global retail industry

Rating Methodology

LondonRichard Morawetz 44.20.7772.5454Amanda NeffMarika MäkeläMichael WestMilanPaolo Leschiutta 39.02.5821.5585MexicoSebastian Hofmeister 52.55.1253.5700MoscowEkaterina Botvinova 7.495.641.1881New YorkRichard Baldwin 212.553.1658Elaine FrancolinoRobert LinCharles O'SheaMargaret TaylorMichael ZuccaroAngela JamesonParisMyriam Durand 33.1.53.30.10.47Marie Fischer-SabatiéEric de BodardSydneyPeter Fullerton 61.2.9270.8100Brian CahillTokyoMina Sawamura 813.5408.4100Emiko Otsuki

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December 2006

Global Retail Industry

Overview

This rating methodology provides detailed guidance on Moody's approach to rating the retail sector globally. Morespecifically, it outlines the key analytical factors that underpin ratings in the retail universe and offers guidance as tohow these individual factors combine to produce a rating outcome.

The wide range of rating outcomes for retailers reflects a common set of credit considerations. Within this ratingmethodology, we have distilled these considerations into six key rating factors, outlined below:

1. Business and Cash Flow Volatility2. Market Positioning of Retailer3. Execution Ability4. Real Estate Assets Positioning5. Financial Policies6. Key Indicator Ratios

The purpose of this rating grid is to provide investors, issuers and intermediaries with a detailed reference tool togauge the possible rating implications of specific changes in a given rating factor. While the grid aims to offer robustguidelines as to how we assign ratings to retailers, we would nonetheless caution that no company will match exactlyevery factor outlined for a given rating category within the rating grid; in other words, a Baa-rated credit will not scoreas a Baa in every single factor - the rating outcome is a balance of all the rating factors we have identified, and of thescores achieved by the company within the rating grid.

This methodology includes:• An overview of the industry characteristics• A description of our rating methodology• A detailed explanation of each key rating factor• A summary discussion of our results

About the Retail Rated Universe

The global rated retail universe is very diverse, covering a large number of segments (e.g. pure food retailers, specialtyapparel stores, or retailers whose earnings are primarily derived from consumer finance operations), different businessmodels (e.g. operators that mostly own real estate versus those that lease) and a wide range of formats (e.g. "big box"retailers, or Internet-based operations). Accordingly, retailers globally exhibit very diverse operational and financialdynamics. Such diversity is also reflected in published ratings: the highest rating assigned to a retailer globally is Aa2;the lowest is Caa1. Approximately 38% of publicly rated retailers are investment-grade and 62% are speculative-grade.

Moody's publicly rates 127 retailers globally. The global debt-weighted median rating for retailers is currentlyBaa2. At present, around 60% of all retail ratings are speculative-grade, with a high concentration in the B2 and B1categories. The debt-weighted median rating for speculative-grade retailers is B1. Within the investment-grade uni-verse, Baa2 ratings clearly dominate, with a debt-weighted median rating for investment-grade retailers at A2.

Approximately 68% of ratings have a stable outlook; 13% either have a positive outlook or are on review for pos-sible upgrade, while the remaining 19% either have a negative outlook or are on review for possible downgrade.

Approximately 80% of issuers are based in North America (and essentially in the US), with the remainder splitbetween Europe and Asia.

For the purposes of illustrating our global rating methodology, we have applied it to 19 representative credits outof 127 that span the three broad geographic regions - Europe, Asia and the US. For each of the selected companies, weshow the 11 qualitative measurements plus the 5 key credit metrics, and how these criteria are mapped to the ratinggrid. It is observed that a company may perform higher or lower on a specific factor or sub-factor than its actual ratinglevel would otherwise indicate. These companies are identified as "outliers" for that factor. A company whose perfor-mance on a specific factor is two (or more) broad rating categories higher/lower than its rating is deemed respectivelya positive/negative outlier for that factor. This document provides discussion of the general reasons for such outliersfor each factor.

Figure 1

Global Retail Issuers

Source: Moody's Investors ServiceNote: Data as of 11/8/2006

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910

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Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2

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uers

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$US

(in b

illio

ns)

No. of Issuers - Left Axis Rated Debt - Right Axis

2 Moody’s Rating Methodology

Industry Definition and Characteristics

For the purposes of this methodology, we have defined retailers as companies whose principal business is to act as thefinal sales point to end-consumers for wholesalers and manufacturers of both food and non-food products. Companiesthat fall within the retail industry typically exhibit the following characteristics: • The purchaser of the retailer's goods is a private individual or small trader. For example, cash-and-carry operators

which supply retail channels are included within the scope of this methodology.• The goods being purchased are principally physical goods, although Moody's notes that many retailers sell ser-

vices (e.g. financial services/service contracts) as a secondary component of their offer.• Purchasing frequency of goods can vary significantly, ranging from near-daily food purchases to annual purchases

of large consumer electronics or white goods.

KEY SECTOR CHARACTERISTICSThe following points summarise the key characteristics of the global retail industry:• Significant diversity in business risk: As discussed further in this report, business risk is largely a function of the segment

in which the retailer operates, as well as the overall competitive environment and the retailer's positioning within a spe-cific segment. For example, specific segments which cater to more inelastic products (e.g. food) will generally exhibitlower business risk than many other segments. Conversely, we view specialty retailers as being more exposed to cyclicaland seasonal volatility, as well as product obsolescence and fashion risk, and therefore subject to higher business risk.The positioning of a retailer within its segment is a response to the business risk of the segment, reflected in its store for-mats, its real estate arrangements, as well as the retailer's ability to secure a niche within a given segment. A further com-plicating factor is the general regulatory environment governing new store openings.

• Tight logistics and high standards of execution are key success factors: Ultimately, a successful retail business will havedemonstrated its ability to efficiently provide customers with the right product at the right time, and at the right price.Competition can be fierce, and customer loyalty can fluctuate rapidly if the value proposition of the retailer changes. Asa result, a retailer that is unable to provide and maintain satisfactory value to customers will likely see an impact on itsoperating and financial performance, which may be gradual or more rapid in some instances.

• Retail is capital-intensive: Retailers typically require significant investments in fixed assets, including retail outlets,warehouses and distribution networks. These assets need to be stringently managed to provide optimal returns,

Global Retail Industry Ratings - Selected Benchmark Retail Issuers19 Selected Issuers with US$104 Billion in Rated DebtCompany Public Rating Rating Outlook DomicileWal-Mart Stores, Inc. Aa2 STA United StatesHome Depot, Inc. (The) Aa3 STA United StatesTesco Plc A1 STA United KingdomCarrefour S.A. A2 STA FranceCostco Wholesale Corporation A2 STA United StatesWoolworths Limited A3 STA AustraliaAEON Co., Ltd. Baa1 STA JapanFederated Department Stores, Inc. Baa1 NEG United StatesIsetan Co., Ltd. Baa1 POS JapanBest Buy Company, Inc. Baa2 STA United StatesColes Myer Ltd. Baa2 STA AustraliaKroger Co. (The) Baa2 STA United StatesMetro AG Baa2 STA GermanyDaimaru, Inc. (The) Baa3 RUR-UP JapanPenney (J.C.) Company, Inc. Baa3 STA United StatesKoninklijke Ahold N.V. Ba1 POS NetherlandsSears Holdings Corp. Ba1 STA United StatesHornbach Baumarkt AG Ba2 STA GermanyFocus DIY Holdings Limited B3 NEG United Kingdom

Source: Moody's Investors ServiceNote:1. Ratings / Outlooks as of 11/8/20062. Total Rated Debt for Global Retail Industry is $202 billion

Moody’s Rating Methodology 3

and also need to be refurbished and relocated on an ongoing basis. Retailers have a number of financing options attheir disposal, including outright asset purchases or lease contracts. We discuss the rating implications of suchfinancing choices further in this report.

• Growth strategy: The growth model for most operators remains based on organic growth, although we may observesome acquisition activities mostly in non-food. In markets where concentration has reached a high level or organicgrowth is limited, some retailers have chosen to expand abroad to find new sources of growth (e.g. Kingfisher, Metro).However, retail formats do not always seem to travel well, with the possible exception of the hypermarkets and cash andcarry. Customers across the world can be resistant to changes and do not always react well to new concepts.

• Relevant markets are likely to be local or regional in nature: While a few large retailers can show significant geo-graphic diversification in their operations, most retailers remain predominantly local or regional businesses.Regional considerations are therefore important to understand, as we rate retailers throughout the world.

Methodological Approach

This rating methodology takes readers through the following steps:

IDENTIFICATION OF THE KEY RATING FACTORSAs noted, Moody's ratings focus primarily on the following factors:

1. Business and Cash Flow Volatility2. Market Positioning of Retailer3. Execution Ability4. Real Estate Assets Positioning5. Financial Policies6. Key Indicator Ratios

The discussion begins with a review of each factor and an explanation of its importance to the ratings.

MEASUREMENT OF THE KEY RATING FACTORSNext, measurement of each of the key factors is explained. Each of the six factors above is comprised of several sub-factors.These measurements are quantitative where we can define an appropriate metric. However, for some factors, qualitativejudgment or empirical observation is necessary to determine the appropriate category. In total, the rating methodologyincorporates sixteen sub-factors or measures, of which nine have quantitative elements and seven are purely qualitative.

All quantitative measures incorporate Moody's standard adjustments to income statement, cash flow statement,and balance sheet amounts for (among other things) off-balance sheet accounts receivable securitization programs,under-funded pension obligations, and recurring operating leases.1

Moody's ratings are forward looking. The rating process does, however, make extensive use of historic financialstatements. Historic results help with understanding the pattern of a company's performance and how the companycompares to others. They also provide perspective, helping to ensure that estimated future results are grounded inreality. While the rating process makes use of both historic and anticipated financial results, this document makes useof only historic data, and does so solely for illustrative purposes.

MAPPING FACTORS TO THE RATING CATEGORIES After identifying the measurements for each factor, the potential outcomes for each of the sub-factors are mapped to aMoody's rating category. (i.e. Aaa, Aa, A, Baa, Ba, B, and Caa)

APPLYING THE RATING METHODOLOGY/OUTLIER DISCUSSIONIt is observed that a company may perform higher or lower on a specific broad factor or sub-factor than its actual rat-ing level would otherwise indicate. These companies are identified as outliers for that sub-factor. A company whoseperformance on a specific sub-factor is two or more rating notches higher than its rating is deemed a positive outlier

1. Refer to the following Rating Methodologies: Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corpora-tions - Part I (issuers in the U.S. and Canada), dated July 2005 Part II (issuers reporting under International Financial Reporting Standards), dated September 2005 and Part III (issuers in Japan) dated October 2006. Also, refer to the following Special Comment: Guideline Rent Expense Multiples for Use with Moody's Global Standard Adjustment to Capitalize Operating Leases, dated February 2006.


for that sub-factor. A company whose performance is two or more notches below is deemed a negative outlier. Thisdocument provides discussion of the general reasons for such outliers for each broad factor or sub-factor.

WEIGHTING FACTORS AND RATING SCORESWe score each company by rating level on each of the sub-factors, as follows:

If a rating score falls into the speculative grade range, the relative sub-factor weighting increases compared to itsweighting in the investment grade range. This approach reflects the assumption that by moving a score from invest-ment into the speculative-grade range - e.g. from Baa to Ba - or within speculative-grade itself - e.g. from Ba to B - theoverall credit strength of any given issuer is weakened more significantly than by moving the score within investmentgrade only - e.g. from A to Baa. Deterioration in one factor cannot be fully offset by improvement in another factor.

This outcome is achieved by assigning different weightings to the respective sub-factors on the rating scale as follows:

For example, a decrease in ratings of any given sub-factor from Baa to Ba implies a score of 1.5 instead of 1. As aconsequence, the total score count of a sub-factor increases accordingly. The total score depends on the relative sub-factor weighting. If, for example, the sub-factor "scale" moves from Baa to Ba, the total score count for this factorwould change from 0.1 (10% x 1 for Baa) to 0.15 (10% x 1.5 for Ba).

DETERMINING THE FINAL RATINGThe steps outlined above produce a final distribution of scores by rating category (e.g. 15% Aa, 35% A, 45% Baa and5% B). The percentage score in each category is then multiplied by a value from 1 for Aaa to 18 for Caa in order tomap to a final rating, as shown in the following table.

This weighted average score is mapped to the table below, and an overall alpha-numeric rating is assigned basedon where the score falls in the range.

Appendix D illustrates the calculations to map the scoring under each rating factor to a specific rating category.

