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TWST: Tell us about your coverage of specialty retail. How broad is the range of specialty retailers that you look at?

Ms. Hix: It’s primarily apparel retailers, although the scope of coverage does include other specialty retailers, such as those with a consumer products focus. Specialty retailers are those that have a distinct focus, or point of view, housed under one store name.

TWST: How have these stocks performed in 2000 year-to-date?

Ms. Hix: Well, those in my coverage universe are down 5% year-to-date and 36% from their highs, most of which were achieved midway through 1999.

TWST: I notice that The Limited (NYSE:LTD) is another one of your recommended stocks. What’s driving the earnings for The Limited these days?

Ms. Hix: Well, The Limited, that’s sort of at the other end of the spectrum of what we’re telling people to look for. When I mentioned the fact that most of our companies are at an all-time high operating basis, The Limited is the one exception. On an aggregate basis, including Intimate Brands (NYSE:IBI), which it owns 85% of, The Limited’s operating margins last year were 9.4%, and projected to be about 10.3%. This is compared to the group average of just over 12%. But when you separate out the five apparel divisions, the operating margin was only 2.8%. What’s driving the total company operating margin is a 17% to 18% operating margin at the IBI side of the business. In the last couple of years The Limited has been in turnaround mode and over the last year, they have really started to gain some traction in their apparel division. Our view is that as they continue to increase the apparel operating margins over the next couple of years, the majority of, or the most significant part of, the earnings growth for The Limited will come from these apparel divisions. IBI is still projected to grow at a 16% to 18% rate on the EPS line, but the apparel divisions I think will contribute above a 20% growth rate over the next couple of years. In fact, we recently lowered our rating on IBI to Market Perform from Buy as we believe the growth will slow there over the next several quarters, and since it contributes so much to The Limited’s sales and operating income, we lowered our rating on The Limited to a Buy from a Strong Buy. However, if we could rate the stub of the apparel divisions as a stand-alone company, it would still be a Strong Buy.

TWST: Does that include Limited Too, Structure, Lerner, Lane Bryant?

Ms. Hix: No, as part of Limited’s restructuring over the last few years, they had spun off a number of businesses in order to focus on five key brands, brands they believe can be 1 billion each in sales and can achieve anywhere from an 8% to a 15% operating margin each. The five divisions are Express, Lerner, Lane Byrant, Limited and Structure. Limited Too they actually spun off to Limited shareholders last August 1999 as Too, Inc. (NYSE:TOO).