October 25, 1999

S&P 500 Index: 1,301.65

Catherine M. Skelly (212) 820-3610, skellyc@gruntal.com

E-Commerce

Selling Clothes on Line

Challenges and Opportunities for Internet
Apparel Retailers
Investment Thesis
From basics to fashion apparel, clothing is a necessity that needs to
be replenished periodically. Accordingly, apparel has become the
third-largest retail sales category on the Internet, after (1) computer-
related products and (2) books and music. This indicates that
shopping on line has entered the mainstream and is no longer an
activity limited to technologically sophisticated people. Moreover,
the percentage of households with a personal computer (PC) has
risen to 43% and is expected to continue to increase as PC prices
fall. Based on its estimate of 1.58 million new Internet users in the
U.S. per month, Web-based research firm eMarketer calculates that
someone clicks on to the Internet for the first time every 1.67
seconds. As the population of Internet users continues to rise, so
does the pool of prospective on-line apparel shoppers. According to
research firm Jupiter Communications, total retail sales on line are
projected to be $12.0 billion in 1999 and $17.0 billion in 2000,
compared with $7.5 billion in 1998 (see Figure 1). The companies
that execute on the basis of a thorough understanding of the nuances
of apparel marketing and that excel at customer retention can expect
repeating revenue streams and good returns on their investment in
customer acquisition. We believe that there are attractive
investment opportunities among the pure Internet content and retail
sites, as well as among the traditional apparel direct marketers that
are transitioning their businesses on line.

Figure 1
RETAIL SALES ON THE INTERNET
($ billion)
$20

$15

$10

$5

$0
1998E 1999E 2000E

Source: Jupiter Comm unications.

Table of Contents

Investment Thesis ............................................................................................. 1

Apparel Market Opportunity.......................................................................... 4

On-Line Apparel Sales in Perspective
More Shoppers Research and Purchase Apparel on Line
Building Consumer Trust

Shopping for Clothing on Line ........................................................................ 5

Making Progress in Searching for Apparel Products

Favorable Demographic Trends...................................................................... 6

Booming Generation Y Population
No Credit Card, No Problem
Women, Who Still Make the Purchase Decisions, Are Internet-Savvy
Busy Parents Look for Solutions on Line

Technology ........................................................................................................ 7
Larger Images and Personalized Features
Zooming and Motion Visualization
Color Accuracy
Wardrobe Building

Bricks-and-Mortar Apparel Retailers Venture on Line ............................... 7

Powerful Retailers Extend Their Brands on Line
An Essential Channel of Distribution

Off-Price Apparel Market ............................................................................... 8

Open Opportunity for Pure Internet Retailers
Improved Customer Experience

Characteristics of Effective Apparel Web Sites ............................................. 8

Direct Marketing Expertise
Fulfillment Mechanisms in Place
Content
Ease of Site Use
Customer Service

Important Participants in the On-Line Apparel Market.............................. 9

fashionmall.com, Inc.*†
Bluefly, Inc.*
Styleclick.com Inc.
Alloy Online, Inc.
dELiA*s and iTurf
DesignerOutlet.com

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Issues That Impact Apparel E-Tailers ..........................................................11
Fulfillment
Overcoming Fear of Cannibalization
Merchandise Returns and Credit-Card Chargebacks

Valuation of Retailers by Channel ................................................................12

E-Commerce Companies
Department Stores
Specialty Retailers
Catalog Marketers
Off-Price Retailers

Index of Apparel-Related Companies and Their Internet Activities .........15

Public Companies Mentioned in This Report ..............................................31

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 Apparel Market Opportunity
On-Line Apparel Sales in Perspective
The NPD Group, a leading authority on consumer behavior, reports that U.S.
retail sales of apparel rose 4.7% to $177.0 billion in 1998. If the retail apparel
market grows 4.0% annually over the next few years, by 2003 it will total
$215.3 billion. While total retail sales of apparel are growing at a much slower
rate than Internet retail, only a modest portion of total apparel sales has to move
on line to create a significant market opportunity for online apparel retailers.
Research firm Forrester Research estimates that $530 million of apparel was
45% of on-line sold on-line in 1998, versus $89.0 million in 1997, and expects the figure to rise
shoppers plan to to $1.62 billion in 1999 and to $20.2 billion in 2003 (see Figure 2).
purchase clothing
on line during the Figure 2
1999 holiday RET AIL APPAREL SALES ON LJNE
($ billion)
shopping season.
$25

— PC Data
$20

$15

$10

$5

$0
1997A 1998A 1999E 2000E 2001E 2002E 2003E

Source: Forrester Research.

More Shoppers Research and Purchase Apparel on Line

According to a survey by research firm CDB Research and Consulting, 31%
of Internet users make purchases on line. About one-third of current Internet
users have conducted a transaction on line, while two-thirds have used the
Internet to research purchases. Among the reasons that some Internet users are
reluctant to shop on line are (1) lack of confidence in order execution, (2)
unfavorable product pricing, (3) merchandise return hassles, (4) trepidation
about using credit cards on line, and (5) concerns about privacy. Prompted by
these issues, consumer forums such as Epinions and Deja.com, where shoppers
can trade feedback on retailers, are gaining popularity. Retailers are listening to
shoppers and have taken steps to eliminate shopper reservations. On-line
retailers are increasingly focusing resources on the logistics of order fulfillment
and customer service to protect their investment in customer acquisition. Most
Web sites post their consumer privacy policies in plain view. Many retailers
have liberal return policies, which is especially important in apparel retail.
Consumer acceptance of on-line apparel sales is rising. A recent survey by PC
Data, a technology research firm, found that 22.0% of on-line shoppers have
purchased clothing on line and that 45.0% plan to purchase clothing on line
during the 1999 holiday shopping season.

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Building Consumer Trust
Trusted retailers such as The Gap and Victoria’s Secret have actively
promoted their commerce-enabled Web sites, thereby legitimizing on-line
shopping for later adapters. Consumers use brands as a shortcut to quality. When
a consumer knows a particular brand, the sizing is much more predictable and
making a purchase sight unseen is less forbidding. The Gap’s emphasis on
basics and Victoria’s Secret’s giftability make their merchandise ideal for on-
line sales. Large and petite sizes, which can be difficult to find in stores, are
expected to become key drivers of on-line apparel sales. J.C. Penney recently
launched an apparel e-commerce site, www.just4meplus.com, targeting full-
figured women.

A joint study by research firms Boston Consulting Group and Shop.org found
that most on-line apparel sales are from multichannel retailers. This is evident in
the results of Forrester PowerRankings, a new report based on feedback from a Established
400,000-member panel by the research firm Forrester Research. The report
ranks the best consumer e-commerce sites in terms of advice and market brands are
information, cost, customer service, delivery, features and content, ease of highly effective
transacting, usability, and value. A score is assigned to each company for each in drawing
attribute. The scores are added and used to rank the companies in each e- people on line.
commerce category. In the apparel category, the top seven sites are

Land’s End;
L.L. Bean;
Bluefly, Inc.;
The Gap;
J. Crew;
Macys.com; and
Spiegel.

Notably, the only pure Internet company mentioned is Bluefly. Bluefly

scored well in most categories despite its recent transition to a larger fulfillment
center, an event which often disrupts service temporarily. In terms of apparel e-
commerce revenues, the National Retail Federation (NRF), a retail trade
association, estimates that for the 12 months ended September 1999, the top five
sites were

gap.com $80-$100 million;

jcpenney.com $60-$80 million;
eddiebauer.com $55-$75 million;
jcrew.com $40-$60 million; and
victoriassecret.com $25-$40 million.

These data illustrate the effectiveness of established brands in drawing people

on line. Part of the cost of establishing a Web presence goes to building brand
recognition and trust, and established bricks-and-mortar retailers have an
advantage here. The Gap, for instance, leverages its powerful brand recognition
to drive people to its Web site. The study also found that customer acquisition
costs average $42 for pure Internet retailers, which is much higher than the $22
estimate for multichannel retailers. Another advantage that traditional retailers
have over virtual retailers is the ability to accept returns and allow merchandise
pickups in the store.

Shopping for Clothing on Line

The Search for Apparel Products
The clothing category does not have a category killer, a one-stop shop where a
consumer can find every variation of a particular type of product. Most shoppers

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 know that if they are looking for a book, they can probably find it at
Amazon.com or Barnes & Noble. However, a consumer looking for a linen shirt
with French cuffs must use a specialized search engine or a fashion portal that
enables him or her to search the inventories of many retailers simultaneously.
Product comparison services, or shop-bots, such as MySimon.com and
Amazon.com’s Shop the Web, allow consumers to search for particular
garments and compare prices, directing consumers to retailers with inventories
that match the search. Both Outletmall.com (a unit of fashionmall.com) and
Bluefly are merchant partners of MySimon and Shop the Web. Frictionless
Commerce, another shop-bot, allows shoppers to compare qualitative factors
other than price, such as the level of customer service, which also impact
purchasing decisions.

