A Look at Consumer Confidence and Spending into 2011

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1 A Look at Consumer Confidence and Spending into

2 Minneapolis London San Francisco New York Chicago Hong Kong Specialty Retail, Apparel & Footwear Brands, & Mass Merchants Sean Naughton, CFA Vice President Senior Research Analyst October 7 th 2010

3 DISCLOSURES Disclosures for universe of Jeff Klinefelter & Sean Naughton 1. I or a household member have a financial interest in the securities of the following companies: none 2. I or a household member is an officer, director, or advisory board member of the following companies: none 3. I have received compensation within the past 12 months from the following companies: none 4. Piper Jaffray or its affiliates beneficially own 1% or more of any class of common equities of the following companies: none 5. The following companies have been investment banking clients of Piper Jaffray during the past 12 months: GIII, GMAN, RUE 6. Piper Jaffray expects to have the following companies as investment banking clients within the next three months: none 7. Other material conflicts of interest for Jeff Klinefelter and Sean Naughton or Piper Jaffray regarding companies in my universe for which I am aware include: GIII, GMAN, RUE: underwriting 8. Piper Jaffray received non-investment banking securities-related compensation from the following companies during the past 12 months: none 9. Piper Jaffray makes a market in the securities of the following companies, and will buy and sell the securities of these companies on a principal basis: CROX, CTRN, DECK, GIII, HOTT, PSUN, ROST, VLCM, WTSLA, ZUMZ 10. Piper Jaffray usually provides bids and offers for the securities of the following companies and will, from time to time, buy and sell the securities of these companies on a principal basis: ANF, ARO, AEO, GCO, GES, GPS, JCG, JCP, KSS, PVH, RL, RUE, TGT, UA, VFC, WRC, ZQK 3

4 CONSUMER SECTOR INVESTMENT RISKS Risks include, but are not limited to: Reliance on key top management Changing consumer preferences; brand relevance Cycle transitions & seasonality Changes in input costs & raw materials; manufacturing risk Markdown risk Product flow; inventory disruptions; product recalls; health & safety concerns Competition; lack of pricing power Deleveraging of fixed expenses, R&D, and design costs Foreign exchange rate risk Government regulation Weather General macroeconomic uncertainty 4

5 EXECUTIVE SUMMARY Thesis Declining asset values, combined with high unemployment rates and decreased access to capital, will continue to influence consumption of discretionary categories in 2011 as well as While difficult to predict, we think it s important to consider current trends in consumer spending, management outlook, and consumer psychology/demographics. We favor companies targeting high-income households and companies that offer value to middle-income consumers. Macroeconomic Trends Employment Situation Income Statement of the Consumer Balance Sheet of the Consumer Confidence of the Consumer Outdoor Industry Economic Sentiment Expectations Back-To To-School Implications for Holiday Opportunities: The Next Generation Consumer & International 5

6 EMPLOYMENT INITIAL UNEMPLOYMENT CLAIMS Initial unemployment claims down 15% year-over-year; Rolling 4 week numbers at 465k, have been rising since late-march 6

7 EMPLOYMENT TEMPORARY VS. NON-FARM PAYROLLS Temporary employment remains solid, up +22.1% Y/Y and up +0.8% in August; Y/Y growth in Non-Farm payrolls up +0.2% in August, second consecutive positive month 7

8 EMPLOYMENT REAL PCE VS. REAL HOURLY WAGE GROWTH Real hourly earnings up 0.7% y/y, down sequentially in July at -0.2%; Real PCE continues to move higher as July up 1.9% y/y. 8

9 DEBT SERVICE AND FINANCIAL OBLIGATION RATIOS Debt service at lowest levels since 2000; consumer has capacity to borrow 9

10 CONSUMER CAPACITY TO SPEND Income Statement for the consumer is improving, confidence will be next step 10

11 CONSUMER CONFIDENCE EXPECTATIONS Confidence Expectations Index has a.68 correlation with retail sales ex-autos w/ 6mo lead 11

12 PERSONAL SAVINGS RATE Personal Savings Rate continues to move higher after years of declines 12

13 HOME PRICES Home prices have declined y/y in 33 of the last 34 months 13

14 HOUSEHOLD NET WORTH Household net worth increased in Q409 to Q210 y/y after 7 quarters of y/y declines 14

15 SPENDING PATTERNS Spending on health care is displacing spending on discretionary categories such as clothing/footwear and furniture/equipment 15

