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High-Yield Retail Checkout Comprehensive Analysis of Major High-Yield Retailers

Volume VI January 2017

Leveraged Finance Table of Contents Executive Summary ........................................................................................................ 2 High-Yield Retail Coverage with Key Financial Metrics .................................................. 16 Company Reports 99 Cents Only Stores LLC .............................................................................................. 19 Abercrombie & Fitch Co. ................................................................................................ 35 Ascena Retail Group, Inc. .............................................................................................. 47 The Bon-Ton Stores, Inc. ............................................................................................... 61 Burlington Stores, Inc. .................................................................................................... 75 Claire’s Stores, Inc. ........................................................................................................ 88 Dollar Tree, Inc. ............................................................................................................. 116 The Gap, Inc.................................................................................................................. 131 GNC Holdings, Inc. ....................................................................................................... 143 The Gymboree Corporation ........................................................................................... 155 Hanesbrands Inc. .......................................................................................................... 169 J. C. Penney Company, Inc. ......................................................................................... 182 J.Crew Group, Inc. ........................................................................................................ 200 Kate Spade & Company ................................................................................................ 216 L Brands, Inc. ............................................................................................................... 231 Levi Strauss & Co. ........................................................................................................ 246 The Michaels Companies, Inc. ..................................................................................... 260 Neiman Marcus Group LTD LLC ................................................................................... 272 Party City Holdco, Inc. ................................................................................................... 292 PVH Corp. ..................................................................................................................... 305 Sally Beauty Holdings, Inc. ........................................................................................... 319 Sears Holdings Corporation .......................................................................................... 334 Staples, Inc. .................................................................................................................. 352 SUPERVALU Inc. ......................................................................................................... 366 Tailored Brands, Inc. ..................................................................................................... 387 Toys ‘R’ Us, Inc. ............................................................................................................ 402

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

High-Yield Retail Checkout Comprehensive Analysis of Major High-Yield Retailers Special Report Spending Stable, but Challenges Remain: Fitch Ratings expects U.S. retail sales (excluding auto and gasoline) to grow 3%–4% in 2017, similar to the approximate 4.0% rate in 2016, on a generally consistent economic backdrop. However, increased online penetration and shifts in spending toward services have severely limited in-store sales growth, requiring companies to invest in omnichannel business models if their cash flow dynamics allow. Online Share Gains to Continue: Fitch expects e-commerce to grow in the mid-teens in 2017 to $400 billion, or around 12% of total retail sales (excluding auto and gasoline). Excluding food and beverage stores, drugstores and restaurants, the online channel will account for virtually all retail sales expansion in 2017 and represent nearly one-quarter of retail sales. Comparable store sales (comps) declines across many brick-and-mortar retailers are only somewhat mitigated by growth in their online businesses. Spend Shifts to Services: Fitch believes consumer budgets have been reset given an increased spend on services, including healthcare and subscriptions for cable/broadband, cellular telephony and streaming media. This shift, in addition to growth in experiential spending (restaurants, travel), limits sales growth within Fitch’s retail coverage. Mall-Based Apparel Most Challenged: The mall-based, mid-tier apparel sector has faced the most severe challenges in recent years, confronting lack of fashion momentum, share gains by online players and value-oriented retailers in the fast-fashion and off-price segments, and spending shifts given moderate replenishment needs. Resulting weak mall traffic has caused negative comps trends and significant EBITDA deterioration on gross margin contraction and deleverage of fixed costs. Capital structures appear increasingly untenable for several names.

Related Research 2017 Outlook: U.S. Retail and Restaurants (Sector Challenges Force Business Model Transformations) (December 2016) Retail Bankruptcy Enterprise Value and Creditor Recoveries (Fitch Case Studies — 10th Edition) (September 2016)

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com Carla Norfleet Taylor, CFA +1 312 368-3195 carla.norfleettaylor@fitchratings.com JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Uneven Performance by Sector: Within Fitch’s high-yield coverage, the battle to offer the customer value is most prominent in general merchandise, grocery, mid-tier apparel and accessories (department stores and specialty), office products and toys. Sectors with stronger positioning include beauty, party supplies/crafts, dollar stores and off-price apparel, while the vitamin, sporting goods and pet supply categories are losing resilience to alternate channels. Most players are using savings from expense management to invest in lower prices and omnichannel initiatives to fortify competitive positions. Issuers with Positive Trajectory: Burlington Stores, Inc.; Dollar Tree, Inc.; and Kate Spade & Company should continue to see growth in both top-line and EBITDA, and see further improvement in their credit metrics over the next 12–24 months. Issuers with Negative Trajectory: Continued weakness and/or upcoming maturities at 99 Cents Only Stores LLC; Claire’s Stores, Inc.; The Gymboree Corporation; J.Crew Group, Inc.; and Sears Holdings Corporation raise liquidity concerns and questions about long-term business viability for some. Abercrombie & Fitch Co.; GNC Holdings, Inc.; Neiman Marcus Group LTD LLC; and SUPERVALU Inc. (SVU) have seen declines in sales and EBITDA, but liquidity is comfortable in the near term. Impact of New Presidential Administration: Changes to policies around taxation, trade and regulations could have meaningful impacts on the operations and cash flows of retailers. Fitch is evaluating potential changes, but has not included any impact in its current forecasts.

Leveraged Finance Challenges Most Acute for Mid-Tier Apparel Retailers While much of Fitch’s high-yield coverage battles competitive incursion from online and valueoriented players, sales weakness is most pronounced for mid-tier apparel and accessories retailers. Fundamental changes in the way consumers think about and shop for clothing seem afoot, negatively affecting many traditional sellers of apparel. Fitch believes consumers have become less concerned with following fashion trends, and coupled with a dearth of fashion product innovation in recent years, seek out value-oriented retailers that offer attractive and acceptable-quality clothing at good prices. Shopping for clothing has become a less-interesting leisure activity, exacerbated by the rise of online apparel sellers, leading to declines in time spent in regional malls. These behavioral changes have resulted in traffic and sales challenges for many traditional apparel sellers, including both department stores and specialty retailers. Impulse-driven business models, such as Claire’s, have also been affected by weak mall traffic. Retailers have had to increase merchandise markdowns to drive unit volume and invest heavily in their omnichannel platform. In addition, companies are evaluating their real estate footprint, given less productive stores. These changes have driven down EBITDA margins and reduced cash flow. Continued operational challenges and heightened restructuring risk have caused several retailers to migrate into the ‘CCC’/‘CC’ category. Capital structures in several cases, particularly for those with significant debt loads from LBOs, have become untenable. Distressed retailers are generating liquidity through closing unprofitable stores, selling real estate and noncore assets, and spinning intellectual property into entities that can issue new debt to conduct a debt exchange or fund liquidity. Given the continued channel shifts and excess supply of retail square footage, accelerated store closures are likely to reshape the physical mall landscape materially over the next few years.

Comps for Major Department Stores and Apparel Retailers (%) Abercrombie & Fitch Co.a Ascena Retail Group, Inc.b The Bon-Ton Stores, Inc. Dillard’s, Inc. The Gap, Inc.c The Gymboree Corporation J. C. Penney Company, Inc. J.Crew Group, Inc.a Kohl’s Corp. Macy’s, Inc. Neiman Marcus Group LTD LLC Nordstrom, Inc. Sears Holding Corporationa Saks Incorporateda

2010 — 9.0 0.9 3.0 1.0 (2.0) 2.5 4.0 4.4 4.6 6.9 8.1 (3.6) 6.4

2011 5.0 6.0 (2.8) 4.0 (4.0) 4.0 0.2 1.0 0.5 5.3 9.4 7.2 (3.0) 9.5

2012 (1.0) 5.0 0.5 4.0 5.0 (2.0) (25.2) 12.6 0.3 3.7 6.2 7.3 (2.5) 3.2

2013 (11.0) 2.0 (4.2) 1.0 2.0 (6.0) (7.4) 2.9 (1.2) 1.9 5.1 2.5 (2.5) 3.1

2014 (8.0) — 0.2 1.4 — (3.0) 4.4 (0.7) (0.3) 0.7 5.5 4.0 (1.8) 2.1

2015 (3.0) (1.0) (1.3) (2.0) (4.0) 1.0 4.5 (8.4) 0.7 (3.0) (1.1) 2.7 (9.2) (1.0)

LTM 10/29/16 (5.0) (5.0) (2.8) (3.8) (2.0) 0.8 1.5 (7.2) (1.5) (4.3) (4.7) 0.2 (6.2) (4.0)

Related Criteria Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (November 2016)

Figure for LTM reflects the performance for the nine months ended Oct. 29, 2016. bFigure for the LTM reflects the performance for the three months ended Oct. 29, 2016. cFigure for the LTM reflects the 11 months ended Dec. 31, 2016. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Criteria for Rating Non-Financial Corporates (September 2016)

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Leveraged Finance Online Sales Penetration of Retail Sales — Excluding Autos and Gasoline Online Sales

($ Bil.)

Online Sales as % of Retail Sales

(%)

600

500

400

300

200

100

0 2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

E – Estimate. Note: Online retail spending, as measured by comScore, excludes travel, autos and auction sites. Total retail sales data is based on U.S. Census Bureau data excluding motor vehicle and parts stores, and gasoline stations. Source: ComScore, U.S. Census Bureau, Fitch Ratings.

Online Sales Penetration of Retail Sales — Excluding Automobiles, Gasoline and Low Online Categories Online Sales

($ Bil.)

Online Sales as % of Retail Sales

(%)

600

500

400

300

200

100

6 0

0 2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

E – Estimate. Note: Online retail spending, as measured by comScore, excludes travel, autos and auction sites. Total retail sales data is based on U.S. Census Bureau data excluding food services and drinking places, food and beverage stores, motor vehicle and parts stores, gasoline stations, and health and personal care stores. Source: ComScore, U.S. Census Bureau, Fitch Ratings.

Contribution of E-Commerce to Total Retail Sales Growth — Excluding Automobiles, Gasoline and Low Online Categories E-Commerce Contribution (LHS)

(%) 150

Total Retail Sales Growth (RHS)

(%) 5.0

129

125

102

105

106

100 60

75 50

4.0 3.0

68 55

2.0 1.0

25 0

0.0 2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

E – Estimate. Note: Fitch assumes total retail sales (excluding auto, gas,and low online categories) grow at 3%, annually. Online retail spending, as measured by comScore, excludes travel, autos and auction sites. Total retail sales data is based on U.S. Census Bureau data excluding food services and drinking places, food and beverage stores, motor vehicle and parts stores, gasoline stations, and health and personal care stores. Source: ComScore, U.S. Census Bureau, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance The LBO Conundrum Six of the most challenged credit stories in Fitch’s retail coverage share a common bond — all went through an LBO that added significant debt to their balance sheets. At the time of the LBOs, the capital structures appeared sustainable based on forecasts of stable or improving EBITDA and positive cash flow. Subsequent operating trends have weakened at each retailer, as they contend with the pressures of secular headwinds, competitive incursion or management misexecution. As a result, EBITDA and cash flow have been pressured, leaving the issuers with heavy debt burdens, onerous maturity schedules, and in some cases, untenable capital structures. Given the significant decline in operations, a number of distressed retailers are struggling to even meet their fixed obligations, such as interest payments, maintenance capex and funding seasonal working capital. This precludes them from meaningfully investing in their business and could prevent them from achieving a turnaround. The ability to sustain operations over the next several years has become less about operational execution and more about the ability to fund their businesses while refinancing often-sizable maturities. As these companies approach significant maturity dates, their abilities to operate as going concerns depend on whether they can extend maturities through refinancing or conduct distressed debt exchanges. Companies may look to creative solutions, such as spinoff of intellectual property or other assets into unrestricted subsidiaries, or asset monetization. An interesting case study compares J.Crew with Abercrombie, two mall-based apparel retailers with strikingly similar operating stories. Both companies saw EBITDA halved in the past three years, the result of negative comps due to secular challenges in mid-tier mall-based apparel and specific brand concerns. However, Abercrombie’s capital structure is relatively benign, with the company’s cash balance well exceeding its term loan balance, Abercrombie’s only debt outside its revolver, providing the company both ample time and investment resources to reverse its operating course. Given a minimal debt load, annual interest expense is relatively modest, limiting shorter term fixed obligations. J.Crew, meanwhile, does not enjoy these attributes. Its significant debt load creates a high ongoing interest burden, while looming maturities create refinancing risk and could force management to make strategic decisions that could diverge from the business’s best interests.

Profiles of Select Retailers Post LBO Transactions 2016Ea EBITDA Adj. Debt/ Sales EBITDA Margin (%) EBITDAR (x) 2,033 15 0.7 15.0

Company 99 Cents Only Stores LLC Claire’s Stores, Inc. The Gymboree Corporation J.Crew Group, Inc. Neiman Marcus Group LTD LLC

LBO Date Sponsors 1/1/12 Ares Management

LTM Figures at LBO EBITDA Adj. Debt/ Multiple Sales EBITDA Margin (%) EBITDAR (x) Paid (x) 1,532 133 8.7 6.4 12.0

5/1/07

Apollo Management, LLC

1,511

298

19.7

8.0

10.4

1,302

180

13.8

9.8

11/23/10

Bain Capital Private Equity, LP

1,056

247

23.4

7.7

7.3

1,156

5.9

10.3

3/7/11

1,855

275

14.8

6.4

10.9

2,398

145

6.0

10.7

4,709

675

14.3

7.1

9.1

4,746

504

10.6

9.2

Neiman Marcus Group LTD LLC Toys ‘R’ Us, Inc.

10/6/05

TPG Capital, L.P. and Leonard Green & Partners, L.P. Ares Management LLC and Canada Pension Plan Investment Board TPG Global, LLC and Warburg Pincus LLC Bain Capital Partners, LLC; Kohlberg Kravis Roberts & Co. L.P. and Vornado Realty Trust

3,860

541

14.0

6.8

9.7

—

11,194

777

6.9

8.5

11.8

11,537

704

6.1

7.1

($ Mil.)

10/25/13

7/21/05

2016E figures are for fiscal years ended January 2017, except for Neiman Marcus LTD LLC and The Gymboree Corporation, whose fiscal years end in July. E – Estimate. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Stacking Up the High-Yield Retailers Fitch sorts the retailers into three main categories — Best in Class, Muddlers and Share Donors — based on how effectively they are defending their market share positioning and maintaining their profitability.

Stacking Up the High-Yield Retailers Best in Class Dollar Tree, Inc. Hanesbrands Inc. Kate Spade & Company L Brands, Inc. The Michaels Companies, Inc. Neiman Marcus Group LTD LLC Party City Holdco, Inc. PVH Corp. Sally Beauty Holdings, Inc.

Muddlers Ascena Retail Group, Inc. Burlington Stores, Inc. The Gap, Inc. J. C. Penney Company, Inc. Levi Strauss & Co. Staples, Inc. Tailored Brands, Inc.

Share Donors 99 Cents Only Stores LLC Abercrombie & Fitch Co. The Bon-Ton Stores, Inc. Claire’s Stores, Inc. GNC Holdings, Inc.a The Gymboree Corporation J.Crew Group, Inc. Sears Holdings Corporation SUPERVALU Inc. Toys ‘R’ Us, Inc.

aIndicates

movement between categories compared with prior year. Source: Fitch Ratings.

Best in Class The Best-in-Class companies stand out positively due to their combination of strong differentiation, compelling brand and/or demonstrated consumer loyalty, which enable them to assert solid competitive traction and a greater degree of overall stability. Through acquisitions, core brand focus, and selective geographic expansion and product extensions, Hanesbrands Inc. and PVH Corp. have established track records of strong growth in a stagnant industry. Some retailers benefit from stronger sector fundamentals, such as The Michaels Companies, Inc. and Party City Holdco, Inc., which enjoy stable growth in crafting/party supplies and resilience to competitive incursion. Similarly, Sally Beauty Holdings, Inc. and L Brands, Inc.’s Bath & Body Works brand have proven to be among the more consistent businesses in the retail sector because products are consumable in nature and are used as part of a daily regimen. Dollar Tree’s low-priced assortment appeals to consumers who seek strong value messaging. Conversely, Neiman and Kate Spade have benefited from the strong growth in luxury spending and successful merchandising efforts. Both companies are exposed primarily to A-rated malls, which continue to see better than average sales productivity. However, comps trends at Neiman decelerated markedly over the last five quarters, reflecting some weakness in U.S. luxury spending, exacerbated by merchandise systems issues, the adverse impact of the strong dollar on tourist traffic in key gateway markets, and the impact of lower crude oil prices on the net worth of many of Neiman’s core customers. Weakening sales also suggests that Neiman is being affected by both direct-to-consumer efforts by vendors and recent entrants to the online-only luxury channel. Fitch believes Neiman has the liquidity and initiatives in place to incorporate the changing customer shopping behavior into its business model.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance The Best-in-Class players can consistently generate FCF and deleverage as needed/desired. These companies are likely to accelerate market share gains in a strong economy and demonstrate resilience in a weak economy. Furthermore, their capital structures are better equipped to withstand external shocks than those of retailers in the other two groups. The clear category leadership these companies possess is a key tenet to their market share defensibility and distinction as Best in Class. With regard to targeted leverage, Fitch expects a number of Best-in-Class players will continue to manage their capital structures within the context of maintaining their leverage at current levels, and will therefore not likely see rating movement. Issuers such as L Brands and Sally, for example, could continue to enhance shareholder returns through debt-financed buybacks and dividends, while Hanesbrands and PVH could continue to execute debt-financed acquisitions. A number of Best-in-Class retailers, including Dollar Tree, PVH, Hanesbrands and Michaels, added debt in recent years to fund transactions or pay special dividends to their equity sponsors. However, they generally remain strong candidates to delever their balance sheets given their strong FCF characteristics. For example, Fitch expects Dollar Tree to generate $1 billion of FCF in 2017, and use it toward debt paydown to achieve its targeted leverage of under 3.5x by 2020, post its acquisition of Family Dollar.

Muddlers High-yield retailers that muddle along are generally holding onto their market share or experiencing slight losses, and have a manageable capital structure. Levi Strauss & Co. and J. C. Penney Company, Inc. have seen gradually improving results over the past few years, with flat to modest top-line growth expected over the next 24–36 months. Burlington continues to produce strong results, as consumer tradedown to the off-price channel continues, although productivity metrics still trail those of direct competitors. Ascena Retail Group, Inc.’s collection of mid-market, primarily women-focused apparel brands is experiencing near-term challenges in concert with the mid-tier apparel trend, and is generally performing in line with a difficult specialty apparel sector. The company is focused on expense reductions (especially post the ANN, Inc. acquisition) to drive EBITDA. However, fiscal 2018 EBITDA is likely to fall far short of its original $1 billion expectation due to weak sales, and could be around $600 million–$650 million, similar to the pro forma post-acquisition level. Leverage remains manageable at 5.7x, and Fitch expects the company to direct most of its projected $200 million in annual cash flow toward debt reduction. The Gap, Inc. has been unable to combat mid-tier apparel challenges with compelling assortments, forcing continuous expense management and real estate retrenchment. Tailored Brands, Inc. is somewhat a tale of two brands, with the Men’s Wearhouse chain producing positive sales growth, while Jos. A. Bank may be concluding a period of significantly negative comps after promotional strategy changes caused traffic declines. Staples, Inc. faces both a deteriorating end-market due to declining usage of core office products and increased competitive pressure from discount and online-only merchants.

Share Donors Share Donors are the notable laggards of their respective subsectors. They exhibit weak business profiles in the face of operationally and financially stronger competitors. Their generally high leverage not only creates greater risk of refinancing, but maturity schedules can limit their ability to redeploy FCF (if any) to business reinvestment. Fitch remains concerned High-Yield Retail Checkout January 31, 2017

Leveraged Finance about the long-term viability of these businesses given operational headwinds, weak cash flow generation and onerous debt loads. Many of Fitch’s Share Donors fall into the ‘CCC’ and ‘CC’ categories given near-term liquidity concerns, with GNC, Abercrombie and SVU in the ‘B’ category. Many of the highly distressed names are apparel-related retailers, a category that has seen significant supply/demand imbalance due to stagnant category growth yet increased competition, including fast-fashion retailers, off-price retailers, general merchants with apparel exposure, and online-only players. Changes to consumer shopping habits (including reduced mall traffic and increased pre-purchase research), price perception and willingness to explore new channels (including off-price and online) complicate the business models for many companies. Weak cash flow at the distressed retailers precludes them from meaningfully investing in merchandising, omnichannel infrastructure and the stores’ physical plant. This creates a vicious cycle of limited cash flow generation and therefore minimal opportunity to reinvest. Gymboree’s high price perception caused consumers to look elsewhere for children’s apparel. J.Crew’s and Abercrombie’s similarly high price perception, coupled with fashion misses, have created sharp traffic declines and aggressive markdowns necessary to clear excess inventory. General mall traffic declines have also affected Claire’s impulse purchase model, and its attempts to diversify its real estate exposure (such as concession stores) could stem some but not the entire decline. Its heavy debt load and tight liquidity remain concerns. Several of the Share Donors are single-category retailers that have suffered due to the rise of the discount model. Toys continues to seek its competitive advantage in a highly seasonal, hitdriven business, with top-selling toys used as loss-leaders for discount competitors during the holiday selling period. Significant online penetration in the toy category is also a concern. SVU’s grocery business post the announced Save-A-Lot spinoff continues to see traffic declines given generally weak regional market shares, and the company is limited in using its scale and expense reductions to invest in price. GNC, which migrated here from the Muddler category, is seeing accelerated sales erosion due to the rise of lower priced alternatives and the proliferation of product usage information online.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Revenue and EBITDA Today Versus 2009 Recession Trough Pre-Recession Peak

Recession Trough

LTM

LTM Versus Recession Trough (% Change)

Revenue Abercrombie & Fitch Co. The Bon-Ton Stores, Inc. Claire’s Stores, Inc. J. C. Penney Company, Inc. Sears Holdings Corporation Toys ‘R’ Us, Inc.

3,700 3,639 1,511 20,186 52,761 14,098

2,929 3,035 1,342 17,556 44,043 13,172

3,403 2,725 1,331 12,582 23,389 11,732

16.2 (10.2) (0.8) (28.3) (46.9) (10.9)

EBITDA Abercrombie & Fitch Co. The Bon-Ton Stores, Inc. Claire’s Stores, Inc. J. C. Penney Company, Inc. Sears Holdings Corporation Toys ‘R’ Us, Inc.

982 282 292 2,387 3,558 1,103

412 162 210 1,416 1,584 968

292 111 188 978 (884) 758

(22.9) (31.8) (10.3) (30.9) N.A. (21.7)

($ Mil.)

N.A. – Not applicable. Note: Pre-recession peak figures are as of fourth-quarter 2007 and recession trough figures are as of fourth-quarter 2009. Source: Company filings, Fitch Ratings.

Finally, 99 Cents Only’s flat to negative comps trend and significant EBITDA erosion are largely a result of over-expansion, cannibalization from new stores and weak execution due to a diffused management focus. This is now exacerbated by the need to tightly manage inventory to increase gross margins and address potential liquidity concerns. The Revenue and EBITDA Today Versus 2009 Recession Trough table on the previous page shows revenue and EBITDA trends for those Share Donors that experienced a downturn in the 2008/2009 recessionary period. The table demonstrates that EBITDA for all of these retailers continues to decline due to secular and competitive pressures.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Profitability Reflects Business Profile The average EBITDA margin for the 26 companies in this report is approximately 11.0%, although margins range from negative for Sears to the positive 20%-plus range for L Brands. High margins are a credit positive, as they generally indicate a differentiated product offering, a meaningful brand and/or structural advantages, such as vertical integration, scale or dominance of a respective subsector. The ability to sustain above average margins over the long term is a Best-in-Class attribute that demonstrates market share defensibility, and enables a stronger FCF profile and the ability to deleverage. Margins on the lower end tend to reflect a more commoditized product offering, or a saturated subsector where price transparency is high and the ability to use price to offset other margin pressures is low. If the business is inherently a lower margin business because of an undifferentiated offering, and selling, general and administrative expenses are heavily fixed and already running lean, there may be little in the way of catalysts to drive margin higher.

LTM EBITDA Margin (%)

EBITDA Margin

Average EBITDA Margin = 10.6

25 20 15 10 5 0 (5)

SHLD – Sears Holdings Corporation. NDN – 99 Cents Only Stores, LLC. BONT – The Bon-Ton Stores, Inc. SVU – SUPERVALU Inc. GYMB – The Gymboree Corporation. TOY – Toys 'R' Us, Inc. SPLS – Staples, Inc. JCG – J.Crew Group, Inc. JCP – J.C. Penney Company, Inc. ANF – Abercrombie & Fitch Co. ASNA – Ascena Retail Group, Inc. BURL – Burlington Stores, Inc. MW – Tailored Brands, Inc. NMG – Neiman Marcus Group LTD LLC. DLTR – Dollar Tree, Inc. LVI – Levi Strauss & Co. GPS – Gap, Inc. PVH – PVH Corp. CLE – Claire’s Stores, Inc. GNC – GNC Holdings, Inc. SBH – Sally Beauty Holdings, Inc. PRTY – Party City Holdco, Inc. MIK – The Michaels Companies, Inc. HBI – Hanesbrands Inc. KATE – Kate Spade & Company. LTD – L Brands, Inc. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Key Issuers to Watch in 2017/2018 The high-yield retailers under coverage have varying trends in terms of leverage trajectory. Some companies have shown leverage stability or improvement through a combination of EBITDA momentum and/or debt paydown. Others are seeing worsening trends, due to operational challenges and/or limited ability to reduce debt through FCF. Below, we categorize our coverage into companies with reasonable or declining leverage, and those with elevated or worsening leverage.

Expected Leverage Trends Over the Next 12–24 Months Elevated/Worsening

Reasonable/Declining

99 Cents Only Stores LLC Abercrombie & Fitch Co. The Bon-Ton Stores, Inc. Claire’s Stores, Inc. GNC Holdings, Inc. The Gymboree Corporation J.Crew Group, Inc. Neiman Marcus Group LTD LLC Sears Holdings Corporation Tailored Brands, Inc. Toys ‘R’ Us, Inc.

Ascena Retail Group, Inc. Burlington Stores, Inc. Dollar Tree, Inc. The Gap, Inc. Hanesbrands Inc. J. C. Penney Company, Inc. Kate Spade & Company L Brands, Inc. Levi Strauss & Co. The Michaels Companies, Inc. Party City Holdco, Inc. PVH Corp. Sally Beauty Holdings, Inc. Staples, Inc. SUPERVALU, Inc.

Source: Fitch Ratings.

Adjusted Leverage Adjusted Leverage

Average Adjusted Leverage = 6.2

(x) 18 15 12 9 6 3 0

SPLS – Staples, Inc. KATE – Kate Spade & Company. LVI – Levi Strauss & Co. LTD – L Brands, Inc. GPS – Gap, Inc. HBI – Hanesbrands Inc. SBH – Sally Beauty Holdings, Inc. BURL – Burlington Stores, Inc. DLTR – Dollar Tree, Inc. PVH – PVH Corp. SVU – SUPERVALU Inc. MIK – The Michaels Companies, Inc. ANF – Abercrombie & Fitch Co. JCP – J.C. Penney Company, Inc. GNC – GNC Holdings, Inc. ASNA – Ascena Retail Group, Inc. MW – Tailored Brands, Inc. PRTY – Party City Holdco, Inc. TOY – Toys 'R' Us, Inc. NMG – Neiman Marcus Group LTD LLC. BONT – The Bon-Ton Stores, Inc. CLE – Claire’s Stores, Inc. JCG – J.Crew Group, Inc. GYMB – The Gymboree Corporation. NDN – 99 Cents Only Stores, LLC. Note: Excludes Sears Holdings Corporation. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Issuers on a Negative Trajectory Sears Holdings Corporation — Running out of Liquidity Options Fitch expects Sears’ comps to be around negative 8% in 2016 and in the negative mid to high single-digit range in 2017. Overall top-line is expected to decline 12%–13% in both years as Sears continues to close stores. Fitch consequently expects EBITDA to be negative $950 million–negative $1 billion in 2016/2017, compared with a loss of $836 million in 2015. Fitch expects cash burn (cash flow from operations after capex and pension contributions) of $1.6 billion in 2016 and $1.8 billion in 2017. Sears has generated over $12 billion in liquidity since 2012 to fund operations and continues to use its real estate — Sears still owns about 190 unencumbered Kmart discount and Sears full-line mall stores — store liquidation sales and continues to explore strategic initiatives for some of its well-known brands. However, the company could run out of liquidity options and Fitch believes restructuring risk for Sears remains high over the next 12–24 months.

Gymboree — Debt Restructuring Due to Looming Maturity Gymboree’s comps have been negative for the last few years, with particular weakness at its core Gymboree brand, which accounts for approximately 64% of sales. Fitch expects fiscal 2017 (ended July) comps to be in the negative 3.0%–negative 4.0% range and negative 2.0% in fiscal 2018/2019. Given the significant decline in store-level sales productivity, Fitch expects fiscal 2017 EBITDA to be around $65 million, and be range-bound at $50 million–$60 million in fiscal 2018/2019. While the company has sufficient liquidity to fund operations over the next 24 months, Fitch believes a debt restructuring is imminent given the $769 million secured term loan that matures in February 2018 and the $171 million senior unsecured notes due December 2018.

Claire’s Stores, Inc. — Liquidity Concerns and Further Debt Restructuring Fitch does not see much upside to Claire’s business, with same-store sales expected to remain in the negative low single digits in 2017/2018 given declining U.S. mall traffic and tough macroeconomic conditions in Europe. Fitch expects 2016 EBITDA to be $180 million and be range-bound between $150 million and $160 million thereafter, assuming negative top-line growth and modest margin compression. Liquidity remains tight, with total cash of $41 million and a fully drawn asset-based loan (ABL) at Oct. 29, 2016. FCF is expected to be around negative $40 million annually. The company may have just enough liquidity to fund the 2017 holiday season, but there is little margin for further deterioration as Claire’s will then most likely have to raise additional capital to fund seasonal working capital. The ability to fund 2018 operations including seasonal working capital will be dependent on improving EBITDA to $200 million or raising additional capital. The company was able to address $574 million in maturities, including $243 million due in 2017 through a distressed debt exchange. However, this only amounts to around 20% of its total debt load. The company has a significant debt maturity wall of $1.4 billion in 2019, or around 70% of total debt, and Fitch views another distressed debt exchange or restructuring as likely.

99 Cents Only Stores LLC — Unsustainable Capital Structure 99 Cents Only could undergo a restructuring in the next 12–18 months due to depressed EBITDA, a heavy debt load, tight liquidity and refinancing needs as early as fall 2018. Fitch projects EBITDA of about $15 million in 2016, $30 million in 2017 and $40 million in 2018. High-Yield Retail Checkout January 31, 2017

Leveraged Finance Revenue is expected to remain relatively flat due to store closures, and gross margins are not expected to return to the 32% level from 2014 given further mix shift toward perishable items. Moreover, meaningful cost reductions are needed to help offset rising minimum wages, which Fitch views as a structural challenge given the firm’s 99.99 cent fixed price point. Liquidity is tight, with persistently negative FCF being offset by proceeds from the sale of property and fixed assets, mainly consisting of sale-leasebacks, which totaled approximately $40 million in 2015 and $40 million for the YTD ending Oct. 28, 2016. Fitch projects 99 Cents Only will maintain at least $50 million of liquidity in 2017, despite a projected $40 million of negative FCF, assuming asset sales continue. Absent asset sales or a more pronounced increase in gross margin, the company may not be able to fund ongoing operations due to minimal cash and negative FCF.

J.Crew Group, Inc. — EBITDA Halved Since peaking at $354 million in 2012 and 2013, J.Crew’s EBITDA fell precipitously to $188 million in 2015 and is expected to be approximately $150 million in 2016. Negative comps at J.Crew stores have led the decline, causing a heightened promotional cadence to clear inventory. Fitch assumes overall comps to decline 3%–5% annually over the next two years. EBITDA is expected to be around $100 million in 2017, barring significant gross margin improvement or expense reduction. Trend-right merchandise at more compelling prices could stabilize top-line, but downside risk remains on weak execution and apparel demand. Given elevated leverage, deteriorating operating trends and negative cash flow projections, debt restructuring risk is increasing in advance of J.Crew’s May 2019 holdco note maturity ($567 million due). The company reportedly spun a significant portion of its intellectual property into a separate unrestricted subsidiary recently, which could possibly be used for a debt exchange or liquidity source.

Neiman Marcus LTD LLC — Growth Stalled on Luxury Market Shifts Comps trends decelerated markedly beginning fiscal (July) 2015 after several years of positive midsingle-digit comps, and have averaged negative 5% over the last five quarters. The decline reflects some weakness in U.S. luxury spending, exacerbated by merchandise systems issues, the adverse impact of the strong dollar on tourist traffic in key gateway markets and the impact of lower crude oil prices on the net worth of many of Neiman’s core customers. While the business is expected to remain soft near term, Neiman’s real estate portfolio, customer and vendor relationships, and omnichannel model should enable it to be somewhat insulated, although not immune, from broader market shifts. Weakening sales suggest Neiman is being affected by both direct-to-consumer efforts by vendors and recent entrants to the online-only luxury channel. Neiman will therefore need to incorporate the changing customer shopping behavior into its business model. Fitch expects comps to decline 5% in fiscal 2017 and EBITDA to decline 10% to about $500 million from $560 million in fiscal 2016 and almost $690 million in fiscal 2015. EBITDA could be range-bound around the $500 million level, assuming comps near flat on average.

Abercrombie & Fitch Co. — Sector and Brand Challenges Comps have been negative, starting in 2012, with annual comps averaging negative 6% for the four years ending 2015, and are expected near this level in 2016. Sales weakness caused EBITDA to decline around 60% from $650 million in 2012 to an expected $250 million in 2016. Fitch believes comps declines are due to challenges in the mid-tier mall-based apparel sector, High-Yield Retail Checkout January 31, 2017

Leveraged Finance exacerbated by loss of brand relevance, particularly at the Abercrombie & Fitch brand. The company enacted a number of initiatives to improve sales through enhanced marketing, merchandising and omnichannel investments, but has not seen material improvement in comps. While the company recently undertook brand repositionings at both Abercrombie & Fitch and Hollister & Co., Fitch does not expect the effort to yield positive sales momentum, especially given continued sector headwinds. Fitch consequently projects continued comps declines in the low single-digit range in each of the next few years and EBITDA trending to the mid-$100 million level. Despite this negative trajectory, the company’s liquidity position remains strong given its net cash position and limited near-term maturities.

SUPERVALU Inc. — Wholesale Wins Not Enough to Offset Retail Weakness SVU’s operations are two-thirds grocery wholesale distribution and one-third retail post the sale of Save-A-Lot. Excluding Save-A-Lot, Fitch projects consolidated EBITDA of $420 million in fiscal 2018 (February), down from a projected $500 million in fiscal 2017 and $584 million in fiscal 2016. Total adjusted deb/EBITDAR is expected increase to 4.3x in fiscal 2018 and 4.4x in fiscal 2019 from 3.7x, pro forma for $1.1 billion of debt reduction following the Dec. 5, 2016 sale of Save-A-Lot. The company’s retail operations are driving declines in EBITDA as negative identical store sales (IDs) are resulting in significant sales deleverage. Fitch believes midsingle-digit ID declines will persist in fiscal 2018, despite moderating deflation due to SVU’s weak share positions and competitive new openings in its markets, and projects segment EBITDA to fall below $100 million by fiscal 2019 from $181 million for the LTM. SVU’s wholesale business also remains challenged due to consolidation and restructuring among its retail grocery client base. Fitch acknowledges SVU’s focus on retaining existing customers and winning new business, as demonstrated by an estimated $1 billion of annualized revenue from new relationships with The Fresh Market, Marsh Supermarkets and America’s Food Basket, but believes SVU will have to offset 2%–3% customer attrition annually with new business to maintain its wholesale revenue base. Moreover, margin pressure is anticipated as new large contracts will come at a lower margin due to volume discounts and incremental costs transitioning new customers onto its distribution network. Fitch projects segment EBITDA will approximate $265 million in fiscal 2019, versus $267 million for the LTM.

GNC Holdings, Inc. — Share Loss to Alternate Channels Following years of positive growth, GNC’s same-store sales have been negative nearly every quarter beginning in 2014, with declines accelerating in 2016. Fitch believes sales declines are the result of greater availability of vitamin/supplement products and information in lower cost channels such as grocery, discount and online. EBITDA is expected to fall over 25% to around $390 million in 2016 from $532 million in 2013. The upward pressure on leverage from weak operating trends is exacerbated by extensive debt-financed share buybacks, yielding a projected 2016 adjusted leverage of 5.8x, compared with 4.4x in 2013. Changes to the company’s product assortment and marketing have not yet proven effective in reversing sales declines. However, more aggressive pricing actions taken in late December 2016 and a revamped loyalty program, could improve pricing perception and limit further sales erosion. A new CEO, expected in 2017 after the prior CEO resigned in July 2016, could yield further operating changes. Fitch expects the combination of recent initiatives to generate lessening declines in 2017 and flattening sales trends thereafter, with EBITDA stabilizing near the projected $390 million in 2016.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Issuers on a Positive Trajectory Dollar Tree, Inc. — Deleveraging Toward 3.5x on Track Dollar Tree is making progress deleveraging following its $9.1 billion acquisition of Family Dollar Stores, Inc. in July 2015. Fitch projects total adjusted debt/EBITDAR of 4.2x in 2016 and 3.8x in 2017, from nearly 6.0x following the acquisition, due to significant debt repayment and EBITDA growth. Total debt following a $750 million term loan prepayment on Jan. 20, 2016 is $6.4 billion, down from $8.3 billion following the acquisition. Fitch forecasts assume total debt declines to approximately $5 billion over the next few years as FCF is expected to grow to about $1 billion annually, enabling debt reduction. Fitch projects comps to approximate 1%–2% through 2018, reflecting Dollar Tree’s leading market share and its continuing maintenance of share as comps trends for the dollar store sector slow. Fitch views market saturation in the dollar store channel as a risk, and therefore assumes 3%–4% net new unit growth annually at Dollar Tree, versus the company’s historical run rate of 6%–7%. Fitch expects EBITDA to rise toward $3 billion, with margin expanding toward 13% as profitability at Family Dollar improves.

Burlington Stores, Inc. — Improved Merchandising Pays Off Burlington’s comps have been on a positive trajectory since 2011, with comps averaging 2.7% through 2015, and are projected around 4% in 2016. EBITDA has grown at a CAGR of almost 10% over the last five years to an LTM level of $553 million on management’s merchandising initiatives, category extensions, strong inventory management and square-footage expansion. Fitch expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and a 2%–3% contribution from new stores. Fixed-cost leverage resulting from sales growth should allow EBITDA margin to improve 30 bps–50 bps over the next 24–36 months to 10.5%. Leverage, which declined to 4.6x in 2015 from 5.9x in 2011, is expected to be around 4.0x in 2016 and remain flat to modestly lower thereafter.

Kate Spade & Company — Growth Continues Fitch projects strong top-line growth of 9%–10% at Kate Spade, driven by both positive comps and product category and geographic expansion in 2017. Comps are expected to be 8%–9% in 2016 and moderate to the midsingle digits in 2017/2018, as the recent decline in U.S. tourist traffic related to the stronger dollar continues to affect the company. Fitch believes the product category and geographic expansion, as well as a maturing international business will also contribute to EBITDA margin growth to the 18%–19% range over the next couple years. As a result of EBITDA growth, leverage is expected to trend toward the 3.0x level over the next 12–24 months, assuming no change in debt. Fitch expects Kate Spade to generate $150 million–$200 million in FCF annually over the next few years as EBITDA trends toward $300 million from $245 million LTM.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance U.S. Retail Sector — High-Yield Ratings Companies

Long-Term IDR

Outlook

The Gap, Inc. J. C. Penney Company, Inc. L Brands, Inc. Levi Strauss & Co. Sears Holdings Corporation Staples, Inc. SUPERVALU Inc. Toys ‘R’ Us, Inc.

BB+ B+ BB+ BB CC BB+ B CCC

Stable Stable Stable Stable — Stable Stable —

IDR – Issuer Default Rating. Note: See table below for additional nonrating coverage. Source: Fitch Ratings.

U.S. Retail Sector — Credit Opinions Companies 99 Cents Only Stores LLC Abercrombie & Fitch Co. Ascena Retail Group, Inc. The Bon-Ton Stores, Inc. Burlington Stores, Inc. Claire’s Stores, Inc. Dollar Tree, Inc. GNC Holdings, Inc. The Gymboree Corporation Hanesbrands Inc. J.Crew Group, Inc. Kate Spade & Company The Michaels Companies, Inc. Neiman Marcus Group LTD LLC Party City Holdco, Inc. PVH Corp. Sally Beauty Holdings, Inc. Tailored Brands, Inc.

Credit Opinion cc* b–* b+* ccc* bb* cc* bb+* b+* cc* bb+* ccc* bb* b+* b–* b* bb* bb* b*

Outlook — stable stable — stable — stable negative — stable negative stable stable stable stable stable stable positive

Fitch maintains Credit Opinions (COs) for a number of entities in this sector, primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are identified in written documents with a lowercase symbol and an asterisk (e.g. ‘b+*’) to signify they are subject to a limited process, and to avoid confusion with ratings.

Limitations of COs in this Report COs are not ratings, and are not substitutes for ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a materially lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process, and reduced robustness of Outlooks and Watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify them. COs are not subject to the same continuous level of surveillance as ratings, and may be “point-in-time” in nature or subject to less frequent review. A “point-in-time” view refers to the surveillance level of the rating, and not to the time horizon of the analytical judgment. Thus, a view described as “point in time” reflects, as of a given point in time, the same view of an issuer’s future condition that would be reflected, were such an issuer or related transaction to be monitored. Only COs assigned or updated in the last 12 months are presented in this report. COs may not be updated individually in response to corporate events or the news cycle, but instead based upon scheduling relevant to their use in a pooled context. Although informed by our sector expertise, individual COs are based on public information from the issuer’s regulatory disclosures. As our COs are forward-looking, they are based upon Fitch-constructed financial forecasts. COs typically will not involve discussions with borrower management. COs are determined by a panel of analysts that is typically fewer in number than for a credit rating, and a less extensive presentation. COs may be re-reviewed by the analytical panel based on the provision of information to Fitch by any party that Fitch deems relevant and material to the CO level assigned. For more information, please consult our published list of loan credit opinions, U.S. Corporate Loan Credit Opinions and our Rating Definitions.

Disclaimers on Covenant Summaries The covenant summaries reflect Fitch’s interpretation and synopsis of information contained in publicly available documents identified in the Document Date and Location section of each covenant summary table. Fitch cannot ensure that the information contained in such documents is either accurate or complete, or that the covenant summaries, or any particular covenant summary, accurately or completely reflect the key terms of any such document. The information presented in the covenant summaries is provided “as is” without any representation or warranty, and is not a substitute for information provided to investors by an issuer and its agents in connection with a sale of securities. High-Yield Retail Checkout January 31, 2017

Leveraged Finance High-Yield Retailers: LTM Summary Data Company Name

IDR/ IDCO

Outlook/ EBITDA Watch Revenues EBITDA Margin (%)

Adjusted Interest Total Leverage Coverage Debt (x) (x)

99 Cents Only Stores LLC Abercrombie & Fitch Co. Ascena Retail Group, Inc. The Bon-Ton Stores, Inc. Burlington Stores, Inc. Claire’s Stores, Inc. Dollar Tree, Inc. The Gap, Inc. GNC Holdings, Inc. a The Gymboree Corporation Hanesbrands Inc. b J. C. Penney Company, Inc. J.Crew Group, Inc. Kate Spade & Company L Brands, Inc. Levi Strauss & Co. The Michaels Companies, Inc. Neiman Marcus Group LTD LLC Party City Holdco, Inc. PVH Corp. Sally Beauty Holdings, Inc. Sears Holdings Corporation Staples, Inc. SUPERVALU Inc. Tailored Brands, Inc. Toys ‘R’ Us, Inc.

cc* b–* b+* ccc* bb* cc* bb+* BB+ b+* cc* bb+* B+ ccc* bb* BB+ BB b+* b–* b* bb* bb* CC BB+ B b* CCC

— stable stable — stable — stable Stable negative — stable Stable negative stable Stable Stable stable stable stable stable stable — Stable Stable positive —

964 342 1,668 1,121 1,310 2,154 7,170 1,746 1,596 1,070 4,116 4,861 2,098 400 5,773 1,141 2,780 4,902 1,886 3,352 1,802 4,321 1,051 2,594 1,624 5,625

($ Mil.)