Favorable Demographic Trends

Booming Generation Y Population
The demographic groups that dELiA*s, iTurf, and Alloy.com target are fast-
growing and increasingly Internet-savvy. Generation Y, the demographic group
aged 10 to 24, has not developed the habit of shopping in the department stores
that Baby Boomers patronize; the younger group gravitates toward specialty
stores such as The Gap and Urban Outfitters. Generation Y is brand-conscious
as well as budget-conscious. Having grown up using the Internet as a vehicle for
communication and entertainment, Generation Y is an ideal target market for
Web-based content and e-commerce business models. According to Teen
Research Unlimited, U.S. teenagers spent $141.0 billion in 1998, up 16.0% from
By 2002, 16.6 million 1997. Web sites such as bluefly.com and Outletmall.com are ideal places for
teenagers will be on the teenagers to shop for discounted fashions.
Internet, spending
No Credit Card, No Problem
$1.2 billion on line. We believe that lack of a payment mechanism is becoming a nonissue and
should not stifle sales to younger consumers. According to Jupiter
—Jupiter Communications Communications, 66% of college students have credit cards. Further, on-line
payment systems such as iCanBuy, DoughNet, RocketCash, and Cybermoola
allow people without credit cards to conduct transactions on line. Forrester
Research estimates that there are 12.4 million Generation Y members on line
currently. Jupiter Communications projects that 16.6 million teenagers will be
on the Internet and spending $1.2 billion a year on line by 2002.

Women, Who Still Make the Purchase Decisions, Are Internet-Savvy

Jupiter Communications estimates that women spend about three times as
much as men on the purchase of apparel on line and through the mail. In 1998,
according to Jupiter, women comprised 39% of the on-line population, and they
are expected to represent 46% of the on-line population by the end of 2000. A
survey by Harris Interactive predicts that six times as many women will shop on
line this holiday season than did last year. These trends should fuel the growth
of on-line apparel sales.

Busy Parents Look for Solutions on Line

The American Express Retail Index estimates that parents and teenage
students spent an average of $455 combined on back-to-school clothing and
supplies in 1999, up 12% versus 1998. According to the estimates, each
student’s parent or parents spent about $342, and each teenager spent about
$113. The findings reveal that both parents and teens are likelier to purchase
apparel on line than any other back-to-school category. An NRF survey found
that 14.1% of parents did some of their back-to-school shopping on line, with
51.5% of those parents buying apparel on line. We believe that these consumers
value quality, recognized brands, and attentive customer service.

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Technology
Larger Images and Personalized Features
Through market research, fashionmall.com has learned that consumers demand
large, detailed images and are willing to wait for them to download. Bluefly has
determined that improved image quality reduces merchandise return rates. The
demand for content tailored to user preferences has prompted Web sites to offer
customization features, such as Bluefly’s My Catalog. These site attributes
improve the shopping experience and encourage frequent visits and repeat
purchases. According to a survey by SupportZone.com, the leaders in on-line
apparel sales distinguish themselves with thorough product information,
interactive visual tools, user-friendly navigation, community/consumer
feedback, and easy access to customer service. Land’s End was noted as having
the most innovative features, with a personalization tool that allows women to
input parameters such as height and hair color and try different clothes on the
custom-built model.

Zooming and Motion Visualization

Live Picture’s Zoom Server allows Internet surfers to zoom in on images and
examine high-resolution details with minimal download time. Using Hewlett-
Packard's OpenPix Internet imaging software, Liz Claiborne’s corporate extranet
allows visitors to zoom in on a garment’s minute details. The Outfitter area of
the site lets retail buyers select various garment silhouettes and coordinate a
collection. Retailers can also place and track orders on the site. The Liz
Claiborne consumer site at lizclaiborne.com features Liz’s latest styles, an
interactive wardrobe planner, a store locator, and consumer contests.
MetaCreations’* Poser 4 is a 3-D visualization tool that lets users dress a
posable human figure. The figures can demonstrate the clothing in motion so
that customers can see how the clothing would look while they were walking or
sitting.

Color Accuracy Some retailers choose to

Colors sometimes appear differently on a user’s monitor than they were
intended to appear by the Web site designer. Further, the user’s printer deliver a cohesive
frequently interprets color differently than the monitor, resulting in confusion marketing message
about the actual appearance of a product. Sonnetech makes a software product throughout their channels,
called Colorific that ensures color consistency between the Web site, the user’s while other retailers
monitor, and the user’s printer. On-line apparel merchants such as J. Crew use
believe that a separately
this product to eliminate color surprises and minimize returns.
managed division is best for
Wardrobe Building their Internet operations.
Jio from iDream uses a Java applet, a small program automatically run on a
Web page, to allow shoppers to mix and match items from a merchant’s
inventory. Eddie Bauer's Virtual Dressing Room employs Jio to allow customers
to visualize complete outfits by dragging and dropping garments into place on
the screen. The software monitors the user’s actions so that merchants can learn
about their customers’ behavior and improve their shopping experience. VF
Corp.’s Lee Jeans site lets users set multiple criteria to search for the perfect fit.

Bricks-and-Mortar Apparel Retailers Venture on Line

Powerful Retailers Extend Their Brands on Line
Banana Republic, a unit of The Gap, recently launched an e-commerce site, and
Old Navy, another Gap unit, is expected to go live as soon as The Gap is
confident that the division can handle order fulfillment. The Gap is committed to
delivering a cohesive marketing message throughout its channels and has no
intention of carving out its on-line entities. Some retailers, however, believe that
the entrepreneurial spirit of an Internet operation is best fostered by creating a

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 separately managed division. Nordstrom, the department store chain known for
its devotion to customer service, announced that it is creating a separate Internet
subsidiary in partnership with Benchmark Capital. The new entity recently
launched Nordstromshoes.com, which is expected to stock 20 million pairs of
shoes by the holiday shopping season compared with the 200,000 pairs currently
offered on Nordstrom.com. We believe that Nordstrom.com’s planned $17-
million marketing campaign will benefit companies such as fashionmall.com
and Bluefly by raising awareness of fashion-related e-commerce.

An Essential Channel of Distribution

We think that the Internet is a logical extension of retail and catalog
operations, well suited to leverage existing customer bases, distribution systems,
and business processes. While separation in the early stages may make sense, we
believe that in five years the Internet will be regarded as just another channel of
distribution, albeit an essential and powerful one. We expect spun-off entities
such as barnesandnoble.com to rejoin their parents to strengthen their brands and
enjoy operating synergies. Moreover, we think that pure Internet entities such as
Bluefly are building strong brands and infrastructure that have the potential to
extend beyond the Internet into multiple channels of distribution.

Off-Price Apparel Market

Open Opportunity for Pure Internet Retailers
According to Discount Store News, off-price retailers such as Loehmann’s, T.J.
Stylish, content-rich Maxx, and Marshalls sold $18.5 billion worth of goods in 1997. Also among the
apparel e-tailers top off-price apparel retailers are Ross Stores, Burlington Coat Factory, and
represent a more Goody’s Family Clothing. Last year, T. J. Maxx acquired Marshalls, extending
appealing environment its leadership position in the marketplace and fortifying its buying clout. Off-
price retail requires specialized merchandising—these retailers buy
in which to liquidate opportunistically, taking excess inventory from manufacturers or other retailers
inventory than clearance at attractive margins. None of the major off-price apparel retailers has an e-
racks at off-price stores. commerce presence, creating a first-mover advantage for companies such as
Bluefly.

Improved Customer Experience

Heightening the competition in the off-price apparel market is the
proliferation of designer apparel stores in the outlet malls. Factory outlet stores
sold $8.3 billion worth of apparel and accessories in 1997. Outlets serve an
important role in clearing excess merchandise for retailers and designers;
however, they rarely offer a satisfactory customer experience. Factory outlets
are often situated in out-of-the-way locales. Despite the proverbial thrill of the
hunt, it frustrates consumers to rummage through bins and racks of garments to
find the right size and color. Designers prefer to have their brands presented in
an attractive setting with knowledgeable customer service. For these reasons
stylish, content-rich apparel e-tailers—such as Bluefly, Outletmall.com, and
DesignerOutlet.com—represent a more appealing environment in which to
liquidate inventory than clearance racks at off-price stores.

Characteristics of Effective Apparel Web Sites

Direct Marketing Expertise
On-line retailers that have developed expertise in direct marketing are well
positioned to service their customers effectively. Thorough data mining and
personalization features permit e-tailers to communicate with customers one on
one, delivering customized and relevant marketing messages.

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Fulfillment Mechanisms in Place
Many e-tailers focus too sharply on marketing and customer acquisition and
underestimate the importance of order fulfillment and customer service. Many e-
tailers lack the critical mass to efficiently pick, pack, and ship orders
themselves. There are many third-party fulfillment companies that handle these
tasks expertly, such as Fingerhut. Customers should be assured of an item’s in-
stock position, prompt delivery, and post-transaction customer service.

Content
Many fashion shoppers consult style guides and fashion magazines before
building their wardrobes. fashionmall.com’s Style Guide and Bluefly’s Flypaper
Well-executed
lead customers to buying opportunities through their fashion tips and fulfillment and
suggestions. Personalization features also help e-tailers retain visitors by follow-through on
engaging them with value-added content tailored to their preferences. customer service
are vital for
Ease of Site Use
Simple search functions, a clear layout, and easy navigation are integral to
customer retention.
visitor retention. Detailed and enlargable product images, thorough product
descriptions, and clearly displayed customer service policies are essential for
consumer confidence in a transactional Web site.

Customer Service
Clearly posted contact information, prompt responses to inquiries, and a
liberal return policy are vital for customer retention. A toll-free number with a
live representative is also becoming a characteristic of better sites.