Rating Factors Factor Weighting Relevant Sub-Factor Sub-Factor Weighting

Business & Cash Flow Volatility 13.0%Product Volatility 6.0%Geographic Diversification 4.0%Seasonality of Cash Flow From Operations 3.0%

Market Positioning of Retailer 26.5%Scale 10.0%Segmental Market Share & Competitive Position 10.0%Cost Efficiency and Profitability 6.5%

Execution Ability 12.0%Quality of Merchandising 5.0%Supply Chain 7.0%

Real Estate Assets Positioning 7.5%Investments in Store Quality 2.5%Barriers to Entry 5.0%

Financial Policies / Liquidity 8.0% 8.0%

Key Indicator Ratios 33.0%

Debt / EBITDA 8.0%RCF / Net Debt 8.0%EBITA / Interest 7.0%FCF / Net Debt 3.0%CFO / Debt 7.0%

Total 100.0%

Rating category Aaa Aa A Baa Ba B CaaWeighting 1 1 1 1 1.5 2.8 3

Rating Category Aaa Aa A Baa Ba B CaaValue 1 3 6 9 12 15 18

Indicated Rating Overall Score Indicated Rating Overall ScoreAaa 1.49 or lower Ba 10.50 to 13.49Aa 1.5 to 4.49 B 13.50 to 16.49A 4.50 to 7.49 Caa 16.50 to 18.00

Baa 7.50 to 10.49


Rating Factor #1: Business and Cash Flow Volatility

WHY IT MATTERSRevenue and cash flow volatility is a key determinant of business risk for any corporate issuer. Simply put, higher vola-tility generally entails less predictable cash flows, and therefore lessens the confidence we may place in the company'sability to service its obligations in the future.

For retailers, revenue and cash flow volatility is particularly important given the significant fixed operating andcapital costs inherent in the business, potentially large seasonal variations in working capital, and significant price com-petition (which tends to constrain profit margins).

Sources of revenue and cash flow volatility may be completely disassociated from a retailer's financial strategy; in otherwords, much of business volatility is a direct result of the business segment in which the retailer operates and the productssold. This first rating factor aims at identifying the sources of revenue and cash flow volatility inherent in a retailer's business,over which management has little or no influence, bar a substantial strategic shift into a different business segment.

HOW DO WE MEASURE IT?We analyse three different sub-factors when examining business and cash flow volatility:• Product volatility• Geographic diversification• Seasonality of cash flow from operations

As noted above, business risk is largely related to the business segment, formats and geographic location of theretailer. Our definition of business risk thus captures the expected vulnerability of revenues and cash flows to cyclical-ity, fashion risk and/or product renewal, and geographic diversification. Seasonality is also influenced by the choice ofthe retailer's business, but to a lesser extent also reflects the retailer's financial strategy in transacting with suppliers andcustomers. Apparel retailers in the US, however, generally exhibit profound seasonality, with the quarter aroundChristmas and New Year accounting for a significant proportion of annual cash flow. Significantly, seasonality is notnecessarily as correlated to the actual business segment as business risk is. Two retailers with identical business riskcharacteristics could in fact exhibit very different seasonality patterns.

RATING GRID MAPPING

Rating Category Aaa Aa A Baa Ba B Caa

a) Product Volatility

Product demand is consistently unaffected by product renewal cycles; no exposure to fashion risk; significant commodity features. Highly resilient to economic cycles.

Very low exposure to product renewal cycles and/or fashion risk, with fairly significant commodity features. No evidence of material sensitivity to economic cycles.

Low exposure to product renewal cycle and fashion risk, with some commodity features. Demand varies moderately with economic trends.

Demand is moderately affected by product renewal cycles and fashion risk, with minimal commodity features. Demand varies moderately with economic trends.

Demand is affected by product renewal cycles and fashion risk, but can be managed, with limited if any commodity features. Demand varies moderately with economic trends.

Demand is significantly affected by product renewal cycles and fashion risk; can be hard to manage. Demand varies significantly with economic trends.

Very high sensitivity to product renewal cycles and fashion risk. Demand varies significantly with economic trends.

b) Geographic Diversification

At least 50% of sales generated from at least 10 international countries, which are overall profitable. Full national coverage in markets that account for 80% of sales.

At least 30% of sales generated from at least 5 international countries, which are overall profitable. Full national coverage in markets that account for 60% of sales.

Mostly national retailer; highly diversified within domestic market with no significant regional concentration.

Operates in one country with significant national coverage and some regional concentration.

Local operator with > 100 stores

Local operator with > 50 stores.

Local operator with < 50 stores.

c) Seasonality of Cash Flow From Operations

No seasonality; cash flows from operations equally split in four fiscal quarters

Very low;26-30% cash flows from operations in a single quarter

Low;30-40% cash flows from operations in a single quarter

Moderate;40-50% cash flows from operations in a single quarter

High;50-60% cash flows from operations in a single quarter

Very High;2-3 weeks accounts for >50% of cash flows from operations;60-80% in single quarter

Make or break seasons;single quarter >80% of cash flows from operations


a) Product volatility: In assessing a retailer's business risk, we analyse the fashion / product renewal risk, which iscritical to certain retailers, but difficult to measure. For example, while data can be obtained to evidence cyclicality(such as a comparison of revenue changes to changes in consumer confidence indices), such data is rarely consistentand available enough to allow meaningful comparisons between issuers. As an illustration, distributors of electric goodsare typically sensitive in terms of their top-line growth to the flow of new products into the market, and benefit fromthe introduction of new technologies (e.g. large flat screens), which tend to result in moderate to high business risk.Conversely, apparel retailers can be highly exposed to the success of new clothes by seasons, with the risk of having towrite down inventories if the retailer has failed to predict the mood of the consumers accurately. As sample illustrationsfor Europe, we would view the following segments as being typical of each degree of product volatility:

b) Geographic diversification can potentially offset the impact of cyclicality, depending on economic trends in dif-ferent geographic markets. Our assessment of geographic diversification therefore takes into consideration differencesin economic trends between regions. It also takes into account the profitability of the retailer in any given location, aswe typically regard geographic diversification as a positive factor in cases where the retailer has overcome the start-upcosts of entering the market in question.

For the purposes of assessing different geographic markets, the following guidelines are applied: the US consistsof five separate geographic markets (North-East, South-East, Central, North-West, South-West). In Europe and Asia,markets are typically defined by language. In most cases, single markets are therefore single countries. Highly popu-lous and large markets (e.g. China, India or Russia) are divided based on population concentration (e.g. the Moscowmarket), language, any material regulatory distinctions between regions, or any natural market limitations (e.g. terrain,prohibitive transportation costs).

Our assessment of geographic diversification also covers diversification within a given market. For example, aretailer operating in a single European country, but with full national coverage, would score better than a retailer oper-ating in a single European country, but with presence in only one or two cities. We nevertheless would score relativelyhighly a department store in Japan where a presence in key cities would offer national coverage even if the number ofstores remains low. These considerations are also partly reflected in Rating Factor #2: Market positioning of retailer, indiscussions relating to the scale of the retailer.

c) Seasonality of cash flows from operations: We measure the seasonal concentration of a retailer's cash flows fromoperations. Significantly, seasonality not only affects retail revenues, but also has a major impact on working capitalflows, through inventory build-up periods (e.g. in the pre-Christmas period) and supplier payments. By using cashflow from operations to measure seasonality, we capture all seasonal variations in the company's operations, includingworking capital flows.

We consider a retailer as exhibiting zero seasonality when its cash flows from operations are equally split across thefour financial quarters. We view seasonality as very high when a period of 2-3 weeks accounts for over 50% of cashflows from operations, with 60-80% of cash flows from operations in a single quarter. This high level of seasonality iscommensurate with the "B" rating category for this sub-factor.

Tying seasonality back to specific segments, we find that seasonality tends to be much higher in non-food seg-ments, due to the significant ramp-up in sales during the Christmas period (e.g. apparel, electronic products, music).Note, however, that retailers in apparently non-seasonal segments may also adopt reporting periods that effectively"smooth out" a low level of seasonality. For example, Ahold has historically shown a first quarter of around 15 weeksrather than the habitual 13 weeks. We take these distinctions into consideration in our analysis. High seasonalityincreases the risk that a retailer will be stocked incorrectly, or that its activity will be impacted by unfavourable eco-nomic conditions at the high season, which may reduce the demand from customers.

Aaa Aa A Baa Ba B CaaFood retailer selling staple products only

Food retailer with limited non-food

offer / Prescription drugs

Food retailer with large non-food

offer

DIY / Home appliances / Auto

parts

Music and books / Home furnishing /

Consumer electronics

Specialty apparel / Toys

Specialty luxury items with low

brand recognition


OBSERVATIONS AND OUTLIERS

In Europe, the outliers are positive given the companies' wide geographic diversification; in particular, Carrefourand Metro stand out amongst their peers.

Wal-Mart Stores, Inc's Baa seasonality results from its fourth quarter holiday focus, when the company logicallyexpands its toy offerings and also uses the toy segment to stimulate additional store traffic.

The A score for Sears Holdings in all three categories reflects the impact of the non-seasonal appliance and toolsegments, in which Sears has market-leading positions.

Federated Department Stores, Inc.'s Ba score on product volatility reflects its sales concentration in apparel andhome goods, both of which are subject to fashion risk. The B score for seasonality acknowledges the fact that the holi-day season provides a significant portion of annual cash flows. Moody's notes that Federated's third and fourth quarterresults in fiscal 2005 reflect the August 2005 acquisition of May Department Stores and also reflect the operation of acredit business. Thus, seasonality seen in fiscal 2005 may differ in future years. Softening the impact of these twoscores is Federated's geographic diversity, following the May acquisition, which is assessed at the A level; the companyoperates about 850 full line department stores in 45 states, making it one of the most diversified US department stores.

Best Buy is a retailer of personal electronics, entertainment and appliances. A material portion of its sales has someentertainment content, and many products carry fashion and obsolescence risk. Thus, Best Buy scores at the Ba levelon product volatility. There is seasonality in the company's cash flows as many of its products can be gift purchases;hence the Ba score on this attribute. Best Buy's geographic diversity, however, is assessed at the A level given its exten-sive and growing North American store base.

Kroger is the largest supermarket chain in the United States. Its scores on product volatility and geographic diver-sity all map to A, given the absence of fashion risk in its products and its national scale. However, the company's scoreson nearly all other measures to follow map to Baa, given the rise of Wal-Mart as the largest food retailer and the result-ing pressures on competitive position, profitability and credit metrics.

Company Corporate Family Rating Model Rating

Business & Cash Flow VolatilityProduct Volatility

Geographic Diversification

Seasonality of Cash Flow From Operations

Factor Weightings 6.0% 4.0% 3.0%Wal-Mart Stores, Inc. Aa2 Aa3 Aaa A BaaHome Depot, Inc. (The) Aa3 A1 Aa Aa AaTesco Plc A1 A1 Aa A ACarrefour S.A. A2 A3 A Aaa BaaCostco Wholesale Corporation A2 A1 Aa Aa AWoolworths Limited A3 Baa1 A A AaaAEON Co., Ltd. Baa1 Baa1 A A AFederated Department Stores, Inc. Baa1 Baa3 Ba A BIsetan Co., Ltd. Baa1 Baa1 Baa Baa AaBest Buy Company, Inc. Baa2 Baa2 Ba A BaColes Myer Ltd. Baa2 Baa2 Baa Baa AKroger Co. (The) Baa2 Baa2 A A BaaMetro AG Baa2 Baa2 Baa Aaa BaDaimaru, Inc. (The) Baa3 Baa2 Baa A AaPenney (J.C.) Company, Inc. Baa3 Baa1 Baa A BKoninklijke Ahold N.V. Ba1 Baa3 Aa Aa BaaSears Holdings Corp. Ba1 Baa1 A A AHornbach Baumarkt AG Ba2 Ba3 Baa A BaaFocus DIY Holdings Limited B3 B2 Baa Baa Ba

Positive Outlier

Negative Outlier


Rating Factor #2: Market Positioning of Retailer

WHY IT MATTERSA retailer's market position speaks directly to its size and track record of successfully operating its business, reflectingthe company's ability to respond to competitive pressures, and its ability to negotiate with suppliers and maintain prof-itability during various business cycles. Accordingly, the existing market position is a valuable indicator of the com-pany's expected ability to withstand future adverse credit shocks.

HOW DO WE MEASURE IT?We have divided this rating factor into three sub-factors:• Scale• Segmental market share and competitive position• Cost efficiency and profitability

RATING GRID MAPPING

a) Scale (total reported revenues): Retailers are the shop window for manufacturers of consumer products. A con-sumer products company will sell its products through any retailer that fits the image of the product (e.g. high-endcosmetics will typically not be sold through "big box" formats or pharmacies). Once the appropriate retail channels areidentified, the likelihood that manufacturers will want to use a particular retailer to distribute their products willincrease with the scale of the retailer. Given that retailing is typically a low-margin activity, and taking into accountthat a low price is normally a competitive advantage, operators are in constant pursuit of size in order to gain procure-ment benefits that can be passed on to the customer, and hence retain or gain market share. Scale therefore implies rel-ative competitive advantage that retailers have with suppliers in terms of negotiating purchase prices, supplierallowances, marketing and promotional support for product categories, which can include advertising and, for someproducts such as apparel, mark-down allowances and can better leverage their operating expenses.

In this context, scale is also indicative of: (i) the strength of an existing franchise in terms of the strength of thebrand, the offer and loyalty that exists between the retailer and its customer base, and (ii) the degree of complexity of aretailer's operations in terms of its distribution network, its supply and distribution infrastructure and its internalreporting and control systems. As a broad rule of thumb, Moody's also notes that businesses that enjoy significant scaletypically exhibit stable revenue profiles.


a) Scale (Revenues)

>USD 200 billion

USD 75 billion to USD 200 billion

USD 25 to 75 billion

USD 7.5 to 25 billion

USD 1 to 7.5 billion

USD 375 million to 1 billion

< USD 375 million

b) Segmental Market Share and Competitive Position

Market leader across multiple product lines and segments (e.g. #1 or #2 competitor in >80% of markets and product lines); static competitive environment; concept is still growing and is demonstrably portable; sales growth remains above 10%. Unquestioned price leader.

