The Executive Review Housewares Home Furnishings Retailers Operational and

The Executive Review: Housewares/Home Furnishings Retailers Operational and Working Capital Analysis • page 2 - Economic & Industry Outlook • page 3 - Sales • page 4 - Store Count • page 5 - Comparable Store Sales (YTD) • page 6 - Spotlight on Tuesday Morning • page 7 - Gross Margin • page 8 - SG&A Margin • page 9 - EBITDA Margin • page 10 - Spotlight on Williams-Sonoma • page 11 - Capex Margin • page 12 - Days Payable Outstanding • page 13 - Inventory Turnover • page 14 - Spotlight on Kitchen Collection • page 15 - Free Cash Flow as % of Sales • page 17 - Stock Index Important Credit Measures & Warning Signs • page 18 • page 19 • page 20 • page 21 - Interest Coverage Debt/EBITDA Bank Credit Availability Credit Rating Chart January 2009

Economic & Industry Outlook • Rollback in consumer spending power – Depreciation of assets • Homes • Stocks • Absence of savings – Rollback in consumer credit • Outstanding consumer debt is approximately $2. 50 Trillion • Rise in consumer debt meant that consumption was based on borrowed consumer capital – Jobs and Wages • Rise in unemployment (low of 4. 5% in middle of 2007) • Rises to 7. 2% in January and anticipated to rise as high as 9. 5% to 10. 0% later this year • Stagnation of hourly wages – Above concerns have sent Consumers to put cash away rather than spend. • Liquidity Crisis – Absence of balance sheet trust has resulted in a credit crunch at the corporate level – Government has become the lender and guarantor of first and last resort for financial institutions – While corporate borrowing has returned in 2009, the risk premium for companies with solid financial backing remains high (Staples (BBB rating) issued $1. 5 billion notes in January 2009 with a yield of 9. 75%) – At the consumer level, banks and financial institutions have reacted to a rise in defaults by pulling back on credit levels offered. • Near-term impact is a reduction in available funds for customers to spend and retailers to use.

TTM Sales ($ in millions) 3

Store Count

YTD Comparable Store Sales Looking only at net sales can be misleading as it is easily skewed by store openings and closings. For this reason, Comparable Store Sales is extremely significant when analyzing a retailer’s sales performance because it provides a true apples-to-apples comparison by only measuring sales at stores that have been open for both periods.

Spotlight on…. Tuesday Morning • Significant operational deterioration • Sixth straight quarter of falling comps, negative double digit for third straight quarter • Hurt by Linens n’ Things GOB sales • Losing market share to mass merchandisers and competitors • Taking steps to improve inventory management • Inventory down 11% as of 9/30/08; has hurt gross margin • Sales still falling faster than inventory; possibility of additional markdowns • Limited borrowing availability under revolver at 9/30/08 • Warning of covenant noncompliance if forecasted results not achieved • New credit facility in December 2008 - Only one covenant related to operations; dormant until triggered • Creditntell. com Credit Rating: D 1

Gross Margin [(Sales - Cost of Goods Sold) / Sales] is a measurement of the retailer’s markup over cost. As a rule, the higher the gross margin the better, but some retailers prefer to keep margins slim and prices low to attract more shoppers. In any case, a significant erosion is a warning sign.

SG&A Margin Selling, General, & Administrative Expenses as a Percent of sales (SG&A Margin) is a measure of how well a company leverages its operating expenses over its sales base. As a rule, the lower the margin the better off the Company is.

EBITDA Margin EBITDA margin (Earnings Before Interest, Taxes, Depreciation, and Amortization as a percent of sales) is an excellent tool to analyze a company’s profitability year-over-year and for peer comparison because it eliminates all non-cash items and also creates an apples-to-apples comparison regardless of the size of the retailer.

Spotlight on…. Kirkland’s Williams-Sonoma • • • Negative comparable store sales in six out of the last eight quarters • Not including a 24. 2% decline during the first two months of the current fourth quarter. Anticipating a 27 -32% drop in 4 q sales and a 74 -91% drop in earnings “Potential 10 -12% drop” in sales next year. Management cash conservation initiatives: • Reducing inventory purchases by 10% • $75 million reduction in SG&A expenses (laying off 1, 400 workers or 18% of workforce) • $100 million or 50% reduction in capital spending • “Assertive plan to close underperforming stores” • Cancellation of $150 million share repurchase authorization No borrowings under recently amended $300 million unsecured revolving credit facility • Amendment loosens leverage ratio requirement, adds a fixed charge covenant ratio and also adds an estimated $1. 5 million in annual facility costs. Creditntell. com Credit Rating: C 1 TTM EBITDA is expected to 10 drop significantly when 4 q earnings are factored in.

