9% 2.4% 2.0% 2.0% -2.5% 5.0%J.C. Penney -2.0% -4.7% 10.6% -0.2% 3.6% 2.6% 1.4% 8.1% 8.7%Kohl’s 10.5% -10.5% 16.8% 4.4% 8.7% 3.0% 3.7% 4.2% 16.3%Macy’s, Inc. -3.3% -2.2% 2.3% 1.2% 8.6% 4.4% 8.5% 7.7% 6.2%Sharper Image -8.0% -11.0% -29.0% -24.0% -25.0% -20.0% -27.0% -31.0% -21.0%Stage Stores 1.7% -14.8% 12.4% 1.4% 7.5% 2.2% 0.2% -2.5% 11.0%Stein Mart 2.5% -13.9% 8.0% -1.9% -1.9% 0.0% 3.8% -2.2% 4.8%Target Corp. 5.8% -6.1% 12.0% 5.7% 5.1% 4.1% 5.9% 3.9% 6.7%Wal-Mart 1.3% -3.5% 4.0% 0.9% 2.2% 1.6% -0.1% 0.5% 1.3%Drug Stores 3.6% 5.3% 5.3% 5.1% 6.8% 5.0% 5.8% 6.7% 5.6%CVS 6.2% 6.1% 7.0% 7.0% 8.6% 8.5% 8.4% 9.3% 8.8%Longs 0.0% 3.6% 2.9% 2.7% 3.4% 1.0% 2.7% 2.1% 1.4%Rite Aid 1.7% 2.1% 3.3% 2.2% 4.5% 2.6% 2.9% 4.0% 3.5%Walgreen 6.4% 9.2% 8.0% 8.6% 10.8% 7.9% 9.3% 11.4% 8.5%Total Comp Store Sales 2.4% -5.7% 6.2% 1.9% 1.9% 1.1% 1.3% 1.3% 5.7%

Comp Store Sales Trackerselected Comparable store sales data


Company nameltM

30-apr 2007 31-octltM

31-Jul 30-apr 2006 31-octltM

31-Jul 30-aprAbercrombie & Fitch $440 $404 $374 $323 $283 $256 $230 $219 $194 % YoY Change 56% 57% 63% 47% 46% 39% 27% 24% 10%Aeropostale $49 $45 $49 $57 $58 $58 $55 $52 $50 % YoY Change -15% -23% -11% 11% 17% 25% 21% 29% 26%American Eagle Outfitters $260 $226 $183 $146 $97 $82 $71 $79 $98 % YoY Change 169% 177% 160% 86% -1% -16% -36% -22% 21%AnnTaylor Stores $157 $166 $149 $147 $166 $188 $193 $181 $155 % YoY Change -6% -12% -23% -19% 8% 37% 55% 61% 39%Barnes & Noble $181 $179 $179 $168 $179 $187 $203 $202 $202 % YoY Change 1% -4% -12% -17% -11% 1% 52% 51% 58%Big Lots $36 $36 $36 $39 $59 $69 $86 $107 $126 % YoY Change -39% -48% -58% -64% -53% -49% -43% -30% -14%BJ’s Wholesale Club, Inc. $173 $191 $186 $165 $143 $123 $123 $136 $134 % YoY Change 21% 55% 52% 21% 7% -8% -6% 5% -12%Borders Group $201 $204 $203 $198 $196 $196 $178 $161 $144 % YoY Change 3% 4% 14% 24% 36% 70% 58% 54% 35%Bon-Ton Stores $97 $101 $83 $67 $42 $29 $27 $29 $30 % YoY Change 132% 246% 212% 133% 39% -7% -24% -2% 28%Casual Male Retail Group $25 $23 $21 $17 $16 $16 $16 $18 $18 % YoY Change 51% 45% 28% -6% -9% -24% -13% 14% 23%Charming Shoppes $147 $133 $128 $121 $110 $104 $87 $74 $66 % YoY Change 33% 28% 48% 64% 66% 71% 53% 43% 26%Chico’s FAS, Inc. $217 $218 $226 $193 $176 $148 $116 $105 $102 % YoY Change 23% 48% 95% 85% 73% 59% 48% 75% 97%Dick’s Sporting Goods $209 $190 $155 $116 $116 $112 $123 $134 $116 % YoY Change 80% 70% 26% -13% 0% 7% 26% 63% 77%Dillard’s, Inc. $353 $321 $387 $429 $432 $456 $424 $381 $344 % YoY Change -18% -30% -9% 13% 25% 60% 74% 65% 50%Dollar General Corp. $219 $262 $288 $301 $296 $284 $286 $293 $293 % YoY Change -26% -8% 1% 3% 1% -1% 7% 39% 71%Dollar Tree Stores $173 $175 $165 $153 $148 $139 $148 $163 $161 % YoY Change 17% 26% 11% -6% -8% -23% -28% -29% -30%Foot Locker $174 $165 $171 $158 $151 $155 $142 $150 $156 % YoY Change 15% 6% 20% 5% -3% -1% -21% -11% -1%Fred’s, Inc. $27 $27 $28 $24 $27 $28 $25 $29 $30 % YoY Change 3% -5% 10% -17% -10% -13% -36% -33% -33%Gap Inc. $603 $572 $558 $558 $569 $600 $573 $547 $506 % YoY Change 6% -5% -3% 2% 12% 43% 53% 84% 111%Home Depot, Inc. $3,533 $3,542 $3,538 $3,549 $3,765 $3,881 $4,023 $4,246 $4,089 % YoY Change -6% -9% -12% -16% -8% -2% -8% 7% 1%Hot Topic $37 $39 $40 $42 $64 $69 $73 $77 $60 % YoY Change -42% -44% -45% -46% 6% 20% 19% 42% 25%J.C. Penney Company $890 $772 $700 $625 $564 $535 $485 $452 $431 % YoY Change 58% 44% 44% 38% 31% 34% 11% 12% 16%Jo-Ann Stores, Inc. $51 $58 $94 $140 $145 $143 $111 $76 $66 % YoY Change -65% -59% -16% 84% 121% 113% 49% 16% -4%Kohl’s Corporation $1,184 $1,142 $1,074 $1,089 $904 $828 $911 $863 $898 % YoY Change 31% 38% 18% 26% 1% -10% -6% -8% 2%Kroger Co. $1,789 $1,683 $1,473 $1,397 $1,325 $1,306 $1,365 $1,458 $1,582 % YoY Change 32% 29% 8% -4% -16% -20% -16% -17% -12%Limited Brands, Inc. $606 $548 $507 $479 $469 $480 $457 $443 $464 % YoY Change 29% 14% 11% 8% 1% 11% 7% 15% 40%Longs Drug Stores $138 $150 $140 $132 $131 $106 $94 $84 $87 % YoY Change 6% 41% 49% 58% 50% 16% -11% -22% -18%

