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Four analysts and top management from two sector firms examine the broadline retailers & discounters sector in this special 31-page Broadline Retailers & Discounters issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info515.htm

TWST: Are inventories still a problem for these companies, or is excess inventory “targeted,” so to speak, for the outlet stores or the discounters?

Ms. Murray: To the industry’s credit, it did a very good job of cleaning inventory up during the fourth quarter of 2001. While the levels of markdowns and promotions were much higher than normal, the companies moved a lot of product to enter 2002 with a clean slate. We’ve just completed year-end profit reports, and the numbers reveal that inventory levels at the end of 2001 were actually down 1% versus year-end 2000. This decline is a marked improvement from September 2001, when inventories were up more than 15%. Some of the inventory was sold through off-price channels such as T.J. Maxx and factory outlet stores, in addition to very aggressive promotions at full-price specialty and department stores. An important issue to watch in the first half of 2002 is whether consumer demand was satiated in the fourth quarter of 2001, taking advantage of all the compelling deals at retail, and whether spending levels will be restrained in the early part of 2002, as they do not need to go back into the stores and buy.

TWST: Moving on to the stocks, you’ve written that the best months to own apparel and footwear stocks have historically been February and March. Has this been true for 2002, and what does this mean in terms of how investors should be looking at the stocks in April, May and June?

Ms. Murray: Similar to retail stocks, there is a seasonal pattern in stock performance for apparel and footwear companies. Looking back at a period of almost 15 years, there is a positive bias for January, February and March. In 2002, the stocks have outperformed the market in January and February, and we would expect that also to hold true for March of this year. For the rest of the year, we do not necessarily expect a reversal in performance, but the outlook is less compelling. The data indicate outperformance of roughly 55%-60% on a monthly basis, versus 80%-90% in February and March. The seasonality of stock moves does have some correlation with earnings. The calendar second quarter is the smallest period for industry sales and profits, and the stocks typically don’t rally during this period. Part of the first quarter preference is that holiday reports are released, which are the lion’s share of industry sales and profits. So the confirmation that companies did enjoy a good holiday season is reported during the calendar first quarter, as are early bookings for the following fall. In 2002, given our expectations that the economy will enjoy a recovery, and that company earnings will improve, the apparel and footwear stocks should have the ability to continue to outperform. We did increase our rating for the group at the beginning of this year to market-weight from underweight, based on our view that as earnings recover and profits go up, the stocks will show relative strength.

TWST: Are there any other companies you’d like to highlight, companies that might not be stocks that investors should rush out and buy today, but where investment interest could develop as we move through the year and look out to 2003?

Ms. Murray: Yes. In apparel, I have high regard for the management team at Liz Claiborne (NYSE:LIZ). This stock did very well in 2001, up 19.5%, as the company managed its business and weathered the tough climate much better than most of its competitors. Liz is well positioned to participate in a more robust or more normal environment for apparel. That said, I think a portion of the upside is already captured in its stock price at $30. If there were to be a pullback of any significance, we would want to revisit the name, or if the appetite for spending proves to be stronger than anticipated, that might provide an opportunity for stronger earnings growth.

This special issue includes:

1) Broadline Retailers & Discounters - In an in-depth (9,300 words) Analyst Roundtable, Shari Schwartzman Eberts, Vice President at J.P. Morgan Securities, Wayne Hood, Managing Director at Prudential Securities, Inc. and Jeffrey Stinson, Research Analyst at Midwest Research, examine the outlook for the sector including outlook for the economy, earings expectations and share specific stock recommendations.

2) Apparel & Footwear Stocks - In an in-depth (3,200 words) Expert Interview, Carol Pope Murray, Director at Salomon Smith Barney, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of two sector firms examine the outlook for their firm and the sector.