Market leader in its segment (e.g. #1 or #2 competitor in 70% to 80% of markets and product lines); highly stable competitive environment; concept may be maturing, but growth potential still evident; presence is acknowledged and factored heavily into competitors' strategy. Exhibits strong price leadership.

Strong competitor, with market leader generally forced to react to and consider implications of strategy (e.g. #1 or #2 competitor in 60% to 70% of core markets and product lines); stable competitive environment; still growing concept as it should have very limited geographic weakness. Moderate price leadership.

Solidly credible competitor that may need to rely on tactical promotions to maintain share in face of stronger players in core markets or segments (e.g. #1 or #2 competitor in 45% to 60% of markets and product lines); moderately changing competitive environment; concept generally mature and exhibit signs of competitive stagnation. Little price leadership.

Tactically competitive and generally price-promotional to maintain sales; moderately competitive in certain markets and product line niches (e.g. #1 or #2 competitor in 30% to 45% of markets and product lines); significantly changing competitive environment; concept mature and may be slightly eroding. Price taking behavior evidenced.

Minimal competitive presence (e.g. #1 or #2 competitor in 20% to 30% of markets and product lines); very significantly changing competitive environment; falling sales and no growth potential; long-term survival is questionable. No pricing power except for very defensive promotions.

Non-factor competitively (e.g. #1 or #2 competitor in <20% of markets and product lines); highly unsettled competitive environment; falling sales and no growth potential; long-term survival is unlikely

c) Cost Efficiency and Profitability

EBITA margin >3% above peers

EBITA margin 2-3% above peers

EBITA margin 1-2% above peers

EBITA margin in line with peers

EBITA margin 1-2% below peers

EBITA margin 2-3% below peers

EBITA margin >3% below peers


b) Segmental market share and competitive position: Retailing is an extremely competitive business with lowabsolute differentiation as the products offered are typically the same across the different retailers (save for ownbrands). The ability to sustain market share on a consistent basis is key to defend margins. As an illustration, wenote that Tesco has been successful over a long period in developing an offer that has allowed it to grow marketshares in the UK and retain a stable operating margin at the expense of its competitors.

This sub-factor examines the market position of a retailer within its segment, relative to its peers, and capturesthe competitiveness of the retail environment. As a result, we examine the absolute market positioning of the com-pany within the segment, the concentration of players within the segment, as well as the overall trend in marketshare for the retailer. We also evaluate the degree of competition between all retailers that offer the same merchan-dise or compete for discretionary consumer spending (e.g. Tesco selling consumer electricals and entertainmentproducts competing with DSG international). Market leadership within a segment typically affords operators supe-rior leverage with suppliers, therefore supporting higher gross margins. At the same time, market leadership (com-bined with adequate scale) enables operators to leverage their central costs over a larger revenue base, which againcan help to support operating performance returns, including higher operating margins. However, there is no defin-itive linkage between segmental market leadership and operating margins: many retailers choose to reinvest savingsinto lower prices, or some retailers (e.g. discounters) may actually design their businesses on a model of low mar-gins.

c) Cost efficiency and profitability: We use EBITA margin to gauge cost efficiency and profitability. Signifi-cantly, because different segments or geographic markets can vary markedly in terms of their margin performance(e.g. Next, an apparel retailer, has operating margins of 15% while Metro, a leader in cash and carry, exhibits 3%),we examine EBITA margin performance in comparison to the relevant peers within the same segment . For exam-ple, in the case of the UK food retail segment, Moody's assesses the performance of the rated food retailers as wellas the performance of unrated operators in the same segment and market to gauge relative performance. We thenrank EBITA margin in terms of the retailer's margin differential compared to peers. As such, an EBITA margin inline with that of peers yields a "Baa" score for this sub-factor; an EBITA margin that is consistently 2 to 3 percent-age points above that of peers yields a "Aa" score.

Moody's notes that the accounting treatment of certain items such as depreciation and maintenance capitalexpenditures can have a material bearing on the EBITA margin, whereas the choice of business model of leased vsowned stores also will tend to reduce operating margins.



Market Positioning of Retailer

Scale Segmental Market Share & Competitive Position

Cost Efficiency and Profitability

Factor Weightings 10.0% 10.0% 6.5%Wal-Mart Stores, Inc. Aa2 Aa3 Aaa Aaa AaHome Depot, Inc. (The) Aa3 A1 Aa Aaa AaTesco Plc A1 A1 A Aaa AaCarrefour S.A. A2 A3 Aa Aa BaaCostco Wholesale Corporation A2 A1 A A AWoolworths Limited A3 Baa1 A Aa BaaAEON Co., Ltd. Baa1 Baa1 A Aa BaaFederated Department Stores, Inc. Baa1 Baa3 A Ba BaaIsetan Co., Ltd. Baa1 Baa1 Ba A ABest Buy Company, Inc. Baa2 Baa2 A B BaaColes Myer Ltd. Baa2 Baa2 A Aa BaKroger Co. (The) Baa2 Baa2 A Baa BaaMetro AG Baa2 Baa2 A Aa BaaDaimaru, Inc. (The) Baa3 Baa2 Ba Baa APenney (J.C.) Company, Inc. Baa3 Baa1 Baa Baa BaaKoninklijke Ahold N.V. Ba1 Baa3 A Baa BaSears Holdings Corp. Ba1 Baa1 A A BaaHornbach Baumarkt AG Ba2 Ba3 Ba Baa BaaFocus DIY Holdings Limited B3 B2 Ba Ba B

Positive Outlier

Negative Outlier


Aeon is a positive outlier, as it holds the leading position in Japan's fragmented retail market and has had success inexpanding its operating franchise nationwide, as well as having strong incentives to expand for future growth.

Sears' A score for scale is a function of the post-combination size of Sears/Kmart. The A score in segmental mar-ket share reflects its almost 40% share of the U.S. appliance market, which is more than double the share of the num-ber two player, Lowe's.

Given the many sources of apparel and home goods, the increasing apparel and home goods offerings of discount-ers and the general maturity of the department store format, Federated's competitive position scores at the Ba level.The company's A score on the equally weighted measure of scale yields an average of Baa, consistent with Federated'sactual rating.

Best Buy's B score on competitive position reflects the fact that the products sold by the company are available atdiscounters, on the Internet and from the vendors themselves. Best Buy's A score on scale, an equally weightedattribute, brings the average on these two measures to a low Baa or high Ba.


Rating Factor #3: Execution Ability

WHY IT MATTERSA retailer's business is ultimately about developing and maintaining customer loyalty by ensuring that the retailer providesconsistent access to the right products, in the right locations at the right time, and with the appropriate value propositionthat the customer can identify and feel comfortable with. While a retailer may score highly in the first three rating factors(indicating a favourably positioned business compared to peers), any slippage in execution can have an immediate adverseimpact on customer loyalty, financial performance and credit quality. The execution will ensure that the logistics are efficient,correctly dimensioned and able to deliver the product to the shelf when the customer wants it. If there are too many missingproducts, the customer may take his business to a competitor, sometimes permanently. If a retailer is efficient and responsiveto the customer expectations, it may benefit by higher revenue growth, which will allow it to obtain better purchasing condi-tions that it can pass on to its customers, hence feeding a virtuous circle of growth and profitability.

While a deterioration in execution would eventually be reflected in the first two rating factors and in credit met-rics, this third rating factor aims to capture areas of vulnerability in execution, which may provide early warning signsof future credit deterioration.

HOW DO WE MEASURE IT?We examine two different sub-factors when assessing execution ability, both of which are qualitative assessments:• Quality of merchandising• Assessment of supply chain

RATING GRID MAPPING


a) Quality of Merchandising

Product offer perfectly and consistently matches evolving customer preferences. Like-for-like sales growth consistently >3% per annum above peers

Excellent track record of product offer matching evolving consumer preferences. Isolated instances of misreading market trends. Like-for-like sales growth consistently 2 to 3% per annum above peers

Solid track record of product offer matching evolving consumer preferences. Generally able to anticipate major trends, with occasional misses. Like-for-like sales growth consistently 1 to 2% per annum above peers

Product offer broadly matches evolving consumer preferences. Uneven track record of anticipating changing preferences. Like-for-like sales growth in line with peers

Product offer tends to lag changes in consumer preferences compared to peers, but remains adaptable. Like-for-like sales growth 1 to 1.5% below peers

Weak; product offer is often mispositioned. Uneven track record of adaptability. Can have volatile markdowns. Like-for-like sales growth 1.5 to 2% below peers

Poor; product offer consistently mispositioned. Product offer inflexible, subject to highly volatile markdowns. Like-for-like sales growth 1.5 to 2% below peers

b) Supply Chain World-class systems; recognized leader in development. In-stock positions flawlessly handled, with same-day or next day availability for virtually the entire product line. Ability to dictate most terms for virtually all vendor relationships, and is most important customer to almost all vendors, ensuring significant sourcing advantages. Working capital management is "best in class".

Best-in-segment systems provide significant competitive advantage against others in segment. In-stock positions flawlessly handled, with next day replenishment the norm. Ability to dictate significant terms for significant majority of vendor relationships and is critical customer to vendors, ensuring significant sourcing advantages. Working capital management is distinct competitive advantage.

Above Average; overall is an asset to company's competitive position, with in-stocks and replenishment solidly handled and acceptable to customers. Able to dictate majority of vendor terms. Working capital is a competitive advantage.

Average;occasionally lacks consistency in supply chain effectiveness, with replenishment adequate enough to maintain competitiveness. Vendor terms subject to negotiation.Working capital is adequately managed, but exposed to one-off movements which materially impact cash flows.

Below Average; inconsistencies can be a competitive hindrance. Replenishment not always predictable. Most terms dictated by vendors. Working capital is adequately managed, but exposed to one-off movements which materially impact cash flows.

Well Below Average;structural issues hinder supply chain effectiveness, and leave company at clear disadvantage. Terms dictated by vendors.Working capital shows clear room for improvement, and can manifest unpredictable or deteriorating trends.

Weak history of quick response to customer demand;Chronic availability issues in certain product lines; tertiary vendor relationships at best, with price-taking the norm. Working capitalmovements are highly erratic year-on-year.


a) Quality of merchandising: In our view, the quality of a retailer's merchandising reflects the strength and depthof management's knowledge of the sector, and management's capacity to anticipate market trends. In assessing thisfactor, Moody's considers principally one quantitative factor (i.e. the ability to produce like-for-like sales above rele-vant competitors over a 12-month period). Although there may theoretically be other measurements of performance(e.g. sales per square foot), there is no consistent industry standard to allow dimensioning. In this assessment we willalso weigh other qualitative attributes, including:• Depth and history of supplier arrangements, and the extent to which these arrangements reflect a "win-win"

cooperation between the retailer and its suppliers.• The consistency with which the company's buyers are able to meet evolving consumer taste and preferences.• The consistency of the price and quality components of the offer.• The ability to judge and manage the product mix during key trading periods (e.g. Christmas) and during key sales

periods.• Evidence of meaningful stock overhangs and markdowns affecting gross and operating margins.

Merchandising quality affects all retailers; however, this rating factor may be a more prominent consideration inspecific segments such as apparel, consumer electronics, or soft furnishings, which tend to be subject to more rapidchanges in consumer preferences. By contrast, consumer trends in food retail tend to be less volatile; however, foodretailers do remain exposed to certain substantial shifts in consumer preferences, including the need to accommodateFairtrade, low-carb, or organic product lines. As a note, supermarkets globally are increasingly differentiating them-selves through their merchandising, for example through the use of private label offerings, which separately also tendto enhance margins.

A retailer whose like-for-like sales performance has been broadly in line with that of its peers over the recent pastwould score as a "Baa" for this sub-factor. Note that, for operators present in more than one market (such as Ahold),Moody's focuses on the performance of the retailer's main operations in its key markets (North Eastern and EasternUS and the domestic Dutch market).

b) Assessment of supply chain: Our qualitative assessment of the retailer's supply chain encompasses a number ofconsiderations associated with the efficiency, reliability and robustness of the supply chain. Of particular importance isthe retailer's ability to get the required stock units on the shelves at the time they are required by customers. The fol-lowing elements are key to our assessment:• How well invested the supply chain is, and what incremental investments are required to mirror "best in class" retailers.• Running levels of stock availability compared to peers.• The degree to which a retailer can track a specific good throughout the entire supply chain, from order to sale in the store.• Reliance on third-party operators as part of the supply chain, such as haulers specialised in logistics to the retail industry • The extent to which management is able to maintain an offer that focuses on the fastest-moving lines across its

SKUs (stock keeping units).• The potential for merchandise obsolescence.

With few exceptions, Moody's has found that retailers with "best in class" logistics also tend to be amongst thebest-performing operators in their business segments. Note that Moody's considers Wal-Mart (rated Aa2) to have thebest logistics of any retailer worldwide. Recent examples of operators that have suffered from supply chain problemsinclude J. Sainsbury plc (Baa3 Corporate Family Rating, Not Prime), which, until recently, had suffered much publi-cised product availability issues. As a result, Moody's current assessment of J. Sainsbury for this rating factor fallswithin the "Ba" score, reflecting poorer product availability compared to peers. Such availability issues were driven inlarge part by problematic interaction between the stores and depots, as well as certain systems issues within the com-pany's stores. The "Ba" score also positively reflects our view that the company's supply chain remains well-investedand that there is visibility for resolution. Wm Morrison is another example where the integration of supply chain infra-structure, working practices, supplier relationships and IT systems of Safeway Ltd has proved much more challengingthan anticipated at the time of the acquisition.