Retail CapEx Monitorfifty large u.s. retailers (Last Twelve Months Ended, $ in Millions)


Retail CapEx Monitorfifty large u.s. retailers (Last Twelve Months Ended, $ in Millions)

Company nameltM

30-apr 2007 31-octltM

31-Jul 30-apr 2006 31-octltM

31-Jul 30-aprLowe’s Companies $3,891 $3,916 $3,826 $3,570 $3,487 $3,379 $3,088 $2,972 $2,983 % YoY Change 12% 16% 24% 20% 17% 15% 10% 12% 18%Macy’s Inc. $1,356 $1,317 $1,051 $778 $618 $568 $726 $1,093 $1,108 % YoY Change 119% 132% 45% -29% -44% -49% -31% 7% 6%Men’s Wearhouse $72 $73 $62 $56 $61 $67 $81 $97 $94 % YoY Change 19% 10% -24% -42% -35% -22% 11% 76% 88%Michaels Stores $132 $143 $140 $127 $130 $118 $105 $100 $93 % YoY Change 2% 20% 34% 28% 40% 30% 0% -13% -20%New York & Company $77 $83 $79 $76 $83 $81 $80 $75 $60 % YoY Change -7% 2% -2% 2% 39% 49% 43% 78% 58%Nordstrom, Inc. $303 $264 $254 $256 $266 $272 $287 $276 $252 % YoY Change 14% -3% -11% -7% 6% 10% 31% 21% 2%Pacific Sunwear $161 $158 $138 $124 $117 $109 $97 $90 $87 % YoY Change 38% 45% 43% 37% 35% 33% 28% 27% 49%Pathmark Stores $68 $70 $79 $75 $70 $64 $59 $69 $83 % YoY Change -3% 9% 34% 8% -17% -35% -44% -21% 0%Payless ShoeSource $151 $119 $105 $82 $66 $64 $71 $82 $98 % YoY Change 131% 84% 47% 0% -33% -37% -38% -29% -18%Pep Boys $56 $50 $46 $58 $72 $86 $101 $102 $100 % YoY Change -22 -42% -54% -43% -28% -2% 63% 106% 143%PetSmart $255 $241 $198 $187 $183 $166 $169 $171 $161 % YoY Change 39% 46% 17% 10% 14% 16% 22% 47% 22%Ross Stores $253 $224 $217 $226 $178 $176 $177 $186 $140 % YoY Change 42% 27% 23% 22% 27% 18% 14% 30% -7%Saks Incorporated $142 $124 $225 $211 $222 $237 $145 $207 $201 % YoY Change -36% -48% 55% 2% 10% 20% -26% 9% 3%Sears (Pro Forma) $546 $513 $538 $539 $560 $546 $661 $862 $1,035 % YoY Change -3% -6% -19% -37% -46% -51% -44% -23% -4%Stage Stores, Inc. $76 $72 $68 $66 $74 $75 $74 $71 $57 % YoY Change 3% -4% -8% -7% 28% 57% 57% 56% 22%Staples, Inc. $478 $529 $519 $536 $507 $456 $424 $373 $344 % YoY Change -6% 16% 22% 44% 48% 36% 47% 23% 19%Stein Mart, Inc. $41 $49 $49 $47 $39 $35 $28 $25 $24 % YoY Change 5% 40% 73% 87% 61% 83% 61% 68% 97%Talbots, Inc. $108 $104 $84 $73 $73 $73 $79 $80 $85 % YoY Change 47% 43% 6% -9% -14% -22% -30% -29% -21%Target Corporation $4,227 $3,928 $3,735 $3,513 $3,555 $3,388 $3,519 $3,445 $3,153 % YoY Change 19% 16% 6% 2% 13% 10% 24% 27% 17%Tiffany & Co. $170 $182 $179 $169 $169 $157 $153 $148 $145 % YoY Change 1% 16% 17% 14% 16% 10% 12% 11% -46%TJX Companies, Inc. $377 $378 $386 $456 $491 $496 $544 $510 $467 % YoY Change -23% -24% -29% -11% 5% 16% 42% 42% 21%Wal-Mart Stores, Inc. $15,613 $15,666 $15,600 $14,920 $15,011 $14,530 $14,013 $13,654 $13,020 % YoY Change 4% 8% 11% 9% 15% 13% 15% 20% 19%Williams-Sonoma $184 $191 $177 $159 $156 $152 $156 $177 $178 % YoY Change 18% 26% 13% -10% -12% -16% -31% -20% -21%TRAILING 12 MOS CAPEX $40,706 $40,014 $38,934 $37,167 $36,838 $35,888 $35,474 $35,633 $34,581 % YoY Change 10% 11% 10% 4% 7% 6% 7% 14% 13%TTM CAPEX (EX-WMT) $25,093 $24,348 $23,334 $22,247 $21,827 $21,358 $21,461 $21,979 $21,561 % YoY Change 15% 14% 9% 1% 1% 1% 2% 10% 9%


