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TWST: Jeff, will lower interest rates and the promise of a tax cut be enough to get consumers back on the shopping track?

Mr. Feiner: From a macro perspective, we believe many factors can create a more favorable environment for retail stock investors and consumer spending and confidence in 2001, including lower interest rates and potential tax cuts. The recent Federal Reserve easings could set the stage for the retail group to outperform the broader market. With the easing of interest rates by the Federal Reserve (which began with a 50 basis point reduction in the fed funds rate on January 3, 2001 and an additional 50 basis point reduction on January 31, 2001), retailers should gain, as consumers’ concerns for the overall economic environment subside. Additionally, earnings estimate revisions are likely to turn positive in the second half of 2001. After several quarters of downward earnings revisions during 2000 from key retailers, easier comparisons beginning in 2Q01 (although more likely in second half 2001) should set the stage for some positive estimate changes from major names in the group. Although we have made some minor revisions to our 4Q 2000 estimates to reflect a slowing second half of 2000, our main thesis remains intact. We do not believe that a $0.01-$0.02 reduction in 4Q EPS estimates is significant, given our original expectations for a modest quarter resulting from a slowing economy, higher gas and home heating oil prices, as well as inclement weather and volatility in the stock market. Rather, more importantly, we believe investors should continue to focus on the market share, unit growth leaders with visible long-term earnings growth potential.

TWST: Jeff, let’s start with the companies that investors should be buying today. At the current prices, given that these stocks have had a good run, what’s the upside?

Mr. Feiner: Retail stocks have had a very nice run since November. However, the absolute valuation of the retail group remains relatively conservative. Accordingly, we maintain our view that select retail stocks are undervalued on an absolute basis and relative to the S&P 500. In this context, we believe that investors have two major themes to explore within the retail group. First, many growth retailers appear positioned to generate above-average earnings gains in the next few years because of defined expansion and dominant consumer franchises. Second, several retail equities remain undervalued relative to the S&P 500, particularly considering their favorable earnings potential and, in some cases, attractive dividend yields.

TWST: Jeff, both you and Joe have alluded to new management at Sears and Penney. What is it going to take to affect a turnaround at these companies?

Mr. Feiner: During October 2000, Alan Lacy succeeded Arthur Martinez as president and CEO of Sears (NYSE:S). Mr. Lacy, formerly the president of services at Sears, is credited with the highly successful turnaround of Sears’ credit business. With his proven track record at Sears and his intimate knowledge of the company, I believe that Mr. Lacy is the most qualified person to fill the position. Additionally, I believe that Sears under Lacy can leverage from its strength, which is obviously still having strong, dominant, hard, good brand names out there, across the board, more or less, whether it’s in the battery area, the DieHard area, the Craftsman area, etc., and leverage from that.