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Four analysts and top management from twenty-eight sector firms examine the consumer sector in this special 119-page Bear, Stearns & Co. 8th Annual Retail, Restaurants & Apparel Conference issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info501.htm

TWST: What are some of the trends to note today in food and drug retailing that could become more visible over the next several years?

Ms. Weinswig: Competitive pressures in the food retail industry stemming from the weak economy and the proliferation of Wal-Mart Supercenters have led the supermarket sector to search for an edge in order to drive customer traffic and boost profitability. In response to this gargantuan task, supermarkets have begun to roll out diversified operations and new customer-centric shopping environments. Initiatives are under way at all the major operators and include 1) higher-margin private label and natural food items, 2) loyalty cards that increase average transaction size, and 3) customer-traffic-stimulating pharmacies, photo centers, and fuel stations. In the drugstore industry, the outlook appears bright, as the top drugstore chains are expected to grow top-line revenues at a 13% rate over the next five years, offering the best demand trends in all of retailing. We primarily attribute the increase in the size of the industry to strength in the prescription drugs category, which is expanding at a 12%-14% pace across all retail channels. Key trends to watch for are the growth in prescriptions and drugstores carrying more consumables to drive traffic. There are several other issues occurring within the drugstore industry, which include the ongoing pharmacist shortage, prescription drug cards, the mix shift toward higher third-party sales as a percentage of total pharmacy sales, and greater generic drug utilization.

TWST: What is your overall outlook for food retailers in 2002? Who will be at the top of the performance curve over the next 12 months and what will that strong performance be based on?

Ms. Weinswig: We believe that the supermarket industry is poised to deliver growth of 3% to 4% in 2002, with price growth of 2% to 2.5% and real growth of 1% to 1.5%. Notably, real growth in food retail was negative in 2001, the first time since 1996, at approximately –0.2%. Feeling the pinch of an economic slowdown, we believe that many shoppers traded down to opening price merchandise and private label goods, pressuring overall sales results. We expect sales to rebound in 2002 as the economy should stage a recovery in the second half of the year, contributing to higher sales growth and our expectations for real growth of 1% to 1.5%. We estimate that price inflation was 3.3% in 2001. This is the highest level in the last five years, but in line with the average annual food-at-home inflation rate of 3.3% over the past decade. According to the Food Marketing Institute, seven commodity groups advanced at levels exceeding overall food-at-home inflation in 2001, including beef and veal, fresh fruits and vegetables, fats and oils, dairy products, pork, bakery products, and eggs. Additionally, increases in marketing costs, labor expenses, and energy costs earlier in the year contributed to the realized price inflation. Our forecast for price inflation in 2002 is slightly lower than in 2001, at approximately 2% to 2.5%, with lower energy costs the primary reason for our estimate.

TWST: Are there small or mid-cap companies that investors should review — food or drug retailers or services?

Ms. Weinswig: A mid-cap company that we like is Delhaize Group (NYSE:DEG), which has a market cap of approximately 5 billion. Delhaize is a Belgium-based food retailer that operates three high profile supermarket chains in the United States. The shares are currently trading at 11.5 times our 2002 EPS estimate, near the bottom of their three-year p/e range of 9-19 times. We believe that the current valuation reflects the impact of increased competition from Wal-Mart Supercenters in the United States, where the company incurs 79.0% of sales, encroaching competition from Carrefour in Belgium, and recent sluggishness in US sales growth. However, we expect Delhaize’s improving cash flow, strong management team, and focus on infrastructure and technology improvement to drive favorable earnings growth of 12%-13% over the long term.

This special conference issue includes:

1) Outlook for Restaurants - In an in-depth (3,100 words) Analyst Interview, Joseph T. Buckley, Senior Managing Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

2) Specialty Stores & Hardline Retailing - In an in-depth (3,300 words) Analyst Interview, Dana Telsey, Senior Managing Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

3) Food & Drug Retailing - In an in-depth (4,000 words) Analyst Interview, Deborah H. Weinswig, Managing Director covering Retailing/Food and Drugstores and Retailing/Department Stores at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

4) Outlook for Retail - In an in-depth (3,300 words) Analyst Interview, Brian Tunick, Associate Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

5) CEO interviews (average 2,500 words). Top management of twenty-eight sector firms examine the outlook for their firm and the sector.