North America Equity Research

29 April 2013

2013
Big Box Retail: The Reports of Its Death Are Greatly Exaggerated; Retail Can
Thrive in an AMZN World

Conference Call Details

April 29th, 2013 at 11:00 a.m.
Dial-in Info:
DIAL-IN: 800-593-9933 (US); +1-415-228-4645 (outside US);
Passcode: RETAIL
Replay Info:
Replay through 5/6: 888-562-2793 (US); +1-402-998-1450
(Outside US); Passcode: 2013

Hardlines Retailing Internet

Christopher Horvers AC Doug Anmuth AC

(1-212) 622-1316 (1-212) 622-6571

christopher.horvers@jpmorgan.com douglas.anmuth@jpmorgan.com
Bloomberg JPMA Horvers <GO> Bloomberg JPMA Anmuth<GO>
J.P. Morgan Securities LLC J.P. Morgan Securities LLC

See the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
E-commerce Growth: Slower but Still Far Outpacing Retail Sales

Annual E-commerce Sales as % of Total, 2000-2012

Retail Sales E-commerce Percent Change

Year (millions of dollars) as a Percent From a Year Ago
Total E-commerce of Total Total E-commerce
2000 2,979,381 27,561 0.9%
2001 3,062,310 34,460 1.1% 2.8% 25.0%
2002 3,129,681 45,041 1.4% 2.2% 30.7%
2003 3,261,942 58,011 1.8% 4.2% 28.8%
2004 3,461,405 73,957 2.1% 6.1% 27.5%
2005 3,687,622 92,627 2.5% 6.5% 25.2%
2006 3,880,256 114,523 3.0% 5.2% 23.6%
2007 4,001,299 137,486 3.4% 3.1% 20.1%
2008 3,938,497 142,498 3.6% -1.6% 3.6%
2009 3,628,603 144,618 4.0% -7.9% 1.5%
2010 3,840,262 168,269 4.4% 5.8% 16.4%
2011 4,157,173 193,722 4.7% 8.3% 15.1%
2012 4,355,734 224,606 5.2% 4.8% 15.9%
Source: U.S. Census Bureau, J.P. Morgan estimates.

2
Online Sales Mix: Electronics and Apparel Biggest, Sports Tiny

Mix of Online Sales by Category for 2012

Sports & Fitness, 2%

Office Supplies, 6% Apparel &
Music, Movies & Accessories, 19%
Videos, 2%
Home & Garden, 4%
Furniture &
Appliances 5%
Books & Magazines,
5%
Event Tickets, 7%

Consumer Packaged
Goods, 11%

Computers /
Peripherals / PDAs,
Consumer 25%
Electronics (excl.
Computer
Peripherals), 10% Other, 11%
Source: comScore data.
Online Growth Converges to Between 10-20%; CE & Apparel Faster

Online Growth Post-Recession

25%

20%

15%

10%

5%

0%
2009 2010 2011 2012
-5%

-10%

-15%

-20%
Apparel & Accessories Computers / Peripherals / PDAs Consumer Electronics (excl. Computer Peripherals)
Furniture, Appliances & Related Equipment Office Supplies Home & Garden
Sports & Fitness TOTAL

Source: comScore data.

4
Office Leads Online Penetration, Home Improvement Lowest
Online Penetration in Office Category, 2003-2012

35%

30%

25%

20%

15%

10%

5%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p

Office Supplies

Online Penetration in Other Retail Categories, 2003-2012

14%

12%

10%

8%

6%

4%

2%

0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p

Furniture + Appliances Consumer Electronics Home Improvement

Clothing & Accessories Sporting Goods

Source: comScore data and U.S. Census Bureau.

5
CE Case Study: Product Issues Were at the Core
Retail Sales & Growth – Electronics and Appliances Stores Only ($ in billions)

120 "Downslope" 20%

17.5%
"Supercycle"
15%
100 14.0% 13.8%

10%
8.9%

Year-Over-Year Percentage Change

80
7.7%
6.3%
Retail Sales ($ in billions)

5.6% 6.5%
5.5% 4.9% 5%
4.2%
3.1%
60 2.6% 2.5% 1.2% 1.0%
(1.2%) 0%
(1.4%)
(2.6%)
40

-5%

20
-10%

(10.0%)

0 -15%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: U.S. Census Bureau; J.P. Morgan estimates.

