Internet Trends In Retail and Restructuring Implications Consumer Purchasing Trends, Omni-channel and strategic M&A

1. PRIVATE AND CONFIDENTIAL DECEMBER 10, 2014
RMA: Senior Workout Officers Fall Round Table
Retail Sector Trends and Risk

2. PRIVATE AND CONFIDENTIAL
2
Table of Contents
Section
I Background on Panelists & Introduction 3
II Impact of E-Commerce 7
III What is Omni-Channel? 15
IV Debt Market & Retail Sector Risk Profile 23
V Wrap Up & Q&A 36

3. 3
PRIVATE AND CONFIDENTIAL
Background on Panelists & Introduction

4. PRIVATE AND CONFIDENTIAL
4
Introduction to Peter J. Solomon Company and AlixPartners Panelists
Peter J. Solomon Company AlixPartners
Durc A. Savini
Managing Director,
Head of Restructuring
& Recapitalization
212.508.1618 (w)
dsavini@pjsc.com
Jeffrey A. Derman
Managing Director,
Mergers & Acquisitions
(Retail / Consumer)
212.508.1625 (w)
jderman@pjsc.com
Deborah Rieger-
Paganis
Director, Turnaround &
Restructuring
212.297.6337 (w)
dpaganis@alixpartners.
com
Ted Stenger
Managing Director,
Turnaround &
Restructuring
212.297.6318 (w)
tstenger@alixpartners.
com

5. PRIVATE AND CONFIDENTIAL
5
The Retail Industry Has Evolved Over Time
 Retail industry in midst of widespread restructuring to reduce over-capacity following decades of new store growth
 Each successive wave of new formats ended more quickly than the previous wave (discount stores matured in 35 years,
specialty stores in 25 years, category killers in 15 years and outlets in 10 years)
– Waves created by entrepreneurs, funded by VCs, and staffed by retail veterans
 Aggressive national chains (Wal-Mart, Target, Kohl’s) exacerbated the competitive environment and created additional capacity
 Consumers more educated about “value”
 Chains selling a value proposition have flourished as have, paradoxically, stores offering high-end quality merchandise
 Despite perceived threat from Internet vendors, on-site shopping has remained the dominant retail format as retailers seek to
leverage store base as competitive advantage
 The shift to mobile commerce continues, with materially higher conversion rates through tablets versus smartphones
Growth of
Department
Stores
Growth of
Discounters
Increasing
Strength of
Specialty
Store Chains
Roll out of
Big Box
Category
Killers
Growth of
Outlet Stores
Rise of
Dollars Stores
and Return of
Large
Discounters
Evolution of
e-commerce
and other
forms of
distribution
1950s and
1960s
1960s and
1970s
1970s and
1980s
1980s and
1990s
Late 1980s &
Early 1990s
Late 1990s &
Early 2000s
Late 2000s –
Current

6. PRIVATE AND CONFIDENTIAL
6
The US retail market has grown to approximately $3 trillion, with
grocery accounting for the largest share of the market
Source: Euromonitor International, May 2014.
2013 US Retail Sales By Sector

7. 7
PRIVATE AND CONFIDENTIAL
Impact of E-Commerce

8. PRIVATE AND CONFIDENTIAL
8
E-commerce penetration as a % of sales is growing rapidly & forecast
to reach 16% of US retail sales by 2018
Source: UBS Retail Study, 10/10/14.
US Retail Sales and E-Commerce Penetration
Penetration today 9%
w/o travel only 6%

9. PRIVATE AND CONFIDENTIAL
9
Just Who is Shopping Online?
Source: UBS Retail Study, 10/10/14 (respondents data).
Percentage of Total Spend Done Online by Segment

10. PRIVATE AND CONFIDENTIAL
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What is Driving the Decision to Either Shop Online or Not?
Source: UBS Retail Study, 10/10/14.
Reasons Consumers Buy Online Reasons Consumers Do Not Buy Online

11. PRIVATE AND CONFIDENTIAL
11
And What are They Shopping For?
Source: UBS Retail Study, 10/10/14.
Percentage of Total Spending Done Online by Product Category
High Penetration Online Sales
 Music 56%
 Books 50%
 Electronics 42%
Low Penetration Online Sales
 Groceries 6%
 Household Products 8%
 Personal Care Products 12%
Mid Penetration Online Sales
 Apparel 28%