2,027 3,403 7,002 2,725 5,447 1,332 20,449 15,472 2,588 1,183 5,862 12,582 2,441 1,340 12,480 4,538 5,129 4,864 2,316 8,208 3,953 23,389 20,475 16,010 3,411 11,732

5 292 637 111 553 188 2,341 2,119 408 75 1,061 978 169 245 2,676 602 847 518 375 1,125 626 (884) 1,390 673 361 758

0.2 8.6 9.1 4.1 10.1 14.1 11.4 13.7 15.8 6.3 18.1 7.8 6.9 18.3 21.4 13.3 16.5 10.7 16.2 13.7 15.8 NM 6.8 4.2 10.6 6.5

17.1 5.1 5.7 9.2 4.3 9.6 4.5 3.6 5.6 9.7 4.1 5.6 10.1 3.3 3.4 3.4 4.9 9.2 6.1 4.6 4.3 NM 3.2 4.7 6.0 7.7

0.6 1.7 1.5 1.3 2.5 1.0 2.5 2.5 2.0 1.0 4.8 2.0 1.4 3.3 3.1 3.1 2.0 1.6 1.9 2.5 2.3 NM 2.6 2.6 1.7 1.3

CFFO 38 265 548 78 521 (1) 1,487 1,660 250 (25) 522 455 109 168 1,924 211 633 321 268 1,089 351 (1,521) 905 314 196 163

Capex Dividends (46) (135) (380) (58) (186) (18) (595) (604) (51) (26) (91) (368) (84) (48) (949) (111) (116) (292) (74) (258) (151) (174) (324) (210) (110) (254)

— (54) — (1) — — — (367) (55) (5) (165) — — — (1,241) (60) (0) — — (12) — — (310) — (35) —

Net Equity Proceeds — — (16) — (225) 12 27 (188) (428) — (425) 2 — 2 (511) (3) (173) — 1 (279) (191) — 18 3 2 —

LTM figures are estimated and exclude Gymboree Play and Music. bEBITDA excludes noncash pension expenses and is adjusted for stock-based compensation and restructuring charges. IDR – Issuer Default Rating. IDCO – Issuer Default Credit Opinion. CFFO – Cash flow from operations. NM – Not meaningful. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance High-Yield Retailers: Liquidity Summary ($ Mil.) Company Name 99 Cents Only Stores LLC Abercrombie & Fitch Co. Ascena Retail Group, Inc. The Bon-Ton Stores, Inc.a Burlington Stores, Inc. b Claire’s Stores, Inc. Dollar Tree, Inc. The Gap, Inc. GNC Holdings, Inc. c The Gymboree Corporation Hanesbrands Inc. J. C. Penney Company, Inc. J.Crew Group, Inc. Kate Spade & Company L Brands, Inc.d Levi Strauss & Co. The Michaels Companies, Inc. Neiman Marcus Group LTD LLC Party City Holdco, Inc.e PVH Corp. Sally Beauty Holdings, Inc. Sears Holdings Corporation Staples, Inc. SUPERVALU Inc.f Tailored Brands, Inc. Toys ‘R’ Us, Inc.g

Cash and ST. Inv. 2 470 271 7 33 41 734 1,522 37 10 450 183 38 308 654 272 150 42 48 662 87 258 1,076 227 35 420

Credit Facilities FCF LTM FCF Margin (%) Committed Available Maturity (8) 76 168 18 335 (19) 892 689 143 (56) 266 87 24 115 311 40 516 29 194 819 200 (1,695) 271 172 52 (91)

(0.4) 2.2 2.4 0.7 6.2 (1.4) 4.4 4.5 5.5 (4.7) 4.5 0.7 1.0 8.6 2.5 0.9 10.1 0.6 8.4 10.0 5.1 (7.2) 1.3 1.1 1.5 (0.8)

160 400 600 880 600 75 1,250 500 300 225 1,162 2,350 350 200 1,000 850 850 900 640 696 500 1,971 1,000 1,000 500 2,213

49 360 523 215 384 0 1,092 500 157 92 1,000 1,767 329 190 992 665 793 455 305 663 478 174 996 935 427 841

April 2021 August 2019 August 2020 Various August 2019 February 2019 March 2020 May 2020 September 2018 December 2017 Various June 2019 November 2021 May 2019 July 2019 March 2019 May 2021 July 2021 August 2020 May 2021 July 2018 July 2020 November 2022 February 2021 June 2019 Various

Total Liquidity

51 830 794 222 416 41 1,826 2,022 195 102 1,450 1,950 367 498 1,646 937 943 497 353 1,325 565 432 2,072 1,162 462 1,261

— — — — — — — — — — — — — — — — — — — — — 248 — — — —

Debt Maturities 2017 2018 2019 6 3 — — — 26 173 472 4 56 112 262 16 4 — 31 25 30 3 117 — 553 500 — 11 26

6 3 45 — — — 155 — 141 934 77 307 16 4 — — 25 30 3 147 — 1,262 — — 11 456

832 3 90 — — 1,437 155 — 1,162 — 233 442 582 4 500 — 25 30 3 205 — 625 — 524 11 1,754

Debt maturities pro forma for the 10.625% $57.3 Mil. notes due 2017 redeemed in November 2016. bDebt maturities pro forma for the new $50 Mil. senior secured term loan due 2019. cThe 2017 maturity includes a $49.4 Mil. ABL term loan due December 2017 to reflect the springing maturity. In addition, the ABL also has a springing maturity of December 2017. dFCF is before special dividends. eCommitted ABL varies seasonally being $540 Mil. between Nov.1 and June 30 of each year. Pro forma for subsequent $100 Mil. drawing of ABL to prepay term loan borrowings. fLiquidity and maturities are pro forma for the $260 Mil. revolver paydown and approximately $180 Mil. of remaining cash proceeds from sale of Save-A-Lot. gDebt maturities pro forma for refinancing of the $725 Mil. Propco II notes due 2017. ST – Short-term. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

99 Cents Only Stores LLC Credit Profile Credit Opinion Long-Term Issuer Default Credit Opinion Senior Secured ABL Revolver Credit Opinion

Credit Profile Summary cc* ccc+*/rr1*

Senior Secured Term Loan ccc–*/rr3* Senior Unsecured Bonds

c*/rr6*

ABL – Asset-based loan.

Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data 99 Cents Only Stores LLC FYE LTM 1/29/16 10/28/16 ($ Mil.) Total Revenue 2,004.0 2,027.4 EBITDA 19.3 4.7 EBITDA Margin (%) 1.0 0.2 FCF (34.3) (7.8) Total Debt 929 964 Total Adjusted Debt 1,709.3 1,744.3 Total Adjusted Debt/EBITDAR (x) 14.6 17.1 EBITDAR/ (Interest + Rent) (x) 0.7 0.6 Same-Store Sales (%)a (2.7) 0.6 Real Estate Owned (%) 18 N.A. No. of Stores 391 394

Unsustainable Capital Structure: Fitch Ratings views 99 Cents Only Stores LLC’s capital structure as unsustainable given depressed EBITDA, a heavy debt load resulting in more than $60 million of annual interest expense and negative FCF. Fitch projects EBITDA of less than $50 million, total adjusted debt/EBITDAR above 10.0x and negative FCF annually through 2018. Absent a more significant improvement in EBITDA, restructuring of the company’s debt is possible over the next 12–18 months. Weak EBITDA Trajectory: 99 Cents Only’s EBITDA declined to $19 million in 2015 from $130 million in 2014 due to negative same-store sales (SSS), gross margin contraction and rising wages. Fitch views EBITDA above $100 million as unattainable over the intermediate term due to top-line challenges given still-weak customer traffic, rising wages and Fitch’s view that 99 Cent Only’s gross margin will not return to the 32% seen in 2014. Fitch projects EBITDA of about $15 million in 2016, $30 million in 2017 and $40 million in 2018, driven by gradually improving sales, modest gross margin expansion to 30% and cost reductions. Negative FCF, Tight Liquidity: Fitch projects FCF will remain in the negative $25 million– negative $40 million range annually through 2018 due to rising wages, high interest cost and relatively stable working capital post 2016. Fitch projects liquidity will be adequate but tight at about $50 million through 2017 as sale-leaseback proceeds, which approximated $41 million in 2015 and $42 million for YTD Oct. 28, 2016, reduce the need for revolver borrowings. Wages Present Structural Challenge: Fitch previously viewed 99 Cent Only’s problems as fixable and expected EBITDA to recover at a more rapid pace. However, rising minimum wages —particularly in California, where over 70% of 99 Cents Only’s roughly 390 stores are located — are viewed as a structural challenge to the company given its 99.99 cent fixed price point and limited pricing power. California’s minimum wage will continue to increase in a stepwise fashion to $15/hour in 2022, from $10.50/hour effective Jan. 1, 2017. Additional Store Closures Likely: Fitch projects SSS of 1%–2% annually and gross margin expansion toward 30%, from 28.1% at the end of 2015, over the intermediate term. However, absent significant store closures and expense reduction, operating losses will persist due to rising wages. 99 Cents Only announced plans to close a record five units in 2016 upon expiration of leases. The firm has 104 leases expiring in 2017, 2018 and 2019, which would enable additional store closures.

Credit Profile Drivers

Same-store sales for the LTM reflect the nine months ended Oct. 28, 2016. N.A. – Not available.

Positive Drivers: Positive credit profile drivers include sustained improvement in comps and EBITDA to a level where the company is covering its fixed obligations and a successful refinancing of upcoming maturities. Negative Drivers: Negative credit profile drivers would include tightening liquidity and the inability to fund ongoing operations and/or refinance maturities in a timely fashion.

Analysts Carla Norfleet Taylor, CFA +1 312 368-3195 carla.norfleettaylor@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch Base Case Assumptions — 99 Cents Only Stores LLC 2015A 2,004 4.0

2016F 2,033 1.4

2017F 2,044 0.5

Same-Store Sales (%) EBITDA EBITDA Margin (%)

(2.7) 19 1.0

0.7 15 0.7

1.0 29 1.4

Working Capital Change Cash Flow from Operations Capex

53 32 (66)

54 18 (45)

22 (3) (35)

— (34) — 929 1,709

— (27) — 915 1,703

— (38) — 909 1,691

14.6

15.0

13.4

($ Mil.) Revenue Revenue Growth (%)

Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Adjusted Debt/EBITDAR (x)

2018F Comments 2,065 — 1.0 Revenue growth negatively affected by store closures. 1.5 — 42 — 2.0 Driven by improving SSS, modest gross margin expansion and cost reductions. 5 — (9) — (30) Reduction due to fewer new stores and closures. — — (39) — — — 948 — 1,724 Rent expense grows with net change in stores. 12.4 Leverage remains elevated through forecast period.

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. SSS – Same-store sales. Note: Fiscal years end the Friday closest to the end of January. Source: Fitch Ratings.

Business Profile Assessment Untenable Capital Structure Fitch views 99 Cents Only’s capital structure as unsustainable given its depressed EBITDA, heavy debt load resulting in more than $60 million of annual interest expense and negative FCF. Fitch believes a restructuring could occur in the next 12–18 months. The maturity date on the company’s revolver accelerates to 90 days prior to the term loan maturity date of January 2019 if the loan has not been extended or refinanced. Such restructuring could include a distressed debt exchange that reduces the principal and interest rate on the company’s debt and extends maturities. 99 Cents Only’s EBITDA declined to $19 million in 2015 from $131 million in 2014 due to negative SSS, gross margin contraction and rising wages. Fitch views EBITDA of at least $100 million as necessary to sustain the company’s current capital structure. However, due to top-line challenges given still-weak customer traffic, rising wages and Fitch’s view that gross margin will not return to the 32% seen in 2014, Fitch does not view this as attainable over the forecast period. Fitch projects EBITDA of about $15 million in 2016, $30 million in 2017 and $40 million in 2018, driven by gradually improving sales and gross margin expansion. Fitch’s forecasts also incorporate assumptions regarding selling, general and administrative (SG&A) growth and the impact of rising wages. Gross margins are expected to expand approximately 80 bps to 28.9% in 2016 and gradually toward 30% by 2018. Expansion is expected to be driven by improving sales, less shrink and fewer inventory markdowns. SG&A is projected to decline slightly as cost reductions partially offset increases in the minimum wage. The tables below illustrate potential improvement in 99 Cent Only’s 2017 EBITDA, assuming different SG&A margin and gross margin levels. 99 Cents Only’s liquidity is currently adequate but tight given minimum cash and reduced revolver capacity following the firm’s April 2016 amendment. Fitch projects FCF will remain in High-Yield Retail Checkout January 31, 2017

Leveraged Finance EBITDA Sensitivitya ($ Mil., Fitch 2017 Forecast) Revenue 2,044

Comps (%)

Gross Margin (%)

SG&A Margin (%)

EBITDA

1.0

29.5

31.7

28.6

SG&A Margin (%) 31.7

31.0

30.5

30.0

18.8 29.0 39.3 49.5 59.7 69.9 80.1

33.1 43.3 53.6 63.8 74.0 84.2 94.4

43.3 53.6 63.8 74.0 84.2 94.4 104.7

53.6 63.8 74.0 84.2 94.4 104.7 114.9

Gross Margin (%) 29.0 29.5 30.0 30.5 31.0 31.5 32.0 a

Assumes relatives flat revenue. Comps – Comparable store sales. SG&A – Selling, general and administrative. Note: Assumes depreciation and amortization of $73 Mil. and stock-based comps of $1 Mil. Source: Fitch Ratings.

the negative $25 million–negative $40 million range annually through 2018 due to rising wages, high interest cost and relatively stable working capital post 2016. However, the company should be able to maintain at least $50 million of liquidity through 2017, assuming a similar run rate of sale-leaseback proceeds, which approximated $40 million YTD through Oct. 28, 2016. 99 Cents Only sold two stores for $10.5 million and one warehouse facility for $29.1 million during 2016. The company continues to own about 65 stores and two distribution centers.

Wages Present Structural Challenges — Less Robust Margin Recovery 99 Cents Only’s EBITDA margin declined to just less than 1% for the LTM ended Oct. 28, 2016. This compares with just over 11% at Dollar Tree, Inc. and Dollar General Corp. during the same period. 99 Cents Only’s gross margin declined to 28.3% for the LTM ended Oct. 28, 2016 from over 32% in 2014. Compression was caused by increased shrink and scrap, higher product costs, markdowns to clear excess seasonal inventory and higher freight costs. Shifts in product mix toward lower margin grocery items also contributed to margin erosion. Fitch expects gross margins to increase over 80 bps to 28.9% in 2016 and then gradually rise to 30% by 2018 due to better inventory management. The company installed a new automated Store Inventory Module in 113 stores as of Dec. 9, 2016 and expects to complete implementation in all stores by April 2017. This should result in continued reduction of shrink and scrap. Gross margins are not likely to return to the peak 2014 level of 32% due to the company’s efforts to increase the mix of perishable items, which are lower margin. Food and grocery items in general increased to 57% of sales in 2015 from 55% in 2012, and management continues to focus on increasing traffic-driving perishable items. Additionally, rising minimum wages in the company’s core California market will limit EBITDA margin expansion over the intermediate term. California’s minimum wage has been on an uptrend since 2014, when it was increased by $1 to $9/hour. The rate increased another $1 to $10/hour in 2016 and another $0.50 cents to $10.50/hour effective Jan. 1, 2017. Wage rates are set to rise $0.50 to $11/hour in 2018, and then increase annually by $1 increments until reaching $15/hour in 2022. 99 Cents Only estimates a $10 million dollar impact for the wage increase in 2016. The company stated the impact should be less in 2017 given the lower perhour increase. Fitch’s anticipates the company’s EBITDA margin will remain in the low single-digit range over the intermediate term given increased wage rates and limited pricing power. The company has High-Yield Retail Checkout January 31, 2017

Leveraged Finance not publicly quantified any benefits from cost reductions, but is looking for opportunities to reduce expenses and expects better labor management and scheduling to partially offset the impact of higher wages. Fitch assumed a 1%–2% reduction in costs, or about $10 million off of a 2016 base spending of $645 million over the next two years, allowing the company to partially offset the increase in minimum wages.

Same-Store Sales Recover to Positive Low Single Digits 99 Cents Only’s SSS growth decelerated to 0.4% in 2014 and turned negative in 2015 after the company rapidly expanded its footprint, adding over 35% to its store base since 2011. The company opened 40 net new stores in 2014 (12% on 2013 base of 343 stores) after adding 27 net new stores in 2013, which stressed the company’s operations due to higher capex and growth in inventory associated with the new stores. Sales cannibalization by new stores, out-ofstocks on key merchandise resulting from the implementation of a new inventory-replenishment system and poor in-store execution resulted in weak traffic and SSS performance. SSS growth recovered to 0.6% in the first three quarters of 2016 as the company fully lapped the 40 new stores opened in 2014, the impact of cannibalization softened and in-stock positions improved. Fitch projects SSS will approximate 1.0% in 2016, 1.5% in 2017 and 2.0% in 2018 due to efforts to improve the customer shopping experience through cleaner stores, better product layout and better in-stock levels.

Sales and Store Trends (Fiscal Period Ending)

4/2/11

3/31/12

3/30/13

1/31/14a

1/30/15

1/29/16

10/28/16b

Same-Store Sales (%)

0.7

7.3

4.3

3.7

0.4

(2.7)

0.6

Stores by Location California Texas Arizona Nevada Total

211 35 27 12 285

219 37 29 13 298

232 39 29 16 316

245 46 34 18 343

277 49 36 21 383

283 49 38 21 391

287 48 38 21 394

Net New Stores Selling Sq Ft (Mil.) % Change Sales/Sq Ft ($)

10 5 — 291

13 5 4.0 309

18 5 5.3 321

27 6 7.6 330

40 6 10.4 328

8 6 1.9 314

3 N.A. N.A. N.A.

10 months. bThird-quarter YTD. Sq Ft – Square foot. N.A. – Not available. Source: Company filings, Fitch Ratings.

Strategy to Turn Around Performance 99 Cents Only’s strategy to increase sales and profitability includes improving the customer shopping experience, reducing shrink and scrap, managing and reducing inventory, getting the right product to the right store at the right time, and reducing workers’ compensation claims by creating a culture of safety. The company also terminated margin-losing promotions; reverted to its legacy inventory system, which continues to be tweaked; and is taking a more measured approach to store growth. The company slowed net openings to eight in 2015 and expects to open five stores in 2016. The majority of store openings were in California.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Margin and Expense Trends — 99 Cents Only

Dollar Store EBITDA Margins (%)

99 Cents Only Dollar General

Dollar Tree Family Dollar

(%) 35

Gross Margin SG&A Margin

EBITDA Margin

7 0

(7)

0 2012

2013

2014

2015

LTM 10/16 Note: Family Dollar was acquired by Dollar Tree in July 2015, diluting the companies' margins from fiscal 2015. Source: Company filings, Fitch Ratings.

SG&A – Selling, general and administrative. Note: Family Dollar was acquired by Dollar Tree in July 2015. Source: Company filings, Fitch Ratings.

The company also reduced capex, guiding to $45 million–$47 million in 2016, down from $111 million in 2014, allowing it to preserve liquidity. The company indicated two-thirds of its 2016 capex is related to new or existing stores, and one-third to IT and supply chain maintenance. Fitch estimates ongoing maintenance capex of about $25 million, but believes capex will run at a higher level due to efforts to refresh stores. During the October 2016 quarter, 99 Cents Only announced plans to close five units by year end as leases expire. Fitch anticipates the potential for more store closures given still-difficult operating conditions and a significant number of expiring leases over the next several years. Leases associated with 104 of the company’s 391 properties are set to expire over 2017–2019, versus only seven expiring in calendar 2016. Fitch’s base case assumptions assume five store closures annually through 2018.

Differentiated Dollar Store Concept 99 Cents Only operates a chain of extreme value retail stores in the southwestern U.S. The company sells consumable products and other household and seasonal items, most of which are priced at $1 (officially 99.99 cents) or less. Approximately 60% of products are everyday items and 40% are closeout items, most of which are name brands, which helps create a treasure hunt aspect to the shopping experience.

Category Mix (%) Food and Grocery Household and Housewares Health and Beauty Care Hardware Stationery and Party Seasonal Other Total

FYE 3/30/13

10M 1/15/14

FYE 1/30/15

FYE 1/29/16

55 14 9 3 5 5 9 100

56 14 9 3 5 4 9 100

57 13 9 3 5 5 8 100

57 13 9 2 6 5 8 100

Source: Company filings, Fitch Ratings.

The company operates a store concept different from a typical dollar store. Stores are larger, with 16,000 square feet of average selling square footage. As shown in the Category Mix table at right, stores also offer a high proportion of grocery items. These grocery items, including fresh produce, deli, dairy, and frozen and refrigerated items, drive customer traffic. However, they have lower gross margins, and given the higher perishables component, are at higher risk of shrink and require higher labor costs to service these departments. The firm instituted a perishables initiative in 2016 to improve the customer shopping experience and drive traffic. Fitch believes the company’s increasing mix of food and grocery products could limit gross margin expansion and projects gross margins will expand to 30% by 2018 High-Yield Retail Checkout January 31, 2017

Leveraged Finance from a trough of 28.1% in 2015 due to less shrink and scrap, and higher product margin due to initiatives to minimize excess seasonal inventory in the nonfood categories.

Private Ownership Structure 99 Cents Only was acquired in January 2012 by Ares Management, the Canada Pension Plan Investment Board and the rollover investors (management and the Gold Revocable Trust). Total cash consideration was $1.6 billion, or roughly 12.0x EBITDA. The company bought out the Gold/Schiffer family for $129.7 million in October 2013, financed by upsizing the term loan by $100 million, and with cash on hand at the company and the parent. This followed the January 2013 resignation of CEO Eric Schiffer, President and Chief Administrative Officer Jeff Gold, and EVP of Special Projects Howard Gold from the company, and represents a disengagement from the company by the founding family.

Significant Management Turnover Significant management turnover occurred in the wake of 99 Cents Only’s weak operating results. Geoffrey J. Covert was appointed CEO and elected to the board of directors in September 2015. Mr. Covert spent 20 years with The Kroger Co., most recently leading nine retail divisions, and 22 years with Proctor & Gamble Co. in a variety of leadership roles. Previous CEO Stephane Gonthier, who was appointed in September 2013, was replaced on an interim basis by Board Chairman Andrew Giancamilli in May 2015. Felicia Thornton — who formerly held positions at DMS Inc.; New Albertsons, Inc.; and Kroger — replaced interim CFO and board member Michael Fung in November 2015, after 99 Cents Only’s previous CFO resigned after less than a year. Other new members of management include Jack L. Sinclair, who was named chief merchandising officer in July 2015 following the resignation of Michael Kvitko in January 2015.

Liquidity and Debt Structure 99 Cents Only’s liquidity consists mainly of roughly $49 million available on its asset-based loan (ABL) revolver as of Oct. 28, 2016, in addition to a small cash balance of around $2 million. The company amended its ABL facility in April 2016, reducing the facility size to $160 million and extending the maturity date to the earlier of April 2021 or 90 days prior to the maturity of the term loan and senior notes, if this debt is not refinanced or does not have extended maturities.

ABL Revolver Availability (Closest Calendar Quarter) ($ Mil.) 180 150 120 90 60 30 0 4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

ABL – Asset-based loan. Note: Fiscal year ends January. Source: Company filings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Liquidity Analysis — 99 Cents Only Stores LLC LTM

($ Mil.) Closest Calendar Quarter 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16F 2017F

Cash 34.8 34.1 15.6 16.2 12.5 2.4 2.3 2.6 2.3 2.4 2.3 2.4 3.0 4.0

Facility Borrowing Size Base 175.0 175.0 175.0 175.0 175.0 175.0 175.0 185.0 185.0 160.0 160.0 160.0 160.0 160.0

136.9 151.3 168.2 — — — — — 141.2 107.5 126.6 122.0 122.0 122.0

Borrowings 0.0 0.0 0.0 36.0 57.0 52.9 106.6 75.7 47.8 40.0 47.8 41.8 33.8 33.8

Revolver a LOC Availability 1.0 1.0 2.5 2.5 2.5 2.5 2.5 2.5 2.5 11.0 14.6 31.6 31.6 31.6

135.9 150.3 165.7 136.5 115.5 119.6 65.9 106.8 90.9 56.5 76.3 48.6 56.6 55.6

Total Liquidity

EBITDA

170.7 184.4 181.3 152.7 128.0 122.0 68.2 109.4 93.2 58.9 78.6 51.0 59.6 60.6

73.0 80.6 81.5 107.0 131.1 110.0 80.6 52.5 19.3 4.7 1.9 4.7 15.0 29.0

CFFO

80.9 57.3 39.9 29.1 38.2 38.1 (11.9) 12.9 31.7 37.1 81.3 37.8 18.0 (3.0)

Proceeds FCF Before from Asset c Capex Dividends Sales (62.1) (64.9) (73.6) (86.2) (111.4) (117.6) (111.1) (90.1) (66.0) (53.7) (46.2) (45.5) (45.0) (35.0)

18.8 (7.6) (33.7) (57.1) (73.2) (79.5) (123.0) (77.2) (34.3) (16.6) (35.1) (7.7) (27.0) (38.0)

1.5 1.5 1.5 0.1 0.0 1.5 10.1 30.9 40.8 41.4 62.8 52.4 42.0 42.0

Cash proceeds from sales-leasebacks assumed to approximate $42 Mil. in 2016 and $42 Mil. in 2017, limiting the need to draw on the revolver. bCFFO in secondquarter 2015 was negatively affected by lower earnings and increased outflows due to a reduction in accounts payable. cThe majority of asset sales have been sale and leaseback transactions with various accounting treatments. F – Forecast. CFFO – Cash flow from operations. Note: Fiscal year ends January. Source: Company filings, Fitch Ratings.

The borrowing rate is subject to quarterly adjustment, based on an average historical excess availability that was increased by $10 million with the amendment. However, it will be reduced by 50 bps should the term loan and notes be refinanced to mature after the ABL. 99 Cents Only’s cash balances declined significantly over the past three years to $2 million in the quarter ending October 2016 from $35 million in the fourth quarter of 2013. Fitch views the company’s revolver and proceeds from sale-leasebacks as a primary source of liquidity over the next year. The borrowing base is dependent on eligible credit card receivables, eligible inventory and corresponding advance rates for both, less certain reserves. Liquidity declined meaningfully below $100 million to about $50 million at fiscal third quarter end, due to significantly lower EBITDA. The company’s debt structure is around 75% secured and 25% unsecured. Debt inclusive of capital leases and financing obligations totaled $952 million at Oct. 28, 2016. The company had approximately $42 million drawn on the $160 million ABL revolver maturing in April 2021, $592 million outstanding (net of $3.2 million of unamortized original issue discount) on the secured term loan B maturing in January 2019 and $250 million of 11% senior unsecured notes maturing in December 2019. The ABL facility is guaranteed by the parent and subsidiary guarantors, and is secured by a first lien on current assets, a second lien on capital stock, and a second lien on intellectual property and certain owned real property. The term loan B is also guaranteed by the parent and subsidiary guarantors, and is secured by a first lien on the company’s equity interests and those of the guarantors, a first lien on intellectual property and certain owned real property, and a second lien on current assets.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Capital Structure ($ Mil., At Oct. 28, 2016) Description

Amount

(%)

Secured Debt $160 Mil. ABL Revolver due April 2021 Secured Term Loan due January 2019 Total Secured Debt

41.8 592.2 634.0

4.4 62.2 66.6

Unsecured Debt 11% Senior Unsecured Notes due December 2019 Total Unsecured Debt Other Including Capital Leases and Financing Leases a Total Debt

250.0 250.0 67.7 951.7

26.3 26.3 7.1 100.0

Net of $3.2 Mil. of original issuance discount and $9.4 Mil. of deferred financing costs. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 28, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 28, 2016) 6.1 6.1 831.6 — — —

Cash Revolver Availability Total

2.4 48.6 51.0

Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Note: Excludes capital leases, financial lease obligations and revolver maturities. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Recovery Analysis In accordance with Fitch’s Recovery Rating (rr*) methodology, issue ratings are derived from the Issuer Default Rating and the relevant rr*. Fitch’s recovery analysis assumes a going concern enterprise value (EV) after administrative claims of approximately $495 million. The EV assumes $1.8 billion of annualized revenue and a post-default EBITDA margin of 5% as the company takes corrective actions to restructure its operations. Applying this value across the capital structure leads to outstanding recovery prospects (91%–100%) for the ABL revolving credit facility, good recovery prospects (51%–70%) for the secured term loan and poor recovery prospects (0%–10%) for the senior unsecured notes.

Recovery Analysis — 99 Cents Only Stores LLC ($ Mil., Except Where Noted; Credit Opinion: cc*) Distressed Enterprise Value (EV) as a Going Concern (GC) Going Concern EBITDA GC EV Multiple (x) EV on GC Basis

90.0 5.5 495.0

Book Value 2.4 3.1 188.4 522.0 —

Liquidation Value (LV) Cash A/R Inventory Net PPE Total LV

Advance Rate (%) 0 80 70 20 —

Available to Creditors — 2.5 131.9 104.4 238.8

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

495.0 49.5 445.5

Distribution of Value Secured Priority Sr. Secured Revolvera Sr. Secured Term Loan Sr. Secured (Second Lien)

Amount 112.0 592.2 —

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Concession Allocation (5%) Value to be Distributed to Senior Unsecured Claims

Unsecured Priority Sr. Unsecuredb Unsecured Sr. Subordinated Subordinated Sr. Equity

Amount 293.2 0.0 0.0 0.0 0.0

Value Recovered 112.0 333.5 —

Recovery (%) 100 56 —

Recovery Rating rr1* rr3* —

Notching +3 +1 —

Credit Opinion ccc+* ccc–* —

Amount 445.5 445.5 — — — Value Recovered — — — — —

Recovery (%) 0 0 0 0 0

Recovery Rating rr6* — — — —

Notching –1 — — — —

Credit Opinion c* — — — —

a The revolver is assumed to be 70% drawn. bRepresents senior unsecured notes and one-third lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix A Organizational Structure — 99 Cents Only Stores LLC ($ Mil., As of Oct. 28, 2016) Ares Management LLC 62%

Canada Pension Plan Investment Board

Management

37%

Number Holdings, Inc.a

99 Cents Only Stores LLC (CO — cc*) Debt Issue $160 Mil. ABL Revolver due 4/8/21 Secured Term Loan B due 1/13/19b 11.000% Senior Unsecured Notes due 12/15/19 Other Total

Amount 42 592 250 68 952

CO ccc+*/rr1* ccc–*/rr3* c*/rr6* — —

Subsidiary Guarantorsc aGuarantees

credit facilities but not notes. bNet of $3.2 Mil. original issuance discount. cGuarantee both the credit facilities and the notes. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix B Bank Agreement Covenant Summary — 99 Cents Only Stores LLC Overview Borrower Document Date and Location

Maturity Date Description of Debt Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross Acceleration MAC Clause Equity Cure

Financial Covenants Coverage (Minimum)

Covenant Suspension Required Lenders/Voting Rights

99 Cents Only Stores LLC ABL facility dated 1/13/12, Exhibit 10.1 to 8-K filed 1/13/12 Amendment No. 2 dated 10/8/13, Exhibit 10.5 to 10-Q dated 11/8/13 Amendment No. 3 dated 8/24/15, Exhibit 10.1 to 8-K filed 8/25/15 Amendment No. 4 dated 4/8/16, Exhibit 10.1 to 8-K filed 4/11/16 The earlier of 4/8/21 or 90 days prior to the term loan maturity date of 1/13/19 and 90 days prior to the senior notes maturity date of 12/15/19, unless they have been repaid, refinanced or have an extended maturity date. ABL revolver $160 Mil.; incremental revolver capacity of $25 Mil. (must take form of a last-out term loan). Senior secured. The facility is secured by a first lien on personal property, a second lien on capital stock, and a second lien on intellectual property and certain owned real property. The facility is unconditionally guaranteed by Number Holdings, Inc. (Parent), and each of the company’s direct and indirect 100% owned subsidiaries except for immaterial subsidiaries.

Ratio Debt: Additional debt, including any incremental facilities, is permitted so long as the total leverage ratio does not exceed 4.5x. Notable Permitted Debt: 1) Capital leases and purchase money debt up to the greater of $50 Mil. or 2.75% of total assets; 2) Assumed acquisition debt not more than $35 Mil.; 3) Debt of a nonloan party up to $25 Mil.; and 4) All-purpose additional debt up to the greater of $75 Mil. or 4.0% of total assets. Permitted liens include a general carveout of $25 Mil. Consistent with limitations on debt incurrence.

If, prior to a qualifying IPO, anyone acquires more than 50% voting power and, after a qualifying IPO, anyone acquires more than 35% voting power, it is an event of default. Prior to the term/notes refinancing date, no extensions of credit under the facility shall be utilized to finance any permitted acquisition and no permitted acquisitions of subsidiaries that do not become guarantors or assets that do not become collateral shall be permitted. Pro forma for an acquisition, the total leverage ratio may not exceed 4.5x. Acquisitions of subsidiaries that do not become guarantors are limited to the greater of $50 Mil. and 2.75% of total assets. At least 75% of consideration must be in cash, and the noncash consideration is limited to the greater of $25 Mil. and 1.5% of total assets.

RPs are permitted so long as the payment conditions are met. These include no event of default exists and the fixed-charge coverage ratio is at least 2.0x. Other Notable Permitted RPs: 1) Repurchase of employee equity interests not to exceed $2 Mil. annually (can be carried over to a maximum of $4 Mil. in a year) prior to the term/notes refinancing date and $3.5 Mil. thereafter (can be carried over to a maximum of $10 Mil. in a year); 2) Additional RPs not to exceed the greater of $20 Mil.

Yes, exceeding $25 Mil. N.A. A MAC clause is in effect through the term of the agreement. There is a right to cure in up to two quarters out of each period of four fiscal quarters, and up to five times during the term of the agreement.

If a covenant trigger event shall be in effect, consolidated fixed-charge coverage shall not be less than 1.0x. covenant trigger event means excess availability is less than the greater of $15 Mil. and 10% of the lesser of the commitment or borrowing base; the covenant trigger shall be deemed continuing until excess availability is greater than or equal to the excess availability requirement for 30 days. No. Lenders holding more than 50% of all loans outstanding and unused revolving commitments.

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Bank Agreement Covenant Summary — 99 Cents Only Stores LLC (Continued) Financial Covenants Leverage (Maximum) Fixed-Charge Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

None. There is a 1.0x minimum fixed-charge coverage during covenant trigger events (when excess availability is less than the greater of 12.5% of the line cap or $20 Mil.). — —

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

N.A. N.A. Optional prepayment without prepayment penalty.

Pricing Coupon Type/Index Pricing Grid

Floating based off LIBOR Average Historical Excess Availability Applicable Rate > $110 Mil. LIBOR + 175 bps >= $55 Mil. but <= $110 Mil. LIBOR + 200 bps < $55 Mil. LIBOR + 225 bps The applicable margin is reduced by 0.50% after the term loan/notes refinancing date

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix C Term Loan Agreement Covenant Summary — 99 Cents Only Stores LLC Overview Borrower Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

99 Cents Only Stores LLC Term Loan dated 1/13/12, located in Exhibit 10.2 of 8-K dated 1/13/12 Second Amendment to Term Loan dated 10/8/13, located in Exhibit 10.6 of 10-Q dated 11/8/13 1/13/19 Senior secured term loan B $625 Mil. Senior secured. The facility is secured by a first lien on capital stock held by the immediate parent and by the company, a first lien on intellectual property and certain owned real property, and a second lien on current asset collateral. The facility is unconditionally guaranteed by Number Holdings, Inc. (Parent), and each of the company’s direct and indirect 100% owned subsidiaries except for immaterial subsidiaries.

Ratio Debt: Additional debt, including any incremental facilities, is permitted so long as the total leverage ratio does not exceed 4.5x. Notable Permitted Debt: 1) Capital leases and purchase money debt up to the greater of $50 Mil. or 2.75% of total assets; 2) Assumed acquisition debt not more than 35 Mil.; 3) Debt of a nonloan party up to $25 Mil.; and 4) All-purpose additional debt up to the greater of $75 Mil. or 4.0% of total assets. Permitted liens include a general carveout of $25 Mil. Consistent with limitations on debt incurrence.

If, prior to a qualifying IPO, anyone acquires more than 50% voting power and, after a qualifying IPO, anyone acquires more than 35% voting power, it is an event of default. Pro forma for an acquisition, the total leverage ratio may not exceed 4.5x. Acquisitions of subsidiaries that do not become guarantors are limited to the greater of $50 Mil. and 2.75% of total assets. At least 75% of consideration must be in cash, and the noncash consideration is limited to the greater of $25 Mil. and 1.5% of total assets.

RP Basket: $20 Mil. plus 50% of cumulative net income, and minus 100% of net losses, from March 31, 2013. Payment conditions include no event of default exists and the fixed-charge coverage ratio is at least 2.0x. Other Notable Permitted RPs: 1) Repurchase of employee equity interests up to $10 Mil. a year, which can be carried over for two years to a maximum of $30 Mil.; 2) Additional RPs not to exceed the greater of $40 Mil. or 2.0% of total assets.

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, exceeding $25 Mil. N.A. A MAC clause is in effect through the term of the agreement. No. No. Lenders holding more than 50% of the aggregate commitments.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

— — — —

Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule Callability/Optional Prepayment

Mandatory prepayment with x% of proceeds from: • Excess Cash: x = 0%–50%, based on leverage test. • Asset Sale: x = 100% of net proceeds, unless reinvested. • New Debt: x= 100% of net proceeds. 0.25% of the aggregate principal amount is payable quarterly until maturity. Optional prepayment without prepayment penalty.

Pricing Coupon Type/Index

Floating based off LIBOR (minimum floor of 1.00%) + 3.5% or Base Rate + 2.5%.

N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix D Bond Covenant Summary — 99 Cents Only Stores LLC Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross Default Cross Acceleration MAC Clause Equity Clawback Covenant Suspension

99 Cents Only Stores LLC Indenture dated 12/29/11 (Exhibit 4.1 to 8-K filed on 1/13/12) 12/15/19 Senior unsecured notes. $250 Mil. Senior None. The notes are unconditionally guaranteed on a senior unsecured basis by each of the company’s existing and future restricted subsidiaries.

Ratio Debt: Additional debt is permitted so long as the fixed-charge coverage ratio is at least 2.0x. Notable Permitted Debt: 1) Purchase money debt up to the greater of $50 Mil. and 2.75% of total assets; 2) Debt of restricted subs, incurred to finance or assumed in connection with an acquisition, of up to $20 Mil.; and 3) Debt of nonguarantor restricted subs of up to the greater of $25 Mil. and 1.5% of total assets. Allowed for permitted debt as long as the secured indebtedness leverage ratio would not exceed 3.5x. There is a general carveout of $25 Mil. Consistent with limitations on debt incurrence.

A CoC is defined as the acquisition of more than 50% of voting stock, unless the management group continues to hold at least 65% of the total voting power. In the event of a CoC, there is a required put at 101. Permitted only if the company becomes a corporation, partnership or LLC, and assumes the obligations of the notes, and provided the fixed-charge coverage ratio of the surviving entity is better than the issuer. At least 75% of consideration consists of cash or cash equivalents. Proceeds may be used to repay debt or invest in a permitted business within 450 days.

Limited to 50% of consolidated net income accrued on a cumulative basis from the issue date to the last day of the most recent completed quarter, plus repurchases of equity of up to $10 Mil. annually, which can be carried over for up to two years for a maximum of $30 Mil., plus other RPs not to exceed $40 Mil. or 2% of total assets.

No. Yes, exceeding $25 Mil. No. Maximum 35% with proceeds of equity offer at 111% until Dec. 15, 2014. Provided notes have investment-grade ratings and no event of default exists, certain covenants are suspended.

MAC – Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix E Financial Summary — 99 Cents Only Stores LLC 10 12 Months Months 3/31/12 3/30/13 1/31/14 1/31/15 12 Months

($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

12 Three Months Months LTM 5/1/15 7/31/15 10/30/15 1/29/16 1/29/16 4/29/16 7/29/16 10/28/16 10/28/16 Three Months

12.4 8.7 6.5 4.7 1.3 8.6

11.9 8.1 4.6 4.0 1.1 4.8

8.8 4.8 1.2 3.4 (5.0) 1.8

11.2 6.8 3.9 3.5 (3.8) 4.7

9.5 4.7 1.4 2.0 (1.1) 3.1

5.6 0.7 (3.0) (1.5) (12.4) 1.0

4.3 (0.7) (4.2) (2.4) 2.5 (1.0)

3.9 (0.8) (4.3) (2.4) 3.8 (3.3)

5.8 1.0 (2.5) (1.1) (1.7) (3.3)

6.5 1.8 (1.6) (0.5) 2.4 (4.4)

5.0 0.1 (3.6) (4.0) (1.8) (4.7)

4.7 (0.1) (3.9) (0.9) (6.1) (4.9)

5.0 0.2 (3.3) (1.9) (0.4) (4.9)

6.4 9.0 1.6

6.3 6.9 1.5

10.0 8.3 (5.7)

7.5 7.6 (4.5)

8.5 8.4 (4.7)

9.9 9.5 (6.9)

11.2 10.2 (4.4)

14.6 12.4 (2.0)

16.7 13.7 (1.0)

17.2 15.3 2.0

17.1 14.7 (0.4)

5.7 3.8

5.6 3.7

11.7 8.2

7.1 5.2

8.4 6.1

12.3 9.1

18.3 13.4

48.2 35.2

197.5 144.2

489.3 358.3

206.8 153.2

15.9

15.4

16.9

130.5

136.2

(69.4)

68.7

27.0

21.1

12.9

19.4

6.3 8.7 37.5

6.1 6.7 37.7

9.7 8.1 45.6

7.4 7.6 (12.6)

8.4 8.4 (11.6)

9.9 9.5 (8.0)

11.2 10.2 (12.4)

14.6 12.4 (27.0)

16.7 13.7 (55.6)

17.2 15.2 26.6

17.1 14.7 (124.1)

2.9 17.4 2.1 10.3 1.4

1.7 2.5 1.6 2.2 1.3

1.2 1.5 1.5 2.1 1.3

1.5 2.3 1.5 2.2 0.3

1.3 1.8 1.3 1.9 0.3

1.1 1.3 1.2 1.5 (0.1)

0.9 0.9 1.0 1.1 0.1

0.7 0.3 0.9 0.6 0.5

0.6 0.1 0.8 0.4 0.7

0.6 0.0 0.7 0.2 1.8

0.6 0.1 0.8 0.4 0.8

764 1,221 457 — (8) 2.0

759 1,263 504 — (54) 7.1

856 1,439 584 — (48) 5.6

933 1,617 684 — (58) 6.5

928 1,708 780 — (60) 6.7

990 1,770 780 — (60) 6.5

958 1,738 780 — (61) 6.6

929 1,709 780 — (61) 6.6

925 1,705 780 — (61) 6.6

934 1,714 780 — (61) 6.4

964 1,744 780 — (61) 6.3

(7)

(12)

(13)

(22)

(2)

(20)

(5)

(39)

(6) 66 — (47) — 20 (1,478) 763 538

15 81 — (62) — 19 — (5) —

29 81 — (62) — (77) — 94 —

(30) 38 — (111) — (73) — 51 —

10 20 — (26) — (5) — (6) (0)

(36) (43) — (18) — (61) — 52 (0)

36 24 — (12) — 12 — (33) 0

42 30 — (10) — 20 — (30) 0

53 32 — (66) — (34) — (16) (0)

28 26 — (13) — 12 — (8) —

21 1 — (11) — (9) — 9 —

(14) (19) — (11) — (30) — 30 —

77 38 — (46) — (8) — 1 0

168 11

4 18

(28) (11)

(0) (22)

1 (10)

9 (0)

20 0

10 (0)

40 (10)

(5) 0

0 (0)

1 0

7 (0)

31 175

45 174

35 174

12 116

2 120

2 66

3 107

2 125

2 124

2 140

2 49

110 0.7 80.2 16.5 3.1

99 0.4 71.6 17.8 3.7

70 0.4 79.6 17.4 4.1

84 0.4 82.6 38.8 5.8

81 0.4 77.7 37.6 5.1

125 0.3 70.2 21.9 3.7

91 0.3 66.6 24.7 2.4

46 0.3 46.6 18.8 2.0

46 0.3 49.8 20.1 3.3

17 0.3 41.3 18.4 2.6

(3) 0.3 44.5 26.6 2.1

12 0.6 47.8 22.3 2.3

12 0.6 47.3 22.1 2.2

EBITDA/R after dividends to associates and minorities. bSame-store sales for the LTM reflect the nine months ended Oct. 28, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Summary — 99 Cents Only Stores LLC (Continued) 10 12 Months Months 3/30/13 1/31/14 1/31/15

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Same-Store Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

3/31/12

12 Three Months Months LTM 5/1/15 7/31/15 10/30/15 1/29/16 1/29/16 4/29/16 7/29/16 10/28/16 10/28/16 Three Months

1,532 7.6 190

1,669 8.9 199

1,529 (8.4) 134

1,927 26.0 217

506 5.9 48

489 6.6 28

491 2.8 21

518 1.0 20

2,004 4.0 117

513 1.3 33

496 1.6 25

500 1.8 24

2,027 1.4 102

190 133

199 136

134 73

217 131

48 24

28 3

21 (3)

20 (4)

117 19

33 9

25 0

24 (1)

102 5

133 100

136 77

73 19

131 75

24 7

3 (15)

(3) (21)

(4) (22)

19 (51)

9 (8)

0 (18)

(1) (20)

5 (68)

7.3 298 40.3 (0.5) 4.6 22.1 11.2 2.5 140.7

4.3 316 38.4 (1.7) 5.1 20.6 10.0 (0.5) 109.7

3.7 343 38.1 (1.6) 4.6 13.3 5.9 (0.7) 117.4

0.0 383 32.1 2.0 4.4 9.4 11.1 0.3 203.8

(1.7) 386 30.9 85.9 4.4 9.2 9.9 (0.1) 157.9

(1.9) 389 27.8 85.9 5.0 16.1 8.0 (4.4) 104.2

(3.9) 389 26.8 82.0 5.3 14.3 7.0 (13.5) 70.9

(3.2) 391 26.7 70.3 7.3 18.2 3.9 (14.7) 58.2

(2.7) 391 28.1 (4.4) 7.3 18.2 3.9 (14.7) 96.8

0.4 392 29.0 70.8 8.7 19.5 2.7 (16.9) 79.2

1.1 394 28.4 72.0 8.3 13.9 2.5 (14.2) 59.4

0.8 394 29.0 67.6 7.7 16.5 2.6 (6.9) 61.3

0.6 394 29.0 67.6 7.7 16.5 2.6 (6.9) 61.3

a EBITDA/R after dividends to associates and minorities. bSame-store sales for the LTM reflect the nine months ended Oct. 28, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

Abercrombie & Fitch Co. Credit Profile Credit Opinion

Credit Profile Summary

Abercrombie & Fitch Co. Long-Term Issuer Default Credit Opinion

b–*/stable

Abercrombie & Fitch Management Co. Long-Term Issuer Default Credit Opinion Senior Secured ABL Revolver Credit Opinion Senior Secured Term Loan Credit Opinion

b–*/stable bb–*/rr1* bb–*/rr1*

ABL – Asset-based loan.

