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TWST: Joe, what in your view are the issues that have contributed most to the pressure that’s been put on the retail industry, and more specifically, the pressures that have been felt by the broad lines retailers?

Mr. Grillo: One thing that I think is pretty interesting is that December saw essentially the culmination of a number of bad months for the department store industry. We really started to see consumers getting concerned about the economy, we saw the NASDAQ coming down, and among the broad line retailers things had started to soften at the beginning of the summer. Certainly in front of the holiday season we were not expecting sales and earnings to be particularly favorable and, frankly, results came in below our very modest expectations. What caused the sales softness? Certainly the typical consumer had seen all the press about the economy and the difficulty in the stock market in general, and that really kept a check on purse strings in December. There was heavy discounting out there. All of the leverage that was to be had in retail was held by the consumer this year, and the longer they waited, the deeper the discounts got, and that was clearly represented in a lot of the preannouncements that we saw. Even though some companies did a reasonable job from a top-line standpoint, there were still significant gross margin cuts year over year. In addition, I think that the discount channel had a tough time trying to build on the record sales they experienced last December prior to Y2K. As we track it (in our Deutsche Banc Same-Store Sales Index), looking at same-store sales for December, the original projections were for a 3.5% increase and the actual number came in at just approximately 1%, well below original projections. Why the disappointment? Again, we look at factors such as the fickle consumer, heavy discounting, and a very tough comparison with the prior year. Added to that, weather didn’t help, and that’s something that retailers focus on a lot, perhaps to a fault. But big storms and record snowfalls in some areas of the country kept shoppers in front of the fire instead of in the stores.

TWST: Joe, what will it take for you to be more confident about the potential turnaround at Sears and at J.C. Penney?

Mr. Grillo: What we’d like to see at Penney (NYSE:JCP) is stabilized gross margins and consistent same-store sales growth. They have had a string of years of same-stores sales decline, which speaks to a real erosion of the J.C. Penney brand. Allen Questrom is a big gun and his track record speaks to his talents. We also think that he has a very big challenge ahead of him with J.C. Penney, and we’re going to wait to see some real signs of improvement there before recommending the name.