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TWST: Jeff, why did the retail sector come under such pressure?

Mr. Klinefelter: Well, during the back half of the year, and the fourth quarter specifically (and I think everyone would agree that historically retailers and specialty retailers do come under pressure), there’s a lot of anxiety every year about the holiday sales as a significant portion of the overall sales for the year and the overall profitability. So I think a lot of them came under pressure, and then people started anticipating falling consumer spending patterns, and I think that really weighed in on these slots. I think that it’s interesting just how typical it is historically, and what a predictable pattern it is, yet it seems to catch people by surprise every year.

TWST: Jeff, following a disappointing December, it appears that a number of retailers are reporting somewhat improved results for January. To what do you attribute the January rebound?

Mr. Klinefelter: Well, it is clear that the rebounds in these stocks happened before January results were announced, and I think that has a lot to do with macro factors. It’s an interest rate-cutting environment, and retail stocks have historically done a great job of factoring in, 12 months out, what’s going to happen. As such, I believe retail stocks are pricing in a recovery that will happen during the back half of 2001. Fundamentally, I believe many of the teen-focused specialty retailers and a couple of the mass merchants did a great job this year of managing inventory. Despite the slowdown in sales during the holiday season, inventory levels were also planned lower following a slow spring season. Bottom line, apparel retailers started experiencing a slowdown in consumer spending far earlier in the year than many other retailers.

TWST: Jeff, out of your 17 companies, are there any that you believe will beat the estimates?

Mr. Klinefelter: There are a small number of specialty retailers that will likely beat our estimates. One of these companies is The J. Jill Group, Inc. (Nasdaq:JILL). I believe there has been a lack of visibility during the company’s recovery, and I believe investors will continue to be surprised by the positive trends in the business. Most of the other companies in my space have done a good job of guiding investors to the current set of expectations, which in most cases have been coming down during the past few quarters, or are just starting to move back up very modestly.

TWST: Jeff, what are you looking for?

Mr. Klinefelter: We’re looking for a very modest start to the year. I think the key takeaway for our clients is that many of our stocks, particularly the specialty apparel stocks, have had expectations reduced starting early last year. For this reason, I believe a lot of the concern about the first half is overblown in this space, as expectations have been relatively low throughout the second half of calendar 2000 and the first half of calendar 2001.