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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Top 10 Takeaways from Day 2 of the Goldman Sachs 24th Annual Global Retailing Conference

TheFGRTteamattendedtheGoldmanSachs24thAnnualGlobalRetailingConferenceinNewYorkCitythisweek.Here,wehighlightourtoptakeawaysfromthesecondandfinaldayoftheconference.

1) Retailersarefocusingonprivatelabelstooffervalueanddifferentiation.

2) Wageheadwindswillcontinueandefficiencieswillhavetobefoundelsewhere.

3) Homeimprovementstoresareresilientinanageofretaildisruption.

4) Digitalshoppersareincreasinglychoosingtobuyonlineandpickupin-storewhentheyshop.

5) Retailersareincreasinglylookingatinternationalexpansionopportunities.China,EuropeandCanadaappeartobethegeographiesretailersaremostinterestedinwithregardtointernationalexpansion.

6) Thehomeandbeautycategoriesareoutperformingapparel.

7) SupplychainspeedIscrucialindrivinggrowth.

8) Storeclosuresstilloutpacestoreopeningsandrealestateownersfacerentpressure.

9) Smartretailersarepivotingandrebrandingtomeetopportunities.

10) Consumersareseekingoutproductsthataredifferentiatedandunique,andwhenproductsareindemand,priceisnotanissue.

TheFGRTteamattendedtheGoldmanSachs24thAnnualGlobalRetailingConferenceinNewYorkCitythisweek.Below,wehighlightourtop10takeawaysfromthesecondandfinaldayoftheconference.

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

1)RetailersAreFocusingonPrivateLabelstoOfferValueandDifferentiationRetailersdiscussedtheimportanceofincorporatingprivate-labelbrandsintotheproductmix.Presentersnotedthatprivate-labelcollectionsenableretailerstocapturehighermarginsandofferdifferentiatedproducts,whichcanultimatelydriveloyalty.

EdwardStack,CEOofDick’sSportingGoods,saidthatalthoughthecompany’ssecond-quartercompswererelativelyflat,private-labelcompswereupbymid-singledigits.Stacksaidthat,giventhecurrentpromotionalenvironment,exclusivescanhelpthecompanyalleviatesomeofthemarginpressurethatitisexperiencing.

UrbanOutfittersCFOFrankConfortidiscussedhowproductexclusivescontinuetodriveengagementandtoplinesalesforUrbanOutfitters.ThecompanyoffersexclusivitythroughcollaborationswithbrandssuchasChampionandAdidas,Confortisaid,notingthatprivate-labelbrandsaregrowingandrepresent“20-ishpercent”ofUrbanOutfitters’sales.

OntheRight:UrbanOutfittersCFOFrankConfortiSource:FGRT

TractorSupplyCFOKurtBartonnotedthesuccessofhisowncompany’sexclusivebrandsandsaidthatTractorSupplywillcontinuetointroducenewbrandsacrossproductlines.TractorSupplyrecentlylaunchedanewlineofexclusivedogfoodcalled4healthUntamed.

IntheMiddle:TractorSupplyCFOKurtBartonandCEOGregorySandfortSource:FGRT

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

2)WageHeadwindsWillContinueandEfficienciesWillHavetoBeFoundElsewhereSeveraloftheconferencepresentersdiscussedtheimpactofwageinflationontheirbusinesses.Tocombatrisingwages,retailersarefindingwaystodriveefficiencieselsewhereintheiroperations,thespeakerssaid,notingthattheyareundertakingvariousinitiativestocreateleverageintheirbusinessesandgrowthebottomline.

AccordingtoHomeDepotCEOCraigMenear,HomeDepotdrivesproductivitythroughsupplychaininitiatives.“We’vejustreallybegunworkingattheendof’16intothisyearonproductivityinthebackendofourstoresasitrelatestofreighthandling,”Menearsaid.ScottGoldenberg,CFOofTJXCompanies,saidrisingwageshadhadanegativeimpactonHomeGoodsmargins,whichnegativelyimpactedEPSgrowthby2%inthecompany’sfiscalsecondquarter.DrivingsalesinTJXCompanies’stronginternationalbusinesshashelpedpartiallyoffsetwageincreases,Goldenbergnoted.