16 DISPARITY IN INCOME GROWTH BY QUARTILE Wage Growth By Income Quintile 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% May-10 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 Source: IRS, Piper Jaffray & Co. Highest Quintile Fourth Quintile Middle Quintile 16

17 HIGH-INCOME CONSUMER WAGE GROWTH OFFSETS TAXES THE 800-POUND DONKEY IN THE ROOM INCREMENTAL TAX BURDEN IN A POST-BUSH-TAX-CUT ERA Adjusted Gross Income Taxable Income Marginal Marginal Taxes Incremental AGI/Hhld Incr. Tax By Household Bracket Up To $250K* Tax Base (+460bps) Taxes/Hhld By Bracket % AGI $200,000 under $500,000 $693,238,200 $96,779,951 $4,451,878 $1,284 $227, % $500,000 under $1,000, ,669, ,907,915 8,689,764 15, , % $1,000,000 under $1,500,000 34,915, ,770,193 5,141,429 36,814 1,050, % $1,500,000 under $2,000,000 14,769,500 74,224,112 3,414,309 57,793 1,506, % $2,000,000 under $5,000,000 21,422, ,966,926 9,382, ,495 2,630, % $5,000,000 under $10,000,000 5,309, ,756,355 5,692, ,047 6,077, % $10,000,000 or more 3,350, ,888,323 15,864,863 1,183,680 25,982, % Total ($200K +) 916,674,450 $1,144,293,775 $52,637,514 $12,073 $472, % *Except the $200K under $500K bracket, in which we assumed $200K. All dollars in thousands, except household data; based on 2008 tax year. Source: IRS, Piper Jaffray & Co. research 17

18 RETAIL SALES TRENDS RETAIL SALES EX. AUTO (SA) VS. PRIOR YEARS 2009 vs. Prior Years 2010 vs. Prior Years ($ BILLIONS) January % -0.7% -2.9% -7.6% 14.0% 4.1% 1.8% -3.1% 4.9% February % -0.2% -2.6% -6.3% 14.2% 5.1% 2.5% -1.4% 5.3% March % -1.7% -5.1% -8.3% 15.4% 6.3% 2.5% -0.9% 8.1% April % -2.2% -4.3% -9.1% 14.2% 5.9% 3.6% -1.6% 8.3% May % -1.5% -5.2% -9.3% 13.3% 4.6% 0.6% -3.7% 6.1% June % -0.2% -3.4% -9.2% 12.0% 4.7% 1.3% -4.7% 4.9% July % -0.8% -4.3% -9.8% 12.0% 4.5% 0.8% -5.0% 5.3% August % -0.4% -2.9% -7.5% 11.1% 4.6% 2.0% -2.9% 5.0% September % 1.1% -3.0% -6.0% October % 1.3% -3.4% -3.2% November % 2.7% -4.1% 1.9% December % 1.3% -3.3% 5.8% Total 2,188 2,250 2,315 2,424 2,602 2,806 2,983 3,096 3,167 2, % -0.1% -3.7% -5.9% % Change 2.8% 2.9% 4.7% 7.3% 7.8% 6.3% 3.8% 2.3% -5.9% DPI* 7,327 7,649 8,010 8,378 8,889 9,277 9,916 10,403 10,806 10,924 % Change 4.4% 4.7% 4.6% 6.1% 4.4% 6.9% 4.9% 3.9% 1.1% % of DPI 30% 29% 29% 29% 29% 30% 30% 30% 29% 27% *Disposable Personal Income Source: Census Bureau and Bureau of Economic Analysis Retail sales have increased +6.1% YTD after steep decline in 2009; still below 2008 levels 18

