Deutsche Bank Securities Managing Director Charles Grom Sees High End and Discount Retailers Showing Investment Promise: the "Barbell Strategy"

Wall Street Transcript

67 WALL STREET, New York - September 3, 2012 - The Wall Street Transcript has just published its Retail Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Brick-And-Mortar Versus Online Retail Sales - Cautious Consumer Spending - Specialty Hardlines and Softlines Retail - Strong Secular Growth in E-Commerce - International Retail Platforms

Companies include: Wal-Mart Stores Inc. (WMT), Target Corp. (TGT), Costco Wholesale Corporation (COST), Family Dollar Stores Inc. (FDO), J. C. Penney Company, Inc. (JCP), Dollar Tree Inc. (DLTR), Kohl's Corp. (KSS), Safeway Inc. (SWY), SUPERVALU Inc. (SVU), Big Lots Inc. (BIG), Macy's, Inc. (M), Nordstrom Inc. (JWN), Saks Incorporated (SKS), The TJX Companies, Inc. (TJX), Ross Stores Inc. (ROST), Apple Inc. (AAPL), Kroger Co. (KR) and many others.

In the following excerpt from the Retail Report, an Institutional Investor All America Research Team equity analyst discusses the outlook for the sector for investors:

TWST: It sounds like the two extremes - the high-end stores and the lower-end value stores - are doing well while the middle is in the worst shape. Is that accurate?

Mr. Grom: Since my relaunch at DB last fall, we have identified what we call a "barbell strategy," which, of course, was to own the best-performing names at the high end and the best-performing names at the low end. When I say low end, I mean those retailers targeting a lower-income demographic.

As part of that barbell strategy, the key was to be hedged as much as possible, but also to avoid the middle-income consumer. It seems like the most strapped names - like Kohl's (KSS) and J. C. Penney, Safeway (SWY), Supervalu (SVU), Big Lots (BIG), Target - all fall in that zone. So with our barbell strategy, we have tried to target names at the high end that we like and names at the low end that we like. Again, we try to be as balanced and hedged as possible.

TWST: There were some earnings announcements over the past week or so. What did those tell us?

Mr. Grom: We are in the middle innings of earnings season for the second quarter. Four or five department stores reported last week, and you're seeing the winners continuing to win, and you're seeing losers continue to struggle. In other words, we saw no big surprises in the earnings.

For us, the winners were Macy's (M) and Nordstrom (JWN), which both are up about 13% year to date, and they both fall in that somewhat upper-echelon or higher-spending consumer. They both raised guidance. They both had inventory levels in control. They have both reported healthy second quarters with better-than-expected gross profit margin improvement and comps that were both up roughly 3% to 5%.

On the flip side, you had Kohl's and J. C. Penney also announce results. Kohl's lowered guidance, J. C. Penney removed their guidance for the full year. So obviously, J. C. Penney missed Street expectations by a mile. Like I said, the earnings showed that the names who were doing well are continuing to outperform, while other names continue to struggle. So we will see if that continues. But for now, that's where we are anticipating that theme - the winners continuing to win - will play out.

TWST: What are some of the themes happening with the department stores?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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