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Not a lot of buys in retail. On the short side: Macy's, Carters. On the long side: Fifth and Pacific (formerly Liz Claiborne), Nike.

JCPenney: Let’s beat a dead horse, shall we? Consensus is finally in: JCP is not performing well. Spain is 13% GDP relative to Eurozone, JCP is that to retail. Their impact on the industry is huge. Their strategy is to taken an item that sold last year for $100 and mark it to $25. They get consumers to appreciate that and want them to come to their store all the time. They need great product and aren’t there yet.

Notes From Our Q3 Retail Call - Q3RETAIL slide1

Over the past 5 years during the recession, the consumer sought out more discounts. Moms used to go into Macys and bring a ton of coupons and wait for an item to get marked down. That’s hard to ween people off of.

What brands are JCP putting out there for you to buy? Which are stuck by the bathrooms?

Why can’t JCP go bankrupt? It can. Who cares about Bill Ackman and what he thinks – remember Borders?

Kohl’s: Going head to head with JCP. Over past two months, getting creamed by competition. Turnaround needed on operating asset turns. The stock is cheap on next year’s estimates? Not a chance. It can go lower.

Dollar stores: Very negative outlook. (pg 20) Relative to the S&P 500, massive earnings growth in 2010. We don’t think comps will grow and the same goes for new stores –do we really need more dollar stores?

Notes From Our Q3 Retail Call - Q3RETAIL slide3

Food stamps also have a huge impact on margins for dollar stores. A ton of people are on food stamps and the surge in those receiving food stamps during the recession definitely helped dollar stores grow. Since January 2011, we’ve had salaries decline year over year. Consumption is up, however. We need more spending, less saving. We are well below consensus on earnings announcements going forward. Big drop in stock prices coming.

Capital intensity: Retail at sky high valuations. High returns relative to other industries. Peak margins. Stable earnings. We’re about 8 quarters into a decline in capital reinvestment period yet sales are up at a healthy level. If we’re coming off an investment period and we want to harvest, a few thing need to happen: the consumer needs to be strong or the company needs to put capital into capital expenditures (capex), which will hurt margins. Or they can have their top line rollover.

We like companies investing in all the right areas. Those who want to grow e-commerce sales who want to grow 10%-50% online because eventually, that’s where everyone’s going to go.

Notes From Our Q3 Retail Call - Q3RETAIL slide2