Financial Data

Weak Sales Trends: Abercrombie & Fitch Co.’s long-term business trajectory is uncertain, with average annual comparable store sales (comps) of negative 7% the past three years and negative 5% YTD October 2016. Sales have declined due to fickle teen tastes, exacerbated by weakness in midmarket, mall-based apparel. Mall-based apparel retailers face diversion of discretionary spending to areas such as technology subscriptions and experiences; a lack of compelling fashion trends; and share shifts to fast-fashion, off-price and online competitors. EBITDA Erosion: Following weak sales, EBITDA margin fell to 10.5% in 2015 from 14.5% in 2012 and a recent peak of 15.6% in 2010. EBITDA fell 43% from 2012 to $370 million in 2015. LTM October 2016 margins fell further to 8.6%. Margin declines are driven by selling, general and administrative (SG&A) deleverage on negative comps, with SG&A margin rising 440 bps to 57.5%. Gross margin have fallen only 90 bps from recent peak levels of 62.9% in 2013 as the company experienced limited markdowns due to generally reasonable inventory management. Multifaceted Plan to Stabilize Sales: The company embarked upon a number of initiatives in 2013 to reverse sales declines, including improving customer relationships via data analytics, reducing product speed to market, and pruning the real estate base while investing in online capabilities and assortments. Despite some stabilization in trends at Hollister (54% of LTM October 2016 revenue) over the past year, continued negative sales and EBITDA trends at the company suggest the efforts have yet to effectively battle Abercrombie’s broader headwinds. Worsening Credit Metrics: Lease-adjusted leverage was approximately 5.0x at LTM October 2016, from 4.6x at the end of 2015 and 3.0x in 2012 on lower EBITDA and a $300 million term loan issued in 2014. The loan was issued to refinance $190 million of existing debt for general corporate purposes and to support the company’s share-repurchase program. Fitch Ratings expects continued comps declines could result in leverage trending to the 6.0x range over the next 24–36 months.

Abercrombie & Fitch Co. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/(Interest + Rent) (x) Comparable Store Sales (%)a No. of Stores

FYE LTM 1/30/16 10/29/16 3,518.7 3,403.3 369.9 292.4 10.5 8.6 111.7 76.1 3,462.3 3,465.3 4.6

5.1

1.9

1.7

(3.0) 932

(5.0) 930

Comparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016.

Adequate Liquidity: Despite operating challenges, FCF generally remained positive other than a temporary, unanticipated inventory increase in 2013 related to sharp sales declines. The company generated $112 million in FCF in 2015 after investing 4% of sales in capex, ending the year with $589 million of cash and $265 million availability on its revolver. However, given continued comps declines, FCF could be close to break-even over the next several years.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include stabilization of comps and EBITDA margin trends, suggesting recent marketing initiatives have gained traction with customers and yielding improved confidence in the company’s longer term brand turnaround. Negative Drivers: Negative credit profile drivers include accelerations in comps declines, resulting in consistently negative FCF generation and concerns around brand and business model sustainability.

Analysts David Silverman +1 212 908-0840 david.silverman@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch Base Case Assumptions — Abercrombie & Fitch Co. 2015A

2016F

2017F

2018F

Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases

3,519 (6.0) (3.0) 370 10.5 72 310 (143) 4.1 (55) 112 (50)

3,330 (5.4) (4.8) 255 7.6 (13) 225 (140) 4.2 (57) 17 —

3,182 (4.4) (4.0) 217 6.8 3 204 (140) 4.4 (57) 7 —

3,042 (4.4) (4.0) 167 5.5 4 156 (140) 4.6 (57) (41) —

Total Debt a Total Adjusted Debt

341 3,462

338 3,397

335 3,333

332 3,345

4.6

5.3

5.6

6.2

($ Mil.)

Total Adjusted Debt/EBITDAR (x)

Comments — — — — Fixed-cost deleverage. — — — — — Repurchase decisions made quarterly. — Decline in 2017 due to store closures in 2016. —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Abercrombie is a specialty apparel retailer that generally markets to teens and young adults. The company operates two brands, Abercrombie & Fitch (A&F) and Hollister, each of which contributed approximately half of company revenue in 2015. The A&F brand portrays a modern American preppy aesthetic, while Hollister’s image conjures a beachside Southern California lifestyle. A&F’s price points sit at the upper end of midmarket specialty apparel while Hollister is closer to the middle. The A&F brand also includes abercrombie kids stores, which cater to a younger customer. As a specialty apparel retailer, both brands compete with a number of direct competitors and alternate formats. Direct specialty competitors include The Gap (owned by The Gap, Inc.), Aeropostale, American Eagle, Express and a multitude of other mall-based retailers. Beyond specialty, Abercrombie competes with department stores, fast-fashion retailers, online-only players and off-price retailers. Mall-based, mid-tier specialty apparel retailers have faced a number of challenges in recent years. Lack of compelling fashion trends and redeployment of consumer budgets to services such as travel, entertainment, and technology subscriptions contributed to comps weakness for many sector participants. Mall traffic declines and the rise of online shopping habits, especially among the teen and young adult demographic, have exacerbated the challenges at physical retail locations. Fitch also believes customers are increasingly price bifurcating their apparel and accessories purchases. The rise of fast-fashion retailers allows customers to buy trend-right merchandise of acceptable quality at prices significantly lower than mid-tier mall competitors, including specialty stores and department stores. Continued acceptance of, and therefore growth in, the off-price channel is further pressuring mid-tier apparel competitors. Fitch believes customers are also trading up for investment pieces at high-end retailers, which are aspirational in terms of either quality or brand value. Mid-tier players such as Abercrombie are seeing growth stagnate as they fall victim to these issues. Several of these trends appear to be even more pronounced in the teen/young adult High-Yield Retail Checkout January 31, 2017

Leveraged Finance space, which disproportionately affected Abercrombie versus other mid-tier players. Abercrombie also had to tackle branding challenges, particularly at its A&F brand, as teenfocused specialty retailers are susceptible to popularity cycles. The company outlined a number of opportunities to improve sales trends late in 2013. Elements of the plan include the use of customer data to improve segment marketing, investing in online capabilities, and having online-only inventory and assortments. Abercrombie also targeted a reduction in product-sourcing timelines, a simpler and clearer promotional message, a rationalization of store count and selective remodels. Although the company reduced store counts for several years prior to these initiatives, it closed a net 46 domestic A&F stores and 46 domestic Hollister stores between February 2014 and October 2016 as part of its sales-improvement strategy, with domestic store count declining approximately 10%. Net company closures totaled 60 due to 17 and 15 international A&F and Hollister openings, respectively, over the same period. Abercrombie has focused on closing underperforming full-line stores, especially as leases expire, resulting in increased outlet penetration and a more profitable store base. The company has also adjusted the formats of new units to reduce construction costs per store. International expansion remains a strategic priority given strong comps in countries such as China and Japan. Despite these initiatives, sales have continued to decline. Annual comps were negative 11% in 2013, negative 8% in 2014 and negative 3% in 2015, with negative 5% comps in the first nine months of 2016. Weakness is more pronounced at A&F, offset by relative strength in Hollister, where comps steadily improved to flat in 2015 from negative 14% in 2013. Geographically, the International segment (35% of 2015 sales) has recently shown more weakness than U.S. operations, with comps declining 7% in the first nine months of 2016, versus U.S. declines of 4% in the same period. The company’s e-commerce initiatives have shown positive results in the company’s direct-to-consumer (primarily online) business, which grew revenue 5% in 2014 and 3% in 2015, representing 24% of 2015 revenue versus midteens penetration in 2011–2012. The company began the process of repositioning both the A&F and Hollister brands in secondquarter 2016. The goal for Hollister is to be a teen-oriented brand with a carefree California attitude. The A&F brand is being repositioned to be the iconic American casual luxury brand for the 20-something consumer demographic, offering quality and style at a reasonable price. The company is remodeling 64 Hollister stores in 2016 — 52 as of the end of third-quarter 2016 — as part of the brand repositioning, and indicated positive early results. A new A&F prototype will open in 2017.

Same-Store Sales by Brand Abercrombie

(%)

Hollister

Total Company

8 4 0 (4) (8) (12) (16) 1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Source: Company filings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Same-Store Sales by Geography U.S.

(%)

International

Total Company

8 4 0 (4) (8) (12) (16) (20) 1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Source: Company filings.

Operating Performance Revenue peaked in 2012 at $4.5 billion and has fallen each year thereafter, on negative annual comps (negative 7% average) and net store closures for both brands. Gross margins declined to the high-61% range from the high-62% range in 2012 and 2013, primarily due to the deleveraging impact of negative comps on fixed costs. The company is generally effective in managing inventory, which limits the need for excessive markdowns. However, SG&A margins increased to the mid-57% level from the low-53% range, as the impact of negative comps on fixed costs are not mitigated by expense management. EBITDA consequently declined to $370 million in 2015 from $654 million in 2012, with margins declining to 10.5% from 14.5% during that time.

Abercrombie Cost Breakdown SG&A (Excl. D&A) Operating EBITDA

($ Mil.) 5,000

Cost of Goods Sold Operating EBITDA Margin (RHS)

(%) 20

4,000

3,000

2,000

1,000

4 0

0 2010

2011

2012

2013

2014

2015

D&A â&#x20AC;&#x201C; Depreciation and amortization. Source: Company filings, Fitch Ratings.

FCF, which was nearly $300 million in 2012, declined to an outflow of $50 million in 2013 due primarily to the EBITDA decline and an increase in working capital (inventory) that was reversed in 2014. Cash flow declines were somewhat mitigated by a reduction in capex as the company slowed expansion plans. FCF became positive at around $100 million in 2014 and 2015.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Breakdown Across Segments and Geography — Abercrombie & Fitch 2011

2012

2013

2014

2015

LTM 10/29/16

2,063 2,022 73 4,158

2,087 2,315 110 4,511

1,894 2,128 95 4,117

1,771 1,948 25 3,744

1,641 1,878 — 3,519

1,554 1,849 — 3,403

10.0 30.2 81.3 19.9

1.1 14.5 50.2 8.5

(9.2) (8.1) (13.2) (8.7)

(6.5) (8.5) (73.9) (9.1)

(7.3) (3.6) — (6.0)

(6.2) (1.0) — (3.5)

49.6 48.6 1.8 100.0

46.3 51.3 2.4 100.0

46.0 51.7 2.3 100.0

47.3 52.0 0.7 100.0

46.6 53.4 — 100.0

45.7 54.3 — 100.0

Comps (%) A&F Hollister Total

3.0 8.0 5.0

(3.0) (1.0) (1.0)

(10.0) (14.0) (11.0)

(4.0) (10.0) (8.0)

(6.0) 0.0 (3.0)

(10.0) (1.0) (5.0)

Domestic Store Count A&F Hollister Total

434 490 924

407 478 885

384 458 842

361 433 794

340 414 754

333 412 745

International Store Count A&F Hollister Total Total Store Count

19 77 96 1,020

25 107 132 1,017

27 129 156 998

32 135 167 961

39 139 178 932

41 144 185 930

Sales Contribution by Geography ($ Mil.) U.S. Europe Other Total

3,108 823 227 4,158

3,087 1,138 286 4,511

2,659 1,117 341 4,117

2,408 960 376 3,744

2,282 833 404 3,519

2,182 802 420 3,403

— — —

(0.7) 38.3 25.8

(13.9) (1.8) 19.3

(9.4) (14.0) 10.1

(5.2) (13.2) 7.5

(5.1) (2.9) 5.0

74.8 19.8 5.5 100.0

68.4 25.2 6.3 100.0

64.6 27.1 8.3 100.0

64.3 25.6 10.0 100.0

64.9 23.7 11.5 100.0

64.1 23.6 12.3 100.0

541 — 13.0

722 33.5 16.0

782 8.4 19.0

824 5.3 22.0

845 2.5 24.0

— — —

Sales ($ Mil.) A&F Hollister Other Total YoY Growth (%) A&F Hollister Other Total Sales Contribution by Brand (%) A&F Hollister Other Total

YoY Growth (%) U.S. Europe Other Sales Contribution by Geography (%) U.S. Europe Other Total Direct To Consumer Segment Estimated Sales ($ Mil.) YoY Growth (%) % of Total Sales

YoY – Year-over-year. Note: Beginning at the end of fiscal 2014, the company began combining A&F and abercrombie kids in comparable store sales calculations. In 2014, Abercrombie also restated its store count to not include abercrombie kids stores within an A&F store as a separate store, reducing store count by eight in 2014. Comparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016. Source: Company filings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance 2017 Outlook Fitch expects Abercrombie’s revenue to decline by around 5% in 2016 to $3.3 billion, primarily due to negative midsingle-digit comps. If the company’s brand positioning and remodel strategy is unsuccessful in mitigating ongoing challenges, comps and sales trends could remain in this range, yielding around $3.0 billion in revenue in two to three years. Fitch expects the company to net close 8–10 stores per year, with domestic closures mitigated by a few international openings each year. Hollister comps trends are expected to continue to somewhat outperform those at A&F. Negative comps are expected to drive an approximately 30% decline in EBITDA in 2016 — down around 40% in the first nine months of the year — to $250 million. EBITDA margins are projected to decline around 300 bps in 2016 to the mid-7.0% level. Given negative sales expectations over the next 24–36 months, EBITDA could decline toward around $170 million, with margins trending to the mid-5.0% range. FCF is expected to be modestly positive in 2016 and 2017, versus $112 million in 2015 on EBITDA declines. Beginning in 2018, annual FCF could turn somewhat negative on continued EBITDA declines, to the negative $10 million level. The company eliminated its sharerepurchase program during 2015; the board of directors makes buyback decisions on a quarterly basis depending on the state of current operations and alternative cash opportunities. Debt paydown, other than amortization, is not expected. Adjusted leverage, which was 4.6x in 2015, is expected to be approximately 5.3x in 2016. Continued EBITDA declines could drive leverage toward 6.0x thereafter.

Liquidity and Debt Structure Abercrombie had $469.7 million in cash and $360.3 million available under its $400 million asset-based loan (ABL) revolver as of Oct. 29, 2016. The revolving credit facility has a first lien on inventory, accounts receivable and other working capital, and a second lien on real estate, property and equipment, and intellectual property.

Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $400 Mil. ABL Revolver due 8/7/19 Senior Secured Term Loan due 8/7/21 Total Secured Debt

0.0 293.3 293.3

0.0 85.7 85.7

Capital Leases Total Debt

48.8 342.1

14.3 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 2.9 2.9 2.9 2.9 280.1 —

Cash Revolver Availability Total

469.7 360.3 830.0

Note: Revolver availability is net of borrowings, letters of credit outstanding and limits as a result of the borrowing base as disclosed by the company. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Abercrombie issued a $300 million seven-year term loan in August 2014 to refinance approximately $190 million of existing debt and for general corporate purposes, including share repurchases. The term loan has a first lien on real estate, property and equipment, and intellectual property, and a second lien on inventory, accounts receivable and other working capital.

Recovery Analysis Given Abercrombie’s EBITDA generation and limited outstanding debt, recovery prospects are strong. Fitch assumes a distressed EBITDA of $200 million, approximately 20% below current levels but above Fitch’s long-term EBITDA forecast. Achievement of $200 million in run-rate EBITDA would result from closure of around 15%–20% of Abercrombie’s store base and stabilized comps trends at the remaining chain. Fitch assumes a 4.0x enterprise value/EBITDA multiple, at the low end of the typical 4.0x–6.0x range for retailers. This yields a going concern value of $800 million, substantially higher than the liquidation value of approximately $600 million. Fitch assumes a 70% draw on the $400 million ABL. The ABL and term loan are fully recovered with $280 million in value remaining. Thus, both are assigned a ‘bb–*/rr1*’.

Recovery Analysis — Abercrombie & Fitch Co. ($ Mil., Except Where Noted; Credit Opinion: b–*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Projected Post-Default EBITDA GC EV Multiple (x) Distressed EV on GC Basis

200.0 4.0 800.0

Book Value

Advance Rate (%)

Avail. to Creditors

469.7 71.2 516.1 894.2 —

0 80 70 20 —

 57.0 361.3 178.8 597.1

Cash A/R Inventory Net PPE Total LV

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

800.0 80.0 720.0

Distribution of Value Secured Priority Sr. Secured Facilitya Sr. Secured Term Loan

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

280.0 293.3

100 100

rr1* rr1*

+3 +3

bb–* bb–*

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecuredb Sr. Subordinated Subordinated

0.0 0.0 

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

130.1  —

130.1  

100  

  

a Fitch assumes the $400 Mil. credit facility is 70% drawn in a distressed scenario. bSenior unsecured debt includes estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix A Organizational Structure — Abercrombie & Fitch Co. ($ Mil., As of Oct. 29, 2016) Abercrombie & Fitch Co. (Parent/Guarantor) (CO — b–*/stable)

Abercrombie & Fitch Holding Corporation (Guarantor)

100% Owned Abercrombie & Fitch Distribution Company (Guarantor)

Abercrombie & Fitch Management Co. (Borrower) (CO — b–*/stable) Debt Issue $400 Mil. ABL Revolver Due 2019a $300 Mil. Secured Term Loan Due 2021 Total

Subsidiary Guarantors

Amount — 293.3 293.3

CO bb–*/rr1* bb–*/rr1* —

Nonguarantor Subsidiaries

aABL facility is subject to a borrowing base. At Oct. 29, 2016, revolver availability is $360.3 Mil. net of $1.7 Mil. letters of credit. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix B Bank Agreement Covenant Summary — Abercrombie & Fitch Management, Co. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Event

Key Definitions

Pricing Coupon Type/Index Pricing Grid

Abercrombie & Fitch Management, Co. Credit Agreement dated 8/7/14 (Exhibit 10.3 to 10-Q filed 9/5/14) Senior secured asset-based revolving credit facility of up to $400 Mil. subject to a borrowing base equal to 90% of eligible credit/debit card receivables plus 85% of eligible trade receivables plus 90% of eligible inventory appraised at the lower of cost or market value. 8/7/19 $400 Mil. Senior secured. Secured by a first lien on A/R and inventory; a second lien on all other tangible and intangible assets, and 100% of equity interests in domestic term loan parties and 65% of equity interests in foreign term loan parties. Guaranteed by the ultimate parent (Abercrombie & Fitch Co.), the borrowers and all domestic material subsidiaries on a senior secured basis.

Notable Permitted Debt: 1) Capital lease obligations. 2) $300 Mil. term loan facility and any incremental debt permitted to be incurred by the term loan documents. 3) $100 Mil. of foreign subsidiary indebtedness, reduced by the amount drawn in foreign subfacility. 4) No cap on subordinated debt and other unsecured non-amortizing debt provided maturity is after the ABL. Liens securing ABL agreement not to exceed the greater of $500 Mil. or the borrowing base, subject to the intercreditor agreement. General carveout of $25 Mil. Guarantees are defined as debt and hence governed by the debt restrictions.

A CoC is defined as the acquisition of more than 33% of voting stock of the company or if Abercrombie & Fitch Co. (the parent) owns less than 100% of the equity of the loan parties except when this is permitted by the loan document. CoC constitutes an event of default. M&A and investments permitted if payment conditions are satisfied as defined below. Equipment disposition limited to $10 Mil. per year, unless equipment is worn, damaged, obsolete or no longer useful. Permitted dispositions of inventory in connection with store closures allowed, limited to dispositions associated with 60 closures per annum net of openings and 150 closures in total, over the life of the facilities. Other dispositions allowed as long as payment conditions, as defined below, are satisfied.

Allowed if Payment Conditions, as defined below, are satisfied.

Yes, for material indebtedness of more than $25 Mil. N.A. Yes. N.A. The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility upon occurrence of a cash dominion event, which means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of 12.5% of loan cap or $35 Mil. for five consecutive days. Payment Conditions are defined as: 1) No event of default (EoD) has occurred; the pro forma loan cap for the next 12 months is the greater of 17.5% and $50 Mil., and over the next 12 months the pro forma fixed-charge coverage ratio exceeds 1.0x; 2) No EoD has occurred and the pro forma loan cap for the next 12 months is the greater of 25% and $75 Mil.; or 3) No EoD has occurred and the current loan cap is the greater of 35% and $100 Mil. Loan cap is defined as the lesser of aggregate commitments ($400 Mil.) and the borrowing base.

Floating based off LIBOR or BR. BR is either the federal funds rate + 50 bps, LIBOR + 100 bps or the prime rate as defined by Wells Fargo. ABL Facility: LIBOR + 125 bps−175 bps or BR + 25 bps−75 bps, depending on average daily availability. Commitment Fee: 0.250% of aggregate commitments minus total outstanding loans.

ABL − Asset-based loan. A/R − Accounts receivable. N.A. – Not applicable. MAC − Material adverse change. EoD – Event of default. BR – Base rate. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Term Loan Agreement Covenant Summary — Abercrombie & Fitch Management, Co. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction Sale of Assets Restriction

Abercrombie & Fitch Management, Co. Credit Agreement dated 8/7/14 (Exhibit 10.4 to 10-Q filed 9/5/14) Senior secured term loan. 8/7/21 $293 Mil./$300 Mil. Senior secured. Secured by a first lien on all other tangible assets, intangible assets,100% of equity interests in domestic term loan parties and 65% of equity interests in foreign term loan parties. Second lien on A/R and inventory. Guaranteed by the ultimate parent (Abercrombie & Fitch Co.), the borrowers and all domestic material subsidiaries on a senior secured basis.

Notable Permitted Debt: 1) Capital lease obligations. 2) $400 Mil. ABL Facility up to the higher of $500 Mil. and the borrowing base. 3) $100 Mil. of foreign subsidiary indebtedness. 4) $50 Mil. unsecured indebtedness with a maturity at least six months after the term loan with no interim amortization. 5) No cap on unsecured, non-amortizing debt provided maturity is 91 days after the term loan and the pro forma leverage ratio is below 3.0x. General carveout of $25 Mil. Guarantees are defined as debt and hence governed by the debt restrictions.

A CoC is defined as the acquisition of more than 33% of voting stock of the company or if Abercrombie & Fitch Co. (the parent) owns less than 100% of the equity of the loan parties except when this is permitted by the loan document. CoC constitutes an event of default. Investments in similar businesses if the leverage ratio does not exceed 2.0x on a pro forma basis and in any amount if the aggregate amount of investments does not exceed $50 Mil. Acquisitions permitted if the leverage ratio is below 3.0x on a pro forma basis. Equipment disposition limited to $10 Mil. per year, unless equipment is worn, damaged, obsolete or no longer useful. Permitted dispositions of inventory in connection with store closures allowed, limited to dispositions associated with 60 closures per annum net of openings and 150 closures in total, over the life of the facilities. Other dispositions allowed as long as payment conditions, as defined below, are satisfied.

Restricted Payments Restricted Payments (RP)

Limited to $200 Mil. of the term of the agreement, or in any amount if pro forma leverage is below 2.0x.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, for material indebtedness (more than $50 Mil.). N.A. Yes. None. None. 50% of total commitments.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

 —  

Principal Repayments Mandatory/Tax Prepayment

Callability/Optional Prepayment Pricing Coupon Type/Index Pricing Grid

50% of excess cash flow, with a stepdown to 25% if total leverage is less than 1.75x, then 0% if total leverage is less than 1.0x; 100% of net proceeds from asset sales over $25 Mil. subject to company’s reinvestment rights; 100% of net proceeds from debt issuance other than debt permitted under the credit facilities. Optional prepayment with or without prepayment penalty.

Floating based off LIBOR or BR. BR is either the federal funds rate + 50 bps, LIBOR + 100 bps or the prime rate as defined by Wells Fargo. Term Loan: LIBOR + 375 bps or BR + 275 bps .

A/R − Accounts receivable. ABL − Asset-based loan. N.A. – Not applicable. MAC − Material adverse change. BR – Base rate. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix C Financial Summary — Abercrombie & Fitch Co. 12 Months 1/28/12 ($ Mil.) Profitability (%) Operating EBITDAR Margin 24.3 Operating EBITDA Margin 14.4 Operating EBIT Margin 8.8 FFO Margin 10.1 FCF Margin (0.3) Return on Capital Employed 15.5 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 3.2 FFO-Adjusted Leverage 3.9 FCF/Total Adjusted Debt (%) (0.4) Total Debt with Equity Credit/ Operating EBITDAa 0.0 Total Secured Debt/Operating EBITDAa — Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 7.2 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 2.6 FFO-Adjusted Net Leverage 3.1 Total Net Debt/(CFFO – Capex) (14.3) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a 2.4 Operating EBITDA/Interest Paida 166.4 FFO Fixed-Charge Coverage 2.0 FFO Interest Coverage 117.6 CFFO/Capex 1.1 Debt Summary Total Debt with Equity Credit 0 Total Adjusted Debt with Equity Credit 3,278 Lease-Equivalent Debt 3,278 Other Off-Balance Sheet Debt — Interest (Paid) (4) Implied Cost of Debt (%) 0.0 Cash Flow Summary FFO 420 Change in Working Capital (Fitch Defined) (55) CFFO 365 Non-Operating/Nonrecurring Cash Flow 0 Capital (Expenditures) (319) Common Dividends (Paid) (61) FCF (14) Acquisitions and Divestitures 0 Net Debt Proceeds (45) Net Equity Proceeds (197) Other Investing and Financing Cash Flows 13 Total Change in Cash and Equivalents (243) Liquidity Readily Available Cash and Equivalents 429 Availability Under Committed Credit Lines 350 Not Readily Available b Cash and Equivalents 239 Working Capital Net Working Capital (Fitch Defined) 73 Trade Accounts Receivable (Days) 7.8 Inventory Turnover (Days) 126.9 Trade Accounts Payable (Days) 47.1 Capital Intensity (%) 7.7

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

2/2/13

2/1/14

1/31/15

5/2/15

23.2 14.5 9.5 10.3 6.4 18.5

22.7 12.2 6.5 8.6 (1.2) 11.7

22.4 11.5 5.5 7.7 2.2 9.5

14.6 0.8 (6.7) (11.4) (19.4) 8.1

21.4 9.5 2.8 3.8 2.4 8.1

23.3 12.2 6.2 12.4 4.2 6.9

24.9 16.1 11.3 16.0 17.3 8.0

21.6 10.5 4.4 6.8 3.2 8.0

14.2 (0.1) (7.5) (2.3) (16.9) 8.0

17.1 4.6 (1.7) 2.6 (3.5) 6.3

21.3 9.4 3.7 12.0 3.3 5.0

20.1 8.6 2.7 8.3 2.2 5.0

3.1 3.7 9.0

3.9 4.6 (1.4)

4.3 5.1 2.2

4.3 5.1 1.0

4.4 5.4 2.8

4.6 5.3 4.3

4.5 5.4 3.2

4.6 5.4 3.2

4.6 4.9 3.8

4.9 5.0 2.5

5.1 5.1 2.2

0.1 0.1

0.4 0.4

0.8 0.8

0.9 0.9

1.1 1.1

1.2 1.2

4.3

8.2

6.6

6.9

6.2

5.7

6.2

6.0

6.5

6.7

2.4 3.0 (1.7)

3.3 3.9 (34.9)

3.7 4.3 (1.2)

3.9 4.5 (0.9)

3.9 4.7 (0.7)

4.1 4.7 (0.5)

3.8 4.5 (1.5)

4.0 4.2 (0.8)

4.2 4.4 (0.8)

4.4 4.4 (1.0)

2.6 89.6 2.2 64.7 2.0

2.1 67.0 1.8 48.0 1.1

2.0 23.2 1.7 16.4 1.8

1.9 18.9 1.6 13.1 1.6

1.8 16.8 1.5 10.6 1.9

1.8 16.4 1.6 11.8 2.4

1.9 23.0 1.6 15.8 2.2

1.9 23.0 1.6 15.5 2.2

1.9 22.6 1.7 19.5 2.4

1.8 20.2 1.7 19.1 2.1

1.7 19.0 1.7 19.0 2.0

64 3,194 3,130 — (7) 22.8

199 3,660 3,461 — (8) 5.7

350 3,613 3,263 — (19) 6.8

299 3,422 3,123 — (20) 13.7

298 3,421 3,123 — (22) 15.0

297 3,420 3,123 — (21) 14.3

341 3,458 3,117 — (16) 5.0

341 3,462 3,122 — (16) 4.7

344 3,480 3,136 — (16) 5.0

343 3,479 3,136 — (16) 5.0

342 3,465 3,123 — (15) 4.8

465

352

287

(81)

109

178

238

(16)

281

219 684 0 (340) (58) 287 0 0 (322)

(177) 175 0 (164) (62) (50) 0 135 (116)

26 313 0 (175) (57) 81 0 161 (285)

(13) (94) 0 (30) (14) (138) 0 (1) 0

42 73 0 (39) (14) 20 11 (1) 0

(22) 87 0 (36) (14) 37 0 (1) (50)

65 243 0 (38) (13) 192 0 (4) 0

72 310 — (143) (55) 112 11 (6) (50)

(60) (76) — (26) (14) (116) 4 0 0

(2) 18 — (32) (14) (27) 0 0 0

(20) 79 — (39) (14) 27 0 0 0

(17) 265 0 (135) (54) 76 4 (4) 0

95 60

(12) (43)

(36) (79)

1 (138)

(5) 25

11 (3)

(5) 183

1 68

14 (98)

(8) (35)

(13) 14

(12) 64

404 350

361 341

281 391

144 268

169 339

166 391

349 265

219 280

181 313

199 360

239

272

275

271

(10) 8.1 92.0 30.2 7.5

145 6.0 125.5 30.9 4.0

89 5.2 117.6 36.2 4.7

97 7.5 146.5 40.8 4.2

52 8.0 138.7 57.8 4.8

50 6.4 168.4 85.1 4.1

(12) 4.6 89.8 37.9 3.4

(12) 5.9 118.9 50.2 4.1

46 8.1 150.9 54.4 3.8

72 9.1 133.3 53.2 4.1

92 7.8 149.4 66.2 4.7

92 7.6 143.3 63.6 4.0

EBITDA/R after dividends to associates and minorities. bFitch assumes not readily available cash is the same as the oldest figure provided in January 2016. Comparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Summary — Abercrombie & Fitch Co. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data c Comparable Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

4,158 19.9 1,009

4,511 8.5 1,045

4,117 (8.7) 935

3,744 (9.1) 839

709 (13.7) 103

818 (8.2) 175

879 (3.6) 204

1,113 (0.6) 277

3,519 (6.0) 760

686 (3.4) 98

783 (4.2) 134

822 (6.5) 175

3,403 (3.5) 683

1,009 599

1,045 654

935 502

839 431

103 6

175 78

204 107

277 180

760 370

98 (0)

134 36

175 77

683 292

599 366

654 430

502 267

431 204

6 (48)

78 23

107 55

180 126

370 156

(0) (51)

36 (13)

77 31

292 92

5.0 1,045 60.0 (30.0) 2.9 7.8 40.0 0.0 140.0

(1.0) 1,051 60.0 (30.0) 4.0 12.1 40.0 10.0 150.0

(11.0) 1,006 60.0 (30.0) 2.9 11.8 40.0 0.0 70.0

(8.0) 961 60.0 (30.0) 3.1 10.1 40.0 0.0 80.0

(8.0) 956 60.0 70.0 3.2 11.3 40.0 0.0 60.0

(4.0) 954 60.0 60.0 2.8 6.8 40.0 0.0 70.0

(1.0) 965 60.0 50.0 2.2 4.4 30.0 0.0 70.0

1.0 932 60.0 30.0 3.1 7.3 30.0 0.0 70.0

(3.0) 932 60.0 (30.0) 3.1 7.3 30.0 0.0 70.0

(4.0) 925 60.0 60.0 3.1 8.5 30.0 0.0 50.0

(4.0) 926 60.0 50.0 2.9 7.3 30.0 0.0 70.0

(6.0) 930 60.0 40.0 2.5 5.7 30.0 0.0 80.0

(5.0) 930 60.0 40.0 2.5 5.7 30.0 0.0 80.0

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

Ascena Retail Group, Inc. Credit Profile Credit Opinion

Credit Profile Summary

Long-Term Issue Default Credit Opinion b+*/stable ABL Revolving Credit Facility bb+*/rr1* Credit Opinion Senior Secured Term Loan bb+*/rr1* Credit Opinion ABL – Asset-based loan.

Financial Data Ascena Retail Group, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/(Interest + Rent) (x) Comparable Store Sales (%)a No. of Stores

FYE LTM 7/30/16 10/29/16 6,995.4 7,001.8 684.9 637.0 9.8 9.1 78.9 167.7 8,537.4 8,486.8 5.6

5.7

1.7

1.5

(5.0) 4,906

(5.0) 4,920

Multibrand Portfolio: Ascena Retail Group, Inc.’s collection of well-known brands, including Ann Taylor and LOFT (33% of sales), Justice, Lane Bryant, maurices and dressbarn (each around 15% of sales), provides some end-market diversification and shared service cost advantages. In addition, several brands target the plus-size customer, a less-competitive sector than women’s apparel, and half of Ascena’s stores are located in strip or lifestyle centers, somewhat protecting the portfolio from mall traffic declines. Exposure to Challenged Sector: Despite some brand diversification, Ascena primarily competes in the mid-tier women’s apparel sector, with Justice targeting tween girls. Mid-tier women’s apparel retailers are struggling to grow revenue, given increased competition from low-priced players (i.e. the fast fashion and off-price sectors) and online retailers, exacerbated by mall traffic declines and the absence of a strong fashion cycle. Industry challenges have inflated inventory levels, pressuring margins through increased promotions. Declining Sales Expected: Sector pressures and a price point repositioning at Justice caused a 5% comparable store sales (comps) decline in fiscal 2016 (ended July 2016) with little visibility into material near-term improvement. Fitch Ratings projects comps to decline around 4% in fiscal 2017 and decline 1%–3% beginning in fiscal 2018 given ongoing sector headwinds. EBITDA margins are expected to be pressured by the impact of declining sales on Ascena’s fixed cost base, exacerbated by promotional activity needed to drive volume. EBITDA Improvement Limited: Following the acquisition of the Ann Taylor and LOFT brands (ANN) in August 2015, yielding $620 million in pro forma EBITDA, the company outlined $235 million of cost synergy opportunities. In October 2016, outlined an additional $150 million in expense-reduction initiatives. These cost-management opportunities are expected to be completely mitigated by sales-related EBITDA challenges. Fitch consequently projects Ascena’s EBITDA over the next two to three years to be range-bound near $620 million. Leverage Moderating on Debt Paydown: Ascena financed the $2.0 billion ANN acquisition with equity and a $1.8 billion term loan, yielding pro forma adjusted leverage close to 6.0x. The company subsequently paid down $200 million of term loan debt through the end of October 2016. Ascena could continue to pay down around $200 million of term loan borrowings annually using most of its expected FCF generation, yielding adjusted leverage below 5.5x by fiscal 2019.

Figure for the LTM reflects the performance for the three months ended Oct. 29, 2016

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on comps improvement such that EBITDA approached $800 million, which in combination with debt paydown could yield adjusted leverage in the high-4.0x range. Negative Drivers: Negative credit profile drivers include accelerated comps weakness, which would cause EBITDA to trend toward approximately $500 million, and/or lack of meaningful debt paydown, which would cause adjusted leverage to remain in the high-5.0x range.

Analysts David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch Base Case Assumptions — Ascena Retail Group, Inc. 2016A 6,995 45.7

2017F 6,790 (2.9)

2018F 6,620 (2.5)

685 9.8

575 8.5

589 8.9

Working Capital Change Cash Flow from Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt

(22) 445 (367) 5.2 — 79 (18.6) 1,719

2 461 (250) 3.7 — 211 — 1,519

1 467 (250) 3.8 — 217 — 1,319

Total Adjusted Debtb Adjusted Debt/EBITDAR (x)

8,537 5.6

8,231 5.8

8,031 5.6

($ Mil., Years Ended July) Revenue Revenue Growth (%)a EBITDA EBITDA Margin (%)

2019F Comments 6,479 — (2.1) Revenue decline driven by comps; minimal store activity forecast. 613 — 9.5 Improvement beginning 2018 due to expense management. 1 — 489 — (250) Reduction in 2017 due to weak sales. 3.9 — — — 239 One-time integration charges in 2016. — — 1,119 Assumes majority of FCF used for debt reduction. 7,898 — 5.4

Given lack of square footage growth, comparable store sales growth approximates revenue growth. bTotal Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Ascena is a $7 billion national specialty apparel retailer with operating presence in traditional malls, off-mall locations and online. The company operates eight brands, six of which generate over $900 million in sales, with the largest brand contributing approximately 23% of sales. Several brands cater to niche markets based on customer age and size. Despite some brand diversification, Ascena primarily competes in the mid-tier women’s apparel sector, with Justice targeting tween girls. Mid-tier women’s apparel retailers are struggling to grow revenue, given increased competition from low-priced players (i.e. the fast fashion and off-price sectors) and online retailers, exacerbated by mall traffic declines and the absence of a strong fashion cycle. Industry challenges have inflated inventory levels, pressuring margins through increased promotions. Ascena’s real estate is diverse, with only 1,463 stores, or 30%, operating in traditional enclosed malls. The majority — 2,735 stores or 56% — of locations are located in strip and lifestyle centers, while the remaining 708, or 14%, are in outlet malls. Ascena’s top-line initiatives generally include developing product leadership in key categories, building omnichannel capabilities, growing e-commerce penetration, and sharpening its marketing message using social media and customer databases. Ascena has also targeted a faster inventory and replenishment cycle, allowing it to purchase less initial inventory and reorder successful styles to maximize assortments and minimize the need to markdown excess product. Increased direct sourcing penetration enables a more nimble supply chain while reducing merchandise costs. Real estate expansion is not expected to drive material revenue growth across the portfolio. Ascena’s brands are supported by a shared services platform, including the company’s entire supply chain and omnichannel infrastructure. The company leverages its scale on a fixed backoffice operation and distribution systems. Ascena also uses its size to generate procurement savings across merchandise and nonmerchandise purchases. This platform allowed Ascena to acquire and integrate the Lane Bryant and Catherines brands in 2012, and has thus far enabled a successful integration of the LOFT and Ann Taylor brands. Fitch believes Ascena’s portfolio approach to apparel retail is unique in the industry and expects the company to High-Yield Retail Checkout January 31, 2017

Leveraged Finance continue adding brands to its platform over the long term. However, near-term acquisitions are not expected given sector challenges and the company’s internal focus on the current integration and sales trends at existing brands.

LOFT LOFT, part of the 2015 ANN acquisition, is Ascena’s largest brand by revenue, at $1.6 billion in the 12 months ended January 2015. LOFT is a moderately priced brand focused on versatile outfits and pieces customers can wear from work to weekend. LOFT operated 682 stores as of July 30, 2016, including 10 Lou & Grey stores, which is Ascena’s smallest brand and grew out of LOFT’s loungewear collection. LOFT’s comps were in the positive midsingle-digit range until 2014, when comps turned modestly negative due to broad challenges in women’s apparel. While annual comps trends were not reported in the first year of the ANN integration, recent comps for the quarter ending October 2016 and holiday 2016 period were modestly negative. Fitch projects continued modestly negative comps over the next two to three years, somewhat better than the corporate average given LOFT’s lower price focus and merchandising/marketing opportunities presented from the Ascena acquisition. Minimal incremental square footage is assumed over the forecast period. Ascena will combine LOFT with Ann Taylor in its Premium Fashion reporting segment beginning in fiscal 2017.

Ann Taylor Ann Taylor generated $950 million in sales in the 12 months ended January 2015, and operated 340 stores as of July 30, 2016. Ann Taylor focuses on midpriced wear-to-work styles, and generated positive comps for a few years until comps turned to the negative low single digits in 2014. Fitch anticipates negative mid to high single-digit comps in fiscal 2017, with some improvement thereafter, as new merchandising and marketing concepts somewhat mitigate sector challenges.

Lane Bryant Lane Bryant produced $1.1 billion of sales in fiscal 2016 and ended the year with 772 stores. Ascena purchased the midpriced, plus-size fashion retailer in fiscal 2012, averaging around 1.5% in annual comps since the acquisition, including 1% in fiscal 2016. The brand is currently focused on improving gross margin by reducing promotional cadence and couponing. Fitch expects medium-term growth for the brand to be in the negative low single digits on increased competition.

Justice Justice produced $1.1 billion in sales during the fiscal year ended July 30, 2016, and operated 937 locations at year end. Justice, which sells to tween girls, is Ascena’s only brand not focused on adult women’s clothing. The brand’s narrow age focus yields a short customer life cycle, which can be both a brand negative due to continuous age-outs of the customer base and a brand positive due to continuous customer age-ins. Justice’s comps were positive until fiscal 2014, and management executed a plan to combat recently negative comps by broadening its assortment and eliminating pricing confusion by reducing promotional activity and initial markup. This pricing strategy caused an expected nearterm comps dislocation, with comps in the negative mid-teens beginning late in fiscal 2015.

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Leveraged Finance Comps improved to the negative low single digits in recent quarters, and Fitch expects modestly negative comps in fiscal 2017, improving to flat thereafter.

maurices The maurices brand generated $1.1 billion in fiscal 2016 sales and ended the year with 993 stores. The brand targets women in their 20s and 30s in less-populated regions, selling moderately priced fashion apparel across categories. Sales growth averaged in the high singledigit positives over the five years ending 2015 on unit growth and positive comps, although growth declined to 4% in fiscal 2016 on a 2% comps decline. The company plans to continue growing units 2%–3% annually toward its 1,200-store target. Fitch believes maurices’ focus on less-populated areas restricts competitive incursion, though sector challenges could restrain comps to the negative low single-digit range over the next 24–36 months.

dressbarn Dressbarn generated $1.0 billion in fiscal 2016 and ended the year with 809 stores, selling moderately priced apparel styled to target women in their 40s. Comps turned modestly negative beginning in fiscal 2013, due largely to a competitive market. Management has refined its merchandise assortment to focus on core categories and reinvent the brand through new marketing. Fitch expects dressbarn comps to remain in the negative midsingle digits in fiscal 2017, improving to the negative low single-digit range thereafter if the initiatives gain traction in the market.

Catherines Ascena’s smallest stand-alone brand generated fiscal 2016 revenue of $333 million and operated 373 stores at the end of the year. Catherines sells moderately priced, plus-size apparel targeted to women over 45 years old. It produced 5%–11% annual comps since Ascena purchased the brand in fiscal 2012, until comps declined 4% on overall apparel challenges in fiscal 2016.

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Leveraged Finance Segment Operating Trends — Ascena Retail Group, Inc. (Years Ended July)

2010

2011

2012

2013

2014

2015

2016

Net Sales ($ Mil.) Justice Lane Bryant maurices dressbarn Catherines c ANN d Total

712 — 681 982 — 1,980 2,375

1,150 — 777 988 — 2,213 2,914

1,307 120 853 1,038 36 2,376 3,353

1,407 1,050 918 1,021 319 2,494 4,715

1,384 1,080 971 1,023 332 2,534 4,791

1,277 1,096 1,061 1,024 346 2,500 4,803

1,106 1,130 1,101 993 333 2,400 6,995

— — — — — — —

61.5 — 14.1 0.6 — 11.7 22.7

13.6 — 9.8 5.1 — 7.4 15.1

7.7 777.3 7.6 (1.6) 776.6 5.0 40.6

(1.6) 2.8 5.9 0.2 4.2 1.6 1.6

(7.8) 1.5 9.2 0.1 4.1 — 0.3

(13.4) 3.1 3.8 (3.0) (3.7) — 45.6

30.0 — 28.7 41.4 — — 100.0

39.5 — 26.6 33.9 — — 100.0

39.0 3.6 25.4 30.9 1.1 — 100.0

29.9 22.3 19.5 21.6 6.8 — 100.0

28.9 22.5 20.3 21.3 6.9 — 100.0

26.6 22.8 22.1 21.3 7.2 — 100.0

15.8 16.2 15.7 14.2 4.8 33.3 100.0

Comps (%) Justice Lane Bryant maurices dressbarn Catherines ANNc Totald

— — — — — 10.7 —

8.0 — 10.0 2.0 — 6.8 6.0

8.0 3.0 2.0 3.0 11.0 3.3 5.0

2.0 (2.0) 0.0 (4.0) 8.0 2.3 2.0

(4.0) 3.0 1.0 (1.0) 8.0 (1.9) 0.0

(10.0) 2.0 5.0 (1.0) 5.0 — (1.0)

(13.0) 1.0 (2.0) (5.0) (4.0) — (5.0)

Store Count Justice Lane Bryant maurices dressbarn Catherines ANN Totald

887 — 757 833 — 896 2,477

902 — 784 830 — 953 2,516

942 805 832 827 422 984 3,828

971 788 877 826 397 1,025 3,859

997 771 922 820 386 1,030 3,896

978 765 951 824 377 1,035 3,895

937 772 993 809 373 1,022 4,906

59 — 84 74 — — 218

130 — 105 56 — — 290

173 0 103 50 (1) — 324

182 (15) 107 30 15 — 320

99 (4) 99 39 24 — 258

(12) (2) 126 11 31 — 154

29 21 106 (14) 16 178 336

Net Sales Growth (%) Justice Lane Bryant maurices dressbarn Catherines ANN Totald Net Sales Contribution (%) Justice Lane Bryant maurices dressbarn Catherines ANN Totald

Adjusted Operating Income ($ Mil.) Justice Lane Bryant maurices dressbarn Catherines ANN Totald

a The acquisition of Justice was consummated in November 2009. bThe Charming Shoppes’ acquisition affecting Lane c Bryant and Catherines was consummated in June 2012. ANN acquisition closed Aug. 21, 2015, and includes Ann Taylor and LOFT. Full-year revenue not provided for 2015 or 2016, and reflects Fitch’s estimates. dTotal figures are as reported, excludes ANN until 2016. Note: Fiscal year end for Ascena is July. Fiscal year end for ANN Inc. is January. Source: Company filings, Fitch Ratings.

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Leveraged Finance EBITDA Opportunities Thwarted by Sector Challenges Following the August 2015 acquisition of ANN, Inc., operator of Ann Taylor and LOFT, Ascena outlined a path to achieve $1 billion in EBITDA in fiscal 2018 (ending July 2018), versus a pro forma level of $620 million in fiscal 2015 ($374 million legacy Ascena and $246 million legacy ANN). The plan included revenue growth, gross margin recovery from a less-promotional posture, integration synergies and expense management. The company targeted a total of $650 million in EBITDA opportunity from the various initiatives. These opportunities were projected to be mitigated by $270 million in cost inflation and investment in key strategic focus areas, such as omnichannel and marketing. The largest expense opportunity ($235 million) would be achieved through a successful integration of Ann Taylor and LOFT, yielding a shared infrastructure, direct sourcing benefits, and SG&A reductions. The next largest opportunity ($220 million) was to come through top-line growth across the combined company. The remaining $200 million was to come from a variety of other opportunities, including gross margin expansion efforts, increased penetration of direct sourcing and omnichannel investments — also referred to as direct-order management.

Enumerated EBITDA Opportunitiesa Opportunity

($ Mil.)

