Specialty Retail & Department Stores Guide to Retail Softlines: January 2016 Edition

Transcription

1 INDUSTRY OVERVIEW Specialty Retail & Department Stores 125% 76% 75% BULL M O R G A N S T A N L E Y R E S E A R C H North America Retail, Specialty Retail, Department Stores, & Off- Price Kimberly Greenberger Kimberly.Greenberger@morganstanley.com Lauren Cassel Lauren.Cassel@morganstanley.com Gregory Baglione Gregory.Baglione@morganstanley.com % current price -25% -75% 31% 21% 14% 14% 4% -3% -9% -17% -34% BASE PT BEAR -125% KORS BURL LULU LB ROST AEO JWN KSS JCP ANF Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. Sources: Thomson Reuters, Bloomberg, Morgan Stanley Research

2 Table of Contents 1. Introduction 2. Key Debates 3. Macroeconomic View 4. Industry Insights 5. Current Comp and Inventory Trends 6. Valuation 7. Stock Price Performance History 8. Upcoming Catalysts 9. Company Overviews 10. Disclosures

3 RISK-REWARD ESSENTIALS Key Investor Debates Given -18% 2015 underperformance vs. the S&P, which stocks in the group have bottomed/are poised for 2016 outperformance? How much will rising wage pressures impact retailers in 2016? When will the promotional environment abate? M O R G A N S T A N L E Y R E S E A R C H Consensus view: With Specialty Retail and Dept Store stocks ending -23% and -18% on average, respectively, in 2015, there could be a 2016 reversion to the mean trade for select stocks. Our view: Despite -18% 2015 YTD stock-price underperformance, Softline FY2 P/E multiples only derated 1.0x on average in 2015: This leaves the 17x sector P/E multiple ~10% above the 10-year 15-16x average, suggesting further multiple contraction risk in Retail stocks also tend to underperform the S&P late in the economic cycle as the market anticipates eroding retailer profitability during the next recession. Should fears of a recession become more prominent in 2016 (baked into MS Economists' 2016 Bear case), we likely see further derating. Thus, very few of 2015 s underperforming stocks represent good value in our view. Where we could be wrong: Easy comparisons, low gas prices, wage inflation, and potentially better 3Q/4Q weather could help boost overall consumer spending. Consensus view: Rising wages will have a minimal impact on retailers P&Ls as companies should be able to fully offset wage headwinds with further cost cuts or fewer labor hours. Our view: We believe the market underappreciates the magnitude of 2016 wage pressure headwinds. Recent voluntary increases from large retailers suggest a $10 de facto minimum wage could materialize without Federal legislation. We estimate a move to $10/hour would impact EBIT margins by ~70 bps and reduce 2016 EPS estimates by ~9% on average (ex-jcp). Where we could be wrong: Retailers may not elect to raise wages to $10 Our estimates represent the theoretical impact to margins and EPS if all retailers were forced to raise their minimum wage to $10/hour at the beginning of 2016 and without any cost savings to offset the pressure. Consensus view: Overtime, retailers will be able to wean customers off deep promotions and return to historical double-digit operating margins. Our view: Since 2001, the average selling price of apparel has tumbled -12% to $20.45, only 2.4% above 2009's low. We attribute the reduction in average selling price to 1) consumer behavior shifts inspired by the Great Recession, 2) off-price retailers' store expansions, 3) broader availability of low priced fast fashion apparel and 4) heightened promotions brought about by retailers reacting to weak top-line growth. We do not foresee deflationary pressures receding and are skeptical apparel retailers will be able to return to 10%+ operating margins again. Where we could be wrong: Retailers may stand together in slowing the depth and breadth of promotions offered, forcing shoppers to accept higher prices over time; massive store closures and cost saving initiatives could boost operating margins. 3

4 Key Stock Call Summary Overweight Lululemon Athletica (LULU): Our analysis suggests LULU could deliver an EBIT margin inflection in 2016, supporting a return to 20% EPS growth. With the stock down 30% over the past 3 years, double-digit EPS growth in 2016 should allow LULU to return to outperformance. Ranked by conviction level (most to least) Burlington Coat Factory (BURL): Burlington is a combined turnaround and debt paydown story. Its transformation is still in the middle innings, but has already shown strong results. We think BURL can grow EPS mid-teens moving forward. Ross Stores (ROST): ROST is a secular winner in the battle between moderate Dept Stores and Off-Price Retail. Consumers increasingly prefer the Off-Price better brands at lower prices value proposition over moderate department stores private label merchandise despite the easier shopping experience. L Brands (LB): We think the Street underestimates the company s int l growth and EBIT margin expansion opportunity. We find current 23x FY16e EPS valuation appropriate for two brands (Victoria s Secret and Bath & Body Works) with no real peers and genuine global growth prospects. Michael Kors (KORS): We believe KORS' stock recovery likely requires two steps in order to convince the market current consensus estimates are achievable. We think 2Q comp acceleration and guidance for 3Q comp stabilization is the first step in this process and should help the stock rerate to 12-13x as the market realizes today's 10x P/E is not the right multiple. Underweight Ranked by conviction level (most to least) Abercrombie & Fitch (ANF): We believe the profit profile of ANF's business is structurally impaired. The competitive environment has changed and the apparel industry is experiencing structural apparel price deflation, in our view. The next few years should prove whether ANF is a rebounding global brand that deserves a high-teens multiple or a retailer in structural decline. J.C. Penney (JCP): We are encouraged by recent sales momentum and tight SG&A control, but see a volatile road ahead to creating long-term Equity value. Kohl s (KSS): Its merchandise offering (50% private label) has lost resonance with consumers over the past 5 years leaving KSS in a weakened competitive position, particularly relative to the more compelling value of off-price retailers ROST, TJX & BURL. We see ongoing sales and earnings risk. Nordstrom (JWN): JWN remains a best-in-class operator, but we see secular headwinds slowly eroding margins and limiting long-term earnings growth. We now model a 5.3% e EPS CAGR (vs. prior 8.1%), which does not support the stock's 14.0x P/E, in our view. American Eagle Outfitters (AEO): After four reasonably good quarters, we think upside from here appears less certain. Therefore, we think the probability of downside relative to our Base case is considerable and view AEO as a high-risk, volatile stock. 4

5 Coverage Universe Comp Sheet MS Price Mkt. Value Price Return YTD EPS P/E '14-'17 PEG FCF Yield EV/EBITDA Div idend Ticker Rating 1/13/2016 ($ MM) Target to PT Perf 2014A 2015E 2016E 2014A 2015E 2016E Grow th 2015E 2015E 2016E 2015E 2016E Yield (FY1) AEO U ,724 $15 7% -10% $0.63 $1.09 $ x 12.9x 12.7x % 9.9% 4.9x 4.7x 3.6% ANF U ,716 $17-33% -5% (8.6) NM 9.5% 9.8% % BURL O ,574 $61 30% 10% % 5.8% NA CHS E ,423 $12 18% -4% % 10.0% % COH E ,747 $27-14% -4% (16.6) NM 5.1% 4.0% % GPS E ,035 $28 25% -9% (3.3) NM 8.8% 8.5% % JCP U ,252 $6-18% 11% (2.16) (1.20) (0.30) NM NM NM NM NM NA NA NA NA NA JWN U ,450 $45-2% -8% (0.7) NM 25.0% 5.9% % KORS O ,655 $63 74% -10% % 9.4% NA KSS U ,486 $45-10% 5% % 10.5% % LB O ,697 $107 16% -4% % 2.9% % LULU O ,942 $68 21% 7% % 2.6% NA M E ,148 $40 4% 10% (4.7) NM 8.2% 13.0% % ROST O ,137 $60 15% -3% % 4.9% % TIF E ,551 $91 36% -13% % 5.7% % TJX E ,318 $76 12% -5% % 4.9% % URBN E ,466 $31 47% -8% % 8.1% NA (b) Specialty Retail Avg. -6% $2.36 $2.24 $ x 17.3x 15.9x x 7.2% 7.1% % Specialty Retail Med. (b) -7% % 8.3% % Off-Price Retailers Avg. 1% % 5.2% % Off-Price Retailers Med. -3% % 4.9% % Total Softlines Retail Avg. -4% % 6.7% % Total Softlines Retail Med. -5% % 5.8% % Department Store Av g. 5% (1.7) % 9.8% % Department Store Med. 8% (0.7) % 10.5% % Note: All Estimates are Calendarized (a) JCP EPS reflects EPS for consensus adding back pension expense and one-time items. (b) Specialty Retail excludes Off-Pricers and Dept Stores. Sources and note: Thomson Reuters, Morgan Stanley Research. Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at 5

6 Coverage Universe Comp Sheet (In Order of Preference) MS Price Mkt. Value Price Return YTD EPS P/E '14-'17 PEG FCF Yield EV/EBITDA Dividend Ticker Rating 1/14/2016 ($ MM) Target to PT Perf 2014A 2015E 2016E 2014A 2015E 2016E Growth 2015E 2015E 2016E 2015E 2016E Yield (FY1) LULU O ,942 $68 21% 7% $1.87 $1.82 $ x 30.8x 25.9x % 2.6% NA BURL O ,574 $61 30% 10% % 5.8% NA ROST O ,137 $60 15% -3% % 4.9% % LB O ,697 $107 16% -4% % 2.9% % KORS O ,655 $63 74% -10% % 9.4% NA TIF E ,551 $91 36% -13% % 5.7% % TJX E ,318 $76 12% -5% % 4.9% % URBN E ,466 $31 47% -8% % 8.1% NA M E ,148 $40 4% 10% (4.7) NM 8.2% 13.0% % CHS E ,423 $12 18% -4% % 10.0% % GPS E ,035 $28 25% -9% (3.3) NM 8.8% 8.5% % COH E ,747 $27-14% -4% (16.6) NM 5.1% 4.0% % AEO U ,724 $15 7% -10% % 9.9% % JWN U ,450 $45-2% -8% (0.7) NM 25.0% 5.9% % KSS U ,486 $45-10% 5% % 10.5% % JCP U ,252 $6-18% 11% (2.16) (1.20) (0.30) NM NM NM NM NM NA NA NA NA NA ANF U ,716 $17-33% -5% (8.6) NM 9.5% 9.8% % Specialty Retail Avg. (b) -6% $2.48 $2.40 $ x 16.8x 15.4x x 9.2% 7.3% % Specialty Retail Med. (b) -8% % 8.3% % Off-Price Retailers Avg. 1% % 5.2% % Off-Price Retailers Med. -3% % 4.9% % Total Softlines Retail Avg. -5% % 6.8% % Total Softlines Retail Med. -5% % 5.9% % Department Store Avg. 6% (6.9) % 9.2% % Department Store Med. 8% (4.7) % 10.5% % Note: All Estimates are Calendarized (a) JCP EPS reflects EPS for consensus adding back pension expense and one-time items. (b) Specialty Retail excludes Off-Pricers and Dept Stores. Sources and note: Thomson Reuters, Morgan Stanley Research. Please note that all important disclosures including personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at 6

7 Retail stocks significantly outperformed the S&P the first several years postrecession, but then began to lag the market in 2013, 2014 & 2015 M O R G A N S T A N L E Y R E S E A R C H 200% YoY % Retail YoY % S&P 150% 100% 50% 0% -50% -100% Sources: Company Data, Morgan Stanley Research 7

8 On a cumulative basis, Softline stocks have still outperformed the S&P by 36% since 2005 (Softlines +108% over the past 10.5 years vs. S&P +71%). However, since Jan , Softlines are now underperforming by 9% (Softlines +36%, S&P +45%) suggesting the lion s share of Softline outperformance was during 2005/ Softlines S&P500 Sources: Company Data, Morgan Stanley Research 8

9 The Economic Cycle Drives Sector Relative Performance: Late Contraction and Early Expansion Favors Consumer Cyclicals M O R G A N S T A N L E Y R E S E A R C H? Where are we now in the economic cycle? Sources: Company Data, Morgan Stanley Research 9

10 Valuations are mixed relative to historical levels, far different from this time last year when all stocks except KORS were at or above their 5-year average. Six stocks are trading above their 5-year P/E multiple averages while 10 are trading at or below. FY1 EV/EBITDA multiples contracted -1.1x on average in 2015, with KORS, GPS, and M posting the largest declines. 5Y P/E Multiple Ranges (High / Median / Low) and Current (Diamond, Labels) x 25 22x 22x 19x 19x 20 17x 15x 15x 15 12x 13x 13x 11x 10x 11x 9x 8x ANF AEO BURL CHS COH GPS JWN KSS LB LULU KORS M ROST TIF TJX URBN Ticker 1/1/2015 Current Change KORS 8.9x 4.8x -4.1x GPS 7.0x 4.0x -3.0x CHS 7.2x 5.1x -2.1x M 6.8x 4.7x -2.1x JWN 8.5x 6.5x -2.0x URBN 6.7x 5.1x -1.6x TIF 11.6x 10.1x -1.5x KSS 6.3x 5.1x -1.2x LULU 16.6x 15.6x -1.0x BURL 10.8x 10.0x -0.8x AEO 6.1x 5.5x -0.6x COH 9.2x 8.8x -0.4x ANF 3.4x 4.0x 0.6x LB 11.4x 12.1x 0.7x ROST 10.6x 11.5x 0.9x TJX 10.1x 11.0x 0.9x Average 8.8x 7.7x -1.1x Sources: Company Data, Morgan Stanley Research 10

11 Key Debates 11

12 Given -18% 2015 underperformance vs. the S&P, which stocks in the group have bottomed/are poised for 2016 outperformance? Market s view With Specialty Retail and Department Store stocks ending % and -18% on average, respectively, in 2015, there could be a 2016 reversion to the mean trade for select stocks. Our 2016 EPS estimates are -2.5% below consensus, on average Our view Despite -18% 2015 YTD stock-price underperformance, Softline FY2 P/E multiples only derated 1.0x on average in This leaves the 17x sector P/E multiple ~10% above the 10-year 15-16x average, suggesting further multiple contraction risk in Retail stocks also tend to underperform the S&P late in the economic cycle as the market anticipates eroding retailer profitability during the next recession. Should fears of a recession become more prominent in 2016 (baked into MS Economists' 2016 Bear case), we likely see further derating. Thus, very few of 2015 s underperforming stocks represent good value in our view. Source: Morgan Stanley Research Valuations are mixed relative to historical levels, far different from this time last year when all stocks except KORS were at or above their 5-year average Where we could be wrong Easy comparisons, low gas prices, wage inflation, and potentially better 3Q/4Q weather could help boost overall consumer spending. Store closures and cost saving initiatives could temporarily boost earnings. Source: Thomson Reuters, Morgan Stanley Research 12

13 How much will rising wage pressures impact retailers in 2016? Market s view Rising wages will have a minimal impact on retailers P&Ls as companies should be able to fully offset wage headwinds with further cost cuts or fewer labor hours. Our view We estimate a hike to $10 would impact EBIT margins by ~70 bps on avg... We believe the market underappreciates the magnitude of 2016 wage pressure headwinds. We estimate a move to $10/hour would impact EBIT margins by ~70 bps and reduce 2016 EPS estimates by ~9% on average (ex-jcp). Given the industry has struggled to grow earnings over the past three years, most of the companies we cover have already implemented the most significant rounds of cost cuts since the '08/'09 recession. Therefore, in a Bear case, retailers may not be able to counter any wage pressures with offsets or further costs reductions. Thus, retailers with flat or negative same stores sales are more at risk given their inability to drive four-wall leverage. Where we could be wrong Retailers may not elect to raise wages to $10. Our estimates represent the theoretical impact to margins and EPS if all retailers were forced to raise their minimum wage to $10/hour at the beginning of 2016 and without any cost savings to offset the pressure. Source: Company Data, Morgan Stanley Research...while ANF, KSS, and ARO would likely see the largest EPS reductions. Source: Company Data, Morgan Stanley Research 13