19 RETAIL APPAREL SALES TRENDS TOTAL RETAIL CLOTHING STORE SALES (SA) VS. PRIOR YEARS 2009 vs. Prior Years 2010 vs. Prior Years ($ BILLIONS) January % -0.6% -6.8% -7.3% 8.9% 1.3% -5.0% -5.5% 1.9% February % 2.5% -2.4% -2.8% 7.7% 3.4% -1.6% -2.0% 0.8% March % -0.4% -7.5% -7.0% 13.2% 6.0% -1.5% -1.0% 6.4% April % -2.2% -5.4% -7.5% 9.5% 4.1% 0.7% -1.5% 6.5% May % -1.1% -6.8% -7.1% 9.6% 3.7% -2.3% -2.5% 4.9% June % -3.1% -6.7% -8.2% 7.7% 2.9% -1.0% -2.5% 6.2% July % -2.7% -6.7% -7.2% 9.6% 2.2% -2.0% -2.5% 5.0% August % -0.8% -4.7% -5.3% 9.1% 3.8% -0.3% -0.9% 4.7% September % -3.8% -4.8% -0.1% October % -3.7% -5.4% 1.4% November % -2.2% -6.7% 1.0% December % -6.0% -6.1% 3.1% Total % -2.0% -5.8% -4.0% % Change 0.2% 2.8% 3.4% 6.0% 6.0% 6.2% 4.0% -1.9% -4.0% DPI* 7,327 7,649 8,010 8,378 8,889 9,277 9,916 10,403 10,806 10,924 11,229 % Change 4.4% 4.7% 4.6% 6.1% 4.4% 6.9% 4.9% 3.9% 1.1% 2.8% % Apparel 2.3% 2.2% 2.2% 2.1% 2.1% 2.2% 2.1% 2.1% 2.0% 1.9% 1.9% *Disposable Personal Income Represents declining investment in apparel Source: Census Bureau and Bureau of Economic Analysis Est. apparel $s '10: % change from '09 2.8% 19

20 MACROECONOMIC REVIEW Thesis Declining asset values, combined with high unemployment rates and decreased access to capital, continue to influence consumption of discretionary categories in 2010 as we believe it is impacting the consumer psychology and confidence. Macroeconomic Trends Employment situation is improving, but not as quickly as was initially hoped Consumer has the capacity to spend, but will they? Home prices and net worth improving, but partially driven by stimulus Confidence will be key driver of consumer spending Non-Discretionary spending increasing as a portion of total Retail Sales excluding autos remains below 2008 levels 20

21 ECONOMIC CONCERN FROM OIA COMMUNITY Respondents Very Concerned About the Economy 60% 50% 47% 57% 55% 40% 37% 37% 30% 20% 23% 10% 0% Fall '08 Spring '09 Summer '09 Fall '09 Winter '09 Spring '10 Source: Piper Jaffray & Co. 21

22 EXPECTATIONS FROM OIA COMMUNITY Expectations Index Spring '09 Summer '09 Fall '09 Winter '09 Spring '10 14% 12% 10% 8% 6% 4% 2% 0% -2% Source: Piper Jaffray & Co. Expectations Index 22 Q/Q Change

23 RETAIL SALES TRENDS Source: Census Bureau, Piper Jaffray & Co. Strong August retail sales suggests holiday sales growth ~ +5% Y/Y 23

24 IDENTIFYING POTENTIAL OPPORTUNITIES Piper Jaffray Taking Stock with Teens Survey Spending by category (apparel, food, entertainment, etc.) Total spending per teen Market size for apparel and footwear products Brand preferences Environmental awareness Higher Profitability in International Markets Favorable operating margin differential Higher price points 24

25 TEEN SPENDING BY CATEGORY 25

26 TEEN MARKET SIZE X = $71 billion 28.2 million $2,500/person Apparel Shoes Accessories = 39% $71 billion X = 39% 39% $28 billion Source: Census Bureau and Piper Jaffray & Co. 26

