21 January 2009
Retail Industry '09 Outlook
Retail shakeout to drive leaders
ahead of recovery
Mike Baker, CFA
Research Analyst
(1) 617 217 6253
michael.baker@db.com
Bill Dreher Jr
Research Analyst
(1) 212 250 5427
bill.dreher@db.com
Dave Weiner
Research Analyst
(1) 212 250 5577
david.weiner@db.com
Lindsey Bell
Research Analyst
(1) 212 250 8343
lindsey.bell@db.com
Shane Higgins
Research Analyst
(1) 212 250 6620
shane.higgins@db.com
Adam Sindler
Research Analyst
(1) 617 217 6263
adam.sindler@db.com
Fundamental, Industry, Thematic, Thought Leading
Deutsche Bank Company Research’s Research Product Committee has deemed
this work F.I.T.T. for our clients seeking differentiated ideas. While we estimate
that most macro economic factors will likely worsen in 1H09, retail square footage
consolidation and strong balance sheet catalysts should help our top picks. As
such, our broadline and hardline retail teams have become incrementally positive
on select stocks benefiting from these themes. We upgrade BBY, LOW, and M to
Buy from Hold, and downgrade more defensive NDN and PETM to Hold from Buy.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
Best Buy (BBY.N),USD27.23 Buy
Family Dollar Stores (FDO.N),USD27.75 Buy
J.C. Penney Company (JCP.N),USD17.42 Buy
Kohl's (KSS.N),USD35.98 Buy
Lowe's Companies (LOW.N),USD19.87 Buy
Macy's, Inc. (M.N),USD8.73 Buy
Staples (SPLS.OQ),USD16.43 Buy
Companies featured
99 Cents Only Stores (NDN.N),USD9.04 Hold
AutoZone (AZO.N),USD128.98 Hold
Barnes & Noble (BKS.N),USD17.11 Hold
Bed Bath & Beyond (BBBY.OQ),USD25.27 Hold
Best Buy (BBY.N),USD27.23 Buy
Big 5 Sporting Goods (BGFV.OQ),USD5.96 Hold
BJ Services (BJS.N),USD10.39 Hold
Borders Group (BGP.N),USD0.51 Hold
Cost Plus (CPWM.OQ),USD0.87 Hold
Costco Wholesale (COST.OQ),USD47.22 Hold
CVS Caremark Corporation (CVS.N),USD26.19 Buy
Dick's Sporting Goods (DKS.N),USD11.36 Buy
Dillard's (DDS.N),USD3.79 Hold
Dollar Tree Inc. (DLTR.OQ),USD42.69 Hold
Family Dollar Stores (FDO.N),USD27.75 Buy
J.C. Penney Company (JCP.N),USD17.42 Buy
Kohl's (KSS.N),USD35.98 Buy
Lowe's Companies (LOW.N),USD19.87 Buy
Macy's, Inc. (M.N),USD8.73 Buy
Nordstrom (JWN.N),USD12.01 Hold
Office Depot (ODP.N),USD2.23 Hold
OfficeMax (OMX.N),USD6.10 Hold
O'Reilly Automotive Inc (ORLY.OQ),USD27.62 Buy
PetSmart, Inc. (PETM.OQ),USD17.49 Hold
Pier 1 Imports (PIR.N),USD0.41 Buy
RadioShack (RSH.N),USD11.51 Hold
Rite Aid Corporation (RAD.N),USD0.33 Hold
Saks Inc. (SKS.N),USD2.83 Hold
Sears Holdings Corp. (SHLD.OQ),USD43.49 Sell
Staples (SPLS.OQ),USD16.43 Buy
Target (TGT.N),USD32.55 Buy
Home Depot (HD.N),USD21.99 Hold
Tuesday Morning Corp. (TUES.OQ),USD1.30 Hold
Walgreen (WAG.N),USD25.94 Hold
Wal-Mart (WMT.N),USD50.56 Buy
Williams-Sonoma (WSM.N),USD6.85 Hold
Fundamental: SQFT. shakeout and Govt. stimulus help balance tough macro
We have identified drivers that may help select stocks, despite a weak consumer.