14 When will the promotional environment abate? Market s view Overtime, retailers will be able to wean customers off deep promotions and return to historical double-digit operating margins. Our view Since 2001, the average selling price of apparel has tumbled -12% to $20.45, only 2.4% above 2009's low. We attribute the reduction in average selling price to 1) consumer behavior shifts inspired by the Great Recession, 2) off-price retailers' store expansions, 3) broader availability of low priced fast fashion apparel and 4) heightened promotions brought about by retailers reacting to weak top-line growth. Given these weak industry fundamentals, market share capture is critical to apparel retailers. We expect off pricers (TJX, ROST, BURL) and low-cost fashion players (Primark, H&M, Forever 21) to continue to take share from the mid-tier (AEO, ANF, GPS, Dept stores).we do not foresee deflationary pressures receding and are skeptical apparel retailers will be able to return to 10%+ operating margins again. Where we could be wrong Retailers may stand together in slowing the depth and breadth of promotions offered, forcing shoppers to accept higher prices over time; massive store closures and cost saving initiatives could boost operating margins. In 2001, we saw the widest spread between apparel sales and units sold, arriving at the highest average selling price of apparel over the past 15 years of $23.20 Source: Euromonitor, Morgan Stanley Research Apparel prices per unit have shrunk 12% since 2001 from $23.20 to $20.45 in 2014, only 2.5% above 2009's low Source: Euromonitor, Morgan Stanley Research 14

15 Macro View 15

16 Key Drivers Unemployment, Hourly Earnings, and Credit Unemployment and Average Hourly Earnings Unemployment rate falling, but hourly earnings growth weak NFIB Small Business Hiring Plans Index Continued momentum, now slightly above the 30-year average 25% Net Percent of Businesses 20% 15% 10% 5% 0% -5% -10% NFIB Small Business Hiring Plans Index -15% Credit Availability Sr. Loan Officer Survey Recent trends show slight incremental loosening Percent Net percentage of domestic respondents tightening standards on consumer loans ex credit cards Banks' willingness to lend to consumers Source: Bloomberg, US Census Bureau, U.S. Gov, NFIB, Haver Credit Revolving and Non-revolving Credit Trends Growth still low relative to history YoY Change 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Nonrevolving Consumer Credit Outstanding (EOP, SA, Bil.$) Revolving Consumer Credit Outstanding (EOP, SA, Bil.$) Nonrevolving Consumer Credit Outstanding (EOP, SA, Bil.$) 16

17 More Key Drivers Construction and Food & Fuel U.S. Architecture Billings Index SA Modest positive. Leads non-resi const. by 9-12 mos (50 = neutral). National Assoc. of Home Builders Market Index Sentiment has recovered to moderately positive territory (50 = neutral) Food & Fuel Change as a % of PCE Looking like a secular headwind Percent of Total 16% Food and fuel as a % of Personal Consumption Expenditures (PCE) Gas Prices Still ~30% lower y/y despite recent rebound 60% % change (yoy, left) Retail Gasoline Prices (cents/gallon, right) $ % 14% 13% 12% 11% 10% 9% 40% 20% 0% -20% -40% -60% $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 Source: Bloomberg, AAA, US Census Bureau, U.S. Gov, AIA,NAHB 17

18 Key Macro Drivers Housing Prices New and Existing Home Sales New and existing home sales appear to be moderating Months of Supply, Visible Inventory Months of supply at a low; situation much improved Shadow Inventory Significant overhang remains, but falling. Case-Schiller Y/Y House Price Changes Prices still rising on a y/y basis but at a slower rate Source: Bloomberg, NAR, Morgan Stanley Research 18

19 Consumer Health - Balance Sheets Improving, But Savings Rate Still Low Savings Rate Ticked up slightly since 2013 Household Net Worth Significantly improved since the crisis Consumer Sentiment Starting to advance after being range-bound for 3+ years Debt Service Obligations Lowest since data series began (1980) Source: Thomson Reuters, Morgan Stanley Research 19

20 Financial Health - Sovereign Risks Remain, but Receding MS Financial Conditions Index Conditions have improved but softened recently 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 10-Year U.S. Treasury Yields Treasury yields still near record lows % MS Financial Conditions Index (inverted) US Personal Consumption Expenditures Durable Goods Chained 2005 Dollars -15.0% 0 Italian Sovereign Bonds Curve Yields much improved y/y VIX Recent spike following an extended period of historical lows Yield (%) 9/10/2015 9/10/2013 9/10/ Source: Bloomberg, Thomson Reuters, Morgan Stanley Research 20

21 Financial Health: Other categories still crowding out apparel U.S. PCE by Category Medical expenses are crowding out other categories, including clothing 100% Notes 90% 80% 70% 44% 44% 42% 45% 43% 45% 46% 45% 44% 44% 45% 45% Rising Medical Costs Health care costs have grown from 8% of PCE in 1972 to 17% in % 50% 40% 30% 20% 10% 0% 5% 4% 5% 3% 3% 3% 3% 3% 2% 4% 4% 4% 3% 3% 3% 3% 3% 4% 3% 3% 3% 3% 3% 3% 6% 5% 7% 6% 5% 4% 4% 3% 3% 3% 3% 3% 3% 3% 2% 2% 3% 4% 4% 4% 4% 4% 4% 4% 9% 13% 10% 8% 8% 8% 8% 8% 7% 7% 15% 14% 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% 17% 17% 8% 9% 11% 12% 15% 14% 15% 15% 17% 16% 17% 17% Medical Care Housing & Uts. Food Recreation Softgoods Transportation Gas Other Source: Bloomberg, Morgan Stanley Research Source: Haver, Morgan Stanley Research 21

22 Apparel PCE - Real Apparel Sales Growth Still Lagging Historical Averages Real PCE Slowed slightly in 2015 Real PCE Clothing and Shoes Slight acceleration after 2+ years of below-average growth Retail Sales: Clothing YoY Chg. Further deceleration in 2015 Apparel CPI Sharply decelerating growth, back in negative territory Source: U.S. Government statistics, BEA, BLS, Morgan Stanley Research 22

23 Other Industry Macro Trends Y/Y sales by category US Retail Sales Rolling 3 month YoY Percent Change by Category Clothing & Accessory underperforming the average. Auto parts accelerating. 15% 10% 5% 0% -5% -10% -15% Retail Sales Ex Autos & Gas Consumer Electronics Home Improvement Clothing & Accessory Food Discounters Food Services & Drinking Places Auto Parts Source: Haver, Bloomberg, Morgan Stanley 23

24 Restaurants and Home Improvement Continue to Take a Disproportionate Share of Spending Breakout of retail sales (ex autos/gas) over the past year Source: Haver, Morgan Stanley 24

25 Cotton Prices Lower Y/Y Cotton Prices - Historical Down 70% off peak and 29% lower y/y. Cents per Pound Cotton Prices - Futures Curve has flattened, predicting prices remain relatively stable Cents per pound Cotton, No. 2 (NYB) 5/4/2015 USd/pound Source: Haver, Bloomberg, Morgan Stanley 25

26 Cotton Morgan Stanley Commodities Team Forecasts $0.65 cotton Morgan Stanley s commodities team sees 2016/17 price of $0.6509/lb. World Supply vs. Demand by End Use (World supply and demand, mln 480-lb bales) Investment thesis Global cotton prices remain beholden to Chinese reserve policy decisions. Prices are likely to remain near current levels until China demonstrates the commitment to meaningfully reduce its stockpiles. Supply The elimination of the long-term drought from the Southern Plains has lifted US 15/16 production prospects and should limit the magnitude of any stock draws, despite the steepest decline in plantings in 8 years. The sharpest drop in global production in 7 years should trim record global stockpiles in 15/16. However, stocks will remain well above normal, capping price upside. Demand Cotton demand faces secular challenges in the US and China, as synthetic substitutes remain cheap, especially after the steep drop in crude oil prices in Going forward, global cotton demand growth should be driven more by countries with fast-growing textile industries, such as India, Vietnam, and Bangladesh. Global Stocks-to-Use is Up (World stocks-to-use, %) Source: USDA, Morgan Stanley Research 26

27 Other Industry Macro Trends China Manufacturing Costs YoY Change in China Labor Costs Manufacturing Sector Rising consistently, although decelerated in 2013 YoY Chg. 20% 15% 10% 5% 0% China Average Wage of Staff and Workers - Manufacturing Total and Y/Y Change in U.S. Apparel Imports from China Falling 3 of the last 4 years, accounts for 39% of all U.S. imports Source: Bloomberg, OTEXA Y/Y chg. (bps) Y/Y chg. (bps) China as a % of total U.S. Imports (in Dollars) 50% 40% 30% 20% 10% 0% China as a % of total U.S. imports 27

28 Other Industry Macro Trends China Manufacturing Costs Y/Y Change in Imports from China by Company Limited data mirrors overall trends Percent of product sourced from China 100% 80% 60% 40% 20% 0% ANN 25% 27% 32% 28% 34% 38% 47% 50% 50% 48% 43% 40% 38% CHS 37% 50% 50% 54% 55% 60% 58% 66% 63% 61% 63% 55% 55% GPS 14% 16% 18% 20% 20% 22% 23% 27% 27% 26% 26% 28% 27% LULU 60% 65% 75% 60% 49% 34% 23% 11% PLCE 40% 50% 54% 41% 40% 40% 39% 38% 36% 34% Source: Company Data, Morgan Stanley. Notes: Data for LULU before 2007 and PLCE before 2005 not available. Data for other companies in our coverage universe not published in SEC filings. 28

29 Other Industry Macro Trends China Losing Share of US Apparel Imports El Salvador Cambodia 2.3% 3.0% Honduras, 3.1% India, 4.2% Pakistan, 1.8% Honduras, 3.1% Cambodia, 3.2% Mexico, 4.6% El Salvador, 2.3% Sri Lanka, 2.1% Mexico, 4.5% India, 4.0% Bangladesh, 6.0% China 36.4% Bangladesh, 6.2% China 37.3% Indonesia, 6.0% Indonesia, 6.2% Vietnam, 11.3% Rest of World 21% Vietnam, 10.2% Rest of World, 20.7% Apparel Imports by Country (by $ Volume) YTD October 2015 Apparel Imports by Country (by $ Volume) 2013 Source: OTEXA, Morgan Stanley China Indonesia Bangladesh Cambodia Pakistan Mexico India Vietnam (1.50) (1.00) (0.50) Major US Apparel Import Share Shifts by Country/Region YTD October 2015 vs

30 Industry Insights 30

31 Retail Atlas Where US Retail is Located 31

32 Retail Atlas - Retailers Store Base by Region / State Company Name Ticker Industry Midwest Northeast Northwest South Central Southeast Southwest HI, PR, AK Canada Other Int'l California Florida Texas NY/NJ/CT Cold Climate Total Locations Abercrombie & Fitch Co ANF Specialty 14% 19% 3% 9% 20% 16% 1% 2% 15% 12% 7% 8% 11% 35% 969 Aeropostale, Inc ARO Specialty 18% 18% 3% 12% 27% 13% 1% 7% 0% 10% 8% 11% 12% 44% 860 American Eagle Outfitters AEO Specialty 20% 20% 4% 10% 24% 10% 1% 10% 1% 5% 5% 6% 9% 49% 1056 Ann Inc ANN Specialty 18% 23% 3% 10% 29% 15% 1% 1% 0% 9% 7% 7% 13% 43% 1030 Ascena Retail Group, Inc* ASNA Specialty 32% 17% 5% 12% 21% 11% 0% 3% 0% 4% 2% 5% 6% 52% 3896 Body Central Corp* BODY Specialty 23% 8% 0% 20% 48% 1% 0% 0% 0% 0% 11% 13% 1% 31% 294 Buckle* BKE Specialty 37% 4% 7% 17% 21% 14% 0% 0% 0% 4% 5% 11% 1% 41% 460 Burlington Stores Inc BURL Specialty 22% 22% 3% 12% 24% 16% 0% 0% 0% 11% 7% 9% 12% 44% 542 Cache, Inc* CACH Specialty 9% 17% 2% 15% 35% 20% 3% 0% 0% 14% 20% 12% 13% 25% 151 Cato Corporation* CATO Specialty 12% 1% 0% 27% 59% 2% 0% 0% 0% 0% 5% 13% 0% 12% 1346 Chico's FAS, Inc CHS Specialty 19% 18% 4% 12% 30% 16% 0% 1% 0% 10% 9% 8% 9% 37% 1547 Children's Place PLCE Specialty 18% 20% 3% 12% 24% 15% 1% 7% 0% 17% 7% 16% 20% 45% 1097 Christopher & Banks* CBK Specialty 50% 14% 8% 5% 14% 9% 0% 0% 0% 1% 1% 2% 4% 64% 518 Coach, Inc COH Specialty 10% 12% 3% 7% 14% 12% 2% 4% 35% 7% 4% 4% 6% 27% 1014 Express, Inc EXPR Specialty 21% 21% 2% 11% 24% 17% 1% 3% 0% 12% 7% 8% 12% 45% 641 Fossil, Inc* FOSL Specialty 7% 6% 1% 6% 10% 8% 1% 9% 52% 5% 3% 5% 4% 22% 543 Francesca's Holdings* FRAN Specialty 23% 18% 4% 13% 28% 15% 0% 0% 0% 9% 7% 9% 9% 41% 539 Gap Inc GPS Specialty 15% 18% 3% 8% 18% 14% 1% 7% 15% 10% 5% 6% 11% 40% 3280 Hennes & Mauritz (H&M)* HMB Specialty 2% 3% 0% 0% 2% 3% 0% 2% 87% 2% 0% 0% 2% 7% 3511 Kate Spade & Co.* KATE Specialty 9% 16% 2% 6% 21% 18% 3% 3% 22% 10% 4% 4% 7% 28% 248 L Brands LB Specialty 22% 16% 3% 10% 24% 15% 0% 9% 0% 9% 6% 7% 8% 47% 2969 Lululemon Athletica LULU Specialty 13% 16% 4% 7% 16% 19% 1% 15% 9% 17% 6% 7% 12% 44% 302 Men's Wearhouse* MW Specialty 20% 19% 2% 10% 28% 13% 0% 7% 0% 8% 6% 7% 10% 47% 1758 Michael Kors Holdings KORS Specialty 7% 14% 2% 8% 17% 15% 2% 7% 28% 10% 6% 6% 11% 28% 405 New York & Company* NWY Specialty 18% 26% 0% 12% 31% 13% 0% 0% 0% 9% 6% 9% 16% 44% 519 Ross Stores, Inc ROST Specialty 6% 4% 7% 17% 29% 36% 1% 0% 0% 28% 14% 16% 1% 10% 1210 Rue21* RUE Specialty 24% 9% 5% 19% 32% 12% 0% 0% 0% 4% 4% 11% 4% 32% 950 Signet Jewelers Ltd.* SIG Specialty 17% 17% 3% 9% 24% 10% 1% 5% 14% 5% 7% 7% 8% 39% 3579 Talbots, Inc* TLB Specialty 16% 26% 1% 11% 35% 8% 0% 3% 0% 5% 7% 7% 11% 45% 511 Tiffany & Co TIF Specialty 6% 11% 2% 4% 9% 14% 5% 6% 45% 10% 6% 3% 7% 23% 195 TJX Companies TJX Specialty 15% 21% 2% 7% 20% 13% 1% 7% 13% 10% 7% 5% 11% 43% 3222 Urban Outfitters, Inc URBN Specialty 12% 21% 3% 7% 19% 23% 0% 6% 9% 17% 4% 6% 13% 39% 553 Vera Bradley* VRA Specialty 20% 24% 3% 11% 33% 8% 1% 0% 0% 4% 7% 7% 11% 44% 125 Wet Seal* WTSLA Specialty 17% 21% 5% 13% 22% 21% 2% 0% 0% 15% 9% 11% 10% 38% 223 Zara (Inditex)* ITX Specialty 0% 0% 0% 0% 0% 0% 0% 1% 99% 0% 0% 0% 0% 1% 6683 Zumiez Inc* ZUMZ Specialty 15% 17% 8% 11% 14% 24% 1% 6% 3% 14% 4% 8% 10% 38% 603 Average Specialty 17% 15% 3% 11% 24% 14% 1% 4% 12% 9% 6% 8% 9% 36% 1315 * Not currently covered by Morgan Stanley. Source: Company data, Morgan Stanley Research. Store data updated as of FY14 end. 32