6
CE Case Study: AMZN Becomes Third Largest CE Player in 2011

Top 100 Consumer Electronics Retailers Company Rankings by Revenue

Rank 2000 2001 2002 2003 2005 2006 2007 2008 2009 2010 2011
1 Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy Best Buy
2 Circuit City Circuit City Wal-Mart Wal-Mart Wal-Mart Wal-Mart Wal-Mart Wal-Mart Wal-Mart Wal-Mart Wal-Mart
3 Sears Wal-Mart Circuit City Circuit City Circuit City Circuit City Circuit City Circuit City Apple Stores Apple Stores Amazon.com
4 CompUSA RadioShack Dell Dell Dell Dell Dell Apple Stores Target Amazon Apple Stores
5 RadioShack Target Target Target RadioShack Target Target Target Costco Target Target
6 Wal-Mart CompUSA RadioShack RadioShack Target RadioShack RadioShack Dell Dell Costco Costco
7 Target Staples CompUSA Staples CompUSA Game Stop Game Stop Game Stop Game Stop Game Stop Gamestop
8 Staples Sears Staples CompUSA Costco CompUSA CompUSA Costco Amazon Dell Dell
9 Office Depot Office Depot Sears Sam's Club Sears Costco Costco RadioShack RadioShack RadioShack RadioShack
10 Kmart Kmart Office Depot Office Depot Sam's Club Apple Stores Apple Stores Amazon Sam's Club Sam's Club Sam's Club
Source: TWICE; Consumer Electronics Association; J.P. Morgan estimates

7
CE Case Study: CE Sweet Spot Peaked in 2008, then Recession

U.S. Household Penetration by Category

01/2005 01/2006 01/2007 01/2008 01/2009 01/2010 01/2011 01/2012 01/2013

Digital TV Sets and Displays
DTV 12% 20% 33% 50% 62% 77% 85% 88% 89%
HDTV 10% 16% 26% 41% 53% 63% 72% 87% 88%
LCD TV 10% 12% 17% 26% 41% 57% 67% 72% 74%
Home Information Technology/Security
All Home PCs 70% 74% 76% 82% 83% 87% 89% 90% 90%
Desktop 70% 72% 68% 72% 71% 75% 79% 72% 68%
Laptop/Tablet 28% 32% 35% 47% 53% 59% 68% 69% 71%
Imaging
Digital Camera 42% 55% 59% 73% 77% 81% 84% 84% 85%
Camcorder 45% 46% 48% 48% 51% 54% 55% 52% 42%
Portable Media
MP3 Players 14% 20% 33% 43% 46% 51% 51% 54% 45%
Speaker Docks 4% 7% 12% 23% 30% 35% 43% 44% 44%
Portable Communication
Wireless Telephones 69% 73% 76% 87% 90% 91% 91% 91% 91%
Smartphones 1% 4% 7% 18% 23% 33% 39% 55% 55%
Video Gaming
Portable 29% 30% 30% 30% 33% 34% 37% 34% 31%
Console 37% 38% 39% 42% 46% 47% 52% 53% 49%
Information
Portable Navigation 3% 6% 8% 12% 20% 31% 39% 45% 46%
In-Dish Navigation 2% 3% 4% 9% 13% 15% 19% 18% 17%
Source: Consumer Electronics Association.

8
Capabilities by Retailer: Caught Off-Guard, but Catching Up

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BOPUS                  
Ship to store                  
Ship from store                  
QR Codes                  
Mobile Site                  
Mobile App                  
Extended online SKUs                  
Testing mobile checkout                  
Free shipping* available                  
Wifi available in stores                  
Testing same-day delivery                  
Price match Amazon.com                  
Free returns of online purchases in store                  
Product/industry research on website                  

Total 7 6 6 6 6 6 5 5 5 5 5 4 3 3 3 2 2 1

*WSM had free shipping for 30 minimum and WMT introduced free shipping with no minimum for the first time ever
Free shipping offers were largely for the holiday season in 2010
DKS, GNC, and PETM were a part of Shoprunner when it launched in late 2010

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BOPUS*                  
Ship to store                  
Ship from store                  
QR Codes                  
Mobile Site                  
Mobile App                  
Extended online SKUs                  
Testing mobile checkout                  
Free shipping** available                  
Wifi available in stores                  
Testing same-day delivery                  
Price match Amazon.com                  
Free returns of online purchases in store                  
Product/industry research on website                  

Total 13 11 10 10 9 9 9 8 8 7 7 7 7 6 6 6 5 3
Online sales included in comp?                  

*BOPUS: Buy online, pick up in store; includes reserve online, pick up in store
**with minimum purchase, cutomer loyalty program, through ShopRunner, or promotional free shipping
 :Only BBBY has free ship all the time on all items; launched in July 2012
DKS only has free returns on shoes

Source: Company data.

