1

A Presentation Given To

FTA Revenue Estimating ConferenceBurlington, VT

September 19-22, 2004

The Retail Sector EncountersThe Retail Sector EncountersThe The ““Soft PatchSoft Patch””

Michael P. NiemiraMichael P. NiemiraChief Economist & Director of Research

International Council of Shopping Centers1221 Avenue of the Americas, 41st Floor

New York, New York 10020-1099mniemira@icsc.org

Retail Sector IssuesRetail Sector Issues

•• The Consumer is No Longer in the Driver SeatThe Consumer is No Longer in the Driver Seatof the Economyof the Economy

•• The State of the Retail Industry The State of the Retail Industry –– Experiencing Experiencingthe Soft Patchthe Soft Patch

•• The State of the Consumer - MixedThe State of the Consumer - Mixed

•• Gasoline Price ImpactsGasoline Price Impacts

•• 2004 Christmas Outlook & Beyond2004 Christmas Outlook & Beyond

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05040302010099

15

10

5

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-5

-10

15

10

5

0

-5

-10

% C

hang

e (TQ

SAR)

% Cha nge (TQS AR)

Consumption Expenditures vs. Business Fixed InvestmentInflation Adjusted

Consumption Fixed Investment

Sources: U.S. Department of Commerce; ICSC Research.

TQSAR = Two-QuarterSmoothed AnnualizedRate.

Business Spending Takes the Lead Over Consumer SpendingBusiness Spending Takes the Lead Over Consumer Spending-2-

040200989694929088868482807876747270

115

110

105

100

95

90

85

20

18

16

14

12

10

8

Inde

xM

illions o f Un it s ( 3 - M

on t h Ce nt e r e d A ve r a g e )

Souce: ICSC Research.

ICSC Leading Indicator of Motor Vehicle Salesvs. Motor Vehicle Sales

Leading Indicator (Left Scale) Motor Vehicle Sales (Right Scale)

Motor Vehicle Leading Indicator Signals Softness inMotor Vehicle Leading Indicator Signals Softness inKey Discretionary Spending ComponentKey Discretionary Spending Component……But IndicatorBut Indicator

has been Improving in Last Two Monthshas been Improving in Last Two Months

2004 LEAD SALES JAN 103.7 16.7 mn. FEB 103.9 16.9 MAR 103.1 17.1 APR 103.3 17.0 MAY 102.3 18.1 JUN 101.5 15.8 JUL 102.5 17.6 AUG 102.9 17.0

ICSC Leading Index, 1990=100

Retail Sector Encounters the Soft Patch – Where? -3-

3

050301999795939189

10

8

6

4

2

0

10

8

6

4

2

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% Ch

ange

from

Pr io

r Yea

r (3- M

o. A v

e r ag e

s ) % C h an g e fr o m Pr i o r Ye a r ( 3- M o . Av e r ag e s )

Note: Shaded Areas Represent Classical Business Cycle Recessions as Defined by theNational Bureau of Economic Research.

U.S. Chain Store Sales GrowthComparable Store Sales

The State of the Non-Auto Retail IndustryThe State of the Non-Auto Retail Industry

A Long Eight-Year Retail CycleCycle Upswing: 1995-1999 (4 Years)

Cycle Downswing: 1999-2003 (4 Years)

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200308200309

200310200311

200312200401

200402200403

200404200405

200406200407

200408

Year/Month

53

54

55

56

57

58

59

60

Diff

usio

n In

dex

(%)

53

54

55

56

57

58

59

60

Shopping Center Executive Business BarometerReadings Over 50% Represent Growth

ICSC Shopping Center Executive Component Diffusion Indexes (%)Components Aug '03 Sep '03 Oct '03 Nov '03 Dec '03 Jan '04 Feb '04 Mar '04 Apr '04 May '04 Jun '04 Jul '04 Aug '04SCE Barometer 56.458.959.658.955.757.257.456.855.756.457.354.255.5