33 Retailers Sales: United States and International 2014 % Sales % Sales Detail Other Other Other Sector Retailer Ticker Revs($M) US Int'l Canada Europe UK Germany Italy Spain France Europe Asia Japan China Korea Asia Int'l Specialty Abercrombie & Fitch Co ANF $3,744 64% 36% 4% 26% 7% 6% 3% 3% 3% 4% 4% 1% 2% 1% <1% 2% Specialty Aeropostale, Inc ARO $1,839 91% 9% 7% % Specialty American Eagle Outfitters AEO $3,283 88% 12% 10% <1% <1% <1% - <1% - - 2% Specialty Ann Inc ANN $2,534 99% 1% 1% <1% Specialty Ascena Retail Group, Inc* ASNA $4,791 99% 1% 1% <1% Specialty Bebe Stores, Inc* BEBE $425 90% 10% 2% % Specialty Body Central Corp* BODY $ % Specialty Buckle* BKE $1, % Specialty Burlington Stores Inc BURL $4, % Specialty Cache, Inc* CACH $ % Specialty Cato Corporation* CATO $ % Specialty Chico's FAS, Inc CHS $2,675 99% 1% <1% <1% Specialty Children's Place PLCE $1,766 87% 13% 13% Specialty Christopher & Banks* CBK $ % Specialty Coach, Inc COH $4,828 64% 36% 4% 1% % 14% 11% - 8% - Specialty Express, Inc EXPR $2,219 98% 2% 2% Specialty Fossil, Inc* FOSL $3,510 45% 55% NA 34% % % Specialty Francesca's Holdings* FRAN $ % Specialty Gap Inc GPS $16,435 77% 23% 7% 6% % % Specialty Hennes & Mauritz (H&M)* HMB $17,752 11% 89% 2% 75% 7% 19% 4% 4% 7% 34% 10% 2% 5% 1% 1% 2% Specialty Kate Spade KATE $1,139 79% 21% Specialty L Brands LB $11,454 93% 7% 5% 2% 2% Specialty Lululemon Athletica LULU $1,591 70% 30% 24% % Specialty Men's Wearhouse* MW $2,473 85% 15% 8% 7% Specialty Michael Kors Holdings KORS $3,238 73% 27% 7% 19% 10% 3% 1% 1% 1% 3% 1% 1% Specialty New York & Company* NWY $ % Specialty Ross Stores, Inc ROST $11, % Specialty Rue21* Private NA 100% Specialty Signet Jew elers Ltd.* SIG $5,736 81% 19% 5% 14% 13% % Specialty Talbots, Inc* Private NA 97% 3% 3% Specialty Tiffany & Co TIF $4,250 42% 58% 3% 12% 5% 2% 2% <1% 1% 2% 37% 13% 13% NA 11% 6% Specialty TJX Companies TJX $29,078 76% 24% 10% 14% 10% 2% % Specialty Urban Outfitters, Inc URBN $3,087 86% 14% 5% 9% 6% 1% - <1% <1% 1% Specialty Vera Bradley* VRA $ % Specialty Wet Seal* WTSLQ $ % Specialty Zara (Inditex)* ITX $22,980 10% 90% 4% 65% NA NA NA 19% NA NA 21% NA NA NA NA NA Specialty Zumiez Inc* ZUMZ $812 87% 13% 9% 4% - 2% % Note: International sales breakdowns by geography are MS estimates where not provided by the Company. * Company not covered by Morgan Stanley. Source: Company data, Morgan Stanley Research. pp p 33

34 US Retailers ecommerce Sales as a Percent of Total Revenue Online Sales Retailer Ticker 2014 Revs($M) Specialty Abercrombie & Fitch Co. ANF $3,744 22% 19% Aeropostale, Inc. ARO $1,839 10% 10% American Eagle Outfitters AEO $2,686 18% 16% Ann Inc. ANN $2,533 17% 15% Ascena Retail Group, Inc.* ASNA $4,791 8% 8% Body Central Corp.* BODY $284 7% 10% Buckle* BKE $1,153 8% 8% Burlington Stores Inc. BURL $4,815 1% 1% Cache, Inc.* CACH $217 10% 10% Cato Corporation* CATO $978 <1% <1% Chico's FAS, Inc. CHS $2,675 20% 17% Children's Place PLCE $1,761 16% 14% Christopher & Banks* CBK $436 NA NA Coach, Inc.(2) COH $4,828 8% 6% Express, Inc. EXPR $2,165 16% 15% Fossil, Inc.* FOSL $3,510 NA NA Francesca's Holdings* FRAN $378 4% 3% Gap Inc. GPS $16,435 15% 14% Hennes & Mauritz (H&M) HMB $17,752 NA NA Kate Spade* KATE $1,139 NA NA L Brands LB $11,454 16% 16% Lululemon Athletica LULU $1,797 18% 17% Men's Wearhouse* MW $3,253 10% 10% Michael Kors Holdings(2) KORS $4,377 NA NA New York & Company* NWY $939 NA NA Ross Stores, Inc. ROST $11,042 0% 0% Signet Jew elers Ltd* SIG $5,736 5% 4% Talbots, Inc.* TLB NA NA NA Tiffany & Co. TIF $4,250 5% 5% TJX Companies TJX $29,078 1% <1% Urban Outfitters, Inc. URBN $3,323 27% 26% Vera Bradley* VRA $509 NA NA Wet Seal* WTSLQ $530 NA 6% Zara (Inditex) ITX $19,780 NA NA Zumiez Inc.* ZUMZ $812 13% 12% Online Sales Retailer Ticker 2014 Revs($M) Branded Apparel Columbia Sportsw ear Co COLM 2,101 2% 2% Decker's Outdoor Corp DECK 1,557 15% 14% Finish Line FINL $1,670 14% 14% Foot Locker FL $7,151 12% 11% Nike NKE $27,799 3% 2% Philips van Heusen PVH $8,241 2% 2% Ralph Lauren RL $7,405 7% 6% Under Armour UA $3,084 9% 9% VFC Corp VFC $12,282 3% 2% Brow n Shoe Co BWS 2,572 2% 1% DSW Inc DSW 2,496 3% 3% Express EXPR 2,165 3% 3% Genesco Inc GCO 2,860 4% 4% Hanesbrands Inc HBI 5,325 1% 1% Steve Madden Ltd SHOO 1,335 9% 8% Skechers USA Inc SKX 2,378 10% 9% Wolverine Worldw ide WWW 2,761 2% 2% Department Stores Bon-Ton Stores* BONT $2,834 NA NA Dillard's Inc* DDS $6,532 NA NA J. C. Penney JCP $11,859 10% 9% Kohl's KSS $19,031 11% 9% Macy's M $27,931 14% 12% Nordstrom(1) JWN $12,166 15% 13% Sears Holdings Corp* SHLD $36,188 NA NA Source: Company data, Morgan Stanley Research. * Company not covered by Morgan Stanley. 34

35 Average Specialty Company Store Saturation Stands at 76% Store Count (2015 estimate) Max Chain Size 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Max. Chain Size AEO 1,220 stores ANF 935 stores ANN 1,100 stores ARO 885 stores BURL 1,000 stores CHS 2,450 stores COH 1,075 stores GPS 3,775 stores KORS 700 stores LB 7,980 stores LULU 640 stores ROST 2,500 stores TIF 440 stores TJX 5,375 stores URBN 905 stores Source: Company data, Morgan Stanley Research. Store data updated as of FY13 end. 35

36 Current Comp and Inventory Trends 36

37 Same Store Sales January Outlook for monthly reporters Guidance January Same-Store Sales Company Sam e-store Sales EPS 2015E 2014A M S Es t Gap Inc. None FY15: $2.38-$2.42 (5) - (3) (3.0) L Brands Gap Brand 0-2 (9.0) Old Navy (6) - (4) 3.0 Banana Republic (12) - (10) 2.0 None 4Q EPS 4Q15: $1.85-$1.95 FY15: $3.69-$ Victoria's Secret Bath & Body Works (1) MS Cons Source: Company Data, Retail Metrics Inc. and Morgan Stanley Research 37

38 Same Store Sales 4Q15 Outlook for quarterly reporters M O R G A N S T A N L E Y R E S E A R C H 4Q15 Same-Store Sales Management Guidance MS 4Q EPS Company Sam e-store Sales EPS 2015E 2014A M S Es t Cons American Eagle Outfitters 4Q15: +MSD 4Q15: $0.40-$ Abercrombie & Fitch 4Q15: flat FY15: Expect sequential improvement None (1) - 1 (10.0) A&F (4) - (2) (8.0) Hollister 2-4 (11.0) Burlington Coat Factory FY15: % FY15: $2.27-$ FY15: Expects modest positive None increase Chico's FAS (5) - (3) 4.3 (0.03) 0.00 FY16: -LSD aggregate comp None Coach decline (5) - (3) (22.0) JCPenney FY15: +4-5% None Nordstrom Inc. Michael Kors Kohl's Corp. FY15: +2-4% FY16: -LSD in CC FY15: % Source: Company Data, Retail Metrics Inc. and Morgan Stanley Research FY15:$3.40-$3.50 (1) Q16: $1.44-$1.48 FY16: $4.38-$4.42 (4) - (2) FY15: Low end of $4.40-$4.60 (2) Lululemon Athletica FY15: +HSD FY15: $1.87 -$ Macy's Ross Stores Tiffany 4Q15: ~Flat 4Q15: Flat to +1% FY15: SSS +1-2% None 4Q15: $2.54-$2.64 FY15 $4.20-$4.30 (6) - (4) Q15: $0.60-$0.63 FY15: $2.40-$ Q15: +DD% grow th FY15: 5-10% below LY TJX Cos. FY15: SSS +4-5% FY15: $3.26-$ Urban Outfitters 4Q15: +2-4% None (3) - (1) Urban Outfitters (4) - (2) 4.0 Anthropologie (3) - (1)

39 Same Store Sales Historical Monthly Reporter Tracker Ticker S-10 O-10 N-10 D-10 J-11 F-11 M-11 A-11 M-11 J-11 J-11 A-11 S-11 O-11 N-11 D-11 J-12 F-12 M-12 A-12 M-12 J-12 J-12 A-12 S-12 O-12 N-12 D-12 J-13 F-13 M-13 A-13 GPS -1% 4% 5% -2% 3% -3% -10% 8% -4% 1% -5% -6% -4% -6% -5% -4% -4% 4% 8% -2% 2% 0% 10% 9% 6% 4% 3% 5% 8% 3% -1% 7% Gap brand 0% 7% 6% -6% 2% -1% -9% 2% -4% -1% -6% -8% -4% -5% -2% -4% -5% 1% 9% 4% 6% 4% 13% 9% 5% 6% 5% 2% 8% 2% 0% 8% Int'l 4% 2% 0% -3% 9% -7% -9% -1% -9% 3% -10% -9% -13% -7% -9% -6% -10% -9% 2% -6% 1% -14% 13% -2% -3% -2% 3% -6% 1% NA NA NA Old Navy -3% 4% 7% 0% 0% -4% -12% 14% -1% 2% -3% -4% -1% -9% -7% -4% -6% 5% 11% -6% -1% 1% 12% 12% 10% 5% 1% 13% 12% 6% -2% 9% Ban. Rep. 1% 0% 1% 2% 5% -4% -8% 11% -6% 3% -4% -4% -1% 1% 0% -2% 6% 12% 5% 1% 8% 5% 8% 8% 4% 5% 3% 1% 8% -5% 1% 1% JWN 8% 3% 5% 8% 5% 7% 5% 8% 7% 8% 7% 7% 11% 5% 6% 9% 5% 10% 9% 7% 5% 8% 1% 21% 4% 10% -1% 9% 11% NA NA NA KSS 3% -3% 6% 4% 1% 5% -7% 10% 1% 8% -5% -2% 4% 4% -6% 0% 1% -1% 4% -4% -4% -4% 2% 3% -3% 3% -6% 3% 13% NA NA NA LB 12% 9% 10% 5% 24% 12% 14% 20% 6% 12% 6% 11% 11% 6% 7% 7% 9% 8% 8% 6% 6% 7% 12% 8% 5% 3% 5% 3% 9% 3% 3% 2% Vic. Sec. 13% 14% 13% 8% 35% 15% 19% 25% 8% 17% 9% 16% 13% 9% 11% 11% 17% 10% 10% 8% 9% 11% 12% 9% 6% 3% 4% 0% 8% 5% 2% 2% Bath & BW 11% 5% 8% 4% 9% 10% 8% 16% 4% 5% 2% 8% 12% 6% 6% 4% -3% 7% 6% 4% 7% 2% 17% 6% 5% 5% 6% 7% 10% 0% 4% 4% La Senza 3% -2% -10% -7% 8% -3% -7% -1% 1% 1% 2% -8% 2% -5% -7% 0% -8% 1% 1% -5% -8% 2% -5% 0% -4% -2% 5% -9% 15% 5% 7% 2% M 5% 3% 6% 4% 3% 6% 1% 11% 7% 7% 5% 5% 5% 2% 5% 7% 2% 5% 7% 1% 4% 1% 4% 5% 3% 4% -1% 4% 12% NA NA NA ROST 2% 4% 6% 4% 3% 3% -1% 10% 4% 5% 7% 4% 5% 5% 5% 9% 5% 9% 10% 7% 8% 7% 7% 8% 5% 4% 2% 6% 4% -1% 2% 7% TJX 1% 0% 3% 2% 2% 3% -1% 5% 2% 5% 4% 1% 4% 3% 4% 8% 7% 9% 10% 6% 8% 7% 7% 8% 6% 7% 3% 6% 3% 1% -2% 8% Marmaxx 2% 0% 4% 2% 2% 3% 0% 8% 4% 6% 5% 2% 5% 3% 4% 7% 7% 8% 10% 5% 8% 6% 7% 9% 6% 6% 2% 6% 3% 0% -3% 8% TJX Canada 4% 1% 3% 5% 0% 3% -5% -4% -4% -1% -3% -4% -2% 0% -1% 5% 4% 6% 8% 4% 6% 5% 3% 2% 4% 7% 2% 4% 4% -1% -5% 7% TJX Europe -2% -6% -5% -6% -6% -5% -9% 0% -4% 2% 2% -3% -2% 5% 5% 14% 7% 9% 17% 10% 11% 12% 7% 9% 13% 11% 11% 8% 0% 5% 6% 9% Homegoods 2% 3% 2% 1% 1% 4% 7% 5% 3% 3% 3% 1% 8% 7% 6% 15% 10% 14% 6% 8% 7% 10% 11% 10% 4% 6% 2% 6% 6% 4% 6% 12% Ticker M-13 J-13 J-13 A-13 S-13 O-13 N-13 D-13 J-14 F-14 M-14 A-14 M-14 J-14 J-14 A-14 S-14 O-14 N-14 D-14 J-15 F-15 M-15 A-15 M-15 J-15 J-15 A-15 S-15 O-15 N-15 D-15 GPS 7% 7% 1% 2% -3% 4% 2% 0% 1% -7% -6% 9% 1% -2% 2% -2% 0% -3% 6% 1% -3% -4% 2% -12% -1% -1% -3% -2% -1% -3% -8% -5% Gap brand 8% 5% 7% 2% -3% 5% 2% 1% 1% -10% -7% 3% -3% -7% -2% -6% -3% -7% -4% -5% -9% -7% -7% -15% -6% -5% -7% -8% 0% -4% -4% -2% Int'l NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Old Navy 9% 13% -5% 1% -2% 2% 3% -2% 4% -6% -7% 18% 2% 7% 3% 2% 1% 0% 18% 8% 3% 0% 14% -6% 6% 1% 3% 6% 4% 2% -9% -7% Ban. Rep. 0% -1% -1% 2% -5% 1% -1% 0% -10% -7% -4% 7% 3% -7% 6% -2% 2% -2% 2% 0% 2% -5% -3% -15% -5% 1% -10% -11% -10% -15% -19% -9% JWN NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA KSS NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA LB 3% 0% 3% 2% 1% 8% -5% 2% 9% 2% -1% 8% 3% 2% 6% 5% 6% 3% 8% 4% 7% 6% 9% -1% 5% 3% 3% 6% 9% 5% 7% 8% Vic. Sec. 4% -1% 2% 3% 1% 10% -3% 3% 10% 2% -1% 8% 2% 3% 5% 5% 4% 0% 6% 3% 4% 7% 9% 0% 5% 1% 2% 6% 9% 5% 6% 8% Bath & BW 3% 2% 6% 1% 2% 4% -7% 1% 6% 1% -2% 8% 5% 1% 7% 4% 10% 5% 11% 5% 16% 5% 9% -2% 5% 6% 4% 5% 8% 5% 7% 6% M NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA ROST NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA TJX NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Marmaxx NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA TJX Canada NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA TJX Europe NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Homegoods NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Source: Bloomberg, Company Data, Morgan Stanley Research 39