12. PRIVATE AND CONFIDENTIAL
12
Internet sales are expected to grow at a 16.5% CAGR vs. overall U.S.
retail sales growth at 3.5%
2013 2018 Increase
U.S. Retail Sales $3,000B $3,600B $600B
Internet Sales 260B 565B 305B
Brick & Mortar Sales $295B
Source: UBS Retail Study, 10/10/14.
Although online shopping is slowly taking market share, the bulk of consumer
shopping still largely takes place at brick and mortar locations

13. PRIVATE AND CONFIDENTIAL
13
The impact of this shift to online shopping can be felt in a number of
areas
 Brick & mortar stores
– In-store fulfillment of online orders – convenience / omni-channel
– Re-prioritizing what is stocked in-store – high touch/need to see items
– New formats
• E-Tailers opening stores -- Zappo’s opened a store in Las Vegas
• E-Tailers and brick and mortar opening pop-up stores
– Significant investments in “owning” customers
• Loyalty programs internet and mail
• Sophisticated cataloging by specific customer using Big Data
• Omni-channel
 Landlords
– Reducing floor space – lower traffic
– Shorter term leases to synch with accelerated trending -- e.g. teen retailers
– Anchor tenants are changing rapidly and in some cases are not in development
plans

14. PRIVATE AND CONFIDENTIAL
14
As online and mobile shopping increases, the landscape will change
for certain retailers, particularly those:
 In highly shopped categories
─ Borders Books
 With transparent pricing
─ Branded product versus private label
─ Mobile apps
 Offering commoditized merchandise
─ Customer is agnostic to brand
 Where an in-store experience is not unique or value enhancing
─ Employees offer expertise advice
─ Store ambiance is pleasing
─ Technology plays a role in meeting customer needs
 Not able to offer alternative delivery options
Winning solutions must address each challenge

15. 15
PRIVATE AND CONFIDENTIAL
What is Omni-Channel?

16. PRIVATE AND CONFIDENTIAL
16
What is Omni-Channel?
The seamless approach to the consumer experience through
multiple retailing channels
“Customers should be able to start
their projects within one channel and
continue them in any other channel,
maintaining visibility to previously
generated ideas and selections, the
status of orders placed, and pending
deliveries…”
For Customers
“Expanded fulfillment capabilities will
allow transactions to be fulfilled
through the most convenient and
cost-effective means available,
whether from another store,
distribution center or directly from
the supplier…”
For Businesses
Per Lowe’s Annual Chairman’s Letter

17. PRIVATE AND CONFIDENTIAL
17
 In-store customer service as a strategic weapon
 People get to touch and feel the products
 Order online and pickup in store provides (near)
instant gratification and no shipping cost
 Every store can become a distribution center
 Offering exclusive products
Omni-Channel Mitigates Challenges from E-Commerce Competition
Challenges Posed by E-Commerce Omni-Channel Mitigants / Strategies
 Price transparency
 “Showrooming”
 Convenience of shopping from home
 E-Commerce retailers’ cost advantage (no rent,
streamlined inventory)
 Demographic shift to internet-only buyers
– Millennials one-third of consumption by 2020
 Fewer impulse attachment purposes
Critical Opportunity: Getting people in the door means they may buy more stuff

18. PRIVATE AND CONFIDENTIAL
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 “Shop in store, ship it home”
 Increasing capacity and productivity in DCs to shorten
delivery times
 Next-day service on all but large cube orders
 “William-Sonoma Express” – allows customer to call ahead
to store and have product rung up, wrapped and ready for
pick up
 “Where’s my order” interface for customers on smartphones
 Enabling warehouses to do more customization
Case Study: Williams-Sonoma Omni-Channel Capabilities
Key Trends Capabilities
Percentage of Company Shoppers that Shop the Retailer Over the Internet
Source: Company filings and UBS Equity Research.
“We continued to invest in technology to support our multi-channel business…and we believe the investments we are making in
technology to redefine the customer experience are allowing us to provide the best level of service to our customers”
- WSM 2013 Annual Report
E-Commerce represents 51% of total revenue, up
from 30% in 2009
E-Commerce has grown at a ~20% CAGR over
the period vs. 5% for retail stores
--
20.0%
40.0%
60.0%
80.0%

19. PRIVATE AND CONFIDENTIAL
19
Key Topics Our Clients Care About Today
“Can I still charge for
shipping?”
“Do I need to offer
same-day delivery?”
“How can I use M&A to
build scale, deepen or
broaden my offering,
enhance my capabilities
and/or add talent?”
“How the hell am I going
to beat Amazon?”
“How do I support a
fast-growth e-commerce
culture in my slow-
growth brick-and-mortar
enterprise?”
“How do I become truly
omni-channel?”