Current Conditions 54.657.057.658.056.455.956.856.155.755.857.353.654.3 Sales 56.859.362.564.261.660.559.559.161.559.262.756.356.1 Customer Traffic 57.457.460.263.661.456.062.160.461.060.162.857.958.5 Occupancy Rates 57.762.958.554.055.758.055.753.653.357.860.457.854.9 Rent Spreads 52.151.657.655.857.554.254.854.754.954.359.152.657.9 Capitalization Rate 48.953.649.452.345.851.051.952.647.847.741.543.644.2

Expectations 58.260.861.559.855.058.458.157.555.757.057.354.856.6 Sales 64.067.667.966.361.264.264.163.363.264.864.563.359.6 Customer Traffic 64.467.669.068.058.262.563.761.662.861.861.762.559.6 Occupancy Rates 63.266.163.159.957.263.959.859.457.561.463.258.560.9 Rent Spreads 55.158.660.458.756.357.555.955.857.056.460.954.860.3 Capitalization Rate 44.443.947.345.942.143.846.947.538.040.736.334.742.6

Note: Capitalization rate diffusion indexes are inverted to capture the effect that a higher capitalization rate will lower the value of the property, other things being equal.

The Soft Patch ThroughThe Soft Patch Throughthe Eyes of the Industrythe Eyes of the Industry

The ICSC Shopping CenterExecutive Opinion Survey foundthat industry business conditionsimproved in August 2004, but the

pace of the improvement was a tadsofter than the same time of 2003.

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How Is the Shopping-Center Industry Performing?How Is the Shopping-Center Industry Performing?

0504030201009998979695949392

160

140

120

100

80

60

160

140

120

100

80

60

Inde

x, 1

995=

1 00 In d e x , 1 99 5 = 1 0 0

ICSC Shopping Center Activity Index

05040302010099989796959493

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8

6

4

2

0

10

8

6

4

2

0

% C

hang

e fro

m P r

i or Y

e ar % C ha ng e fro m P rio r Y ea r

Sources: U.S. Census Bureau; ICSC Research.

U.S. Shopping Center-Inclined Retail Sales

05040302010099989796959493

5

4

3

2

1

0

-1

-2

-3

5

4

3

2

1

0

-1

-2

-3

% C

hang

e fr o

m P

r ior Y

ear % C

h ange f r om P

r io r Ye ar

Sources: U.S. Bureau of Labor Statistics; ICSC Research.

U.S. Shopping Center-Related Employment

05040302010099989796959493

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40

20

0

-20

-40

60

40

20

0

-20

-40

% C

hang

e f ro

m P

r i or Y

e ar % C hange f rom

Pr io r Yea r

Sources: U.S. Census Bureau; ICSC Research.

U.S. Shopping Center Construction Spending

Composite Index ofSales, Jobs and

ConstructionSpending.

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The New Katona ParadigmThe New Katona ParadigmFor Understanding Consumer Spending MotivationFor Understanding Consumer Spending Motivation

The Expanded Katona Paradigm

Income

Wealth

CreditAvailability

Abilityto Spend

Confidence

Willingnessto Spend

New Demand

ReplacementDemand

GiftBuying

ComplementarySpending

Needto Spend

Weather

Time orConvenience

Buyer ResearchCompleted

ProductSelection

Opportunityto Spend

Consumer Spending

Original ParadigmConsumer Spending = f(Ability to Spend, Willingness to Spend)

Motivation for Spending

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A Closer Look: Store Sales Growth Rate Trends WeakenA Closer Look: Store Sales Growth Rate Trends WeakenSustainable Pace About 3% For Remainder of YearSustainable Pace About 3% For Remainder of Year

040200989694

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m P

ri or Y

ear (

3 -M

o. A

v er a

ges)

% C

ha nge f ro m P r io r Ye ar ( 3- M

o. A v er age s)

Note: Shaded Areas Represent Classical Business Cycle Recessions as Defined by theNational Bureau of Economic Research.