Important Participants in the On-Line Apparel Market

fashionmall.com, Inc.*†
fashionmall.com is a vertical fashion portal, a home base that shoppers use as a
starting point to research and purchase apparel, accessories, and cosmetics. The
company aggregates content, promotes its anchor tenants, and delivers
customers to them. fashionmall.com generates traffic for its merchant partners
much more cost-effectively than the merchants could do themselves. Most of
fashionmall.com’s tenants are not experienced Internet marketers and are willing
to pay fashionmall.com a premium to ensure that fashion-seeking, shopping-
minded individuals are exposed to their e-commerce sites. The company also
operates Outletmall.com, an on-line discounter of designer apparel.

fashionmall.com has a diversified revenue model comprising several revenue

streams. Designers and e-tailers pay rent in the form of tenant fees in exchange
for the promotion they receive on fashionmall.com. Tenant fees represented
68.4% of revenues in the second quarter of 1999. Tenants also pay click-through
fees, a fee per visitor, which accounted for 21.2% of revenues in the third
quarter of 1999. Merchandise sales through the Outletmall.com unit contributed
10.4% of revenues. The company was established in 1994 and its
fashionmall.com Web site was launched in July 1995. Revenues grew to $2.1
million in 1998 from $219,000 in 1996.

Bluefly, Inc.*
Bluefly is an Internet retailer of brand-name apparel, accessories, and home
furnishings at deeply discounted prices. The company’s Web site, Bluefly.com,
was launched in September 1998 and has rapidly become a premier on-line
shopping destination for branded apparel at discounted prices, with second-
quarter 1999 net sales of $802,000. Bluefly chose to target the off-price apparel
market because catalog marketers have largely neglected it and bricks-and-
mortar retailers have failed to offer consumers a satisfactory experience.

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In July, Bluefly debuted a complete redesign of its Web site, with easier-to-use
search and buy tools and enhanced content. Two new merchandise departments
were introduced, Teens and Gifts. Bluefly also recently launched the House and
Home department, a category well suited for, but underserved on, the Internet.
To ensure that its site is expertly merchandised, Bluefly employs a team of eight
buyers formerly employed by retailers such as Bergdorf Goodman, Saks, and
Henri Bendel.

Bluefly has marketing agreements with America Online and two of its units,
CompuServe and Netcenter, and with Excite@Home, Go Network, Lycos,
MSN, Online, Tripod (a unit of Lycos), Women.com, and Yahoo! Bluefly’s
prominent placement within these shopping channels helps attract shopping-
minded Internet surfers to the site. Bluefly recently announced plans for a
Bluefly-branded credit card through an alliance with First USA, a subsidiary of
Bank One Corporation.

Styleclick.com, Inc.
Styleclick.com, Inc., formerly known as Modacad, Inc., is a network of e-
commerce sites that includes Styleclick.com, FashionTrip.com, and
Daisyfuentes.com. Styleclick.com is a content-rich site that guides visitors to
purchase fashion apparel, accessories, cosmetics, and footwear. The site
generates revenues primarily through referral fees and features true interactivity,
with a live style consultant helping customers select merchandise twice a week.
The site’s featured products can be viewed in high resolution with three-
dimensional rotation, providing visually rich images that allow consumers to
make informed purchasing decisions.

FashionTrip.com, loaded with community features and content, is a

commerce site targeted to the female Generation Y demographic (ages 10 to 24).
This ad-driven site promotes its commerce partners through suggestive fashion
articles and banner advertisements. To conduct purchases, users are directed to
buy the fashiontrip.com CD-ROM, which contains a virtual mall that links
shoppers to commerce-enabled Web sites.

Styleclick.com, Inc., has marketing alliances with the shopping portals of

America Online, Excite@Home, iVillage, and Women.com. Revenues for the
second quarter decreased 84% to $574,920—a result of the company
discontinuing its electronic merchandising and computer automated design
product operations and transitioning to a Web-centric business model.

Alloy Online, Inc.

A direct marketing company that targets Generation Y, Alloy Online uses a
print catalog to widen its reach and drive customers to its Web site, alloy.com.
alloy.com provides an interactive community where boys and girls can interact,
explore content, and shop. Merchandise available for purchase on the site
includes apparel, accessories, footwear, music, cosmetics, and magazine
subscriptions. Revenues from merchandise, sponsorship, and other arenas grew
74.0% year over year to $6.4 million for the six months ending July 31, 1999.
Due to the ever-changing trends of this age group, the company stays in style by
listening to customer feedback and by sending buyers out to hip teen hangouts.
It plans to increase its traffic by expanding its marketing and sales team to
capitalize on sponsorship, advertising, and other potential revenue opportunities.

dELia*s and iTurf

dELia*s is a direct marketer that currently sells from a catalog, from discount
outlet stores, and from fully priced stores. dELia*s has built both a proprietary
nine-million name database and in-house fulfillment services into its distribution
center. dELia*s catalog publication has a yearly circulation of over 60 million

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copies, and the company has relationships with hundreds of merchandise
vendors. iTurf, its recently spun-off Internet subsidiary, comprises a network of
Web sites that includes iTurf.com, gURL.com, gURLnet.com, gURLmAIL.com
and OnTap.com, as well as e-commerce sites dElias.com, discountdomain.com,
TSIsoccor.com, droog.com, Contentsonline.com, dotdotdash.com, and
StorybookHeirlooms.com. These sites offer interactive Web-based magazines
with proprietary content, communication tools, personal home pages, and
shopping. iTurf’s network of Web sites (excluding recently acquired
OnTap.com) reaches 13% of all girls and 2.6% of all boys between the ages of
12 and 17. These numbers indicate that the network’s reach to teens of both
sexes exceeds that of every other on-line network competitor.

DesignerOutlet.com
DesignerOutlet.com, launched in 1996, is a privately held e-tailer that sells first-
quality overstock goods from designers and manufacturers at reduced prices.
The company has relationships with 350 designers and buys most of its
merchandise directly from them. To minimize customer frustration, the site
attempts to offer only items with complete size availability. The Web site
includes fashion-related articles and a personal shopper who answers questions
about products. The site also offers a 30-day return policy. To help its designer
partners preserve their relationships with full-price retail partners,
DesignerOutlet.com does not feature merchandise on its site until the retailers
mark down the goods in their stores. The company currently offers about 1,500
product styles and plans to expand its categories over the next few months to
include plus sizes, petites, and home furnishings.

Issues That Impact Apparel E-Tailers

Fulfillment
The on-line apparel market is likely to become much more competitive as it
becomes easier for traditional apparel merchants to conduct e-commerce.
Companies such as Keystone Fulfillment, a unit of Hanover Direct, provide a
complete set of behind-the-scenes services for marketers that want to sell direct.
Keystone handles all telemarketing, order processing, credit card transaction
processing, customer service and maintenance of customer files, receiving,
warehousing, and distribution services for its customers. Fingerhut, a direct
marketer recently acquired by Federated Department Stores, lends its fulfillment
expertise to eToys and wal-mart.com.
Fear of cannibalization
Companies that contemplate e-commerce must make a choice between handling should not delay
order fulfillment in house or outsourcing it. There is a trade-off to evaluate. retailers from
Distribution centers are expensive to construct, which negatively impacts the
cash-flow dynamics of the business. In-house fulfillment also requires expertise
addressing the
in drop-shipping individual orders, a complicated procedure. Outsourcing Internet, a crucial new
fulfillment, however, reduces the gross margin and makes quality control and channel of distribution.
excellent customer service difficult to ensure. Some large e-tailers, such as
Amazon.com, have achieved the critical mass necessary to justify building
distribution centers. Amazon.com is spending aggressively on distribution
centers because it believes that it can provide better customer service and fill
orders faster while protecting its investment in customer acquisition.

Overcoming Fear of Cannibalization

Many traditional retailers have hesitated to go on line because they were afraid
of conflicts between their on-line ventures and their traditional businesses. In
particular, retailers that franchise their stores are concerned that franchisees will
feel that corporate e-commerce will cannibalize their sales. GNC’s solution to
this problem has been to share e-commerce revenues generated in each zip code
with the franchisees operating in that zip code. Retailers such as The Gap, that

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 sell proprietary-branded merchandise, have been aggressive in cross-promoting
their brands across multiple channels.

Merchandise Returns and Credit-Card Chargebacks

To derive net sales, gross sales must be reduced by merchandise returns and
credit-card chargebacks. A certain percentage of merchandise returns is built
into the model of remote apparel purchases to allow for fit and color problems.
On-line apparel retailers have found that high-quality images, thorough product
information, and effective data mining also help reduce merchandise returns.
Credit-card chargebacks include fraudulent purchases for which the retailer is
liable. If a credit card used to make a purchase was stolen, the sale may be
voided after the merchant has shipped the goods. Fraud protection software
allows e-tailers to check many variables to reveal and reject potentially
fraudulent transactions.

Valuation of Retailers by Channel

We evaluated the revenue multiples and revenue growth of participants in each
of the apparel market’s primary channels of distribution (see Table 1).

E-Commerce Companies
The group of pure Internet fashion companies has a market capitalization that is
an average of 10.6 times its projected 2000 revenues. This is the highest
multiple of the groups that we surveyed, but appears to be justified by the
group’s average projected revenue growth rate of 186.0%. Because companies
We believe that there are such as Bluefly, fashionmall.com, and Alloy Online have highly scalable
attractive investment business models with multiple revenue streams and rapid growth, we think that
opportunities among pure there is room for share price appreciation in the group.
e-tailers as well as Department Stores
specialty retailers and J.C. Penney, the largest retailer of apparel in the U.S., operates an e-commerce
catalog marketers that are enabled Web site. Federated Department Stores has been successful with
transitioning their macys.com and acquired direct marketer Fingerhut earlier this year for its
fulfillment expertise. The average revenue multiple of the group, 0.5 times 2000
businesses on line.
projections, does not reflect its progress in e-commerce. We think that this is a
function of the group’s sheer size and relatively low projected revenue growth
rate of 8.4% in 2000. The group’s e-commerce revenues are still too small
relative to total revenues to impact the group’s revenue growth and valuation.