3)HomeImprovementStoresAreResilientinanAgeofRetailDisruptionTheongoingUShousingrecoveryismakingthehomeimprovementspaceoneofthebestretailsegmentstobein.Themacroenvironmenthasbenefitedthissector:homevaluesarerising,existinghomesalesareincreasing,wagesarerisingandinterestratesareathistoricallows.

HomeDepothasbenefitedfromcontinueddemandforbuildingmaterialsfromcontractorsandfromdemandforappliancesonthepartofconsumers.Meanwhile,theconstructionofnewhomesamidtightsupplycontinuestofuelcontractordemandforbuildingmaterialssuchasplywoodandshingles,Menearsaid.Meanwhile,Lowe’shasexpandeditsnetworkofvendorsinordertoensureithastherightglobalmarketcoverageintherightmarkets,saidthecompany’sCEO,RobertNiblock.Lowe’shasalsoexperiencedstronggrowthinbig-tickettransactions,asrisinghomevalueshavemadeconsumersfeelbetteraboutinvestingintheirhomes.

OntheLeft:RobertNiblick,CEOofLowe’sOntheRight:CraigMenear,CEOofHomeDepotSource:FGRT

ExecutivesfromHomeDepotandLowe’sdiscussedtheimportanceoflocalizingproductofferingstomeetthemarket-specificneedsofcustomers.Executivesatbothcompaniesbelievethatthehousingrecoverystillhasquiteabitofroomlefttorun,butHomeDepotandLowe’smighthavealreadyproventhemselvestobesomewhat“Amazon-proof.”

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

4)OmnichannelCapabilities:Click-and-CollectIsHeretoStayConsumersareincreasinglychoosingthebuy-online,pick-up-in-storeoptionwhentheyshop.Manyretailersattheconferencenotedthatclick-and-collectstrategieshadbeensuccessfulpartsoftheiromnichannelinitiatives.Customersenjoytheconvenienceofbeingabletopickupanorderthesamedaythattheymakeapurchase.Theybenefitretailersbyenablingthemtosaveondirectshippingcostsandbyencouragingincrementalsalesinbrick-and-mortarlocations.

HomeDepot’se-commercebusinesshasgrownconsistentlyforalongperiodoftime,andmuchofthechannel’ssuccesscanbeattributedtothecompany’sbuy-online,pick-up-in-storeoffering.Morethan40%oforderspurchasedonHomeDepot.cominthesecondquarterwerepickedupbycustomersfromaHomeDepotstore.

TractorSupplyrolledoutitsbuy-online,pick-up-in-storeprograminMaythisyear,andtheofferingnowrepresents55%ofitsonlinebusiness,accordingtoCEOGregorySandfort.Carter’sCEOMichaelCaseydiscussedtheincrementalrevenuethatbuy-online,pick-up-in-storeservicehasdriventothecompany’soutletstores.AccordingtoCasey,about30%ofCarter’scustomerswhocomeintoastoremakeanadditionalpurchase,whichhasincreasedthecompany’saveragetransactionvalue.

5)RetailersAreIncreasinglyLookingatInternationalExpansionOpportunitiesTherewasmuchdiscussionofinternationalexpansionopportunitiesattheconference.China,EuropeandCanadaappeartobethegeographiesthatretailersaremostinterestedinforinternationalexpansion.Macy’sCEOJeffGennettecommentedontheinitialsuccessofthecompany’spartnershipwithAlibaba’sTmalle-commerceplatformandsaidthatMacy’splanstolaunchastand-alonewebsite,Macys.cn,inChina.UrbanOutfittersCFOFrankConfortiemphasizedthestellarperformanceofhiscompany’sstoresinVienna,Austria,andsaidthatthereissignificantopportunityinEuropeforallthreeofthecompany’sbrands.ExecutivesfromseveralcompaniesmentionedCanadaastheirfirstchoicetotestinternationalmarkets,givenitsproximityandculturalsimilaritytotheUS.EyewearstartupWarbyParkernowshipstoCanadaandhasopenedanofficeinToronto.AnexecutivefromthecompanysaidthattheteamconsidersenteringtheCanadianmarketasthelogicalfirststepwhentestinganinternationaloperation.