Key to Federated's A score on supply chain is its expertise in the design and sourcing of private label and exclusiveproducts. Pure private label was 18% of Macy's sales in fiscal 2005, for example, while only 12% at May and 9% atMay's Marshall Field's division.

Best Buy's quality of merchandising maps to A, given its robust comparable store sales. The company has clearlydistinguished itself from its competitors with a customer centricity business model that involves the segmentation of itscustomer base, the identification of stores that have critical mass in certain segment(s) and the adjustment of the mer-chandise assortment and in-store service as appropriate. The customer-centric format (approximately 40% of U.S.Best Buy Stores at fiscal year-end February 2006), Geek Squad computer installers and service agents, home theatreinstallers, enhanced small business products and expanded private label offerings all give the company authority in sell-ing what are often commoditised products.


Execution AbilityQuality of Merchandising Supply Chain

Factor Weightings 5.0% 7.0%Wal-Mart Stores, Inc. Aa2 Aa3 Aaa AaaHome Depot, Inc. (The) Aa3 A1 A ATesco Plc A1 A1 Aa AaCarrefour S.A. A2 A3 A ACostco Wholesale Corporation A2 A1 A AaWoolworths Limited A3 Baa1 A AAEON Co., Ltd. Baa1 Baa1 A AFederated Department Stores, Inc. Baa1 Baa3 Baa AIsetan Co., Ltd. Baa1 Baa1 A ABest Buy Company, Inc. Baa2 Baa2 A BaaColes Myer Ltd. Baa2 Baa2 Baa BaaKroger Co. (The) Baa2 Baa2 Baa BaaMetro AG Baa2 Baa2 Baa ADaimaru, Inc. (The) Baa3 Baa2 A APenney (J.C.) Company, Inc. Baa3 Baa1 Baa BaaKoninklijke Ahold N.V. Ba1 Baa3 Baa BaaSears Holdings Corp. Ba1 Baa1 Baa BaaHornbach Baumarkt AG Ba2 Ba3 Baa BaaFocus DIY Holdings Limited B3 B2 B Baa

Positive Outlier

Negative Outlier


Rating Factor #4: Real Estate Assets Positioning

WHY IT MATTERSHow a retailer manages its real estate is a critical determinant of operational and financial success. Operationally, aretailer's real estate strategy determines whether or not consumers are reached in the right locations and using theright types of formats (e.g. "big box" vs. urban "express" stores). Customers are also extremely sensitive to the qualityof the stores in which they shop. Real estate can also be a significant source of operational and financial flexibility, asnoted below. It can also function as a barrier to entry, particularly in Europe, where there exist many regulatory restric-tions to new store openings. As a result, real estate has a significant impact on absolute performance and on competi-tive positioning. Additionally, the extent to which new real estate is available within the relevant market will have asignificant impact on the competitive dynamics affecting a retailer.

In a nutshell, what we try to capture with this rating factor is: (i) the extent to which the retailer's real estate port-folio is a source of strength for the existing business, and (ii) the extent to which real estate dynamics in the retailer'sgiven market can support or hinder future operational and financial performance, especially vis-à-vis the entry of newcompetitors.

A further consideration tied to a retailer's real estate portfolio is the extent to which the nature of the real estate port-folio itself can provide a source of additional financial flexibility given their intrinsic value. Valuable and unencumberedowned real estate assets may be a means for a retailer to obtain secured financing should the need arise. For example, JSainsbury was able to raise GBP2.07 billion non-recourse debt through the issuance of Commercial Mortgage-BackedSecurities, secured by around half of its UK property portfolio. Conversely in the event assets are leased, an absence ofexit penalties can allow for rapid changes in a store portfolio (for example, shifting locations within or between shoppingmalls). This last consideration ultimately relates to the role of the real estate portfolio as an additional source of liquidityfor the retailer. As such, we incorporate these points within Moody's broader liquidity analysis.

HOW DO WE MEASURE IT?We examine two sub-factors to assess the credit implications of an issuer's ability to manage its real estate assets:• Quality of store base• Barriers to entry

RATING GRID MAPPING

a) Investment in store quality: Our assessment of store quality aims to capture the extent to which the retailer hasmanaged its physical stores such that they remain attractive and well-positioned outlets for customers over time. Suchmanagement entails new store openings, store relocations and store remodels. When assessing store quality, we exam-ine the extent to which the store portfolio is refreshed and relocated, as well as the extent to which the capital expendi-tures budget tied to the store portfolio is in excess of depreciation on average over the past three years.


a) Investments in Store Quality

Stores significant competitive advantage, and are continuously refreshed and relocated, capex budget never reduced/delayed due to financial policy (e.g. 3-year average Capex to Depreciation ratio > 300%)

Stores solid competitive advantage, very regularly refreshed and relocated, capex budget almost never reduced/delayed due to financial policy (e.g. 3-year average gross Capex to Depreciation ratio between 200% and 300%)

Stores are a distinct competitive advantage, regularly refreshed and relocated, capex budget rarely reduced/delayed due to financial policy (e.g. 3-year average gross Capex to Depreciation ratio between 150% and 200%)

Stores are a competitive advantage, regularly refreshed and relocated, capex budget rarely subject to reductions, but delays do occur due to financial policy (e.g. 3-year average gross Capex to Depreciation ratio between 100% and 150%)

Stores may be competitively neutral to minor competitive disadvantage, infrequently refreshed and relocated, capex budget subject to reductions or rescheduling/delays due to financial policies (e.g. 3-year average gross Capex to Depreciation ratio between 75% and 100%)

Store condition represents distinct competitive disadvantage rarely refreshed and never relocated. Subject to frequent financial policy impact (e.g. 3-year average gross Capex to Depreciation ratio between 25% and 75% but decreasing)

Store condition almost a fatal competitive hindrance, rarely refreshed and never relocated. At best, capex budget is purely defensive. (e.g. 3-year average gross Capex to Depreciation ratio below 25%)

b) Barriers to Entry (See Appendix B)

Stringent Very High High Moderate Low Very Low Minimal


Comparing capital expenditures to depreciation can be subject to distortion, primarily due to: (i) differentaccounting practices (e.g. differing useful lives employed by different retailers, and (ii) the choice of asset financing(e.g. leased versus owned stores). In addition, a rapidly growing retailer will have likely spent in excess of depreciation.Nevertheless, we try to circumvent this constraint by taking a view on the overall budget tied to relocation and refur-bishment, and its appropriateness compared to investment needs in the store portfolio. Importantly, we also assess thelikelihood that spending budgets on the store portfolio may be curtailed as a result of financial policy decisions. Finally,we not only look at the average spent over the last three years, but also focus on the trends as a relatively healthy ratiocould mask a deceleration in investment.

b) Barriers to entry: Barriers to entry into a specific segment or geographic market can provide incumbent retail-ers with a significant competitive advantage. In this sub-factor, we examine two different types of barrier to entry,namely regulatory barriers to entry and the cost of real estate investments (i.e. the extent to which real estate may beprohibitively costly for new or smaller players).

We provide the following guidelines to scoring barriers to entry in our rating grid. As there are no robust and con-sistently available quantitative measures to assess barriers to entry, we rely on qualitative assessments, as detailed below:

In order to place these considerations into context, we have also provided the following examples of how certainselected geographic markets may score on this rating factor:

Rating CategoryAaa

StringentAa

Very HighA

HighBaa

ModerateBa

LowB

Very LowCaa

MinimalGeneral Considerations

Regulatory Barriers to Entry in Relevant Geographic Market

- New store openings are all either explicitly or effectively prohibited

- Regulatory limitations prohibit (effectively or explicitly) the vast majority of store openings. A small number of new site openings do still occur each year.

- Selective award of planning permissions; compliance with regulatory requirements is costly and time-consuming, effectively favoring large retailers

- Regulated, although planning permissions can be obtained for most formats.- Specific regulatory requirements must be met and maintained (e.g. size and location limitations, opening hours, etc.)

- Regulatory requirements can be easily satisfied for most formats and most types of operators- However, zoning restrictions may limit large formats in urban areas

- Very limited evidence of any regulatory barriers to entry for all formats

- Regulatory environment actively encourages new store openings for all formats

Cost of Real Estate Investments in Relevant Geographic Market

- Prohibitive for all potential new entrants, including large and well-capitalised retailers

- Affordable only to large and very well-capitalised global retailers with leading market shares in core markets, and in the context of a clear strategic move into the new geographic market

- Real estate is costly, and only affordable for top 3 market players domestically- May be attractive to large and very well-capitalised foreign retailers seeking strategic expansion into new markets

- Real estate is affordable for well-established and profitable retailers; costs are prohibitive for retailers with limited scale and/or below-average profitability

- Real estate is affordable to retailers with limited scale and/or below-average profitability, remains prohibitive to retailers with very limited scale or financial resources- Competition is expected to increase real estate values and barriers to entry

- Real estate is affordable to most new entrants except retailers with very limited scale or financial resources- Real estate values are unlikely to increase going forward

- Very low cost real estate, affordable to any new entrants, even with very limited scale or financial flexibility (e.g. single family-owned location)- No foreseeable increase in real estate values

Rating CategoryAaa

StringentAa

Very HighA

HighBaa

ModerateBa

LowB

Very LowCaa

MinimalExamples by Geographic Markets

Examples of Regulatory Barriers to Entry

France ("big box" format)

France (all formats)

GermanyJapan

Southern Europe

US coasts Central US Selected emerging markets

Examples of Economic Barriers to Entry

UK (selected sites)

UK (most sites)Japan

Germany Southern Europe

US coasts Central US Selected emerging markets



As regards investments in store quality, Hornbach is a positive outlier as the company has been expanding signifi-cantly in the last few years, particularly outside Germany (its home market) but it has also been updating and relocat-ing a number of its German stores.

Concerning the barriers to entry, the outliers on both the negative and positive sides show the significant differ-ence between the US market and Europe and Asia, where barriers are much higher owing to planning regulation, costof real estate, standard terms and conditions of leasing agreements (e.g. upward-only rental review contracts in theUK, so-called 3-6-9 year lease agreements in France).

The score on barriers to entry for most U.S. retailers maps to B. In most markets in the country, there are fewinsurmountable regulatory barriers to entry.


Real Estate Assets PositioningInvestments in Store Quality Barriers to Entry

Factor Weightings 2.5% 5.0%Wal-Mart Stores, Inc. Aa2 Aa3 Aaa BaHome Depot, Inc. (The) Aa3 A1 A BTesco Plc A1 A1 Aaa AaCarrefour S.A. A2 A3 A AaCostco Wholesale Corporation A2 A1 Aa BaWoolworths Limited A3 Baa1 Baa AAEON Co., Ltd. Baa1 Baa1 A AaFederated Department Stores, Inc. Baa1 Baa3 Baa BIsetan Co., Ltd. Baa1 Baa1 A AaBest Buy Company, Inc. Baa2 Baa2 Baa BColes Myer Ltd. Baa2 Baa2 Ba AKroger Co. (The) Baa2 Baa2 Baa BMetro AG Baa2 Baa2 Baa ADaimaru, Inc. (The) Baa3 Baa2 Ba AaPenney (J.C.) Company, Inc. Baa3 Baa1 Ba BKoninklijke Ahold N.V. Ba1 Baa3 Baa BaaSears Holdings Corp. Ba1 Baa1 Ba BHornbach Baumarkt AG Ba2 Ba3 A AFocus DIY Holdings Limited B3 B2 Ba Aa

Positive Outlier

Negative Outlier


Rating Factor #5: Financial Policies

WHY IT MATTERSPrevious rating factors have focused primarily on the retailer's track record of growth and business stability. In this rating factor,we turn more towards the expected impact of strategic and financial decisions on future credit quality. While we believe thatrisk-taking is an integral part of sound financial and strategic policies, this rating factor measures the balance struck between dif-ferent investor classes, and whether financial policies will direct returns more towards creditors or other stakeholders.

Particular areas of focus in this rating factor include event risk (e.g. possible acquisitions) or the likelihood that"excess" cash flow will be contributed to shareholders (e.g. share buy-backs, exceptional dividends) rather than credi-tors. This rating factor also reflects more general assessments of shareholder strategy and corporate governance.

HOW DO WE MEASURE IT?As noted above, our analysis in this rating factor focuses largely on the use of the company's cash flows, in particular whethercash flows are returned to creditors or applied to enhance shareholder returns. To be clear, by no means do we view share-holder returns as credit-negative per se - in the long run, measures put in place to enhance shareholder returns (such as selec-tive acquisitions) may also be very beneficial to creditors. We nonetheless note that retailers typically do not resort broadly toexceptional shareholder returns as they need to invest in stores to finance growth. We will therefore carefully assess the ratio-nale for such a policy in this industry, in particular for investment-grade issuers. However, investments that are likely to yieldhigher returns (e.g. geographic expansion, M&A activity) also likely entail higher risk (e.g. execution risk, or uncertainty offuture cash flows), which may cause greater volatility in cash flows, and hence may reduce overall creditworthiness.