Specialty Retailers
Specialty apparel retailers such as The Gap and Abercrombie & Fitch appeal to
the burgeoning Generation Y demographic. At an average multiple on 2000
projected revenues of 1.8, the valuations of these companies reflect a premium
over the other traditional retailers that we believe is justified by their
investments in brand awareness. Most of them have made a commitment to
building an e-commerce presence, which negatively impacts earnings growth in
the short term for these profitable companies. We expect the valuations of this
group to benefit from the returns on e-commerce initiatives as these initiatives
become more significant as a percentage of total revenues.

Catalog Marketers
The direct marketing model enables merchants to eliminate the inefficiencies of
mass marketing by targeting their customer bases with offers tailored to
consumers' preferences. As direct marketers develop their Internet businesses,
they gain access to ever more effective tools for one-to-one targeting. Further,
direct marketers have an advantage over bricks-and-mortar retailers because
they have the logistical expertise to handle remote order fulfillment. According
to the Direct Marketing Association, consumer catalog sales are expected to

12
total $57.1 billion in 1999, representing 2.0% of overall retail revenue of $2.8
trillion. Catalog sales are outpacing the growth of total retail sales, which are
projected to rise a modest 3.6% a year. Growing at 6.1% a year, consumer
catalog sales are forecast at $76.8 billion in 2004, accounting for 2.3% of total
projected retail sales of $3.33 trillion. The catalog apparel retailers that we
evaluated had an average market capitalization of only 0.7 times projected 2000
revenues despite the companies’ e-commerce-ready infrastructure. We expect
them to use the efficient marketing tools of the Internet to (1) better monetize
their customer databases, (2) improve their revenue growth rates, and (3)
increase their valuations.

Off-Price Retailers
None of the off-price apparel retailers in our group has a commerce-enabled
Web site. Feedback from the companies indicates that they have delayed going
on line because they are unprepared to execute individual orders. Retail off-price
apparel sales were $27.0 billion last year, a large market which to date has been
left open to Internet start-ups. We think that off-price apparel retailers will find
it impossible to ignore this increasingly important channel of distribution.
However, we believe that it will be at least a year before any of the dominant
off-price retailers launches a full-service transactional Web site. The group
trades at an average of 0.7 times its estimated 2000 revenue, which is forecast to
rise 12.2% from 1999 projections.

13
 Table 1
COMPARISON OF RETAILERS’ 2000E REVENUE MULTIPLES
($ millions, except for per-share data)
1999E 2000E 2000E/1999E Multiple on
Price ($) Market Estimated Estimated Revenue 2000E
Company Ticker 10/22/99 Cap ($) Revenues ($) Revenues ($) Growth Revenues

E-Commerce Companies

Alloy Online, Inc. ALOY 14 1/8 $201.0 $21.4 $60.1 181.1% 9.4
Bluefly, Inc.* BFLY 8 15/16 43.8 5.5 22.5 313.1% 8.0
fashionmall.com, Inc.*+ FASH 5 9/16 41.7 3.5 7.6 114.0% 11.8
Styleclick.com Inc. IBUY 8 1/2 62.9 3.0 11.0 266.7% 21.0
iTurf Inc. TURF 10 1/2 50.7 18.2 28.3 55.2% 2.8
Average: 186.0% 10.6

Specialty Retailers

American Eagle Outfitters, Inc. AEOS 46 3/4 $2,177.5 $805.1 $992.5 23.3% 2.7
Abercrombie & Fitch Co. ANF 21 13/16 2250.7 1066.3 1389.0 30.3% 2.1
Intimate Brands, Inc. IBI 41 9/16 10339.8 4425.5 4929.4 11.4% 2.3
Pacific Sunwear of California, Inc. PSUN 31 7/16 972.2 430.6 556.1 29.1% 2.3
The Gap, Inc. GPS 33 15/16 29096.4 11488.6 14257.0 24.1% 2.5
The Limited, Inc. LTD 41 3/16 9103.6 9571.5 10332.6 8.0% 1.0
The Wet Seal, Inc. WTSLA 16 3/8 204.3 568.3 654.2 15.1% 0.4
Urban Outfitters, Inc. URBN 16 1/2 288.2 267.0 328.3 23.0% 1.1
Average: 20.5% 1.8

Catalog Retailers

Coldwater Creek Inc. CWTR 22 1/16 $225.7 $332.5 $399.6 20.2% 0.7
dELiA*s Inc. DLIA 6 7/8 98.2 202.7 245.2 20.9% 0.5
J. Jill Group, Inc.* JILL 3 1/2 34.6 257.9 256.1 -0.7% 0.1
Land’s End, Inc. LE 72 13/16 2188.5 1411.3 1503.7 6.5% 1.6
Spiegel, Inc. SPGLA 13 1/4 1746.4 3176.4 3445.5 8.5% 0.5
Average: 11.1% 0.7

Department Stores

Federated Department Stores, Inc. FD 42 15/16 $9,012.6 $16,761.0 $19,699.0 17.5% 0.5
J.C. Penney Company, Inc. JCP 28 5/8 7442.5 32799.0 34499.7 5.2% 0.2
The May Department Stores Company MAY 35 3/8 13569.9 14494.1 15639.1 7.9% 0.9
Sears, Roebuck & Co. S 28 11/16 9552.9 41415.8 42658.1 3.0% 0.2
Average: 8.4% 0.5

Off-Price Retailers

Goody’s Family Clothing, Inc. GDYS 10 $333.2 $1,260.0 $1,445.8 14.7% 0.3
Ross Stores, Inc. ROST 20 7/8 1888.6 2464.3 2729.6 10.8% 0.8
TJX Companies, Inc. TJX 26 1/4 8294.7 8820.3 9785.8 10.9% 0.9
Average: 12.2% 0.7

Source: I/B/E/S and Gruntal & Co., L.L.C.

14
 INDEX OF APPAREL-RELATED COMPANIES AND THEIR INTERNET ACTIVITIES
(✔indicates that at least one fully owned Web site is currently transactional)
Currently
selling
Company Name Web Sites on line

Alloy Online, Inc. (ALOY) ✔

Alloy.com is a content-driven e-tailer that targets the Generation Y demographic (age 10 to 24) via the Web www.alloy.com
and print catalogs. In the second quarter of 1999, revenue increased 82.8% to $3.8 million versus a year
ago. Registered users increased to 850,000 in July 1999 from 570,000 in April 1999.

Ambercrombie & Fitch (ANF) ✔

Abercrombie & Fitch sells its branded casual apparel on its sparse Web site, where it also promotes its www.abercrombie.com
quarterly lifestyle magazine. The Web site’s performance has been in line with management expectations
but is not a significant contributor to total revenues.

American Eagle Outfitters, Inc. (AEOS) ✔

American Eagle Outfitters’ Web site is fully transactional, with content that complements its lifestyle www.ae.com
apparel brand. The site has a section called AE-zine which features articles on music, fashion, decorating,
and other topics that appeal to its young and trend-conscious customer base.

Bebe Stores, Inc. (BEBE) ✔

Bebe Stores’ line of fashion apparel is available for purchase on its content-rich site. The site offers fashion www.bebe.com
and beauty tips, celebrity gossip, and community features.

Big Dog Holdings, Inc. (BDOG) ✔

Big Dog Holdings sells logo apparel and accessories on its Web site, through its catalogs, and in its retail www.bigdogs.com
stores. The company reports that the site is profitable, and an upgrade is planned before the year-end
holiday shopping season.

Bluefly, Inc.* (BFLY) ✔

Bluefly.com, launched in September 1998, is a pure Internet retailer of discount-priced designer apparel and www.bluefly.com
home fashions. The Web site offers personalized features and exclusive content from fashion magazines
Elle and Harper’s Bazaar, and the company plans to introduce a Bluefly credit card. Bluefly’s revenues for
the second quarter of 1999 were $802,000 and unique visitors numbered 5.1 million.

15
 Currently
selling
Company Name Web Sites on line

Boo.com (private)
Boo.com plans a global launch of its e-commerce site, which will retail high-end branded sportswear. For www.boo.com
each item, the site will contain fully rotatable 3-D displays, zoomable images, and 2-D models for try-ons.
The company intends to sell its merchandise at full retail prices. The site is planned to accommodate
multiple languages and currencies. The launch of this site has been delayed since spring 1999.

Bon-Ton Stores, Inc. (BONT)

The Bon-Ton department store chain sells moderately priced brand-name apparel and housewares. Its Web www.bonton.com
site is not commerce enabled.

Brooks Brothers (MASPY: ADR) ✔

Brooks Brothers’ Web site is a classy on-line representation of the veteran high-end apparel retailer. The www.brooksbrothers.com
full-service, commerce-enabled Web site offers men’s and women’s apparel as well as content and store
information. Brooks Brothers is a unit of U.K.-based retailer Marks & Spencer, p.l.c.