U.S. Chain Store Sales GrowthComparable Store Sales

Jan-May 2004 Average %Change Per Month = 5.9% y/y

Jun-Aug 2004 Average %Change Per Month = 2.4% y/y

Source: ICSC Research.

-8-

-0.0

-1.7

0.7

6.2

-5.1

-2.8

3.5

Apparel Chain Stores

Department Stores

Discount Stores

Drug Stores

Footwear Stores

Furniture Chain Stores

Wholesale Clubs

-6 -4 -2 0 2 4 6 8

% Change (Y/Y)

August 2004 Sector Performance

August 2004 Comp-Store Industry Sales Grew By 1.1% Year/Year

The Relative Sales StoryThe Relative Sales Story

Even the Once Mighty Discount Sector Has Slowed Sharply

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Jan

01

Ma

rM

ay Jul

Se

pN

ov

Jan

02

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rM

ay Jul

Se

pN

ov

Jan

03

Ma

rM

ay Jul

Se

pN

ov

Jan

04

Mar

04

May

04

Jul 0

4

Month/Year

-15

-10

-5

0

5

10

% C

hang

e (Y

ear/

Yea

r)

Apparel

Industry

Source: ICSC Research.

Apparel Specialty Sales vs. IndustryComparable-Store Sales Performance

Jan

01

Ma

rM

ay Jul

Se

pN

ov

Jan

02

Ma

rM

ay Jul

Se

pN

ov

Jan

03

Ma

rM

ay Jul

Se

pN

ov

Jan

04

Mar

04

May

04

Jul 0

4

Month/Year

-10

-5

0

5

10

% C

hang

e (Y

ear/

Yea

r)

Department Store

Industry

Source: ICSC Research.

Department Store Sales vs. IndustryComparable-Store Sales Performance

Jan

01

Ma

rM

ay Jul

Se

pN

ov

Jan

02

Ma

rM

ay Jul

Se

pN

ov

Jan

03

Ma

rM

ay Jul

Se

pN

ov

Jan

04

Mar

04

May

04

Jul 0

4

Month/Year

-202468

1012

% C

hang

e (Y

ear/

Yea

r)

Discount Store

Industry

Source: ICSC Research.

Discount Store Sales vs. IndustryComparable-Store Sales Performance

Jan

01

Ma

rM

ay Jul

Se

pN

ov

Jan

02

Ma

rM

ay Jul

Se

pN

ov

Jan

03

Ma

rM

ay Jul

Se

pN

ov

Jan

04

Mar

04

May

04

Jul 0

4

Month/Year

-5

0

5

10

15

% C

hang

e (Y

ear/

Yea

r)

Wholesale Club

Industry

Source: ICSC Research.

Wholesale Club Sales vs. IndustryComparable-Store Sales Performance

A Further Look at Sector Sales PerformanceA Further Look at Sector Sales Performance -10-

0403020100999897969594939291

2.00

1.80

1.60

1.40

1.20

1.00

0.80

2.00

1.80

1.60

1.40

1.20

1.00

0.80

Dol

lars

Dolla rs

Source: U.S. Energy Information Administration.

U.S Regular Gasoline PricesDollars Per Gallon, Including Taxes

Causes of the Economic Soft Patch andCauses of the Economic Soft Patch andWhy It LingersWhy It Lingers

High Gasoline PricesHigh Gasoline Prices……

But prices have recededBut prices have recededa bit since late Maya bit since late Mayrecord high.record high.