Note that this rating factor focuses on the potential for volatility in cash flows available to creditors resulting frommanagement's strategic choices; in contrast, Rating Factor #1 focuses on the sources of cash flow volatility inherent tothe retailer's business model. While the two can be somewhat correlated (e.g. in the choice of business mix), we haveopted to disaggregate both sources of volatility given that management choices in applying cash flows can clearly miti-gate or exacerbate the credit implications of the business model.

We have identified several elements through which to examine and substantiate our views of financial policies, including:(i) Stability of financial metrics, including the impact of share buybacks and acquisitions(ii) Possibility of event risk(iii) Shareholders' wishes, including appetite for returns (particularly in the case of leveraged-buy-outs)(iv) Liquidity assessment.In extreme cases, a retailer's financial cushion can be paid out to shareholders ahead of creditors, or specific mech-

anisms can be created to accelerate distributions to shareholders in spite of established creditor protections.2 In suchcases, the retailer would likely score in the "B" category for this particular rating factor.

RATING GRID MAPPING

2. For a specific example, please refer to Moody's Special Comment entitled Rating Paid-In-Kind ("PIK") Securities and Shareholder Loans in European Leveraged Finance, April 2005.


a) Financial Policies/Liquidity

Very conservative; stable metrics, no "one-off" movements. Excellent Liquidity

Stable and predictable returns to shareholders; Creditors share equally in cash flow growth and proceeds from any asset sales. Liquidity is strong

Predictable. Share buybacks and acquisitions have minimal impact on metrics. Possible event risk tied to acquisitions. Liquidity is strong

Financial policies favour shareholder returns, possible track record of ratings migration following acquisitions. Liquidity is satisfactory

Clearly favourable to shareholders;Material debt-funded acquisitions and shareholder returns. Liquidity is satisfactory

Very focused on shareholder returns;Financial cushion may be paid out to shareholders ahead of business pressure. Liquidity is strained

Highly unfavourable to creditors: obligations close to default;Debt-restructuring likely. Liquidity virtually non-existent



Wal-Mart's Baa rating for financial policy/liquidity is due to the combination of high levels of growth-driven cap-ital expenditures as well as generous returns to stockholders, which exceed free cash flow.

Costco's Ba rating results from the lack of a committed bank facility or commercial paper program, which isunique for investment grade retail.

Company Corporate Family Rating Model Rating Financial Policies / LiquidityFactor Weightings 8.0%

Wal-Mart Stores, Inc. Aa2 Aa3 BaaHome Depot, Inc. (The) Aa3 A1 ATesco Plc A1 A1 ACarrefour S.A. A2 A3 ACostco Wholesale Corporation A2 A1 BaWoolworths Limited A3 Baa1 BaaAEON Co., Ltd. Baa1 Baa1 AFederated Department Stores, Inc. Baa1 Baa3 BaaIsetan Co., Ltd. Baa1 Baa1 ABest Buy Company, Inc. Baa2 Baa2 AaaColes Myer Ltd. Baa2 Baa2 BaaKroger Co. (The) Baa2 Baa2 BaaMetro AG Baa2 Baa2 BaaDaimaru, Inc. (The) Baa3 Baa2 APenney (J.C.) Company, Inc. Baa3 Baa1 AaKoninklijke Ahold N.V. Ba1 Baa3 BaaSears Holdings Corp. Ba1 Baa1 AHornbach Baumarkt AG Ba2 Ba3 BaaFocus DIY Holdings Limited B3 B2 Caa

Positive Outlier

Negative Outlier


Rating Factor #6: Key Credit Metrics

WHY IT MATTERSThe first five rating factors aim to capture the credit strengths and weaknesses afforded by the retailer's fundamentalbusiness and its financial policies. However, a company's ultimate credit profile must also incorporate its financial met-rics. Two identical retailers in terms of business and financial policies may exhibit radically different credit profiles dueto different financial metrics.

When examining credit metrics, there is no single measure which invariably predicts the likelihood of default. Weutilise metrics which measure both the absolute capacity of the issuer to service its debt, and the size of the debt burdenrelative to that of peers. Leverage ratios aim to capture different measures of how easily an issuer can repay its debt;coverage and return ratios focus more on the ability to service the debt prior to repayment.

We also use different measures of cash flows when formulating metrics (e.g. P&L-derived measures such asEBITA or EBITDA, retained cash flows, funds from operations, cash flows from operations, and free cash flows) - thepurpose of these different measures is to isolate different movements in cash flows. Similarly, we use different measuresof debt which aim to isolate different types of movements.

HOW DO WE MEASURE IT?We use five key ratios globally, as detailed below. All are calculated in accordance with Moody's standard analyticaladjustments. Importantly, when examining credit metrics, our ratings also incorporate our "expected case", i.e. how webelieve the metrics will evolve over the near to medium term. As a general rule of thumb, our assessment of credit met-rics will tend to be equally focused on historical and projected metrics.

RATING GRID MAPPING

a) Debt/EBITDA: Debt incorporates all adjustments which Moody's customarily makes to debt figures, includingoperating leases using a factor of 8x, pensions, and other off-balance sheet arrangements deemed to be debt-like.3 Thisratio is more commonly used within the speculative-grade arena, where it is often a financial covenant contained incredit agreements.

b) Retained Cash Flow/Net Debt: Retained cash flow is defined as cash flows from operations before working cap-ital changes minus dividends, i.e. this ratio assumes that companies maintain their dividend policy. Retained cash flowis not reduced for capital expenditures, and therefore aims to capture the ability of cash flows from operations to repaynet debt, assuming dividends remain constant. Note that, just as the Debt figure reflects Moody's standard adjust-ments, Retained Cash Flow also captures the impact of these adjustments on the P&L and operating cash flows (forexample, adjustments to interest expense resulting from the re-classification of certain items as debt).

Interestingly, this ratio is likely to be less useful in speculative grade. Speculative-grade issuers are likely to havelower operating cash flows than investment-grade counterparts, but also will likely not be paying dividends, or at leastwill be paying much lower dividends than their investment-grade counterparts. As a result, Retained Cash Flow maybe similar, but for different reasons. In this instance, Funds From Operations or coverage measures may be a moreaccurate measure of leverage when comparing investment-grade and speculative-grade issuers.

c) EBITA/Interest: EBITA/Interest is measure of interest coverage, adjusted for Moody's capitalisation of operat-ing leases: interest expense incorporates the "interest component" of rents, and depreciation incorporates the "capitalcomponent" of rents. A 'one-third: two-thirds' ratio is used to split the net lease rental expense into interest and depre-ciation, respectively.

d) Free Cash Flow/Net Debt: Free cash flows are all cash flows excluding cash flows from financing activities. Inessence, free cash flows reflect the cash flows truly available to repay debt. We note that this measure may be less

Rating Category Aaa Aa A Baa Ba B Caaa) Debt / EBITDA <1.25x 1.25-2.25x 2.25-3x 3-4x 4-5x 5-6.5x >6.5xb) RCF / Net Debt >36% 30-36% 22-30% 14-22% 12-14% 8-12% <8%c) EBITA / Interest >10x 7-10x 5-7x 2.5-5x 1.5-2.5x 1-1.5x <1x per annum;

Well below market averaged) FCF / Net Debt >25% 18-25% 14-18% 12-14% 9-12% 0-9% Negativee) CFO / Debt >35% 25-35% 20-25% 13-20% 9-13% 6-9% <6%

3. See Moody's Rating Methodology entitled The Analysis of Off-Balance Sheet Exposures, July 2004. See also Moody's Rating Methodology entitled Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations - Part I, II and III, February 2006.


revealing for investment-grade issuers than for speculative-grade issuers. Investment-grade issuers are likely to havehigher financial flexibility and liquidity, and therefore can better afford to have negative free cash flows for a period oftime. In addition, retailing is an industry where growth is mostly driven by organic initiatives, hence with a sustainedlevel of capital expenditures which will consume free cash flows. For example, Tesco has had negative free cash flowsover the past five years as it has expanded its international footprint while growing in the UK market. In general, stableinvestment-grade issuers should have sufficient access to liquidity (either on balance sheet, through credit facilities, orthrough the capital markets) to enable them to fund negative free cash flows on a temporary basis.

However, speculative-grade issuers will typically not have the level of market access offered to investment-gradeissuers. As a result, debt service obligations need to rely much more heavily on internally generated cash flows. Conse-quently, negative free cash flows can signal a near-default situation for a speculative-grade issuer. This is particularlytrue for leveraged buy-outs, which rely on increasing cash flow generation over time in order to de-leverage, andwhich also need to meet mounting debt amortisation requirements after the initial 12-24 month period following theleveraged buy-out. If free cash flows fail to materialise in this case, a default situation is highly likely.

Accordingly, Free Cash Flows/Net Adjusted Debt may be a more critical ratio in speculative grade; however, it isalso useful in rank-ordering the creditworthiness of issuers in investment grade.

e) Cash Flows from Operations/Gross Debt: Cash flow from operations typically equals the cash flows from oper-ating activities after working capital reported by retailers; however, this may vary by region. As is the case for othermetrics, we also adjust this metric to add back the capital component of operating leases to cash flow from operations.

Seasonality - The Importance of Average DebtWhile the definitions call for the use of debt numbers reported at the end of the fiscal year, Moody's factors in theimpact of seasonality patterns in its analysis and, when deemed necessary, calculates the ratios using the AverageAdjusted Debt in order to smooth out seasonal fluctuations in total adjusted debt. For example, a high ramp-up ininventories prior to the Christmas season can translate into higher debt funding in the fourth quarter, which may infact be reduced by the time the retailer's financial year closes. As such, year-end total adjusted debt figures may infact underestimate the average amount of debt drawn during the year.


Moody's Adjustments for Operating Leases - What about rental income?When calculating its key credit metrics, Moody's capitalises gross lease expense and does not net this amountwith lease income - be it lease income generated from the retailer's owned assets or sub-lease generated from itsleased assets. In general, Moody's is cautious about offsetting future income or assets against actual liabilities.Lease income is no different from other contractually committed income streams and Moody's has decided that itshould not be applied to reduce debt.

However, Moody's recognizes that rental income can be a significant source of recurring revenues for anumber of retailers: Tesco, for example, had rental income representing 49% of total rental expense at year-endFebruary 2006. In some cases (e.g. Tesco, Carrefour, Ahold, Metro), rental income is a well-established componentof the retailer's business model. For example, at most of their hypermarkets, Carrefour and Tesco lease space tosmall shops (e.g. bakery, perfumery), which is seen by customers as part of the retailer product offering.

Furthermore, Moody's recognizes that the activity of real estate lessor may carry intrinsically less businessrisk than retailing in some highly competitive real estate markets and requires less capital allocation. Thoughcredit risk would typically remain present in all regions, the vacancy risk ("dark store") is perceived by Moody's assignificantly reduced in Europe. In particular, retailers benefit from high barriers to entry, generally longer-termleases and low vacancy rates, which ensure relative stability of lease income given the retailer's ability to moreeasily replace a tenant who leaves or goes bankrupt. Competition in the UK retail market, for example, has beenlimited by a regulation (Planning Policy Guidelines 6 since 1996, updated by Planning Policy Statement 6 in 2005)which imposes strict control over planning authorisation for retail developments, and in effect restricts thedevelopment of out-of town shopping centres. Moreover, most tenant leases for both office and retail propertieshave a term of 10-20 years or more. Typically, leases are at fixed rents with upward-only adjustments to prevailingmarket rents every 5 years. In the United States, however, many real estate markets are not as competitive asthey are in Europe. For example, big box retailers have been able to find sites in attractive markets such asCalifornia and the northeast. Conversely, many retailers who have not needed a store location have had toguarantee the sub-lessee, while other retailers have not been able to find sub-lessees. Winn-Dixie, prior to itsFebruary 2005 bankruptcy filing, was making significant payments for leases on closed stores.

As a result, not incorporating rental income at all in our analysis of European retailers which record a steadystream of lease income may seem punitive. But there are disclosure limitations and methodological issues thatmake it difficult to make consistent adjustments to metrics across the span of affected issuers. Moody's also notesthat these activities - though material in a few instances as illustrated above - do not significantly shift the overallrisk profile of the affected retailer. For these reasons, Moody's therefore incorporates rental income in itsqualitative assessment of a retailer, when it is material (i.e. when the ratio of 8 times the rental income to leaseadjusted debt amounts to 5% or more) and will take that into account in its overall rating analysis by assigninglower target metrics to the retailers that are above this threshold. In the US, Moody's will generally not set lowertarget metrics for retailers with material rental income, for the reasons discussed earlier. We will, of course,consider the quality of a retailer's locations and the economics of its leases in our analysis. Moody's will alsocomment as appropriate on these factors in its published research on impacted retailers.

Moody's Adjustments for Operating Leases - Present value vs. 8 times multipleAs per its special comment "Guideline Rent Expense Multiples for Use with Moody's Global Standard Adjustment toCapitalize Operating Leases", Moody's uses a multiple of eight times for the retail sector. Nonetheless, it is Moody'smethodology not to capitalize operating lease commitments at less than the present value of the future leasepayments (discounted by the long-term borrowing rate) as these represent firm commitments over the long term.

