The Future of Retail: A Wall Street Perspective

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The Future of Retail: A Wall Street Perspective A Bifurcated Consumer and the Four Pillars of Success John Heinbockel Steven Forbes Please see slide 51 for Analyst

1 The Future of Retail: A Wall Street Perspective A Bifurcated Consumer and the Four Pillars of Success John Heinbockel Steven Forbes Please see slide 51 for Analyst Certification and Important Disclosures John Heinbockel john.heinbockel@guggenheimpartners.com Steven Forbes steven.forbes@guggenheimpartners.com July

2 A Bifurcated Consumer and the Four Pillars of Success The U.S. Consumer: The Stressed and the Blessed Despite Selective Purges, Competition Is Intensifying Lowered Expectations Facilitate Share-Driving Investments The Four Pillars of Success VPED Long-Term Implications to Consider The U.S. Consumer: The Stressed and the Blessed The Maturation of the Consumer Sector Macro/Micro Conundrum, Part One Services Macro/Micro Conundrum, Part Two E-Commerce The Low-End Consumer Is Being Squeezed The High-End Consumer Is Not Immune Debt, Currently A Non-Event, Is A Wild Card 2

3 The Consumer Sector Has Matured 3-4% Secular PCE Growth Source: Bureau of Economic Analysis and Guggenheim Securities, LLC. Beginning in 2013, Spending on Services Surpassed Goods Source: Bureau of Economic Analysis and Guggenheim Securities, LLC. 3

4 This Moderation Was Driven by Non-Durable Goods Durable Goods (34%) Motor Vehicles and Parts Furnishings and Household Equipment Recreational Goods and Vehicles Jewelry Non-Durable Goods (66%) Food and Beverage Clothing and Footwear Prescription Drugs Games, Toys, and Hobbies Household Supplies Personal Care Products Vehicle Fuels, Lubricants, and Fluids Source: Bureau of Economic Analysis and Guggenheim Securities, LLC. E-Commerce Is Growing 10x Brick & Mortar, Leaving A Smaller Pie Source: U.S. Census Bureau and Guggenheim Securities, LLC. 4

5 Lower-Income Households Are Deficit Spending, Higher-Income Ones Are Saving, But Not Much As of 2010 As of 2015 Source: Bureau of Labor Statistics and Guggenheim Securities, LLC. The Low-End Consumer Is Being Squeezed Source: Bureau of Labor Statistics and Guggenheim Securities, LLC. 5

6 The High-End Consumer Is Not Immune Source: Bureau of Labor Statistics and Guggenheim Securities, LLC. Higher-Income HH s Control 67% of Discretionary Spend, A Positive For Experiential Brands As of 2010 As of 2015 Source: Bureau of Labor Statistics and Guggenheim Securities, LLC. 6

Consumer Debt Is Rising Again, But Manageable Mortgage Rates Are Critical Source: Federal Reserve Bank of New York and Guggenheim Securities, LLC.

7 Consumer Debt Is Rising Again, But Manageable Mortgage Rates Are Critical Source: Federal Reserve Bank of New York and Guggenheim Securities, LLC. Despite Selective Purges, Competition Is Intensifying The United States Is Overstored Large Retailers Unit Growth Is Only Moderating As Capacity Is Repurposed Into Stronger Hands Low-Margin, Non-Traditional Competition Is Increasing The Unanticipated Consequences of Store Closings 7

8 The United States Is Simply Overstored Total Retail Footage: 13,000,000,000 U.S. Population: ~320,000,000 Retail Footage Per Person: ~40 Number of Households: ~130,000,000 Retail Footage Per Household: ~100 Shopping Centers: ~95,000 Population Per Shopping Center: ~3,400 Households Per Shopping Center: ~1,400 Source: Bureau of Labor Statistics, U.S. Census Bureau, CoStar Group, and Guggenheim Securities, LLC. Unit Growth Has Moderated But Remains Positive Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 24 large-cap retail companies (Enterprise Value of ~$10 Billion or More) 8

Store Closings Are Increasing But The Quality of

Forbes.com, and Guggenheim Securities, LLC.