40 Same Store Sales Historical Quarterly Reporter Tracker Ticker 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 AEO -10% -4% 5% 5% -1% 1% -7% -8% 0% 5% 10% 17% 9% 10% 4% -5% -7% -5% -7% -10% -7% -5% 0% 7% 11% 9% ANF -30% -22% -13% 1% 5% 7% 13% 10% 9% 7% 0% -5% -10% -3% -4% -15% -10% -14% -8% -4% -7% -10% -10% -8% -4% -1% A & F -27% -18% -8% 3% 8% 8% 13% 8% 5% 4% -4% -4% -11% -4% 0% -13% -6% -13% -6% -2% -2% -7% -8% -9% -7% -5% Hollister -33% -26% -19% -2% 2% 7% 13% 11% 12% 8% -2% -5% -10% -1% -2% -18% -13% -16% -10% -7% -10% -12% -11% -6% -1% 3% BURL -7% 0% -7% 3% 0% -6% 1% 1% 4% 2% -2% 1% 3% 2% 0% 3% 8% 4% 4% 3% 5% 5% 7% 1% 6% 3% CHS 3% 14% 16% 16% 8% 6% 5% 8% 13% 4% 9% 10% 6% 10% 4% 0% -3% -1% -3% -3% 0% -2% 4% 0% 1% -3% Chico's 2% 13% 13% 16% 6% 4% 4% 8% 12% 1% 6% 9% 7% 12% 2% -3% -3% -3% -2% -1% 1% -3% 1% -2% 1% -5% White House/Black Market 6% 15% 23% 16% 13% 10% 5% 7% 15% 11% 15% 11% 2% 6% 6% 6% -2% 3% -7% -9% -2% -1% 5% 2% -2% -2% COH (1) -6% -1% 3% 5% 6% 9% 13% 10% 10% 9% 9% 7% 2% 6% -2% 1% -2% -7% -14% -21% -17% -24% -22% -23% -19% -10% JCP -10% -5% -5% 1% 1% 2% 5% 4% 2% -2% -2% -19% -22% -26% -32% -17% -12% -5% 2% 6% 6% 0% 4% 3% 4% 6% JWN -10% -1% 7% 12% 8% 6% 7% 7% 7% 8% 7% 9% 5% 11% 6% 3% 4% 0% 2% 4% 3% 4% 5% 4% 5% 1% KORS (2) 10% 14% 22% 29% 38% 41% 60% 50% 46% 40% 38% 37% 37% 45% 41% 37% 27% 23% 28% 26% 24% 16% 11% -2% -5% -3% North America 10% 14% 22% 29% 38% 41% 60% 50% 46% 40% 38% 37% 38% 45% 41% 35% 25% 21% 24% 21% 19% 11% 7% -6% -9% -8% Europe NA NA NA NA 29% 37% 1% -3% 10% 25% 34% 14% 24% 50% 58% 63% 56% 45% 73% 63% 54% 41% 30% 11% 6% 8% Japan NA NA NA NA NA NA NA NA NA 22% 59% 25% 21% 17% 11% 14% 23% 15% 18% 50% 49% 53% 54% 30% 15% 31% KSS -2% 2% 5% 7% 5% 2% 4% 1% 2% 2% -2% 0% -3% 1% 2% -2% 1% -2% -2% -3% -1% -2% 4% 1% 0% 1% LULU -2% 10% 29% 35% 31% 29% 28% 16% 20% 16% 26% 25% 15% 18% 10% 7% 8% 5% -2% 1% 0% 3% 8% 6% 11% 8% M -10% -4% -1% 6% 5% 4% 4% 5% 6% 4% 5% 4% 3% 4% 4% 4% -1% 4% 1% -2% 3% -1% 2% -1% -2% -4% TIF -16% -6% 8% 10% 5% 7% 9% 15% 22% 16% 5% 4% -1% 1% 0% 8% 5% 7% 6% 11% 3% 4% 0% -1% 7% 1% Americas -25% -10% 10% 15% 5% 5% 8% 17% 23% 15% 3% 0% -5% 1% -2% 3% 0% 1% 7% 8% 8% 11% 0% 1% 0% -6% Asia-Pac 5% 9% 24% 21% 7% 11% 16% 26% 41% 36% 13% 10% -5% -4% 6% 9% 13% 22% 4% 10% 7% -3% 3% 2% 6% 2% Europe 5% 9% 14% 14% 21% 24% 16% 15% 11% 6% -2% 0% 2% 8% 0% 6% 7% 2% 2% -3% -8% 2% 4% 17% 19% 6% Japan -11% -13% -9% -10% -7% -2% 1% -3% 8% 4% 4% 12% 10% 5% 2% 21% 8% 5% 8% 30% -13% -6% -5% -24% 21% 24% URBN -6% -2% 4% 16% 11% 6% 4% -1% 1% -3% 2% 2% 4% 8% 11% 9% 9% 7% 1% 0% 0% -1% 6% 4% 4% 1% Urban Outfitters -8% -5% 0% 6% 7% 1% -2% 1% 1% 0% 3% 6% 6% 7% 11% 6% 5% -1% -9% -12% -10% -7% 4% 5% 4% 1% Anthropologie -4% 3% 10% 15% 5% -2% -4% -6% 0% -7% 1% -2% 0% 6% 7% 8% 9% 13% 10% 8% 6% 2% 6% 1% 2% 0% Free People -16% -13% 11% 21% 23% 20% 18% 30% 18% 14% 9% 2% 12% 24% 37% 44% 38% 30% 20% 25% 21% 15% 18% 17% 14% 3% Source: Company Data, Morgan Stanley Research. Notes (1) last quarter reported 1Q16 and (2) last quarter reported was 2Q15. 40

41 3Q Sales-Inventory Spread Widens Ending 3Q inventory growth (+6.2%) is 5.2% above our +1.0% 4Q industry sales outlook, tied with last quarter for the most unfavorable inventory spread since 4Q13. Of the last 10 quarters, only 2 have seen inventory growth slower than sales. We forecast another -47 bps gross margin contraction in 4Q15. Spread Between Quarterly Sales and Inventory Growth Inventory per square foot change vs. gross margin trends Normally an inverse relationship Source: Company data, Morgan Stanley research Source: Company data, Morgan Stanley research 41

42 Valuation 42

43 Comparative Risk Reward Company Rating Share Price Bear Case Base Case Bull Case KORS O/W $ $ 35 $ URBN E/W $ $ 15 $ TIF E/W $ $ 56 $ BURL O/W $ $ 34 $ GPS E/W $ $ 15 $ LULU O/W $ $ 37 $ CHS E/W $ $ 7 $ LB O/W $ $ 68 $ ROST O/W $ $ 34 $ TJX E/W $ $ 53 $ AEO U/W $ $ 9 $ M E/W $ $ 30 $ JWN U/W $ $ 32 $ KSS U/W $ $ 39 $ COH E/W $ $ 20 $ Bear Case % Base Case % Bull Case % 羅 懶 $ -3% 74% 121% $ -29% 47% 81% $ -16% 36% 68% $ -28% 30% 53% $ -33% 25% 56% $ -34% 21% 45% $ -31% 18% 86% $ -26% 16% 33% $ -35% 15% 34% $ -22% 12% 30% $ -36% 7% 50% $ -22% 4% 42% $ -30% -2% 35% $ -22% -10% 24% $ -37% -14% 30% JCP U/W $ 7.36 $ 1 $ 6 12 ANF U/W $ $ 10 $ 17 $ 31-61% -33% 21% $ -86% -18% 63% Source: Morgan Stanley Research, Thomson Reuters. 43

44 Peak-to-Trough Margins and Earnings 10 Yr GM Range (LTM) 10 Yr SG&A Range (LTM) 10Yr Op Mrgn Range (LTM) 10 Yr EPS Trend (LTM) Ticker 奈 蘿 契 Curr 更 Curr 奈 Curr B l u e =P e a k,r e d =T r o u g h AEO 37% 28% 9% $1.03 ANF 61% 59% 3% $1.22 BURL 41% 35% 6% $2.28 CHS 54% 48% 6% $0.71 COH 69% 51% 18% $1.80 GPS 37% 26% 10% $2.58 JCP 36% 37% -1% (1.45) JWN 37% 28% 9% $3.48 KORS 60% 33% 27% $4.26 KSS 36% 28% 9% $4.28 LB 43% 25% 18% $3.73 LULU 49% 30% 18% $1.81 M 40% 30% 10% $4.20 ROST 28% 15% 14% $2.45 TIF 60% 41% 19% $3.88 TJX 29% 17% 12% $3.28 URBN 35% 24% 10% $1.79 Curr Source: Morgan Stanley Research, Thomson Reuters. Note: Margin trends for AEO are 6 yrs, ANF 6 yrs, JCP 7 yrs, LULU 5 yrs. 44

45 P/E Ratio Current, Historical, and Relative Trends! FY 1 P/E 5-Yr. Range (5th/95th %ile), Median FY1 P/E YoY Chg. - Past 1 Year FY 2 P/E 5-Yr. Range (5th/95th %ile), Median FY2 P/E YoY Chg. - Past 1 Year R R Ticker Curr eference_line_=_0% Curr Curr eference_line_=_0% Curr AEO % % ANF % % BURL % % CHS % % COH % % GPS % % JWN % % KORS % % KSS % % LB % % LULU % % M % % ROST % % TIF % % TJX % % URBN % % Source: Morgan Stanley Research, Thomson Reuters. JCP is excluded due to negative EPS. 45

46 EV/EBITDA Current, Historical, and Relative Trends FY1 EV/EBITDA 5-Yr. Range (5th/95th %ile), Median FY1 P/E YoY Chg. - Past 1 Year FY2 EV/EBITDA 5-Yr. Range (5th/95th %ile), Median FY2 P/E YoY Chg. - Past 1 Year R R Ticker Curr eference_line_=_0% Curr Curr eference_line_=_0% Curr AEO % % ANF 4.4 8% % BURL % % CHS % % COH % % GPS % % JWN % % KORS % % KSS % % LB % % LULU % % M % % ROST % 9.8 1% TIF % % TJX % % URBN % % Source: Morgan Stanley Research, Thomson Reuters. JCP is excluded due to negative EBITDA. 46

47 FCF Yield, Dividend Yield, Street Ratings and Short Interest Free Cash Flow Yield (5th/95th %ile), Median FCF Yield - Time Series Data Dividend Yield - Past 2 Years Source: Morgan Stanley Research, Thomson Reuters. Notes: Street Ratings color code Green = Buy, Beige = Hold, Red = Sell Street Ratings Short Interest (not to scale) Ticker 奈 蘿 契 Past 2 Years Curr Curr % Buy Curr AEO NA 4.3% 29% 16.2% ANF 3.6% 1.9% 41% 23.2% ANN 10.3% 0.0% 45% 6.2% ARO NA 0.0% 6% 30.3% BURL 11.3% 0.0% 89% 8.0% CHS 4.1% 1.8% 45% 2.7% COH 8.4% 0.0% 30% 9.9% EXPR 3.1% 0.0% 55% 9.3% FINL 2.5% 1.1% 45% 6.3% FL 6.6% 0.0% 79% 1.4% GPS 6.3% 2.1% 32% 3.4% JCP NA 0.0% 17% 29.4% JWN 4.2% 2.0% 39% 3.6% KORS 2.5% 0.0% 65% 4.0% KSS 9.5% 3.0% 44% 12.7% LB 3.3% 2.4% 52% 2.7% LULU 3.6% 0.0% 29% 26.2% M 8.1% 2.2% 75% 2.8% NKE 3.2% 1.3% 58% 1.1% PLCE 6.6% 0.0% 45% 15.2% PVH 2.5% 0.0% 76% 2.8% RL 3.7% 1.2% 58% 2.7% ROST 4.1% 1.2% 66% 2.7% TIF 0.5% 1.5% 48% 4.0% TJX 5.0% 0.0% 61% 1.9% UA -0.5% 0.0% 36% 9.7% URBN 4.5% 0.0% 63% 6.7% VFC 4.3% 1.7% 68% 1.3% 47

48 What s In The Price? Implied Long-Term Growth 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Using Morgan Stanley s What s in the Price tool, we derived the stock price implied terminal growth rate for each company in our coverage universe. This analysis was based on 1) consensus estimates and 2) our estimates (when consensus was not available). This methodology solves for the terminal growth rate by subtracting 1) the value of current earnings and 2) the value of earnings in the three-year transition period from the current market price. Source: Morgan Stanley Research, Thomson Reuters. Note Data for ARO, JCP is NM due to cost of capital higher than forecasted ROE, ANF is NA 48

49 Consensus EPS Tracker FY1 EPS Source: Morgan Stanley Research, Bloomberg 49

50 MS EPS vs. Consensus FY1 (2015) and FY2 (2016) MS vs. Consensus FY1 MS vs. Consensus FY2 ANF LULU LB M AEO TIF URBN COH BURL TJX ROST GPS JWN KORS KSS CHS -15% -10% -5% 0% 5% 10% LULU KORS URBN BURL ANF GPS TIF ROST TJX LB M JWN COH CHS AEO KSS -10% -8% -6% -4% -2% 0% 2% Source: Thomson Reuters, Morgan Stanley Research.. 50

51 Forecasted EPS Growth FY1 (2015) and FY2 (2016) Forecasted EPS Growth FY1 vs. LY (MS Estimates) Forecasted EPS Growth FY2 vs. FY1 (MS Estimates) AEO BURL ROST LB TJX URBN KSS KORS LULU TIF CHS JWN M GPS ANF COH -40% 0% 40% 80% CHS LULU BURL URBN TIF ROST TJX ANF LB KORS JWN KSS GPS AEO COH M -20% -10% 0% 10% 20% 30% Source: Thomson Reuters, Morgan Stanley Research. Note ARO & JCP not included due to lack of comparability. 51