Burlington Coat Factory Warehouse Corporation (BCF)

Burlington Coat Factory is one of the largest retailers of off-price apparel. Its Web site displays product www.coat.com
information, but transactions cannot be conducted there. Customers view merchandise, and orders are
processed over the telephone.

Catherines Stores Corporation (CATH)

Catherines Stores’ Web site features company information and fashion content. The site does not sell the www.catherines.com
company’s large-sized women’s apparel.

Chico’s FAS, Inc. (CHCS)

Chico’s FAS, an apparel retailer and catalog marketer, operates an informational, non-commerce-enabled www.chicos.com
Web site that allows a visitor to view merchandise and order the company’s catalog.

16
 Currently
selling
Company Name Web Sites on line

Coldwater Creek Inc. (CWTR ) ✔

Coldwater Creek is a catalog direct marketer of apparel, gifts, jewelry, and home furnishings. Its commerce- www.coldwatercreek.com
enabled Web site offers 15,000 stock keeping units. On-line revenues for the first six months of 1999 were
$3.1 million versus $134,000 for the first half of 1998. The company reported on-line net sales of $1.0
million and $2.0 million in August and September of 1999, respectively. The company’s Web site has been
effective in reaching new customers, with 25% of the on-line customers first-time Coldwater Creek
shoppers. The Web site is equipped with real-time inventory information.

Cybershop.com, Inc. (CYSP) ✔

CyberShop, an on-line department store, recently obtained exclusive on-line distribution rights for www.cybershop.com
overstock merchandise direct from apparel designers August Silk, Harve Bernard, XOXO Essentials, New
Frontier, A Gold E, Ronni Nicole, Touch Me, Zone One, Metrokane, Aziz, Patricia Jones, and Central Park
West. However, because of merchandise availability through third-party distributors, these agreements do
not prevent other on-line apparel retailers from carrying these brands. CyberShop’s net sales for the second
quarter of 1999 were $2.1 million versus $553,000 in the second quarter of 1998.

David’s Bridal, Inc. (DABR)

David's Bridal retails bridal and special-occasion apparel and accessories. Its Web site features content and www.davidsbridal.com
company information but is not commerce enabled. The company's 800 number is highlighted throughout
the site to facilitate appointment requests.

Deb Shops, Inc. (DEBS)

Deb Shops operates retail apparel and book stores and maintains a nontransactional Web site. The site www.debshops.com
provides Generation Y content and community.

dELiA*s Inc. (DLIA) ✔

dELiA*s is a multichannel direct marketer of casual apparel, accessories, and soccer merchandise to young www.delias.com
men and women age 10 to 24. Products are marketed through catalogs, discount outlet stores, and fully
priced stores. In April 1999, the company spun off its Internet operations under the name of iTurf. (See
iTurf below.)

17
 Currently
selling
Company Name Web Sites on line

DesignerOutlet.com (private) ✔
DesignerOutlet.com is an e-tailer of discounted designer apparel. The company currently offers about 1,500 www.designeroutlet.com
product styles and plans to expand its categories over the next few months to include plus sizes, petites, and
home furnishings. The Web site also includes fashion-related articles and a personal shopper to answer
questions about the products.

Designers Direct.com, Inc. (private) ✔

Designers Direct.com, launched in April 1996, is a pure Internet retailer of designer apparel. The site carries www.designersdirect.com
over 400 styles of designer jeans, footwear, eyewear, and fragrances. Repeat orders represent 25% of its
business. The company provides an 800 number for customers who prefer to order merchandise over the
phone. Designers Direct.com offers customer service in English, German, and Japanese.

dressmart, Inc. (private)

dressmart’s mission is to become the leading Internet retailer of branded apparel for men age 25 to 45. The www.dressmart.com
company sells shirts, ties, shoes, underwear, and accessories at full retail prices, offering Swedish and
international brands. dressmart currently operates in Sweden, Finland, Norway, and Denmark. The
company plans to launch in the United Kingdom, the Netherlands, Germany, and France.

eOffprice.com (private)
eOffprice.com is a multilingual e-tailer of discount-priced designer apparel. The site offers brands such as www.eoffprice.com ✔
Tommy Hilfiger, Calvin Klein, Ralph Lauren, Brooks Brothers, and DKNY. The company recently
announced a marketing alliance with Spanish-language portal StarMedia Network to gain exposure to the
rapidly growing Latin American e-commerce market.

fashionmall.com, Inc.*† (FASH) www.fashionmall.com ✔

fashionmall.com operates a vertical fashion portal and an on-line discount apparel e-commerce site. www.outletmall.com
Revenues have grown to $2.1 million in 1998 from $219,000 in 1996.

18
 Currently
selling
Company Name Web Sites on line

Federated Department Stores, Inc. (FD) ✔

Federated Department Stores has been aggressive in building its Internet presence. It has over 20 e- www.federated-fds.com
commerce enabled Web sites. Macys.com was designed to be gift-oriented and carries more than 250,000 www.macys.com
products across eight merchandise categories. The company’s acquisition of direct marketer Fingerhut www.bloomingdales.com
earlier this year demonstrates its commitment to order fulfillment. According to CNET’s News.com, www.burdinesflorida.com
Fingerhut’s on-line operations are expected to generate over $100.0 million in revenues in 1999. www.burdinesgiftexpress.com
www.weddingline.com
www.myjewelry.com
www.fingerhut.com
www.skiresorts.com
www.mountainzone.com
www.roxy.com
ww.handtech.com
www.andysgarage.com

Gadzooks, Inc. (GADZ)

Gadzooks is a mall-based specialty retailer of casual apparel for Generation Y. The site does not sell www.gadzooks.com
merchandise.

Goody’s Family Clothing, Inc. (GDYS)

Goody's Family Clothing retails moderately priced apparel for women, men, and children. The site does not www.goodysonline.com
sell merchandise.

Gottschalks Inc. (GOT) ✔

Gottschalks is a department store retailer with a commerce-enabled Web site. www.gottschalks.com

Gucci Group NV (GUC)

Gucci designs, produces, and distributes luxury items. Its Web site offers photos of its products and is www.gucci.com
nontransactional.

19
 Currently
selling
Company Name Web Sites on line

Harold’s Stores, Inc. (HLD) ✔

Harold’s Stores is a specialty retailer of men’s and women’s apparel, shoes, and accessories. Its Web site, www.harolds.com
www.harolds.com, is a fully transactional site with fashion content and a clothing-size calculator. www.oldschoolclothing.com

hipO.com (private) ✔
hipO.com is a graphically vibrant content-rich e-commerce site loaded with community features. Targeting www.hipO.com
a hip, youthful audience, hipO.com offers stylish apparel and accessories. The company also markets its
hipcard, which stores electronic cash for on-line purchases at hipO.com.

Intimate Brands, Inc. (IBI) ✔

Intimate Brands retails intimate apparel and personal care products under the Victoria’s Secret and Bath & www.intimatebrands.com
Body Works brand names. The company sells merchandise through its retail stores, its catalogs, and the www.victoriassecret.com
Victoria's Secret Web site. Its Web sites are content-rich and highly informational. The Victoria's Secret www.bathandbodyworks.com
Web site was made famous by its splashy $1.6-million promotion during the 1998 Super Bowl, which drew
an estimated 1.5 million visitors to the site. The site is attracting new customers; in fact, male customers
account for a higher percentage of sales through the site than through the traditional channels. In addition,
the site has received orders from 136 countries. The NRF estimates that, for the 12 months ended
September 1999, revenues from www.victoriassecret.com were $25-$40 million.

iTurf Inc. (TURF) ✔

iTurf is a network of Internet community and commerce Web sites targeted to boys, girls, and college www.iturf.com
students. The Web sites offer interactive magazines with proprietary content, chat rooms, communication www.delias.com
tools, personal home pages, and on-line shopping. iTurf's e-commerce sites offer apparel, accessories, www.tsisoccer.com
footwear, athletic gear, and home furnishings. Its community sites are gURL.com, gURLmAIL.com, and www.discountdomain.com
OnTap.com; its e-commerce sites are dElias.com, discountdomain.com, TSIsoccer.com, droog.com, www.droog.com
Contentsonline.com, dotdotdash.com, and StorybookHeirlooms.com. Because most of iTurf's Web www.contentsonline.com
properties are focused on adolescents, the company recently acquired college student-oriented OnTap.com www.dotdotdash.com
to appeal to customers that outgrow the children's sites. www.storybookheirlooms.com
www.gurl.com
www.gurlmail.com
www.ontap.com

20
 Currently
selling
Company Name Web Sites on line

J. Baker, Inc. (JBAK) ✔

J. Baker sells footwear and apparel under the names Casual Male Big & Tall, Repp Big & Tall, Work ’n www.thinkbig.com
Gear, and JBI Footwear. Thinkbig.com provides information about the company stores and its four www.reppbynet.com
catalogs (Repp ltd., Premier, Essentials, and Cutter & Buck). Reppltd.com allows customers to make on- www.reppltd.com
line purchases. The company uses this channel because Repp by Mail possesses the essential fulfillment
capabilities.