Increasing Specialty Online Operators (Hollar,

Established E-Commerce Platforms (Amazon) New

9 Store Closings Are Increasing But The Quality of Competition Is Improving Source: Company Data, Forbes.com, and Guggenheim Securities, LLC. Low-Margin, Non-Traditional Competition Is Increasing Specialty Online Operators (Hollar, Warby Parker, Wayfair) Category Expansion by Established E-Commerce Platforms (Amazon) New Foreign Entrants (Primark, Lidl, SuperDry) New Business Models (Blue Apron) 9

10 The Unanticipated Consequences of Store Closings Direct Job Loss Indirect Job Loss (Adverse Traffic Impact) Headwind to Local Incomes The Need for Job Relocation (Population Changes) Shrinkage of the Tax Base, Effect On Public Spending Lowered Expectations Facilitate Share-Driving Investments Post-Great Recession, Retail Performed Well Sales Drove EBIT, EBIT Drove Share Price Outperformance Recently, We Have Seen A Retail Nightmare On Wall Street Shares Have Underperformed, Growth Expectations Have Moderated Lower Growth Algorithms = Incremental Share-Driving Investments 10

The Solid Post-Recession Performance Feels Like A Lifetime Ago 2011-2013 CAGRs (Expected vs. Actual)* Source: FactSet and Guggenheim Securities, LLC.

11 The Solid Post-Recession Performance Feels Like A Lifetime Ago CAGRs (Expected vs. Actual)* Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) From , Large Retail Stocks Generally Outperformed the S&P 500 Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) 11

12 Fundamentals Drove This Outperformance Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) The Last 18 Months Have Been A Vastly Different Story Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) 12

Growth Expectations Have Been Halved 2011-2013 CAGRs (Actual) vs. 2017-2019 CAGRs (Expected)* Source: FactSet and Guggenheim Securities, LLC.

13 Growth Expectations Have Been Halved CAGRs (Actual) vs CAGRs (Expected)* Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) Double-Digit Growth Should Be A Very Rare Occurrence Sales CAGR (Actual vs. Expected ) EBITDA CAGR (Actual vs. Expected ) Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) 13

14 EBITDA Margin Expansion Potential Appears Optimistic EBITDA Margin Expansion (Actual)* EBITDA Margin Expansion (Expected)* Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 29 large-cap retail companies (Enterprise Value of ~$10 Billion or More) But The Market Is Pricing In A Difficult Operating Environment % Change in FY1 P/E Multiples December 2014 vs. June 2017 % Change in FY1 EBITDA Multiples December 2014 vs. June 2017 Source: FactSet and Guggenheim Securities, LLC. *Based on a select group of 30 large-cap retail companies (Enterprise Value of ~$10 Billion or More) 14

15 The Four Pillars of Success VPED 1. An Unquestioned VALUE Proposition 2. True PRODUCT Differentiation 3. Unique In-Store EXPERIENCES With Value-Added Services 4. A Credible DIGITAL Offering PLNT s Pricing Is Virtually Unbeatable $0.30 A Day Source: Planet Fitness ( PLNT ) and Guggenheim Securities, LLC. 15

16 ALDI s Appeal Lies In Its Absolute, and Relative, Value Source: ALDI US and Guggenheim Securities, LLC. COST s Massive Pumpkin Pie for $5.99 Source: Costco Wholesale Corporation ( COST ) and Guggenheim Securities, LLC. 16

17 Member s Mark Improving Value Less Than $10 For A High-Quality Polo Source: Sam s Club ( WMT ) and Guggenheim Securities, LLC. FIVE s Fashion for $5 Presentation Is Great Too Source: Five Below ( FIVE ) and Guggenheim Securities, LLC. 17

18 RH s White Modern Sofa, Luxury At Its Finest Source: RH ( RH ) and Guggenheim Securities, LLC. Speaking of Differentiated Luxury, How About A Walk-In TCS Closet Source: The Container Store ( TCS ) and Guggenheim Securities, LLC. 18

19 The Most Crowded Store In Any Mall Source: Apple ( APPL ) and Guggenheim Securities, LLC. LULU s Product Remains A Stand-Out In A Crowded Space Source: Lululemon ( LULU ) and Guggenheim Securities, LLC. 19