9
Online Capability Summaries for CE Retailers
CE Retailers’ Online Capabilities Charts
Online sales as a % of total revenue
2012 Online Online purchases
Sales Effect of Online ship from a Requirement
Contribution to Sales on Operating Ship to Same day specific for free Promotional Mobile Mobile Mobile
2009 2010 2011 2012 2013E Comp? Margins BOPUS? store? delivery? warehouse(s)? shipping? free shipping? growth site? app?

Saw large
Included, growth during
expect meaningful Free shipping holidays in
BBY N.A. 7% 6% 7% growth contribution. Slightly lower. Yes No No No, use all DCs all the time Yes 2012 Yes Yes
No, they come
Included, but not Similar to retail from the closest Not
HGG Not disclosed disclosed. stores. Yes No No DC Varies Yes disclosed. Yes No
No, multiple DCs
and fulfilled directly $50 order
from vendor as minimum; Not
RSH <5% <5% <5% <5% <5% Not included. Not meaningful. No Yes No well Shoprunner Yes disclosed. Yes Yes

SKUs offered
Price Price match Difference since TX
Expanded Pricing match to other brick & Price and CA began
Online In-store Online Private label categories different own mortar retailers' match to collecting taxes on Use QR
2010 2012 2012 percentage online? online? website? online prices? Amazon? AMZN? Codes? Other
Music, media,
small Have noticed a
appliances, difference in BOPUS Consolidating websites and improving
phone/tablet & online sales in product search and rewards zone viewing
BBY <70,000 <10,000 >100,000 5% accessories No N/A Yes Yes those areas Yes online.
Not much
change Focusing on adding functionality to the
HGG N/A N/A from 2010. Not disclosed. No No N/A Yes Yes N/A No mobile site.
Everything plus
additional
Not categories not in
RSH disclosed. ~4,000 ~16,000 Not disclosed. stores Yes No No No N/A Yes N/A

Source: Company reports and J.P. Morgan estimates.

10
Online Capability Summaries for Discounters
Discount Retailers’ Online Capabilities Charts
Online sales as a % of total revenue
2012 Online Online purchases
Sales Effect of Online ship from a Requirement
Contribution to Sales on Operating Ship to Same day specific for free Promotional Mobile Mobile Mobile
2009 2010 2011 2012 2013E Comp? Margins BOPUS? store? delivery? warehouse(s)? shipping? free shipping? growth site? app?

Online business Majority direct from

produces a higher supplier, rest No free
Included, but not pretax operating comes from two shipping; often Not
COST 2-2.5% ~2% ~2% 2.2% ~2.5% disclosed. margin No No No other warehouses. included in price No disclosed Yes Yes
Redcard
Several dedicated members get
online fulfillment free shipping
Outpace Digital isn't as warehouses or always; Strong
industry Included, not profitable as stores direct from frequently $50 triple digit
TGT 1-2% <2% <2% <2% growth rate disclosed. yet. Testing No Testing supplier. minimum Yes growth Yes Yes
Two online only Free shipping to
warehouses but home on
merchandise is consumables
Not Included in comp, also shipped from purchases of Not
WMT Not disclosed. ~3% disclosed. but not disclosed. Not disclosed. Yes Yes Testing regular DCs. $45 or more. Yes disclosed Yes Yes

SKUs offered
Price Price match Difference since TX
Expanded Pricing match to other brick & Price and CA began
Online In-store Online Private label categories different own mortar retailers' match to collecting taxes on Use QR
2010 2012 2012 percentage online? online? website? online prices? Amazon? AMZN? Codes? Other

Yes, because
most prices
Electronics and includes the
COST N/A 3,800 3,800 20% furniture shipping. N/A No No No. Yes N/A

Free wifi in all stores. Focusing on mobile

Home, apparel, Yes, have seen an product search, in-store maps, shopping
big ticket items, overall lift in web lists, integrating product offerings with
music, movies, sales in those mobile coupons. Continued collaboration
TGT N/A 75,000 ~750,000 33% and books Yes Yes Yes Yes states. Yes with MCX for future mobile payment system.
Scan and go, in-store maps, shopping lists,
budgeting via eReceipts, QR coes lead to
more choices online. Walmart Labs runs
Electronics and like a startup and focuses on ecommerce
WMT N/A ~140,000 >1,000,000 Not disclosed. home Yes No No No No Yes initiatives.

Source: Company reports and J.P. Morgan estimates.