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Data Through September 6, 2004

2004 % Change (Y/Y)JAN 7.8FEB 2.1MAR 2.5APR 13.1MAY 32.5JUN 31.9JUL 26.4AUG 15.9

Retail Sector Encounters the Soft Patch – Why

7

Examining the Gasoline Price Impact

How Sensitive are Store Sales to Gasoline Price Swings?Estimated Consumption Function, November 1996 - April 2004

Store/Store Type

Every 10% Increasein Gasoline Impacts

Store Sales By

August 2004Estimated Impact of

Gasoline PriceIncrease (in

Percentage Points)Wal-Mart -0.77 -1.2

Discount Stores -0.66 -1.0Furniture Stores -0.60 -1.0

Overall Chain Store Sales -0.36 -0.6Department Stores -0.34 -0.5

Drug Stores -0.31 -0.5Footwear -0.21 -0.3

GAFO Sales -0.14 -0.2Wholesale Clubs -0.13 -0.2Apparel Specialty -0.11 -0.2

Note: Those rows shaded in gray represent not statistically significant results.

04030201009998979695949392

25

20

15

10

5

0

25

20

15

10

5

0

Dol

lars

, Th r

ee- M

onth

Mov

i ng

Aver

a ge Dol l ars, Thr ee- M

onth Mov i ng Av era ge

Excess Weekly Earnings After Average Gasoline Expenditures,Assuming 15,000 Annual Miles Driven and 20 MPG

Chart to Right: How much moreis the consumer spending forgasoline relative to the increasein average weekly earnings?

Average Expenditure Per Weekfor Gasoline: Early September $26.70 May 2004 $28.60 December 2003 $21.30

Discounters mostsensitive sector tohigh gasolineprices.

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0504030201009998979695949392919089888786

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2.0

1.5

1.0

0.5

0.0

10

8

6

4

2

0

% C

hang

e (3

/12)

% Ch an ge (3/1 2)

Household Formation & Chain Store SalesHousehold Formation Growth Leads By 12 Months

Household Formation Growth (Left Scale)Chain Store Sales, Three-Month Average (Right Scale)

Short-Term Demographics Turned NegativeShort-Term Demographics Turned Negative-13-Retail Sector Encounters the Soft Patch – Why

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Consumers React to Price Volatility (as Uncertainty) and Curtail SpendingConsumers React to Price Volatility (as Uncertainty) and Curtail Spending

-14-Retail Sector Encounters the Soft Patch – Why

050301999795939189878583817977753.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0 8

6

4

2

0

-2

-4

Vola

tility

in th

e Pr

i ce

Lev e

l%

Ch a n ge ( S M

S AR w i t h a F i l t e r )

The Katona Effect and U.S. Consumer SpendingVolatility in the Consumer Price Level Inverted

Price Level Volatility on Left ScaleReal Consumer Spending Growth (Smoothed) on Right Scale

Consumer Debt TrendsConsumer Debt Trends

050403020100999897

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% C

hang

e fro

m P

ri or Y

ear ,

3 -M

o. A

v er a

ge

% C

hang e fr om P

r io r Year , 3- M

o . Av era ge

The Relationship Between Credit and Spending

Consumer Credit Use (Left Scale)Consumer Goods Expenditure (Right Scale)

040302010099989796959493929190898887868584838281807978

60

40

20

0

-20

-40

-60

-80

-100

30

20

10

0

-10

-20

-30

Net

Per

cen t

age

Rep

o rtin

g ( %

)

% C

ha ng e (T QS A R

)

Banks' Willingness to Lend to Consumersand Durable Goods Spending

Willingness-to-Spend Measure (Left Scale)Durable Goods Spending (Right Scale)

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40

30

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10

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-10

50

40

30

20

10

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-10

% C

hang

e f ro

m P

rior Y

e ar % C

ha ng e f rom P

rio r Ye ar

Home Equity Loan Demand

04030201009998979695949392919089888786858483828180

13.5

13.0

12.5

12.0

11.5

11.0

10.5

10.0

13.5

13.0

12.5

12.0

11.5

11.0

10.5

10.0

% o

f Dis

pos a

b le

I nc o

me % o f D

i sp os ab le I n co me

Household Debt-Service Burden

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0403020100999897969594

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10

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-10

15

10

5

0

-5

-10

% C

hang

e (T

QSA

R)

% Ch ange ( TQ

S AR)

Source: U.S. Department of Commerce; ICSC Research.