Capex Margin (capital expenditures as a percent of sales) is a useful tool when determining if a retailer is investing too little, too much or just the right amount into its business. A capex margin that is disproportionately high could result in added debt to the balance sheet, and a capex margin that is too low may be a sign that perhaps the Company is not making the necessary improvements, which could put it at a competitive disadvantage. Because each case is different, it is important to look at this along with other factors to understand the full picture.

Quarterly Days Payable Outstanding (Accounts Payable/Cost of Sales) is an indicator of how long a company is taking to pay its trade creditors. This metric evaluates the terms a company is getting from its vendors, and also how promptly it is paying. It is important to note that some retailers choose to take advantage of discounts. Because each case is different, it is important to look at significant changes which may highlight either: (i) vendors tightening terms; or (ii) liquidity issues, which may cause late payments.

Inventory Turnover (Annualized) Inventory Turnover (Cost of Goods Sold / Average Inventory) is a measurement of how many times inventory is turned in a given year. This ratio should be compared against industry averages. A low turnover could imply poor sales, resulting in excess inventory and ultimately the need for markdown activity which would pressure gross margin. As a rule, the higher the turnover the better. However, it could mean the retailer is not effectively anticipating demand, which can result in inventory shortages.

Spotlight on…. Linens –Collection Kitchen N -Things • Subsidiary of Nacco Industries, a multi billion conglomerate; two units: • Kitchen Collection - specialty retailer of brand-name kitchenware; • Le Gourmet Chef (LGC) - gourmet foods, cookware, and bakeware; Acquired in 2006 • Operational problems • Sales and margins both deteriorating • LGC underperforming; liquidating stale inventory • Strategy: Enhance merchandise mix • Liquidity concerns – strained borrowing availability • Nacco Industries has taken an active role in financing KC But Nacco has not guaranteed KC’s borrowing agreements • Creditntell. com Credit Rating: E 2

Free Cash Flow as a Percent of Sales Note: TTM free cash flow not available for Kitchen Collection. Last year’s free cash flow not available for Tuesday Morning due to a change in the Company’s fiscal year. Understanding a company's ability to generate Free Cash Flow (FCF) (cash from operating activities minus capital expenditures) is an essential component in analyzing its ability to meet its capital requirements. A company that has negative FCF must borrow funds to make interest payments and does not have the ability to repay outstanding debt without refinancing.

Stock Index

Warning Signs Important Credit Measures & Warning Signs • page 15 - Interest Coverage • page 16 - Debt/EBITDA • page 17 - Credit Availability • page 18 - Credit Scoring Chart

Interest Coverage TJX Companies’ interest coverage for the current TTM period was over 200 as interest expense was minimal. Below 3 x is a warning sign NOTE: Bed Bath and Beyond, Williams- Sonoma have Net Interest Income. Interest Coverage (EBITDA/Interest Expense) is a measurement of how many times a company’s EBITDA covers its Interest Expense. The higher the ratio the healthier the credit. When the ratio is at 1. 0 x it means the company is generating just enough EBITDA to make the minimum interest payments on its debt and it does not have the ability to pay down the principal or invest in its operations without additional borrowings.

Debt/TTM EBITDA Above 3. 5 x is a warning sign NOTE: Kirkland’s and Bed Bath and Beyond do not have debt. Debt/EBITDA is a leverage measurement that reflects whether a company’s debt levels are disproportionate to its profitability. Banks typically require a similar covenant in loan agreements to ensure that a company does not take on too much debt.

% Available Under Revolver Availability of less than 25% is a warning sign. Since most retailers finance their working capital needs via a credit facility, keeping track of available credit is critical in understanding a company’s ability to make timely payments to its vendors. Typically a retailer should have maximum availability after the end of the holiday quarter as it likely repaid outstanding borrowings with cash flow. We consider it a warning sign when credit availability falls below 25% of the size of the credit facility. It is important to compare availability against the same period in the prior year because borrowings are typically seasonal.

Credit Ratings 21

Thank You!! We would greatly appreciate your feedback and suggestions. For questions or analytical support please contact: Dennis Cantalupo Vice President Creditntell. com 1 -800 -789 -0123 x 110 dennisc@creditntell. com David Silverman Senior Analyst Creditntell. com 1 -800 -789 -0123 x 119 daves@creditntell. com This financial information is issued to the named subscriber for its exclusive use only and is compiled from sources which Information Clearinghouse Incorporated, 310 East Shore Road, Great Neck, NY 11023, does not control and unless indicated is not verified. Information Clearinghouse, its principals, riters and agents do not guarantee the accuracy, completeness or timeliness of the information provided nor do they assume responsibility for failure to report any matter omitted or withheld. This report and any/or part thereof may not be reproduced, and/or transmitted in any manner whatsoever. Any reproduction and/or transmission without the written consent of Information Clearinghouse is in violation of Federal and State Law. 22