11
Online Capability Summaries for Sports and Nutrition Retailers
DKS’ Online Capabilities Charts
Online sales as a % of total revenue
2012 Online Online purchases
Sales Effect of Online ship from a Requirement
Contribution to Sales on Operating Ship to Same day specific for free Promotional Mobile Mobile Mobile
2009 2010 2011 2012 2013E Comp? Margins BOPUS? store? delivery? warehouse(s)? shipping? free shipping? growth site? app?

Profitable business; $15 shipping

expect GM to be credit with $99
higher than stores minimum
expect Included, eventually because No, ship from purchase;
continued contributed ~160 guns and ammo not stores fully shoes always Not
DKS 2% 3% 4% 5% growth bps sold online. Testing No No fuctional ship free Yes disclosed. Yes Yes

SKUs offered
Price Price match Difference since TX
Expanded Pricing match to other brick & Price and CA began
Online In-store Online Private label categories different own mortar retailers' match to collecting taxes on Use QR
2010 2012 2012 percentage online? online? website? online prices? Amazon? AMZN? Codes? Other
Continue to make investments in
Apparel and ecommerce with a new platform; new IT
DKS N/A N/A N/A 15% footwear N/A Yes Yes No Not disclosed. N/A system

Nutrition Retailers’ Online Capabilities Charts

Online sales as a % of total revenue
2012 Online Online purchases
Sales Effect of Online ship from a Requirement
Contribution to Sales on Operating Ship to Same day specific for free Promotional Mobile Mobile Mobile
2009 2010 2011 2012 2013E Comp? Margins BOPUS? store? delivery? warehouse(s)? shipping? free shipping? growth site? app?
Traffic
in-line with GNC.com has through
market higher margins than Shoprunner; mobile, few
GNC N/A 4% 5% 6% growth ~100 bps company average. No No No No $99 minimum Yes (frequent) sales Yes Yes
in-line with No, many items
market Lower GM, but EBIT ship from All orders over
VSI N/A N/A ~8% ~9% growth Not included. margins are similar. No No No distributor $25 No N/A Yes No

SKUs offered
Price Price match Difference since TX
Expanded Pricing match to other brick & Price and CA began
Online In-store Online Private label categories different own mortar retailers' match to collecting taxes on Use QR
2010 2012 2012 percentage online? online? website? online prices? Amazon? AMZN? Codes? Other
Yes Social marketing concept is very
(company- important. Online automatic
Vitamins and owned replenishment option began a couple of
GNC ~5,000 1,800 5,400 ~57% herbs Yes stores) No No Not disclosed. Yes years ago, but not used much.

Reminder emails about replenishing

VSI 20,000 8,000 17,500 ~22% Everything Yes Yes No No Not disclosed. Yes supplements sent.

Source: Company reports and J.P. Morgan estimates.

12
Omni-Channel > Online Only

Which Retailers Send Follow-up Emails

BBBY BBY COST DKS GNC HD HGG LOW ODP

*  * * * *  * 

OMX PETM RSH SPLS TGT TSCO VSI WMT WSM

*      *  *
Source: J.P. Morgan.

Services Available by Retailers in Our Coverage Universe

Ticker Services Offered
BBBY N/A
Geek Squad, cloud and data services, delivery & installation, product repair, 3rd
BBY
party wireless services
Technical support services, digital photo processing, pharmacy, travel, check
COST
printing, insurance, online investing, & merchant credit-card processing
Golf club fittings, repair, golf lessons, tennis racquet stringing, bicycle
DKS repair/assembly, steam baseball gloves, sharpen ice skates, home delivery and
assembly, cut arrows, sell hunting & fishing licenses, mount gun scopes
GNC GNC Medical advice board and protein number finder online
Installation services, delivery, dedicated staff for pro customers, designated
HD parking spots, expanded credit programs, service-finding website (Redbeacon),
flooring measuring, CFL bulb recycling, lumber cutting, kitchen design

In-home repair & PC optimization, 3rd party wireless services, next day delivery
HGG
& installation
Installation, extended warranties, repair services, Pro services, MyLowes tool for
LOW
home improvement projects, kitchen design
ODP Copy, print, shipping, and tech services
OMX Paper, print, document, and print services
PETM Grooming, training, PetsHotel
RSH N/A
SPLS Copy, print, and tech services
TGT Pharmacy
TSCO N/A
VSI N/A
WMT Photo processing, pharmacy, optical services, financial services & products
WSM Home design
Source: Company reports.