For some retailers, such as Tesco and Kingfisher, the present value of future lease payments is larger than theeight times capitalization. Moody's recognizes that this can, to some extent, be related to market characteristicsand will consider that in its analysis. For example, the fiscal regime in the UK leads companies to structure longer-term leases (up to 20-25 years) than is typically the case in other markets (e.g. in France, the typical lease has a 3/6/9-year structure). However the true economic differential - though real as the UK retailer has a firm commitment- is not as significant as it is apparent, factoring that a retailer operating in a market where typical leases on storesare shorter term is likely to renew/replace them when they expire, as these assets are core for their business.



We note a significant number of negative outliers on FCF/Net Debt, most of which are in the investment-grade arena.This illustrates the fact that issuers in the leveraged arena may have relatively high free cash flow metrics compared totheir investment-grade counterparts as they have weaker franchises with high debt loads and less ability to withstandbusiness challenges. These companies therefore typically do not pay ongoing dividends, but return capital to share-holders by selling the enterprise or paying large, discrete debt-funded distributions after de-leveraging.

Best Buy's financial policy targets an extremely liquid position, with funded debt of $596 million covered 6.2 timesby cash balances of approximately $3.7 billion at 25 February 2006. (The completion of the acquisition of Pacific SalesKitchen and Bath Centers for $410 million subsequently reduced cash.) Financial metrics are consistent with Aa- orAaa-rated retailers. However, the model yields a rating of Baa2 overall, consistent with the company's actual rating, asmany of the non-financial scores discussed earlier are Baa or lower.

Woolworths Limited's financial profile is at present weak for its A3 rating, primarily due to high leverage metrics.In recent years the company has made a number of material acquisitions that have weakened key leverage metrics.Moody's expects the company will continue to de-lever over the next two years, such that its key financial metrics willreturn to levels more appropriate for the current rating.

In the case of Hornbach, FCF/Net Debt is very negative because the company has been spending on its expan-sion. The company generally builds new stores using its own financing and then once the store is complete, enter intosale and leaseback transactions.

CompanyCorporate

FamilyRating

ModelRating

Key Indicator RatiosDebt /

EBITDARCF / Net

DebtEBITA / Interest

FCF / Net Debt CFO / Debt

Factor Weightings 8.0% 8.0% 7.0% 3.0% 7.0%Wal-Mart Stores, Inc. Aa2 Aa3 Aa Aa Aa B AaaHome Depot, Inc. (The) Aa3 A1 Aaa Aaa Aaa A AaaTesco Plc A1 A1 A A A Caa AaCarrefour S.A. A2 A3 Baa Baa Baa Caa AaCostco Wholesale Corporation A2 A1 Aaa Aaa Aaa Aaa AaaWoolworths Limited A3 Baa1 Ba Baa Baa B BaaAEON Co., Ltd. Baa1 Baa1 Ba Baa Baa Caa BaFederated Department Stores, Inc. Baa1 Baa3 Ba Baa Baa Aa AaIsetan Co., Ltd. Baa1 Baa1 Baa A Baa Ba ABest Buy Company, Inc. Baa2 Baa2 Aa Aaa Aa Aaa AaaColes Myer Ltd. Baa2 Baa2 Ba Baa Baa Caa BaaKroger Co. (The) Baa2 Baa2 Baa Baa Baa B AMetro AG Baa2 Baa2 Ba Baa Baa Caa BaaDaimaru, Inc. (The) Baa3 Baa2 Baa Baa Baa B BaaPenney (J.C.) Company, Inc. Baa3 Baa1 A Aaa A Aaa AaKoninklijke Ahold N.V. Ba1 Baa3 B Baa Ba B BaSears Holdings Corp. Ba1 Baa1 Baa Aa Baa A AHornbach Baumarkt AG Ba2 Ba3 B B B Caa BFocus DIY Holdings Limited B3 B2 Caa Caa B Caa Caa

Positive Outlier

Negative Outlier


Case Study: How We Rate Wal-mart

Wal-Mart Stores, Inc.LT Rating: Aa2 Model Rating: Aa3

1 - BUSINESS AND CASH FLOW VOLATILITY 13.0%

a) Product Volatility 6.0% Aaa Wal-Mart receives a Aaa in this category due to the high proportion of food and commodity-type general merchandise in the overall mix.

b) Geographic Diversification 4.0% A The A rating in this category results from Wal-Mart's roughly 80/20 mix of U.S. and International revenues.

c) Seasonality of Cash Flow From Operations 3.0% Baa The Baa rating for cash flow seasonality results from the disproportionate share of fourth quarter cash flows.

2 - MARKET POSITIONING OF RETAILER 27%

a) Scale (Revenues) 10.0% Aaa With revenues of $300+ billion, Wal-Mart easily exceeds the threshhold Moody's has set for a Aaa rating.

b) Segmental Market Share and Competitive Position 10.0% Aaa Wal-Mart's Aaa rating here is based on its dominance in the U.S. market, which accounts for 80% of revenues.

c) Cost Efficiency and Profitability 6.5% Aa Wal-Mart's Aa rating is based on an individual segment analysis that results in margins in most segments of better than 200bps higher than a broadly-defined peer group in each segment.

3 - EXECUTION ABILITY 12.0%

a) Quality of Merchandising 5.0% Aaa The Aaa rating is based on Wal-Mart's consistent maintenance of solid merchandise targeted at its core demographic group.

b) Supply Chain 7.0% Aaa The Aaa rating for supply chain recognizes Wal-Mart's world-class sourcing and logistics capability.

4 - MANAGEMENT OF REAL ESTATE ASSETS 7.5%

a) Investments in Store Quality 2.5% Aaa The Aaa rating is based on Wal-Mart's pattern of spending roughly 3x its annual depreciation in capital expenditures.

b) Barriers to Entry (See Appendix B) 5.0% Ba The Ba rating in barriers to entry is notched up one from the B default rating for U.S. retailers due to Wal-Mart's 20% international presence, which have sufficient barriers to entry to warrant one notch.

5 - FINANCIAL POLICIES 8.0%

a) Financial Policies/Liquidity 8.0% Baa Wal-Mart receives a Baa rating for financial policy and liquidity due to its relatively low level of free cash flow due to its capital spending for new store growth and aggressive policy with respect to shareholder returns. Its liquidity is impaired by a relatively small bank credit facility.

6 - KEY INDICATOR RATIOS 33.0% Aaa Aa A Baa Ba B Caa

a) Debt / EBITDA 8.0% Aa 1.95x

b) RCF / Net Debt 8.0% Aa 33.6%

c) EBITA / Interest 7.0% Aa 8.81x

d) FCF / Net Debt 3.0% B 2.0%

e) CFO / Debt 7.0% Aaa 37.6%


Final Considerations

The primary goal of this rating methodology is to help issuers, investors and other market participants understandhow Moody's assesses credit risk for companies in the retail industry and to explain how key quantitative and qualita-tive risk factors map to specific rating outcomes. Our objective is for readers to be able to gauge the final credit ratingfor retail companies within two notches. This methodology enables us to track our assigned ratings within one or twonotches in about 90% of the cases. Appendix C provides a summary report for the selected benchmark retail issuers.

Moody's recognizes there are instances in which consolidated financial information may not capture a completepicture of credit risk. This can occur for many reasons, the most common of which relates to recently completed orpending mergers that are not yet reflected in reported historical data, reorganization activity, and the prospectivenature of a given rating. These instances are identified and explained as part of the overall rating mapping process andassessment.

Note that certain more generic factors (including corporate governance, management strength, event risk and thequality of financial disclosure) remain key components of our ratings analysis. However, these factors are not deemedspecific to the retail sector, but rather are applied across the entire corporate finance franchise. As a result, we havechosen not to cover these issues in significant detail within this report. It is nonetheless important to keep in mind thatthese factors may impact a retailer's ratings, even if they are not expressly represented in the rating grid.


Appe

ndix

A: S

umm

ary

Grid

of G

loba

l Ret

ail R

atin

g M

etho

dolo

gy

Rat

ing

Cat

egor

yA

aaA

aA

Baa

Ba

BC

aa

1 -

BU

SIN

ESS

AN

D C

ASH

FL

OW

V

OLA

TILI

TY

a) P

rodu

ct

Vola

tilit

yPr

oduc

t dem

and

is

cons

iste

ntly

una

ffect

ed

by p

rodu

ct r

enew

al

cycl

es; H

ighl

y re

silie

nt

to e

cono

mic

cyc

les.

Ver

y lo

w e

xpos

ure

to

prod

uct r

enew

al c

ycle

s an

d/or

fash

ion

risk

, w

ith fa

irly

sig

nific

ant

com

mod

ity fe

atur

es.

Low

exp

osur

e to

pr

oduc

t ren

ewal

cyc

le

and

fash

ion

risk

, with

so

me

com

mod

ity

feat

ures

. D

eman

d va

ries

mod

erat

ely

with

ec

onom

ic tr

ends

.

Dem

and

is m

oder

atel

y af

fect

ed b

y pr

oduc

t re

new

al c

ycle

s an

d fa

shio

n ri

sk, w

ith

min

imal

com

mod

ity

feat

ures

.

Dem

and

is a

ffect

ed b

y pr

oduc

t ren

ewal

cyc

les

and

fash

ion

risk

, and

va

ries

mod

erat

ely

with

ec

onom

ic tr

ends

but

ca

n be

man

aged

.

Dem

and

is si

gnifi

cant

ly

affe

cted

by

prod

uct

rene

wal

cyc

les

and

fash

ion

risk

Ver

y hi

gh s

ensi

tivity

to

prod

uct r

enew

al c

ycle

s an

d fa

shio

n ri

sk.

b) G

eogr

aphi

c D

iver

sific

atio

nA

t lea

st 5

0% o

f sal

es

gene

rate

d fr

om a

t lea

st

10 in

tern

atio

nal

coun

trie

s, w

hich

are

ov

eral

l pro

fitab

le.

Full

natio

nal c

over

age

in

mar

kets

that

acc

ount

fo

r 80

% o

f sal

es.

At l

east

30%

of s

ales

ge

nera

ted

from

at l

east

5

inte

rnat

iona

l co

untr

ies,

whi

ch a

re

over

all p

rofit

able

.

Full

natio

nal c

over

age

in m

arke

ts th

at a

ccou

nt

for

60%

of s

ales

.

Mos

tly n

atio

nal

reta

iler;

hig

hly

dive

rsifi

ed w

ithin

do

mes

tic m

arke

t with

no

sig

nific

ant r

egio

nal

conc

entra

tion.

Ope

rate

s in

one

co

untr

y w

ith si

gnifi

cant

na

tiona

l cov

erag

e an

d so

me

regi

onal

co

ncen

tratio

n.

Loca

l ope

rato

r w

ith >

10

0 st

ores

Loca

l ope

rato

r w

ith >

50

sto

res.

Loca

l ope

rato

r w

ith <

50

sto

res.

c) S

easo

nalit

y of

C

ash

Flow

Fro

m

Ope

rati

ons

No

seas

onal

ity;

cash

flow

s fr

om

oper

atio

ns e

qual

ly s

plit

in fo

ur fi

scal

qua

rter

s

Ver

y lo

w; 2

6-30

% c

ash

flow

s fr

om o

pera

tions

in

a s

ingl

e qu

arte

r

Low

; 30-

40%

cas

h flo

ws

from

ope

ratio

ns

in a

sin

gle

quar

ter

Mod

erat

e; 4

0-50

%

cash

flow

s fr

om

oper

atio

ns in

a s

ingl

e qu

arte

r

Hig

h; 5

0-60

% c

ash

flow

s fr

om o

pera

tions

in

a s

ingl

e qu

arte

r

Ver

y H

igh;

2-3

wee

ks

acco

unts

for

>50

% o

f ca

sh fl

ows

from

op

erat

ions

; 60-

80%

in

sing

le q

uart

er

“Mak

e or

bre

ak"

seas

ons;

si

ngle

qua

rter

>80

% o

f ca

sh fl

ows

from

op

erat

ions

2 -

MA

RK

ET

POSI

TIO

NIN

G

OF

RET

AIL

ER

a) S

cale

(R

even

ues)

>U

SD 2

00 b

illio

nU

SD 7

5 bi

llion

to U

SD

200

billi

onU

SD 2

5 to

75

billi

onU

SD 7

.5 to

25

billi

onU

SD 1

to 7

.5 b

illio

nU

SD 3

75 m

illio

n to

1

billi

on<

USD

375

mill

ion

b) S

egm

enta

l M

arke

t Sh

are

and

Com

peti

tive

Po

siti

on

Mar

ket l

eade

r ac

ross

m

ultip

le p

rodu

ct li

nes

and

segm

ents

(e.g

. #1

or #

2 co

mpe

titor

in

>80

% o

f mar

kets

and

pr

oduc

t lin

es);

stat

ic

com

petit

ive

envi

ronm

ent

Mar

ket l

eade

r in

its

segm

ent (

e.g.