J.C. Penney Company, Inc. (JCP) ✔

J.C. Penney, the nation’s largest retailer of apparel, is also the largest catalog merchant of general
merchandise, distributing over 400 million catalogs annually. Ideally positioned to sell apparel on line, J.C. www.jcpenney.com
Penney’s Internet apparel revenues are estimated at $60-$80 million in 1998 by the NRF. The company www.arizonajeans.com
plans to spend $75.0 million in 1999 to promote its e-commerce initiatives. The site features over 3,500 www.eckerd.com
product images and allows customers to order any of the 90,000 products available in current J.C. Penney www.ehs.com
catalogs. The company recently launched www.just4meplus.com, selling apparel to full-figured women. www.e-pharmacy.com
The site will feature content from Mode magazine, and customers will be able to build 3-D models of www.e-photo.com
themselves. The company also operates www.arizonajeans.com a slick content-rich site that sells J.C. www.jcpenneyincentives.com
Penney’s private label denim brand, Arizona Jeans. www.jcpenneyinsurance.com
www.flowersdirect.com/jcpenney
www.just4meplus.com

J. Crew, Inc. (private) ✔

J.Crew, known as a catalog marketer of casual apparel, also operates 180 retail stores and factory outlets in www.jcrew.com
the U.S. and Japan as well as a commerce-enabled Web site. The site has a simple layout, but interesting
features include on-line games, screensavers, and electronic greeting cards. According to The Wall Street
Journal, J.Crew's e-commerce division accounted for $42 million, or 5.0%, of the company's revenues in
1998.

J. Jill Group Inc.* (JILL) ✔

J. Jill is a direct marketer of women's apparel, accessories, shoes, and gifts. It targets affluent women over www.jjill.com
the age of 35. Its commerce-enabled Web site was launched on September 1, 1999, and averaged $35,000
daily in September. In the second week of October 1999, it averaged $81,000 daily. Overall sales for the
quarter were disappointing, partly due to the popularity of other e-commerce sites competing in the apparel
marketplace, according to the company.

21
 Currently
selling
Company Name Web Sites on line

Jones Apparel Group, Inc. (JNY) ✔

Jones Apparel Group’s portfolio of brands includes Jones New York, Evan-Picone, Rena Rowan, Todd www.jny.com
Oldham, Saville, Nine West, Easy Spirit, and Enzo Angiolini. The company also produces product under www.ninewest.com
the brand names Lauren by Ralph Lauren, Ralph by Ralph Lauren, and Polo Jeans Company, which are www.polojeansco.com
licensed from Polo Ralph Lauren. The ninewest.com site has e-commerce capabilities. www.toddoldham.com

Kenneth Cole Productions (KCP) ✔

Kenneth Cole’s graphically intense web site sells the company’s broad line of shoes and accessories as well www.kencole.com
as the apparel manufactured for the company by licensees.

Kohls Corporation (KSS)

Kohls, a chain of specialty department stores, operates a nontransactional Web site. www.kohls.com

L.L. Bean (private) ✔

L.L. Bean, which circulated over 150 million catalogs in 1998, recently expanded its retail store and www.llbean.com
Internet operations. Its Web site, which is fully transactional and rich with outdoor and sporting content,
generated revenues of about $36.0 million in 1998, or 4% of its catalog sales, according to The New York
Times. The company offers over 5,000 items on its Web site, where shoppers can also order any of the
16,000 catalog items. Technology improvements have made the site more efficient for customers, reducing
the number of clicks necessary to locate and purchase an item. The company expects Internet sales to fuel
double-digit revenue growth through 2002. Media Metrix reported that www.llbean.com had 427,000
unique visitors in June 1999. L.L. Bean relies on search engine keywords and banner advertisements to
drive visitors to its Web site.

22
 Currently
selling
Company Name Web Sites on line

Land’s End Inc. (LE) ✔

Land’s End retails clothing, accessories, shoes, luggage, and bath and bedding products through mail-order www.landsend.com
catalogs. It also operates a chain of outlet stores offering overstocks and end-of-season closeouts. Its
commerce-enabled Web site has two unique features, Your Personal Model™ and Oxford Express™. Your
Personal Model™ lets a woman build and store a 3-D model of her body type. It recommends outfits that
flatter her body profile and suggests sizes based upon the data supplied. Oxford Express™ prompts the
shopper to provide sizes, fabrics, styles, collars, and cuff preferences. A digital image of a suggested item
appears, and customers can then order or change any feature to view new options. The site also allows
customers to speak with representatives or shop with friends located at separate computers. The Land’s End
Web site generated sales of $61.0 million in 1998. According to Media Metrix, www.landsend.com had
931,000 unique visitors in June 1999.

Levi Strauss & Company (private) ✔

Levi Strauss's core Web site, www.levi.com, is commerce enabled and content rich, featuring video clips, www.levistrauss.com
interactive games, and detailed product photos. The Original Spin Program allows customers to design and www.levi.com
order customized jeans. In an experiment with convergence, levi.com launched an interactive version of the www.dockers.com
brand’s television campaign, with streaming video, trivia questions, and a contest. Both the levi.com and www.slates.com
dockers.com sites sell merchandise. All of the sites offer content and community features.

Liz Claiborne, Inc. (LIZ) ✔

Although Liz Claiborne's core Web site is not commerce enabled, it serves as an effective representation of www.lizclaiborne.com
the Liz Claiborne brand image, providing merchandise descriptions, style guides, a fabric glossary, and a www.elisabeth.com
quarterly newsletter. The company recently acquired casual apparel company The Lucky Brand, which www.luckyjeans.com
operates an e-commerce-capable Web site. Liz Claiborne recently indicated its intention to expand its
direct-to-consumer inititives, including e-commerce.

23
 Currently
selling
Company Name Web Sites on line

May Department Stores Company (MAY)

All of May Department Stores’ Internet addresses automatically link to its information-only corporate Web www.maycompany.com
site. www.mayco.com
www.lordandtaylor.com
www.hechts.com
www.strawbridges.com
www.foleys.com
www.robinsonsmay.com
www.filenes.com
www.kaufmanns.com
www.famousbarr.com
www.lsayres.com
www.thejonesstore.com

Mothers Work, Inc. (MWRK) ✔

Mothers Work, a specialty retailer of maternity clothing, operates two commerce-enabled Web sites, www.motherswork.com
motherswork.com and maternitymall.com. The sites also offer content and community features. www.maternitymall.com

Nautica Enterprises, Inc. (NAUT)

Nautica operates Web sites that are currently nontransactional but provide content and information about www.nautica.com
sponsored events and promotions. www.nauticajeans.com
www.nauticasporttech.com
www.yonautica.com

Neiman-Marcus Group, Inc. (NMGa) ✔

Just in time for the 1999 holiday shopping season, Neiman Marcus launched an e-commerce site offering www.neimanmarcus.com
designer apparel and accessories, home furnishings, and holiday gifts. The site also boasts advanced
imaging technology, e-mailable personal shoppers, and live customer service via the telephone. The site
was launched with over 500 items, and the company plans to expand it continually.

24
 Currently
selling
Company Name Web Sites on line

Nordstrom, Inc. (JWN) ✔

Nordstrom operates under the names Nordstrom, the Nordstrom Racks, Façonnable boutiques, and www.nordstrom.com
nordstrom.com. In partnership with venture capitalists Benchmark Capital, Nordstrom has created a www.nordstromshoes.com
separate one-to-one retailing entity, nordstrom.com, which includes its catalog and Web operations. Its first
venture is nordstromshoes.com, which plans to offer 20 million pairs of shoes for sale. Eventually,
nordstrom.com plans to launch similar sites with expanded offerings in merchandise categories such as
apparel, accessories, jewelry, and gifts.

Pacific Sunwear (PSUN) ✔

Pacific Sunwear sells casual apparel, footwear, and accessories to teenagers and young adults in its mall- www.pacsun.com
based stores and on its Web site. The site also contains an on-line magazine named Pipeline, wish-list
capabilities, and company information.

PTN Media Inc. (PTNM) ✔

PTN Media provides branded content focusing on fashion, beauty, style, and fitness. The company's two www.fashionwindow.com
sites link the visitor to e-commerce sites. Revenues were $13,216 for the first six months of 1999. www.ptnmediainc.com

Paul Harris Stores, Inc. (PAUH)

Paul Harris Stores retails women's clothing and accessories. Its Web site is informational and www.paulharrisstores.com
nontransactional.

Ross Stores, Inc. (ROST)

Ross Stores operates a national chain of off-price retail stores that offer brand-name apparel. The company www.rossstores.com
has no current plans to enable its Web site for commerce.

S&K Famous Brands, Inc. (SKFB)

S&K Famous Brands sells men's tailored clothing, furnishings, sportswear, and accessories, all at www.skmenswear.com
discounted prices, through its Famous Brand Menswear retail stores. Its Web site is nontransactional.

25
 Currently
selling
Company Name Web Sites on line

Saks Incorporated (SKS)

Saks Incorporated operates department stores under the names Saks Fifth Avenue, Proffitt’s, McRae’s, www.saksincorporated.com
Younkers, Parisian, Herberger’s, Carson Pirie Scott, Bergner’s, Boston Store, and Off 5th. The company has
fulfillment capabilities through its direct mail businesses, but its Web site does not sell merchandise.

Spiegel, Inc. (SPGLA) ✔

Spiegel markets apparel and home furnishings through its catalogs, specialty retail stores, and Internet sites. www.spiegel.com
Businesses include Spiegel Catalog, Eddie Bauer, Newport News, and First Consumers National Bank. The www.eddiebauer.com
firm has six Internet sites—eddiebauer.com, newport-news.com, spiegel.com, eddiebaueroutlet.com, www.eddiebaueroutlet.com
spiegelronics.com, and ultimate-outlet.com, Spiegel's on-line clearance section. eddiebauer.com features an www.newport-news.com
interactive wardrobe builder powered by Jio, from software developer iDream, that lets users drag and drop www.spiegelronics.com
garments to mix and match outfits. Although the company does not break out its Internet revenues, it www.ultimate-outlet.com
reported that Internet sales increased 260% in the second quarter of 1999 compared with a year ago.
Catalog Age magazine estimates Eddie Bauer's e-commerce revenues at $10.0 million in 1998. The NRF
estimates that Eddie Bauer's Internet revenues for the 12 months ended September 1999 were $55-$75
million.