52 Forecasted EPS Growth and MS vs. Consensus FY1 (2015)/FY2 (2016): The data Ticker FQ2LY FQ2MS FQ2ST Growth vs. Cons FY1LY FY2015M S FY2015ST Growth vs. Cons FY2016M S FY2016S T Growth vs. Cons LY Q Next Q MS Next Q St Growth vs. Cons LY FY1 FY1 MS FY1 St Growth vs. Cons FY2 MS FY2 St Growth vs. Cons AEO $0.36 $0.42 $ % 0.1% $0.63 $1.09 $ % 0.1% $1.10 $ % -5.0% ANF $1.15 $1.02 $ % 2.7% $1.54 $1.09 $ % 4.9% $1.17 $ % -0.9% BURL $1.43 $1.46 $1.46 NA -0.1% $1.83 $2.28 $ % -0.3% $2.70 $ % -0.4% CHS $0.04 ($0.03) $ % % $0.69 $0.63 $ % -8.0% $0.75 $ % -4.8% COH $0.72 $0.64 $ % -4.3% $3.10 $1.92 $ % -0.2% $1.80 $ % -4.6% GPS $0.75 $0.52 $ % -2.4% $2.82 $2.36 $ % -0.5% $2.42 $ % -1.3% JCP ($0.11) $0.18 $ % -18.8% ($2.16) ($1.20) ($1.20) NA NA ($0.30) ($0.31) NA NA JWN $1.32 $1.18 $ % -4.8% $3.72 $3.32 $ % -2.1% $3.45 $ % -4.1% KORS $1.48 $1.48 $ % 1.0% $4.28 $4.20 $ % -2.9% $4.40 $ % 0.1% KSS $1.83 $1.77 $ % -5.7% $4.24 $4.17 $ % -3.1% $4.30 $ % -6.8% LB $1.89 $2.02 $ % 0.9% $3.50 $3.86 $ % 0.4% $4.05 $ % -3.7% LULU $0.78 $0.80 $ % 1.3% $1.87 $1.82 $ % 0.4% $2.16 $ % 0.7% M $2.44 $2.23 $ % 0.9% $4.40 $3.90 $ % 0.1% $3.63 $ % -3.7% ROST $0.60 $0.63 $ % -2.3% $2.21 $2.48 $ % -0.5% $2.70 $ % -1.9% TIF $1.51 $1.52 $ % 1.3% $4.20 $3.89 $ % 0.1% $4.25 $ % -1.8% TJX $0.93 $0.93 $ % -1.7% $3.16 $3.27 $ % -0.4% $3.53 $ % -2.2% URBN $0.60 $0.55 $ % -2.5% $1.70 $1.74 $ % -0.1% $1.93 $ % -0.1% (1) EPS excludes qualified pension expense; Street estimates excluded as they do not adjust for pension expense. Source: Thomson Reuters, Morgan Stanley Research 52

53 Industry Estimate Changes and Valuation Softlines Industry EPS Estimates vs. S&P 500 Declined throughout 2015 Relative EPS changes Softlines vs. S&P 500 Softline revisions relatively improved after 4Q14 EPS season Softlines and S&P 500 FY1 P/E Multiples corrected in 2H15 after being boosted by the lower gas trade 26x 24x 22x 20x 18x 16x 14x 12x 10x Softlines S&P 500 8x Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Source: Bloomberg, Thomson Reuters, Morgan Stanley Research Softlines and S&P 500 Relative FY1 P/E Softlines still trading at a 4x premium to S&P 500 despite the YTD contraction 10x 8x 6x 4x 2x 0x Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15-2x -4x -6x -8x 53

54 Short Interest Data Average Short Interest Shares Short Daily Vol. Days to / Float Ticker Company 10/30/ /15/ /1/ wk. seq. % chg. 12/1/2015 Cover 12/1/2015 Specialty Retailers & Department Stores AEO American Eagle Outfitters 45,158,729 44,548,733 43,643, % 4,969, % ANF Abercrombie & Fitch Co. 22,072,383 23,060,487 23,897, % 3,180, % ARO Aeropostale 16,428,804 15,511,489 16,728, % 1,585, % BURL Burlington 4,562,246 4,784,398 5,654, % 1,523, % CHS Chico's FAS 10,381,156 12,991,772 13,998, % 2,476, % COH Coach 17,085,863 18,175,902 18,381, % 4,563, % DKS Dick's Sporting Goods 8,908,024 8,839,983 7,706, % 2,703, % EXPR Express 8,814,668 8,956,483 8,526, % 1,940, % FINL Finish Line 4,464,953 4,122,581 3,522, % 1,123, % FL Foot Locker 13,910,253 15,485,593 17,953, % 2,708, % GPS Gap Inc. 26,105,497 27,408,412 28,993, % 6,086, % JCP J.C. Penney 88,524,895 90,569, ,428, % 13,670, % JWN Nordstrom 8,552,895 8,670,761 12,001, % 3,345, % KORS Kohl's 13,178,484 15,486,164 14,831, % 3,350, % KSS Michael Kors Holdings 20,113,107 20,963,837 23,410, % 4,015, % LB L Brands 5,850,407 5,996,719 8,023, % 1,540, % LULU Lululemon Athletica Inc 27,574,371 28,988,707 28,237, % 3,486, % M Macy's 10,440,982 11,250,513 9,550, % 7,877, % NKE Nike 6,279,381 5,191,014 5,610, % 9,332, % PLCE Children's Place 2,682,611 2,797,848 3,316, % 534, % PVH PVH Corp 3,901,351 3,458,862 3,231, % 1,293, % RL Ralph Lauren Corp 4,662,777 4,263,026 5,229, % 1,179, % ROST Ross Stores Inc 7,848,671 8,396,277 10,899, % 3,030, % TIF Tiffany & Co 6,029,071 6,819,745 10,217, % 1,620, % TJX TJX Companies Inc 7,363,376 6,575,466 7,786, % 3,493, % UA Under Armour 17,555,852 18,040,517 22,051, % 3,334, % URBN Urban Outfitters Inc 10,187,712 10,482,157 12,026, % 3,202, % VFC VF Corp 8,204,462 8,376,841 9,556, % 2,579, % Total: 426,842, ,213, ,416, % Average: % 1 Month % Change 11.4% Source: Thomson Reuters, Bloomberg 54

55 Quantitative view U.S. Equity Strategist Adam Parker s MOST and BEST models 3 Month View (1=highest rank, 5=lowest) 24 Month View (1=highest rank, 5=lowest) Ticker MOST BEST URBN 1 1 JWN 2 1 TJX 2 4 CHS 3 1 GPS 3 1 AEO 3 3 ROST 3 5 TIF 3 5 M 4 1 KSS 4 2 KORS 4 2 BURL 4 3 COH 4 4 LB 4 5 JCP 5 2 Overall Alpha Filter All stocks in the universe are grouped into quintiles (5 groups of equal size) according to their theoretical expected return estimated by our models. Stocks in the first quintile have the highest theoretical expected return while stocks in the fifth quintile have the lowest theoretical expected return. MOST MOST is a quantitative tool that systematically ranks the attractiveness of the largest 1500 U.S. equities over a 3- month horizon. MOST takes stock-specific data as inputs valuation metrics, profitability measures, balance sheet uses, sentiment and technicals (prices) - and computes an expected alpha for each stock. BEST BEST is a quantitative tool that systematically ranks the attractiveness of the largest 1500 U.S. equities over a 24- month horizon. In BEST we define a stock s attractiveness as its predicted excess return over a 24-month period. Source: Morgan Stanley Research. Note ANF not rated. For those interested in MS s quantitative output, please go to 55

56 What the Options Market is Saying About Individual Softline Stocks Implied Volatility and Skew for Individual Softline Stocks Implied vol has fallen from peak levels for many stocks. Skew is also low. Low relative skew = bullishness (ex: UA), high relative skew = bearishness (ex: JCP). 3M Implied Vol: Range, Avg. - Past 2 yrs Skew: Range, Avg. - Past 2 yrs. Ticker Current Current AEO ANF ANN ARO BURL CHS COH DKS EXPR 43 (0.9) FINL 29 (1.9) FL GPS JCP JWN KORS KSS LB LULU M NKE PLCE PVH RL ROST TIF TJX UA URBN VFC Implied Jump Over Earnings Option market expected stock price move over upcoming EPS reports Ticker Report Date (est.) Implied Jump (+/-) VFC 10/21/ % UA 10/23/ % COH 10/28/ % KORS 11/5/ % RL 11/6/ % M 11/12/ % JWN 11/13/ % KSS 11/14/ % Note No direction is implied, only the magnitude of the implied jump over earnings. Source: Bloomberg, Morgan Stanley. Note Implied volatility is the options-market expected one standard deviation price change at the end of a one-year period. For example, if implied volatility on the options of a stock is 30%, we would expect the underlying stock to trade + or 30% of its current stock price approximately 68% of the time one year from now. 56

57 Stock Price Performance History 57

58 Price Performance Closing Price Price performance (% Change) Relative 52 Week Market Value 12/29/2015 Dec-15 YTD LTM YTD High Low (MM) Specialty Apparel and Department Stores 343,321 Market value-weighted index -0.85% 8.99% 8.64% 9.11% Equal-weighted index 0.60% % % AEO American Eagle Outfitters Inc % 16.93% 16.85% 7.94% ,013 ANF Abercrombie & Fitch Co % -0.73% -1.15% -9.73% ,849 ARO Aeropostale Inc % % % % BURL Burlington Stores Inc % -7.07% -7.89% % ,296 CHS Chico's Fas Inc % % % % ,487 COH Coach Inc % -8.55% -9.27% % ,053 DKS Dick's Sporting Goods Inc % % % % ,045 EXPR Express Inc % 20.90% 19.44% 11.90% ,442 FINL Finish Line Inc % % % % FL Foot Locker Inc % 18.65% 18.30% 9.66% ,958 GPS Gap Inc % % % % ,088 JCP J C Penney Company Inc % 5.56% 5.88% -3.44% ,114 JWN Nordstrom Inc % % % % ,258 KORS Michael Kors Holdings Ltd % % % % ,478 KSS Kohls Corp % % % % ,967 LB L Brands Inc % 17.71% 18.33% 8.72% ,977 LULU Lululemon Athletica Inc % -6.13% -6.06% % ,368 M Macys Inc % % % % ,160 NKE Nike Inc % 34.87% 33.86% 58.90% ,826 PLCE Childrens Place Inc % -1.84% -2.51% -1.84% ,082 PVH Pvh Corp % % % % ,976 RL Ralph Lauren Corp % % % % ,633 ROST Ross Stores Inc % 17.57% 17.99% 18.30% ,028 TIF Tiffany & Co % % % 61.62% ,821 TJX Tjx Companies Inc % 5.81% 6.03% 12.88% ,316 UA Under Armour Inc % 21.13% 20.37% 52.10% ,529 URBN Urban Outfitters Inc % % % % ,705 UA Under Armour Inc % 21.13% 20.37% 48.34% ,529 Retail Softlines Sector Market value-weighted index 2.74% 2.88% N/A 3.00% Equal-weighted index 0.05% % N/A % S&P % -0.12% -1.63% * indicates company under coverage Source: Thomson Reuters 58

59 Softlines vs. S&P Price Performance Comparison Softlines vs. S&P Rotation out of energy and into consumer discretionary on the lower gas price trade drove 2H14 outperformance Softlines S&P500 YoY % Chg., Equally-Weighted Softlines Index vs. S&P500 Strongest outperformance in ; underperformance in 2013, 2014 & % 150% 100% YoY % Retail YoY % S&P 50% 0% -50% -100% Source: Thomson Reuters, Morgan Stanley Research 59

60 Monthly Price Performance Softlines vs. S&P September is the best month for outperformance. Holiday (November/December) is the weakest. Note: Data is market cap weighted. 1.0% 0.5% --% (0.5%) (1.0%) (0.0%) (0.8%) (1.2%) 0.1% (0.8%) (0.2%) (0.4%) 0.8% (0.6%) (1.5%) (1.5%) (1.4%) (1.6%) Consumer Discretionary vs. S&P August/September historically strong. Note: Data is market cap weighted. (2.0%) 2.0% 1.5% 1.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Present 1.4% 0.5% --% 0.2% 0.3% 0.0% (0.5%) (1.0%) (1.0%) (0.4%) (0.5%) (0.7%) (0.7%) (0.7%) (1.0%) (1.5%) Source: Thomson Reuters, Morgan Stanley Research (2.0%) (1.8%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Present 60

61 Upcoming Catalysts 61

62 Upcoming Event Calendar January 2016 February 2016 Monday Tuesday Wednesday Thursday Friday Monday Tuesday Wednesday Thursday Friday December Retail Sales Day January Retail Sales Day ICR 2016 ICR 2016 Conference; Conference; Orlando, FL Orlando, FL MLK Day TIF Holiday President's Day JWN 4Q15 EPS Sales Report COH 2Q16 EPS 29 Source: Thomson Reuters, Morgan Stanley Research 62

63 NRF Calendar First Quarter Second Quarter Third Quarter Fourth Quarter HOLIDAYS S M Tu W Th F S S M Tu W Th F S S M Tu W Th F S S M Tu W Th F S Fiscal 2015 February May August November 2/14 Valentine's Day /16 Presidents' Day /5 Easter Sunday /10 Mother's Day /25 Memorial Day 6/21 Father's Day March June September December /4 Independence Day /7 Labor Day /12 Columbus Day /31 Halloween /11 Veteran's Day 11/26 Thanksgiving April July October January /6 Hanukkah /25 Christmas /1 New Year's Day /18 Martin Luther King Day Fiscal 2014 February May August November 2/14 Valentine's Day /17 Presidents' Day /20 Easter Sunday /11 Mother's Day /26 Memorial Day 6/15 Father's Day March June September December /4 Independence Day /1 Labor Day /13 Columbus Day /31 Halloween /11 Veteran's Day 11/27 Thanksgiving April July October January /7 Hanukkah /25 Christmas /1 New Year's Day /19 Martin Luther King Day Source: NRF, Morgan Stanley Research 63

64 NRF Calendar Fiscal 2013 February May August November 2/14 Valentine's Day /18 Presidents' Day /31 Easter Sunday /12 Mother's Day /27 Memorial Day 6/16 Father's Day March June September December /4 Independence Day /2 Labor Day /14 Columbus Day /31 Halloween /11 Veteran's Day 11/28 Thanksgiving April July October January /8 Hanukkah /25 Christmas /1 New Year's Day /20 Martin Luther King Day Fiscal 2012 February May August November 2/14 Valentine's Day 2/20 Presidents' Day /8 Easter Sunday /13 Mother's Day /28 Memorial Day /17 Father's Day /4 Independence Day March June September December 9/3 Labor Day /8 Columbus Day /31 Halloween /11 Veteran's Day /22 Thanksgiving /9 Hanukkah April July October January 12/25 Christmas /1 New Year's Day /21 Martin Luther King Day Source: NRF, Morgan Stanley Research 64