Passive Income Rises Interest andDividendIncomeAccount forabout 14% ofPersonalIncome.These twocategories of“passiveincome”have startedto rise morerapidly thisyear.

But Not Everything is Negative…Some Sources of Income Are Improving

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The The DiderotDiderot Effect Still Exists Effect Still Exists

Consumer Fundamentals…

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ri or Y

ear (

12/1

2)%

Change fr om Pr ior Y

ear ( 12/12 )

Home Demand as a Trigger for the Diderot EffectNine-Month Lead Time

Home Demand (Left Scale) Retail Sales (Right Scale)

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Holiday Sales Outlook and BeyondHoliday Sales Outlook and Beyond

Stocking Those Racks and ShelvesStocking Those Racks and ShelvesCan The Ordering Flow of Apparel Tell Us About RetailersCan The Ordering Flow of Apparel Tell Us About Retailers’’ Holiday Expectations? Holiday Expectations?

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20

15

10

5

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-5

-10

-15

% C

hang

e fro

m P

r ior Y

e ar % Ch a n g e fr o m

Prio r Ye a r

Apparel Imports

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Changing Importance of Christmas SalesChanging Importance of Christmas Sales

030201009998979695949392919089888786858483828180

25.5

25.0

24.5

24.0

23.5

23.0

22.5

22.0

25.5

25.0

24.5

24.0

23.5

23.0

22.5

22.0

% o

f Ann

ual % of Ann ua l

November-December GAFO Sales as Share of Annual SalesShifting Importance of Christmas Sales

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2004 Christmas Sales Expectations

Table 1

U.S. Chain Store Holiday SalesYear/Year Percentage Change)

4-to-5%-1.13-to-4%------2004 est.

6.5-2.54.04.33.72003

2.0-1.50.51.00.02002

2.5-0.32.22.22.12001

1.80.62.40.74.02000

5.20.25.46.74.11999

3.91.25.15.74.51998

4.10.44.54.94.11997

2.11.03.13.42.91996

0.41.72.11.62.61995

2.41.43.84.13.61994

2.01.63.64.23.11993

3.02.65.67.43.81992

-1.64.12.52.62.41991

-1.43.42.02.71.31990

Real Spending InflationAverageDec.Nov.Year

NOTE: Sales are based on the monthly ICSC Chain Store Sales Index, whichis a composite of chain store sales on a comparable store basis. Inflation isbased on the Consumer Price Index for commodities less food and energy on aDecember-over-December percentage change basis, except for 2004 which isbased for July 2004.

Sources: International Council of Shopping Centers ; U.S. Bureau of Labor Statistics.Sources: U.S. Department of Commerce; ICSC Research.

5.0%4.5%5.5%2004 est.4.8%5.4%4.0%20031.1%0.7%1.6%20023.7%3.5%3.9%20013.8%1.9%6.8%20008.4%9.4%6.8%19996.1%6.4%5.7%19983.9%4.0%3.8%19972.7%2.6%3.0%19963.6%2.3%5.6%19958.4%8.2%8.7%19946.6%5.8%7.8%1993

Nov-DecDecemberNovemberYear(Based on NOT Seasonally Adjusted Data

Table 2

Tracking GAFO Holiday Sales(Year/Year Percentage Change)

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ICSC's Chain Store Sales Leading Index vs. Chain Store Sales12-Month Lead Time in Leading Indicator

ICSC Leading Indicator (left scale)Chain Store Sales, Three-Month Average (right scale)

Retail Sector Encounters the Soft Patch – Where?

Looking Ahead: WhatLooking Ahead: What’’s In Store For Sales?s In Store For Sales?Leading Indicator Suggests a Roller Coaster over the Next YearLeading Indicator Suggests a Roller Coaster over the Next Year——But Reasonably Healthy TrendBut Reasonably Healthy Trend

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