1. CONSUMER SECTOR PRESENTATION 4/3/2002 Brian PriceJohn Wilson sector head associate sector head Arianne Obering Mary Whitehouse senior analyst research analyst

2. PRESENTATION OUTLINE  State of the Sector  Valuation Models, the future of the investment fund (Wal-Mart example)  Recommendation: Sell GPS (Gap)  Future opportunities in the sector

3. STATE OF CONSUMER SECTOR Limited Inc LTDPepsico Inc PEPWalmart WMTGap Inc GPS Price: 4-Sep-2001 13.9447.3048.9519.68 2-Jan-2002 15.5249.1558.0514.1 1-Apr-2002 16.9251.4359.5614.93 Beta: 1.440.70.941.55 PE: 20.630.74288.5 EPS: 1.191.661.40.18 Debt/Capital: 17%35%36%39%

5. SECTOR PERFORMANCE 9/4/01-4/1/02  ND Consumer: 11.55%  IYK (consumer index): 7.64%  S&P 500: -.34%

6. SECTOR BETA 1-Apr GPS160$14.93$2,388.807.31%1.550.113271 LTD218$16.92$3,688.5611.28%1.440.162489 PEP170$51.43$8,743.1026.75%0.70.187227 WMT300$59.56$17,868.0054.66%0.940.513818 $32,688.46 Beta Portfolio0.976805

7. Sector Stock Weights 9/4/014/1/02

8. VALUATIONS: The Fund’s Future  Applied Investment Management, aka AIM, is a senior and graduate level class for finance majors/MBA concentrators  Like professional management funds, they run valuation models to come up with their dollar estimate of the price per share  This makes decisions fairly simple: if the stock’s present share price is under the estimated value, buy, if above, sell.

9. VALUATIONS, cont.  The problem: I have no clue how to run these valuation models  The solution: perhaps we could schedule either professor Reilly, Langley, or Malpass for a quick lecture on this, or bring in some senior AIM alumni for help

10. VALUATION EXAMPLE  Check out www.nd.edu/~aim and click on AIM Alumni link (AIM XIII) to see valuations. Some valuations of interest include Wal- Mart, Caterpillar, Amgen, EMC, and Enronwww.nd.edu/~aim  Valuation is, of course, not an exact science. The Enron valuation placed its value at $58.72. “ Based on the previous reports, the industry is prime for the taking and Enron has the financial strength and the expertise to operate in such high volume, low margin market. Technical analysis had a very bearish outlook on the stock, but the latest trough may well have been the bottom, as the stock has risen in the past few weeks. My estimated price is greater than 25% of the current price and thus is a ‘strong buy’.” Frederick VonMering 10/15/01 The Moral: Don’t listen to Grad Students. Only take valuations from undergrads who aren’t named Jason King.

11. VALUATION TECHNIQUES WAL-MART  Book Value Technique61.38  Dividend Discount 48.46  Discounted Cash Flow64.75 *DCF determined to be best for Wal-Mart, and since stock traded at $52.90, it was rated as a BUY. In this example, a very good call, and good valuation (today’s price about $59.00)

12. GAP, INC THE PROBLEMS AND THE SOLUTION

13. GAP, INC.  Banana Republic  Gap  Old Navy  All three lost money in 2001—Old Navy and Banana Republic lost less that Gap

14. MARKETING PROBLEMS  “We changed too much, too quickly, in ways that weren’t consistent with our brands”  “Gap stores became unfocused, trying to attract too many different customers”  Comments from Gap’s CEO

15. INVENTORY PROBLEMS  Started in early 2000  Show no signs of stopping  Already discounting new Spring merchandise  Customers do not like what they see so far from Gap this Spring

16. THE EFFECT  Loss of $0.01 per share in 2001  Very small gain in Revenue (1.27%)  Worst performing year that I can find since 1985

17. GAP, NOW...  No PE—lost money in 2001  Dividend growth rate is –2%  Industry avg. Div. growth rate is +5%  Credit downgraded to “junk” status  Gap Debt/Equity is 67%  Limited’s Debt/Equity is 17%  Financially weak compared to industry

18. GAP, FUTURE...  Priced at 56 times 2002 est. EPS  Priced at 29 times 2002 est. EPS  Industry avg. PE is 21  Note: It is hard to predict Gap’s earnings in future years, due to its cyclical nature

19. GAP, INC.

22. CONCLUSION  Not a quick turnaround  Already own Limited, which is a better company right now  Sell all of our shares of GAP, INC

23. Why Sell GPS Continued We want to increase our return in the short-term. GAP will more than likely increase over the next couple of years. However, for our purposes holding on to this stock while the company figures its way out of the web it has weaved is not wise. Instead, the money lost in GAP and the portfolio as a whole may produce better results by diversifying and investing in better opportunities. There are many stocks that we feel are strong companies with high growth potential, perhaps a bit more risk and/ or both short-term and long-term gains.

24. Future Possibilities  The Interpublic Group Company IPG  Steak-n-ShakeSNS  Papa John’s PizzaPZZA  Linens-n-ThingsLIN  Limited (add to holdings)LTD  Backyard BurgersBYB

25. For next time….. Please take some time to look into these stocks and we will make a presentation in the near future as to which we feel would be most beneficial to our sector. Bear in mind how heavily weighted we currently are in Wal-Mart, and how few stocks the consumer sector holds.

26. In Closing… "99% of fund managers demonstrate no evidence of skill whatsoever." 1%