20 Unique Partnerships Offer Differentiation PBKids Emily & Meritt Collection Source: Williams-Sonoma ( WSM ) and Guggenheim Securities, LLC. A Strong Statement By Adidas In DKS Athletic Shoe Department Source: Dick s Sporting Goods ( DKS ) and Guggenheim Securities, LLC. 20

21 RH s Design Atelier's Offer A Uniquely- Engaging Experience Source: RH ( RH ) and Guggenheim Securities, LLC. ULTA s Unique Experience Revolves Around Its Salons and Boutiques Source: Ulta Beauty ( ULTA ) and Guggenheim Securities, LLC. 21

22 On A More Basic Level, MIK s Classrooms Drive Valuable Customer Engagement Source: Michaels Stores ( MIK ) and Guggenheim Securities, LLC. CVS Minute Clinic: Raising The Bar On Convenient Primary Care Source: CVS Caremark ( CVS ) and Guggenheim Securities, LLC. 22

23 A Credible Digital Offering: 7 of the Top 10 Are B&M Source: Company Data, U.S. Census Bureau, emarketer, ATKearney Internet Retailer 2017 Report, and Guggenheim Securities, LLC. Digital Value Introducing The Pickup Discount Source: Walmart.com ( WMT ) and Guggenheim Securities, LLC. 23

Digital Product Differentiation One Click Project Shopping

24 Digital Value Jet s Renowned Basket Building Algorithm Source: jet.com ( WMT ) and Guggenheim Securities, LLC. Digital Product Differentiation One Click Project Shopping at MIK Source: Michaels.com ( MIK ) and Guggenheim Securities, LLC. 24

25 Digital Experiences Salon Appointment Scheduling at ULTA Source: Ulta Beauty ( ULTA ) and Guggenheim Securities, LLC. Long-Term Implications to Consider As Expectations Rise, What Happens to Customer Loyalty? How Are Consumers Going to Spend All of Their Free Time? What Happens to All of the Purged Retail Square Footage? What Do the Rural and Urban Communities of Tomorrow Look Like? What Is the Outlook for Future Retail LBOs and IPOs? 25

26 ANALYST CERTIFICATION By issuing this research report, each Guggenheim Securities, LLC ("Guggenheim Securities") research analyst whose name appears in this report hereby certifies that (i) all of the views expressed in this report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst. IMPORTANT DISCLOSURES Please refer to this website for any company-specific disclosures referenced in this report: Disclosure information is also available from Compliance, 330 Madison Avenue, New York, NY The research analyst(s) and research associate(s) have received compensation based upon various factors, including quality of research, investor client feedback, and Guggenheim Securities, LLC's overall revenues, which includes investment banking revenues. OTHER DISCLOSURES This communication does not constitute an offer of Shares to the public in the United Kingdom. No prospectus has been or will be approved in the United Kingdom in respect of the Securities. Consequently, this communication is directed only at (i) persons who are outside the United Kingdom or (ii) persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), (iii) high net worth entities falling within Article 49(2) of the Order (iv) and other persons to whom it may lawfully be communicated (all such persons together being referred to as relevant persons ). Any investment activity to which this communication relates will only be available to, and will only be engaged with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents. Copyright 2017 by Guggenheim Securities, LLC, ( Guggenheim ) a FINRA registered broker-dealer. All rights reserved. The contents of this report are based upon information or are obtained from sources that Guggenheim generally considers reliable, but Guggenheim makes no representations or warranties with respect to their accuracy, completeness, timeliness, suitability or otherwise, and assumes no responsibility to update them for subsequent events or knowledge. Guggenheim is not responsible for your use of this information. 26

Amazon.com, Inc. (AMZN)

Amazon.com, Inc. (AMZN) September 7, 2017 (AMZN) Channel Checks Highlight Positive Impact of WFM Price Cuts INVESTMENT HIGHLIGHTS: We recently conducted price comparison checks at Whole Foods, Safeway, Trader Joe's and Costco,