13
Tax Disadvantage Ending; Helps the Price War 5-10%

Percentage of Each Company's Stores in States Collecting Sales Tax from AMZN According to Effective date, Ranked by 2013

70.0%

7.3%
10.7%

60.0%

10.4%
12.7%

9.3%
13.2%

8.6%

8.6%

8.2%
50.0%

8.7%

11.1%

11.7%
12.8%
18.4%

12.2%
14.8%

8.9%
12.1%

8.8%

10.0%
18.0%

8.9%
11.3%

11.3%

10.1%
11.5%
40.0%

6.0%
11.7%

4.1%
8.8%

3.9%
6.0%

12.7%
10.6%
14.6%

9.4%
12.5%

8.5%
13.9%

18.8%
30.0%

10.2%
44.1%

20.0%
37.1%

36.9%
36.1%

35.4%
34.4%

34.4%

34.4%
34.1%

33.1%
32.5%

32.4%
32.1%

8.7%
28.6%

26.4%

26.7%
25.2%

24.2%
23.0%
10.0%

17.7%

11.5%
0.0%
SPLS COST BBBY VSI RSH BBY BBY TGT GNC AZO TSCO DKS LOW ORLY ODP PETM HD WMT OMX AAP HGG
Taxable States (as of Dec 31st, 2012) 2013 Taxable States Future Taxable States (after Dec 31st, 2013)

Source: Company data and J.P. Morgan estimates.

14
Online Dislocation: Product Mix Drives Online Threat

Online Susceptibility Ranking from Product Mix

2.5

1.5

0.5

0
ODP OMX SPLS BBY HGG BBBY VSI GNC RSH DKS PETM HD LOW

Source: J.P. Morgan estimates.

15
Private Label and Exclusives Drive Differentiation

Private Label Penetration

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
WSM GNC TGT SPLS TSCO VSI COST LOW DKS HD BBY

Source: Company reports, J.P. Morgan estimates.

16
AMZN Still Stronger in Pricing, but Retailers Closing the Gap

Premium/Discount to AMZN Prices

Spring 2012 Spring 2013

BBY.com 18% 3%
HGG.com 0% -2%
RSH.com 28% 28%
BBBY.com 8% 0%
WSM.com 10% 9%
Casa.com 9% 8%
GNC.com 30% 32%
VSI.com 10% 9%
LuckyVitamin
-9% -2%
.com
ODP.com 33% 16%
OMX.com 34% 19%
SPLS.com 22% 20%

March 2012 March 2013

DKS.com 9% 9%
PETM.com 10% 3%
Wag.com - 6%
HD.com 9% 9%
LOW.com 7% 8%

Company websites.

17
CE Online Penetration Still Growing; Comps Still Negative
Online Penetration and SSS by Category

14% 35% 12% 35%

30% 30%
12%
10%
25%
25%
10%
8% 20%
20%

Online Pentration Rates

Online Penetration Rates

8%

Growth Rates
Growth Rates
15%
15% 6%
10%
6%
10%
4% 5%
4%
5%
0%
2%
2%
0% -5%

0% -5% 0% -10%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p
Online Penetration Online Pentration Growth Rate Consumer Electronics SSS Clothing and Clothing Accessories Online Penetration Growth Clothing and Accessories SSS

1.8% 25%
7% 60%

1.6%
50% 20%
6%

1.4%
40%
5% 15%
1.2%
30%
Online Penetration Rates
Online Penetration Rates

4% 10%

Growth Rates
Growth Rates

1.0%
20%

3%
0.8%
5%
10%
0.6%
2% 0%
0%
0.4%

1% -5%
-10%
0.2%

0% -20% 0.0% -10%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p
Furniture + Appliance stores Online Penetration Growth Rate Home Furnishings SSS Building Materials & Garden Equip ment & Supplies Dealers Online Penetration Growth Home Improvement SSS

Source: Company reports, ComScore, Census data, and J.P. Morgan estimates.

18
Office Online Penetration Rebounds; Sports Growing

Online Penetration and SSS by Category

35% 50% 7% 25%

30% 40% 6%
20%

25% 30% 5%
15%
Online Penetration Rates

Online Penetration Rates

20% 20% 4%

Growth Rates
Growth Rates
10%
15% 10% 3%

5%
10% 0% 2%

5% -10% 0%
1%

0% -20%
0% -5%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p
Office Supplies Online Penetration Online Penetration Growth Rate Office Supplies SSS Sporting Goods Online Penetration Online Penetration Sales Growth Sporting Goods SSS

Source: Company reports, ComScore, Census data, and J.P. Morgan estimates.

19
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