6)StoreClosuresStillOutpaceStoreOpeningsandRealEstateOwnersFaceRentPressureOnbalance,theretailindustryisseeingmorestoreclosuresthanstoreopenings.Recentclosureshavebeenconcentratedinthedepartmentstoreandspecialtyretailsectors,wherebusinesshasbeenchallenging.GapInc.planstocloseabout200specialtystores(includingGapandBananaRepublicstores)inthenextthreeyearsinanefforttorepositionitselftobeamorevalue-drivenretailer.UrbanOutfitters’managementteamsaidthatitiswillingtocloseprofitablestoresinanticipationofafasterchannelshiftasonlinepenetrationcontinuestoincrease.

Therewasalsodiscussionofretailrentstrendingdownasretailersreevaluatetheirstorebases.Realestateownershavebeenofferinglowerrentswhenretailersnegotiateforrenewals,andthedownwardrenttrendismorepronouncedatshoppingmallsandstripmalls,speakersnoted.

7)SupplyChainSpeedIsCrucialinDrivingGrowthOntheseconddayoftheconference,weheardmoreabouttheneedtoimprovesupplychainspeedinordertodrivetoplinegrowth.Thisrepresentsachangefromafewyears

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

ago,whenretailersfocusedonoptimizingtheirsupplychainsbasedoncostattheexpenseofleadtime.UrbanOutfitters’Confortisharedhiscompany’sinitiativetodrasticallyincreasetheproportionofitemsitsourceswithashorterleadtime.Henotedthatthishadsignificantlyimprovedthecompany’sabilitytoofferon-trenditems,asitismucheasiertopredictatrendwhenspeedtomarketisfaster.ExecutivesfromTJXCompaniesandSignetJewelershighlightedsupplychainspeedasapriorityareafortheircompanies,too.ArepresentativefromPVHCorp.notedthatthecompanyisexpectingsomemarginenhancementsinthenext18monthsfromsupplychainimprovements.

GlobalsupplychainmanagerLi&Fungisactivelyworkingwithretailerstohelpthemimprovetheirsupplychainagility.Thecompanyistestingvirtualsamplingtechnologiesandplanstodigitizetheend-to-endretailsupplychainby2019.

8)SmartRetailersArePivotingandRebrandingtoMeetOpportunitiesDaniReiss,CEOofCanadaGoose,a60-year-oldluxuryouterwearcompany,saidthatthecompanylaunchedanewcapsuleknitwearcollectionjusttwoweeksago.HesaidthatalthoughCanadaGooseintendstomaintainitsstrengthasanouterwearcompany,itsawagrowingopportunityintheknitwearcategoryandthatcompanyresearchshowedconsumerswereopentoaCanadaGooseknitwearoffering.Reisssaidthatthecompanyhasreceivedgreatinitialfeedbackinstoresandthatitplanstogrowitsknitwearofferingovertime.

OntheRight:DaniReiss,CEOofCanadaGooseSource:FGRT

PhilipKrim,CEOandCofounderofCasper,saidthathiscompanyoriginallylaunchedasamattresscompany,butthatithasexpandedintotheentiresleepcategoryandnowoffersluxurysheets,duvetcoversandevenbedframes.Krimsaidthatthecompanyisstudyingmanyaspectsofsleep,andthatresearchhashelpedCasperofferthebestnewproducts.

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Lastly,DennisWeber,HeadofInvestorRelationsatHugoBoss,reportedthatthecompanyhasrebrandedtobetteralignwiththemarkettrendthatseesconsumersmovingfromformalweartocasualwear.HugoBosswashearingthat“thesuitisdead,”andWebernotedthat,althoughsuitsstillaccountfor20%ofthecompany’ssales,thecompanyrealizedthattoday’scustomerislookingforsmartercasualalternativestoweartotheoffice.Salesareupatbothofthecompany’srebrandedbrands;theyareup2%atBoss,drivenbyathleisure,andup6%atHugo,Webersaid.