65 Company Views 65

66 Underweight: American Eagle Outfitters (AEO) $ Price Target $15 Bull $21 5 Base $15 Bear $9 5x Bull Case FY17e $660M EBITDA 4x Base Case FY17e $523M EBITDA 3x Bear Case FY17e $345M EBITDA $14.00 $21.00 (+50%) $15.00 (+7%) $9.00 (-36%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price Source: Morgan Stanley Research, Thomson (pricing) Recent Report: 2016 the True Test WARNINGDONOTEDIT_RRS4RL~AEO.N~ Our $15 price target is derived by applying a peer average EV/EBITDA multiple to our FY17 EBITDA estimate in each scenario below. Breaks free from Teen War. AEO successfully differentiates product and drives positive traffic, generating +MSD SSS. GM expands to 39% given lower inventory, fewer promotions and increased full price selling. Operating margin recovers back to 11-12%. Share losses continue. The competitive environment has changed and the apparel industry is experiencing structural apparel price deflation, in our view. AEO has to sacrifice positive comps for gross margin or vice versa. Achieves ~10% EBIT margin in FY17. Teen space gets bullied. Comps fall back to -MSD levels in FY16/FY17. Primark accelerates its US expansion plans and existing US off-pricers continue to take share, adding to an already competitive environment. AEO's EBIT margin returns to ~6%. Why Underweight? 2016 should reveal whether AEO can consistently deliver positive comps and a +9-10% EBIT margin or prove 2015 was simply a one-time rebound after two years of disappointing results. Our Base case assumes consistent +LSD positive comps (+1%, in-line with AEO s 10 year average), but in 5 of the last 10 years, AEO has delivered negative comps. After four reasonably good quarters, we think upside from here appears less certain. Therefore, we think the probability of downside relative to our Base case is considerable and view AEO as a high-risk, volatile stock. Greater competition among teen and low cost fashion retailers, a deflationary apparel environment, and management uncertainty keep us cautious. Key Value Drivers Omni-channel initiatives, aerie growth, and international expansion drive top-line growth and raise the margin potential for the company. Gross margin: we think 38-39% is AEO s new normal. SG&A: Cost-cutting initiatives could play out faster or slower than expected. Higher inventory turnover could see better use of capital and higher margins. Investment Risks Ability to deliver unique and compelling product can drive SSS and gross margins above or below our estimate. Increased/decreased consumer and teen spending would likely cause sales and EPS to perform above/below expectations and drive the stock price higher/lower. 66

67 Underweight: Abercrombie & Fitch (ANF) $ Price Target $17 Bull $31 Base $17 17x FY16 Bull Case $1.80 EPS 15x FY17 Base Case $1.15 EPS $25.53 $31.00 (+21%) $17.00 (-33%) $10.00 (-61%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~ANF.N~ Valuation Methodology Our $17 price target is derived by applying a peer-average 15x P/E multiple to our FY17 EPS estimate in each scenario below. International rebounds. International comps and margins rebound, while U.S. comps stabilize, driving consistent +L-MSD comps. ANF identifies significant further SG&A cost cuts not expected by the Street. A more stable top line allows ANF to resume buying back stock. Multiple expands to 17x. ~5% operating margin. International falls further, Primark gains traction in the US. FX impacts normalize, but remains a headwind. Comps stabilize, but remain roughly flat. Primark's sharp price points require ANF to pass AUC cost savings through to customers. ~4% operating margin. Brand power questioned. ANF discovers it has a major global brand issue as both US and int'l comps decelerate further and margins contract, despite cost-cuts. Comps remain -M-HSD. Bear Store closure plans increase but is not enough to offset the sales $10 ~0.2x Sales decline. Dividend at risk of being cut. ~2% operating margin. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Less Bad than Feared, but Not an All Clear Why Underweight? We are Underweight all three teen apparel retailers (AEO, ANF, ARO). The competitive environment has changed and the apparel industry is experiencing structural apparel price deflation, in our view. The next few years should prove whether ANF is a rebounding global brand that deserves a high-teens multiple or a retailer in structural decline. ANF is likely to remain a highly volatile stock. We believe the risk/reward is skewed sharply to the downside. International is a major earnings driver, but ANF comps have been consistently double-digit negative and store growth is slowing. Potential margin benefits from new cost cutting initiatives and online mix shift should help offset some impact from our weakening same store sales outlook. Key Value Drivers International growth New Asia stores continue to open at very high productivity rates. E-commerce growth Higher margin e-commerce business could grow 10-15% annually. Same store sales Most important retail metric. Operating margin Second most important metric. Risks Management announces a larger or smaller amount of SG&A cost cuts than expected. Large-scale buybacks or other potential strategic actions could boost the stock. US same store sales results either improve as consumer incomes rebound or decelerate more than expected as ANF s brands struggle to regain traction. Today s highly promotional retail environment changes, allowing gross margins to deviate significantly from current forecasts. 67

68 Price Target (Jan-17) Historical Stock Performance Current Stock Price M O R G A N S T A N L E Y R E S E A R C H Overweight: Burlington Stores, Inc (BURL) $ Price Target $61 Bull $72 Base $61 Bear $34 20x Bull Case 17e $3.60 EPS 20x Base Case 17e $3.05EPS 14x Bear case 17e $2.45 $47.02 $72.00 (+53%) $61.00 (+30%) $34.00 (-28%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 WARNINGDONOTEDIT_RRS4RL~BURL.N~ Valuation Methodology We use a 20x P/E multiple, in-line with our valuation for ROST/TJX. Applying an 11x EV/EBITDA mutliple to our 2017e adjusted $560M EBITDA implies a similar PT. Comps accelerate to +4.5% in 2016/2017, GM increases ~30 bps per year, SG&A leverages ~20-30 bps per year. Share repurchases remain steady. EPS grows mid-high teens moving forward. Comps remain steady, increasing ~3.0% in 16/17. GM modestly expands and SG&A dollars grow +MSD-LSD. BURL continues to track towards doubling its store count, while also leveraging supply chain and infrastructure costs as it gains scale. Comps moderate to % as new off-price entrants steal share and at the same time TJX/ROST outpace BURL. GM expansion moderates, while SG&A deleverages ~30-40 bps y/y. L-T store targets are trimmed; valuation multiple contracts. Why Overweight? Burlington is a combined turnaround and debt paydown story. Its transformation is still in the early to middle innings, but has already shown strong results. We think BURL can grow EPS mid-teens moving forward. Its ongoing transformation should help it sustain solid top-line momentum while expanding margins and paying down debt. We rate BURL Overweight as we see high probability that our Bull case plays out and expect upward earnings revisions. We are positive on Burlington s fundamental story. The stock is a way to gain exposure to the secular off-price retail growth thesis for those looking for a bigger bull case and willing to tolerate more risk relative to TJX and ROST. Key Value Drivers Comp store sales trends New store openings EBIT margin expansion Interest savings with debt pay down Potential Catalysts Earnings announcements Macro events Investment Risk Downside #1: Revenue shortfall due to mis-execution, increased competition, inventory availability or other unforeseen circumstances. Downside #2: High debt levels. A cash shortfall could hinder the co s ability to service its debt. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Increased Confidence in L-T Thesis 68

69 Equal-weight: Chico s FAS (CHS) Price Target $12 Bull $19 Base $12 Bear $7 $ x Bull Case FY17e $360M EBITDA 5x Base Case FY17e $302M EBITDA 4x Bear Case FY17e $240M EBITDA $10.21 $19.00 (+86%) $12.00 (+18%) $7.00 (-31%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price Source: Morgan Stanley Research, Thomson (pricing) Recent report: Increased Conviction in our L-T Thesis WARNINGDONOTEDIT_RRS4RL~CHS.N~ Our $12 price target is derived by applying a mature, modest EPS growth retailer peer-set average EV/EBITDA multiple to our FY17 estimates in each scenario below. CHS achieves ~8.5% FY17 operating margin. Multiple expands as CHS comps +L-MSD consistently and investors believe CHS can return to +DD operating margin. Soma profitability scales faster than expected. Renewed financial discipline pays off. +2% comps, bps annual gross margin expansion, and bps annual SG&A leverage lead to ~6.5% FY16 EBIT margin. Low-to-mid single digit share annual count reductions help. Share loss returns; investors perceive peak margins. Comps turn persistently negative and CHS loses share. Multiple contracts and CHS s path to double-digit EBIT margin looks very far off. Why Equal-weight? LULU's unique brand positioning and fashionable product offering have allowed it to dominate the North American athletic yoga apparel category. Compelling LT growth opportunity driven by 4 main factors: 1) international expansion, 2) continued growth in men's, 3) larger format stores and remodels, and 4) further ivivva store roll-outs. Management believes LULU has the ability to return to 2014 merchandise margin levels, but even our ~20% EPS growth estimate is predicated on a more modest recovery (+100 bps) than management's guidance (+300 bps). We see the current valuation as attractive given that our '15-17E EPS estimates imply a 1.2x PEG ratio vs. an average of 1.5x for a group of comparable high-growth retail stocks. Key Value Drivers SG&A - HQ restructuring will lead to $38M in annualized cost savings and store closures from FY15-FY17 should drive $65M+ in cumulative savings. Gross margin Better inventory control should drive gross margin improvement over the next few years. A more promotional environment than anticipated could partially offset this. Stock repurchases The company entered a $250M ASR in 1Q15. Dividend growth. Investment Risks 2016 comps could be stronger or weaker than modeled. CHS has a loyal customer base, but at the same time, a lack of a major product cycle, an apparel deflation environment, or renewed macro concerns could increase miss-risk. CHS may buy back more or less stock than anticipated. Stronger sales could allow CHS to repurchase even more stock than we currently forecast. The reverse is also true. Fashion risk. Almost all specialty retailers are susceptible to missing fashion trends, which hurt sales and margins. 69 Industry consolidation/potential activist involvement.

70 Equal-weight: Coach (COH) Price Target $27 Bull $41 Base $27 Bear $20 $ x Bull Case '16e $2.30 EPS 15x Base Case '16e $1.80 EPS 13x Bear Case '16e $1.50 EPS Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Transformation on Track $31.52 $41.00 (+30%) $27.00 (-14%) $20.00 (-37%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~COH.N~ Valuation methodology derived by applying a multiple based on historical averages with adjustments for growth and the economic cycle to our '16 (June '16 fiscal year end) estimates in each scenario below. Coach back on track. Positive PR, reduced promotions, improved product, and store remodels drive better than expected traffic returns and conversion at full price stores. Intl sales growth reaccelerates and COH resumes share buybacks. Earnings beats send COH s shares higher. Trends "less bad". COH's market share stabilizes at ~17%, but doesn't rebound. Positive comps in 4Q16 should be achievable given easy comparisons, elimination of EOS headwind, and a greater number of store remodels (mainly a 2H16 benefit). Mgmt makes the right long-term decisions for the health of the brand, but weighs on SG&A in the near term. Share losses continue. Despite Coach s new assortment and store remodels, share losses accelerate. COH s P/E falls to low levels as the Street now sees a low probability of a turnaround and a broken brand. Turn around efforts coupled with declining sales deleverage SG&A at a higher degree than anticipated. Why Equal-weight? Over the past two years, we estimate COH has ceded 7% of its US handbag market share (from 24% to 17%) and over the past 18 months FY16 EPS estimates have fallen nearly 50% from $3.60 to $1.88 today. Since store comps troughed in COH's 1Q15 (-19%), sales trends have gradually improved on both a 1- and 2-year basis and negative EPS revisions have been less severe. However, with the stock significantly underperforming the market over the past 12 and 18 months, we think most of the bad news is priced in. COH's valuation appears more reasonable at 17x FY1 EPS vs. its 17.5x 5-year average and six turns below its 22x multiple just 6 months ago. Key Value Drivers North America same store sales/ecommerce sales International sales growth Stuart Weitzman sales growth/margin expansion SG&A leverage/deleverage on improving or worsening comps and marketing spend Dividend yield Investment Risks Upside Risks: Stuart Vevers helps to elevate the brand even further through improved product and positive PR, driving SSS above our estimates International sales grow robustly, potentially offsetting NA weakness Stuart Weitzman becomes more EPS accretive than expected COH implements greater than expected cost cuts lowering SG&A dollars Downside Risks: Market share losses continue; comps remain double-digit negative driving further EBIT margin declines COH is forced to cut its dividend given cash constraints Further increases in marketing spend are needed to repair the brand, leading to higher than expected SG&A growth 70

71 Price Target (Jan-17) Historical Stock Performance Current Stock Price M O R G A N S T A N L E Y R E S E A R C H Equal-weight: Gap Inc. (GPS) $ $22.48 $35.00 (+56%) $28.00 (+25%) $15.00 (-33%) Why Equal-weight? SSS key metric for evaluating health of each brand. Comps have been negative for the company as a whole in 3 of the last 5 quarters. Improving margin profile resulting from key technology and inventory management investments. Free cash flow as a mature business, GPS uses incremental FCF to repurchase shares and pay dividends. Share buybacks GPS has bought back over ~$14Bn in stock since 2004, reducing the share count more than 50% Price Target $28 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 WARNINGDONOTEDIT_RRS4RL~GPS.N~ Valuation Methodology Our scenarios are derived by applying a multiple based on historical averages + peers, adjusting for growth and the economic cycle, to our 2017 estimates in each scenario below. Potential Catalysts Monthly Retail Sales Release GPS Earnings News regarding designer assortment and shopper response Insider Share Purchase or Sale M&A speculation Management changes Bull $35 Base $28 12x Bull Case 2017e $2.90EPS ~11x Base Case 2017e $2.55EPS Filling the sales Gap. Comps turn slightly positive, GM improves ~10-20 bps per year, and SG&A remains tightly managed. Management hits on fashion for the first time in several years, multiple expands to 12x from current ~9x P/E. Near-term stays consistent: Old Navy gradually slows to a +1-2% comp rate, while Gap/BR remain weak. GM stays flat, but SG&A dollars increase ~1% in '16/'17. Our 11x P/E is in line with the stock s average valuation multiple over the last two years (chart below). GPS has historically traded at 13-14x P/E, however, given recent sales declines and eroding operating income (down 18% since 2012), we think the stock is likely to trade at a LDD P/E (in line with recent range) until showing some signs of stabilization. Investment Risks All three brands execute product well and simultaneously such that comps exceed our estimates. Expansion opportunities exceed our estimates, changing the growth profile and producing margin expansion. Comps decline further due to poor execution and bring greater than expected operating margin deleverage. Bear $15 9x Bear Case 2016e $1.70 EPS Source: Morgan Stanley Research, Thomson (pricing) Recent Report: N-T Visibility Limited; Challenges Still Ahead Falls into Gap. Comps worsen, and remain in the negative 2-3% range. GM declines bps/year moving forward, while SG&A meaningfully deleverages. GPS' cadence from buybacks meaningfully slows, accelerating the pace of earnings declines. 71

72 Underweight: J.C. Penney (JCP) Price Target $6 Bull $12 Base $6 Bear $1 $ ~6.0x Bull Case FY17e ~$1.3Bn adj. EBITDA discounted back at 15% ~5.4x Base Case FY17e ~$1.074B adj. EBITDA discounted back at 15% ~5.5x Bear Case FY17e ~$500M adj. EBITDA discounted back at 15% We arrive at our $6 price target based on our ~$1.074B adjusted FY17 EBITDA estimate (adding back non-cash pension expense) at a 5.4x multiple and discounting back at 15%. Sales productivity improves faster than expected. JCP generates consistent +MSD comps as it regains market share and begins chasing inventory. New management identifies additional expense saving opportunities. Multiple expands as investors balance sheet concerns wane. Transformation takes time. JCP delivers +LSD comps in and recover margins steadily. Cash balance continues to deteriorate through FY15. JCP achieves positive EPS by FY18. While we come to no equity value in our analysis, the market will likely place some value on the optionality of the equity, which supports our $1 Bear case price target Market share losses continue. JCP must clear through excess inventory with steep clearance markdowns. Vendors pull back on receivables and JCP loses access to inventory. Multiple contracts as earnings power wanes. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: December Recap/January Preview: Fundamental Concerns Remain $7.36 $12.00 (+63%) $6.00 (-18%) $1.00 (-86%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~JCP.N~ Why Underweight? We are UW JCP shares. We think after +3.4% revenue growth, +540 bps gross margin recovery, and 210 bps of SG&A leverage in FY14, improvement from here will be much more difficult to come by and increasingly top-line dependent. We continue to expect modest sales and EBIT margin improvement through FY18, but in absence of this rosy scenario we are doubtful JCP will make money again. Key value drivers Balance sheet: JCP burned ~$2.8B cash in We model - $135M free cash flow in Traffic: A key driver behind top-line weakness. April 14 was the first positive traffic month in 30 months. JCP has returned back to 87M active customers (same level as 2011). Conversion: Deteriorated since 2012, but turned positive in 1Q14. Return to Discounting: Ullman-led mgmt plans to step-up discounting to drive top-line. Our consumer survey work shows the #1 reason consumers have shopped JCP in the past is because of coupons. JCP re-instated fired brands: JCP brought back several select private brands, including St. John s Bay and Ambrielle. Expense Saves: JCP realized ~$600M of gross savings in FY12, ~$400M in FY13, and ~$120M in FY14. Management expects $120M in SG&A saves in FY15. Risks to Our Price Target Margins and operating cash flow recover faster than expected. Greater promotional cadence drives higher than expected traffic and conversion improvements. Cash burn less than expected and/or slows faster than expected. 72