27 TEEN SPENDING ON FASHION PER TEEN 27

28 BRANDS TEENS PREFER IN ATHLETIC/PERFORMANCE APPAREL PREFERRED ATHLETIC CLOTHING BRAND - UPPER INCOME STUDENT SURVEY Fall 2010 Spring 2010 Fall 2009 Spring 2009 Fall 2008 Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total 1 Nike 51% 1 Nike 47% 1 Nike 48% 1 Nike 43% 1 Nike 38% 2 Under Armour 18% 2 Under Armour 25% 2 Under Armour 25% 2 Under Armour 26% 2 Under Armour 23% 3 adidas 6% 3 adidas 7% 3 adidas 6% 3 adidas 6% 3 adidas 8% 4 The North Face 2% 4 The North Face 3% 4 Soffe 2% 4 The North Face 4% 4 Puma 3% 5 Mizuno 1% 5 Soffe 2% 5 Jordan 2% 5 Champion 2% 5 Jordan 1% Puma 2% PREFERRED ATHLETIC CLOTHING BRAND (F) - UPPER INCOME STUDENT SURVEY Fall 2010 Spring 2010 Fall 2009 Spring 2009 Fall 2008 Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total 1 Nike 49% 1 Nike 48% 1 Nike 46% 1 Nike 41% 1 Nike 39% 2 Under Armour 16% 2 Under Armour 19% 2 Under Armour 23% 2 Under Armour 26% 2 Under Armour 18% 3 Adidas 7% 3 adidas 8% 3 adidas 7% 3 adidas 6% 3 adidas 10% 4 The North Face 2% 4 The North Face 4% 4 Soffe 3% 4 The North Face 5% 4 Soffe 4% 5 Mizuno 2% 5 Soffe 3% 5 The North Face 2% 5 Champion 2% 5 Puma 4% PREFERRED ATHLETIC CLOTHING BRAND (M) - UPPER INCOME STUDENT SURVEY Fall 2010 Spring 2010 Fall 2009 Spring 2009 Fall 2008 Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total Rank Sport % Total 1 Nike 52% 1 Nike 46% 1 Nike 49% 1 Nike 46% 1 Nike 38% 2 Under Armour 19% 2 Under Armour 30% 2 Under Armour 27% 2 Under Armour 26% 2 Under Armour 29% 3 Adidas 6% 3 adidas 5% 3 adidas 5% 3 adidas 6% 3 adidas 7% 4 The North Face 2% 4 Jordan 2% 4 Jordan 2% 4 The North Face 3% 4 Jordan 2% 5 Jordan 2% 5 Puma 1% 5 Reebok 1% 5 Puma 2% 5 Reebok 1% Puma 1% Source: Piper Jaffray & Co. 28

29 TEENS CONCERNED ABOUT GLOBAL WARMING 29

30 TEENS WHO RECYCLE AT HOME 30

31 TEENS WHO HAVE PURCHASED ORGANIC PRODUCTS 31

32 TEENS WILLING TO PAY MORE FOR ORGANIC 32

33 YOUNG ADULT POPULATION CONTINUES TO GROW Population Trend year old age group Millions of persons % CAGR U.S. Census Bureau & NCHS Compared to 0.85% estimated growth rate for total U.S. population from

34 INT L REVENUE VS. INT L OPERATING INCOME 34

35 REVIEW OF OPPORTUNITIES SUMMARY 1) Teen and youth markets - Teens spend about $28B annually on discretionary categories - Demographics favor young adult, growth exceeds rest of population - Teens care about the environment 2) Higher profitability in international markets - Higher margins and price points 35

36 Analyst Certification Jeff P. Klinefelter, Senior Research Analyst, Sean P. Naughton, CFA, Senior Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. and/or its affiliates Piper Jaffray Ltd., and Piper Jaffray Asia Securities Limited, all of which are subsidiaries of Piper Jaffray Companies (collectively Piper Jaffray). Piper Jaffray & Co. is regulated by FINRA, NYSE and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN Piper Jaffray Ltd. is registered in England, no , and its headquarters is located at One South Place, London, EC2M 2RB. Piper Jaffray Ltd. is authorised and regulated by the UK Financial Services Authority ( FSA ), entered on the FSA's register, no and is a member of the London Stock Exchange. Piper Jaffray Asia Securities Limited is a licensed corporation regulated by the Securities and Futures Commission of Hong Kong ( SFC ), entered on the SFC s register, no. ABO154, and is an exchange participant of The Stock Exchange of Hong Kong Limited. Its headquarters is located at 39/F Tower 1 Lippo Centre, 89 Queensway, Hong Kong. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless otherwise specified. Piper Jaffray research analysts receive compensation that is based, in part, on the firm's overall revenues, which include investment banking revenues. Ratings and Other Definitions Stock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At times analysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performance is measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinion or analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor s decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or other information about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the research analyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions contained in fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst. An industry outlook represents the analyst s view of the industry represented by the stocks in the analyst s coverage group. A Favorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to improve over the investment time horizon. A Neutral industry outlook generally means that the analyst does not expect the fundamentals and/or valuations of the industry to either improve or deteriorate meaningfully from its current state. An Unfavorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to deteriorate meaningfully over the investment time horizon.

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