20. PRIVATE AND CONFIDENTIAL
20
Omni-Channel Retailer Strategies
Creating a Long Tail
/ Endless Aisle
Site-to-Store
Site-to-Store-to-Door
Anywhere, Anytime
Returns
International
Integrated Payment
Systems
Dynamic Pricing

21. PRIVATE AND CONFIDENTIAL
21
/
/
Recent Retail E-Commerce and Tech Acquisition Rationale
/
/
/
/
Extend Presence
in Category
Verticals
Accelerate
E-Commerce
Penetration
Online retailer of health, beauty and pharmacy products
Online retailer of baby care products
Online retailer of shoes
Online retailer of apparel and other outdoor accessories
Online retailer of home improvement products
Target Description
/ Online beauty / skincare retailer
Online value-oriented nutritional supplements retailer
/ Online kitchenware retailers/
(a) Nordstrom made an investment, not a full acquisition.
Acquire
Customers /
Community
/ Mobile and online fitness app community and developer
/ Online customized window treatment retailer
/ Online retailer of men’s clothing (a)

22. PRIVATE AND CONFIDENTIAL
22
/
/
/
Recent Retail E-Commerce and Tech Acquisition Rationale (cont.)
/
/
/
Leverage a
Complementary
Business Model
Add Technology,
Talent and
Capabilities
/
Restaurant ratings company
Digital distribution company for online games
Home service provider marketplace
Mobile social ad network / social media company
Daily deal site
Fashion boutique apparel distributor
Replacement parts platform for CE and appliances
Target Description
/ Online luxury retailer
/
/
/ Online flash sales site
/ Online curated retailer of men’s clothing

23. 23
PRIVATE AND CONFIDENTIAL
Debt Market & Retail Sector Risk Profile

24. PRIVATE AND CONFIDENTIAL
24
 For the 12-month period ended 9/30/14, the institutional loan default rate was 3.33% by principal amount, compared with 2.31%
for the period ended 9/30/13
– According to S&P, consensus view is that default rates will remain inside the historical average of 3.3% in the near-term due
to a lack of near-term maturities and short watch lists
 The volume of new issue leveraged loans and high yield bonds continued to increase, and while down from 1Q 2013 levels, still
remains at 2007 levels
U.S. Leveraged Loan Issuance
U.S. Leveraged Loan Issuances and Default Rate Since 2000
Source: Bloomberg, S&P 3Q’14 LCD reports.
--
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
$0
$40
$80
$120
$160
$200
1Q'00 1Q'01 1Q'02 1Q'03 1Q'04 1Q'05 1Q'06 1Q'07 1Q'08 1Q'09 1Q'10 1Q'11 1Q'12 1Q'13 1Q'14
Leveraged Loan Volume Default Rate Average Quarterly Issuances

25. PRIVATE AND CONFIDENTIAL
25
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
Shadow + Actual Default Rate Actual Default Rate
0%
25%
50%
75%
 The percentage of leveraged loan issuance rated single-B and lower was over 56% for 3Q’14 unchanged from the same period
in the previous year, approximating levels in 2006 / 2007 and 2009 / 2010
 S&P’s shadow default rate measures issuers that have missed a bond payment, entered into forbearance or hired bankruptcy
counsel
– Excluding EFH, the shadow default rate fell to 0.39% (3.33% including EFH) in November
U.S. Leveraged Loan Issuance (CONT.)
Distribution of Leveraged Loan Issuance Rated Single-B and Lower
Source: Bloomberg, S&P 3Q’14 LCD reports.
Default Rate and Shadow Default Rate by Amount
Annual Averages
EFH enters
shadow
default rate
EFH files