#1

or #

2 co

mpe

titor

in 7

0% to

80

% o

f mar

kets

and

pr

oduc

t lin

es);

high

ly

stab

le c

ompe

titiv

e en

viro

nmen

t;

Stro

ng c

ompe

titor

(e.g

. #1

or

#2 c

ompe

titor

in

60%

to 7

0% o

f cor

e m

arke

ts a

nd p

rodu

ct

lines

); st

able

co

mpe

titiv

e en

viro

nmen

t

Solid

ly c

redi

ble

com

petit

or (e

.g. #

1 or

#2

com

petit

or in

45%

to

60%

of m

arke

ts a

nd

prod

uct l

ines

); m

oder

atel

y ch

angi

ng

com

petit

ive

envi

ronm

ent

Tact

ical

ly c

ompe

titiv

e an

d ge

nera

lly p

rice

-pr

omot

iona

l to

mai

ntai

n sa

les

(e.g

. #1

or #

2 co

mpe

titor

in

30%

to 4

5% o

f mar

kets

an

d pr

oduc

t lin

es);

sign

ifica

ntly

cha

ngin

g co

mpe

titiv

e en

viro

nmen

t

Min

imal

com

petit

ive

pres

ence

(e.g

. #1

or #

2 co

mpe

titor

in 2

0% to

30

% o

f mar

kets

and

pr

oduc

t lin

es);

very

si

gnifi

cant

ly c

hang

ing

com

petit

ive

envi

ronm

ent

Non

-fac

tor

com

petit

ivel

y (e

.g. #

1 or

#2

com

petit

or in

<

20%

of m

arke

ts a

nd

prod

uct l

ines

); hi

ghly

un

settl

ed c

ompe

titiv

e en

viro

nmen

t; lo

ng-

term

sur

viva

l is

unlik

ely

c) C

ost

Effic

ienc

y an

d Pr

ofit

abili

ty

EBIT

A m

argi

n>

3% a

bove

pee

rsEB

ITA

mar

gin

2-3%

abo

ve p

eers

EBIT

A m

argi

n1-

2% a

bove

pee

rsEB

ITA

mar

gin

in li

ne w

ith p

eers

EBIT

A m

argi

n1-

2% b

elow

pee

rsEB

ITA

mar

gin

2-3%

bel

ow p

eers

EBIT

A m

argi

n>

3% b

elow

pee

rs

3 - E

XEC

UTI

ON

A

BILI

TY

a) Q

ualit

y of

M

erch

andi

sing

Prod

uct o

ffer

perf

ectly

an

d co

nsis

tent

ly

mat

ches

evo

lvin

g cu

stom

er p

refe

renc

es.

Like

-for

-lik

e sa

les

grow

th c

onsi

sten

tly

>3%

per

ann

um a

bove

pe

ers

Exce

llent

trac

k re

cord

of

pro

duct

offe

r m

atch

ing

evol

ving

co

nsum

er p

refe

renc

es.

Like

-for

-lik

e sa

les

grow

th c

onsi

sten

tly 2

to

3%

per

ann

um

abov

e pe

ers

Solid

trac

k re

cord

of

prod

uct o

ffer

mat

chin

g ev

olvi

ng c

onsu

mer

pr

efer

ence

s. L

ike-

for-

like

sale

s gr

owth

co

nsis

tent

ly 1

to 2

%

per

annu

m a

bove

pee

rs

Prod

uct o

ffer

broa

dly

mat

ches

evo

lvin

g co

nsum

er p

refe

renc

es.

Like

-for

-lik

e sa

les

grow

th in

line

with

pe

ers

Prod

uct o

ffer

tend

s to

la

g ch

ange

s in

co

nsum

er p

refe

renc

es

com

pare

d to

pee

rs.

Like

-for

-lik

e sa

les

grow

th 1

to 1

.5%

be

low

pee

rs

Wea

k; p

rodu

ct o

ffer

is

ofte

n m

ispo

sitio

ned.

U

neve

n tr

ack

reco

rd o

f ad

apta

bilit

y. L

ike-

for-

like

sale

s gr

owth

1.5

to

2% b

elow

pee

rs

Poor

; pro

duct

offe

r co

nsis

tent

ly

mis

posi

tione

d. .

Like

-fo

r-lik

e sa

les

grow

th

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rs

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tand

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ly

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REA

L ES

TATE

ASS

ETS

POSI

TIO

NIN

G

a) I

nves

tmen

ts

in S

tore

Qua

lity

Stor

es s

igni

fican

t co

mpe

titiv

e ad

vant

age,

gr

oss

cape

x bu

dget

ne

ver

redu

ced/

dela

yed

due

to fi

nanc

ial p

olic

y (e

.g. 3

-yea

r av

erag

e C

apex

to D

epre

ciat

ion

ratio

> 3

00%

)

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es s

olid

co

mpe

titiv

e ad

vant

age,

ca

pex

budg

et a

lmos

t ne

ver

redu

ced/

dela

yed

due

to fi

nanc

ial p

olic

y (e

.g. 3

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r av

erag

e gr

oss

Cap

ex to

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epre

ciat

ion

ratio

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twee

n 20

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nd

300%

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es a

re a

dis

tinct

co

mpe

titiv

e ad

vant

age,

ca

pex

budg

et ra

rely

re

duce

d/de

laye

d du

e to

fina

ncia

l pol

icy

(e.g

. 3-

year

ave

rage

gro

ss

Cap

ex to

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reci

atio

n ra

tio b

etw

een

150%

an

d 20

0%)

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es a

re a

co

mpe

titiv

e ad

vant

age,

cape

x bu

dget

rare

ly su

bjec

t to

redu

ctio

ns, b

ut d

elay

s do

occ

ur d

ue to

fin

anci

al p

olic

y (e

.g. 3

-ye

ar a

vera

ge g

ross

C

apex

to D

epre

ciat

ion

ratio

bet

wee

n 10

0% to

15

0%)

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ex b

udge

t sub

ject

to

red

uctio

ns o

r re

sche

dulin

g/de

lays

du

e to

fina

ncia

l po

licie

s (e

.g. 3

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erag

e gr

oss

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ex to

D

epre

ciat

ion

ratio

be

twee

n 75

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10

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nditi

on

repr

esen

ts d

istin

ct

com

petit

ive

disa

dvan

tage

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bjec

t to

freq

uent

fina

ncia

l po

licy

impa

ct (e

.g. 3

-ye

ar a

vera

ge g

ross

C

apex

to D

epre

ciat

ion

ratio

bet

wee

n 25

% to

75

% b

ut d

ecre

asin

g)

Stor

e co

nditi

on a

lmos

t a

fata

l com

petit

ive

hind

ranc

e. A

t bes

t, ca

pex

budg

et is

pur

ely

defe

nsiv

e. (e

.g. 3

-yea

r av

erag

e gr

oss

Cap

ex to

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epre

ciat

ion

ratio

be

low

25%

)

b) B

arri

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to

Entr

y (S

ee

App

endi

x B

)

Stri

ngen

tV

ery

Hig

hH

igh

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erat

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wV

ery

Low

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imal

5 -

FIN

AN

CIA

L PO

LIC

IES

a) F

inan

cial

Po

licie

s/Li

quid

ity

Ver

y co

nser

vativ

e;

stab

le m

etri

cs, n

o "o

ne-

off"

mov

emen

ts.

Exce

llent

Liq

uidi

ty

Stab

le a

nd p

redi

ctab

le

retu

rns t

o sh

areh

olde

rs;

Cre

dito

rs s

hare

equ

ally

in

cas

h flo

w g

row

th

and

proc

eeds

from

any

as

set s

ales

. Liq

uidi

ty is

st

rong

Pred

icta

ble.

Sha

re

buyb

acks

and

ac

quis

ition

s ha

ve

min

imal

impa

ct o

n m

etri

cs.

Poss

ible

eve

nt

risk

tied

to

acqu

isiti

ons.

Liq

uidi

ty

is s

tron

g

Fina

ncia

l pol

icie

s fa

vour

sha

reho

lder

re

turn

s, p

ossi

ble

trac

k re

cord

of r

atin

gs

mig

ratio

n fo

llow

ing

acqu

isiti

ons.

Liq

uidi

ty

is s

atis

fact

ory

Cle

arly

favo

urab

le to

sh

areh

olde

rs; M

ater

ial

debt

-fun

ded

acqu

isiti

ons

and

shar

ehol

der

retu

rns.

Li

quid

ity is

sat

isfa

ctor

y

Ver

y fo

cuse

d on

sh

areh

olde

r re

turn

s;Fi

nanc

ial c

ushi

on m

ay

be p

aid

out t

o sh

areh

olde

rs a

head

of

busi

ness

pre

ssur

e.

Liqu

idity

is s

train

ed

Hig

hly

unfa

vour

able

to

cred

itors

: obl

igat

ions

cl

ose

to d

efau

lt; D

ebt-

rest

ruct

urin

g lik

ely.

Li

quid

ity v

irtu

ally

non

-ex

iste

nt

6 -

KEY

IN

DIC

ATO

R

RA

TIO

S

a) D

ebt

/ EB

ITD

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1.25

x1.

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CF

/ N

et

Deb

t>

36%

30-3

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14-2

2%12

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8-12

%<

8%

c) E

BIT

A /

In

tere

st>

10x

7-10

x5-

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2.5x

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1x p

er a

nnum

;W

ell b

elow

mar

ket

aver

age

d) F

CF

/ N

et

Deb

t>

25%

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12-1

4%9-

12%

0-9%

Neg

ativ

e

e) C

FO /

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Appe

ndix

B: G

uide

lines

for R

atin

g Fa

ctor

4(b

) - B

arrie

rs to

Ent

ry

Rat

ing

Cat

egor

yA

aaSt

ring

ent

Aa

Very

Hig

hA

Hig

hB

aaM

oder

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ry L

owC

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inim

alG

ener

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onsi

dera

tion

sR

egul

ator

y B

arri

ers

to E

ntry

in R

elev

ant

Geo

grap

hic

Mar

ket

- N

ew s

tore

ope

ning

s ar

e al

l eith

er e

xplic

itly

or e

ffect

ivel

y pr

ohib

ited

- R

egul

ator

y lim

itatio

ns p

rohi

bit

(effe

ctiv

ely

or

expl

icitl

y) th

e va

st

maj

ority

of s

tore

op

enin

gs.

A s

mal

l nu

mbe

r of

new

site

op

enin

gs d

o st

ill

occu

r ea

ch y

ear.

- Se

lect

ive

awar

d of

pl

anni

ng p

erm

issi

ons;

co

mpl

ianc

e w

ith

regu

lato

ry

requ

irem

ents

is c

ostly

an

d tim

e-co

nsum

ing,

ef

fect

ivel

y fa

vori

ng

larg

e re

taile

rs

- R

egul

ated

, alth

ough

pl

anni

ng p

erm

issi

ons

can

be o

btai

ned

for

mos

t for

mat

s.-

Spec

ific

regu

lato

ry

requ

irem

ents

mus

t be

met

and

mai

ntai

ned

(e.g

. siz

e an

d lo

catio

n lim

itatio

ns, o

peni

ng

hour

s, e

tc.)

- R

egul

ator

y re

quir

emen

ts c

an b

e ea

sily

sat

isfie

d fo

r m

ost f

orm

ats a

nd m

ost

type

s of

ope

rato

rs-

How

ever

, zon

ing

rest

rict

ions

may

lim

it la

rge

form

ats

in u

rban

ar

eas

- V

ery

limite

d ev

iden

ce o

f any

re

gula

tory

bar

rier

s to

en

try

for

all f

orm

ats

- R

egul

ator

y en

viro

nmen

t act

ivel

y en

cour

ages

new

sto

re

open

ings

for

all

form

ats

Cos

t of

Rea

l Est

ate

Inve

stm

ents

in

Rel

evan

t G

eogr

aphi

c M

arke

t

- Pr

ohib

itive

for

all

pote

ntia

l new

en

tran

ts, i

nclu

ding

la

rge

and

wel

l-ca

pita

lised

ret

aile

rs

- A

fford

able

onl

y to

la

rge

and

very

wel

l-ca

pita

lised

glo

bal

reta

ilers

with

lead

ing

mar

ket s

hare

s in

cor

e m

arke

ts, a

nd in

the

cont

ext o

f a c

lear

st

rate

gic

mov

e in

to th

e ne

w g

eogr

aphi

c m

arke

t

- R

eal e

stat

e is

cos

tly,

and

only

affo

rdab

le

for

top

3 m

arke

t pl

ayer

s do

mes

tical

ly-

May

be

attr

activ

e to

la

rge

and

very

wel

l-ca

pita

lised

fore

ign

reta

ilers

see

king

st

rate

gic

expa

nsio

n in

to n

ew m

arke

ts

- R

eal e

stat

e is

af

ford

able

for

wel

l-es

tabl

ishe

d an

d pr

ofita

ble

reta

ilers

; co

sts

are

proh

ibiti

ve

for

reta

ilers

with

lim

ited

scal

e an

d/or

be

low

-ave

rage

pr

ofita

bilit

y

- R

eal e

stat

e is

af

ford

able

to r

etai

lers

w

ith li

mite

d sc

ale

and/

or b

elow

-ave

rage

pr

ofita

bilit

y, r

emai

ns

proh

ibiti

ve to

ret

aile

rs

with

ver

y lim

ited

scal

e or

fina

ncia

l res

ourc

es-

Com

petit

ion

is

expe

cted

to in

crea

se

real

est

ate

valu

es a

nd

barr

iers

to e

ntry

- R

eal e

stat

e is

af

ford

able

to m

ost

new

ent

rant

s ex

cept

re

taile

rs w

ith v

ery

limite

d sc

ale

or

finan

cial

res

ourc

es-

Rea

l est

ate

valu

es

are

unlik

ely

to

incr

ease

goi

ng

forw

ard

- V

ery

low

cos

t rea

l es

tate

, affo

rdab

le to

an

y ne

w e

ntra

nts,

ev

en w

ith v

ery

limite

d sc

ale

or fi

nanc

ial

flexi

bilit

y (e

.g. s

ingl

e fa

mily

-ow

ned

loca

tion)

- N

o fo

rese

eabl

e in

crea

se in

rea

l est

ate

valu

es

Exam

ples

by

Geo

grap

hic

Mar

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Exam

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Reg

ulat

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Bar

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Fran

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big

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form

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Sele

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ecte

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t site

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lect

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Appe

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Appendix D: Rating Methodology Grid and Mapping

This Appendix shows the calculations to arrive at an indicated rating from the methodology grid.