Legacy Ascena Top-Line Growth (2%–5%) ANN Inc. Integration Synergies ANN Inc. Top-Line Growth (0%–3%) Justice Gross Margin Rate Recovery ANN Inc. Integrations: Sourcing Initiative Internal Sourcing Penetration ANN Inc. Integration: SG&A Optimization Lane Bryant Gross Margin Rate Initiatives Distributed Order Management ANN Inc. Gross Margin Rate Recovery Fiscal 2016 Annualized Synergies from Lane Bryant/Catherines ANN Inc. Inflation/Reinvestment Legacy Ascena Inflation/Reinvestment Total

150 150 70 50 50 40 35 30 25 25 25 (80) (189) 381

Fiscal 2015 EBITDA (Pro Forma) Fiscal 2018 EBITDA Plan at 2015 Analyst Day

620 1,001

Fiscal 2018 versus fiscal 2015, pro forma. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

However, fiscal 2016 proved to be a difficult year at many of Ascena’s brands, given challenges in the mid-tier women’s apparel sector. All of Ascena’s legacy brands produced negative comps except Lane Bryant (up 1%) on a weak fashion cycle, discretionary spend shifts toward services and experiences, and market share gains by value segments, including off-price and fast fashion. The Justice brand produced the company’s lowest comps at negative 13%, although this was primarily due to the company’s price repositioning efforts. Justice adjusted operating income swung to $29 million in 2016 from negative $12 million in fiscal 2015 on gross margin benefits from reduced promotions. While Lane Bryant’s adjusted operating income was nearly flat on modestly positive comps, Ascena’s other legacy brands generated operating income declines in 2016. Despite sales challenges, the company generated approximately $55 million of ANN integration synergies, primarily from procurement and SG&A savings. Management projected incremental fiscal 2017 savings in the $80 million–$90 million range, suggesting the company is making

High-Yield Retail Checkout January 31, 2017

Leveraged Finance good progress on its overall ANN synergy target. The company has not provided quantitative updates on the remaining elements of its overall EBITDA plan. Given sector challenges, Ascena undertook a deeper look at its cost structure. The company announced its Change for Growth profit-enhancement program in October 2016, with a target of driving an incremental $150 million in cost savings by fiscal 2019, beyond the EBITDA opportunities enumerated above. Planned savings will be achieved through reductions in nonmerchandise spending and procurement ($74 million goal), centralizing operating functions ($45 million) and elimination of duplicative back-office resources ($31 million). Savings are expected to be phased in over three years, with $36 million expected in realized savings in fiscal 2017, $65 million in 2018 and the final $49 million in fiscal 2019. Sales challenges, meanwhile, have continued through the first five months of fiscal 2017, with portfolio comps of negative 5% in the three months ended October 2016 and negative 3% in the 2016 holiday period (mid-November through December 2016). The company believes the secular and competitive pressures on its brands could yield comps in the negative low singledigit range over the next two years. As a result, the integration synergies expected from the ANN acquisition, coupled with the Change for Growth program and other smaller cost management initiatives, are likely to be completely mitigated by EBITDA declines due to continued sales weakness. EBITDA, which was $620 million in 2015 pro forma including Ann, could consequently remain range-bound around this level over the next two to three years.

Fiscal 2017 Outlook Fitch expects Ascenaâ&#x20AC;&#x2122;s revenues to be around $6.8 billion in fiscal 2017 (ending July 2017), compared with $7.0 billion in 2016, on a comps decline of 3%â&#x20AC;&#x201C;5% and one less selling week, mitigated somewhat by a full-year inclusion of ANN sales, an approximately $120 million positive impact. Fitch expects revenue to decline in the low single-digit range beginning in fiscal 2018 on comps declines and near-flat store count. Fitch expects fiscal 2017 EBITDA to be around $580 million, a low-teens decline from 2016 from fixed-cost deleverage on weak comps, somewhat supported by incremental ANN integration synergies and partial achievement of other expense initiatives. Fitch expects EBITDA could trend to the low-$600 million range as negative low single-digit comps trends are mitigated by continued ANN synergies and other expense initiatives. FCF, which was around $80 million in fiscal 2016, could improve to the low-$200 million range in fiscal 2017 on reduced acquisition-related cash expenses and significantly reduced capex. FCF could increase toward $250 million by fiscal 2019 on EBITDA growth and reduced interest expense due to debt paydown. In fiscal 2016, the company deployed FCF toward $77 million in repayment of the term loan Ascena issued for its ANN acquisition. The company repaid an additional $100 million of term loan debt during fiscal first-quarter 2017 and announced an additional $22 million repayment in fiscal second-quarter 2017. Fitch projects the company will continue to direct FCF toward debt repayment, and could reduce the term loan balance by around $200 million per year. The company could use excess FCF beyond debt repayment to execute its remaining $181 million share repurchase authorization once it meets its covenant requirement of debt/EBITDA below 2.5x, which is expected to occur in fiscal 2018. Lease-adjusted leverage increased to 5.6x at the end of fiscal 2016 from a 4.5x average during the prior three years, due to the debt-financed ANN acquisition. Fitch expects leverage to increase modestly in 2017 as EBITDA declines are somewhat mitigated by term loan

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Leveraged Finance repayment. Fitch projects adjusted leverage to decline below 5.5x by fiscal 2019 on modest EBITDA improvement and continued debt reduction.

Liquidity and Debt Structure Ascena had $271 million of cash and $523 million of availability on its $600 million revolver as of Oct. 29, 2016. The $600 million revolving credit facility has a first lien on current assets and a second lien on all other assets. The company issued a $1.8 billion seven-year term loan in August 2015, in connection with the ANN acquisition. The remainder of the $2.0 billion purchase was financed through equity issuance to existing ANN shareholders. The term loan is secured by a second lien on current assets and a first lien on all other assets. The loan requires amortization payments of $22.5 million per quarter. However, the companyâ&#x20AC;&#x2122;s $100 million term loan repayment in the first quarter of fiscal 2017 covers all required amortization payments until February 2018. There are no maintenance financial covenants under the term loan agreement. The restricted payments covenants allow for dividends and share repurchase if debt/EBITDA is less than 2.5x. Debt/EBITDA was 2.5x at the end of fiscal 2016 and is expected to be around 2.6x at the end of 2017, but trend below 2.5x thereafter.

Capital Structure ($ Mil., At Oct. 29, 2016) Description Secured Debt $600 Mil. ABL Revolver due August 2020 $1.8 Bil. Term Loan B due August 2022 Total Secured Debt Total Debt

Amount

(%)

49.4 1,619.0 1,668.4 1,668.4

3.0 97.0 100.0 100.0

ABL â&#x20AC;&#x201C; Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 0.0 45.0 90.0 90.0 90.0 1,304.0

Cash Revolver Availability Total

270.7 523.0 793.7

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Fiscal years. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis is based on a going concern value of $2.25 billion, versus approximately $900 million from an orderly liquidation of assets, which are composed primarily of inventory. Post-default EBITDA was estimated at $450 million, assuming around 20% of stores close with stabilized trends at the remainder of the chain. The analysis uses a 5.0x EV/EBITDA multiple, near the midpoint of the typical 4.0x–6.0x range for retailers. The multiple considers Ascena’s historically strong brands and good real estate position, as well as midmarket apparel sector challenges. After deducting 10% for administrative claims, the remaining $2 billion would lead to outstanding recovery prospects (91%–100%) for the revolver and term loan, which are assigned a ‘bb+*/rr1*’.

Recovery Analysis — Ascena Retail Group, Inc. ($ Mil., Except Where Noted; Credit Opinion: b+*) Distressed Enterprise Value (EV) as a Going Concern (GC) GC EBITDA GC EV Multiple (x) EV on GC Basis

Liquidation Value (LV) 450 5.0 2,250

Cash A/R Inventory Net PPE Total LV

Book Value

Advance Rate (%)

Avail. to Creditors

270.7 0 807.8 1608.5 2,687.0

0 80 70 20 —

— — 565.5 321.7 887.2

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

2,250.0 225.0 2,025.0

Distribution of Value Secured Priority Revolving Credit Facility Term Loan Facilitya

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

420.0 1,596.5

420.0 1,597.5

100 100

rr1* rr1*

+3 +3

bb+* bb+*

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority

2,025.0 2,017.5 7.5

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

Sr. Unsecuredb 202.7 7.5 3.7 — — a Pro forma to include $22.5 Mil. paid subsequent to quarter-end. bIncludes estimated operating lease claims A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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—

Leveraged Finance Appendix A Organizational Structure — Ascena Retail Group, Inc. ($ Mil., As of Oct. 29, 2016) Public

Management

92.2%

7.8%

Ascena Retail Group, Inc.a (CO — b+*/stable) Debt Issue $600 Mil. ABL Revolver due 8/21/20 $1.8 Bil. Term Loan B due 8/21/22 Total

Subsidiary Guarantorsb

Borrowing Subsidiariesc

Amount 49 1,619 1,668

AnnTaylor Retail Inc.d (Subsidiary Borrower)

CO bb+*/rr1* bb+*/rr1* —

Nonguarantor Subsidiaries

aParent

borrower under the revolver and term loan. bSubsidiary guarantors of the ABL revolver include, among others, The Dress Barn Inc.; Tween Brands Inc.; Maurices Incorporated; and DBX, Inc. cBorrowing subsidiaries are borrowers under the ABL revolver and are wholly owned domestic subsidiaries of Ascena Retail Group, Inc. dAnnTaylor Retail Inc. is a subsidiary borrower of the Term Loan. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Ascena Retail Group, Inc. Covenant Borrower Document Date and Location

Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights Financial Covenants (Maintenance) Fixed-Charge Coverage Ratio (Minimum) Coverage (Minimum) Current Ratio (Minimum) Excess Availability (Minimum) Net Worth (Minimum)

Ascena Retail Group, Inc. Amended and Restated Credit Agreement dated 1/3/11 (Exhibit 99.1 to 8-K filed 1/5/11) Amendment and Restatement Agreement dated 6/14/12 (Exhibit 10.1 to 8-K filed 6/15/12) Amendment and Restatement Agreement dated 3/13/13 (Exhibit 10.1 to 8-K dated 3/14/13) Fourth Amendment and Restatement dated 7/24/15 (Exhibit 10.1 to 8-K filed 8/27/15) 8/21/20 ABL facility $600 Mil. Senior secured. First lien on all current assets and second lien on other assets. By all the restricted subsidiaries.

Ratio Debt: For secured debt: $2 Bil. term loan plus an unlimited amount, as long as the secured debt ratio is less than 2.0x; for unsecured debt as long as the interest coverage ratio is more than 2.0x. Notable Permitted Debt: 1) Acquisition debt up to the greater of $75 Mil. and 1.5% of total assets; 2) all-purpose debt up to the greater of 150 Mil. and 3% of total assets. Additional liens (first and second) on the same collateral is allowed up to the greater of $150 Mil. and 3% of total assets. Consistent with limitations on debt incurrence.

CoC is defined as 35% voting control or the board of directors ceases to consist of a majority of existing directors, and constitutes an event of default. Investments in subsidiaries up to the greater of $200 Mil. and 3.5% of total assets. Sale leaseback transaction not permitted unless sale of assets is made for cash consideration no less than the cost of the asset, and is consummated within 270 days of the company acquiring or completing construction of the asset.

Carveouts: 1) $25 Mil. per year for company equity benefit plan. 2) $12.5 Mil. per quarter so long as no event of default exists, or $17.5 Mil. if senior secured leverage ratio is less than 1.75x. 3) Any amount, so long as, i) no event of default exists ii) average availability exceeds the greater of 15% of credit limit and $75 Mil. and iii) the fixed-charge coverage ratio is greater than 1.0x, or, alternatively, if average availability exceeds the greater of 20% of credit limit and $85 Mil.

Yes, for any amount $75 Mil. or greater. N.A. MAC clause is only a condition for executing the agreement. N.A. No. Lenders holding more than 50% of the aggregate commitments.

1.0x if availability is less than 10%. — — — —

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

— — —

Pricing Coupon Type/Index

Availability > 50%, ABR spread is 0.25%; availability < 50%, ABR spread is 0.5%.

ABL – Asset-backed loan. N.A. – Not applicable. MAC – Material adverse change. ABR – Alternate base rate. Source: Fitch Ratings.

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Leveraged Finance Appendix C Term Loan Covenant Summary — Ascena Retail Group, Inc. Covenant Borrower Document Date and Location Maturity Date Description of Debt Amount ($ Mil.) Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Ascena Retail Group, Inc. Term Credit Agreement dated 8/21/15 (Exhibit 10.2 to 8-K filed 8/27/15) 8/21/22 Secured Term Loan B 1.8 Bil. Senior secured. Second lien on current assets and first lien on all other assets. By all the restricted subsidiaries.

Ratio Debt: Unsecured debt allowed as long as interest coverage ratio is greater than 2.0x. Notable Permitted Debt: 1) Acquisition debt up to the greater of $75 Mil. and 1.5% of total assets; 2) all-purpose debt up to the greater of $150 Mil. and 3% of total assets. Additional liens (first and second) on the same collateral is allowed up to the greater of $150 Mil. and 3% of total assets. Consistent with limitations on debt incurrence.

Carveouts: 1) Amount not to exceed $100 Mil. per year and 1.75% of total assets. 2) Any amount, so long as no event of default exists, the amount is less than the available amount, or total leverage ratio is less than 2.50x.

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, for any amount $75 Mil. or greater. N.A. MAC clause is only a condition for executing the agreement. N.A. No. Lenders holding more than 50% of the aggregate commitments.

Financial Covenants Leverage Covenant (Maximum) Coverage (Minimum) Current Ratio (Minimum) Excess Availability (Minimum) Net Worth (Minimum)

— — — — —

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

— Up to October 2016, $4.5 Mil. every quarter. Then $22.5 Mil. every quarter until maturity. Optional prepayment in whole or in part without premium or penalty.

Pricing Coupon Type/Index

LIBOR + 3.5% for ABR Term B, LIBOR + 4.5% for Eurodollar Tranche B Term loans.

N.A. – Not applicable. MAC – Material adverse change. ABR – Alternate base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Ascena Retail Group, Inc. ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

12 12 12 Three Three Months Three Months Months Months Months Months LTM 7/26/14 10/25/14 1/24/15 4/25/15 7/25/15 7/25/15 10/24/15 1/23/16 4/23/16 7/30/16 7/30/16 10/29/16 10/29/16 21.7 10.1 6.1 7.8 (2.1) 12.4

23.1 11.2 7.0 7.2 (6.1) 11.0

17.2 6.2 2.2 10.0 10.2 9.7

21.5 9.2 4.2 8.5 (0.9) 8.4

19.3 7.1 2.1 (0.0) 6.0 7.9

20.2 8.4 3.9 6.5 2.5 7.9

26.1 13.4 8.5 9.5 (8.3) 6.6

18.0 6.5 1.6 7.7 6.9 7.0

22.5 9.7 4.4 4.3 (5.6) 7.5

21.7 9.9 4.6 5.2 10.2 9.8

22.0 9.8 4.7 6.7 1.1 9.8

23.2 10.5 4.9 8.7 (3.0) 5.8

21.3 9.1 3.8 6.5 2.4 5.8

4.4 4.9 (2.2)

4.9 5.5 (1.7)

4.9 5.2 0.6

5.0 5.2 1.4

5.0 5.5 2.4

4.8 5.3 2.5

7.6 8.4 0.6

6.8 7.5 0.6

6.3 7.2 (0.4)

5.6 6.1 0.9

5.7 6.0 2.0

0.4 0.4

1.0 1.0

0.8 0.8

0.9 0.9

0.3 0.3

3.7 3.7

3.1 3.1

3.0 3.0

2.5 2.5

2.6 2.6

9.8

10.6

8.4

7.8

7.1

6.8

12.5

11.2

11.5

9.2

8.3

4.4 4.9 (1.3)

4.9 5.4 (5.5)

4.9 5.2 12.3

5.0 5.1 5.1

5.0 5.5 2.6

4.7 5.2 0.6

7.5 8.3 32.6

6.8 7.4 33.4

6.2 7.1 (49.0)

5.4 6.0 19.6

5.7 5.9 9.6

1.9 105.7 1.7 82.4 0.8

1.8 97.5 1.6 75.9 0.8

1.8 93.2 1.7 82.6 1.1

1.7 88.4 1.7 82.5 1.2

1.7 122.2 1.5 95.8 1.4

1.7 87.6 1.5 69.0 1.4

1.8 176.0 1.6 138.6 1.2

1.7 19.3 1.5 15.5 1.1

1.6 11.9 1.4 8.5 0.9

1.7 9.0 1.5 7.1 1.2

1.5 5.7 1.5 5.1 1.4

172 4,590 4,418 — (5) 3.0

484 5,032 4,548 — (5) 1.0

370 4,918 4,548 — (5) 1.3

398 4,946 4,548 — (5) 1.1

357 4,905 4,548 — (3) 0.8

116 4,664 4,548 — (5) 3.2

1,807 8,625 6,818 — (3) 0.2

1,659 8,477 6,818 — (28) 2.7

1,780 8,598 6,818 — (50) 4.5

1,719 8,537 6,818 — (76) 7.3

1,719 8,537 6,818 — (76) 8.3

1,668 8,487 6,818 — (111) 6.4

374

129

(0)

313

159

141

468

147

456

21 395 (20) (478) — (103) — 36 18

(62) 23 — (97) — (73) — 64 2

60 189 — (58) — 131 — (109) 2

(28) 71 — (81) — (10) — 28 2

148 148 — (78) — 70 — (39) 3

118 431 — (313) — 119 — (56) 9

(205) (46) — (93) — (139) (1,495) 1,736 8

66 208 — (80) — 127 0 (149) (18)

(70) 2 — (96) — (93) 0 45 1

187 282 — (98) — 184 0 (61) 1

(22) 445 — (367) — 79 (1,495) 1,571 (8)

(91) 56 — (107) — (51) — (51) 0

92 548 — (380) — 168 0 (216) (16)

19 (30)

14 7

10 34

(9) 11

(3) 32

12 84

(28) 82

11 (29)

0 (48)

1 126

(16) 131

— (101)

12 (52)

65 310

30 251

26 360

30 332

49 371

93 482

38 381

64 524

175 442

62 523

122

139

176

192

205

231

257

184

199

208

106 6.9 68.1 31.2 10.0

46 — 78.9 31.5 8.1

(36) — 51.0 22.2 4.5

(17) — 71.0 31.2 7.0

(58) 5.4 59.2 28.9 6.6

(58) 5.4 59.7 29.1 6.5

198 7.2 82.7 38.8 5.6

81 8.3 50.3 28.9 4.4

165 7.1 68.0 34.8 5.7

(41) 4.2 53.2 35.2 5.4

(41) 4.4 56.1 37.1 5.2

(76) — 73.8 46.8 6.4

(76) — 69.5 44.0 5.4

EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the three months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Summary — Ascena Retail Group, Inc. (Continued) ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 12 12 Three Three Months Three Months Months Months Months Months LTM 7/26/14 10/25/14 1/24/15 4/25/15 7/25/15 7/25/15 10/24/15 1/23/16 4/23/16 7/30/16 7/30/16 10/29/16 10/29/16 4,791 1.6 1,038

1,194 (0.2) 276

1,289 1.7 222

1,150 0.5 248

1,170 (1.1) 226

4,803 0.3 972

1,672 40.0 437

1,842 42.9 332

1,669 45.1 376

1,812 54.9 393

6,995 45.7 1,537

1,678 0.4 389

7,002 32.6 1,489

1,038 486

276 134

222 80

248 106

226 84

972 403

437 224

332 119

376 163

393 180

1,537 685

389 176

1,489 637

486 293

134 84

80 28

106 49

84 25

403 185

224 141

119 29

163 73

180 83

685 326

176 82

637 267

0.0 3,896 38.2 (4.8) 5.4 11.7 44.2 4.3 246.6

(2.0) 3,937 40.2 66.3 4.7 11.9 36.2 4.2 191.1

1.0 3,916 34.6 58.4 6.3 14.4 36.5 3.6 111.3

(1.0) 3,918 40.1 68.1 5.5 12.6 34.7 3.2 141.5

(2.0) 3,895 36.4 70.8 6.1 12.5 40.2 (8.1) 132.0

(1.0) 3,895 37.7 (5.0) 6.1 12.5 46.1 (8.1) 143.2

(3.0) 4,968 42.1 68.1 3.6 7.8 24.0 (5.3) 112.7

(6.0) 4,918 35.9 47.4 5.4 9.4 27.4 (6.2) 89.7

(5.0) 4,895 41.4 53.3 5.2 10.2 28.9 (6.4) 106.3

(4.0) 4,906 39.3 52.0 6.5 9.8 32.9 (0.2) 100.8

(5.0) 4,906 39.6 (8.7) 6.5 9.8 32.9 (0.2) 102.2

(5.0) 4,920 41.3 65.0 5.3 8.3 31.5 0.4 113.5

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

The Bon-Ton Stores, Inc. Credit Profile Credit Opinion

Credit Profile Summary

The Bon-Ton Stores, Inc.

Modestly Negative Comps: Fitch Ratings expects The Bon-Ton Stores, Inc.’s comparable store sales (comps) to remain around negative 3% in 2017, after projected negative 4% comps in 2016. Comps trends have been erratic, with annual comps ranging from modestly positive to negative 4% since 2011. Bon-Ton remains competitively disadvantaged longer term compared with its larger and well-capitalized peers that have spent aggressively on their in-store and digital infrastructure, and have more developed omnichannel offerings to offset weak mall traffic trends.

Long-Term Issuer Default Credit Opinion

ccc*

The Bon-Ton Department Stores, Inc. Long-Term Issuer Default Credit Opinion ccc* Senior Secured Credit Facility Credit Opinion b*/rr1* Senior Second Lien Secured Notes Credit Opinion ccc–*/rr5* Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data The Bon-Ton Stores, Inc. FYE LTM 1/30/16 10/29/16 ($ Mil.) Total Revenue 2,789.5 2,724.7 EBITDA 111.2 110.6 EBITDA Margin (%) 4.0 4.1 FCF (70.8) 18.4 Total Adjusted Debt 1,695.5 1,821.6 Total Adjusted Debt/EBITDAR (x) 8.5 9.2 EBITDAR/(Interest + Rent) (x) 1.4 1.3 Comparable Store a Sales (%) (1.3) (3.3) Real Estate Owned (%) No. of Stores 267 267

Below Industry Profitability: Fitch expects Bon-Ton’s EBITDA to be flat at approximately $115 million in 2016, and be in the $100 million range over the next 12-24 months, assuming comps remain in the negative low single-digit range. Fitch expects it will be challenging for Bon-Ton to reverse trends longer term given its weak market positioning. Weak FCF, High Leverage: Fitch expects FCF to be positive $5 million–$10 million in 2016, assuming modest working capital benefit. FCF is expected to be approximately negative $20 million annually in 2017/2018. This assumes gross capex remains at approximately $65 million and no benefit from working capital improvements. Fitch consequently expects leverage (adjusted debt/EBITDAR) to be around 9.0x over the next two years. Near-Term Adequate Liquidity: Fitch expects total liquidity to be between $150 million and $175 million, net of the minimum borrowing availability covenant, at the end of 2016. Bon-Ton successfully addressed its debt maturities through revolver borrowings and debt paydown, including the recent paydown of $57.3 million second-lien secured notes due July 2017. The company’s next debt maturity is the $730 million Tranche A asset-based loan (ABL) facility that matures in December 2018. Bon-Ton has adequate liquidity to fund the 2017/2018 holiday seasons. However, the longterm viability of the business remains uncertain given the secular challenges facing mid-tier department and apparel retailers.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of stable to modestly positive comps; gross margin improvement; and EBITDA growth to a level where it can continue to fund its operations and meet its fixed obligations with internally generated cash flow. Negative Drivers: Negative credit profile drivers would include further deterioration in comps and EBITDA relative to Fitch’s expectations leading to concerns about the company’s liquidity position.

Comparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch Base Case Assumptions — The Bon-Ton Stores, Inc. ($ Mil., Year Ended Jan. 31) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex (Gross) Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

2015A

2016F

2017F

2018F

2,789 (1.2) (1.3) 111 4.0 (24) 18 (85) 3.0 (4) (71) — 995 1,695 8.5

2,686 (3.7) (3.6) 116 4.3 13 72 (63) 2.3 — 10 — 987 1,716 8.3

2,616 (2.6) (3.0) 106 4.1 (1) 50 (65) 2.5 — (15) — 1,017 1,746 8.9

2,566 (1.9) (2.0) 99 3.8 (3) 41 (65) 2.5 — (25) — 1,052 1,781 9.4

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment A Marginal Player in a Secularly Challenged Sector Bon-Ton’s comps performance has been erratic, with annual comps ranging from modestly positive to negative 4% since 2011. Fitch expects comps to remain in the negative 2%–negative 3% range beyond 2016, as the overall soft department store apparel spending, weak mall traffic trends and heavy promotional pressure across the mid-tier department store space continue. Bon-Ton has posted below industry average comps trends and operating profitability over the past decade. Comps trends have been negative for much of this period. The company’s EBITDA margin at 4%–6% has been substantially lower than the 11%–14% margins realized by its larger investment-grade mid-tier department store peers over the past five years, given lagging sales trends and store productivity. Bon-Ton was significantly underpenetrated in e-commerce sales at only 5% of sales in 2013. However, it has made significant investments on this front, and Fitch projects Bon-Ton’s online sales will represent about 9.6% of revenue in 2016, assuming online growth of around 25%. Excluding the contribution from online, Fitch estimates Bon-Ton’s store-level comps at negative 2.7% in 2015 and negative 6.0% in 2016.

Comps Versus Industry (%) 6

Bon-Ton

Middle Market

3 0 (3) (6) (9) (12)

Comps – Comparable store sales. Note: Middle market reflects the sales-weighted comps performance of Bon-Ton, Dillard's, J. C. Penney, Kohl's and Macy's. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Bon-Ton E-Commerce Contribution ($ Mil.)

2013

2014

2015

2016E

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16E

Total Retail Sales YoY Growth (%) Total Comps (%)

2,770 — (4.2)

2,756 (0.5) 0.2

2,718 (1.4) (1.3)

2,614 (3.8) (3.6)

611 — 0.8

555 — (1.3)

623 — (2.6)

928 — (1.9)

591 (3.3) (2.9)

542 (2.4) (2.0)

590 (5.4) (4.9)

891 (4.0) (4.0)

139 — 5.0 —

165 19.4 6.0 1.0

198 20.0 7.3 1.2

250 26.2 9.6 1.9

38 — 6.2 —

32 — 5.7 —

41 — 6.5 —

87 — 9.4 —

46 21.7 7.8 1.3

44 38.8 8.1 2.2

51 26.7 8.7 1.7

109 25.0 12.2 2.4

2,632 —

2,591 (1.6)

2,520 (2.7)

2,364 (6.2)

573 —

524 —

583 —

841 —

545 (4.9)

498 (4.8)

539 (7.6)

782 (7.0)

— —

(0.8) (0.8)

(2.5) (2.7)

(5.5) (5.9)

0.8 —

(1.3) —

(2.6) —

(1.9) —

(4.2) (4.5)

(6.6) (7.1)

(6.4) (7.0)

E-Commerce YoY Growth (%) % of Sales Contribution to Comps (%) Store-Level Sales YoY Growth (%) Store-Level Contribution to Total Comps (%) Implied Store-Level Comps (%)

E – Estimate. YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

The company has a near-term target of 12% and long-term target of 15%–20%. The online penetration is still relatively low compared with the 15% plus penetration at Kohl’s Corp. and Macy’s Inc. Growth in online sales has also been the main driver of comps growth at these retailers over the past three to four years. Bon-Ton’s overall capital spending has been constrained over the past few years given modest FCF and a highly leveraged balance sheet. However, Bon-Ton has made significant recent omnichannel investments to support its growing business. The company opened a new 743,000-square foot e-commerce distribution center in West Jefferson, OH, in fall 2015 and consolidated its five former e-commerce distribution centers into it. Fitch expects Bon-Ton will continue to face stiff competition from larger, well-capitalized department store peers, off-price retailers and online players. Department store traffic trends remain soft and industry sales are expected to continue to decline 2%–3% annually as volume continues to shift to off-mall channels, such as online, discount and off-price retailers. However, Fitch expects overall apparel, accessories, footwear and home sales to grow 1%–2% annually, with most of the growth coming from online. Fitch expects it will be challenging for Bon-Ton to generate positive comps to maintain market share in these categories given its weak market position in the overall mid-tier department store space.

2017 Outlook Fitch expects Bon-Ton’s EBITDA to be flat at approximately $115 million in 2016, and to be range-bound at approximately $100 million over the next 12–24 months This compares with $145 million in 2014, $170 million–$175 million between 2011 and 2013, and a post-recession peak of $244 million in 2010. Fitch expects Bon-Ton to report negative 4.0% comps in 2016 and remain in the negative low single-digit range digit thereafter. Fitch expects gross margins to be up approximately 80 bps in 2016 as a result of reduced markdown on lower inventory, lower distribution cost and delivery expense. Fitch expects flat to modest improvement in gross margin in 2017 due to some of these factors. Selling, general and administrative (SG&A) expense is expected to decline modestly over the next 12–24 months The company expects to achieve a full run rate of $21 million–$24 million of targeted net savings between SG&A and gross margin and lap against $6 million–$7 million of severance costs and consulting expense related to this in 2017.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch expects FCF to be positive $5 million–$10 million in 2016, assuming modest working capital benefit. FCF is expected to be approximately negative $20 million annually in 2017/2018. This assumes gross capex remains at approximately $65 million and no benefit from working capital improvements. Fitch consequently expects leverage (adjusted debt/EBITDAR) to be around 9.0x over the next two years.

Multiple Banners Comps Sales, Comps Inventory and Gross Margin Relationship Gross Margin Change (LHS)

Comps Sales (RHS)

Comps Inventory, Beg. (RHS)

(bps) 350

(%) 10

175

(175)

(5)

(350)

(10)

Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Bon-Ton is the 10th largest U.S. regional department store chain, with 266 stores, which includes nine furniture galleries and four clearance centers, in small, midsize and metropolitan markets in 26 states concentrated in the Northeast, Midwest and upper Great Plains. The chain operates under the Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers nameplates, encompassing a total of approximately 25 million square feet. BonTon’s core customer is a 40–65 year old working mother with an average household income of $95,000. Bon-Ton and Elder-Beerman stores are primarily located in midsized communities, while the Carson’s units are located in midsized and larger cities such as Chicago, Milwaukee and Minneapolis. The localization initiatives the company has implemented over the past two to three years appear to be a logical move to manage its diverse banners, and localized merchandise now represents 16% of sales against the company’s goal of 20%. Bon-Ton is also focused on expanding faster growing categories, such as home, and adding new brands to enhance its good, better and best portfolio assortment. However, these initiatives are late catch-ups with large and well-capitalized competitors such as Macy’s, and are expected to have only a modestly positive impact on top-line and profitability improvement in the near to intermediate term.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Snapshot of Mid-Tier Department Stores’ Sales, Industry Share and Operating Profit Performance 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

LTM 10/29/16

26,970 (10.8) 15,597 16.4 19,903 6.0 7,636 1.7 3,362 161.2 218,132 (1.0)

26,313 (2.4) 16,474 5.6 19,860 (0.2) 7,207 (5.6) 3,366 0.1 213,941 (1.9)

24,892 (5.4) 16,389 (0.5) 18,486 (6.9) 6,743 (6.4) 3,130 (7.0) 202,144 (5.5)

23,489 (5.6) 17,178 4.8 17,556 (5.0) 5,890 (12.6) 2,960 (5.4) 189,283 (6.4)

25,003 6.4 18,391 7.1 17,759 1.2 6,020 2.2 2,981 0.7 187,058 (1.2)

26,405 5.6 18,804 2.2 17,260 (2.8) 6,194 2.9 2,885 (3.2) 185,609 (0.8)

27,686 4.9 19,279 2.5 12,985 (24.8) 6,489 4.8 2,919 1.2 179,362 (3.4)

27,931 0.9 19,031 (1.3) 11,859 (8.7) 6,439 (0.8) 2,770 (5.1) 172,371 (3.9)

28,105 0.6 19,023 0.0 12,502 5.4 6,490 0.8 2,756 (0.5) 170,421 (1.1)

27,079 (3.7) 19,204 1.0 12,625 3.0 6,389 (1.6) 2,718 (1.4) 167,079 (2.0)

26,132 (5.2) 18,868 (1.5) 12,582 0.5 6,196 (3.7) 2,651 (3.0) 161,472 (4.0)

Comps by Year (%) Macy’s, Inc. Kohl’s Corp. J. C. Penney Co., Inc. Dillard’s, Inc. The Bon-Ton Stores, Inc.

4.4 5.9 3.7 (1.0) (2.7)

(1.3) (0.8) 0.0 (5.0) (6.5)

(4.6) (6.9) (7.5) (7.0) (7.4)

(5.3) 0.4 (6.3) (10.0) (5.4)

4.6 4.4 2.5 3.0 0.9

5.3 0.5 0.2 4.0 (2.8)

3.7 0.3 (25.2) 4.0 0.5

1.9 (1.2) (7.4) 1.0 (4.2)

0.7 (0.3) 4.4 1.4 0.2

(3.0) 0.7 4.5 (2.0) (1.3)

(4.3) (1.5) 1.5 (3.8) (2.8)

Industry Share (%) Macy’s, Inc. Kohl’s Corp. J. C. Penney Co., Inc. Dillard’s, Inc. The Bon-Ton Stores, Inc.

12.4 7.2 9.1 3.5 1.5

12.3 7.7 9.3 3.4 1.6

12.3 8.1 9.1 3.3 1.6

12.4 9.1 9.3 3.1 1.6

13.4 9.8 9.5 3.2 1.6

14.2 10.1 9.3 3.3 1.6

15.4 10.8 7.2 3.6 1.6

16.2 11.0 6.9 3.7 1.6

16.5 11.2 7.2 3.8 1.6

16.2 11.5 7.6 3.8 1.6

16.2 11.6 7.8 3.8 1.6

EBITDA Margins (%) Macy’s, Inc. Kohl’s Corp. J. C. Penney Co., Inc. Dillard’s, Inc. The Bon-Ton Stores, Inc.

12.8 14.5 11.8 8.1 8.3

13.1 15.3 11.6 6.3 7.5

10.9 14.3 8.1 2.4 5.0

11.7 15.2 8.5 6.8 7.1

12.5 15.8 7.9 9.5 8.3

13.4 15.9 7.7 10.6 5.9

13.6 14.4 (4.5) 11.9 5.8

13.8 14.1 (5.3) 12.1 6.0

14.2 13.8 2.3 12.1 5.1

12.8 13.2 5.9 11.1 4.0

10.9 12.8 7.8 9.2 3.9

Revenues ($ Mil.) Macy’s, Inc. YoY Growth (%) Kohl’s Corp. YoY Growth (%) J. C. Penney Co., Inc. YoY Growth (%) Dillard’s, Inc. YoY Growth (%) The Bon-Ton Stores, Inc. YoY Growth (%) Department Stores (Incl. L.D.) YoY Growth (%)

YoY – Year-over-year. L.D. – Leased department store space. Comps – Comparable store sales. Source: U.S. Census Bureau, Company filings, Fitch Ratings

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Liquidity and Debt Structure Bon-Ton had $7.0 million in cash and cash equivalents and $214.7 million available under its ABL credit facility — net of the minimum borrowing availability covenant of $88 million — as of Oct. 29, 2016. Fitch expects total liquidity to be between $150 million and $175 million, net of the minimum borrowing availability covenant, at the end of 2016. Bon-Ton successfully addressed its debt maturities through revolver borrowings and debt paydown, including the recent payoff of $57.3 million second-lien secured notes due July 2017. The company’s next debt maturity is the $730 million Tranche A ABL facility that matures in December 2018.

Bon-Ton Liquidity Analysis

($ Mil.)

Cash

Facility Size

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

7.1 8.2 7.7 7.5 8.8 8.7 20.9 21.7 6.9 7.8 7.1 7.0

675.0 675.0 675.0 675.0 675.0 675.0 675.0 750.0 830.0 830.0 830.0 880.0

Borrowing Basea 608.1 669.1 626.4 675.0 625.8 663.0 601.3 750.0 711.8 712.5 647.7 880.0

Borrowings LOCsb 184.9 227.1 237.2 358.3 238.9 290.7 332.1 495.4 455.3 463.9 418.3 572.1

4.0 3.0 5.0 3.9 4.0 4.0 4.0 4.4 4.6 4.6 4.6 5.2

Total Revolver Availability 419.2 439.0 384.2 312.8 382.9 368.3 265.2 250.2 251.9 244.0 224.8 302.7

Required Revolver Minimum Availability Borrowing Less Required Availability Minimum 60.8 66.9 62.6 67.5 62.6 66.3 60.1 75.0 71.2 71.2 64.8 88.0

358.4 372.1 321.6 245.3 320.3 302.0 205.1 175.2 180.7 172.8 160.0 214.8

LTM Total Liquidity EBITDA 365.5 380.3 329.2 252.8 329.0 310.7 226.0 196.9 187.6 180.6 167.1 221.7

169.6 161.0 155.8 146.7 145.4 142.0 142.5 120.1 106.9 103.2 100.5 105.3

CFFO

Capex

FCF

120.1 94.3 69.5 36.3 46.6 44.6 63.2 13.1 17.8 47.9 70.4 77.6

(77.3) (79.5) (79.5) (80.5) (90.7) (99.7) (100.4) (97.2) (84.7) (72.9) (63.1) (58.1)

39.8 10.9 (13.0) (47.2) (48.0) (59.1) (42.1) (89.1) (70.9) (28.0) 5.3 18.4

In periods where the company has access to the full revolving credit facility, Fitch assumes the borrowing base to equal the revolver size, although it is likely to be b higher. Bon-Ton does not disclose interquarter LOCs. Fitch assumes an amount consistent with the prior year-end reported figure. CFFO – Cash flow from operations. Source: Company filings, Fitch Ratings.

Successfully Addressed 2016/2017 Debt Maturities Bon-Ton entered into a sale-leaseback arrangement in June 2015 and sold six retail department stores for $84 million, and leased them back for a period of 20 years with three optional 10-year renewal terms. Proceeds from the sale-leaseback transaction, supplemented with borrowings under the Bon-Ton’s secured credit facility, were used to pay the remaining principal balance of $104.5 million on one of the two mortgage facilities due in April 2016. On Jan. 15, 2016, Bon-Ton retired its remaining $103 million mortgage loan facility due in April 2016 using $15 million in cash and $89 million of borrowing under Bon-Ton’s $830 million revolving credit facility. The company’s revolving credit facility was amended to include the special purpose entities (SPEs) that previously participated in the company’s two mortgage loan facilities. Pursuant to the amendment, the security interests in the 18 properties owned by the SPEs were granted to the creditors under the revolving credit facility. As a result, the borrowing base availability increased to reflect the addition of the properties under the revolving credit facility, which was increased in November 2015 by $80 million to $830 million via an accordion provision.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

422.1 150.0 57.3 350.0 979.4 141.3 1,120.7

37.7 13.4 5.1 31.2 87.4 12.6 100.0

Secured Debt $730 Mil. Senior Secured ABL Revolver Tranche A due 12/12/18 $150 Mil. Senior Secured Tranche A-1 FILO Term Loan due 3/15/21 a 10.625% Second-Lien Senior Secured Notes Due 7/15/17 8.000% Second-Lien Senior Secured Notes Due 6/15/21 Total Secured Debt Capital Leases/Other Total Debt a

The company redeemed the 10.625% $57.3 Mil. notes in full on Nov. 29, 2016 with borrowings under its credit facility. ABL – Asset-based revolving credit facility. FILO – First in, last out. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016 Pro Forma)

($ Mil., At Oct. 29, 2016)

2017 2018 2019 2020 2021 Thereafter

— — —

Cash Revolver Availabilitya Total

—

350.0 —

7.0 214.7 221.7

Revolver availability is net of the minimum borrowing availability covenant. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility, mortgages and capital leases. The company redeemed the 10.625% $57.3 Mil. notes in full on Nov. 29, 2016 with borrowings under its credit facility. Source: Company filings, Fitch Ratings.

In August 2016, Bon-Ton made an amendment to its credit facility, revising the Tranche A-1 commitment levels to $150 million from $100 million, and increasing the advance rate on inventory by 10%. The Tranche A-1 first in, last out (FILO) term loan facility expires in March 2021. This amendment increased the total commitments under the facility to $880 million from $830 million previously. On Nov. 29, 2016, the company completed its tender of the $57.3 million second lien secured notes due July 2017 using borrowings under the credit facility. Post the tender, the company’s nearest maturity is the $730 million Tranche A of its revolver that matures in December 2018.

Recovery Analysis In accordance with Fitch’s Recovery Rating (RR) methodology, issue ratings are derived from the Issuer Default Rating and the relevant RR. Fitch’s recovery analysis assumes a liquidation value under a distressed scenario of approximately $835 million. Bon-Ton’s senior secured credit facility comprises a $730 million revolving credit facility due December 2018 and $150 million Tranche A-1 FILO term loan facility that expires in March 2021, and both have outstanding recovery prospects (91%−100%) in a distressed scenario. The facility is secured by a first lien on substantially all of the assets, which mainly consists of inventory of the borrowing entities and guarantors. Availability for borrowings and letter of credit obligations under the credit agreement is limited to 105% of the inventory of the company’s certain unrestricted operating subsidiaries, as well as stated percentages of eligible real estate and credit card receivables. There is a minimum borrowing availability covenant required under the facility, equal to an amount greater than or High-Yield Retail Checkout January 31, 2017

Leveraged Finance equal to the greater of (i) 10% of the lesser of: (a) $880 million and (b) the borrowing base; and (ii) $75 million. If the Tranche A-1 borrowing base is less than $150 million, a reserve for the difference is set against Tranche A to ensure the total amount of borrowings does not exceed the borrowing base. Tranche A-1 is a FILO tranche, so it will be repaid after the borrowings under the revolving credit facility in a distressed scenario. The 8.000% senior secured notes due June 2021, which have a second lien on the assets that support the credit facility, are considered to have below average recovery prospects (11%– 30%).

Recovery Analysis — The Bon-Ton Stores, Inc. ($ Mil., Except Where Noted; Credit Opinion: ccc*) Distressed Enterprise Value (EV) as a Going Concern (GC)

Liquidation Value (LV)

Going Concern EBITDA GC EV Multiple (x) EV on GC Basis

120 4 480

Book Value

Advance Rate (%)

Available to Creditors

7.0 0 945.9 493.5 —

0 80 70 35 —

— — 662.1 172.7 834.9

Cash A/R Inventory Net PPEa Total LV Value Available for Claims Distribution Greater of GC or LV Less Administrative Claims (10%) Adjusted LV Available for Claims

834.9 83.5 751.4

Distribution of Value Secured Priority Sr. Secured ABLb Sr. Secured FILO Term Loan Sr. Secured (Second Lien)c

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

511.0 150.0 350.0

511.0 150.0 90.4

100 100 26

rr1* rr1* rr5*

3 3 –1

b* b* ccc–*

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

128.6 0.0

 

0 0

 

Concession Payment Availability Table Adjusted LV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecuredd Unsecured

763.7 763.7 

Net PPE value is reduced by the net capital lease assets of $113 Mil. as of Jan. 30, 2016. bFitch assumes the $730 Mil. credit facility is 70% drawn under a distressed c d scenario. Excludes 10.625% $57.3 Mil. notes that were fully redeemed on Nov. 29, 2016. Reflects estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based loan. FILO – First in, last out. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix A Organizational Structure — The Bon-Ton Stores, Inc. ($ Mil., As of Oct. 29, 2016) Management and Directors

Other Public Investors

30.78%

67.22% The Bon-Ton Stores, Inc. (PA) (Guarantor of Credit Facility) (CO — ccc*)

The Bon-Ton Department Stores, Inc. (PA) (CO — ccc*) $730 Mil. Senior Secured ABL Revolver Tranche A due 12/12/18 $150 Mil. Senior Secured Tranche A-1 FILO Term Loan due 3/15/21 10.625% Second-Lien Senior Secured Notes Due 7/15/17a 8.000% Second-Lien Senior Secured Notes Due 6/15/21 Total

The Bon-Ton Giftco, LLC (VA) (Guarantor)

Bon-Ton Distribution, LLC (IL) (Co-Borrower of Credit Facility)

Amount 422 150 57 350 979

CO b*/rr1* b*/rr1* — ccc–*/rr5* —

Carson Pirie Scott II, Inc. (FL) (Co-Borrower of Credit Facility)

Bonstores Holdings One, LLC (Guarantor)

Bonstores Holdings Two, LLC (Guarantor)

McRIL, LLC (VA) (Co-Borrower of Credit Facility)

Bonstores Realty One, LLC (Co-Borrower of Credit Facility)

Bonstores Realty Two, LLC (Co-Borrower of Credit Facility)

aOwnership figures as of March 11, 2016. The company redeemed the 10.625% $57.3 million notes in full on Nov. 29, 2016 with borrowings under its credit facility. CO – Credit Opinion. ABL – Asset-based loan. FILO – First in, last out. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix B Bank Agreement Covenant Summary — The Bon-Ton Department Stores, Inc. Overview Borrower

The Bon-Ton Department Stores, Inc.; Carson Pirie Scott II, Inc.; Bon-Ton Distribution, LLC; McRIL, LLC; Bonstores Realty One, LLC; and Bonstores Realty Two, LLC. Document Date and Location Second Amended and Restated Loan and Security Agreement dated 3/21/11 (Exhibit 10.1 to 8-K filed 3/24/11). First Amendment to Second Amended and Restated Loan and Security Agreement dated 10/25/12 (Exhibit 10.1 to 8-K filed 10/31/12). Second Amendment to Second Amended and Restated Loan and Security Agreement dated 12/12/13 (Exhibit 10.1 to 8-K filed 12/13/13). Commitment Increase Acknowledgement Letter dated 8/28/15 (Exhibit 10.1 to 8-K filed 9/2/15). Commitment Increase Acknowledgement Letter dated 11/17/15 (Exhibit 10.1 to 8-K filed 11/18/15). Consent and Third Amendment to Second Amended and Restated Loan and Security Agreement dated 1/15/16 (Exhibit 10.1 to 8-K filed 1/19/16). Fourth Amendment to Second Amended and Restated Loan and Security Agreement dated 8/15/16 (Exhibit 10.1 to 8-K filed 8/15/16). Maturity Date Tranche A Revolver: 12/12/18 Tranche A-1 FILO Term Loan: 3/15/21 or the earlier of 12/12/18 and the date that is 60 days prior to the earliest maturity date of any senior note debt (unless there is less than $60 Mil. of aggregate senior debt outstanding) or junior debt (if incurred). Description of Debt $880 Mil. senior secured revolving credit facility subject to a borrowing base consisting of stated percentages of eligible inventory, real estate and credit card receivables. Amount ($ Mil.) Tranche A Revolver: $730 Tranche A-1 FILO Term Loan: $150 Ranking Senior secured. Security Secured by a first-priority lien on substantially all of the current and future assets of the borrowers and the other obligors, including, but not limited to, inventory, general intangibles, trademarks, equipment, certain real estate and proceeds from any of the foregoing, subject to certain exceptions and permitted liens. The borrowing entities are several of the company’s operating subsidiaries, including The BonTon Department Stores, Inc., and these entities will be jointly and severally liable. Guarantee Guaranteed by the parent (The Bon-Ton Stores, Inc.) and other nonborrowing entities.