26. PRIVATE AND CONFIDENTIAL
26
U.S. Outstanding Debt
Maturity WallOutstanding Leveraged Loans and High Yield Bonds
Source: S&P LCD data.
 The aggregate amount of outstanding debt has grown considerably since 2007, at a rate of 8% annually
 At the end of 2011, the amount of loan maturities from 2014 - 2016 approximated $250 billion
 As of 3Q’14, the amount of maturities from 2014 - 2016 maturities declined to $26 billion
($ in Billions) ($ in Billions)
--
$500
$1,000
$1,500
$2,000
$2,500 Bank Loans Bonds
--
$250
$500
$750
$1,000 Bank Loans Bonds

27. PRIVATE AND CONFIDENTIAL
27
Leveraged Loan Issuer Credit Statistics – Overall Market
Average Total Debt / EBITDA (EBITDA – Capex) / Cash Interest
Source: S&P LCD data.
 Leverage has crept up to 2007 levels
 Cash flow coverage has improved since 2007
($ in Billions) ($ in Billions)
4.0 x
4.9 x 4.9 x
--
1.0 x
2.0 x
3.0 x
4.0 x
5.0 x
6.0 x
1.8 x
2.4 x
3.4 x
--
0.5 x
1.0 x
1.5 x
2.0 x
2.5 x
3.0 x
3.5 x
4.0 x

28. PRIVATE AND CONFIDENTIAL
28
Leveraged Loan Volume By Industry
YTD Leveraged Loan Volume By Industry
Source: Standard & Poor’s as of 11/20/14.
(a) Includes Retail, Restaurants and Retail Food & Drug.
(b) Includes Building Materials (1.9%), Aerospace & Defense (1.4%), TV (1.1%), Insurance (1.0%), Telecom Equipment (0.7%), Environmental (0.7%), Textile & Apparel (0.6%), Home Furnishings (0.5%),
Radio (0.5%), Forest Product (0.5%), Not for Profit (0.3%), Film (0.2%), Consumer Nondurables (0.2%) and Tobacco (0.1%).
 The retail industry is one of the largest issuers of leveraged loans
10%
2%
2%
2%
2%
3%
3%
3%
3%
3%
3%
3%
4%
5%
7%
9%
11%
12%
14%
0% 2% 4% 6% 8% 10% 12% 14% 16%
Other (b)
Transportation
Cable
Real Estate
Food & Beverage
Entertainment & Leisure
Telecom
Printing & Publishing
Metals & Mining
Utilities
Automotive
Gaming & Hotel
Manufacturing & Machinery
Chemicals
Oil & Gas
Retail (a)
Healthcare
Computers & Electronics
Services & Leasing

29. PRIVATE AND CONFIDENTIAL
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$0
$5
$10
$15
$20
$25
$30
Retail Leveraged Loan Volume
Annual Retail Leveraged Loan Issuances Since 2000 ($ in B)
Source: Standard & Poor’s.
 Retail loan volume increased at a 15% CAGR from 2000 to 2007, peaking at just over $18.5 billion in 2007
 Post financial crisis, volume has been in excess of $20 billion annually
 Through the first three quarters of 2014, volume has increased by nearly 50%

30. PRIVATE AND CONFIDENTIAL
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Average Total Debt / EBITDA (EBITDA – Capex) / Cash Interest
Source: S&P LCD data.
 While leverage has crept up from 2008, coverage levels are approaching their 2009 levels
($ in Billions) ($ in Billions)
3.4 x
5.1 x
4.5 x
--
1.0 x
2.0 x
3.0 x
4.0 x
5.0 x
6.0 x
2.4 x
1.7 x
3.5 x
--
0.5 x
1.0 x
1.5 x
2.0 x
2.5 x
3.0 x
3.5 x
4.0 x
4.5 x
Leveraged Loan Issuer Credit Statistics – Retail Market