OntheLeft:DennisWeber,HeadofInvestorRelationsatHugoBossSource:FGRT

9)HomeandBeautyCategoriesAreOutperformingApparelWeheardfromseveralretailersthatthehomeandbeautycategoriesareoutperformingapparel.Whileapparelspecialtyretailersarereportingcompsinthelowtomid-singledigits,homeandbeautyretailersareexperiencinghighercomps—andopeningstores.

MichaelHartshorn,CFOofRossStores,reportedthatthehomecategoryisanareaofstrengthforthecompanyandthatitaccountsfornearlyaquarterofRossStores’business.Theretailer’shomeitemsincludenontraditionalgoodssuchaspetandgardenitems,andthisareacontinuestoexpand,Hartshornsaid.Heexpectsthecategorytocontinuetogrow,andnotedthat25%isnotaceiling,inthecompany’sview.

Theapparelcategoryisgrowingmuchmoreslowlythanhome,asapparelislargerandmorefragmented.JohnRicciuti,PresidentofHomeGoods(whichisownedbyTJXCompanies),alsoreportedthatthehomecategoryisthriving.Ricciutisaidthatmorethan30%ofthecompany’sbusinessisinhomeandthatthecategoryresonateswithmillennialconsumers,whoareatthelifestagewheretheyarestartingtobuytheirownhomes.Hesaidthatreturnratesarealsolowerforthehomecategory,atapproximately16%–17%.HomeGoodsplanstoopen100storesthisyear,Ricciutisaid.

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Beautyisanothergrowthcategory.UltaBeautyreportedcomparablesalesof11.7%forthequarterendedJuly29.AccordingtoUltaCFOScottSettersten,thecompanycurrentlyhasabout1,010storesand“iscomfortablewith”opening100storesayear,withalong-termgoalof1,400–1,700storesintheUS.

AnexecutivefromDollarGeneralreportedthatthecompanycurrentlyholds1.2%ofthehealthandbeautymarketandthatitexpectstoincreasethatshareto3%overtime.Theexecutivenotedthatbeautydrivestraffic,sothecompanyisreducingthenumberof“fashionitems”itoffersandreplacingsomeofthemwithbeautyproducts.

10)ConsumersWantDifferentiatedProductsConsumersareseekingoutproductsthataredifferentiatedandunique,andwhenproductsareindemand,priceisnotanissue.CanadaGooseCEODaniReisssaidthatthecompanymanufacturesallofitsproductsonshore,andsellsthematthepricesatwhichtheyweremeanttobesold.Thecompanyis“functionfirst,”hesaid,anditsgoalistomakethebestproductineverycategoryinwhichithasanoffering.CanadaGooseouterwearretailsfornearly$1,000,andthecompanyreportsthatsomeofitsstylesaresoldoutregularly.Thecompanyiscurrentlyseeingdemandinbothitsonlineandofflinechannels,andplanstoopen15–20storesthrough2020.Itiscarefullyconsideringwheretolocatestores,dependingonconsumerretailtraffic,bothonlineandin-store.Reisssaidthatthecompany’sresearchhasshownthereisconsumerdemandforouterwearexceeding$1,000withadditionalfunctionalfeatures.

AnexecutivefromTJXCompaniesreportedthatitscustomerscomebackfrequentlybecausetheylikeitsproductdifferentiationandfearthattheywillmisssomething.Hesaidthatthebestcustomersknowthetruckschedules,andthattheyareexcitedandentertainedbytheideathattheremaybeonlyoneofaparticularitemavailable.Thatideakeepsthemcomingback,hesaid.Intermsofbranddifferentiation,hesaidthattherearemanythingsthatcanmakeaproductunique,includingproductqualityandcountryoforigin(asindicatedbya“MadeinItaly”or“MadeinGermany”label).Hesaidthatthecompanyhasthousandsofbuyerswhosourceallovertheworld,lookingforunique,differentiatedproducts.

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September8,2017

DeborahWeinswig,ManagingDirector,FGRTdeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFGRTNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comErinSchmidtResearchAssociateJingWangResearchAssociateStevenWinnickResearchAssociateHongKong:2ndFloor,HongKongSpinnersIndustrialBuildingPhase1&2800CheungShaWanRoad,KowloonHongKongTel:85223004406London:242–246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,18thFloorNewYork,NY10018Tel:6468397017

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