73 Price Target (Jan-17) Historical Stock Performance Current Stock Price M O R G A N S T A N L E Y R E S E A R C H Underweight: Nordstrom (JWN) $ Price Target $45 Bull $62 Base $45 Bear $32 $ x vs. ~14x today. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Structural Headwinds Limit Future Earnings Potential; Downgrading to UW $62.00 (+35%) $45.00 (-2%) $32.00 (-30%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 15x Bull Case 17e EPS of $ x Base Case 17e EPS of $ x Bear Case 17e EPS of $3.00 WARNINGDONOTEDIT_RRS4RL~JWN.N~ 12.5x P/E on our $ EPS. We use a ~15% discount to JWN's 5-year average P/E ~14.5x in-line with the discount we use in our M and KSS valuation. Our price target is also supported by a DCF valuation, yielding a $45 stock price. N-T struggles alleviate in 2016, growth accelerates in H15's headwinds prove transitory. Comps rebound to 3.0% in 2016 and sustain that level thereafter. GM stabilizes in 2016 and remains flat. SG&A deleverages ~20-30 bps y/y due ongoing heightened investment spend. Buybacks continue at a healthy pace, helping drive ~8% annual EPS growth in Top line remains weak in 2016 and only modestly improves thereafter; structural margin pressure continues. Comps increase 0.7%/2.0% in '16/'17, as the top-line contribution from Rack and Nordstrom.com stays soft. Gross margin declines continue due to markdown pressure, price matching, and occupancy deleverage on ~1-2% comp growth. SG&A increases ~6-7% per year, as JWN is unable to pull back on heightened investment spend due to competitive pressures. Buybacks moderate due to declining cash flow and are not enough to offset EBIT margin declines, leading to ~5.3% EPS CAGR in '15- '18e. Target customer retrenches. JWN comps flat in 2016/2017, GM pressure mounts (~20 bps per year), and SG&A deleverages ~30-40 bps per year. Investors fear margin declines will continue, leading the multiple to contract to Why Underweight? Secular Challenges Eclipse JWN's Strengths: JWN's standout service, competitive pricing, coveted product, and seamless multichannel shopping experience differentiate JWN from department store peers and should stay relevant L-T. But, as noted in our 2016 Outlook, department store margins appear in secular decline, largely driven by channel shift to lower margin ecommerce sales, and JWN is not immune. Although we think JWN can remain highly relevant, its future earnings potential appears limited, triggering our downgrade. Key Value Drivers Soft consumer spending on apparel could weigh on JWN's comp. Eroding Rack sales productivity and ROIC and a more modest pace of Nordstrom.com sales growth will limit JWN's top-line potential, as these two channels have accounted for ~75% of sales growth since Apparel deflation and pricing pressure from new and existing competitors continue to weigh on JWN's GMs. Additionally, on our reduced comp forecasts, we believe JWN will continue to face expense deleverage from heightened occupancy costs. ecommerce is lower margin than full-line stores and as greater percentage of sales shift online, we expect margins to continue to suffer. Moreover, the digital investment cycle may prove unending as ecommerce leaders (i.e Amazon) continue to raise consumer expectations for speed, accessibility, and price. Buybacks have added ~4% to annual EPS growth since However, given JWN's current cash position, we now model ~$450 M in 2017/2018 buyback (vs. $600-$650M prior). Investment Risks Extreme strength at the high end causes a meaningful rebound in store comps and ecommerce growth. EBIT margins stabilize after multi-year declines. Capital spending on IT/Technology meaningfully decelerates, potentially allowing JWN to drive expense leverage on a 1-2% comp. Rack's new store productivity rebounds. Macy's and other department stores struggle in off-price. 73

74 Overweight: Michael Kors (KORS) Price Target $63 Bull $80 Base $63 Bear $35 $ x Bull Case $4.70 FY2 EPS(e) 15x Base Case $4.20 FY2 EPS(e) 10x Bear Case $3.50 FY2 EPS(e) Source: Morgan Stanley Research, Thomson (pricing) Recent Report: 2Q Comp Stabilization A Success $36.15 $80.00 (+121%) $63.00 (+74%) $35.00 (-3%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~KORS.N~ Valuation Methodology Our scenarios are derived by applying a multiple based on historical averages with adjustments for growth and the economic cycle to our FY1 estimates in each scenario below. Running with the Jet Set. A reacceleration to positive comps, ~10% wholesale growth, roughly flat GM, and greater than expected SG&A leverage result in close to $5 earnings power. Bear case fears are put to rest and the stock rerates to 17x. KORS disproves the "Coach 2.0" bear case. KORS' global comps stabilize and wholesale grows +LSD. GM remains relatively stable and drives a sustainable ~24% EBIT margin long term. Stock re-rates as the market regains confidence in the future financial outlook of the business. Brand loses traction. NA comps remain deeply negative. Europe fails to maintain its rapid growth trajectory and Asia slows on falling global GDP. Earnings decline double-digits y/y. Why Overweight? We believe KORS' stock recovery likely requires two steps in order to convince the market current consensus estimates are achievable. We think 2Q comp acceleration and guidance for 3Q comp stabilization is the first step in this process and should help the stock rerate to 12-13x as the market realizes today's 10x P/E is not the right multiple. If comps continue to stabilize, markdown/margin pressures begin to ease in 4Q, and management continues to buy back stock, we think KORS could begin to deliver positive EPS revisions in mid CY2016. This is likely the catalyst that causes the stock to rerate to 14-15x. KORS continues to capitalize on the design credibility and unique advantage created by founder Michael Kors fame. We see multiple growth avenues from category and geographic expansion; the North American handbag market continues to grow at a +LSD rate. Our outlook calls for a 3% sales CAGR through 2016 driven by revenue growth across geographies, channels, and categories. Key Value Drivers Sales growth: Key strategies 1) Expand North Am. store base; 2) Continued wholesale and same store sales; 3) Grow dept. store shop-in-shops; 4) Develop EU retail and wholesale businesses; 5) Expand throughout Japan and SE Asia; 6) Category expansions; 7) US and international ecommerce growth. Operating margin: Generally dictated by pricing, inventory management, and SG&A control. KORS potential channel, category, and geographic mix shifts are also important drivers. Potential Catalysts Credit card transaction data such as NPD or 1010 data Channel checks Earnings releases News related to order volume changes Supply chain disruptions Risks to Our Price Target Key man risk - Michael Kors. US &/or European economy falters. Brand cedes share in competitive environment. Execution risk - Management is juggling various growth initiatives - 1) expanding the global store count; 2) broadening the breadth and depth of product categories offered; and 3) bringing ecomm in-house. The China business is currently a separate entity not owned by KORS. GM falls or SG&A rises to a greater degree than expected. 74

75 Underweight: Kohl s (KSS) Bull $62 Base $45 Bear $39 $ x Bull Case 17e EPS $ x Base Case 17e EPS $ x Bear Case 17e EPS $3.65 Source: Morgan Stanley Research, Thomson (pricing) Recent Report: $4.40 EPS Could Be a "Great" Stretch $49.98 $62.00 (+24%) $45.00 (-10%) $39.00 (-22%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~KSS.N~ Kohl s finds its sweet spot and earns $5.10 in 2017 and its multiple expands to 12.5x. Comp store sales grow +1-2% as brand focused marketing resonates with consumer faster than expected. Product introductions accelerate and expand KSS centercore penetration. Gross margins improve as y/y promotional cadence wanes. Share buybacks exceed plan. Sales and margins continue to lag; capital return story loses steam. Kohl's fails to deliver a top-line improvement and margin erosion continues, with -0.5% comps, 10 bps GM pressure, 10 bps SG&A deleverage, resulting in 2017 EPS $4.30. KSS' P/E multiple stays at ~10.5x, leading to a $45 stock price. Competitive environment intensifies. KSS comps -LSD as its new sales strategy fails to gain traction and JCP regains market share faster than expected. Gross margins contract and fixed costs deleverage. Share buybacks fall below plan. Why Underweight? Merchandise offering (50% private label) has lost resonance with consumers over the past 5 years, leaving KSS in a weakened competitive position, particularly relative to the more compelling value of off-price retailers. Further, KSS struggles to secure compelling national brands for its assortment. We see ongoing sales and earnings risk. Valuation is too high for a market share loser with little sales/earnings visibility. Key Value Drivers Comp store sales: Steady sales and traffic improvement is critical. Lack of product newness: We think this contributes to sales weakness. Also, a lack of branded centercore offerings (shoes, handbags, cosmetics) is a disadvantage. Potential SG&A leverage: Despite tight expense control, SG&A has delevered since FY13. SG&A could potentially deleverage again in 2015 on slower sales growth. Slowing sq. ft. growth: KSS will open ~4 stores in FY15 (flat yoy growth, down from 2.8% in 11, 1.1% in 12, and 0.7% in '13). Stepped-up ecommerce investments: ecommerce sales grew 42% in 2012 to $1.4Bn and grew ~20% in Use of B/S: Share buyback authorization is ~$3Bn. KSS also pays a ~3.2% dividend yield. Risks to Our Price Target KSS comps +2% in 2H15 as new sales strategy resonates more than expected and offsets economic headwinds. Gross margins hit company plan. Buybacks increase above our forecasts. KSS gains distribution access to hot centercore brands. 75

76 Overweight: L Brands (LB) $ 140 Price Target $107 Bull $123 Base $107 Bear $ x Bull Case FY17e $4.90 EPS 23.5x Base Case FY17e $4.55 EPS 18x Bear Case FY17e $3.80 EPS Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Standout 3Q; 4Q Runway Ready $92.25 $ (+33%) $ (+16%) $68.00 (-26%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~LB.N~ 23.5x multiple on our $ EPS outlook; multiple based on global brands peer group applied to our FY17 EPS estimates in each case. Global brand territory. VS and BBW store expansions and remodels coupled with shorter lead times drive consistent +MSD% comps domestically and 19% operating margins. China expansion ramps faster than the market anticipates. Multiple expands into elite brand range. Steady gains continue. 17 margins climb to ~18.5% and international story continues to play out as expected, with China an increasing focus. VS and BBW store expansions and remodels help to drive steady +3% comp growth. Stock tracks strong low to mid-teens y/y EPS growth. Loses steam. Operating margins stay roughly flat at 17% and LB only achieves +1-2% SSS growth. Multiple contracts to 18x as growth momentum slows. Why Overweight? We think the Street underestimates the company s international growth and EBIT margin expansion opportunity. We find current 23x FY16e EPS valuation appropriate for two brands (Victoria s Secret and Bath & Body Works) with no real peers and genuine global growth prospects. We have conviction in our above consensus, out-year EPS estimates. We believe a 20% operating margin in the long run is achievable. Key Value Drivers/Catalysts Store growth: New international stores provide many years of new store opening potential. Same store sales: Main stock driver and top business health indicator. Gross margin: Continued supply chain improvement, increased international penetration, strong sales and inventory management initiatives should drive gross margin, and ultimately EPS, higher. Potential Catalysts Monthly Retail Sales Releases; Quarterly Earning Reports. Risks to Our Price Target New competition in intimate apparel: Concepts like aerie and Soma have failed to take share from VS, but new competition could emerge. Operational execution: The next leg of margin expansion depends in part on supply chain improvements. LB could experience growing pains near term, similar to 2007 inventory management and POS upgrade. Personnel risk: In our opinion, an effective, cohesive leadership team has emerged over the past 4-6 years. Turnover could disrupt execution and performance. 76

77 Overweight: Lululemon Athletica Inc. (LULU) Price Target $68 Bull $81 Base $68 Bear $37 $ x Bull Case FY 17 EPS(e) $ x Base Case FY 17 EPS(e) $ x Bear Case FY17 EPS(e)$2.05 $55.97 Valuation Methodology Our $68 price target is derived by applying a 25x multiple based on historical averages with adjustments for growth and the economic cycle to our FY17 EPS estimate. LULU's comps accelerate to consistent +HSD, driving high-teens top-line growth. In addition, GM exceeds our current base case estimate for a modest recovery, returning to ~51%by SG&A remains well controlled at ~30.5% of sales. Combined, these factors lead to EPS of $3.00 by MSD comps continue, growth initiatives accelerate top-line to a mid-teens % increase. GM gradually recovers to 50.1% by SGA deleverages modestly over the next several years to 30.9% of sales vs. 2015E 30.6%. Combined, these factors deliver EPS of $2.70 in Competitive environment heats up, comps slow to +LSD as other brands take share. GM recovery takes longer than anticipated, with little recovery from 2015 at 48.2%. SG&A continues to deleverage on weaker than expected comps, leading to EPS of $2.05 in Source: Morgan Stanley Research, Thomson (pricing) Recent Report: Management Meeting Review: LULU Remains Our Favorite 2016 Turnaround $81.00 (+45%) $68.00 (+21%) $37.00 (-34%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~LULU.O~ Why Overweight? LULU's unique brand positioning and fashionable product offering have allowed it to dominate the North American athletic yoga apparel category. Compelling LT growth opportunity driven by 4 main factors: 1) international expansion, 2) continued growth in men's, 3) larger format stores and remodels, and 4) further ivivva store roll-outs. Management believes LULU has the ability to return to 2014 merchandise margin levels, but even our ~20% EPS growth estimate is predicated on a more modest recovery (+100 bps) than management's guidance (+300 bps). We see the current valuation as attractive given that our '15-17E EPS estimates imply a 1.2x PEG ratio vs. an average of 1.5x for a group of comparable high-growth retail stocks. Key Value Drivers Same store sales This metric is the best indicator of brand strength and earnings potential. New store growth LULU remains only ~2/3 penetrated in the US. Europe/Asia are also opportunities. Operating margin LULU earns one of the highest margins in retail. Men's sales growth, ivivva store roll-outs, and larger store formats are also future opportunities. Investment Risks New competitors could emerge or current competitors may become more aggressive. Should consumers shift from wearing athletic apparel to denim in nonathletic/everyday settings, this could pose a risk to LULU's sales. Elevated 4Q ending inventory pressuring GM throughout Should comps fall short of our expectations (+5.0% comp in 4Q15/ +6.1% comp in 2016), the stock may experience further multiple compression, as our 25x multiple is warranted on LULU maintaining MSD comp growth in addition to its other sales initiatives. FX volatility could continue to impact sales and margins. If the CAD devalued ~10%, we estimate it would have an approximate $40M impact to revenue and ~5c impact to EPS (note these are annual figures and exclude FX gains and losses on the balance sheet). 77