Financial Covenants Minimum Excess Availability

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

An amount greater than or equal to the greater of (i) 10% of the lesser of: (x) the total commitments and (y) the borrowing base and (ii) $75 Mil.

Coverage Debt Ratio: None. Notable Permitted Debt Incurrence: (1) Purchase money debt of $30 Mil.; (2) debt that is not secured by a lien and the principal amount does not exceed, in the aggregate at any time (x) $10 Mil. minus (y) the then outstanding principal amount of permitted purchase money debt in excess of $25 Mil.; (3) junior lien debt up to $100 Mil., provided that (i) final maturity, scheduled amortization or mandatory prepayments of the new junior lien debt shall be set 60 days beyond the existing loans’ termination date; (ii) 100% of the proceeds from the new junior lien debt issuance should be applied to repay the existing loans; (iii) no EoD; (iv) same obligors as the existing loans; (v) new intercreditor agreement shall be in place; (4) convertible note debt in an aggregate principal amount not to exceed $100 Mil.; provided that (i) final maturity, scheduled amortization or mandatory prepayments of the new convertible note debt shall be set 91 days beyond the existing loans’ termination date; (ii) 100% of the proceeds from the new debt issuance should be applied to repay the existing loans; (iii) no EoD; (5) refinancing debt: the company can issue up to $600 Mil. in debt with respect to refinancing the $510 Mil. unsecured debt due March 2014), and up to $260 Mil. in debt with respect to refinancing the mortgage loan debt. Liens securing the junior lien debt are permitted. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of more than 50% of voting stock and constitutes an EoD. M&A, Investments Restriction Acquisitions permitted provided pro forma excess availability for the upcoming six-month period is ≥ 15% of the lesser of the aggregate commitments and the aggregate borrowing base, and consolidated fixed-charge coverage ratio ≥ 1.0x. If pro forma excess availability for six months remains ≥ 30%, no fixed-charge coverage test is required. Sale of Assets Restriction As long as no EoD has occurred, the company may sell equipment (a) in the normal course of business and (b) worth $1 Mil. or less, up to a total of $5 Mil. per year. In addition, the company may sell unpledged real estate without limit and pledged real estate as long as the proceeds are used to repay the loan. Restricted Payments Restricted Payments (RP)

RP Basket: None. Notable Permitted RPs: 1) Dividends may not exceed $10 Mil. in any year or $30 Mil. for the term of the agreement, unless pro forma excess availability is ≥ 17.5% of the lesser of the aggregate commitments and the aggregate borrowing base, and pro forma consolidated fixed-charge coverage ratio ≥ 1.1x. If pro forma excess availability for six months remains ≥ 35%, no fixed-charge coverage test is required ; 2) prepayment or retirement of senior notes permitted provided pro forma excess availability is ≥ 15.0% of the lesser of the aggregate commitments and the aggregate borrowing base, and pro forma consolidated fixed-charge coverage ratio ≥ 1.0x. If pro forma excess availability for six months remains ≥ 30%, no fixed-charge coverage test is required.

FILO – First in, last out. EoD – Event of default. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Bank Agreement Covenant Summary  The Bon-Ton Department Stores, Inc. (Continued) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/ Voting Rights

Yes. Yes. Exists as precedent condition of an EoD. None. None. > 50% of total commitments

Financial Covenants

Maintenance

Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

Consolidated Net Leverage: None. Senior Secured Leverage: None. Interest Coverage: None.  

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. None. None.

Pricing Pricing Grid

Availability Percentage

Applicable Rate

If facility availability > 60% If facility availability ≤ 60% but > 30% If facility availability ≤ 30%

Tranche A = LIBOR + 1.50% or Base Rate +0.50% Tranche A = LIBOR + 1.75% or Base Rate + 0.75% Tranche A = LIBOR + 2.00% or Base Rate + 1.00%

Tranche A-1: 9.50% per annum for LIBOR loans and 8.50% per annum for Base Rate loans. FILO – First in, last out. EoD – Event of default. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix C Bond Covenant Summary — The Bon-Ton Department Stores, Inc. Overview Issuer Document Date and Location Description of Debt Maturity Date Original Issue/Outstanding Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability

The Bon-Ton Department Stores, Inc. Indenture dated 5/28/13 (Exhibit 4.1 to 8-K filed 6/3/13) 8.000% second-lien senior secured notes. 6/15/21 $350 Mil./$350 Mil. Senior Second-lien secured Guaranteed by the parent (The Bon-Ton Stores, Inc.) and all the subsidiaries that provide guarantees under the credit agreement of the revolving credit facility.

Coverage Debt Ratio: Fixed-charge coverage ≥ 2.0x on a pro forma basis. Notable Permitted Debt Incurrence: 1) Incurrence by the company or any guarantor under credit facilities, in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $800 Mil. and (y) the borrowing base on such date of incurrence; 2) capital lease obligations up to the greater of $50 Mil. and 3.0% of total assets; 3) general all-purpose indebtedness not to exceed the greater of $75 Mil. or 4.5% of total assets. Permitted liens include liens related to the bank facility (up to the greater of $800 Mil. and borrowing base) and mortgage loan facility plus $40 Mil. of purchase money financing plus $50 Mil. of other permitted indebtedness plus $50 Mil. of capital leases plus $75 Mil. of miscellaneous plus general carveout of $35 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

CoC is defined as acquisition of more than 50% of voting stock. There is a CoC put at 101. General carveout of $25 Mil. for investments. Asset sale proceeds in excess of $25 Mil. that are not used to repay secured debt or purchase replacement assets within one year must be used to offer to repurchase a like amount of the notes at par.

RP Basket: Cumulative sum of: 1) 50% of net income, plus 2) 100% cash equity proceeds, plus 3) other customary items; subject to Fixed-Charge Coverage Ratio ≥ 2.0. Notable Permitted RPs: 1) Dividend to parent company not to exceed $0.40/share per year; 2) general all-purpose payment not to exceed $75 Mil.

Yes. Yes, exceeding $50 Mil. None. Max. 35% of the issue can be redeemed @108.000% with proceeds from an IPO on or before 6/15/16. Redeemable on or after 6/15/16 at the redemption price below 2016: 106.000% 2017: 104.000% 2018: 102.000% 2019+: 100.000%

MAC − Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix D Financial Summary — The Bon-Ton Stores, Inc. 12 Months

12 Months

Three Months

LTM

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15

10/31/15

1/30/16

4/30/16

Operating EBITDAR Margin

9.1

8.8

9.1

8.3

4.3

4.8

4.4

12.2

7.1

4.0

4.5

5.5

7.3

Operating EBITDA Margin

5.9

5.8

6.0

5.2

0.8

1.0

9.9

4.0

0.4

0.6

1.8

4.1

Operating EBIT Margin

2.6

2.7

2.8

1.8

(2.9)

(3.4)

(2.7)

7.4

0.5

(3.6)

(4.1)

(2.0)

0.5

FFO Margin

3.9

4.0

3.3

2.2

0.3

(5.8)

0.8

7.1

1.5

2.5

(2.3)

(2.7)

2.0

FCF Margin

1.0

(0.2)

1.4

(1.7)

(6.9)

0.9

(27.4)

15.1

(2.5)

(0.1)

6.8

(26.8)

0.7

Return on Capital Employed

6.2

6.9

4.3

4.4

4.3

2.0

1.3

1.0

0.8

1.1

Total Adjusted Debt/Operating EBITDARa

6.1

6.2

6.1

6.9

7.2

7.3

8.9

8.5

8.7

8.6

9.2

FFO-Adjusted Leverage

5.5

5.7

6.1

7.7

7.6

8.5

9.2

9.0

8.4

7.5

8.8

FCF/Total Adjusted Debt (%)

1.8

(0.3)

2.5

(3.0)

(3.6)

(2.5)

(4.8)

(4.2)

(1.6)

0.3

1.0

Total Debt with Equity Credit/Operating EBITDAa

5.0

5.2

5.1

6.2

6.7

6.9

9.5

8.9

9.2

9.0

10.1

Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex)

2.3

4.0

5.1

6.2

5.3

6.1

8.6

8.9

9.2

9.0

10.1

13.0

18.1

12.0

36.4

50.1

33.0

502.1

81.7

27.1

17.4

17.0

Total Adjusted Net Debt/Operating EBITDARa

6.0

6.1

6.9

7.2

8.7

8.5

8.6

8.5

9.2

FFO-Adjusted Net Leverage

5.5

5.6

6.0

7.7

7.6

8.4

9.1

9.0

8.4

7.4

8.7

Total Net Debt/(CFFO – Capex)

26.7

(1,786.5)

20.1

(20.4)

(17.2)

(25.8)

(13.3)

(14.8)

(39.6)

128.9

57.3

Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a

1.5

1.6

1.4

1.3

Operating EBITDA/Interest Paida

2.0

2.3

2.2

2.5

2.4

2.0

1.9

1.8

1.7

FFO Fixed-Charge Coverage

1.6

1.7

1.6

1.4

1.5

1.4

1.3

1.4

1.5

1.4

FFO Interest Coverage

2.3

2.6

2.2

2.0

2.2

1.9

1.7

1.9

2.3

1.8

CFFO/Capex

1.5

1.0

1.6

0.5

0.4

0.6

0.1

0.2

0.7

1.1

1.3

($ Mil.)

7/30/16 10/29/16 10/29/16

Profitability (%)

Gross Leverage (x)

Net Leverage (x)

Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%)

883

901

865

907

955

978

1,139

995

996

955

1,121

1,627

1,623

1,575

1,614

1,656

1,679

1,840

1,696

1,695

1,696

1,656

1,822

744

721

710

707

701

—

(87)

(76)

(77)

(59)

(58)

(59)

(60)

(59)

(66)

9.6

8.6

8.7

6.6

6.3

6.2

5.4

6.3

6.0

6.1

5.9

Cash Flow Summary FFO

115

121

(33)

(13)

(16)

Change in Working Capital (Fitch Defined)

(15)

(47)

(15)

(20)

(157)

(24)

(3)

(128)

CFFO

100

120

(18)

(152)

159

(145)

—

(67)

(74)

(77)

(91)

(24)

(23)

(14)

(85)

(13)

(18)

(58)

Common Dividends (Paid)

(3)

(5)

(3)

(4)

(1)

(4)

—

(1)

FCF

(5)

(48)

(43)

(176)

143

(71)

(0)

(163)

—

(32)

(38)

(70)

161

(146)

(6)

(47)

163

(23)

Non-Operating/Nonrecurring Cash Flow Capital (Expenditures)

Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds

—

Other Investing and Financing Cash Flows

(18)

(3)

(6)

(12)

(6)

(0)

(11)

(2)

(6)

(1)

(0)

(15)

(2)

(1)

(0)

(15)

Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents

438

450

419

383

368

265

250

134

252

371

412

303

Net Working Capital (Fitch Defined)

300

367

330

339

367

334

456

373

383

309

436

Trade Accounts Receivable (Days)

—

138.2

147.7

146.5

151.3

164.3

189.3

215.7

105.8

146.3

163.9

181.4

222.3

200.3

40.6

37.8

41.4

43.0

44.0

61.9

78.5

24.2

33.5

36.8

56.2

78.0

70.3

2.3

2.5

2.7

3.2

3.9

4.0

3.6

1.5

3.0

2.1

2.3

3.0

2.1

Availability Under Committed Credit Lines Not Readily Available Cash and Equivalentsb Working Capital

Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%) a

EBITDA/R after dividends to associates and minorities. bComparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Summary — The Bon-Ton Stores, Inc. (Continued) 12 Months 1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

2,954

2,979

2,834

2,823

627

571

(3.1)

0.9

(4.9)

(0.4)

0.8

(1.2)

Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities

268

263

258

234

268

263

258

234

Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities

175

173

170

145

175

173

170

145

(18)

($ Mil.)

12 Months

Three Months 8/1/15

10/31/15

Three Months 4/30/16

LTM

1/30/16

7/30/16 10/29/16 10/29/16

641

950

2,789

608

559

607

2,725

(2.7)

(1.4)

(1.2)

(3.0)

(2.2)

(5.2)

(2.8)

116

199

198

116

199

198

111

(20)

(17)

(22)

(23)

(12)

13 (3.3)

Income Statement Revenue Revenue Growth (%)

Operating EBIT Sector-Specific Data Comparable Sales Growth (%)b

(2.8)

0.5

(4.2)

0.2

0.8

(1.3)

(2.6)

(1.9)

(1.3)

(2.9)

(2.0)

(4.9)

No. of Stores

272

271

270

268

267

Gross Margin

37.5

37.1

37.6

37.2

35.5

38.6

35.2

36.3

35.7

38.4

36.9

SG&A/Revenues

(12.0)

(12.5)

(12.2)

(12.7)

64.0

70.4

62.4

37.9

(13.0)

63.0

67.4

60.9

Inventory Turnover

2.6

2.5

2.4

1.8

2.5

1.8

Accounts Payable Turnover

9.0

9.7

8.8

8.5

9.0

7.4

4.9

10.9

11.0

8.2

5.2

Return on Invested Capital (%)

16.6

16.8

16.9

14.0

13.4

13.6

10.0

10.5

9.8

Return on Assets (%)

(0.7)

(1.3)

(0.2)

(0.4)

(0.6)

(0.8)

(1.9)

(3.7)

(4.0)

(3.3)

Capex/Depreciation (%)

67.4

79.3

85.5

95.8

105.7

90.7

97.0

72.6

92.3

54.4

52.5

81.5

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

Burlington Stores, Inc. Credit Profile Credit Opinion

Credit Profile Summary

Burlington Stores, Inc. Long-Term Issuer Default Credit Opinion bb*/stable Burlington Coat Factory Investments Holdings, Inc. Long-Term Issuer Default Credit Opinion bb*/stable Burlington Coat Factory Warehouse Corporation Senior Secured Credit Facility Senior Secured Term Loan

bb+*/rr1* bb+*/rr1*

Financial Data Burlington Stores, Inc. FYE LTM 1/30/16 10/29/16 ($ Mil.) Total Revenue 5,129.8 5,447.3 EBITDA 483.6 552.7 EBITDA Margin (%) 9.4 10.1 FCF 125.7 335.2 Total Adjusted Debt 3,448.1 3,540.4 Total Adjusted Debt/EBITDAR (x) 4.6 4.3 EBITDAR/ (Interest + Rent) (x) 2.3 2.5 Comparable Store a Sales (%) 2.1 4.5 Real Estate Owned (%) 7.1 7.1

Positive Operating Trends: Burlington Stores, Inc.’s annual comparable store sales (comps) are on a positive trajectory that started in 2011, averaging 2.7% through 2015 and projected at around 4.0% in 2016. EBITDA grew at a CAGR of almost 10% over the last five years to an LTM level of $553 million. Revenues grew 40% to $5.4 billion and EBITDA margin expanded by 130 bps to 10.1% over this time on increased acceptance of off-price shopping, management’s merchandising initiatives, strong inventory management and square-footage expansion. Sustained 4%–5% Revenue Growth: Fitch Ratings expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and 2%–3% contribution from new stores. Comps growth is predicated on ongoing improvements to the customer experience, merchandise category expansions — including home — and technology-enhanced inventory management and forecasting. Fixed-cost leverage resulting from sales growth should allow EBITDA margin to improve 30 bps–50 bps over the next 24–36 months from an expected 10.2% in 2016. Off-Price Model Well Positioned: Burlington’s model is differentiated from traditional off-price players as it couples a traditional department store’s broad merchandise offering with an offprice retailer’s approach to providing low prices on branded products. The company’s stores, which are on average larger than competitors, are well suited to this strategy. The company’s product assortment and price positioning are a good fit with the ongoing high/low bifurcation in apparel. Improving Credit Metrics: Lease-adjusted leverage was 4.3x as of Oct. 29, 2016, versus 4.6x in 2015 and 5.9x in 2011 on both EBITDA growth and debt paydown. Management previously discussed a target debt/EBITDA of 2.5x — although there has been no recent update — which equates to Fitch-defined leverage of 4.4x. Fitch expects leverage to be around 4.0x in 2016 and to remain flat to modestly lower thereafter, as Fitch does not expect any further debt paydown. Steady FCF and Liquidity: Fitch expects FCF to increase to approximately $200 million in 2016 from $126 million in 2015 on higher EBITDA and reduced capex. FCF is expected to trend in the $200 million–$250 million range over the next two to three years. Fitch assumes FCF will be used for share repurchases. In addition to modest cash on its balance sheet, Burlington had $384 million available under its asset-based revolver (ABL) as of Oct. 29, 2016.

Credit Profile Drivers

Comparable store sales for the LTM period reflect the performance for the nine months ended Oct. 29, 2016.

Analysts JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

Positive Drivers: Positive credit profile drivers include higher than expected comps and EBITDA growth, and a public commitment to target debt/EBITDA below 2.0x, which equates to adjusted debt/EBITDAR sustained below 4.0x. Negative Drivers: Negative credit profile drivers would include weakening operating trends and shareholder-friendly activity that result in leverage sustained above 4.5x.

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Fitch Base Case Assumptions — Burlington Stores, Inc. ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Adjusted Debt/EBITDAR (x)

2015A 5,130 5.8 2.1 484 9.4 (28) 327 (202) 3.9 — 126 (202) 1,305 3,448 4.6

2016F 5,548 8.1 4.0 563 10.2 (21) 374 (155) 2.8 — 219 (200) 1,305 3,534 4.2

2017F 5,845 5.3 2.0 609 10.4 (22) 407 (165) 2.8 — 242 (250) 1,305 3,623 4.0

2018F 6,125 4.8 2.0 645 10.5 (12) 439 (175) 2.9 — 264 (250) 1,305 3,716 3.9

Comments — — — — — — — — — — — — — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Burlington is a national off-price retailer of well-recognized branded apparel at everyday low prices. The company opened its first store in 1972, selling primarily coats and outerwear. Burlington has since expanded its store base to 592 units in 45 states and significantly diversified its merchandise offering. The company is focused on increasing its sales of women’s apparel, shoes and accessories, and its home décor and gifts business, which together account for approximately 57% of sales, compared with an estimated 50% in 2010. Coats, which represented 9% of sales in 2010, made up only 6% of revenues in 2015. The core customer is female, 25–49 years of age, with an annual income of $25,000–$75,000. Burlington’s core customer is price conscious and value oriented, but enjoys style and nationally recognized brands.

2010 Category Breakdown Coats 9% Homea 9%

Youth Apparel/ Babya 20%

Women's RTW Apparel 21%

Accessories and Footwear 20% Menswear 21%

2015 Category Breakdown Home 11%

Coats 6%

Youth Apparel/ Baby 16%

Women's RTW Apparel 24%

Accessories and Footwear 22% Menswear 21%

a2010

Youth Apparel/Baby and Home are estimated. RTW – Ready-to-wear. Source: Company filings, Fitch Ratings.

RTW – Ready-to-wear. Source: Company filings, Fitch Ratings.

The off-price format, typically offering 60%–70% off department and specialty store regular prices, has taken significant market share over the last few years as consumers continue to seek value in a slow-growth retail spending environment. The availability of trend-right and acceptable-quality apparel, coupled with a reduction to the negative stigma of shopping offprice, has benefited the sector. Burlington recently focused on finding the right balance between pack-and-hold inventory and in-season buys to maintain a level of newness in its High-Yield Retail Checkout January 31, 2017

Leveraged Finance merchandise. Pack-and-hold inventory is an important part of off-price retailing, as it allows the companies to buy merchandise from full-price retailers at the end of a season and hold the inventory until the next appropriate season. For example, winter coats would be purchased at the end of the winter selling season and held in warehouse until the following fall. For more current buys, Burlington purchases a portion of its apparel and apparel-related merchandise through opportunistic purchases created by manufacturer overruns and canceled orders, both during and at the end of a season. These buys allow the company to get inseason goods into stores at lower prices than traditional department store merchandise. This merchandising strategy has helped drive traffic growth and improve gross margin through more efficient inventory management.

A Smaller Player in a Crowded and Competitive Sector Burlington’s scale — with LTM sales of $5.4 billion, EBITDA of $553 million and a current base of 592 stores — is small relative to the two leading off-price retailers. TJX Companies, Inc. (composed of T.J. Maxx, Marshalls, HomeGoods and international operations) generates $31 billion in revenue on a store base of approximately 3,600 units with a global reach, while Ross Stores, Inc. generates close to $12 billion in revenue via 1,446 stores. Both Ross and TJX offer family apparel and home fashion comparable to the assortment at Burlington. The broader set of retail competitors include the mid-tier and value-oriented department stores such as Macy’s Inc., Kohl’s Corp. and J. C. Penney Company, Inc.; specialty retailers such as The Gap, Inc. (including its Gap and Old Navy divisions) and Babies ‘R’ Us; discounters such as Target Corp. and Wal-Mart Stores, Inc.; and warehouse clubs such as Costco Wholesale Corp. and Sam’s Club.

Burlington’s Store Formatsa Concept Burlington Coat Factory

MJM Designer Shoes Cohoes Fashions Super Baby Depot

No. of Avg. Size Stores (Sq Ft) Merchandise Focus 550 80,000 Value-priced women’s, men’s, and children’s apparel and accessories. Most stores include linens, bath items, gifts, luggage, family footwear, baby apparel and furniture. 12 28,000 Moderate to higher priced designer and fashion men’s, women’s and children’s footwear, handbags and other accessories. 2 45,000 Broad selection of luxury and designer-label merchandise for men and women, decorative gifts and home furnishings. 2 25,000 Apparel, furniture and accessories for newborns, infants and toddlers.

As of Jan 30, 2016. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

Burlington’s comps were negative the first five years following its LBO by Bain Capital in 2006, with sales and EBITDA growth driven by store additions. However, annual comps turned positive in 2011 and have averaged 2.7% since 2015. Positive comps were driven by improved merchandise assortment and in-store execution, and benign trends in the off-price channel. The company invested in technology to sharpen its inventory forecasting and better match assortments to customer needs. Management is also enhancing the in-store experience through better signage, lighting, merchandising and improved associate-customer engagement. Fitch expects these initiatives, plus a supportive climate for off-price retail, to allow Burlington to sustain comps around 2% over the next 24–36 months.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Revenue Contribution from Comps and New Stores ($ Mil.)

2008

2009

2010

2011

2012

2013

2014

2015

Revenue YoY Growth (%) (a) Comps (b) Contribution from New Stores (a–b)

3,393 (0.3) (5.2) 4.9

3,542 4.4 (2.5) 6.9

3,670 3.6 (2.0) 5.6

3,854 5.0 0.7 4.3

4,131 7.2 1.2 6.0

4,428 7.2 4.7 2.5

4,815 8.7 4.9 3.8

5,099 5.9 2.1 3.8

No. of Stores YoY Store Growth % YoY Growth

397 18 4.7

433 36 9.1

462 29 6.7

477 15 3.2

500 23 4.8

521 21 4.2

542 21 4.0

567 25 4.6

Total Sq Ft (Mil.) % YoY Sq Ft Growth

31.8 4.7

34.6 9.1

36.8 6.2

38.2 3.7

40.0 4.8

41.7 4.2

42.3 1.5

43.7 3.3

Capex % Capex of Revenue

96 2.8

130 3.7

132 3.6

153 4.0

167 4.0

168 3.8

221 4.6

202 4.0

Comps – Comparable store sales. YoY – Year-over-year. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

In addition to positive comps, Fitch expects new store growth will add another 2%–3% to annual sales growth. Burlington has grown its store base at an average rate of 20 units annually since Bain acquired the company in 2006 (Bain no longer has ownership in the company — see Bain Exits Majority Position Through Partial IPO and Secondary Offerings section). The company expects to open approximately 30 net new stores annually, with a longterm goal of growing its footprint to 1,000 stores to increase scale against larger competitors. This level of store growth is somewhat unique in the mature retail sector, and is mostly supported by the strong growth momentum associated with the off-price concept at the expense of traditional mid-tier department and specialty apparel stores. The new stores planned for 2017 average below 50,000 square feet (sq ft), versus an average of 77,000 sq ft for the entire store fleet. Burlington saw 16% higher productivity than the company’s average in stores less than 60,000 sq ft. In comparison, Ross’s stores average 28,600 sq ft and TJX’s average approximately 30,000 sq ft. The company also continues to devote capex to existing store remodels. While the business has shown a marked improvement over the last few years, operating metrics such as sales productivity, as measured by sales per square foot, and EBITDA margin remain well below its main competitors, as shown in the Off-Price Retailers’ Operating Trends table on the next page.

2017 Outlook Fitch expects Burlington to sustain top-line growth in the midsingle-digit range on 2% comps growth and 2%–3% contribution from new stores, and expects EBITDA margin to improve by 30 bps–50 bps over the next 24–36 months, to about 10.5%. Absent any debt-financed share buybacks, Fitch expects Burlington’s lease-adjusted leverage to trend toward 4.0x over the next two years, versus 4.6x in 2015 and well below the 2011 level of 5.9x, due to EBITDA growth. Fitch expects annual FCF to be $200 million–$250 million over the next two to three years and be directed toward share buybacks. The company began a share-repurchase program in 2015 and purchased $200 million of shares during the year. Burlington’s board approved an additional $200 million share-repurchase authorization in November 2016, bringing total availability to $250 million.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Off-Price Retailers’ Operating Trends 2009

2010

2011

2012

2013

2014

2015

LTM 10/29/16

3,523 20,288 7,184 1,440

3,670 21,942 7,866 1,720

3,854 23,191 8,608 2,045

4,131 25,878 9,721 2,445

4,428 27,423 10,230 2,738

4,815 29,078 11,042 3,215

5,099 30,945 11,940 3,533

5,421 32,678 12,607 3,737

(0.5) 6.8 10.8 16.0

4.2 8.2 9.5 19.4

5.0 5.7 9.4 18.9

7.2 11.6 12.9 19.6

7.2 6.0 5.2 12.0

8.7 6.0 7.9 17.4

5.9 6.4 8.1 9.9

7.5 7.9 7.6 7.6

(4.8) 6.0 6.0 2.5

(0.2) 4.0 5.0 0.7

0.7 4.0 5.0 3.7

1.2 7.0 6.0 7.4

4.7 3.0 3.0 2.7

4.9 2.0 3.0 3.8

2.1 5.0 4.0 (1.0)

4.5 5.0 4.0 0.4

102 320 311 514

100 332 324 508

101 345 338 545

103 370 355 568

106 375 362 553

114 380 372 552

117 385 383 522

— — — —

Store Count (No. of Stores) Burlington TJX Ross Nordstrom Rack

442 2,743 1,005 72

462 2,859 1,055 89

477 2,905 1,125 108

500 3,050 1,199 123

521 3,219 1,276 143

542 3,395 1,362 176

567 3,614 1,446 194

592 3,785 1,535 215

EBIT Burlington TJX Ross

147 1,991 726

180 2,203 907

193 2,447 1,063

176 3,107 1,272

225 3,351 1,343

267 3,590 1,488

312 3,705 1,624

371 3,740 1,739

EBITDA Burlington TJX Ross

303 2,481 911

327 2,709 1,104

346 2,997 1,264

343 3,680 1,506

393 3,975 1,596

434 4,284 1,721

484 4,416 1,970

553 4,418 2,061

EBITDA Growth (%) Burlington TJX Ross

2.3 31.5 38.1

7.9 9.2 21.2

5.7 10.6 14.5

(0.8) 22.8 19.2

14.8 8.0 6.0

10.4 7.7 7.9

11.4 3.1 11.0

17.5 1.3 6.9

EBITDA Margin (%) Burlington TJX Ross

8.6 12.2 12.7

8.9 12.3 14.0

9.0 12.9 14.7

8.3 14.2 15.5

8.9 14.5 15.6

9.0 14.7 15.6

9.4 14.3 16.5

10.1 13.5 16.3

($ Mil.) Revenues Burlington TJX Ross Nordstrom Rack Revenues Growth (%) Burlington TJX Ross Nordstrom Rack a

Comps Sales (%) Burlington TJX Ross Nordstrom Rack

Annual Sales per Sq Ft ($) Burlington TJX Ross Nordstrom Rack

LTM comps reflects the nine months ended Oct. 29, 2016. Comps – Comparable store sales. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Liquidity and Debt Structure Burlington had $33 million in cash and $384 million available under its $600 million ABL revolver as of Oct. 29, 2016. The $600 million revolving credit facility has a first lien on inventory and accounts receivable and a second lien on real estate, property and equipment. Burlington amended its term loan agreement in July 2016 and replaced the existing $1.1 billion Term B-3 loan with a $1.1 billion Term B-4 loan due 2021 and obtained better pricing. The Term B-4 loan is secured by a first lien on real estate, favorable leases, machinery and equipment; and a second lien on inventory and receivables. The term loan does not contain any maintenance financial covenants. The company made a $50 million prepayment on the prior B-3 term loan in May 2015, which allows it to offset the mandatory quarterly payments on the B-4 term loan due through May 1, 2021. The loan requires 50% excess cash flow sweep as long as leverage (essentially total debt/EBITDA) is more than 4.0x. Restricted payments are not allowed as long as leverage is more than 3.5x. Debt/EBITDA was about 2.7x at the end of 2015, and Fitch expects it to trend down to 2.3x at the end of 2016.

Bain Exits Majority Position Through Partial IPO and Secondary Offerings Burlington was acquired by Bain in 2006 for $2.1 billion, reflecting an enterprise value/EBITDA multiple of just over 7.0x. This value was at least two turns lower than most retail LBOs at the time. Burlington pursued a partial IPO in October 2013, with approximately $205 million in net proceeds. Bain remained the majority shareholder following the IPO, with a 74% interest in the company, but reduced its ownership to 34% as a result of two secondary offerings in May 2014 and December 2014. The company closed another secondary offering in April 2015, in which Bain completely exited its investment in the company. Burlington received no proceeds from the offering. Approximately 98% of shares are held by the public and 2% is held by management. The company traded at an enterprise value/EBITDA of 9.0x as of Dec. 31, 2015.

Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $600 Mil. ABL Revolver due 8/13/19 Term B-4 Loans due 8/13/21 Total Secured Debt

174.3 1,111.8 1,286.1

13.3 84.9 98.2

Capital Lease Obligations Total Debt

24.0 1,310.1

1.8 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) — — — — — 1,111.8

Cash Revolver Availability Total

32.8 383.7 416.5

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned ‘bb+*/rr1*’ to the senior secured revolver and senior secured term loan, indicating outstanding recovery prospects (91%–100%) in the event of default.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix A Organizational Structure — Burlington Stores, Inc. ($ Mil., As of Oct. 29, 2016) Public Shareholders

Management

98%

Burlington Stores, Inc. (Parent Holding Company) (CO — bb*/stable) Burlington Holdings, LLC

Burlington Holdings Finance, Inc.

Burlington Coat Factory Investments Holdings, Inc. (Guarantor of all debt at BCFWC) (CO — bb*/stable)

Burlington Coat Factory Warehouse Corporation (BCFWC) Debt Issue $600 Mil. ABL Revolver due 8/13/19 Senior Secured Term B-4 Loan due 8/31/21 Total

Amount 174.3 1,111.8 1,286.1

CO bb+*/rr1* bb+*/rr1* —

Operating Subsidiaries (Guarantor of all debt at BCFWC)

CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix B Bank Agreement Covenant Summary — Burlington Coat Factory Warehouse Corp. Overview Borrower Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Burlington Coat Factory Warehouse Corp. Second Amended and Restated Credit Agreement dated 9/2/11 (Exhibit 10.1 to 8-K filed 9/9/11) First Amendment to Second Amended and Restated Credit Agreement dated 8/13/14 (Exhibit 10.2 to 8-K filed 8/18/14) Senior secured asset based revolving facility of up to $600 Mil. subject to a borrowing base equal to (i) 90% of eligible credit card receivables plus (ii) 85% of appraised value of eligible inventory (net of inventory reserve), minus all availability reserves. $600 Mil. 8/13/19 Senior secured. Secured by a first lien on inventory and receivables; and a second lien on real estate, property and equipment. Guaranteed by the borrower’s direct holding company (Burlington Coat Factory Investments Holdings, Inc. or Holdings) and all of the borrower’s subsidiaries. Coverage Debt Ratio: Qualifying unsecured debt of any loan party as long as pro forma consolidated interest coverage ratio is ≥ 2.0x. Notable Permitted Debt Incurrence: 1) Purchase money debt in respect of financing the purchase, lease or improvement of property or equipment shall not exceed $75 Mil.; 2) indebtedness under term loan financing facility not to exceed the sum of a) $1.2 Bil. plus b) amount of any incremental term loans; 3) subordinated debt when aggregated with the amount of permitted refinancing not to exceed $200 Mil.; 4) unsecured Indebtedness of Holdings not to exceed $100 Mil.; 5) qualifying secured debt of any loan party issued solely for cash consideration and net proceeds applied to prepayment of term obligations; 6) qualifying secured debt of any loan party as long as pro forma consolidated secured leverage ratio is ≤ 3.25x; 8) permitted real estate financings; 9) general unsecured debt not to exceed $150 Mil. Liens securing new indebtedness permitted under debt incurrence covenant; general liens (other than liens on assets constituting ABL priority collateral) securing obligations in an amount not to exceed $75 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Acquisitions/Divestitures Change of Control (CoC)

A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing to control a majority of the board of directors or to own 100% of the capital stock. A CoC is defined as a person or group owning at least 50% of the voting power of the company. M&A, Investments Restriction Investments by any loan party to any other loan party not to exceed $75 Mil.; guarantees of indebtedness of nonloan party subsidiaries not to exceed $75 Mil.; additional investments not to exceed available amount (defined at the bottom of term loan agreement) if payment conditions (defined at the bottom of this page) are satisfied; general carveout of $75 Mil. Sale of Assets Restriction Dispositions of inventory not in the ordinary course of business are permitted if at arm’s length and such store closures and related inventory dispositions shall not exceed 15% of store count at the beginning of such fiscal year; sales and transfers (including saleleaseback transactions) of real estate of any loan party are permitted to the extent permitted by the term loan agreement, or if the term loan facility has been repaid in full, such sale or transfer shall be made for fair market value and at least 75% of the consideration shall be in cash; general carveout of $10 Mil.

Restricted Payments Restricted Payments (RP)

Prepayment of Debt

Other Cross-Default Cross-Acceleration MAC Clause Cash Dominion Event

Key Definitions

Financial Covenants Pricing

RP Basket: None. Notable Permitted RPs: 1) Repurchase of stock not to exceed $25 Mil. in any fiscal year; 2) payment to direct or indirect parent to declare and pay regular quarterly dividends on its common stock in an amount not to exceed 6% per year of the aggregate net cash proceeds of the initial public offering; 3) RPs to Burlington Stores, Inc. using solely a portion of the net proceeds of the additional Term B-4 to fund Burlington Stores, Inc.’s repurchase or redemption, defeasance or other retirement of the holdco notes. 1) Prepayment of term loan facility or any other permitted indebtedness in an amount not to exceed $600 Mil. in aggregate with proceeds from equity issuance or capital contributions; 2) prepayment of term loan facility from any permitted refinancings thereof or any refinancing with the proceeds of qualifying secured or unsecured debt; 3) payments of principal and interest in respect of any subordinated indebtedness; 4) i) payments of principal and interest when due in respect of any permitted indebtedness; and ii) as long as payment conditions are satisfied, prepayment of permitted indebtedness; 5) as long as payment conditions are satisfied, payments or other distributions in an amount not to exceed the then available amount (defined in the term loan covenant summary) are permitted; 6) redemption of the lead borrower’s 10% unsecured senior notes due 2019 on or about the first amendment effective date; 7) prepayment of term loan facility is permitted as long as projected average excess availability during the six fiscal months following, after giving effect of such payment, will be no less than 15% of the then borrowing base.

Yes, exceeding $75 Mil. No. None. The company’s funds will be swept daily to reduce the borrowings outstanding under the ABL revolver if borrowings availability falls below designated thresholds. This means either (a) the occurrence and continuance of any specified default, or (b) the borrower’s failure to maintain availability of at least the greater of $60 Mil. or 12.5% of the loan cap for five consecutive days. Payment Conditions: with respect to a specified transaction or payment (a) no event of default exists or would arise therefrom; (b) pro forma availability will be equal to or greater than 15% of the loan cap (lesser of the total commitments or borrowing base) for each of the six fiscal months following, and (c) pro forma consolidated fixed-charge coverage ratio is not less than 1.0x. None. Level Average Daily Availability LIBOR (%) Prime Rate (%) I Equal to or greater than 50% of the loan cap 1.25 0.25% II Less than 50% of the loan cap 1.50 0.50

ABL – Asset-based loan. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix C Term Loan Covenant Summary — Burlington Coat Factory Warehouse Corp. Overview Borrower Document Date and Location

Description of Debt Maturity Date Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Prepayment of Debt

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Key Definitions

Burlington Coat Factory Warehouse Corp. Credit Agreement dated 2/24/11 (Exhibit 10.2 to 8-K filed 2/24/11) Amendment No. 1 dated 5/16/12 (Exhibit 10.1 to 8-K filed 5/17/12) Amendment No. 2 dated 2/15/13 (Exhibit 10.1 to 8-K filed 2/21/13) Amendment No. 3 dated 5/17/13 (Exhibit 10.1 to 8-K filed 5/22/13) Amendment No. 4 dated 8/13/14 (Exhibit 10.1 to 8-K filed 8/14/14) Amendment No. 5 dated 7/29/16 (Exhibit 10.1 to 8-K filed 7/29/16) Senior secured term loan (Term B-4 loan) 8/13/21 $1,112 Mil. Senior secured. Secured by a first lien on real estate, favorable leases, machinery and equipment; and a second lien on inventory and receivables. Guaranteed by the borrower’s direct holding company (Burlington Coat Factory Investments Holdings, Inc.) and all of the borrower’s subsidiaries.

Coverage Debt Ratio: None. Notable Permitted Debt Incurrence: 1) ABL revolver up to the greater of $900 Mil. and the borrowing base (at time incurred); 2) qualifying secured debt permitted provided that the borrower is compliance with the financial covenants on a pro forma basis and pro forma consolidated interest coverage is at least 2.0x; 3) debt of any loan party or any of its subsidiaries acquired pursuant to permitted acquisition is subject to a minimum consolidated interest coverage test of 2.0x; 4) purchase money debt in respect of financing the purchase, lease or improvement of property or equipment shall not exceed the greater of $75 Mil. and 3% of consolidated total assets; 5) permitted real estate financing; 6) indebtedness of any restricted subsidiary that is not a loan party not to exceed the greater of $25 Mil. and 1.0% of consolidated total assets; 7) subordinated indebtedness in an amount, when aggregated with the amount of permitted refinancing not to exceed $200 Mil.; 8) indebtedness of (i) any securitization subsidiary arising under any securitization facility or (ii) the borrower or any restricted subsidiary arising under any receivables facility shall not exceed $150 Mil.; 9) general carveout not to exceed the greater of $150 Mil. and 6% of consolidated total assets. General carveout not to exceed the greater of 1) $75 Mil. and 2) 3.0% of consolidated total assets. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing to control a majority of the board of directors or to own 100% of the capital stock. A CoC is defined as a person or group owning at least 50% of the voting power of the company. 1) Investments by any loan party to any other loan party not to exceed greater of a) $125 Mil. and b) 5.0% of consolidated total assets; 2) guarantees of indebtedness of nonloan party subsidiaries not to exceed greater of a) $125 Mil. and b) 5.0% of consolidated total assets; 3) additional investments not to exceed available amount (defined at the bottom of this page); 4) as long as no event of default has occurred or would occur, on pro forma basis consolidated leverage ratio must be ≤ 3.5x; 5) investments made by a loan party or any restricted subsidiary in any joint venture or any unrestricted subsidiary not to exceed the greater of a) $25 Mil. and b) 1.0% consolidated total assets at any time; 6) general carveout not to exceed greater of a) $100 Mil. and b) 4.0% of consolidated total assets. Dispositions of inventory not in the ordinary course of business are permitted if at arm’s length and such store closures and related inventory dispositions shall not exceed 15% of store count at the beginning of such fiscal year; sales and transfers (including saleleaseback transactions) of real estate of any loan party are permitted to the extent permitted by the term loan agreement, or if the term loan facility has been repaid in full, such sale or transfer shall be made for fair market value and at least 85% of the consideration shall be in cash; general carveout of $10 Mil.

RP Basket: Cumulative sum of 1) 50% consolidated net income commencing second quarter of fiscal 2012 plus 2) 100% of the net proceeds from an equity issuance and other adjustments; consolidated interest coverage ratio must be ≥ 2.0x on a pro forma basis. Notable Permitted RPs: 1) Loan parties and their restricted subsidiaries may make RPs constituting repurchases of capital stock in BCF Holdings; Burlington Stores, Inc. or any restricted subsidiary not to exceed $10 Mil., with max. carryforward amount of $20 Mil. in any fiscal year; 2) general basket not to exceed greater of a) $50 Mil. and b) 2.0% of consolidated total assets. Special Condition: If (a) no event of default has occurred or would result therefrom and (b) the consolidated leverage ratio as of the last day of the most recently ended fiscal quarter is ≤ 3.5x, any loan party or any restricted subsidiary may make any RP. Payments of scheduled interest in respect of any subordinated indebtedness; prepayment of Specified Indebtedness from equity issuance or capital contributions or from any permitted refinancings thereof or any refinancing with the proceeds of qualifying secured or unsecured debt as permitted under debt incurrence covenant; payments of specified indebtedness by any loan party and any of its restricted subsidiaries given a) no event of default has occurred and consolidated interest coverage ratio must be ≥ 2.0x on pro forma basis or b) no event of default has occurred and consolidated leverage ratio must be ≤ 3.5x on pro forma basis; as long as payment conditions are satisfied, prepayment of senior notes and payments or other distributions in an amount not to exceed the then available amount are permitted. Yes, exceeding $75 Mil. No. None. None. Available Amount: Cumulative excess cash flow commencing from fiscal year ending Jan. 28, 2012, minus (a) excess cash flow sweep required under the mandatory prepayment of term loan, plus (b) $366 Mil. (amount permitted by the definition of available amount prior to giving effect to amendment No. 4), plus (c) capex and investments as permitted under investment covenant, and (d) payments in respect of senior notes, qualifying secured and unsecured debt as permitted under debt covenant and permitted refinancing thereof, and plus capital contributions (excluding proceeds constituting the cure amount).

ABL – Asset-based loan. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Term Loan Covenant Summary — Burlington Coat Factory Warehouse Corp. (Continued) Financial Covenants Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment Pricing Coupon Type/Index

None.

50% excess cash flow, reduced to 25% if consolidated leverage is between 2.75x and 3.00x, 0% if leverage is below 2.75x. This payment offsets future mandatory quarterly payments. None. 1% premium on or prior to the first anniversary of closing.