recent Market activity

Despite recent volatility in the credit and equity markets, the deal market continues to be robust as we reach the midway point of 2007. Mega-deals have been making headlines and some of the nation’s largest private equity firms have gone public (or are getting ready to do so). Many analysts and pundits are emphatic that this may be the last sign of a market peak.

Lincoln international’s view on the market has not changed substantially since our last report was released. We currently have approximately 100 transactions in the market on a global basis and have a strong sense of current conditions. We would characterize the market as robust but increasingly cautious. As the graph below depicts, middle market M&A volumes have plateaued and trended downward somewhat in recent months but remain at historically high levels. Strategic and financial buyers remain active and both have record levels of capital available to deploy. Corporate confidence remains high and, for the most part, Ceos are viewing their share prices as an endorsement of acquisition-led growth strategies. While the earnings outlook may be somewhat mixed, we believe that the strategic appetite for acquisitions should continue to be strong for the time being.

While recent events may cause the market to pause, financial buyers continue to be active. fundraising reached record levels in 2006 and private equity investors are looking to deploy capital as quickly as possible. in many respects capital momentum has become the name of the game as general partners pick up the pace of investment and rush back to the marketplace to raise a newer and larger fund. they realize that the fundraising window will close at some point and are hoping to gather new commitments on favorable terms before that happens. Given the amount of capital that is being deployed at frothy valuation levels, there is concern in the limited partner community that return expectations may be unrealistic.

Lenders are growing more cautious…

But deal activity should continue at a

healthy pace.

MIDDLE MARKET M&A VOLUMETransaction Values Between $10mm and $250mm

Twelve Months Ended

1,200

1,400

1,600

1,800

2,000

2,200

2,400

1Q-071Q-061Q-051Q-041Q-031Q-021Q-01

Source: Factset Mergerstat

Num

ber

of

Tran

sact

ions

Private Capital Markets Update


until very recently, the financing markets had been highly accommodative for private equity transactions. We had argued for some time that middle market leverage multiples had peaked and recent events may prove that to be the case. economic uncertainty, turbulence in the subprime lending arena, a weak housing market and sagging consumer confidence have made lenders more cautious. However, as seen in the graph on the right, total debt multiples for middle market M&A transactions reached 5.1x LtM eBitDA in the first quarter of 2007. this represents a 400+ basis point increase over the heady lending multiples seen in 2006. What was even more surprising is the bifurcation that exists within the sub-$50 million eBitDA range. for instance, depending on the industry, a business generating $30 million of eBitDA with limited capital intensity will still find an ample group of lenders willing to commit to attractive leverage levels. that being said, terms and pricing are clearly moving up as the market reprices risk.