Stage Stores, Inc. (SGE)

Stage Stores operates purely informational Web sites for its retail concepts, which include Stage, Bealls, www.stagestoresinc.com
and Palais Royal.

Steinmart, Inc. (SMRT)

Steinmart is a retailer of brand-name apparel, accessories, gifts, linens, shoes, and fragrances. Its Web site is www.steinmart.com
informational and nontransactional.

Styleclick.com Inc. (IBUY) ✔

Styleclick.com Inc. operates a fashion e-commerce Web site that features apparel, shoes, accessories, www.styleclick.com
cosmetics, gifts, and home fashions. Its technologies manage, search, and display digital content, enabling www.fashiontrip.com
advanced product visualization for e-commerce. Visitors can purchase from the network of on-line stores, www.daisyfuentes.com
view merchandise in 3-D, and interact with personal consultants. Revenues were $6.7 million in 1998.

26
 Currently
selling
Company Name Web Sites on line

StyleShop.com (private) ✔
StyleShop.com sells merchandise, provides content, and offers community features. StyleShop’s business www.styleshop.com
model involves stocking, promoting, and shipping a designer’s merchandise and paying the designer each www.salesandbargains.com
week based on sales completed the prior week. According to the company, designers keep 70% of the www.styleshopdirect.com
selling price, minus the handling and warehousing fees kept by StyleShop. StyleShop plans to spend $2.0
million in the fourth quarter of 1999 and $10.0 million in 2000 for marketing to promote its Web sites.

The Buckle, Inc. (BKE) ✔

The Buckle retails casual apparel under the names Brass Buckle and The Buckle. The company’s www.buckle.com
commerce-enabled Web site features Generation Y fashion content and company information.

The Children’s Place Retail Stores, Inc. (PLCE)

The Children’s Place, a children’s apparel retailer, plans to launch a commerce-enabled Web site. www.childrensplace.com

The Dress Barn, Inc. (DBRN)

Dress Barn sells value-priced women’s apparel in its 674 retail stores. The company recently launched a www.dressbarn.com
Dress Barn catalog and plans to introduce an e-commerce Web site during Spring 2000.

The Finish Line, Inc.* (FINL) ✔

The Finish Line, a bricks-and-mortar retailer of athletic footwear, activewear, and accessories, launched its www.finishline.com
Web site in the second quarter of 1999. The site sells merchandise and provides company information and
fashion content.

27
 Currently
selling
Company Name Web Sites on line

The Gap, Inc. (GPS) ✔

The Gap’s on-line operations generated revenues of over $50 million in 1998, according to The Industry www.gap.com
Standard magazine. The NRF estimates that The Gap’s revenues for the 12 months ended September 1999 www.gapkids.com
were $80-$100 million. While other retailers fear cannibalization, The Gap has been aggressive in cross- www.babygap.com
promoting the Web site in its stores and throughout its advertising messages for Gap, GapKids, BabyGap, www.bananarepublic.com
and Banana Republic. Because The Gap stores sell only the company’s exclusive brand, The Gap does not www.oldnavy.com
have to be concerned with channel conflict (i.e., the alienation of retail partners when a manufacturer sells
direct to customers). To date, The Gap’s Old Navy site is an information-only Web site. Banana Republic
introduced a commerce-enabled site in October 1999. The Banana Republic Web site was designed to
provide a good customer experience regardless of connection speed.

The Gymboree Corporation (GYMB) ✔

Gymboree is a retailer of children’s apparel that operates stores and offers directed parent-child www.gymboree.com
developmental play programs at its franchised and company-operated centers. Its transactional Web site
allows customers to search for products by size, age, height, and weight, and it presents coordinated pieces
with the search results.

The Men’s Wearhouse, Inc. (SUIT)

The Men’s Wearhouse does not sell its line of moderately priced men’s apparel on its informational Web www.menswearhouse.com
site.

The Talbots, Inc. (TLB)

The Talbots’ lines of classic-style apparel are scheduled to be available for purchase through the company’s www.talbots.com
Web site in time for the 1999 holiday season. The Web site currently offers fashion content and company
information.

The Warnaco Group, Inc. (WAC)

Warnaco’s portfolio of casual sportswear and intimate apparel brands includes Olga, Warner’s, Van Raalte, www.warnaco.com
Lejaby, Bodyslimmers, and Calvin Klein. The Web site, warnaco.com, is so far a placeholder.

28
 Currently
selling
Company Name Web Sites on line

The Wet Seal, Inc. (WTSLA) ✔

The Wet Seal, a fashion apparel retailer, operates its stores under the names Wet Seal, Contempo Casuals, www.wetseal.com
Limbo Lounge, and Arden B. The Wet Seal recently launched blueasphalt.com and plans to distribute a www.blueasphalt.com
Blue Asphalt magalog, both of which market Blue Asphalt-branded merchandise and youth-oriented
content, to build brand awareness and boost its customer base.

3Dshopping.com (private)
3Dshopping.com is an e-tail Web site with graphics so moving and features so interactive that the result is a www.3Dshopping.com ✔
confusing shopping experience. Product categories include apparel, home décor, and flowers. The company
estimates that 250,000 shoppers visit per month to view its 12,000 items.

Today’s Man, Inc.* (TMAN)

Today's Man sells its private-label line of menswear through its chain of retail stores but not on its Web site. www.todaysman.com
The site features fashion advice and company information.

Tommy Hilfiger Corporation (TOM)

Tommy Hilfiger does not currently sell its lines of apparel, footwear, and accessories on its Web site. The www.tommy.com
site offers company information and solicits entries for its contest for unsigned musicians. www.tommyhilfiger.com

United Retail Group, Inc. (URGI)

United Retail Group's two retail concepts, THE AVENUE and Sizes Unlimited, operate bricks-and-mortar www.avenue.com
stores that sell the company's private-label large-sized apparel. Its nontransactional Web site,
www.avenue.com, offers merchandise descriptions and corporate information.

Urban Outfitters, Inc. (URBN) ✔

Urban Outfitters is a retailer, wholesaler, and catalog marketer of apparel, accessories, home furnishings, www.anthropologie.com
and gift items. The company operates 36 Urban Outfitters stores and 15 Anthropologie stores. It also sells www.mxgonline.com
merchandise through an Anthropologie catalog and through commerce-enabled anthropologie.com,
launched in December 1998. The company funds MXG media, Inc., a company that publishes a magalog—
an editorial-loaded catalog—and www.MXGonline.com—a transactional Web site for teenage girls. During
the first half of 1999, the company moved its catalog call center and order fulfillment process in house.

29
 Currently
selling
Company Name Web Sites on line

VF Corporation (VFC) ✔
VF Corp., which designs and manufactures a multitude of apparel brands, such as Lee, Vanity Fair, Riders, www.vfc.com
and Healthtex, has been reluctant to sell its merchandise on line, fearing channel conflict. It recently www.denimday.com
launched www.denimday.com, where, until October 8, 1999, visitors could support Lee’s breast cancer
awareness promotion through an on-line purchase of Lee jeans. Depending on response to this initiative,
Lee may enable on-line purchase of more of its lines. The Lee jeans site provides an interactive fit finder,
allowing users to discover the best fit based on their physical attributes.

* Gruntal & Co., L.L.C., makes a market in this security.

† Gruntal & Co., L.L.C., has been an underwriter of securities issued by this company within the past three years.