Term B-4 LIBOR loan: LIBOR + 2.75% Term B-4 Prime Rate loan: Prime Rate + 1.75%

ABL – Asset-based loan. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix D Financial Summary — Burlington Stores, Inc. 12 Months 1/28/12 ($ Mil.) Profitability (%) Operating EBITDAR Margin 13.9 Operating EBITDA Margin 8.9 Operating EBIT Margin 5.0 FFO Margin 5.2 FCF Margin (5.2) Return on Capital Employed 9.5 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 5.9 FFO-Adjusted Leverage 6.3 FCF/Total Adjusted Debt (%) (6.4) Total Debt with Equity Credit/ Operating EBITDAa 4.7 Total Secured Debt/Operating EBITDAa 3.4 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 10.9 Net Leverage (x) Total Adjusted Net Debt/Operating EBITDARa 5.8 FFO-Adjusted Net Leverage 6.3 Total Net Debt/(CFFO – Capex) 16.3 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 1.8 Operating EBITDA/Interest Paida 3.4 FFO Fixed-Charge Coverage 1.7 FFO Interest Coverage 3.0 CFFO/Capex 1.6 Debt Summary Total Debt with Equity Credit 1,613 Total Adjusted Debt with Equity Credit 3,167 Lease-Equivalent Debt 1,554 Other Off-Balance Sheet Debt — Interest (Paid) (102) Implied Cost of Debt (%) 6.9 Cash Flow Summary FFO 204 Change in Working Capital (Fitch Defined) 46 CFFO 250 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (153) Common Dividends (Paid) (298) FCF (201) Acquisitions and Divestitures — Net Debt Proceeds 241 Net Equity Proceeds — Other Investing and Financing Cash Flows (34) Total Change in Cash and Equivalents 5 Liquidity Readily Available Cash and Equivalents 36 Availability Under Committed Credit Lines 410 Not Readily Available Cash and Equivalents 35 Working Capital Net Working Capital (Fitch Defined) 446 Trade Accounts Receivable (Days) 3.8 Inventory Turnover (Days) 105.4 Trade Accounts Payable (Days) 42.7 Capital Intensity (%) 3.9

2/2/13

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

2/1/14 1/31/15

5/2/15

13.6 8.3 4.3 5.6 6.8 9.7

14.0 8.8 5.0 6.4 (4.8) 13.0

14.1 9.0 5.5 6.2 1.7 15.6

14.2 8.6 5.1 0.3 (5.5) 15.6

12.5 6.7 3.1 3.3 (1.5) 16.5

12.2 6.8 3.3 10.6 2.6 17.2

18.5 14.2 11.3 11.7 12.0 18.4

14.7 9.4 6.1 6.9 2.5 18.4

14.7 9.3 5.8 5.3 (0.0) 18.5

13.5 7.9 4.4 4.4 2.2 19.6

13.5 8.3 4.9 9.5 9.0 21.6

15.2 10.1 6.8 7.9 6.2 21.6

5.4 5.5 9.2

5.2 5.2 (6.6)

4.7 5.0 2.5

4.9 5.5 0.4

4.8 5.3 1.2

4.8 4.8 3.0

4.6 5.1 4.0

4.6 5.1 3.6

4.7 4.8 5.6

4.5 4.7 6.9

4.3 4.6 9.5

3.8 2.5

3.6 2.2

2.9 2.9

3.0 3.0

2.9 2.9

3.0 3.0

2.7 2.7

2.6 2.6

2.4 2.4

6.1

9.3

9.8

12.6

11.3

9.2

8.5

8.8

7.6

6.9

5.8

5.4 5.4 4.5

5.0 5.0 10.7

4.7 5.0 15.1

4.9 5.5 82.9

4.8 5.2 31.7

4.7 4.7 12.9

4.6 5.0 9.4

4.6 5.0 10.2

4.6 4.8 6.6

4.5 4.6 5.4

4.2 4.6 3.8

1.7 3.2 1.7 3.2 2.7

1.8 3.5 1.8 3.6 1.7

2.0 4.3 1.9 4.0 1.4

2.1 6.0 1.9 4.9 1.1

2.1 5.7 1.9 4.9 1.2

2.2 7.9 2.2 7.9 1.5

2.3 8.4 2.1 7.2 1.7

2.3 8.4 2.1 7.2 1.6

2.4 8.7 2.3 8.3 2.1

2.4 9.2 2.3 8.6 2.3

2.5 10.1 2.3 8.9 2.8

1,336 3,077 1,741 — (108) 7.3

1,428 3,270 1,842 — (112) 8.1

1,250 3,247 1,996 — (100) 7.5

1,317 3,460 2,143 — (74) 5.5

1,351 3,494 2,143 — (81) 5.9

1,414 3,557 2,143 — (60) 4.2

1,305 3,448 2,143 — (57) 4.5

1,360 3,590 2,230 — (57) 4.3

1,359 3,589 2,230 — (57) 4.2

1,310 3,540 2,230 — (55) 4.0

234 218 453 — (167) (2) 284 — (280) — 3 8

285 4 289 — (168) (336) (215) — 84 239 (19) 90

301 1 302 — (221) — 81 — (189) (1) 2 (108)

4 (26) (22) — (43) — (65) — 66 1 7 9

39 (17) 21 — (39) — (18) — 33 (25) 2 (8)

132 (27) 104 — (72) — 33 — 62 (98) 5 2

181 53 234 — (48) — 186 4 (108) (77) (2) 3

355 (28) 327 — (202) — 126 4 54 (200) 11 (4)

68 (37) 30 — (30) — (0) 0 55 (49) 1 7

55 17 73 — (46) — 27 (0) (2) (25) 1 2

128 55 183 — (62) — 122 0 (49) (74) 4 2

433 88 521 — (186) — 335 4 (104) (225) 4 15

43 423

133 456

25 387

35 386

27 330

29 278

21 401

28 339

30 312

33 384

222 3.7 98.1 72.2 4.0

213 2.9 97.5 73.5 3.8

217 3.7 99.2 78.2 4.6

236 3.5 103.8 79.8 3.6

251 3.0 103.8 76.4 3.4

279 3.6 113.4 85.5 5.8

224 2.2 77.6 59.2 3.1

224 2.7 93.5 71.4 3.9

262 3.6 94.2 69.6 2.4

241 3.0 88.5 64.9 3.6

190 4.0 93.7 78.8 4.6

190 4.0 93.1 78.3 3.4

a EBITDA/R after dividends to associates and minorities. bComparable store sales for the LTM period reflect the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Summary — Burlington Stores, Inc. (Continued) 1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

3,888 5.0 540

4,166 7.2 565

4,462 7.1 624

4,850 8.7 684

1,191 4.8 169

1,152 9.6 144

1,239 6.2 151

1,549 3.5 287

5,130 5.8 752

1,289 8.2 190

1,261 9.5 170

1,349 8.9 182

5,447 7.3 829

540 346

565 348

624 393

684 434

169 102

144 77

151 84

287 220

752 484

190 120

170 100

182 112

829 553

346 193

348 181

393 225

434 267

102 60

77 35

84 41

220 175

484 312

120 75

100 55

112 66

553 371

0.7 477 39.2 (12.0) 3.5 8.6 25.7 (0.6) 100.2

1.2 500 39.3 (14.0) 3.7 5.1 31.7 1.0 100.0

4.7 512 39.6 (14.5) 3.7 5.0 35.6 0.6 100.0

4.9 542 40.2 (14.7) 3.7 4.7 43.6 2.5 131.9

0.8 546 40.1 46.1 3.5 4.6 41.4 3.0 102.2

5.6 546 39.6 49.2 3.7 5.0 42.6 3.6 93.1

2.8 566 40.1 45.4 3.2 4.3 44.7 5.2 166.2

0.1 567 41.3 34.8 3.9 5.1 48.1 5.8 106.8

2.1 567 40.4 (14.7) 3.9 5.1 48.1 5.8 117.3

4.3 570 40.4 43.9 3.9 5.2 47.6 6.2 66.8

5.4 575 39.9 45.8 4.3 5.8 49.3 6.7 102.0

3.7 592 41.5 40.5 3.9 4.7 55.1 7.0 132.8

4.5 592 41.5 40.5 3.9 4.7 55.1 7.0 132.8

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

EBITDA/R after dividends to associates and minorities. bComparable store sales for the LTM period reflect the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Retailing / U.S.A.

Claire’s Stores, Inc. Credit Profile Credit Opinion

Credit Profile Summary

Claire’s Stores, Inc. Long-Term Issuer Default Credit Opinion Senior Secured ABL Credit Opinions Senior Secured Revolving Credit Facility, First-Lien Notes and Term Loan Credit Opinion Second-Lien Notes Credit Opinion Senior Unsecured Notes Credit Opinion Senior Subordinated Notes Credit Opinion

cc* ccc+*/rr1*

cc*/rr4* c*/rr6* c*/rr6*

cc*

CLSIP LLC Long-Term Issuer Default Credit Opinion

cc*

Senior Secured Term Loan

ccc–*/rr3*

Claire’s (Gibraltar) Holdings Limited Long-Term Issuer Default Credit Opinion Senior Unsecured Term Loans Credit Opinion

cc* ccc+*/rr1*

Claire’s (Gibraltar) Intermediate Holdings Limited Long-Term Issuer Default Credit Opinion Senior Secured Term Loan Credit Opinion

EBITDA Below $200 Million: EBITDA was $211 million in 2015, versus $247 million in 2014. Fitch expects 2016 EBITDA to be $180 million and be range-bound between $150 million and $160 million thereafter, assuming negative top-line growth and modest margin compression.

c*/rr6*

CLSIP Holdings LLC Long-Term Issuer Default Credit Opinion

Weak Traffic Hurting Business: Same-store sales trends for Claire’s Stores, Inc. have been negative since 2013 on weak mall traffic, affecting Claire’s impulse-driven business model. Fitch Ratings does not see much upside to Claire’s business, with total same-stores sales expected to be down 4%–5% in 2016, with North America at negative 3.5% and Europe at negative 6%. Fitch expects same-store sales to remain in the negative low single digits in 2017/2018 given declining U.S. mall traffic and tough macroeconomic conditions in Europe.

cc* ccc+*/rr1*

ABL – Asset-based loan. Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Liquidity Concerns Remain: Liquidity remains tight, with total cash of $41 million and a fully drawn asset-based loan (ABL) at Oct. 29, 2016. FCF is expected to be around negative $40 million annually. The company may have just enough liquidity to fund the 2017 holiday season, but there is little margin for further deterioration as Claire’s will then most likely have to raise additional capital to fund seasonal working capital. The ability to fund 2018 operations including seasonal working capital will be dependent on improving EBITDA to $200 million or raising additional capital. DDE Addresses Near-Term Maturities: The company was able to address $574 million in maturities, including $243 million due in 2017 through a distressed debt exchange (DDE). However, this only amounts to around 20% of its total debt load. The company has a significant debt maturity wall of $1.4 billion in 2019, or around 70% of total debt and Fitch views another distressed debt exchange or restructuring as likely.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained improvement in same-store sales and EBITDA to a level where the company is covering its fixed obligations, including seasonal working capital needs and the ability to fund 2019 debt maturities in a timely fashion. Negative Drivers: Negative credit profile drivers would include tightening liquidity and the inability to fund ongoing operations and/or refinance maturities in a timely fashion.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Financial Data

Fitch Base Case Assumptions — Claire’s Stores, Inc.

Claire’s Stores, Inc.

($ Mil.)

FYE LTM 1/30/16 10/29/16 ($ Mil.) Total Revenue 1,402.9 1,331.5 EBITDA 211.4 188.3 EBITDA Margin (%) 15.1 14.1 FCF (48.8) (18.9) Total Adjusted Debt 4,214.6 3,945.0 Total Adjusted Debt/EBITDAR (x) 9.7 9.6 EBITDAR/(Interest + Rent) (x) 1.0 1.0 Same-Store Sales (%) (1.2) (4.2) Real Estate Owned (%) 0 0

Revenue Revenue Growth (%) Same-Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

Same-store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016.

2015A

2016F

2017F

2018F

1,403 (6.1) (1.2) 211 15.1 (7) (21) (28) 2.0 — (49) — 2,424 4,215 9.7

1,302 (7.2) (4.3) 180 13.8 (5) (19) (18) 1.4 — (37) — 2,155 3,874 9.8

1,253 (3.8) (2.0) 160 12.8 (5) (23) (18) 1.5 — (41) — 2,175 3,825 10.4

1,210 (3.4) (2.0) 149 12.4 (5) (35) (18) 1.5 — (53) — 2,230 3,814 11.0

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Liquidity Concerns Remain Same-store sales trends in have been negative since 2013. Fitch believes much of Claire’s U.S. business is dependent on impulse purchases from customer traffic in regional malls. As shopper time spent in malls has declined in recent years, particularly for Claire’s younger demographic, Claire’s purchase occasion opportunities have shrunk, yielding revenue declines. In Europe, some of its bigger markets such as France, Switzerland and Germany, have seen recent macroeconomic challenges suppress spending on discretionary items such as jewelry. Fitch does not see catalysts for significant improvement, given mall traffic declines in the U.S. and some store closure acceleration by anchors such as Macy’s and Sears. Management’s focus on growing its business via concession, franchising and wholesale opportunities is likely to offset declines in the mall-based business rather than be additive to overall top-line and profitability. In addition, approximately one-third of sales are generated in Europe, where macroeconomic headwinds remain strong. Fitch expects same-store sales to be in the negative low single-digit range in 2017, following an expected 4%–5% decline in 2016. Total top-line growth is expected to be down 3.5%–4.0% annually over the next 24–36 months on continued store closings, offset somewhat by new concession stores and excluding any impact from foreign currency fluctuations.

EBITDA Below $200 Million LTM EBITDA was $188 million, versus $211 million in 2015 and almost $300 million in 2012, on both top-line and gross margin contraction. Fitch expects 2016 EBITDA to be $180 million,

Same-Store Sales Trends (%) Consolidated North America Europe Average Transactions Per Store Average Transaction Value

2008

2009

2010

2011

2012

2013

2014

2015

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

(6.9) (9.2) (2.5) (10.7) NR

(1.7) (3.2) 1.1 (6.7) 4.7

6.5 7.8 4.3 0.9 6.7

0.1 2.8 (4.4) (3.9) 4.0

1.8 1.9 1.7 (2.2) 4.2

(3.9) (4.6) (2.8) (1.9) (1.0)

(2.3) (1.5) (3.8) (0.1) (1.2)

(1.2) (0.1) (3.0) (3.1) 2.7

(2.5) (1.9) (3.6) (1.3) (0.8)

(1.7) 0.7 (5.2) (0.4) (1.2)

(0.6) 0.1 (1.6) (1.9) 1.6

(0.2) 0.7 (1.6) (10.2) 11.6

(5.1) (0.8) (12.7) (17.8) 16.5

(5.7) (4.4) (7.8) (16.8) 14.4

(1.6) (1.0) (2.5) (15.6) 16.4

NR – Not reported. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance and expects 2017 and 2018 EBITDA to be $150 million–$160 million, assuming negative 3.5%–4.0% top-line growth and modest margin compression. The contribution from its concession business, which could grow into a $100 million–$120 million revenue business over the next 12–18 months, could provide some support to EBITDA.

Liquidity and Debt Structure Liquidity (cash and revolver availability) has tightened materially over the last year on EBITDA declines, with LTM FCF down $20 million, even as LTM capex has been cut to approximately $18 million from $100 million in 2013. Claire’s had total liquidity of $41 million as of Oct. 29, 2016, made up of consolidated (domestic and European) cash with no availability on its $75 million

Claire’s Liquidity Analysis ($ Mil.) Domestic Liquidity

Domestic Cash

Facility Size (U.S.)

U.S. Borrowings (Secured)

LOC (U.S.)

13.9 7.3 7.8 6.8 7.5 5.8 41.3 8.0 6.1 21.6 38.0 19.3

115.0 115.0 115.0 115.0 115.0 115.0 115.0 115.0 115.0 115.0 115.0 75.0

0.0 34.6 19.5 34.7 0.0 67.5 111.3 111.3 42.2 110.2 110.2 70.2

6.3 3.3 3.3 3.3 3.0 3.6 3.6 3.6 3.6 4.7 4.7 4.7

Facility Size (Europe)

Europe Borrowings (Unsecured)

LOC (Europe)

— — — 43.8 39.5 39.2 50.0 50.0 50.0 50.0 50.0 50.0

— — — 40.0 0.0 0.0 0.0 10.3 0.0 50.0 49.3 49.2

— — — 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

International/Europe Liquidity Available (Excluding Restricted) Cash 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

44.4 17.1 19.3 21.1 19.9 14.7 41.4 15.9 12.8 27.3 37.3 21.2

Revolver Availability Total Domestic (U.S.) Liquidity 108.7 77.1 92.2 77.0 112.0 43.9 0.1 0.1 69.2 0.1 0.1 0.1

122.6 84.4 100.0 83.8 119.5 49.7 41.4 8.1 75.3 21.7 38.1 19.4

Revolver Availability Total European (Europe) Liquidity — — — 3.8 39.5 39.2 50.0 39.7 50.0 0.0 0.7 0.8

44.4 17.1 19.3 24.9 59.4 53.9 91.4 55.6 62.8 27.3 38.0 22.0

Consolidated Liquidity

4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Total Unrestricted Cash

Total Revolver Availability

Total Liquidity

EBITDA

CFO

Capex

FCF

58.3 24.4 27.1 27.9 27.4 20.4 82.6 23.9 18.9 48.9 75.3 40.5

108.7 77.1 92.2 80.8 151.5 83.1 50.1 39.8 119.2 0.1 0.8 0.9

167.0 101.5 119.3 108.7 178.9 103.5 132.7 63.7 138.1 49.0 76.0 41.4

262.0 258.9 259.1 257.3 246.5 234.4 229.8 216.8 152.0 162.5 153.6 151.7

(3.2) (3.8) 23.5 36.6 21.1 1.0 (2.0) (19.5) 211.4 210.8 189.4 188.3

(96.2) (95.4) (86.5) (69.0) (48.4) (35.6) (31.8) (29.4) (21.2) (39.4) (31.9) (1.4)

(99.4) (99.2) (62.9) (32.4) (27.3) (34.6) (33.8) (48.9) (27.6) (25.6) (21.7) (17.5)

LTM

Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance ABL. Domestic liquidity was $19 million, reflecting seasonal working capital buildup, while European liquidity was approximately $22 million. Fitch expects Claire’s to end 2016 with about $105 million of cash and no revolver availability. FCF is expected to be around negative $40 million annually. The company may have just enough liquidity to fund the 2017 holiday season, but there is little margin for further deterioration, as Claire’s will then most likely have to raise additional capital to fund seasonal working capital. The ability to fund 2018 operations, including seasonal working capital, will be dependent on improving EBITDA to $200 million or raising additional capital.

Distressed Debt Exchange On Aug. 12, 2016 Claire’s commenced an offer to exchange any and all of $800 million in debt — its $450 million 8.875% senior secured second-lien notes due 2019, $320 million 7.750% senior unsecured notes due 2020 and the $26.5 million 10.500% senior subordinated notes due 2017 (owned by the public) for term loans. The company completely its exchange offer on Sept. 20, 2016, and Apollo Global Management, LLC completed a similar exchange of its portion of the senior subordinated notes ($242 million in aggregate). Of the total $1 billion in debt outstanding, $574 million (55%) was tendered. The company issued an aggregate $177.9 million in three new term loans against the tendered amount. The term loans contain both payment-in-kind (PIK) and cash portions (which bear 9% interest rate) and mature on Sept. 20, 2021. Commensurate with the Aug. 12, 2016 exchange announcement, the company amended its U.S. credit facility to reduce availability to $75 million from $115 million. Claire’s (Gibraltar) Holdings Limited (Claire’s Gibraltar) became party to a new $40 million unsecured term loan, proceeds of which were used to reduce balances under the U.S. credit facility by $40 million. The company also became party to a new ABL credit agreement in an amount up to $75 million, less any amounts outstanding under the U.S. credit facility. The ABL is secured by a first lien on current assets. All facilities will mature on Feb. 4, 2019.

Details on Distressed Debt Exchange Breakdown of Total Debt Issued

($ Mil.) 8.875% Senior Secured Second Lien Notes due March 2019 7.750% Senior Notes due June 2020 10.500% Senior Subordinated Notes due June 2017 (owned by public) 10.500% Senior Subordinated Notes due June 2017 (owned by Claire's) 10.500% Senior Subordinated Notes due June 2017 (owned by Apollo) Totals

Total Debt Total Debt Amount Issued Issued Outstanding Outstanding Amount Against Against Post Amount Tendered % Tendered Tendered Exchange at 7/30/16 (a) (b) Tendered Amount ($) Amount (%) (a–b)

CLE CLSIP Gibraltar CLE Term CLSIP Term Gibraltar Term Term Loan Term Loan Term Loan — Loan — PIK Loan — PIK Loan PIK

450.0

227.7

50.6

91.1

40.0

222.3

12.5

3.3

40.7

10.8

18.8

5.0

320.0

103.3

32.3

25.8

25.0

216.7

4.1

0.4

13.4

1.2

6.2

0.6

26.5

0.7

2.6

0.4

54.6

25.8

0.1

—

0.2

—

0.1

—

58.7

100.0

14.7

25.0

—

2.3

0.2

7.6

0.7

3.5

0.3

183.6 1,038.8

183.6 574.0

100.0 55.3

45.9 177.9

25.0 31.0

— 464.8

7.3 26.6

0.7 4.6

23.7 86.3

2.2 15.0

10.9 39.8

1.0 6.9

PIK – Payment in kind. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance The company was able to obtain consent from the lenders on the $50 million European credit facility for the whole exchange through an amendment that required the balance on the credit facility ($49.3 million as of July 30, 2016) to be paid down in full by Jan. 31, 2016. In January 2017, the company refinanced the European credit facility with a $50 million secured term loan at Claire’s (Gibraltar) Intermediate Holdings Limited, which is due Jan 31, 2019.

Capital Structure ($ Mil., At Oct. 29, 2016)

Description

Location of Debt

Secured Debt $75 Mil. Revolving Credit Facility due 2/4/19 $75 Mil. ABL Facility 2/4/19b 9.000% Senior Secured First-Lien Notes due 3/15/19 6.125% Senior Secured First-Lien Notes due 3/15/20 8.875% Senior Secured Second-Lien Notes due 3/15/19 9.000% Senior Secured Term Loan due 9/20/21 9.000% Senior Secured Term Loan due 9/20/21 (PIK) 9.000% Senior Secured Term Loan due 9/20/21 9.000% Senior Secured Term Loan due 9/20/21 (PIK)

Pro Forma a 7/30/16 10/29/16 10/29/16

(%)

110.2 — c 1,125.0 210.0 450.0 — — — —

— 70.2 c 1,125.0 210.0 222.3 20.4 10.5 66.3 34.2

— 3.3 52.2 9.7 10.3 0.9 0.5 3.1 1.6

15.000% Senior Secured Term Loan due 1/31/19 Total Secured Debt

Claire’s Stores Claire’s Stores Claire’s Stores Claire’s Stores Claire’s Stores Claire’s Stores Claire’s Stores CLSIP CLSIP Gibraltar Intermediate —

— 1,895.2

— 1,758.9

50.0 1,808.9

2.3 84.0

Unsecured Debt $50 Mil. European Revolving Credit Facility due 8/20/17 $40 Mil. Unsecured Term Loan Credit Facility 2/4/19 9.000% Senior Unsecured Term Loan due 9/20/21 9.000% Senior Unsecured Term Loan due 9/20/21 (PIK) 7.750% Senior Notes due 6/1/20 10.500% Senior Subordinated Notes due 6/1/17 10.500% Senior Subordinated Notes due 6/1/17 Total Unsecured Debt Capital Leases Total Debt

Gibraltar Gibraltar Gibraltar Gibraltar Claire’s Stores Claire’s Stores Claire’s Stores — — —

49.3 — — — 320.0 85.2 183.6 638.1 16.8 2,550.1

49.2 40.0 30.6 15.8 216.7 — 25.8 378.1 16.8 2,153.8

— 40.0 30.6 15.8 216.7 — 25.8 328.9 16.8 2,154.6

— 1.9 1.4 0.7 10.1 — 1.2 15.3 0.8 100.0

Capital structure is pro forma for the new $50 Mil. senior secured term loan due January 2019 that was used to pay off the borrowings outstanding on the $50 Mil. European revolving credit facility. bThe company’s ability to borrow on the $75 Mil. ABL facility is limited by any outstanding borrowings on the $75 Mil. revolving credit facility. cExcludes unamortized premium of $7 Mil. at Oct. 29, 2016 and $8 Mil. at July 30, 2016. ABL – Asset-based loan. PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016 Pro Forma) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 25.8 — 1,437.3 426.7 177.8 —

Note: Excludes borrowings under credit facilities and capital leases. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Cash Domestic Revolver Availability European Revolver Availability Total

40.5 0.1 0.8 41.4

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings

Leveraged Finance Business Profile Assessment Claire’s is a retailer of fashionable accessories and jewelry aimed at girls and young women. The company operates 2,769 company-operated stores and another 598 franchised or licensed stores under two main brands: Claire’s, which is its primary brand and targets girls aged 3–18; and Icing, which targets women in their early 20s to mid-30s. Claire’s has strong brand recognition within its target base of girls and young women. There is no direct competitor of national size and scale in the U.S. that focuses on the same customer demographic with a comparable merchandise assortment. There are more pure-play accessory and jewelry retailers in Europe than there are in North America — notably Accessorize, a U.K.-based chain with a handful of stores in the U.S. Claire’s value-priced offering of jewelry and accessories — the average transaction is about $15–$16 — is relatively broad, with no dependence on any one category or product. Merchandise ranges from hairgoods, handbags, cosmetics and belts, to earrings, bracelets and ear-piercing services. However, Fitch does not see much upside to Claire’s business, with total same-store sales expected to remain somewhat negative given declining mall traffic in the U.S. and tough macroeconomic conditions in Europe. Jewelry sales — which account for 45% of total revenue — at approximately $600 million in the LTM ended Oct. 29, 2016 — declined 10.7% and has driven most of the decline in total revenue since 2013. While accessories sales — which account for the remaining 55% — have held up better, sales declined 4.2% in the LTM. Former CEO Beatrice Lafon commented in the third-quarter 2015 earnings call that while margins on jewelry had historically been significantly higher than the margin on accessories, the jewelry business over the last year or two has been extremely promotional. Therefore, on a net point of view, the margin is not that dissimilar to accessories, and the company does not expect that to change in the near future. Approximately 37% of sales and 22% of the company’s EBITDA base are derived outside North America. While margins are lower for the international segment and same-store sales have trailed the North American operations on average, the company’s geographic diversity remains a differentiating characteristic compared with most specialty retailers, which are focused in domestic markets. EBITDA margin has steadily declined to about 14% from a peak 19% in 2012 on weak top-line. The cost of merchandise is relatively low, and about 85% is sourced from outside the U.S. Moreover, more than 90% of merchandise is proprietary. However, merchandise is discretionary and carries a degree of fashion risk, which can make it susceptible to markdowns. The company is furthermore reliant on mall traffic and derives approximately 40% of its annual EBITDA from the fourth quarter. Given the significant decline in EBITDA and weak liquidity, the company has significantly pulled back on its new store opening program, and is aggressively closing stores that are materially underperforming or as leases come up for renewal. Net store closings in 2016 are expected to be similar to 2015 at around 130 stores, and Fitch expects Claire’s will continue to close a similar amount in 2017. Roughly 90% of Claire’s stores were positive contributors to four-wall EBITDA as of third-quarter 2016.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Claire’s has started opening concession locations at various retailers such as Toys ‘R’ Us, Inc.; recently did tests with Tesco PLC, Carrefour SA and Galleries Lafayette; and is exploring franchising and wholesale opportunities to augment growth. The company operated 935 concession stores as of Oct. 29, 2016, of which, 333 were located in the U.S. and Canada (North America segment), and 602 were located in Europe. Fitch estimates the concession business could grow into a $100 million–$120 million revenue-generating business over the next 12–18 months, or 8%–9% of the total projected 2016 revenue base. EBITDA contribution from the concession stores could be in the $10 million–$15 million range, assuming margin contribution of 10%–13%. This could help offset some of the decline in top-line and profitability in the mall-based business.

Revenue by Product Category 2010

2011

2012

2013

2014

2015

LTM 10/29/16

453.6 323.8 777.4

459.2 347.0 806.3

459.3 351.9 811.2

419.2 346.5 765.7

416.9 367.6 784.5

422.3 346.5 768.8

411.8 316.9 728.6

10.8 4.4 8.0

1.2 7.2 3.7

0.0 1.4 0.6

(8.7) (1.5) (5.6)

(0.5) 6.1 2.5

1.3 (5.7) (2.0)

(0.1) (9.1) (4.2)

31.8 22.7 54.5

30.7 23.2 53.9

29.5 22.6 52.1

27.7 22.9 50.6

27.9 24.6 52.5

30.1 24.7 54.8

30.9 23.8 54.7

433.6 189.3 622.9

456.4 192.6 649.0

475.7 213.9 689.6

509.1 236.7 745.8

490.3 257.2 747.5

463.2 246.6 709.8

444.7 189.4 634.1

423.4 179.4 602.8

(14.8) (14.1) (14.6)

5.3 1.7 4.2

4.2 11.1 6.3

7.0 10.6 8.1

(3.7) 8.7 0.2

(5.5) (4.2) (5.0)

(4.0) (23.2) (10.7)

(6.7) (9.5) (7.5)

32.3 14.1 46.4

32.0 13.5 45.5

31.8 14.3 46.1

32.7 15.2 47.9

32.4 17.0 49.4

31.7 13.5 45.2

31.8 13.5 45.3

2009 Accessories Sales ($ Mil.) North America 409.4 Europe 310.1 Total 719.5 YoY Growth (%) North America 5.0 Europe 5.5 Total 5.2 Contribution to Total Sales (%) North America 30.5 Europe 23.1 % of Total Sales 53.6 Jewelry Sales ($ Mil.) North America Europe Total YoY Growth (%) North America Europe Total Contribution to Total Sales (%) North America Europe % of Total Sales

31.0 16.5 47.5

YoY – Year-over-year. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Claire’s Segment Breakdowna Net Sales ($ Mil.) North America Europe Total % of Total Sales North America Europe b Same-Store Sales (%) North America Europe Consolidated Same-Store Sales Gross Profit ($ Mil.) North America Europe Total Gross Margin (%) North America Europe Total EBIT North America Europe EBITDA North America Europe % of Total Segment EBITDA North America Europe EBITDA Margin North America Europe Store Count North America Europe China Subtotal Company-Owned Joint Venture Franchise and License Total Total Gross Square Footage Net Sales Per Store ($000) Net Sales Per Square Foot Capex New Stores and Remodels Other Total North America Europe Total

2008

2009

2010

2011

2012

2013

2014

2015

LTM 10/29/16

907.5 505.5 1,413.0

850.3 492.1 1,342.4

914.1 512.2 1,426.4

942.3 553.6 1,495.9

977.3 579.7 1,557.0

918.7 594.5 1,513.2

890.4 603.8 1,494.3

877.0 525.9 1,402.9

845.2 486.2 1,331.5

64.2 35.8

63.3 36.7

64.1 35.9

63.0 37.0

62.8 37.2

60.7 39.3

59.6 40.4

62.5 37.5

63.5 36.5

(9.2) (2.5) (6.9)

(3.2) 1.1 (1.7)

7.8 4.3 6.5

2.8 (4.4) 0.1

1.9 1.7 1.8

(4.6) (2.8) (3.9)

(2.9) (1.2) (2.2)

(0.1) (3.0) (1.2)

(2.0) (7.6) (4.2)

435.0 428.0 253.6 Accessories 254.6 692.6 Sales ($ Mil.) 682.6

476.5 264.8 741.3

495.5 2009 275.6 771.1

465.8 2012 293.7 759.5

431.0 2013 295.9 726.8

North America 47.9 50.3 Europe 50.1 51.7 Total 49.0 Growth (%) 50.9 YoY

52.1 51.7 52.0

459.2 52.9 347.0 49.0 806.3 51.4

459.3 50.7 351.9 49.4 811.2 50.2

419.2 416.9 346.548.4 367.6 765.749.0 784.5 48.6

North America 63.5 88.9 Europe 30.3 57.3 Total

124.6 52.9

5.0 153.1 5.5 46.1 5.2

10.8 1.2 4.4 173.6 7.2 8.0 65.4 3.7

0.0 120.7 1.4 56.2 0.6

194.8 30.5 73.2 23.1 53.6 72.7 27.3

31.8 213.430.7 22.7 90.523.2 54.5 53.9 70.2 29.8

163.8 29.5 87.0 22.6

Revenue by Product Category

Contribution to Total Sales (%) 121.0 166.8 North America136.5 57.9 81.2 75.9 Europe % of Total Sales 67.6 62.7 32.4 37.3 Jewelry

68.7 31.3

Sales ($ Mil.) 13.3 America 16.0 North 11.4 16.5 Europe

18.2 14.8

2010 516.92011 284.1 801.0

409.4 453.6 52.6 323.8 310.1 49.8 777.4 719.5 51.6

20.7 456.4 433.6 13.2 192.6 189.3 Total 622.9 649.0 2,026 1,993 1,972 1,953 YoY Growth (%) 943 America 955 1,009 1,118 North (14.8) 5.3 ??? ??? ??? Europe (14.1)??? 1.7 2,969 2,948 2,981 3,071 Total (14.6) 4.2 214 0 Contribution to211 Total Sales (%)0 196 America 195 395 North 32.3381 32.0 3,379 3,354 3,376 3,452 Europe 14.1 13.5 3,011 2,982 3,012 3,092 % of Total Sales 46.4 45.5 461 – Year-over-year. 454 481 494 YoY 453 448filings, Fitch476 490 Source: Company Ratings.

52.1 65.3 34.7

21.8 475.7 15.6 213.9

17.8 509.1 14.6 236.7

689.6 1,921 1,161 4.2 311.1 3,085 6.3 0 39231.8 3,47714.3 3,11746.1 506 502

745.8 1,912 1,185 7.0 17 10.6 3,114 8.1 0 421 32.7 3,535 15.2 3,170 47.9 488 481

LTM 412.6 2014 427.1 2015 10/29/16 241.4 220.4 668.5 633.0 422.3 48.7 346.5 45.9 768.8 47.7

411.8 48.8 316.9 45.3 728.6 47.5

(8.7) (1.5)98.0 (5.6)56.8

(0.5) 1.3 6.1 110.0(5.7) 2.5 32.5(2.0)

(0.1) 107.1 (9.1) 19.1 (4.2)

146.0 27.7 22.982.4 50.6 63.9 36.1

27.9 148.130.1 24.6 55.024.7 52.5 54.8 72.9 27.1

142.4 30.9 40.7 23.8

490.316.4 463.2 257.213.7 246.6 747.5 709.8 1,837 1,161 (5.5) (3.7) 8.7 0 (4.2) 2,998 (5.0) 0.2 0 32.4442 31.0 3,440 16.5 17.0 3,057 47.5 49.4 489 480

54.7 77.8 22.2

16.9 444.7 10.5 189.4

16.8 423.4 8.4 179.4

634.1 1,741 1,126(4.0) 0 (23.2) 2,867 (10.7) 0 53231.7 3,39913.5 2,92145.2 478 469

602.8 1,688 1,081 (6.7) 0 (9.5) 2,769 (7.5) 0 598 31.8 3,367 13.5 — 45.3 — —

38.2 23.1 61.4

17.1 8.4 25.5

40.1 9.7 49.8

63.7 12.9 76.6

64.4 9.5 73.9

86.1 12.9 99.0

38.6 10.3 49.0

24.6 4.0 28.5

— — 18.5

42.6 16.8 59.4

13.7 11.2 25.0

20.5 29.3 49.8

33.8 42.8 76.6

41.9 31.9 73.9

68.8 30.2 99.0

35.8 13.2 49.0

19.2 9.3 28.5

— — 18.5

Segment profit information has not been adjusted for any one-item items or stock-based compensation. bSame-store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016. Source: Company filings, Fitch Ratings.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Recovery Analysis for Various Entities Claire’s Stores, Inc. Fitch’s recovery analysis assumes a $100 million EBITDA for Claire’s domestic business under a distressed scenario that drives an estimated enterprise value (EV) of approximately $550 million at a multiple of 5.5x. In addition, the debt at Claire’s Stores, Inc. benefits from a residual value of approximately $150 million from Claire’s Gibraltar. Deducting 10% of the EV for administrative claims leaves approximately $630 million for creditors. This would provide outstanding recovery prospects (91%–100%) on the senior secured ABL, which is assigned ‘ccc+*/rr1*’. The ABL is secured by a first lien on current assets. The first-lien secured revolving credit facility (under which nothing is currently borrowed given the full draw on the senior secured ABL), first-lien term loans and first-lien secured notes receive average recovery (31%–50%) and are assigned ‘cc*/rr4*’. The Claire’s term loans rank pari passu with the senior secured first-lien notes and the U.S. credit facility, and are secured by a first-priority lien on substantially all assets of Claire’s and the guarantors’ assets securing the company’s first-lien obligations other than certain collateral securing the ABL facility, and a second-priority interest, junior to the liens on such other collateral securing the ABL credit facility. The second-lien notes, unsecured notes and subordinated notes are expected to have poor recovery prospects (0%–10%) and are assigned a ‘c*/rr6*’.

Recovery Analysis — Claire’s Stores, Inc. ($ Mil., Except Where Noted; Credit Opinion: cc*) Distressed Enterprise Value (EV) as a Going Concern (GC) GG EBITDA GC EV Multiple (x) Residual Value from Claire’s Gibraltar EV on GC Basis

100 5.5 151 701

Liquidation Value (LV) Cash A/R Inventory Net PPE Total LV

Book Value 27.7 — 93.8 83.4 —

Advance Rate (%) 0 80 70 20 —

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

Avail. to Creditors — — 65.6 16.7 82.3

701 70 631

Distribution of Value Secured Priority Sr. Secured ABLa Sr. Secured First-Lien Notes and Credit Facilityb Second-Lien Secured Notes Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecuredc Unsecured Sr. Subordinated

Amount 75.0 1,365.9 222.3

Value Recovered 75.0 555.9 —

Recovery (%) 100 41 —

Recovery Rating rr1* rr4* rr6*

Notching +3 0 –1

Credit Opinion ccc+* cc* c*

Value Recovered   

Recovery (%) 0 0 0

Recovery Rating rr6*  rr6*

Notching –3  –3

Credit Opinion c*  c*

631 631 

Amount 297.8 0.0 25.8

Fitch notes the revolver was fully drawn as of Oct. 29, 2016. The ABL is secured by a first lien on the inventory and thus gets recovered prior to the first-lien notes. The senior secured first-lien notes the Claire’s Stores term loans rank pari passu to the senior secured facility in payment priority. cIncludes $320 Mil. of 7.750% senior unsecured notes due 2020 and estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Company filings, Fitch Ratings. b

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Claire’s (Gibraltar) Holdings Limited Fitch’s recovery analysis assumes $58 million EBITDA for Claire’s European business under a distressed scenario that drives an estimated enterprise value (EV) of approximately $320 million at a multiple of 5.5x. The $136 million aggregate senior secured and senior unsecured term loans at Claire’s Gibraltar have outstanding recovery prospects (91%–100%) and are assigned ‘ccc+*/rr1*’. The residual value of $151 million is applied toward debt at Claire’s (Gibraltar) Holdings Limited

Recovery Analysis — Claire’s (Gibraltar) Holdings Limited ($ Mil., Except Where Noted; Credit Opinion: cc*) Distressed Enterprise Value (EV) as a Going Concern (GC) GG EBITDA GC EV Multiple (x) EV on GC Basis

58 5.5 319

Liquidation Value (LV) Cash A/R Inventory Net PPE Total LV

Book Value 12.8 — 57.9 71.2 —

Advance Rate (%) 0 80 70 20 —

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

Avail. to Creditors — — 40.6 14.2 54.8

319 32 287

Distribution of Value Secured Priority Sr. Secured Term Loan Sr. Unsecured Term Loan  Adjusted EV Available for Claims Less Secured Debt Recovery Residual to Claire’s Stores

Unsecured Priority   

Amount 50.0 86.4 

Value Recovered 50.0 86.4 

Recovery (%) 100 100 

Recovery Rating rr1* rr1* 

Notching +3 +3 

Credit Opinion ccc+* ccc+* 

Value Recovered   

Recovery (%)   

Recovery Rating   

Notching   

Credit Opinion   

287 136 151

Amount   

A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to credit opinions. Source: Company filings, Fitch Ratings.

CLSIP LLC The asset of CLSIP LLC is the newly transferred intellectual property, which consists of a 17.5% interest in all U.S. IP of Claire’s. Claire’s is required to pay CLSIP $12 million annually (through semiannual payments) for the use of the 17.5% interest in the U.S. IP that is now held by CLSIP. Fitch assumes an EV of about $65 million after applying a 5.5x multiple to this royalty stream. This results in good recovery prospects (51%–70%) for the CLSIP term loans, which are assigned ‘ccc–*/rr3*.

High-Yield Retail Checkout January 31, 2017

Leveraged Finance Appendix A Organizational Structure — Claire’s Stores, Inc. ($ Mil., Pro Forma As of Oct. 29, 2016) Apollo

Management and Others 98%

2% Claire’s Inc. Delaware Holdings Corporation (Guarantor of Bank Debt)

Claire’s Stores, Inc. (IDCO — cc*) Debt Issue $75 Mil. ABL Facility due 2/4/19 $75 Mil. Senior Secured Revolver due 2/4/19 $1.125 Bil. 9.000% Senior Secured First-Lien Notes due 3/15/19a $210 Mil. 6.125% Senior Secured First-Lien Notes due 3/15/20 9.000% Senior Secured First-Lien Term Loan due 9/20/21 9.000% Senior Secured First-Lien Term Loan due 9/20/21 (PIK) $450 Mil. 8.875% Second-Lien Secured Notes due 3/15/19 $320 Mil. 7.750% Senior Unsecured Notes due 6/1/20 $26.5 Mil. 10.500% Senior Subordinated Notes due 6/1/17 Total

Amount 70 — 1,125 210 20 11 222 217 26 1,901

CO ccc+*/rr1* cc*/rr4* cc*/rr4* cc*/rr4* cc*/rr4* cc*/rr4* c*/rr6* c*/rr6* c*/rr6* —

Domestic Subsidiaries Guarantor of Credit Facility and Notes

CLSIP Holdings LLC (IDCO — cc*)

CLSIP LLC (IDCO — cc*) Debt Issue 9.000% Senior Secured Term Loan due 9/20/21 9.000% Senior Secured Term Loan due 9/20/21 (PIK) Total

Amount 66 34 101

CO ccc–*/rr3* ccc–*/rr3* —

Claire’s (Gibraltar) Holdings Limited (IDCO — cc*) Debt Issue Amount $40 Mil. Senior Unsecured Term Loan Credit Facility 2/4/19 40 9.000% Senior Unsecured Term Loan due 9/20/21 31 9.000% Senior Unsecured Term Loan due 9/20/21 (PIK) 16 Total 86

CO ccc+*/rr1* ccc+*/rr1* ccc+*/rr1* —

Claire’s (Gibraltar) Intermediate Holdings Limited (IDCO — cc*) Debt Issue $50 Mil. Secured Term Loan Credit Facility 1/31/19b

Amount CO 50 ccc+*/rr1*

aExcludes

unamortized premium of $7.0 Mil. bCapital structure is pro forma for the new $50 Mil. senior secured term loan due January 2019 that was used to pay off the borrowings outstanding on the $50 Mil. European revolving credit facility. IDCO – Issuer Default Credit Opinion. ABL – Asset-based loan. PIK – Payment-in-kind. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Claire’s Stores, Inc. Overview Borrower Document Date and Location

Description of Debt Maturity Date Amount ($ Mil.) Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension

Claire’s Stores, Inc. Amended and Restated Credit Agreement dated as of 9/20/12 (exhibit 10.1 to 8-K filed 9/25/12) First Amendment to the Amended and Restated Credit Agreement dated as of 4/30/14 (exhibit 10.1 to 8-K filed 5/2/14) Second Amendment to the Amended and Restated Credit Agreement dated as of 9/10/15 (exhibit 10.2 to 10-Q filed 9/10/15) Amendment No. 3 and Waiver dated as of 8/12/16 (exhibit 10.1 to 8-K filed 8/15/16) Senior secured credit facility. 9/20/17 $75/$0 outstanding at 10/29/16 Senior secured. Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of foreign subsidiaries). Claire’s Inc., and direct and indirect wholly owned domestic subsidiaries.

Coverage Debt Ratio: None. Notable Permitted Debt: 1) Acquisition indebtedness shall not exceed the greater of $75 Mil. and 2.25% of consolidated total assets; 2) capital leases permitted, when combined with the remaining present value of outstanding leases with respect to sale-leaseback, is limited to the greater of $150 Mil. and 5.0% of consolidated total assets; or such a combined amount shall not exceed the greater of $75 Mil. and 2.25% of consolidated total assets if pro forma net secured leverage ratio is greater than 5.0x; 3) indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of consolidated total assets; 4) indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures shall not exceed the greater of $25 Mil. and 1.0% of consolidated total assets; 5) additional all-purpose debt not to exceed the greater of $100 Mil. and 3.0% of consolidated total assets, and pro forma net secured leverage shall not be greater than 5.0x if any of such indebtedness is secured. 1) Aggregate principal amount of revolving facility commitments and senior secured first-lien notes shall not exceed $1.45 Bil., or if such limit is exceeded, pro forma total net secured leverage ratio shall be less than or equal to 3.75x; 2) $30 Mil. for deposits securing swap agreements; 3) general carveout of $30 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

A CoC is an event of default that can result in the termination of the facility commitments. It is defined as the permitted holders failing to control a majority of the board of directors or to own 100% of the capital stock. After an IPO, a CoC is defined as a person or group owning at least 35% of the voting power of the company. Total investments including net intercompany loans and guarantees of indebtedness made to restricted subsidiaries that are not loan parties shall not exceed the greater of $150 Mil. and 5.0% of consolidated total assets. Acquisitions and investments in assets that are not owned by the borrower and restricted subsidiaries or in equity interests of restricted subsidiaries that are not loan parties shall not exceed the greater of $150 Mil. and 4.5% of consolidated total assets. Investments in equity interests of newly formed entity not to exceed $30 Mil. Investments in joint ventures not in excess of the greater of $65 Mil. and 2.0% of consolidated total assets. General carveout not to exceed the greater of $150 Mil. and 5.0% of consolidated total assets. Asset sales shall not exceed the greater of $200 Mil. and 6.5% of consolidated total assets in any fiscal year. Exchange of assets for services and/or other assets of comparable or greater value shall not exceed the greater of $200 Mil. and 6.5% of consolidated total assets in any fiscal year, provided at least 90% of the consideration received by the transferor consists of assets that will be used in permitted business activity and subject to approvals at various levels.

RP Basket: i) $50 Mil. plus ii) 50% of consolidated net income starting Jan. 29, 2012, given the fixed-charge coverage ratio is ≥ 2.0x and consolidated leverage ratio is < 6.0x plus iii) other customary items. Notable Permitted Restricted Payments: 1) Redemption of stock option up to the sum of $30 Mil. annually plus other minor items.

Yes, exceeding $30 Mil. N.A. None. None. None.

MAC − Material adverse change. N.A. − Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Claire’s Stores, Inc. (Continued) Financial Covenants Leverage (Maximum)

Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

When revolver borrowing and letters of credit outstanding exceed $15 Mil., net secured leverage ratio must be at or below the following: Fiscal Quarter (x) 2Q16 6.75 3Q16 6.75 4Q16 6.35 1Q17 6.00 2Q17 6.00 Net secured leverage is defined as net senior secured debt minus the sum of (a) cash of borrower and subs and, prior to an IPO, (b) lesser of (i) cash on unconsolidated balance sheet of the holding company and (ii) 25% of LTM EBITDA. None.  

Pricing Coupon Type/Index

LIBOR + 450 or base rate + 350; facility fee of 0.50%.

MAC − Material adverse change. N.A. − Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Claire’s Stores, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount ($ Mil.) Ranking Security Guarantee Cash Dominion Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Claire’s Stores, Inc. (the “Borrower”) ABL Credit Agreement dated as of 8/12/16 (exhibit 10.12 to 8-K filed 9/26/16) ABL facility 2/4/19 $75 Mil. availability determined under the borrowing base, but not to exceed the total amount of commitments; availability is reduced by outstandings under the $75 Mil. RC; $70.2 Mil. loans and $4.7 Mil. LOCs outstanding at 10/2916. Senior Secured. First priority in the ABL priority collateral, including A/Rs and inventory. Second priority in the notes priority collateral, including real estate, equipment, IP and equity interests of subsidiaries. Guaranteed by Claire’s Inc. and wholly owned domestic subsidiaries of the borrower No traditional cash dominion; cash collateralization of outstanding loans upon EoD.

