Retailing/Broadlines &
Department Stores
2008 EPS Sensitivity
Measuring the Downside Risk to Our EPS Estimates
􀂄 HAS THE BOTTOM BEEN DEFINED? During 2007, the BSC Broadlines Index
declined 23.1%. Meanwhile, the S&P 500 and Dow Jones Industrials Index
increased 3.5% and 6.4%, respectively. As many retail investors have watched
share prices tumble over the past year, we believe most are still asking
themselves: How low can they go?
􀂄 WHAT IS THE DOWNSIDE RISK FROM HERE? This report examines what we
believe to be the “worst-case” earnings per share scenarios for broadlines
retailers. In addition, we examine historical P/E multiples since 1990 (including
during recession periods) to estimate the 2008 year-end upside and downside
potential of the stock prices for each company under our coverage. We also look
at the price performance of retail stocks after prior recessions, as well as historical
retail stock price performance in the wake of interest-rate easing.
􀂄 PICKING THE WINNERS. In some cases, we believe current share prices already
assume that earnings results miss expectations or that a “worst-case” scenario
materializes. Our scenario analysis aims to give investors more clarity on current
retail valuations, as well as highlight the undervalued stocks in our coverage
universe. Our top picks are Macy’s, Nordstrom, and Wal-Mart, all rated
Outperform.

How Low Can They Go?...........................................................................................................................................5
Department Stores: Examining Our Estimates...........................................................................................................6
Macy’s ................................................................................................................................................................6
J.C. Penney .......................................................................................................................................................10
Kohl’s................................................................................................................................................................13
Nordstrom .........................................................................................................................................................16
Saks...................................................................................................................................................................21
Sears Holdings ..................................................................................................................................................25
Discounters: Examining Our Estimates....................................................................................................................28
BJ’s Wholesale..................................................................................................................................................28
Costco ...............................................................................................................................................................32
Dollar Tree Stores .............................................................................................................................................36
Family Dollar ....................................................................................................................................................39
Target ................................................................................................................................................................42
Wal-Mart...........................................................................................................................................................45
Interest Rates and Retail Stock Price Performance ..................................................................................................51
Company Models.....................................................................................................................................................55
Macy’s ..............................................................................................................................................................56
J.C. Penney .......................................................................................................................................................60
Kohl’s Corporation ...........................................................................................................................................64
Nordstrom, Inc. .................................................................................................................................................68
Saks, Inc............................................................................................................................................................72
Sears Holding Corporation ...............................................................................................................................76
BJ’s Wholesale Club, Inc..................................................................................................................................82
Costco Wholesale Corp.....................................................................................................................................86
Dollar Tree Stores .............................................................................................................................................90
Family Dollar Stores .........................................................................................................................................94
Target Corp. ......................................................................................................................................................98
Wal-Mart Stores..............................................................................................................................................102
Appendices ...........................................................................................................................................................107
Appendix 1. Department Stores’ One-Year Forward P/E Ratios Since 1990 — Annual...............................108
Appendix 2. Department Stores’ Two-Year Forward P/E Ratios Since 1990 — Annual ..............................109
Appendix 3. Department Stores’ One-Year Forward P/E Ratios During Prior Recessions — Monthly........110
Appendix 4. Department Stores’ Two-Year Forward P/E Ratios During Prior Recessions — Monthly .......111
Appendix 5. Discounters’ One-Year Forward P/E Ratios Since 1990 — Annual..........................................112
Appendix 6. Discounters’ Two-Year Forward P/E Ratios Since 1990 — Annual .........................................113
Appendix 7. Discounters’ One-Year Forward P/E Ratios During Prior Recessions — Monthly...................114
Appendix 8. Discounters’ Two-Year Forward P/E Ratios During Prior Recessions — Monthly..................115
Appendix 9. Summary of Historical Retail One-Year Forward P/E Ratios....................................................116
Appendix 10. Summary of Historical Retail Two-Year Forward P/E Ratios..................................................116