31. PRIVATE AND CONFIDENTIAL
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Composition of Credit Quality in Retail
All S&P Rated Companies S&P Retail and Restaurants Industry Outlook Distribution
Source: Standard & Poor’s.
 S&P rated U.S. retail and restaurant companies tend to skew mostly toward below investment grade, compared with the
universe of all rated companies , which skews mostly toward investment grade
 Nevertheless, the outlook for the vast majority of S&P retail and restaurant issuers is stable
Stable
78%
Negative
12%
Watch Positive
1%
Watch
Negative
2%
Developing
1%
Positive
6%
BB+ or Lower
33%
BBB- or Higher
67%
S&P Rated U.S. Retail and Restaurants
BB+ or Lower
77%
BBB- or Higher
23%

32. PRIVATE AND CONFIDENTIAL
32
17%
14%
63%
1%
1%
3%
17%
31%
10%
3%
6%
4%
6%
4%
3%
3%
2%
1%
3%
1%
0% 5% 10% 15% 20% 25% 30% 35%
CCC-
CCC
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
Composition of Credit Quality in Retail (CONT.)
Long-Term Corporate Credit Rating
Source: Standard & Poor’s.
 77% of long-term credit rating issuers are below investment grade
Investment Grade

33. PRIVATE AND CONFIDENTIAL
33
S&P U.S. Retail and Restaurant Outlook
Food
Softlines
Hardlines
Specialty
Retail,
Wholesale
Apparel and
Luxury
Electronics,
Home, Office,
Entertainment
and Beauty
Food and Drug
Restaurants
Broadlines
Discount, Off-
Price and
Department
Stores
# of
Companies
Rated B+
and Below
Rated B-
and Below
Rated CCC+
and Below
20
33
35
29
32
7
26
18
17
26
(35%)
(79%)
(51%)
(59%)
(81%)
4
8
6
5
10
(20%)
(24%)
(17%)
(17%)
(31%)
2
2
1
2
0
(10%)
(6%)
(3%)
(7%)
(0%)
S&P
Outlook
Stable
Stable
Stable
Stable
Negative

34. PRIVATE AND CONFIDENTIAL
34
S&P U.S. Retail & Restaurant Rating Trends
Source: S&P RatingsDirect report dated October 29, 2014.
(a) YTD as of October 20, 2014.
 Declining upgrade / downgrade activity points to risk stabilization across retail sector
0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Upgrades Downgrades
(a)

35. PRIVATE AND CONFIDENTIAL
35
Retail Sector Challenges
Source: Standard & Poor’s.
 Teen retail experiencing reduced traffic and alternative spending
 Few specialty chains are demonstrating sustained positive comp store sales
and earnings
 Traditionally best-in-class adult specialty retailers continue to disappoint with
poor product execution and heavy reliance on promotions
 Highly competitive in price and product offerings
 Expansion opportunities exist internationally but limited growth domestically
for larger chains
 Cost inflation likely to continue pressuring operating margins
 Strategic price investments and promotional activity to gain consumers
continue to pressure margins
 Grocery stores challenged by burgeoning online retailers and over-aggressive
store expansion
 Specialty hardlines challenged by commoditization of product and reliance on
promotions
 Consumer electronics challenged by availability of product and competition
from online retailers
 Mid-tier retailers and regional department stores continue to struggle
 Weakness in mass retailers burdened by weak consumer spending power and
migration to online
 Competition from off-price retailers
Food
Softlines
Hardlines
Specialty
Retail,
Wholesale
Apparel and
Luxury
Electronics,
Home, Office,
Entertainment
and Beauty
Food and Drug
Restaurants
Broadlines
Discount, Off-
Price and
Department
Stores

36. 36
PRIVATE AND CONFIDENTIAL
Wrap up and Q & A

37. PRIVATE AND CONFIDENTIAL
37
 Current retail trends will create more distressed players over time
Takeaways
 Businesses will need to adapt to the changing landscape
– Changes to retail footprint/location requiring closures
– Investment in technology and supply chain
– Cost control/reduction efforts
– Internet has created price transparency and omni-channel approach hasn’t necessarily proven the
best response
 Winners and losers will emerge from the pack
– Sustainable niches must be developed and defended (Uniqlo vs. Abercrombie)
– Weakest players in sub-sectors (e.g. apparel, fast-food) with debt constraints most vulnerable
 Restructuring activity likely to accelerate as interest rates rise, giving way to
– Liquidity stresses
– Covenant breaches
– Inability to refinance as easily as in the recent past
– Expectation of continued pressure for Liquidations vs. Reorganizations