In addition to the customary exceptions: (i) General basket up to $100 Mil. for borrower and subsidiaries. (ii) ABS debt up to $50 Mil. (inclusive of the European RC at Claire’s Accessories UK Ltd). (iii) Unlimited unsecured debt for transactions in the ordinary course of business. (iv) Indebtedness related to JVs up to the greater of 1% of total assets and $10 Mil., when combined with Investments in JVs. In addition to the customary exceptions: (i) Liens securing the European RC. (ii) Liens for swap agreements, capped at $30 Mil. (iii) Lien on collateral that is pari passu or junior to the lien securing this facility, provided that pro forma for additional pari passu indebtedness raised in connection with such lien, the aggregate principal amount would not exceed $1.5 Bil. Guarantees are included in the definition of Indebtedness and subject to corresponding terms in the credit agreement. Exceptions for guarantees by the borrower and guarantors that were in existence at close of the transaction, or in connection with ABS transactions allowed under the credit agreement.

Claire’s Stores no longer wholly owned by Claire’s Inc. Loss of majority seats on the board of directors. CoC under a document for material indebtedness. Apollo and management seize to own majority share in Claire’s Inc. prior to an IPO. Apollo and management’s share is less than that of a group that has acquired ownership of 35% or more in Claire’s Inc. or Claire’s Stores post their respective IPOs. Loans and advances to company officers up to the greater of 0.25% of total assets or $5 Mil. Investments in JVs up to the greater of 1% of total assets or $10 Mil., when combined with outstandings under the debt basket related to JVs. General basket up to $10 Mil. per fiscal year. Cash consideration of 75% not applicable to individual transactions up to $10 Mil. each or $25 Mil. in aggregate.

Up to $6 Mil. by borrower and Claire’s Inc., provided pro forma total net secured leverage ratio is 6.75x or less. Up to 6% per annum of the proceeds of an IPO received by the borrower.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension

Cross-default to indebtedness at borrower, Claire’s Inc., or any subsidiary greater than $30 Mil. N.A. None. N.A. N.A.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

None. None. None. None.

Pricing Coupon Type/Index

L+450bps drawn, 50bps undrawn

ABL – Asset-based loan. RC – Revolving credit facility. A/R – Accounts receivable. EoD – Event of default. ABS – Asset-backed security. JV – Joint venture. N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Claire’s Stores, Inc. Overview Borrower Description of Debt Document Date Original Size/Outstanding Maturity Date Ranking Security Guarantee

Claire’s Stores, Inc. Term loan Term Loan Credit Agreement dated as of 9/20/16 (exhibit 10.2 to 8-K filed 9/26/16) At 10/29/16: cash portion $20.4 Mil., PIK $10.5 Mil. 9/20/21 Senior Secured. First priority in the notes priority collateral, including real estate, equipment, IP and equity interests of subsidiaries. Second priority in the ABL priority collateral (A/Rs and Inventory). Guaranteed by the domestic, wholly owned subsidiaries of Claire’s Stores. Unlike the ABL facility, the term loan does not benefit from a guaranty from Claire’s Inc.

Financial Covenants None. Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

In addition to the customary exceptions: (i) Acquired debt not to exceed the greater of $75 Mil. and 2.25% of total assets. (ii) Capital lease obligations, mortgage financings and purchase money indebtedness, combined with the remaining present value of outstanding leases not to exceed the greater of $75 Mil. and 2.25% of total assets if pro forma total net secured leverage ratio exceeds 5.00x. (iii) General exception for other Indebtedness at borrower and subsidiary level not to exceed the greater of $100 Mil. and 3.0% of total assets. (iv) No cap for other indebtedness incurred by borrower or subsidiary loan party if the pro forma fixed-charge coverage ratio of Claire’s Stores is at least 2.00x. (v) Indebtedness at foreign subsidiaries capped at the greater of $50 Mil. and 1.5% of total assets. (vi) Indebtedness in connection with JVs (including guarantees) capped at the greater of $25 Mil. and 1.0% of total assets. (vii) Debt for acquisitions so long as pro forma for it: a. The borrower is able to incur at least $1.00 under the general basket for debt incurred by borrower or subsidiary loan party, or b. The pro forma fixed-charge coverage ratio of the borrower is equal to or above its level prior to the acquisition. In addition to the customary exceptions: (i) Liens securing permitted indebtedness, as long as pro forma total net secured leverage ratio of Claire’s Stores does not exceed 4.75x. (ii) Liens related to collateral under swap agreements capped at $30 Mil. (iii) General basket for other liens capped at $30 Mil.

Claire’s Stores no longer wholly owned by Claire’s Inc. Loss of majority seats on the board of directors. CoC under a document representing material indebtedness. Apollo and management seize to own majority share in Claire’s Inc. prior to an IPO. Apollo and management’s share is less than that of a group that has acquired ownership of 35% or more in Claire’s Inc. or Claire’s Stores post their respective IPOs. Investments in the equity interest of, loans to, or guarantees of indebtedness at the borrower or any subsidiary by the borrower or any subsidiary capped at the greater of $150 Mil. and 5.0% of total assets. Loans and advances to employees capped at the greater of $5 Mil. and 0.25% of total assets. General basket capped at the greater of $150 Mil. and 5.0% of total assets plus any portion of the cumulative credit the borrower wishes to apply here. Investments in JVs capped at the greater of $65 Mil. and 2.0% of total assets. General basket up to $10 Mil. per fiscal year. Cash consideration of 75% not applicable to individual transactions up to $10 Mil. each or $25 Mil. in aggregate. Noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. General basket not to exceed the greater of $200 Mil. and 6.5% of total assets per year. Exchange of assets not to exceed the greater of $200 Mil. and 6.5% of total assets per year.

ABL – Asset-based loan. A/R – Accounts receivable. JV – Joint venture. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Claire’s Stores, Inc. (Continued) Restricted Payments Restricted Payments (RP)

In addition to the customary exceptions: Repurchase of shares in Claire’s Inc. from employees starting at $30 Mil. per fiscal year plus adjustments. Up to 6.0% of the net proceeds from an IPO per year. RP to Claire’s Inc., absent an event of default, up to the cumulative credit, calculated as the sum of: (i) $50 Mil. (ii) If pro forma fixed-charge coverage ratio > 2.00x and pro forma consolidated leverage ratio <6.00x, 50% of net income of Claire’s Stores and its subsidiaries starting from 1/29/12 to the most recent fiscal quarter. (iii) 100% of amounts received from the issue or sale of equity of Claire’s Stores after2/28/12. (iv) 100% of contributions to the capital of Claire’s Stores. (v) 100% of indebtedness of the borrower or any subsidiary issued after 2/28/12 which has been exchanged for equity interest in Claire’s Stores, Claire’s Inc. or any other parent entity. (vi) 100% of disposition of investments, sale of equity interest of an unrestricted subsidiary, or distribution from an unrestricted subsidiary. (vii) The fair market value of the borrower’s investment in a subsidiary that has been reclassified as not an unrestricted subsidiary. Minus (i) The portion of cumulative credit used for guarantees by the borrower and subsidiaries loan parties for indebtedness of the borrower and subsidiary loan parties. (ii) The portion of cumulative credit used under the general basket for investments. (iii) The portion of cumulative credit used to pay down junior indebtedness, plus $50 Mil. (iv) The portion of cumulative credit used for RP.

Other Cross-Default Cross-Acceleration Required Lenders/Voting Rights

Material Indebtedness threshold set to $30 Mil. N.A. Lenders holding more than 50.1% of the outstanding loans

Financial Covenants (Incurrence) Leverage (Maximum) Coverage (Minimum) Asset Coverage Net Worth (Minimum)

No financial covenants. No financial covenants. No financial covenants. No financial covenants..

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. Due at maturity. Ability to prepay at any time and with no prepayment premium.

Pricing Fixed at 9%, debt held by Affiliates is PIK. ABL – Asset-based loan. A/R – Accounts receivable. JV – Joint venture. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Senior Secured First-Lien Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Document Date and Location

Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Covenant Suspension

Claire’s Stores, Inc. Indenture dated 2/28/12 Indenture dated 3/15/13 (exhibit 4.1 to 8-K filed 3/5/12) (exhibit 4.1 to 8-K filed 3/19/13) First Supplemental Indenture dated 3/2/12 (exhibit 4.2 to 8-K filed 3/5/12) Second Supplemental Indenture dated 3/1212 (exhibit 4.1 to 8-K filed 3/14/12) Third Supplemental Indenture dated 9/20/12, (exhibit 4.1 to 8-K filed 9/25/12) 3/15/19 3/15/20 9.000% senior secured first-lien notes 6.125% senior secured first-lien notes $1,125 Mil. $210 Mil. Senior secured. Senior secured. Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of foreign subsidiaries). Each of the company’s direct and indirect wholly owned domestic subsidiaries that guarantee the credit facility.

Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, on pro forma basis, including acquisition indebtedness. Notable Permitted Debt Incurrence: 1) Additional Indebtedness to finance an acquisition not to exceed the greater of $75 Mil. and 2.25% of total assets; 2) indebtedness to finance purchase, lease, construct or improve property or equipment permitted provided pro forma senior secured leverage shall not exceed 5.0x, or subject to limitation of the greater of $75 Mil. and 2.25% of total assets; 3) indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets; 4) indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets; 5) additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets. Permitted provided senior secured leverage ratio shall not exceed 3.75x. General carveout of $30 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Put Option at 101: CoC defined as (1) sale of all or substantially all assets other than the permitted holders and (2) 50% voting rights trigger including by way of merger with a permitted holders’ carveout. Permitted holders include Apollo management, affiliates and co-investment partnerships, and the management group. Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $100 Mil. and 3.0% of total assets. At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil.. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.

RP Basket: i) 50% of consolidated net income (commencing 1/29/12 for the 9.000% notes and commencing 2/3/13 for the 6.125% notes) plus ii) 100% of net proceeds from equity and debt issuances plus iii) $1.4 Mil. plus iv) other customary items. Subject to consolidated leverage ratio < 6.0x. Notable Permitted Restricted Payments: 1) Repurchase of employee stock limited to $30 Mil. annually plus an additional $30 Mil. in any calendar year (with unused amounts in any calendar year being permitted to be carried over to succeeding calendar years); 2) investments in unrestricted subsidiaries not to exceed the greater of $35 Mil. and 1.0% of total assets and on a pro forma basis the consolidated leverage ratio < 6.0x; 3) Additional all-purpose up to the greater of $50 Mil. and 1.50% of total assets.

No. Yes, exceeding $25 Mil. Redeemable, at the company’s option, in whole or in part, Redeemable, at the company’s option, in whole or in part, on and after March 15, 2015, at the applicable redemption on and after March 15, 2017, at the applicable redemption price below. price below. 2015: 106.750% 2017: 103.063% 2016: 104.500% 2018 :101.531% 2017 :102.250% 2019+: 100.000% 2018+: 100.000% Covenants related to debt incurrence, restricted payments, asset sales and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Senior Secured Second-Lien Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

Claire’s Stores, Inc. Indenture dated 3/4/11 (exhibit 4.1 to 8-K filed 3/9/11) Supplemental Indenture dated 3/4/11 (exhibit 4.2 to 8-K filed 3/9/11) 3/15/19 8.875% senior secured second-lien notes $450 Mil. Second lien senior secured. Secured by second-priority lien on all of the assets of the company and the guarantors that are pledged as collateral to secure the senior secured credit facility and senior secured first-lien notes. Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility.

Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt. Notable Permitted Debt Incurrence: 1) Additional M&A debt up to the greater of $75 Mil. and 2.25% of total assets; 2) indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $ Mil. and 2.25% of total assets; 3) indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets; r) indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets; 5) additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets. Permitted provided secured indebtedness leverage ratio shall not exceed 4.75x. General carveout of $30 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Put Option at 101: CoC defined as 1) sale of all or substantially all assets other than the permitted holders and 2) 50% voting rights trigger including by way of merger with a permitted holders’ carveout. Permitted holders include Apollo management, Affiliates and co-investment partnerships, and the management group. Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $ Mil. and 3.0% of total assets. At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.

RP Basket: Equals i) 50% of consolidated net income commencing 10/31/10 plus ii) 100% of net proceeds from equity and debt issuances plus iii) other customary items. Subject to consolidated leverage ratio > 6.0x and fixed-charge coverage ratio > 2.0x. Notable Permitted RP: 1) Repurchase of employee stock limited to $30 Mil. annually with unused amounts in any calendar year being permitted to be carried over to succeeding calendar years; 2) investments in unrestricted subsidiaries not to exceed the greater of $35 Mil. and 1.0% of total assets and subject to consolidated leverage ratio < 6.0x; 3) additional all-purpose up to the greater of $50 Mil. and 1.50% of total assets.

No. Yes, exceeding $25 Mil.. Redeemable, at the company’s option, in whole or in part, on and after March 15, 2015, at the applicable redemption price below. 2015: 104.438% 2016 :102.219% 2017+: 100.000% Up to 35% @ 108.875% with proceeds from an IPO on or before 3/15/14. Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Senior Unsecured Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback

Covenant Suspension

Claire’s Stores, Inc. Indenture dated 5/14/13 (exhibit 4.1 to 8-K dated 5/16/13) 6/1/20 7.75% senior notes $320 Mil. Senior. Unsecured. Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility.

Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt. Notable Permitted Debt Incurrence: 1) Additional M&A debt up to the greater of $75 Mil. and 2.25% of total assets; 2) indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $75 Mil. and 2.25% of total assets; e) indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets; r) indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets; 5) additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets. Secured indebtedness leverage ratio would not exceed 4.75x. General carveout of $30 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Put Option at 101: CoC defined as (1) sale of all or substantially all assets other than the permitted holders and (2) 50% voting rights trigger including by way of merger with a permitted holders’ carveout. Permitted holders include Apollo management, Affiliates and co-investment partnerships, and the management group. Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $100 Mil. and 3.0% of total assets. At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase the notes.

No. Yes, exceeding $25 Mil. Redeemable, at the company’s option, in whole or in part, on and after June 1, 2016 at the applicable redemption price below. 2016: 103.875% 2017 :101.938% 2018+: 100.000% Up to 100% @ 103 within 60 days of an IPO prior to 12/1/14, or if less than all of the notes are redeemed, 50% of principal amount must remain outstanding. Up to 35% @ 107.75 within 90 days of an equity offering other than an IPO prior to 6/1/16, provided that 65% of the original principal amount remains outstanding. Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix F Senior Subordinated Notes Covenant Summary — Claire’s Stores, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

Claire’s Stores, Inc. Indenture dated 5/29/07 (exhibit 4.3 to S-4 filed 12/17/07) 6/1/17 10.500% senior subordinated notes $335 Mil. Senior. Subordinated. Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries that guarantee the credit facility.

Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x, including acquisition and merger debt. Notable Permitted Debt Incurrence: 1) Additional merger and acquisition debt up to the greater of $75 Mil. and 2.25% of total assets; 2) indebtedness to finance purchase, lease, construct or improve property or equipment if a) senior secured leverage shall not exceed 5.0x, or b) the total amount does not exceed the greater of $75 Mil. and 2.25% of total assets; 3) indebtedness of foreign subsidiaries not to exceed the greater of $50 Mil. and 1.5% of total assets; 4) indebtedness incurred on behalf of or representing guarantees of indebtedness of joint ventures of issuer not to exceed the greater of $25 Mil. and 1.0% of total assets; 5) additional all-purpose debt equal to the greater of $100 Mil. and 3.0% of total assets. Secured indebtedness leverage ratio would not exceed 4.75x. General carveout of other liens not to exceed $30 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Put option at 101. CoC defined as (1) sale of all or substantially all assets other than the permitted holders and (2) 50% voting rights trigger including by way of merger with a permitted holders’ carveout. Permitted holders include Apollo management, affiliates and co-investment partnerships, and the management group. Investments in similar business not to exceed the greater of $50 Mil. and 1.5% of total assets. Additional investments in joint ventures not to exceed the greater of $65 Mil. and 2.0% of total assets at any one time in aggregate. General carveout not to exceed the greater of $100 Mil. and 3.0% of total assets. At least 75% of consideration received in cash. Any noncash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. When aggregate amount of excess proceeds exceeds $20 Mil., issuer must make offer to repurchase bonds.

RP Basket: Equals i) 50% of consolidated net income commencing 10/31/10 plus ii) 100% of net proceeds from equity and debt issuances plus iii) other customary items. Subject to consolidated leverage ratio > 6.0x and fixed-charge coverage ratio > 2.0x. Notable Permitted RPs: 1) Repurchase of employee stock limited to $30 Mil. annually with unused amounts in any calendar year being permitted to be carried over to succeeding calendar years; 2) investments in unrestricted subsidiaries not to exceed the greater of $35 Mil. and 1.0% of total assets and subject to consolidated leverage ratio < 6.0x; 3) additional all-purpose up to the greater of $50 Mil. and 1.50% of total assets.

No. Yes, exceeding $25 Mil.. Redeemable, at the company’s option, in whole or in part, on and after June 1, 2012 at the applicable redemption price below. 2013: 103.500% 2014 :101.750% 2015+: 100.000% None. Covenants related to debt incurrence, restricted payments, asset sales, and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — CLSIP LLC Overview Borrower Description of Debt Document Date Original Size/Outstanding Maturity Date Ranking Security Guarantee

Debt Restrictions Debt Incurrence Limitation on Liens Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Required Lenders/Voting Rights

CLSIP LLC $130 Mil. CSLIP term loan Term Loan Credit Agreement dated as of 9/20/16 (exhibit 10.4 to 8-K filed 9/26/16) $130 Mil. /$101 Mil. 9/20/21 First Lien Secured by a first-priority lien on substantially all assets of CLSIP, which consists of a 17.5% interest in all U.S. intellectual property (IP) of Claire’s and all equity interests of CLSIP held by CLSIP Holdings (the parent). Guaranteed by CLSIP Holdings, a wholly owned unrestricted subsidiary of Claire’s. Not guaranteed by Claire’s Stores or any of its subsidiaries.

Only refinancing indebtedness is permitted. Limited to liens on permitted indebtedness.

Upon Claire’s Stores failing to own 100% of the equity interests of Holdings or the borrower or Holdings failing to own 100% of the equity interests of the borrower. Considered an event of default. Investments, loans, advances, mergers, consolidations and acquisitions are not permitted. Sale of assets is permitted.

As long as there is no payment default, restricted payments to Claire’s or CBI Distributing Corp. permitted up to the sum of cash held by the borrower plus the amount of scheduled payments to be received under the IP agreement on or prior to the next scheduled interest payment date over the sum of the amount of scheduled interest payments on or prior to the next interest payment date plus $500,000.

None with other Claire entities. None with other Claire entities. Required lenders are holders of a majority of the principal amount of the loans. Prior to a bankruptcy event, the portion of loans held by affiliates in excess of 49.9% shall be disregarded.

Source: Company filings, Fitch Ratings.

Term Loan Financial Covenant Summary — CLSIP LLC Financial Covenants (Incurrence) Leverage (Maximum) Coverage (Minimum) Asset Coverage Net Worth (Minimum)

None. None. None. None.

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. Due at maturity. No penalty or premium on prepayments.

Pricing Loans bear interest at 9.00% per annum. Interest payable in cash except for loans held by affiliates, which is PIK. PIK – Payment in kind. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Claire’s (Gibraltar) Holdings Ltd. Overview Borrower Description of Debt Document Date Original Size/Outstanding Maturity Date Ranking Security Guarantee

Claire’s (Gibraltar) Holdings Ltd. Term Loan Credit Agreement dated as of 9/20/16 (exhibit 10.11 to 8-K filed 9/26/16) $40 Mil./$40 Mil. 2/4/19 Senior unsecured. Unsecured. None.

Financial Covenants None. Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Required Lenders/Voting Rights

In addition to the customary exceptions: (i) Permitted senior indebtedness – Indebtedness under the senior euro revolver agreement, not to exceed $50 Mil. (ii) Capital lease obligations, mortgage financings and purchase money Indebtedness, combined with the remaining present value of outstanding leases not to exceed $37 Mil. when combined with what is outstanding under the corresponding clauses related to capital lease obligations in the ABL credit agreement. (iii) Indebtedness in connection with permitted receivables financings, the senior euro revolver and their respective permitted refinancing indebtedness, capped at $50 Mil. (iv) Indebtedness related to JVs capped at the greater of $10 Mil. and 1.0% of total assets. In addition to the customary exceptions: (i) Liens securing permitted senior indebtedness. (ii) Liens securing permitted receivables financings, which are capped at $50 Mil.

The borrower no longer wholly owned by Claire’s Stores. Loss of majority seats on the board of directors. CoC under a document representing material indebtedness. Apollo and management seize to own majority share in the borrower. Investments in the equity interest of, loans to, or guarantees of indebtedness at the borrower or any subsidiary by the borrower or any subsidiary capped at the greater of $150 Mil. and 5.0% of total assets. Loans and advances to employees capped at the greater of $5 Mil. and 0.25% of total assets. General basket capped at the greater of $150 Mil. and 5.0% of total assets plus any portion of the cumulative credit the borrower wishes to apply here. Investments in JVs capped at the greater of $65 Mil. and 2.0% of total assets. Cash consideration of 75% .

Exception for permitted foreign cash transfers — transfer of cash from the borrower to Claire’s Stores. RP by any subsidiary of the borrower to the borrower or any of its subsidiaries (with specific mechanics in the case of nonwholly owned subsidiaries of the borrower).

Material Indebtedness threshold set to $5 Mil. None. Lenders holding the majority of the outstanding loans.

JV – Joint venture. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Financial Covenant Summary â&#x20AC;&#x201D; Claireâ&#x20AC;&#x2122;s (Gibraltar) Holdings Ltd. Financial Covenants (Incurrence) Leverage (Maximum) Coverage (Minimum) Asset Coverage Net Worth (Minimum)

None. None. None. None.

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. Due at maturity. Ability to prepay at any time with no prepayment premium.

Pricing L + 450bps. Source: Company filings, Fitch Ratings.

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Claire’s (Gibraltar) Holdings Ltd. Term Loan Term Loan Credit Agreement dated as of 9/20/16 (exhibit 10.6 to 8-K filed 9/26/16) At 10/29/16: cash portion $30.6 Mil., PIK $15.8 Mil. 9/20/21 Senior unsecured. Unsecured. None.

Financial Covenants None. Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

In addition to the customary exceptions: (i) Acquired debt not to exceed the greater of $75 Mil. and 2.25% of total assets. (ii) Capital lease obligations, mortgage financings and purchase money Indebtedness, combined with the remaining present value of outstanding leases not to exceed the greater of $75 Mil. and 2.25% of total assets if pro forma total net secured leverage ratio exceeds 5.00x. (iii) General exception for other indebtedness at borrower and subsidiary level not to exceed the greater of $100 Mil. and 3.0% of total assets. (iv) No cap for other indebtedness incurred by borrower or subsidiary loan party if the pro forma fixed-charge coverage ratio of Claire’s Stores is at least 2.00x. (v) Indebtedness in connection with JVs (including guarantees) capped at the greater of $25 Mil. and 1.0% of total assets. (vi) Indebtedness of subsidiaries capped at the greater of $50 Mil. and 1.5% of total assets. (vii) Debt for acquisitions so long as pro forma for it: a. The borrower is able to incur at least $1.00 under the general basket for debt incurred by borrower or subsidiary loan party, or b. The pro forma fixed-charge coverage ratio of the borrower is equal to or above its level prior to the acquisition. In addition to the customary exceptions: (i) Liens securing permitted indebtedness, as long as pro forma total net secured leverage ratio of Claire’s Stores does not exceed 4.75x. (ii) Liens related to collateral under swap agreements capped at $30 Mil. (iii) General basket for other liens capped at $30 Mil.

The borrower no longer wholly owned by Claire’s Stores. Loss of majority seats on the board of directors. CoC under a document representing material indebtedness. Apollo and management seize to own majority share in the borrower. Investments in the equity interest of, loans to, or guarantees of Indebtedness at the borrower or any subsidiary by the borrower or any subsidiary capped at the greater of $150 Mil. and 5.0% of total assets. Loans and advances to employees capped at the greater of $5 Mil. and 0.25% of total assets. General basket capped at the greater of $150 Mil. and 5.0% of total assets plus any portion of the cumulative credit the borrower wishes to apply here. Investments in JVs capped at the greater of $65 Mil. and 2.0% of total assets. Cash consideration of 75%. Non-cash consideration not to exceed the greater of 3.0% of total assets and $100 Mil. General basket not to exceed the greater of $200 Mil. and 6.5% of total assets per year. Exchange of assets not to exceed the greater of $200 Mil. and 6.5% of total assets per year.

PIK – Payment in kind. JV – Joint venture. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Claire’s (Gibraltar) Holdings Ltd. (Continued) Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Required Lenders/Voting Rights

In addition to the customary exceptions: Repurchase of shares in Claire’s Inc. from employees starting at $30 Mil. per fiscal year plus adjustments. Up to 6.0% of the net proceeds from an IPO per year. RP to Claire’s Inc., absent an event of default, up to the Cumulative Credit, calculated as the sum of: (i) $50 Mil. (ii) If pro forma fixed-charge coverage ratio >2.00x and pro forma consolidated leverage ratio <6.00x, 50% of net income of Claire’s Stores and its subsidiaries starting from 1/29/12 to the most recent fiscal quarter. (iii) 100% of amounts received from the issue or sale of equity of Claire’s Stores after 2/28/12. (iv) 100% of contributions to the capital of Claire’s Stores. (v) 100% of indebtedness of the borrower or any subsidiary issued after 2/28/12 that has been exchanged for equity interest in Claire’s Stores, Claire’s Inc. or any other parent entity. (vi) 100% of disposition of investments, sale of equity interest of an unrestricted subsidiary, or distribution from an unrestricted subsidiary. (vii) The fair market value of the borrower’s investment in a subsidiary that has been reclassified as not an unrestricted subsidiary. Minus (i) The portion of cumulative credit used for guarantees by the borrower and subsidiaries loan parties for indebtedness of the borrower and subsidiary loan parties. (ii) The portion of cumulative credit used under the general basket for investments. (iii) The portion of cumulative credit used to pay down junior indebtedness, plus $50 Mil. (iv) The portion of cumulative credit used for RP.

Material Indebtedness set to $30 Mil. N.A. Lenders holding the majority of the outstanding loans.

PIK – Payment in kind. JV – Joint venture. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

Term Loan Financial Covenant Summary — Claire’s (Gibraltar) Holdings Ltd. Financial Covenants (Incurrence) Leverage (Maximum) Coverage (Minimum) Asset Coverage Net Worth (Minimum)

None. None. None. None.

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. Due at maturity. Ability to prepay at an time with no prepayment premium.

Pricing Fixed at 9%, debt held by Affiliates is PIK. PIK – Payment in kind. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Covenant Summary — Claire’s (Gibraltar) Intermediate Holdings Limited Overview Borrower Document Date and Location Description of Debt Maturity Date Amount ($ Mil.) Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Claire’s (Gibraltar) Intermediate Holdings Limited including the Obligors: Claire’s France S.A.S, Claire’s Accessories UK Limited, Claire’s Switzerland GmbH, Claire’s Accessories Spain S.L.U., and Claire’s Germany GmbH 1/5/17 Credit Agreement dated as of 1/5/17 (exhibit 10.1 to 8-K filed 1/10/16) 1/31/19 $50 Mil. First lien. Secured by equity interests in Claire’s (Gibraltar) Intermediate Holdings Limited and equity interests in direct and indirect subsidiaries. Guarantors include Claire’s (Gibraltar) Intermediate Holdings Limited and direct and indirect subsidiaries. Claire’s Gibraltar, the parent of Claire’s (Gibraltar) Holdings Limited (CGHL), is not a guarantor.

Capital lease obligations up to $37 Mil. Indebtedness arising from agreement with Holdings up to $5 Mil. Indebtedness incurred on behalf of joint ventures when combined with investments made in joint ventures, the greater of $10 Mil. or 1% of consolidated total assets. Permitted liens include pledges of equity interests of permitted joint ventures, acquired liens and for capital lease obligations.

Occurs if i) Claire’s Stores fails to own 100% of the CGIH; and, (ii) CGHL fails to own 100% of the equity of CGIH. Investments and Intercompany loans to non-loan parties up to $4 Mil. Other investments up to $5 Mil. Investments in joint ventures when combined with indebtedness the greater of $10 Mil. or 1% of consolidated total assets. Asset sale in which loan party must receive at least 75% in unrestricted cash or permitted investments, the aggregate amount can be no greater than $30 Mil. in any fiscal year, and proceeds over $5 Mil. is used to prepay the loan. Other asset sales up to $10 Mil.

Restricted Payments Restricted Payments (RP)

Payments to CGHL for overhead expenses of CGHL, taxes and other costs relating to maintenance of company’s existence.

Other Cross-Default MAC Clause Equity Cure

Yes, if the amount of the payment default is in excess of $5 Mil. Yes. No.

Financial Covenants Cash Collateral

Pricing Coupon Type/Index

Minimum unrestricted cash balance of $7 Mil. Specified collateral value cannot be less than $50 Mil. Consolidated total assets and EBITDA allocated to loan parties cannot be less than 75% of consolidated total assets and 60% of EBITDA.

Year One — 15% (3% PIK), Year Two — 12%

MAC − Material adverse change. PIK – Payment in kind. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix G Financial Summary — Claire’s Stores, Inc. 12 Months 1/28/12 ($ Mil.) Profitability (%) Operating EBITDAR Margin 33.1 Operating EBITDA Margin 17.9 Operating EBIT Margin 13.3 FFO Margin 6.1 FCF Margin 2.1 Return on Capital Employed 7.7 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 8.5 FFO-Adjusted Leverage 9.3 FCF/Total Adjusted Debt (%) 0.8 Total Debt with Equity Credit/ Operating EBITDAa 9.0 Total Secured Debt/Operating EBITDAa 6.0 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 16.3 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 8.2 FFO-Adjusted Net Leverage 8.9 Total Net Debt/(CFFO – Capex) 70.4 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 1.4 Operating EBITDA/Interest Paida 2.0 FFO Fixed-Charge Coverage 1.3 FFO Interest Coverage 1.7 CFFO/Capex 1.4 Debt Summary Total Debt with Equity Credit 2,404 Total Adjusted Debt with Equity Credit 4,220 Lease-Equivalent Debt 1,816 Other Off-Balance Sheet Debt — Interest (Paid) (137) Implied Cost of Debt (%) 5.5 Cash Flow Summary FFO 92 Change in Working Capital (Fitch Defined) 11 CFFO 103 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (71) Common Dividends (Paid) — FCF 32 Acquisitions and Divestitures (6) Net Debt Proceeds (122) Net Equity Proceeds — Other Investing and Financing Cash Flows 10 Total Change in Cash and Equivalents (86) Liquidity Readily Available Cash and Equivalents 174 Availability Under Committed Credit Lines 195 Not Readily Available Cash and Equivalents 62 Working Capital Net Working Capital (Fitch Defined) (55) Trade Accounts Receivable (Days) — Inventory Turnover (Days) 71.6 Trade Accounts Payable (Days) 30.6 Capital Intensity (%) 4.7

2/2/13

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16 Three Months

2/1/14 1/31/15

5/2/15

33.8 19.1 14.9 4.9 2.4 9.1

33.4 17.3 12.4 1.0 (6.6) 7.5

32.8 16.5 11.6 (0.1) (1.8) 7.4

29.0 11.5 7.0 (11.2) (23.4) 7.3

33.1 17.0 12.5 2.0 5.1 7.3

27.9 11.1 6.4 (8.3) (20.6) 6.9

33.4 19.5 15.8 10.5 19.1 7.2

31.0 15.1 10.8 (1.0) (3.5) 7.2

30.8 12.1 7.4 (13.4) (30.4) 7.4

29.5 11.9 7.5 1.8 9.1 6.9

29.4 11.5 7.0 (4.3) (10.9) 6.7

31.0 14.1 9.9 (0.4) (1.4) 6.7

8.0 8.9 0.9

8.6 9.1 (2.3)

8.8 9.5 (0.6)

9.0 9.8 (0.8)

9.2 9.8 (0.8)

9.6 10.4 (1.1)

9.7 9.9 (1.2)

10.0 10.3 (1.5)

10.5 10.6 (1.2)

9.6 9.5 (0.5)

8.0 5.4

9.1 6.9

9.7 7.3

10.4 7.7

10.8 7.8

11.5 8.3

11.5 8.7

12.1 9.3

13.5 10.4

11.4 9.4

15.7

30.0

20.0

20.8

21.4

23.9

24.1

27.3

25.5

19.2

7.9 8.8 61.1

8.5 9.1 (23.8)

8.8 9.5 (86.9)

8.9 9.7 (70.2)

9.1 9.7 (71.2)

9.6 10.3 (50.7)

9.6 9.9 (49.3)

9.7 9.9 (49.5)

9.9 10.2 (38.4)

10.3 10.4 (46.1)

9.5 9.5 (112.9)

1.3 1.8 1.2 1.5 1.6

1.1 1.2 1.0 1.1 (0.0)

1.1 1.2 1.0 1.0 0.4

1.0 1.1 1.0 0.9 0.0

1.0 1.1 1.0 0.9 (0.1)

1.0 1.0 0.9 0.9 (0.7)

1.0 1.0 1.0 0.9 (0.8)

1.0 1.0 1.0 0.9 (1.5)

1.0 0.9 1.0 0.9 (1.5)

1.0 1.0 1.0 1.0 (0.1)

2,375 4,217 1,842 — (165) 6.9

2,382 4,333 1,950 — (217) 9.1

2,382 4,329 1,947 — (212) 8.9

2,449 4,241 1,791 — (212) 8.7

2,493 4,284 1,791 — (212) 8.7

2,503 4,295 1,791 — (213) 8.6

2,424 4,215 1,791 — (214) 8.9

2,542 4,333 1,791 — (214) 8.6

2,550 4,341 1,791 — (206) 8.2

2,154 3,945 1,791 — (196) 8.4

(1)

(36)

(27)

(14)

(40)

(14)

(6)

30 107 — (69) — 38 (5) (12) — (24) (3)

(18) (3) — (96) — (99) (3) 6 — (13) (109)

22 21 — (48) — (27) (1) (0) — (3) (31)

(33) (69) — (6) — (75) (0) 67 — 0 (7)

19 26 — (8) — 18 (0) 44 — 1 62

(33) (61) — (8) — (69) (0) 10 — (0) (59)

40 82 — (5) — 77 (1) (79) — (2) (5)

(7) (21) — (28) — (49) (1) 42 — (1) (9)

(47) (87) — (4) — (91) (0) 117 — 4 30

28 33 — (4) — 29 (0) 4 — (6) 26

(17) (30) — (4) — (34) 0 4 12 (16) (35)

5 (1) — (18) — (19) (1) 45 12 (20) 17

61 111 106

14 109 44

5 152 24

20 83 19

83 50 42

24 40 16

19 119 13

6 119 13

49 0 27

75 1 37

19 1 21

(84) — 76.1 35.5 4.4

(69) — 86.6 40.9 6.4

(85) — 69.4 33.2 3.2

(54) — 81.4 42.0 1.9

(65) — 85.8 40.9 2.4

(36) — 96.2 49.4 2.4

(74) — 67.6 32.5 1.3

(74) — 75.6 36.4 2.0

(30) — 92.3 43.6 1.4

(59) — 81.0 35.5 1.4

(20) — 81.8 38.3 1.2

(20) — 79.3 37.1 1.3

EBITDA/R after dividends to associates and minorities. bSame-store sales for the LTM reflect the performance for the three months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Claire’s Stores, Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Same-Store Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16 Three Months

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

1,496 4.9 495

1,557 4.1 527

1,513 (2.8) 506

1,494 (1.3) 490

320 (9.4) 93

348 (8.0) 115

333 (5.1) 93

403 (2.4) 135

1,403 (6.1) 435

300 (6.4) 92

317 (8.8) 94

312 (6.2) 92

1,331 (5.7) 412

495 268

527 297

506 262

490 246

93 37

115 59

93 37

135 79

435 211

92 36

94 38

92 36

412 188

268 200

297 232

262 188

246 173

37 22

59 43

37 21

79 64

211 151

36 22

38 24

36 22

188 131

0.1 3,071 51.5 (23.2) 5.1 11.9 17.9 0.4 103.1

1.8 3,085 51.4 (21.4) 4.8 10.3 19.4 0.0 106.0

(3.9) 3,114 50.2 (20.4) 4.2 8.9 18.7 (2.4) 130.1

(2.2) 2,998 48.6 (22.3) 5.3 11.0 20.2 (8.6) 65.8

(2.5) 2,983 46.0 27.8 4.8 9.3 19.5 (8.5) 42.6

(1.7) 2,954 48.5 23.4 4.3 9.1 19.0 (8.3) 52.3

(0.6) 2,926 46.0 20.3 3.8 7.5 18.4 (8.7) 52.0

(0.2) 2,867 49.7 12.1 4.8 10.0 20.3 (10.7) 34.6

(1.2) 2,867 47.7 (23.7) 4.8 10.0 20.3 (10.7) 45.5

(5.1) 2,831 47.2 20.7 4.4 9.4 19.3 (10.6) 30.0

(5.7) 2,801 46.2 14.7 4.6 10.6 18.7 (11.2) 31.2

(1.6) 2,769 46.5 10.0 4.6 9.8 21.4 (3.2) 27.2

(4.2) 2,769 46.5 10.0 4.6 9.8 21.4 (3.2) 27.2

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Leveraged Finance Retailing / U.S.A.

Dollar Tree, Inc. Credit Profile Credit Opinion

Credit Profile Summary

Dollar Tree, Inc. Long-Term Issuer Default Credit Opinion Secured Revolving Credit Facility Credit Opinion Secured Term Loans Credit Opinion Unsecured Notes Credit Opinion

bb+*/stable bbb–*/rr1* bbb–*/rr1* bb+*/rr4*

Family Dollar Stores, Inc. Long-Term Issuer Default Credit Opinion bb+*/stable Senior Secured Notes Credit Opinion bbb–*/rr1* Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data Dollar Tree, Inc.a ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Debt Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comps (%)b No. of Stores

FYE LTM 1/30/16 10/29/16 15,498 20,449 1,611 2,341 10.4 11.4 300 892 7,466 7,170 15,458 15,162 5.9

4.5

1.8 2.1 13,851

2.5 1.7 14,284

Only includes results of Family Dollar since July 6, 2015. bComps are only reflective of Dollar Tree stores open for at least 15 months. LTM comps reflect the performance for the nine months ended Oct. 29, 2016. Comps – Comparable store sales.

Analysts

Leading Market Position: Dollar Tree, Inc.’s $9.1 billion acquisition of Family Dollar Stores, Inc. on July 6, 2015 upped the company’s market position to No. 1 from No. 3 among U.S. dollar stores, with over $20 billion of revenue and more than 14,000 stores as of October 2016. The transaction was both strategic and complementary given Family Dollar’s multiprice strategy versus Dollar Tree’s primarily fixed $1 price point. Deleveraging Toward 3.5x Anticipated: Dollar Tree’s goal is to reduce total adjusted debt/EBITDAR to below 3.5x by 2020. Fitch Ratings views this goal as achievable and projects leverage of 4.2x for 2016, 3.8x for 2017 and 3.5x for 2018. Deleveraging will be enabled by high single-digit EBITDA compound annual growth and debt repayment, which is supported by the company’s strong FCF profile. Fitch projects annual FCF in excess of $700 million in 2016, rising to $1 billion or more beginning in 2017 as working capital improves. Low Single-Digit Comps Anticipated: Fitch projects 1%–2% consolidated comparable store sales (comps) growth for Dollar Tree through 2018. Fitch attributes the slowdown from mid-tohigh comps following the last recession to market saturation within the dollar store sector. Comps for Dollar Tree have been positive for nearly nine years, but turned negative for Family Dollar in 2014. Family Dollar comps have been in and out of positive territory since being acquired by Dollar Tree. Dollar Tree’s Leading Margins: Dollar Tree’s EBITDA margin led dollar store peers by more than 300 bps prior to its acquisition of Family Dollar. Fitch attributes its profitability to strong comps, effective sourcing, merchandise mix, and efficient cost and inventory management. Although the 2015 Family Dollar acquisition was dilutive, EBITDA margins should improve over time due to better store-level profitability at Family Dollar and synergies that should meet or exceed the $300 million targeted over three years. Family Dollar’s Turnaround: Family Dollar’s operating margin contracted to 7.6% in 2014 from nearly 10% in 2012 due to weak comps, negative mix shift and price investments. As such, there is upside to Family Dollar’s profitability as comps and store-level productivity improve. Fitch believes Dollar Tree is making progress with the turnaround, as comps are no longer consistently negative and segment operating margin increased to 2.2% in the October 2016 quarter, versus being flat in the same period last year.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include comparable sales growth at both Dollar Tree and Family Dollar, and improved profitability at Family Dollar stores. FCF that enables debt reduction so total adjusted debt/EBITDA declines below the mid-3.0x range would result in an improved credit profile. Negative Drivers: Negative credit profile drivers include the inability to sustainably turnaround comps and improve margins at Family Dollar, and/or deteriorating performance at Dollar Tree. Total adjusted debt/EBITDAR sustained at or above 4.0x due to significantly weaker than expected FCF or lower than expected debt paydown would also be negative drivers, as deleveraging is currently factored into Fitch’s forecasts.

Carla Norfleet Taylor, CFA +1 312 368-3195 carla.norfleettaylor@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Dollar Tree, Inc.a ($ Mil.) Revenue Revenue Growth (%) b Comps Growth (%) — Consolidated EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations Capex

2015 15,498 80.0 2.1 1,611 10.4 (68) 781 (481)

2016F 20,700 35.0 1.5 2,440 11.8 (270) 1,360 (635)

2017F 21,500 4.0 1.5 2,660 12.4 (55) 1,755 (660)

2018F 22,400 4.0 1.5 2,815 12.6 (80) 1,865 (685)

3.1 — 300 —

3.1 — 725 —

3.1 — 1,095 (500)

3.1 — 1,180 (500)

7,346

6,330

5,780

5,360

15,339 5.9

14,410 4.2

13,860 3.8

13,440 3.5

Capex/Revenue (%) Dividends FCF Share Repurchases

Total Debt Total Adjusted Debt Adjusted Debt/EBITDAR (x)

Comments Full year of Family Dollar in 2016. — — — — — — Assumed at 3.15% of sales, midpoint of 2016 guidance. — Assumes no policy change. — Fitch assumes company starts to return cash two years after acquisitions. FCF applied to debt reduction and share repurchases. — —

Family Dollar acquisition closed in July 2015. bCompany will not report Family Dollar comps until they are in the system for 15 months. F – Forecast. Comps – Comparable store sales. SG&A – Selling, general and administrative. Source: Fitch Ratings.

Business Profile Assessment Dollar Tree is a leading operator of discount variety stores offering merchandise at the fixed price of $1.00. Primary competitors include Dollar General; 99 Cents Only Stores, LLC; Big Lots Inc.; Fred’s, Inc. and Family Dollar prior to the acquisition. Dollar Tree operated 5,954 Dollar Tree retail stores at the fiscal year ended Jan. 31, 2016. The majority of these stores operate under the Dollar Tree banner, while others include or included Deals, Dollar Tree Deals, Dollar Tree Canada, Dollar Giant and Dollar Bills. About 96%, or 5,729, of Dollar Tree’s stores are in the U.S. and 4%, or 225 units, are in Canada as Dollar Tree Canada or Dollar Giant stores. The company successfully rebannered all of its Deals stores to mostly Dollar Tree stores by the end of second-quarter 2016. With the acquisition of Family Dollar in July 2015, the company operates more than 14,284 stores across 48 states and Canada as of Oct. 29, 2016.

Competitive Landscape ($ Mil.) Latest Fiscal Year-End Net Sales EBITDA EBITDA Margin (%) Number of Stores Average Revenue Per Store Average Selling Square Footage Net Sales/Selling Square Foot Pricing Strategy Consumables as % of Salesb Private Label as % of Sales Geographic Focus

Dollar Tree/ Family Dollar Dollar General Combineda 1/29/16 1/30/16 20,369 15,498 2,331 1,611 11.4 10.4 12,483 13,851 1.6 N.A 7,400 6,000–8,000 221 N.A. Multiple; Multiple $10 or less 76.0 N.A. N.A. N.A National; rural, National; rural, urban and urban and suburban suburban

Big Lots 1/28/16 5,191 357 6.9 1,449 3.6 21,900 164 Includes brand name closeouts 18.0 N.A. National

Fred’s 1/30/16 2,150 35 3.7 641 3.0 14,802 208 Everyday low pricing 26.0 N.A Southeast; small to medium towns

99 Cents Only Stores 1/29/16 2,004 18 0.9 391 5.1 16,000 320 Primary 99 cents 72.0 N.A. West and southwest

Combined results for the latest year end only reflect results for Family Dollar over the period from July 2015 to January 2016 (seven months). bConsumables for 99 Cents Only Stores includes Food and Grocery, Health and Beauty, and Stationary and Party items. Excludes Pharmacy at Fred’s. N.A. – Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance Acquisition of Family Dollar Dollar Tree’s acquisition of Family Dollar catapulted Dollar Tree to No. 1 from No. 3 among U.S. dollar stores, with approximately $20 billion of revenue and 14,000 stores in the LTM months ending October 2016. The transaction was transformational and strategic, given it more than doubled the size of the company’s revenue and store base. The merchandise mix of the two companies is complementary, resulting in increased diversification.

Complementary Operations — Merchandise Mix (As of Jan. 30, 2016)

Family Dollar

Dollar Tree

Seasonal and Electronics 15%

Seasonal 5%

Apparel and Accessories 7%

Variety Categories 46%

Consumable 49%

Consumable 68%

Home Products 10%

Note: Family Dollar figures are for July 6, 2015 to Jan. 30, 2016. Source: Company filings.

The merger consideration was 80% cash/20% stock. The purchase price represented about 11.0x of Family Dollar’s $815 million of EBITDA for the 12 months ended May 31, 2014 (definitive merger agreement announced July 28, 2014), and was in line with past deals in the dollar store sector. Past transactions in the sector include KKR Corp.’s 2007 purchase of Dollar General for 12.3x EBITDA and a consortium’s buyout of 99 Cents Only Stores for 7.9x EBITDA in 2012.

