2009 Outlook and Themes
SECTOR REVIEW
In the Troughs of a Multi-Year Restructuring
Phase
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Theme for 2009. The Broadlines Universe under Credit Suisse’s coverage
will continue to see its share of challenges in 2009 due to the ongoing
deterioration in the macro environment and the imbalance between supply
and diminished demand. As consumer spending remains pressured and
retailers’ cost of capital increased, the structure of the industry should begin
to change substantially. We believe the dominant theme in 2009 will be the
restructuring of the industry in the form of store closings and bankruptcy
announcements, particularly in the mall anchor sub-sector. This in turn will
begin to improve the supply/demand dynamics of the industry.
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Mall Anchors. Potential stabilizing in operating margin during the second
half? We expect to see an acceleration in store closings and bankruptcy
announcements which will likely lead to liquidation sales. Retailers will need
to continue their aggressive promotional activity to clear excess
merchandise left over from the holiday season as well as commitments
made for the first half of 2009 made prior to Fall 2008. The second half of
2009 could look better if gross margins stabilize or even improve as
inventory levels become better controlled and 2008’s rash of store closings
announcements begin to make the competitive environment less intense.
Our investment thesis on the mall anchor sub-sector in particular will depend
heavily on the rate at of which both inventory and capacity is removed from
the system and on any recovery in the consumer demand.
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Mass Merchants. A more cautious stance on the mass merchants subsector
in 2009 given our view that sales momentum will likely slow due in
part to moderating food/consumer product inflation. The incremental benefit
mass merchants realized from consumer trade down in 2008 might not
repeat itself in 2009. The consumer may trade down within the stores,
making it more difficult to achieve the same level of sales growth seen in
2008. Earnings expectations for ’09 and multiples (relative to the broader
market) already appear to be embedding the likely benefit of government
stimulus and lower gasoline prices to consumer spending.
■
A look back. The level of capital spending reduction, store closings and
bankruptcy announcements were above or near historical levels this past
year as the deceleration in demand was far more pronounced than originally
expected at the beginning of the year. Retail stocks suffered tremendous
value destruction in 2008 with the more discretionary-based retailers feeling
the brunt of the economic downturn.
■
Stock recommendation. Nordstrom is our top pick for 2009. We continue
to recommend a Marketweight sector weighting on the mall anchor group
given our view that it is still in the troughs of a multi-year restructuring period.

Table of Contents
Recap of 2008 4
Altering Consumer Landscape 5
Inflection Point of 2008 for Industry Rationalization 5
Credit Concerns Take Center Stage 5
Estimates for Mall Anchors in Free Fall… 6
Wal-Mart: Reasons Why the Stock Outperformed in 2008; Setting Up for More Difficult
Comparisons in 2009 7
2009 Investment Themes and Recommendations 9
Nordstrom - Top-Pick for 2009 10
Sector Valuation 11
Will a Stimulus Program in 2009 Help or Will Increases in State Taxes Offset the
Potential Benefit? 13
Financing Pressure 13
Outlook for Retail M&A 13
Theme # 1: Roll-Out of National Retail System is Near Completion 14
Theme #2: Supply/Demand Balance 16
2008 Marks Largest Year of Store Closings in Terms of Units in the Retail Industry 17
Theme #3: More Than Just Macro “Wrecked” Retail in ’08, Recovery Will Not Depend
Solely on the Consumer 20
Theme #4: Will We Hit Trough Margins in 2009? 21
Peak to Trough Analysis 22
Theme #5: Promotions Intensified at the High End Cascading All the Way Down to the
Low End 24
Theme #6: Opportunity in the Middle? 25
Theme #7: Decelerating Inflation in Food/Staples 26