Despite the volatility, it is important to note that balance sheets remain relatively well-capitalized given the stability of equity contributions. While lenders had been offering attractive rates and a substantial reduction in covenant protections, they were still looking for a meaningful cushion of equity beneath them in the capital structure. As the graph on the right illustrates, equity contributions have been stable in the low- to mid-30% range for the last few years. While these levels are significantly lower than those that were found earlier in the decade, we would not characterize them as inadequate. in fact, we believe that this equity cushion will provide a degree of downside protection when the economy finally takes a turn into recession.

While the overall deal environment remains robust, we believe that there are some unique issues facing store fixtures suppliers who are considering their options at this point.

While deal financing remains available, terms and pricing have certainly grown more difficult in recent weeks...

TOTAL DEBT MULTIPLES OF MIDDLE MARKET LOANSFor Less than $50 million of EBITDA

0

1.0

2.0

3.0

4.0

5.0

6.0x

Source: S&P Leveraged Commentary and Data

Mul

tip

le o

f LT

M E

BIT

DA

20012000199919981997

4.8x

2002 2003 2004 2005 2006

4.7x

4.1x 4.0x

3.4x

3.9x 3.8x

4.2x

4.7x 4.7x5.1x

Q12007

0

10

20

30

40

50

60%

TOTAL EQUITY CONTRIBUTIONS TOLEVERAGED BUYOUTS

Source: S&P Leveraged Commentary and Data

% E

qui

ty in

Cap

ital

Str

uctu

re

20001999199819971996

23%

2001 2002 2003 2004 2005

30%32%

36%38%

41% 40% 40%

35%32% 33%

Q12007

2006

33%


first, the ongoing chorus of negative headlines relating to the retail sector is beginning to influence buyer interest in the sector. our extensive conversations with contacts throughout the industry reflect the fact that there is a meaningful disconnect between these headlines and facts on the ground. for the most part our clients and contacts continue to perform well and have a positive outlook for the remainder of 2007. Potential investors in the sector, however, will continue to be influenced by concerns over the state of the retail industry and the sustainability of retailer investment plans.

Second, given this uncertainty we would argue that customer diversity is more important than ever and will be a key diligence issue for potential investors and acquirors. in times of uncertainty they will want to know that the loss of one customer due to a change in store build or refurb plans will not result in a quick and substantial decline in revenue and profitability.

third, management teams must have credible and defensible long-term strategic and financial plans in place that will give buyers and investors confidence in the company’s ability to weather an inevitable downturn. to the extent that near-term weakness in financial results is possible given the mixed outlook for retail, being able to communicate those plans effectively and to inspire confidence in the team’s vision will be an important driver of shareholder value.

in conclusion, we believe that the deal market will remain active in the months to come despite the market volatility. the uncertainty in the marketplace may prolong diligence periods and impact valuation somewhat but, in our view, solid companies with high earnings visibility will still command attractive purchase price multiples.

Potential sellers of fixtures businesses must take ‘headline

risk’ into account.

A detailed plan for weathering a retail

downturn will be an important

value-driver.

s t e v e W i e s n e r

Senior Vice Presidentretail infrastructure

[email protected]

d a n i e l t i t H

Contributor

M a t t H e W W a n g

Contributor

C H i C a g o

500 West Madison, Ste 3900Chicago, iL 60661 uSAPhone: 312.580.8339fax: 312.580.8317

f r a n k f u r t

Kettenhofweg 29 60325 frankfurt am Main Germany Phone: +49 69 97 10 54 00fax: +49 69 97 10 57 96

l o s a n g e l e s

10940 Wilshire Blvd., Ste 600Los Angeles, CA 90024uSAPhone: 310.909.1020fax: 310.909.1021

n e W y o r k

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p a r i s

21 bis rue Lord Byron75008 ParisfrancePhone: +33 (0)1 53 53 18 18fax: +33 (0)1 53 53 17 18

Lincoln International provides advice on mergers & acquisitions,

private placements and capital raising, corporate finance issues

and special situations. With offices in Chicago, Frankfurt, Los

Angeles, New York and Paris, Lincoln International is the first

and only truly global, integrated, independent M&A

organization focused on the mid-market. Lincoln International

leverages outstanding people, practices and presence to

provide clients with in-depth industry knowledge and superior

access to a comprehensive range of buyers, sellers and

investors. With market-leading international capabilities and

worldwide senior-level expertise, no other mid-market M&A

organization has the resources you need to attain the superior

results that you deserve.

Lincoln International’s Retail Infrastructure team provides a full-

range of advisory and private capital services to innovative

companies throughout the retail industry. Our Private Markets

Research initiative serves as the cornerstone of our efforts and

allows Lincoln International to provide management teams and

ownership groups with a level of strategic advice that is

unparalleled on Wall Street.

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