30
 PUBLIC COMPANIES MENTIONED IN THIS REPORT
Company Name Ticker Exchange Price ($) Company Rating
Alloy Online, Inc. ALOY NASDAQ 14.13 Not Rated
Amazon.com, Inc. AMZN NASDAQ 78.63 Not Rated
Ambercrombie & Fitch ANF NYSE 21.81 Not Rated
America Online, Inc. AOL NYSE 120.38 Not Rated
American Eagle Outfitters, Inc. AEOS NASDAQ 46.75 Not Rated
American Express Company AXP NYSE 148.63 Not Rated
Bank One Corporation ONE NYSE 34.06 Not Rated
Barnes & Noble, Inc. BKS NYSE 22.38 Not Rated
Bebe Stores, Inc. BEBE NASDAQ 26.94 Not Rated
Bluefly, Inc.* BFLY NASDAQ 8.94 1-Outperformer, 1-Outperformer
Bon-Ton Stores, Inc. BONT NASDAQ 4.50 Not Rated
Brooks Brothers MASPY:ADR NASDAQ 28.88 Not Rated
Burlington Coat Factory Warehouse Corporation BCF NYSE 18.81 Not Rated
Catherines Stores Corporation CATH NASDAQ 11.88 Not Rated
Chico’s FAS, Inc. CHCS NASDAQ 33.25 Not Rated
CNET, Inc. CNET NASDAQ 47.38 Not Rated
Coldwater Creek Inc. CWTR NASDAQ 22.06 Not Rated
Cybershop.com, Inc. CYSP NASDAQ 6.50 Not Rated
David’s Bridal, Inc. DABR NASDAQ 9.88 Not Rated
Deb Shops, Inc. DEBS NASDAQ 18.63 Not Rated
dELiA*s Inc. DLIA NASDAQ 6.88 Not Rated
Donna Karan International Inc. DK NYSE 8.31 Not Rated
The Dress Barn, Inc. DBRN NASDAQ 17.75 Not Rated
eToys Inc. ETYS NASDAQ 67.81 Not Rated
Excite@Home ATHM NASDAQ 39.06 Not Rated
fashionmall.com, Inc.*† FASH NASDAQ 5.56 2-Market Performer, 1-Outperformer
Federated Department Stores, Inc. FD NYSE 42.94 Not Rated
Forrester Research, Inc. FORR NASDAQ 41.13 Not Rated
Gadzooks, Inc. GADZ NASDAQ 7.75 Not Rated
Goody's Family Clothing, Inc. GDYS NASDAQ 10.00 Not Rated
Gottschalks Inc. GOT NYSE 8.88 Not Rated
Gucci Group NV GUC NYSE 79.44 Not Rated
The Gymboree Corporation GYMB NASDAQ 6.94 Not Rated
Hanover Direct, Inc. HNV NYSE 2.38 Not Rated
Harold's Stores, Inc. HLD NYSE 5.50 Not Rated
Hearst-Argyle Television, Inc. HTV NYSE 23.44 Not Rated
Hewlett-Packard Company HWP NASDAQ 75.88 Not Rated
Infoseek Corporation SEEK NASDAQ 29.00 Not Rated
Intimate Brands, Inc. IBI NYSE 41.56 Not Rated
iTurf Inc. TURF NASDAQ 10.50 Not Rated
IVillage Inc. IVIL NASDAQ 30.31 Not Rated
J. Baker, Inc. JBAK NASDAQ 5.94 Not Rated
J. C. Penney Company, Inc. JCP NYSE 28.63 Not Rated
J. Jill Group Inc.* JILL NASDAQ 3.50 Not Rated
Jones Apparel Group, Inc. JNY NYSE 31.56 Not Rated
Jupiter Communications, Inc. JPTR NASDAQ 32.00 Not Rated
Kenneth Cole Productions KCP NASDAQ 38.00 Not Rated
Kohls Corporation KSS NYSE 70.06 Not Rated
Land’s End Inc. LE NYSE 72.81 Not Rated
Loehmann's, Inc. LOEHQ NASDAQ 0.08 Not Rated
Liz Claiborne, Inc. LIZ NYSE 39.50 Not Rated
Lycos, Inc. LCOS NASDAQ 56.25 Not Rated
Marks & Spencer, p.l.c. MASPY NASDAQ 28.88 Not Rated
May Department Stores Company MAY NYSE 35.38 Not Rated
Media Metrix MMXI NASDAQ 51.50 Not Rated
MetaCreations Corporation* MCRE NASDAQ 5.63 Not Rated
Microsoft Corporation MSFT NASDAQ 92.69 Not Rated
Mothers Work, Inc. MWRK NASDAQ 12.50 Not Rated
Nautica Enterprises, Inc. NAUT NASDAQ 15.19 Not Rated
Neiman Marcus Group, Inc. NMGA NYSE 23.00 Not Rated
Nordstrom, Inc. JWN NYSE 23.75 Not Rated
Pacific Sunwear PSUN NASDAQ 31.44 Not Rated

31
Company Name Ticker Exchange Price ($) Company Rating
Paul Harris Stores, Inc. PAUH NASDAQ 4.56 Not Rated
Polo Ralph Lauren Corp. RL NYSE 19.38 Not Rated
PTN Media Inc. PTNM NASDAQ 2.00 Not Rated
Ross Stores, Inc. ROST NASDAQ 20.88 Not Rated
S&K Famous Brands, Inc. SKFB NASDAQ 7.25 Not Rated
Saks Incorporated SKS NYSE 15.94 Not Rated
Sears, Roebuck & Co. S NYSE 28.69 Not Rated
Spiegel, Inc. SPGLA NASDAQ 13.25 Not Rated
Stage Stores, Inc. SGE NYSE 5.31 Not Rated
Starmedia Network, Inc. STRM NASDAQ 28.00 Not Rated
Steinmart, Inc. SMRT NASDAQ 6.69 Not Rated
Styleclick.com Inc. IBUY NASDAQ 8.50 Not Rated
The Buckle, Inc. BKE NYSE 18.19 Not Rated
The Children’s Place Retail Stores, Inc. PLCE NASDAQ 25.50 Not Rated
The Finish Line, Inc.* FINL NASDAQ 7.19 Not Rated
The Gap, Inc. GPS NYSE 33.94 Not Rated
The Limited, Inc. LTD NYSE 41.19 Not Rated
The Men’s Wearhouse, Inc. SUIT NASDAQ 22.00 Not Rated
The Talbots, Inc. TLB NYSE 44.94 Not Rated
TJX Companies, Inc. TJX NYSE 26.25 Not Rated
Today’s Man, Inc.* TMAN NASDAQ 1.00 Not Rated
Tommy Hilfiger Corporation TOM NYSE 27.38 Not Rated
United Retail Group, Inc. URGI NASDAQ 9.38 Not Rated
Urban Outfitters, Inc. URBN NASDAQ 16.50 Not Rated
VF Corporation VFC NYSE 29.69 Not Rated
Vivendi VVDIY:ADR NASDAQ 14.88 Not Rated
Wal-Mart Stores, Inc. WMT NYSE 57.06 Not Rated
The Warnaco Group, Inc. WAC NYSE 16.50 Not Rated
The Wet Seal, Inc. WTSLA NASDAQ 16.38 Not Rated
Women.com Networks, Inc. WOMN NASDAQ 16.00 Not Rated
Yahoo! Inc. YHOO NASDAQ 178.13 Not Rated

* Gruntal & Co., L.L.C., makes a market in this security.

† Gruntal & Co., L.L.C., has been an underwriter of securities issued by this company within the past three years.

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34
 Report #EQ99168
Additional information available upon request

35
 U.S. Equity Research
Research Management
Executive Vice President
Director of the Equity Division
Edward E. Dunleavy .......................(212) 820-3682
Vanessa Alicea-Perez .............................(212) 820-3680

Equity Analysts Investment Strategy

Apparel Retailing and Manufacturing
John P. Rouleau...................................... (312) 269-0313
Marc A. Giordano ................................ (312) 269-5489
Closed-End Funds
Michael P. McGrath ............................... (212) 820-3613
John Duggan........................................ (212) 820-3612
Brett Esterson ...................................... (212) 820-3690
Chairman of Investment Policy
Joseph Battipaglia.................................... (212) 820-3601
Kevin Caron ........................................ (212) 820-3603
Mary Beth Collins................................ (212) 820-3602
Technical Strategist
Peter D. Green, CMT............................... (212) 820-3618
Todd Gold ........................................... (212) 820-3639

Communications Equipment
Emerging Growth
Mark Langley......................................... (212) 820-3619
Equity Research Marketing Desk
John Harmon...................................... (212) 820-3609 Manager
Jeffrey Margolin ...................................... (212) 820-3631
Consumer Internet/e-commerce
Patrice K. Cumberbatch ....................... (212) 820-3634
Catherine M. Skelly................................ (212) 820-3610
Debra Bernstein.................................. (212) 820-3611 Michelle Ferino.................................... (212) 820-3633
Paul Lampoutis .................................... (212) 820-8339
Healthcare Information Technology April Langel......................................... (212) 820-3636
Healthcare Internet
Anthony V. Vendetti .............................. (212) 820-3628
Jason Gurda........................................ (212) 820-3629
Editorial
Medical Devices
John M. Putnam, CFA............................ (312) 269-0350 Managing Editor
Daniel E. Owczarski............................. (312) 269-0360 Ron Horning............................................... (212) 820-3638
Marc A. Giordano ................................ (312) 269-5489

Pharmaceuticals, Generic Drugs & Biotechnology

Jeffrey J. Kraws ..................................... (212) 820-3604 Portfolio Associate
Karen B. Feinberg................................ (212) 820-3617
Michael Givner........................................... (212) 820-3632
David Saks............................................. (212) 820-3625
David Weiner....................................... (212) 820-3626
Daniel K. Durkin.................................. (212) 820-3627 Institutional Sales Trading Desks
Rodney Nathan, M.D. .......................... (212) 820-3679
New York (Domestic and International)... (800) 531-5897 or
Semiconductor & Electronics
(212) 820-8600
Mona Eraiba........................................... (212) 820-3607
Vincent A. Benedetti............................ (212) 820-3605 Boston ..................................................... (617) 728-2348
Beverly Hills............................................ (800) 262-8115 or
Software, Software Services & Technology
(310) 288-7000
Vivek N.J. Rao....................................... (212) 820-3624
Garry I.G. Parton ................................. (212) 820-3623

Technology
David Takata.......................................... (310) 288-7002
Jennifer J. Yousem............................... (310) 288-7048

This report includes information obtained from sources believed to be reliable but no independent verification has been made and we do not
guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage
in any transaction. Gruntal & Co., L.L.C. or its affiliates may take a position or engage in transactions with respect to securities identified herein.
Gruntal & Co., L.L.C. 1998. All Rights Reserved.
Gruntal & Co., L.L.C. • Established 1880 • One Liberty Plaza, New York, NY 10006-1487 • Telephone (212) 820-8200
Member New York Stock Exchange, Inc. and other principal exchanges • Member SIPC • www.gruntal.com