Industry Overview Approximately 400,000 specialty retail stores operate in the United States with combined annual sales of $350 billion CAGR 2002-06: 5% Market is dominated by large players such as Best Buy, Toys "R" Us, Gap, Sports Authorities, etc. The market size of some of the major product categories: o Shoes and apparel: $125 billion Electronics and appliances: $85 billion Jewelry: $25 billion Sporting goods: $25 billion Books: $25 billion Other categories include toys, music, suitcases, pet supplies, etc. Specialty retailers target a narrow or niche audience, based on location, customer type, or product mix. Nationally, specialty retail is dominated by national chains, such as office supply store Staples or electronics outlet Best Buy. However, locally, specialty retail is defined by unique, independently owned stores that express the personality of their owners. These small retail outlets — shoe stores, grocery stores or bookstores — have become the foundation of downtown and urban redevelopment across the country. Industry Statistics December 2007 Valuation Ratios P/E (ttm) 22.80 P/Sales (ttm) 1.34 P/Book (mrq) 13.07P/Cash Flow (mrq) 11.17 Profitability (ttm) Margin gross % 34.59% Operating margin % 9.54% Net profit margin % 9.19% Financial strength (mrq) Quick Ratio 0.49 Current ratio 1.46LT Debt/Capital 110.07 Total debt/Capital 118.25Mgt . Effectiveness (ttm) Return on Investment % 13.23% Return on Assets % 9.09% Return on Capital % 25.77% Key Issues The growing popularity of online retail is attracting competition from traditional and online multi-retailers such as Wal-Mart and Amazon, which are gaining considerable market share in many of the product segments included in the specialty retail sector. Currently the majority of revenue is generated from in-store sales, but online sales from store websites are increasing. As the US dollar weakens, international sales from these US-based websites are also increasing. This creates a decidedly positive outlook for large incumbents, but also serves as a significant barrier to entry for new entrants. Furthermore, despite the presence of some large chains, specialty retail markets are highly fragmented. Barnes & Noble, for example, with more than 900 stores, is the largest book retailer in the United States but has only a 15% market share. With rising transport costs and increasingly tight margins there is the potential for some large specialist retail operators to consolidate resources, knowledge and outsourcing capabilities in order to generate economies of scale and scope. Key Opportunities High-end and niche goods: As disposable incomes rise, demand for high-end goods increases, which can be better served by specialty retail stores. Large operators can offer competitive prices because they buy in large quantities. Smaller operators can differentiate themselves by offering niche products and superior customer satisfaction at a premium price.