1. Rating Methodology GridThe characteristics of the issuer are scored for each sub-factor in a grid and the relevant weightings are applied to gen-erate a distribution of weighted scores across the rating scale.

Aaa Aa A Baa Ba B Caa

1 - BUSINESS AND CASH FLOW VOLATILITY %a) Product Volatility 6.0% 1b) Geographic Diversification 4.0% 1c) Seasonality of Cash Flow From Operations 3.0% 1Total 13.0% 1 - 1 1 - - -

2 - MARKET POSITIONING OF RETAILERa) Scale (Revenues) 10.0% 1b) Segmental Market Share and Competitive Position 10.0% 1c) Cost Efficiency and Profitability 6.5% 1Total 26.5% 2 1 - - - - -

3 - EXECUTION ABILITYa) Quality of Merchandising 5.0% 1b) Supply Chain 7.0% 1Total 12.0% 2 - - - - - -

4 - MANAGEMENT OF REAL ESTATE ASSETSa) Investments in Store Quality 2.5% 1b) Barriers to Entry (See Appendix B) 5.0% 1Total 7.5% 1 - - - 1 - -

5 - FINANCIAL POLICIESa) Financial Policies/Liquidity 8.0% 1Total 8.0% - - - 1 - - -

6 - KEY INDICATOR RATIOSa) Debt / EBITDA 8.0% 1b) RCF / Net Debt 8.0% 1c) EBITA / Interest 7.0% 1d) FCF / Net Debt 3.0% 1e) CFO / Debt 7.0% 1Total 33.0% 1 3 - - - 1 -

Aaa Aa A Baa Ba B CaaNUMERIC EQUIVALENT OF MOODY'S RATING SCALE (I) 1 3 6 9 12 15 18Step 1: Grand Total Count (Unweighted) 7.00 4.00 1.00 2.00 1.00 1.00 - TotalStep 2: Grand Total Count Weighted by Factor (II) 0.48 0.30 0.04 0.11 0.05 0.03 - 1.000Overweightings (III) 1.00 1.00 1.00 1.00 1.50 2.80 3.00 Step 3: Grand Total Count Weighted by Factor and Rating Overweightings (II x III) 0.48 0.30 0.04 0.11 0.08 0.08 - 1.079Step 4: Percentage of scores per rating category (IV) 44.0% 27.3% 3.7% 10.2% 7.0% 7.8% 0.0% 100%Step 5: (I x IV) Numeric Value of Model Rating: 0.44 0.82 0.22 0.92 0.83 1.17 - 4.40


2. Rating Look-up The final distribution of scores resulting from the grid is mapped to an indicated rating as follows.

A final score of 4.40 is mapped to a Aa3 rating based on the following look-up table.

Aaa Aa A Baa Ba B CaaFinal Distribution per Category 44.0% 27.3% 3.7% 10.2% 7.0% 7.8% 0.0%Value 1 3 6 9 12 15 18

Indicated Rating Overall ScoreAaa 1.49 or lowerAa1 1.50 - 2.49Aa2 2.50 - 3.49Aa3 3.50 - 4.49A1 4.50 - 5.49A2 5.50 - 6.49A3 6.50 - 7.49

Baa1 7.50 - 8.49Baa2 8.50 - 9.49 Baa3 9.50 - 10.49Ba1 10.50 - 11.49Ba2 11.50 - 12.49Ba3 12.50 - 13.49B1 13.50 - 14.49B2 14.50 - 15.49B3 15.50 - 16.49

Caa1 16.50 - 17.49Caa2 17.50 - 18.00


Appendix E: Global Retail Industry Ratings

Global Retail Industry Ratings - Investment Grade46 Issuers with US$128 Billion in Rated DebtNo. Company LT Rating / CFR Outlook Domicile

1 Wal-Mart Stores, Inc. Aa2 STA United States2 Home Depot, Inc. (The) Aa3 STA United States3 Ito-Yokado Co., Ltd. Aa3 STA Japan4 Walgreen Co. Aa3 NEG United States5 Lowe's Companies, Inc. A1 STA United States6 Marui Co., Ltd. A1 STA Japan7 Target Corporation A1 STA United States8 Tesco Plc A1 STA United Kingdom9 Carrefour S.A. A2 STA France10 Costco Wholesale Corporation A2 STA United States11 Hankyu Department Stores, Inc. A3 STA Japan12 Kohl's Corporation A3 STA United States13 Sherwin-Williams Company (The) A3 RUR-DWN United States14 TJX Companies, Inc. A3 NEG United States15 Woolworths Limited A3 STA Australia16 AEON Co., Ltd. Baa1 STA Japan17 Aoyama Trading Co., Ltd. Baa1 STA Japan18 Federated Department Stores, Inc. Baa1 NEG United States19 Isetan Co., Ltd. Baa1 POS Japan20 Nordstrom, Inc. Baa1 POS United States21 AutoZone, Inc. Baa2 STA United States22 Best Buy Company, Inc. Baa2 STA United States23 Boots Group plc Baa2 STA United Kingdom24 Coles Myer Ltd. Baa2 STA Australia25 Controladora Comercial Mexicana, S.A. de C.V. Baa2 STA Mexico26 CVS Corporation Baa2 RUR-UP United States27 DSG International plc Baa2 STA United Kingdom28 Kingfisher Plc Baa2 RUR-DWN United Kingdom29 Kroger Co. (The) Baa2 STA United States30 Limited Brands, Inc. Baa2 NEG United States31 Marks & Spencer P.L.C. Baa2 STA United Kingdom32 Metro AG Baa2 STA Germany33 Next Plc Baa2 STA United Kingdom34 Safeway Inc. Baa2 NEG United States35 Safeway Limited Baa2 NEG United Kingdom36 Staples, Inc. Baa2 RUR-UP United States37 Uny Co., Ltd. Baa2 STA Japan38 7-Eleven, Inc. Baa3 STA United States39 Daimaru, Inc. (The) Baa3 RUR-UP Japan40 Gap, Inc. (The) Baa3 STA United States41 IAC/InterActiveCorp Baa3 STA United States42 J Sainsbury plc Baa3 STA United Kingdom43 Office Depot, Inc. Baa3 STA United States44 Penney (J.C.) Company, Inc. Baa3 STA United States45 RadioShack Corporation Baa3 RUR-DWN United States46 Whole Foods Market, Inc. Baa3 STA United States


Appendix E: Global Retail Industry Ratings (Continued)

Global Retail Industry Ratings - Speculative Grade81 Issuers with US$74 Billion in Rated DebtNo. Company LT Rating / CFR Outlook Domicile

1 Advance Auto Parts, Inc. Ba1 POS United States2 Alimentation Couche-Tard, Inc Ba1 STA Canada3 AnnTaylor Stores Corporation Ba1 STA United States4 Delhaize America, Inc. Ba1 STA United States5 Dollar General Corporation Ba1 STA United States6 Foot Locker, Inc. Ba1 STA United States7 Koninklijke Ahold N.V. Ba1 POS Netherlands8 Parkson Retail Group Limited Ba1 STA Hong Kong9 Sears Canada Inc. Ba1 STA Canada10 Sears Holdings Corp. Ba1 STA United States11 Guitar Center Inc. Ba2 STA United States12 Hornbach Baumarkt AG Ba2 STA Germany13 OfficeMax, Inc Ba2 NEG United States14 PETsMART, Inc. Ba2 STA United States15 Amazon.com, Inc. Ba3 POS United States16 Brown Shoe Company, Inc. Ba3 STA United States17 Charming Shoppes, Inc. Ba3 POS United States18 GameStop Corp. Ba3 STA United States19 Genesco Inc. Ba3 STA United States20 HVHC, Inc. Ba3 STA United States21 Payless Shoesource, Inc. Ba3 STA United States22 Rent-A-Center, Inc. Ba3 STA United States23 Sotheby's Holdings, Inc. Ba3 STA United States24 SuperValu, Inc. Ba3 STA United States25 A.T.U. Auto-Teile-Unger Invtmt GmbH & Co. KG B1 STA Germany26 Affinity Group Holding, Inc. B1 STA United States27 BCBG Max Azria Group, Inc. B1 STA United States28 BI-LO LLC B1 STA United States29 Bon-Ton Stores Inc., (The) B1 STA United States30 CSK Auto, Inc. B1 NEG United States31 Dillard's Inc. B1 POS United States32 Dollarama Group L.P. B1 STA Canada33 FTD, Inc. B1 POS United States34 Ingles Markets, Incorporated B1 STA United States35 Jo-Ann Stores, Inc. B1 NEG United States36 Matahari Putra Prima Tbk (P.T.) B1 STA Indonesia37 Nash Finch Company B1 NEG United States38 Neiman Marcus Group, Inc.(The) B1 STA United States39 Pantry Inc., The B1 STA United States40 Pep Boys -- Manny, Moe & Jack (The) B1 NEG United States41 Pyaterochka Holding N.V. B1 STA Netherlands42 Stater Bros. Holdings, Inc. B1 STA United States43 Susser Holdings, LLC B1 STA United States44 Victoria Acquisition III BV B1 STA Netherlands45 Agrokor D.D. B2 POS Croatia46 Baker & Taylor Acquisitions Corp. B2 STA United States47 Burlington Coat Factory Warehouse, Inc B2 STA United States48 Eddie Bauer, Inc. B2 STA United States49 Eye Care Centers of America, Inc. B2 NEG United States50 Finlay Fine Jewelry Corporation B2 STA United States51 General Nutrition Centers, Inc. B2 STA United States52 Getty Petroleum Marketing, Inc. B2 STA United States53 Gregg Appliances, Inc. B2 STA United States


54 Harry & David Holdings, Inc. B2 NEG United States55 J. Crew Group, Inc. B2 POS United States56 Leslie's Poolmart, Inc. B2 STA United States57 Loehmann's Capital Corporation B2 STA United States58 MAPCO Inc. B2 STA United States59 Michaels Stores, Inc. B2 STA United States60 NBC Acquisition Corp. B2 STA United States61 Petco Animal Supplies, Inc. B2 STA United States62 Rite Aid Corporation B2 RUR-DWN United States63 Roundy's Supermarkets, Inc. B2 STA United States64 Saks Incorporated B2 POS United States65 Sally Holdings, LLC B2 STA United States66 Savers, Inc. B2 STA United States67 Sports Authority Inc. (The) B2 STA United States68 Toys 'R' US, Inc. B2 NEG United States69 Blockbuster Inc. B3 NEG United States70 Brookstone Company, Inc. B3 NEG United States71 Focus DIY Holdings Limited B3 NEG United Kingdom72 Great Atlantic & Pacific Tea Company, Inc. (The) B3 NEG United States73 Jean Coutu Group, Inc. (The) B3 RUR-UP Canada74 Linens 'N Things, Inc. B3 STA United States75 Mothers Work, Inc. B3 STA United States76 Pathmark Stores, Inc. B3 NEG United States77 Rent-Way, Inc. B3 RUR-UP United States78 Vitamin Shoppe Industries, Inc. B3 STA United States79 Duane Reade, Inc. Caa1 NEG United States80 Movie Gallery, Inc. Caa1 NEG United States81 Pier 1 Imports, Inc. Caa1 STA United States

Note:Ratings / Outlooks as of 11/8/2006LT Rating: Long-Term RatingCFR: Corporate Family RatingSTA: StablePOS:PositiveNEG: NegativeRUR-UP: Rating Under Review for UpgradeRUR-DWN: Rating Under Review for DowngradeRUR-DEV: Rating Under Review Developing


© Copyright 2006, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALLINFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED,FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, INANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained byMOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “asis” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitnessfor any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by,resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees oragents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect,special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of suchdamages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the informationcontained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY,EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHEROPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in anyinvestment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and ofeach issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated byMOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody’s Corporation(MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and ratingprocesses. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publiclyreported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — CorporateGovernance — Director and Shareholder Affiliation Policy.” This credit rating opinion has been prepared without taking into account any of your objectives, financial situation or needs. You should, before acting on the opinion, consider theappropriateness of the opinion having regard to your own objectives, financial situation and needs.


To order reprints of this report (100 copies minimum), please call 1.212.553.1658.Report Number: 100824

Author Editor Associate Analysts Senior Production Associate

Retail Team Justin Neville Marika Mäkelä Yelena PonirovskayaRobert Lin

Related Research

Global Adjustments Part I (US), February 2006 (96760)Global Adjustments Part II (Europe), February 2006 (96729)Global Adjustments Part III (Japan), September 2006 (98842)US Retail Industry Outlook, November 2006 (100842)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this reportand that more recent reports may be available. All research may not be available to all clients.

http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_96760

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