Primarily, ongoing store closures provide significant ‘up for grabs’ sales
opportunities to survivors. Also, overall expectations look more achievable,
incorporating a weak consumer. We expect deteriorating 1H fundamentals, with
some 2H recovery in-line with GDP.
Industry: Fundamental challenges abound
With assistance from DB Economics and Strategy teams, we estimate ‘09
consumer spending declines as follows: (a)wealth effect: -$175B, (b)tighter credit:
-$250B, (c)higher savings: -$300B, (d)higher unemployment: -$100B. However, gas
price declines help retailer costs and soften consumer negativity. We believe that
$665M in net consumer pullback (6.7% of PCE) is largely priced in our forecasts.
Thematic: Retail shakeout provides big opportunities for survivors
Based on our proprietary work, we estimate $9.6B in known, incremental FY09 ‘up
for grab’ sales, with potentially another $17.8B. We believe that the biggest EPS
beneficiaries in the foreseeable future include BBY, BBBY, SPLS, M, KSS, JCP, and
TGT, with even more possible as weaker players fall by the wayside. As this
theme plays out, look for multiple expansion, particularly as we exit the recession.
Thought leading: Proprietary work on retail shakeout available to clients
We analyzed the sales and EPS impact on several of our companies (share
gainers) from an estimated $9.6B in annualized sales from recently-announced
store closures (Known Up-for-Grabs). We also examined a universe of struggling
retailers (total sales ~$172B), to estimate the potential sales/EPS impact should
just a small percentage (~$17.8B) of these retailers close doors.
Actionable: Remain cautious overall, but upgrading some winners; risks
We stay broadly neutral on Retail, but store shakeout, strong balance sheets, and
‘early cycle’ themes support upgrade of BBY, LOW, and M to Buy. Downgrade
defensive NDN and PETM to Hold. Maintain Buy on CVS, DKS, FDO, JCP, KSS,
ORLY, PIR, TGT, and WMT. For the winners in particular, new PTs based on
firming 2010 EPS trends and multiple expansion, as the market anticipates a
recovery led by early cycle groups. Generally, new PTs incorporate DB’s 13.5x tgt.
multiple on ‘10 S&P 500 EPS and a 110% relative P/E. EPS changes are minor,
given recent revisions around holiday reports. The key risk for retail is that ’09
macro economic factors so overwhelm the consumer, that the 2H stabilization

Table of Contents
Executive summary ........................................................................... 3
Key themes for 2009........................................................................ 14
Summary of key 2009 retailer investment themes .................................................................14
First, the good news........................................................................ 16
Reason 1: Retail shakeout benefits the survivors ...................................................................16
Reason 2: 2009 estimates have been reduced significantly, with potential rate of change
improvement..........................................................................................................................25
Reason 3: Retail is an early cycle group..................................................................................31
Now, the bad news ......................................................................... 34
Reason 1: Balance of consumer impacts will be negative in 2009 .........................................34
Reason 2: Deflation likely to weigh against comps.................................................................38
Reason 3: The strong dollar hurts exporters ...........................................................................40
Relative valuations are below historical averages, but should
expand.............................................................................................. 41
Conclusion: Own the winners ........................................................ 43
Company commentaries: upgrades ............................................... 49
Best Buy.................................................................................................................................49
Lowe’s ...................................................................................................................................55
Macy’s ...................................................................................................................................60
Company commentaries: downgrades.......................................... 65
99 Cents Only Stores ..............................................................................................................65
PetSmart ................................................................................................................................67
Company commentaries: maintain Buy ratings............................ 70
Dick's Sporting Goods ............................................................................................................70
Family Dollar ...........................................................................................................................73
O’Reilly Auto Parts..................................................................................................................75
Staples ...................................................................................................................................78
Pier 1......................................................................................................................................82
Kohl’s Corp.............................................................................................................................83
J.C. Penney............................................................................................................................84
Target Corp. ............................................................................................................................85
Wal-Mart Stores Inc. ...............................................................................................................86
Company commentaries: ‘on the radar’ ........................................ 88
Bed Bath & Beyond.................................................................................................................88
Appendix A: Store closure details.................................................. 93