78 Equal-weight: Macy s (M) Price Target $40 Bull $55 Base $40 Bear $30 $ x Bull Case 17e EPS $ x Base Case 17e EPS $ x Bear Case 17e EPS $3.00 $38.64 Valuation Methodology Our scenarios are derived by applying a multiple based on historical averages with adjustments for growth and the economic cycle to our FY2 estimates in each case. Market share gains accelerate from current levels. M comps +0.5% in 2016/2017, as tourism headwinds gradually abate and the overall apparel spending environment improves. GM expands ~20 bps in 2016 and ~10 bps thereafter. FY17 EBIT margin ~8.3%. Multiple slightly expands from current x P/E. Market share gains continue at a modestly slowing pace. Comps stay negative in 2016 (-0.9%), but turn flat in SG&A is reduced by ~$333M from cost save initiatives, partially offset by ~1-2% core SG&A growth SG&A reductions are more modest (~$83M), largely offset by ~1% core SG&A growth. Buybacks are reduces to ~$800M-$1B in out-years due to declining FCF. Competitive pressures escalate. Department store sector remains under intense pressure. Center core categories continue to lag and M cedes market share to off-price, comps stay negative in 2016/2017. GM erosion and SG&A deleverage continues. Multiple contracts. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: December Recap/January Preview: Fundamental Concerns Remain $55.00 (+42%) $40.00 (+4%) $30.00 (-22%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~M.N~ Why Equal-weight? Macy's continues to undergo core operating challenges, similar to peers in the department store space. Expense cuts, real estate monetization, and secondary growth initiatives are encouraging, but we think the market needs to see EBIT stabilization and a return to strong cash flow generation in order to become more constructive on the stock. Stay EW. Key Value Drivers My Macy s localization driving share gains: Merchandise assortments focused on local customer needs and preferences. Omni-channel initiatives: Investments in online (e.g. expanded warehouse, ongoing site improvements, better inventory integration with the stores). MAGIC selling: Intense training of all sales associates has dramatically improved the in-store environment. Potential real estate monetization SG&A reductions (~$500 net of growth initiatives are expected by 2017). Potential Catalysts Earning announcements Risks to Our Price Target Execution mis-steps A severe macro slowdown A greater than expected top-line turnaround at JCP 78

79 Price Target (Jan-17) Historical Stock Performance Current Stock Price M O R G A N S T A N L E Y R E S E A R C H Overweight: Ross Stores (ROST) Price Target $60 Bull $70 Base $60 Bear $34 $ x Bull Case $3.35 FY17 EPS(e) 20x Base Case $3.00 FY17 EPS(e) 14x Bear Case $2.45 FY17 EPS(e) Source: Morgan Stanley Research, Thomson (pricing) Report: Impressive Consistency in a Tough Environment $52.19 $70.00 (+34%) $60.00 (+15%) $34.00 (-35%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 WARNINGDONOTEDIT_RRS4RL~ROST.O~ Valuation Methodology Our scenarios are derived by applying a multiple based on historical averages with adjustments for growth and the economic cycle to our FY2 estimates in each case. It s an Off-Price Paradise. The economy strengthens, but not enough to spur trade-up. Low gas prices plus wage growth spark incremental spending from lower income consumers, driving consistent +MSD comps. Share gains continue and initiatives boost operating margins to 14.2%. Market adopts secular winner thesis and awards ROST a higher multiple. Emerging secular winner. Share gains continue and ROST uses store growth, solid +2% comps and buybacks to drive double digit EPS growth while margins remain flat. Premium to market multiple maintained due to sustainable +HSD-LDD EPS growth algorithm. Off-Price becomes off-trend. A large and unanticipated macro recovery drives consumers back to aspirational brands. Flat comps drive operating margin deterioration to ~12.3%, ROST is once again perceived as a cyclical play and the P/E contracts. Why Overweight? ROST is a secular winner in the battle between moderate Department Stores and Off-Price Retail. Consumers increasingly prefer the Off-Price better brands at lower prices value proposition over moderate department stores private label merchandise despite the easier shopping experience. The Street believes JCP s return to traditional promotional strategies will pull traffic/sales from ROST. However, we think newer off-price shoppers find the channel value superior to promotional moderate brand offerings. We see potential upside to our earnings estimates. The market fears P/E contraction, but we view this as low risk since ROST is no longer a cyclical story. We model an 10% 5- yr. EPS CAGR and see upside to our estimates, supporting today s P/E in our view. Key Value Drivers Same-store sales trends. New store growth Ross Dress for Less could reach 2,000 stores (from ~1,210) and dd s DISCOUNTS may grow to 500 stores from 152 in '14. EBIT margin and inventory levels. Potential Catalysts Earning announcements Key macro news Risks to Our Price Target Despite a long history of strong execution, ROST unexpectedly stumbles on inventory, real estate or some other critical functional area, or the transition to a new CEO goes less smoothly than we anticipate. dd s (lower-price concept) expansion happens more slowly than we expect. JCP generates strong traffic growth, pulling traffic from the offprice channel, leading to slower or negative SSS growth. 79

80 Equal-weight: Tiffany & Co. (TIF) $ 120 Price Target $91 Bull $112 Base $91 Bear $ x Bull Case 2017e EPS of $ x Base Case 2017e EPS of $ x Bear Case 2017e EPS of $3.50 Source: Morgan Stanley Research, Thomson (pricing) Recent Report: 3Q A Relief; We See a High Quality Business on Sale $66.70 $ (+68%) $91.00 (+36%) $56.00 (-16%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~TIF.N~ Valuation Methodology We derive our scenario values by applying a multiple based on historical averages + peers, adjusting for growth and the economic cycle, to our 2017 EPSe. TIF comps +MSD. NA sales strategies drive increased store productivity and global tourist spending meaningfully reaccelerates. Favorable product costs and sales mix shift drive peak 62% gross margin. SG&A leverages slightly. Sales and earnings growth returns as F/X pressures abate. Domestic US sales recover and tourists become accustomed to a strong USD, spending closer to historical norms sales grow +MSD and peak gross margin remains stable due to favorable product costs. Sales take another leg down. The US dollar strengthens further both pressuring foreign tourist discretionary spending and currency translation. Fashion category sales remains lackluster. TIF EPS growth remains negative -MSD. Why Equal-weight? TIF s dominant luxury brand, global expansion potential, and pricing power make it a fundamentally attractive business. TIF continues to focus on store experience, advancing customer insights, innovative product development, and engaging the global shopper. Thoughtful space addition and modest increases underpin growth. Favorable product input costs (precious metals) could drive 2H16/2017 gross margin upside. Constant currency sales growth is solid but F/X headwinds reduce earnings visibility. Key Value Drivers TIF can grow to 50 stores in China and over 60 stores in Europe over the next several years. Gold fashion jewelry shows recent progress. We estimate gold delivers ~65-70% GM. Reaching 150 total Americas stores seems achievable and implies ~5 years of at least mid-single-digit unit growth. Investment Risks Further macro deterioration. The broad diversity of TIF s revenue stream means one-time events or macroeconomic shocks in different markets across the world could influence TIF s results. With over 50% of sales driven by int l markets, sales and profits are impacted by changes in foreign currency rates relative to the dollar. With 80% of SG&A costs fixed, sales slowdown could deleverage fixed expenses. 80

81 Equal-weight: TJX Companies (TJX) Price Target $76 Bull $88 Base $76 $ x Bull Case 2017 $4.20 EPS 20x Base Case 2017 $3.80 EPS $67.69 $88.00 (+30%) $76.00 (+12%) $53.00 (-22%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price WARNINGDONOTEDIT_RRS4RL~TJX.N~ Valuation methodology derived by applying a multiple based on historical averages with adjustments for growth and the economic cycle to our FY2 estimates in each case. +MSD% SSS, Gross Margin Expansion continues. Faster than expected international expansion drives +HSD top line. Currency presents less of a headwind than expected. TJX is able to offset wage headwinds with better than expected top line. Macro uncertainty benefits TJX s value focus and marketing investment drive shoppers to TJX stores globally. SSS +L-MSD% through Traffic and ticket continue to drive comp as customers continue to appreciate TJX s value proposition. However incremental investments and wage increases slightly weigh on OM. Over the last 3 years, TJX has traded ~17.5x P/E. However, more recently, the stock has traded closer to 20x, and for most of 2015, close to if not above this valuation level. Our 20x reflects the premium investors are placing on the off-price retailers as they continue to take share from the department stores and other specialty retailers. We think it s unlikely the valuation for TJX contracts below this level given recent comp momentum, high square footage growth (both domestically and internationally), and more recently its e-commerce expansion. Why Equal-weight? Incremental investments, FX headwinds, and wage pressures likely limit EPS growth over the next months and keep us Equal-weight. TJX is also operating at peak sales productivity, margins, and earnings. We remain positive on TJX s long-term growth. We see a 9% annual EPS CAGR over the next 5 years driven by 1) a low-to-mid-single-digit comp rate 2) 4-5% square footage growth 3) ~4% share repurchases. TJX s scale and strategic and flexible business model supports stable growth and is a competitive advantage in our view. Key Value Drivers New store growth Same-store sales trends Operating margin Inventory levels Stock buybacks Investment Risks Difficulties with new business expansion/new ventures perform better than expected Failure to maintain nimble inventories/increased buying capabilities result in above-expectations inventory management and gross margin deterioration Execution mis-fires similar to TJX Europe s 2010 results Foreign currency exchange risk Bear $53 16x Bear Case 2017 $3.30 EPS SSS ~1%; Margin Contraction. SSS slow driven by traffic declines as TJX s value proposition becomes less compelling in light of major macro weakness. Incremental investments and wage increases, coupled with currency headwinds to pressure margins more than the Street anticipates. Our 16x multiple is where we expect TJX to trade should we enter a recession. Source: Morgan Stanley Research, Thomson (pricing) Recent Report: 3Q's Strong Result, Business as Usual 81

82 Equal-weight: Urban Outfitters (URBN) Price Target $31 Bull $38 Base $31 $ x $ e bull case EPS 15x $ e base case EPS 10x $ e bear case EPS $21.02 $38.00 (+81%) $31.00 (+47%) $15.00 (-29%) 0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Price Target (Jan-17) Historical Stock Performance Current Stock Price Valuation Methodology Our scenarios are derived by applying a multiple based on historical averages + peers, adjusting for growth and the economic cycle, to our 2017 estimates in each scenario below. Consistency across all brands.uo's momentum continues and Anthro stabilizes, driving +L-MSD total comps. Gross margin exceeds 2014 levels as better product execution drives lower markdowns and higher initial mark ups but SG&A continues to deleverage slightly leading to a ~10.5% EBIT margin. Turnaround takes time to play out. After a tough 2015, gross margin stabilizes and recovers to 2014 levels. Modestly positive comps at all brands drives+lsd total comps, but continued SG&A deleverage results in a ~9.9% EBIT margin. UO's momentum not sustained; Anthro decelerates further: Attempted fixes do not work in the expected time frame and both Anthro and UO must go back to the drawing board. Investors question if URBN can combat the tide of apparel price deflation. Bear $15 Source: Morgan Stanley Research, Thomson (pricing) Recent Report: 4Q Deceleration Weighs on Shares, but Valuation Becoming Interesting WARNINGDONOTEDIT_RRS4RL~URBN.O~ Why Equal-weight? We see significant gross margin recovery opportunity with 2015e GM more than 600 bps below 2010 s 41.2%. ~5% revenue growth and share buybacks along with slight margin deterioration should drive ~6.5% EPS CAGR through However, until URBN's earnings visibility improves and proves all three brands can deliver consistent sales momentum, the market may not afford the stock a premium multiple. We see a balanced risk/reward and maintain our EW rating. Key Value Drivers Category expansion: URBN plans to expand lingerie, footwear, wedding and petites online and in stores using larger store formats. Gross margin: Merchandise margin improvement from improving markdown levels at Anthropologie and continued progress at UO. International: Growing from ~50 to ~100 stores and contributing ~100 bps to operating margin. E-commerce: Online likely surpassed ~30% of sales in We believe success in this channel is one of URBN s key competitive advantages. Potential Catalysts Earnings release QTD comp released in 10-Q New category introductions / store expansions Risks to Our Price Target Sector-wide multiple contraction Fashion: URBN s design and buying team must operate on the forefront of new trends. Any misstep in fashion execution could hurt sales & margins. New store productivity: If URBN experiences declining productivity on new openings, EPS growth could slow and pressure the stock. Execution: Execution may be worse than we anticipate. Slower consumer spending behavior: Consumers may spend less on apparel or be more selective and choose lower price point brands. 82

83 Morgan Stanley is acting as financial advisor to J.C. Penney Company Inc. ( JCP ) in connection with its purchase of a group annuity contract that will settle a substantial portion of JCP s remaining retiree pension benefit obligations, as announced on Oct. 2, The transaction s final size is subject to the condition that the qualified pension plan remains overfunded at closing. If market conditions warrant, closing may be extended to JCP has agreed to pay fees to Morgan Stanley for its financial services. Please refer to the notes at the end of the report. 83

84 Disclosure section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., and/or Morgan Stanley Canada Limited. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V., Morgan Stanley Canada Limited and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, USA. For valuation methodology and risks associated with any price targets referenced in this research report, please contact the Client Support Team as follows: US/Canada ; Hong Kong ; Latin America (U.S.); London +44 (0) ; Singapore ; Sydney +61 (0) ; Tokyo +81 (0) Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Gregory Baglione; Lauren Cassel; Kimberly C Greenberger. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at Important US Regulatory Disclosures on Subject Companies As of December 31, 2015, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Abercrombie & Fitch Co., Express, Inc., L Brands Inc, Lululemon Athletica Inc., Macy's Inc., Michael Kors Holdings Ltd, Skullcandy Inc, The Children's Place Inc. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Kohl's. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from J.C. Penney Co., Kohl's, Nordstrom. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Abercrombie & Fitch Co., American Eagle Outfitters, Inc., Burlington Stores Inc, Chico's FAS Inc., Coach Inc, Express, Inc., Gap Inc, J.C. Penney Co., Kohl's, L Brands Inc, Lululemon Athletica Inc., Macy's Inc., Michael Kors Holdings Ltd, Nordstrom, Ross Stores Inc., Skullcandy Inc, Tiffany & Co., TJX Companies Inc., Urban Outfitters Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Burlington Stores Inc, J.C. Penney Co., Kohl's, Macy's Inc., Nordstrom, Skullcandy Inc. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Abercrombie & Fitch Co., American Eagle Outfitters, Inc., Burlington Stores Inc, Chico's FAS Inc., Coach Inc, Express, Inc., Gap Inc, J.C. Penney Co., Kohl's, L Brands Inc, Lululemon Athletica Inc., Macy's Inc., Michael Kors Holdings Ltd, Nordstrom, Ross Stores Inc., Skullcandy Inc, Tiffany & Co., TJX Companies Inc., Urban Outfitters Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Abercrombie & Fitch Co., Burlington Stores Inc, Express, Inc., J.C. Penney Co., Kohl's, L Brands Inc, Macy's Inc., Nordstrom, Skullcandy Inc, TJX Companies Inc.. An employee, director or consultant of Morgan Stanley is a director of Macy's Inc.. This person is not a research analyst or a member of a research analyst's household. 84

85 Disclosure section (cont.) Morgan Stanley & Co. LLC makes a market in the securities of Abercrombie & Fitch Co., American Eagle Outfitters, Inc., Burlington Stores Inc, Chico's FAS Inc., Coach Inc, Express, Inc., Gap Inc, J.C. Penney Co., Kohl's, L Brands Inc, Lululemon Athletica Inc., Macy's Inc., Michael Kors Holdings Ltd, Nordstrom, Ross Stores Inc., Skullcandy Inc, The Children's Place Inc, Tiffany & Co., TJX Companies Inc., Urban Outfitters Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-us jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of December 31, 2015) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. 85

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89 Disclosure section (cont.) 89