Comparable Store Sales Comparison Comps at Dollar Tree have been increasing at a low to midsingle-digit rate annually since 2006 due to growth in transactions and transaction size. The number of transactions and average ticket contributed an average of 3.2% and 0.9%, respectively, to comps since 2010. Expanding the form of payment accepted by its stores to include debit cards and benefits under the government’s Supplemental Nutrition Assistance Program (SNAP), and the continued rollout of freezers and refrigerated coolers helped drive sales.

Comps Decomposition — Dollar Tree (%) 2010 2011 2012 2013 2014 2015

Comps Transactions 6.3 6.0 3.4 2.4 4.3 2.1

5.0 4.8 2.8 1.9 3.4 1.4

Comps – Comparable store sales. Source: Company filings.

Average Ticket 1.3 1.2 0.6 0.5 0.9 0.8

Fitch views the outlook for the dollar store channel as favorable as consumers continue to desire both value and a convenient shopping experience, but comps growth slowed due to increased competition and the government’s 2016 reduction in SNAP benefits. Fitch forecasts

Annual Comparable Store Sales Dollar Tree

(%)

Family Dollar

Dollar General

12 9 6 3 0 (3) 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: Fiscal year ends at the end of January for Dollar Tree and Dollar General, and the end of August for Family Dollar. Source: Company filings.

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Leveraged Finance Comps Decomposition — Family Dollar (%)

Comps Transactions

2010 2011 2012 2013 2014 2015

4.8 5.5 4.7 3.0 (2.1) NR

Average Ticket

4.3 4.0 2.7 1.7 (2.6) NR

0.5 1.5 2.0 1.3 0.5 NR

Comps – Comparable store sales. Note: Fiscal years end the Saturday closest to Aug. 31. NR – Not reported. Source: Company filings.

assume 1%–2% comps over the intermediate term. Sales should be supported by modest improvement in discretionary income for lower income consumers due to rising hourly wages and reduced unemployment, but competition from big box retailers, grocery chains and drug stores remains intense. In contrast, comps for Family Dollar slowed in 2013 and declined 2.1% in 2014, with performance driven by reduced customer transactions. Transactions declined due to execution issues around the seasonal merchandise transition and the company’s value perception with consumers. Family Dollar changed its pricing strategy from everyday low prices (EDLP) to high-low pricing in 2013, and then back to EDLP in 2014 as the high-low pricing confused customers. Expanding outside its core urban market into suburban locations was also a driver of the weak comps performance.

Quarterly Comparable Sales Dollar Tree

(%)

Family Dollar

Dollar General

8.0 6.0 4.0 2.0 0.0 (2.0) (4.0) 2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Note: Family Dollar comparable sales will not enter Dollar Tree comparable sales base until 4Q16. Source: Company filings.

The brand consequently began a strategic initiative to strengthen its value proposition and began investing in price to increase competitiveness. Family Dollar’s merchandising strategy prior to being purchased by Dollar Tree included having a national brand focus while increasing private brand sales, expanding tobacco and wine offerings, and having better transitional timing for promoting seasonal products. The brand is in the early stages of its turnaround. Fitch anticipates gradual improvement in comps performance for Family Dollar toward the 1%–2% range. Dollar Tree will begin reporting comps for Family Dollar in the fourth quarter of 2016, after the stores have been in the system for one year. Management indicated the stores delivered positive comps since the acquisition up to the end of the first quarter of 2016. Comps were negative for the banner in both quarters ended July 2016 and October 2016.

Dollar Store EBITDA Margins Dollar Tree (%)

Family Dollar

Dollar General

16 12 8 4 0 2012

2013

2014

2015

LTM 3Q16

Note: Fiscal years. From 2015, Family Dollar EBITDA margins are not reported separately and only include seven months of Family Dollar results in 2015. Source: Company filings, Fitch Ratings, Bloomberg.

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Management cited a calendar shift that moved the first of the month for August from the second quarter last year to the third quarter this year and cycling of last year’s Red Tag Clearance Event during the third quarter as the reasons for negative comps. The first of the month is an important shopping day for low-income consumers. Dollar Tree’s ability to fully realize its five-year goal of deleveraging the balance sheet to 3.5x will be in large part contingent on comps growth at both brands, strengthening the profitability of Family Dollar stores and using FCF toward debt reduction.

Margins Lead the Dollar Store Sector Dollar Tree’s EBITDA margin exceeded that of peers by 300 bps or more prior to the acquisition of Family Dollar. Fitch believes this is due to a combination of robust sales growth, a merchandise mix that contains a smaller percentage of lower margin consumable products, and effective cost and inventory management. Dollar Tree’s gross margin was maintained 119

Leveraged Finance around 35% over the six years through 2014, but the acquisition of Family Dollar had a dilutive impact, reducing gross margin by roughly 500 bps to approximately 30% for the LTM ended Oct. 29, 2016, which takes into account four quarters of Family Dollar. Dollar Tree’s operating margin, as reported, improved to approximately 12% in 2014 from 10.7% in 2010, but then declined to 6.8% in 2015. Fitch forecasts moderate improvement over the intermediate term as Family Dollar’s operating performance gradually improves and cost synergies are realized.

Business Strategy Dollar Tree successfully executed its business strategy, as reflected in its historical operating performance. The company’s revenue prior to the acquisition of Family Dollar grew at a 10% CAGR since 2009 to $8.6 billion in 2014, while operating income increased at a 15% CAGR over the same period. Integrating Family Dollar and enhancing the brand’s performance is management’s primary focus in the near term.

Fitch’s Assessment of Dollar Tree’s Business Strategy Strategic Goals Integrating Family Dollar

Fitch’s Assessment of Progress to Date and Prospects • Dollar Tree expects to realize an annual run rate of $300 Mil. in cost-related synergies by the end of year three post transaction closing. Sources include procurement, rebannering Family Dollar stores to achieve optimization of formats, distribution, logistics and overhead. Fitch views the target, which represents roughly 3% of the deal price, as low and therefore achievable. Driving Top-Line Growth • Fitch projects revenue will grow at a midsingle-digit rate annually due to 1%–2% comps growth and new store openings. • Dollar Tree has opened stores at a 6%–7% rate annually and believes the market can support up to 7,000 of its stores in the U.S. and up to 1,000 stores in Canada. Since the acquisition of Family Dollar through the third quarter ended Oct. 29, 2016, Dollar Tree has opened 495 new Dollar Tree Stores. Fitch’s base case assumptions reflect 3%–4% net new unit growth annually. Fitch believes the dollar store sector is becoming saturated. Effective merchandising, benefits from an improved pricing and promotional strategy at Family Dollar and increased consumer discretionary income should support low single-digit comps growth. Merchandising efforts include the continued rollout of frozen and refrigerated items in more stores; maintaining seasonal relevance; and an increased emphasis on an expanded assortment of categories, such as pet supplies, healthcare, beauty and home/household products. Fitch anticipates a higher mix of consumable items and expanded offerings could increase Dollar Tree’s traffic and relevance with consumers, but is concerned that mix shift toward lower margin consumables could have an adverse effect on margins, even though EBITDA would grow. Improving Store Profitability • Dollar Tree plans to rebanner a number of low-margin Family Dollar locations as Dollar Tree locations, particularly for suburban stores, as this is not the company’s core market. The company believes Dollar Tree’s fixed price point will better match the needs of customers and improve the profitability of lower margin stores. Dollar Tree also rebannered all 220 Deals locations (a chain Dollar Tree acquired in March 2006) with 210 Deals stores converted to Dollar Tree stores, nine Deals converted to Family Dollar stores and three closed. • Dollar Tree has not disclosed the exact number of stores to be rebannered, but views the opportunity to be in the hundreds. Dollar Tree rationalized SKUs and engaged in markdowns to rid Family Dollar stores of dated merchandise. Fitch expects purchasing synergies, improved inventory management and reduced shrink to also help profitability. Attaining an Investment• Dollar Tree had an investment-grade credit profile prior to the acquisition of Family Dollar, as total adjusted debt/EBITDAR was less Grade Credit Rating Within than 3.0x and lease-adjusted interest coverage approximately 3.0x. The company’s goal is to lower total adjusted debt/EBITDAR to Five Years below 3.5x within five years of the transaction closing. Fitch views this goal as achievable assuming low single-digit comps, low to midsingle-digit square footage growth, EBITDA margin around 12% and the majority of FCF is applied to debt paydown. Comps – Comparable store sales. Source: Fitch Ratings.

Liquidity and Debt Structure Liquidity was composed of $734 million of cash at Oct. 29, 2016 and availability under an undrawn $1.25 billion revolver that expires in July 2020, net of letters of credit outstanding. Fitch expects Dollar Tree to generate significant FCF over the next few years that can be applied toward debt reduction. The firm currently does not intend to pay a common dividend. Dollar Tree’s capital structure reflects the financing related to the acquisition of Family Dollar. Acquisition financing included $8.2 billion of debt, consisting of $4.95 billion of secured term loans and $3.25 billion of senior unsecured notes. Dollar Tree prepaid $1 billion of its term loan debt on Jan. 26, 2016. Subsequent to Oct. 29, 2016 quarter end, Dollar Tree prepaid $748 million of term loan B-3 loans. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Dollar Tree amended its Term Loan A, which had $938 million outstanding at the time and an undrawn revolver in August 2016, reducing the applicable margin to 1.75% until after Jan. 28, 2017, when interest will range between 1.50% and 2.25%, depending on net secured leverage, from the initial rate of 2.25% for eurocurrency loans. The company also added a $1,275 million Term Loan A-1 tranche with identical terms as the existing Term Loan A and a $750 million Term Loan B-3 tranche in September 2016. These proceeds, along with $242 million in cash were used to prepay the existing Term Loan B-1 in full. The new Term Loan B-3 has substantially the same terms as the existing Term Loan B-2. However, it requires quarterly amortization of 0.25% of principal. Approximately 55% of Dollar Tree’s debt was secured and 45% was unsecured at Oct. 29, 2016. Secured debt includes $300 million of Family Dollar legacy notes due 2021 that became secured equally and ratably with Dollar Tree’s secured bank facility. The revolving credit facility, term loans and the secured 2021 notes are secured by substantially all the assets of Dollar Tree and subsidiary guarantors.

Capital Structure ($ Mil., At Oct. 29, 2016) Description Secured $1.25 Bil. Secured Revolving Credit Facility due 3/9/20 $1.00 Bil. Secured Term Loan A due 3/9/20 $1.28 Bil. Secured Term Loan A-1 due 3/9/20 $650 Mil. Secured Term Loan B-2 due 7/6/22 $750 Mil. Secured Term Loan B-3 due 7/6/22a Family Dollar 5.00% Senior Notes due 2/1/21b Total Secured Debt Unsecured 5.250% Senior Notes due 3/1/20 5.750% Senior Notes due 3/1/23 Other Debt (Various Maturities) Total Unsecured Debt Less Unamortized Debt Discount Total Debtc Shareholders’ Equity Total Capitalization

Amount

(%)

0.0 937.5 1,275.0 650.0 750.0 300.0 3,912.5

0 8 11 5 6 3 32

750.0 2,500.0 7.0 3,257.0 85.7 7,083.8 5,047.7 12,131.5

6 21 <1 27 (1) 58 42 100

Subsequent to quarter-end on Jan. 20, 2017, Dollar Tree prepaid $748.1 Mil. of this loan. bTo the extent Family Dollar’s 2021 notes remained outstanding at closing, they became secured equally and ratably with Dollar Tree’s secured bank facilities. cIncludes approximately $85.7 Mil. of unamortized discount and debt issuance costs. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 173.1 154.6 154.6 2,515.5 14.0 4,126.5

Cash and Short-Term Investments Revolver Availabilitya Total

733.8 1,091.8 1,825.6

Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings.

Note: Excludes borrowings under credit facility, capital leases and other lines of credit. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb+*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned a ‘bbb–*/rr1*’ to the senior secured revolver and term loans at Dollar Tree and the 5% legacy notes at Family Dollar, indicating outstanding recovery prospects (91%–100%) in the event of default. Unsecured debt will typically achieve average recovery (31%–50%) and has been assigned ‘bb+*/rr4*’.

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Leveraged Finance Appendix A Organizational Structure — Dollar Tree, Inc. ($ Mil., As of Oct. 29, 2016) Dollar Tree, Inc. (Parent) (CO — bb+*/stable) Debt Issue $1.25 Billion Secured Revolver Due 3/9/20 Secured Term Loan A Due 3/9/20 Secured Term Loan A-1 Due 3/9/20 Secured Term Loan B-2 Due 7/6/22 Secured Term Loan B-3 Due 7/6/22 5.250% Senior Unsecured Notes Due 3/1/20 5.750% Senior Unsecured Notes Due 3/1/23 Other Debt Total

Amount — 938 1,275 650 750 750 2,500 7 6,870

CO bbb–*/rr1* bbb–*/rr1* bbb–*/rr1* bbb–*/rr1* bbb–*/rr1* bb+*/rr4* bb+*/rr4* — —

100% Owned

Dollar Tree Stores, Inc. (Guarantor)

Dollar Tree Distribution, Inc. Distribution Company

Greenbrier International, Inc. Sourcing Company

Family Dollar Stores, Inc. (Guarantor) (CO — bb+*/stable) Debt Issue 5.000% Sr. Notes Due 2/1/21a

Dollar Tree Management, Inc. Servicing Company

Dollar Tree Stores Canada, Inc.

Amount 300

CO bbb–*/rr1*

Subsidiaries (Guarantor)

aNotes secured equally and ratably with Dollar Tree’s secured bank facilities upon closing of the acquisition. CO – Credit opinion. Note: Subsequent to Oct. 29, 2016 quarter end, Dollar Tree prepaid $748 Mil. of term loan B-3 loans. Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Dollar Tree, Inc. Overview Borrower Document Date and Location

Maturity Date

Description of Debt Amount ($ Mil.) Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Dollar Tree, Inc. Credit Agreement Dated 3/9/15 (Exhibit 10.1 to 8-K filed 3/9/15) Amendment No. 1 dated 6/11/15 (Exhibit 10.1 to 8-K filed 6/12/15) Amendment No. 3 dated 8/30/16 (Exhibit 10.1 to 8-K filed 8/31/16) Amendment No. 4, dated 9/22/16 (Exhibit 10.1 to 8-K filed 9/26/16) Revolver, Term Loan A and Term Loan A-1: Five years after the closing date of the Family Dollar acquisition, unless any of the 2020 5.250% senior notes remain outstanding as of 91 days prior to their stated maturity, in which case the revolver will mature at such time. Term Loan B-2 and B-3: Seven years after the closing date of the Family Dollar acquisition. $1,250 Mil. senior secured revolver, $1,000 Mil. senior secured Term Loan A-1 tranche, $1,275 Mil. Term Loan A-1 (add on), $650 Mil. Term Loan B-2 tranche, and $750 Mil. Term Loan B-3 tranche. $6,200 Mil. Original amount, with incremental commitments than can be both first lien and second lien. The total amount of incremental commitments is firstly $1 Bil. and then up to a 3.0x total first-lien leverage ratio. Senior secured. Secured by substantially all of the assets of Dollar Tree, including its mortgaged properties, and assets of the guarantors. Certain securities are excluded, including equity interests or indebtedness agreed by the collateral agent and borrower to be excluded, equity interests of wholly owned subsidiaries to the extent that organizational documents do not permit commercial tort claims with a value less than $15 Mil., and motor vehicles and other assets subject to certificates of title. Collateral Suspension: If the revolver is outstanding during a collateral suspension period (rated at least ‘Baa3’ by Moody’s and at least ‘BBB–’ by S&P), with respect to the revolver only, total net leverage ratio cannot exceed 2.25x. Subject to exceptions, the facility is guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree.

Ratio Debt: Allowed as long as total net leverage ratio < 5.0x. Notable Permitted Debt: 1) Additional all-purpose debt up to the greater of $425 Mil. and 3% of consolidated total assets; 2) assumed acquisition debt as long as total net leverage ratio < 5.0x; 3) qualified receivables facilities up to the greater of $100 Mil. and 0.75% of consolidated total assets. Additional liens (first and second) on the same collateral is allowed up to the greater of $500 Mil. and 3.5% of consolidated total assets. Consistent with limitations on debt incurrence.

CoC is defined as 35% voting control or the board of directors ceases to consist of a majority of existing directors, and constitutes an event of default. Investments in aggregate outstanding amount not to exceed the sum of: 1) The greater of $1.4 Bil. and 10% of consolidated total assets; and 2) the amount equates to any returns actually received in respect of any such investment (excluding any returns in excess of the amount originally invested). Any additional investment as long as after giving effect to the investment, total net leverage ratio does not exceed 3.5x. Sale lease-back transactions with respect to one distribution center property per fiscal year with net proceeds limited to $75 Mil.; asset sales at fair market value with at least 75% of proceeds in cash and any noncash consideration received cannot exceed the greater of $300 Mil. and 2% of consolidated total assets. Proceeds are subject to prepayment requirements.

RP Basket: $150 Mil. plus 50% of net income starting in February 2015 and conditioned upon total net leverage ratio being less than 4.5x. Notable Permitted Payments: Additional all-purpose payments up the greater of $500 Mil. and 3.5% of consolidated total assets. Special Situation: No restriction on payments as long as total leverage ratio is less than 3.5x.

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, for any amount $75 Mil. or greater. N.A. MAC clause is only a condition for executing the agreement. N.A. No. Lenders holding more than 50% of the aggregate commitments.

N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Dollar Tree, Inc. (Continued) Financial Covenants First-Lien Secured Net Leverage (Maximum)

Coverage (Minimum) Current Ratio (Minimum) Excess Availability (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment Amortization Schedule

Callability/Optional Prepayment

Pricing Coupon Type/Index

On or before the one-year anniversary of the closing date of Family Dollar acquisition. After the one-year anniversary of the closing date and on or before the two-year anniversary. After the two-year anniversary of the closing date. — — — —

Consolidated Net Leverage (x) 4.00 3.75 3.50

If first-lien net leverage is > 2.75x, 50% of excess cash flow; 25% if < 2.75x but > 2.25x; 0% if <2.25x; 100% of asset sale net proceeds. Term Loan A-1 amortizes at a quarterly installment of 1.25% (5% annually) of the principal amount until April 15, 2017 and 1.875% thereafter. Term Loan B-2 does not amortize. Term Loan B-3 amortizes quarterly at 0.25% beginning Jan. 13, 2017. Optional prepayment in whole or in part without premium or penalty; Term Loan B tranche requires a 1% prepayment fee if the loans are repriced before March 9, 2016.

Revolving Credit Facility and Term Loan A-1: LIBOR + 1.75% until Jan. 28, 2017, at which time interest will be LIBOR + 1.50%– 2.25% based on the net secured leverage ratio. Term B-2 :$650 Mil., seven-year fixed at 4.25%, and Term B-3 LIBOR+ 2.5%

N.A. – Not applicable. MAC – Material adverse change. Source: Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Dollar Tree, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount ($ Mil.) Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross Default Cross Acceleration MAC Clause Equity Clawback Covenant Suspension

Dollar Tree, Inc. Indenture, Dated as of 2/23/15 (Exhibit 4.2 to 8-K filed 2/23/15) 3/1/23 5.750% senior notes $2.5 Bil. Payment pari passu with bank debt. Unsecured debt. Subject to exceptions, guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree.

Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio > 2.0x, with sublimit of $500 Mil. or 3.5% of total assets for nonguarantor subsidiaries debt. Notable Permitted Debt: 1) Capital lease obligations up to the greater of $300 Mil. and 2.25% of total assets; 2) assumed acquisition debt as long as fixed-charge coverage ratio > 2.0x and the ratio does not go down as result of the acquisition; 3) additional all-purpose debt up to the greater of $750 Mil. and 5.5% of total assets. New lien is allowed as long as secured leverage ratio is less than 3.0x. Guarantees are treated as indebtedness and are limited by limitation on indebtedness.

CoC includes sale of substantially all assets or acquisition of more than 50% voting stock by outsiders. When this occurs, there is a call option at 101%. Not to exceed the sum of the greater of $1,750 Mil. and 13% of total assets plus amount of any returns with respect to the investments. Joint venture and unrestricted subsidiary investments also limited. Asset sales must be done in the form of 75% as cash equivalents. The proceeds from the asset sale need to be reinvested within one year or repay the first-lien bank debt.

RP Basket: 1) $250 Mil., plus 2) 50% of cumulative net income from February 2015, plus 3) 100% of proceeds from new debt issuance and new equity issuance. Subject to fixed-charge coverage ratio > 2.0x. Other Notable Permitted Restricted Payments: 1) Additional all-purpose payments up to the greater of 750 Mil. and 5.5% of total assets. Note: no limitation on restricted payments if total leverage ratio < 3.5x.

N.A. Yes, if total accelerated debt is more than $100 Mil. No MAC clause. No. If both Moody’s and S&P rate the notes above investment grade, covenants are suspended

OID – Original Issue Discount. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Bond Covenant Summary — Dollar Tree, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount ($ Mil.) Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross Default Cross Acceleration MAC Clause Equity Clawback Covenant Suspension

Dollar Tree, Inc. Indenture, Dated as of 2/23/15 (Exhibit 4.1 to 8-K filed2/23/15) 3/1/20 5.250% senior notes $750 Mil. Payment pari passu with bank debt. Unsecured debt. Subject to exceptions, guaranteed on an unsecured basis by all wholly owned material domestic subsidiaries of Dollar Tree.

Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio > 2.0x, with sublimit of $500 Mil. or 3.5% of total assets for nonguarantor subsidiaries debt. Notable Permitted Debt: Debt to finance acquisitions, due to sale/leaseback transactions, and in connection with securitization financing. New lien is allowed as long as secured leverage ratio is less than 3.0x. Guarantees are treated as indebtedness and are limited by limitation on indebtedness.

RP Basket: 1) $500 Mil. plus 2) 3.5% of Total Assets. Subject to fixed-charge coverage ratio > 2.0x. Other Notable Permitted Restricted Payments: 1) Additional all-purpose payments up to the greater of 750 Mil. and 5.5% of total assets. Note: no limitation on restricted payments if total net leverage ratio <3.5x.

N.A. Yes, if total accelerated debt is more than $100 Mil. No MAC clause. No. If both Moody’s and S&P rate the notes above investment grade, covenants are suspended

OID – Original Issue Discount. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Bond Covenant Summary — Family Dollar Stores, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount ($ Mil.) Ranking Security Guarantee

Family Dollar Stores, Inc. Indenture, Dated as of 1/28/11 (Exhibit 4.1 to 8-K filed 1/28/11) 2/1/21 5.000% senior notes $300 Mil. Payment pari passu with bank debt. Same as credit facility. Guaranteed by all Family Dollar’s existing subsidiaries.

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees

N.A. Incurring, assuming or guaranteeing certain secured debt without securing the notes on an equal and ratable basis is not allowed. N.A.

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

CoC triggering event clause. CoC includes sale of substantially all assets or acquisition of more than 50% voting stock by outsiders. When this occurs, there’s a call option at 101%. N.A. Limitation on sale/leaseback transaction where the sale of assets must be at least equal to their fair market value, entitled to incur debt secured by a lien on property being leased without equally and ratably securing the notes, or the amounts must be applied to debt reduction or the purchase of assets. Restriction does not apply if value of sale/leasebacks and other secured debt does not exceed 15% of consolidated net tangible assets.

Restricted Payments Restricted Payments (RP)

N.A.

Other Cross Default Cross Acceleration MAC Clause Equity Clawback Covenant Suspension

N.A. N.A. None. N.A. N.A.

OID – Original Issue Discount. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix F Financial Summary — Dollar Tree, Inc. 12 Months 1/28/12 ($ Mil.) Profitability (%) Operating EBITDAR Margin 21.1 Operating EBITDA Margin 14.7 Operating EBIT Margin 12.3 FFO Margin 10.9 FCF Margin 6.6 Return on Capital Employed 45.3 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 2.6 FFO-Adjusted Leverage 3.2 FCF/Total Adjusted Debt (%) 11.9 Total Debt with Equity Credit/ Operating EBITDAa 0.3 Total Secured Debt/Operating EBITDAa — Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 4.2 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 2.4 FFO-Adjusted Net Leverage 2.9 Total Net Debt/(CFFO – Capex) (0.1) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 3.3 Operating EBITDA/Interest Paida 305.5 FFO Fixed-Charge Coverage 2.7 FFO Interest Coverage 227.3 CFFO/Capex 2.7 Debt Summary Total Debt with Equity Credit 266 Total Adjusted Debt with Equity Credit 3,654 Lease-Equivalent Debt 3,389 Other Off-Balance Sheet Debt — Interest (Paid) (3) Implied Cost of Debt (%) 1.2 Cash Flow Summary FFO 724 Change in Working Capital (Fitch Defined) (38) CFFO 687 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (250) Common Dividends (Paid) — FCF 436 Acquisitions and Divestitures — Net Debt Proceeds (2) Net Equity Proceeds (635) Other Investing and Financing Cash Flows 178 Total Change in Cash and Equivalents (23) Liquidity Readily Available Cash and Equivalents 288 Availability Under Committed Credit Lines 300 Not Readily Available Cash and Equivalents — Working Capital Net Working Capital (Fitch Defined) 581 Trade Accounts Receivable (Days) — Inventory Turnover (Days) 74.5 Trade Accounts Payable (Days) 24.6 Capital Intensity (%) 3.8

2/2/13

Three Months

2/1/14 1/31/15

5/2/15

8/1/15 10/31/15

12 Three Months Months LTM 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

21.5 15.3 12.9 9.8 4.9 50.0

21.6 15.3 12.8 10.4 5.9 48.4

21.2 14.9 12.5 10.4 7.0 45.0

25.5 14.0 11.6 6.0 2.9 18.2

15.7 7.4 4.4 (5.8) (9.2) 12.2

13.5 8.4 5.0 (0.1) (3.5) 12.4

17.5 12.9 9.6 16.8 12.8 13.9

16.8 10.4 7.2 5.5 1.9 13.6

16.8 11.9 8.7 6.8 2.7 11.2

15.6 10.6 7.4 6.5 3.8 11.0

15.2 10.2 7.1 7.2 (2.4) 11.8

16.3 11.4 8.2 9.4 4.4 11.8

2.5 3.3 9.3

2.8 3.6 9.7

2.8 3.5 11.9

8.1 10.1 3.4

8.0 10.5 1.1

7.1 9.7 0.5

5.9 6.6 1.9

5.3 5.8 2.4

4.8 5.1 5.4

4.5 4.6 5.9

0.2 —

0.6 —

6.0 3.0

6.6 —

5.9 —

4.6 2.6

3.8 2.2

3.3 1.9

3.1 1.7

4.8

4.9

4.4

13.3

17.2

17.0

11.9

11.3

8.4

8.0

2.2 3.0 (0.4)

2.6 3.4 1.1

2.3 2.9 (0.2)

7.6 9.5 12.9

7.4 9.7 38.5

6.6 9.1 90.8

5.6 6.3 22.4

4.9 5.4 17.5

4.4 4.7 7.6

4.3 4.4 7.2

3.4 342.7 2.6 219.9 2.2

3.3 82.6 2.6 57.2 2.4

3.2 37.9 2.6 27.3 2.8

2.8 27.0 2.2 19.0 2.7

2.1 5.7 1.6 3.5 1.6

1.7 3.1 1.2 1.7 1.2

1.8 3.4 1.6 2.7 1.6

1.8 3.3 1.6 2.7 1.6

1.8 3.2 1.7 2.8 1.6

2.2 4.9 2.1 4.4 2.3

2.5 6.8 2.4 6.6 2.5

271 3,931 3,660 — (3) 1.2

770 4,755 3,986 — (15) 2.8

757 5,063 4,306 — (34) 4.4

7,820 15,813 7,993 — (48) 1.1

8,349 16,341 7,993 — (224) 4.9

8,344 16,336 7,993 — (460) 10.1

7,466 15,458 7,993 — (487) 11.8

7,445 15,438 7,993 — (604) 7.9

7,441 15,434 7,993 — (455) 5.8

7,170 15,162 7,993 — (347) 4.5

722 (45) 678 — (312) — 366 — 6 (330) 71 112

814 (21) 793 — (330) — 463 (0) 499 (1,106) 12 (132)

891 36 927 — (326) — 601 — (13) 6 3 596

130 — 130 — (67) — 63 — 7,180 3 (7,239) 6

(176) — (176) — (100) — (276) (6,526) 85 1 7,148 432

(5) — (5) — (170) — (174) (2) (21) 2 (1) (196)

899 (68) 831 — (144) — 688 1 (1,041) (6) (12) (371)

849 (68) 781 — (481) — 300 (6,527) 6,204 (105) (128)

347 (36) 311 — (176) — 135 1 (21) 14 64 194

324 46 369 — (180) — 189 0 (33) 8 (1) 164

359 (384) (25) — (96) — (121) (0) (242) 11 (7) (359)

1,929 (442) 1,487 — (595) — 892 2 (1,337) 27 43 (373)

400 750

268 750

864 750

870 750

1,303 1,250

1,107 1,187

736 1,127

930 1,127

1,093 1,127

734 1,092

—

625 — 74.8 26.7 4.2

641 — 74.8 28.5 4.2

602 — 67.9 28.4 3.8

578 — 68.9 32.5 3.1

1,673 — 117.9 48.1 3.3

1,926 — 80.9 32.0 3.4

1,411 — 69.9 30.3 2.7

1,411 — 97.1 42.1 3.1

1,669 — 74.7 32.1 3.5

1,624 — 76.9 34.9 3.6

2,008 — 84.6 32.7 1.9

2,008 — 84.1 32.5 2.9

a EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Dollar Tree, Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

12 Three Months Months LTM 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

8/1/15 10/31/15

6,631 12.7 1,401

7,395 11.5 1,588

7,840 6.0 1,696

8,602 9.7 1,823

2,177 8.8 554

3,011 48.3 472

4,945 136.0 666

5,365 116.7 942

15,498 80.2 2,610

5,086 133.6 856

4,996 65.9 781

5,002 1.1 761

20,449 62.2 3,340

1,401 978

1,588 1,131

1,696 1,198

1,823 1,284

554 305

472 222

666 416

942 692

2,610 1,611

856 606

781 532

761 511

3,340 2,341

978 814

1,131 956

1,198 1,007

1,284 1,079

305 252

222 133

416 246

692 517

1,611 1,124

606 444

532 370

511 354

2,341 1,684

6.0 4,351 35.9 (11.1) 4.9 14.8 76.8 21.0 152.6

3.4 4,671 35.9 (10.0) 4.9 13.7 72.9 22.5 178.1

2.4 4,992 35.6 (8.8) 4.9 12.8 77.6 21.5 173.3

4.3 5,367 35.3 (8.7) 5.4 12.8 63.6 16.8 158.1

3.1 5,454 34.4 33.5 5.2 11.0 18.1 4.9 126.7

2.7 13,864 28.4 80.7 2.3 5.7 14.5 1.9 112.2

2.1 14,038 28.3 40.2 2.7 6.9 15.5 1.6 99.6

1.7 13,851 30.8 33.4 3.8 8.7 18.1 1.8 82.0

2.1 13,851 30.0 (3.9) 3.8 8.7 17.9 1.8 98.5

2.3 13,997 30.6 40.2 4.4 10.3 19.3 2.8 108.4

1.2 14,129 30.3 40.7 4.8 10.6 20.9 4.4 111.2

1.7 14,284 30.4 40.2 4.3 11.2 22.0 5.0 60.7

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Leveraged Finance Retailing / U.S.A.

The Gap, Inc. Full Rating Report Key Rating Drivers

Ratings Long-Term IDR Revolving Credit Facility Senior Unsecured Notes

BB+ BB+/RR4 BB+/RR4

IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data The Gap, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comparable Store Sales (%)a No. of Stores

FYE 1/30/16 15,797.0 2,270.0 14.4 491.0 12,235.0

LTM 10/29/16 15,472.0 2,119.0 13.7 689.0 12,250.0

3.4

3.6

2.6

2.5

(4.0) 3,275

(2.0) 3,281

a Comparable store sales for the LTM period reflect the 11-month period ended Dec. 31, 2016.

Challenging Operating Environment: The Gap, Inc. operates in the challenged mid-tier, mallbased apparel sector, which struggles with the shift of discretionary spend to services and experiences, the lack of a strong product cycle, and market share gains by fast-fashion and offprice competitors and online-only players. Gap and its peers have seen volatile sales results and the need to use omnichannel investments and increased markdowns to drive volume. Weak Sales Continue: Comparable store sales (comps) have been weak recently with 2014 and 2015 comps of flat and negative 4%, respectively. YTD 2016 comps through December were down 2% despite recent initiatives to improve merchandise. Gap continues to see material traffic declines, and while traffic is a sector issue, Fitch Ratings believes these challenges somewhat reflect waning customer loyalty as product continues to disappoint. Gross Margins Remain Volatile: Gross margins fell to around the mid-36% range in 2015 from a peak around 40% in 2009–2010 on increased markdown activity over time, and more recently, the deleveraging impact of negative comps on fixed costs. Margins could decline to around 36% in 2016 and the mid-35% range thereafter on continued comps challenges and heightened promotional activity to drive customer excitement and compete effectively with lower priced peers, mitigated somewhat by sourcing initiatives to reduce product lead times. Good Expense Management: The company has responded to top-line challenges through aggressive cost management and by reducing net selling, general and administrative (SG&A) expenses by 3% over the three years ending 2015, despite inflationary pressures in wages and other categories. The company is also taking appropriate real estate actions to reflect changing shopping habits, including the 2015 closure of around 15% of North American Gap brand stores. Near-flat SG&A could continue to protect EBITDA if gross profit continues to erode. Deteriorating Credit Metrics: Total adjusted debt/EBITDAR increased to 3.4x in 2015 from 2.9x in 2012 on around 10% EBITDA decline and higher debt levels, including the company’s $400 million term loan in 2015. Given near-flat to slightly declining EBITDA expectations over the next two to three years, adjusted leverage is expected to trend in the mid-3.0x range. Strong Liquidity: Gap has good liquidity, with $1.5 billion of cash and an unused $500 million revolver as of Oct. 29, 2016. The company generated FCF after dividends of $490 million in 2015, down from $1 billion in 2014 on EBITDA declines. Fitch expects annual FCF to average around $490 million over the next three years. Fitch expects FCF to be directed toward the repayment of the company’s $400 million term loan in 2017 and toward share repurchases.

Rating Sensitivities

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

Positive Rating Action: An upgrade would be predicated on a combination of the following: stabilized comp trends, defined as several consecutive quarters of nearly flat comps; modest year-over-year gross margin improvement and SG&A leverage on a sustained basis, yielding EBITDA trending from the $2 billion level in 2016 toward $2.5 billion; leverage trending to the low-3.0x range, based on the above EBITDA trend; and paydown of the company’s $400 million term loan.

Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com

Negative Rating Action: A negative rating action could occur if continued sales weakness drives EBITDA toward $1.7 billion and adjusted leverage toward the 4.0x range.

Analysts

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Leveraged Finance Fitch Base Case Assumptions — The Gap, Inc. ($ Mil.)

2015A

2016F

2017F

2018F Comments

Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%)

15,797 (3.9) (3.9) 2,270 14.4

15,450 (2.2) (2.6) 2,026 13.1

15,301 (1.0) (0.5) 2,017 13.2

15,224 (0.5) (0.5) 1,994 13.1

Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases

(94) 1,594 (726) 4.6 (377) 491 (1,019)

(26) 1,434 (525) 3.4 (370) 439 (90)

(0) 1,453 (550) 3.6 (375) 528 (340)

Total Debt Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

1,731 12,235 3.4

1,720 12,224 3.7

1,248 11,752 3.5

— — — — Steady due to expense management, despite negative sales trends. 3 — 1,452 — (575) — 3.8 (380) — 497 — (340) — Term loan paydown 1,248 assumed in 2017. 11,752 — 3.6 —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment and Outlook Company Overview Founded in 1969, Gap is a leading global apparel retail company operating three main brands: Gap, Old Navy and Banana Republic. The company also owns two smaller women’s apparel chains: Athleta, a fitness-oriented brand acquired in 2008, and Intermix, a seller of high-end fashion-focused apparel from third-party designers acquired in 2012. The company operated 1,339 Gap stores, 1,099 Old Navy stores, 671 Banana Republic stores and 172 other stores as of October 2016. Franchisees operate an additional 461 stores in international markets. Gap, like other mall-based, mid-tier apparel retailers, is facing a number of challenges. Lack of compelling fashion trends and redeployment of consumer budgets to services such as healthcare, travel, entertainment and technology subscriptions are contributing to comps weakness for many sector participants. Mall traffic is on a secular decline due to the rise of online shopping habits, especially among the teen and young adult demographics. Fitch also believes customers are increasingly price bifurcating their apparel and accessories purchases. The rise of fast-fashion retailers allows customers to buy trend-right merchandise of acceptable quality at prices significantly lower than mid-tier mall competitors, including specialty stores and department stores. Continued acceptance of, and therefore growth in, the off-price channel is further pressuring mid-tier apparel competitors. Fitch believes customers are also trading up for investment pieces at high-end retailers, which are aspirational in terms of either quality or brand value. With its broad positioning, the Gap’s branded stores compete with other mid-tier specialty apparel retailers, department stores, off-price retailers, fast-fashion players, discounters and online retailers. Given the brand’s relative maturity in the apparel retail space, younger shoppers are gravitating toward newer entrants across the apparel landscape. Old Navy competes with Kohl’s, JC Penney and Target; fast-fashion players such as Uniqlo, Zara, Forever 21 and Hennes & Mauritz; and off-price retailers such as TJX (TJ Maxx/Marshalls) and

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Leveraged Finance Ross Stores. Banana Republic competes with higher price point retailers than the other brands, including J.Crew, Ann Taylor and mid-tier and higher-end department stores.

Sector Challenges and Response The structural challenges faced by the sector have affected Gap’s brands differently, depending on price point. Old Navy showed relative resiliency, with comps remaining positive in recent years other than the fourth quarter of 2015; comps have recovered since. The brand may be a beneficiary of the apparel trade-down phenomenon. Banana Republic, on the other hand, experienced the largest decline in comps, driven in part by the brand’s higher price points and lack of trend-right merchandise. The company unsuccessfully shifted its merchandise focus to trendier fashion, which led to the departure of the brand’s creative director. Gap continues to face some weakness related to sector challenges and the brand’s inability to connect to customers with compelling fashion to mitigate share loss to other competitors. EBITDA declined 17% to $2.3 billion in 2015 from the $2.7 billion peak in 2013 as a result of sales weakness and operational deleveraging, with 2016 EBITDA expected to fall approximately 10% to around $2 billion. EBITDA declines are due to gross margin contraction to 36.1% in 2015 from 39.0% in 2013 and fixed-cost deleverage — primarily rent — on weak sales, leading to SG&A margin contraction of 50 bps. FCF, which was $710 million in 2013, fell to $490 million in 2015 on lower EBITDA. Gap is responding to these operating challenges with a number of initiatives. First, the company is targeting improved brand positioning through product and marketing efforts at both the Gap and Banana Republic brands. The company wants Banana Republic to represent a classic, mature and less-trendy aesthetic, while Gap brand should evoke a casual, optimistic American aesthetic. Within product, the company has taken a sharper focus on responding to in-season customer trends and offering more product innovation, such as technological enhancements to improve fit, wear and laundering/care attributes. Marketing strategies include investments in software systems to understand shopping habits and a return to TV advertising. Second, the company is refocusing growth capital on higher returning investments, including international growth, Old Navy/Athleta expansion and omnichannel. Gap’s store openings are primarily in Asia, the only region to have net company-operated store openings (71 between 2013 and 2015). Domestic expansion is meanwhile centered around the more successful Old Navy and Athleta concepts. Omnichannel investments include efforts around systemwide inventory planning, optimized cross-channel customer service, and robust desktop and mobile websites. Gap, in line with industry trends, is also building a responsive supply chain to target shortened lead times between product design and store arrival. For example, the company’s fabric platforming initiative involves buying significant quantities of key fabric and placing it with specific vendors to improve manufacturing responsiveness to in-season selling results. Thus, the company is moving toward a more continual buying philosophy, limiting up-front inventory risk on specific styles and allowing the company to maximize sales of higher turning product. Finally, the company has tightly managed expenses and capital deployment in recent years. The company announced in 2015 the closure of around 15% of North American Gap brand stores and a commitment to reduce capex by 10% in 2016 to $650 million. Capex guidance for 2016 has subsequently been reduced to $525 million. The company announced in 2016 a $275 million expense-management program, including an incremental 75 store closures. The restructuring effort includes the closure of the Old Navy brand in Japan (53 stores) by the end of 2016, as it was not providing a sufficient return on investment, as well as unprofitable stores in High-Yield Retail Checkout January 31, 2017

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Leveraged Finance other international markets. Most of the cost savings are expected to come in 2017. The company forecast it would cost $210 million–$240 million to implement the program, half of which Fitch expects to be cash. While cost-management measures have proved effective in stabilizing expenses, top-line efforts have been less successful. The company’s SG&A expense, which peaked at $4.1 billion in 2012, trended between $4.0 billion and $4.1 billion beginning in 2013, and is expected to remain in this range over the rating horizon, despite inflationary pressures in wages and other areas. However, comps remain challenged, with negative 2% comps through the first 11 months of 2016. While Old Navy rebounded from weak results in late 2015 and early 2016, the Gap and Banana Republic brands have yet to see sales trends improve on a sustained basis. Online, which represented 16% of sales in 2015, is a relative bright spot, contributing 2% to comps in both 2014 and 2015.

Segment Performance Comparable Sales Growth by Brand Gap Global

(%)

Banana Republic Global

Old Navy Global

15 10 5 0 (5) (10) (15) (20) 1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

Source: Company filings.

Old Navy (42% of 2015 Revenue) Old Navy has performed the best of Gap’s three primary brands, driven by flat comps in 2015 and through the first 11 months of 2016. The brand has expanded its retail and online footprint, leading to revenue growth of 5.8% in 2014 and 0.8% in 2015. Old Navy has consequently become a more significant contributor to Gap’s results as the company’s two other brands have declined. Nearly 90% of the division’s revenue comes from North America, although Old Navy has expanded its footprint in Asia substantially, having increased store count to 65 in 2015 in the region, versus 43 in 2014. Beginning in 2017, Fitch expects a smaller contribution from international markets given the 53 Old Navy store closures in Japan expected in 2016.

Gap Brand (36% of 2015 Revenue) Comps have been negative since the first quarter of 2014, with comps at negative 6% in 2015. This led to a decline in segment sales of 9% to $5.8 billion in 2015, versus 2013 revenue of $6.4 billion. The weakest regions for the brand were North America and Europe, with 7.8% and 11.9% revenue decline in 2015, respectively, offset by relative strength in Asia (flat revenue growth in 2015). The company has outlined a transformation agenda given the weak performance of the brand, with a focus on improving brand position, product offering and supply chain responsiveness to in-season trend analysis.

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Leveraged Finance Banana Republic (17% of 2015 Revenue) Banana Republic has experienced the most weakness since 2013, with comps of negative 10% in 2015 and flat comps in 2014. Nevertheless, the brand is expanding its store footprint in

Segment and Geographic Financial Data and Store Count 2012

2013

2014

2015

LTM 3Q16

Sales ($ Mil.) Gap Old Navy Banana Republic Other Total

6,254 6,112 2,890 395 15,651

6,351 6,257 2,868 672 16,148

6,165 6,619 2,922 729 16,435

5,751 6,675 2,656 715 15,797

5,503 6,721 2,494 754 15,472

YoY Growth (%) Gap Old Navy Banana Republic Other Total

5.8 7.7 8.6 31.2 7.6

1.6 2.4 (0.8) 70.1 3.2

(2.9) 5.8 1.9 8.5 1.8

(6.7) 0.8 (9.1) (1.9) (3.9)

(5.5) (1.3) (9.9) 6.8 (3.9)

3.0 6.0 5.0 — 5.0

3.0 2.0 (1.0) — 2.0

(5.0) 5.0 0.0 — 0.0

(6.0) 0.0 (10.0) — (4.0)

(5.0) 0.0 (8.0) — (2.0)

Sales Breakdown (%) Gap Old Navy Banana Republic Other Total

40.0 39.1 18.5 2.5 100.0

39.3 38.7 17.8 4.2 100.0

37.5 40.3 17.8 4.4 100.0

36.4 42.3 16.8 4.5 100.0

35.6 43.4 16.1 4.9 100.0

Store Count Gap Old Navy Banana Republic Other Franchised Total

1,379 1,011 638 67 312 3,407

1,389 1,022 650 103 375 3,539

1,415 1,056 665 144 429 3,709

1,346 1,095 673 161 426 3,721

1,339 1,099 671 172 461 3,742

13.8 17.6 5.2 0.3 36.9

14.1 17.4 5.3 0.4 37.2

14.3 17.9 5.4 0.5 38.2

13.6 18.3 5.4 0.6 37.9

13.4 18.3 5.4 0.6 37.7

13,289 870 1,310 182 15,651

13,659 891 1,397 201 16,148

13,809 917 1,502 207 16,435

13,260 797 1,521 219 15,797

12,994 719 1,551 208 15,472

2,657 208 230 3,095

2,671 204 289 3,164

2,727 200 353 3,280

2,669 185 421 3,275

2,681 176 424 3,281

Comparable Sales Growth (%) Gap Old Navy Banana Republic Other Total

Square Footage (Mil.) Gap Old Navy Banana Republic Other Total Sales by Geography North America Europe Asia Other Regions Total Owned Stores by Geography North America Europe Asia Total

YoY – Year-over-year. Note: Comparable store sales for the LTM reflect the 11-month period ended Dec. 31, 2016. Source: Company filings.

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Leveraged Finance both North America and Asia. Relative strength in North America was offset by weakness in Asia in 2014 and 2015. Following a push toward more fashion-forward products in recent years, the company’s turnaround plan involves returning the brand to a more classic aesthetic.

2017 Outlook With little change expected in Gap’s competitive environment, Fitch expects revenue declines to somewhat moderate as Gap’s focus on product mitigates secular challenges. Revenue in 2016 is expected to decline in the low single digits to the mid-$15 billion level, on negative 3% comps. EBITDA is expected to be around $2.0 billion, versus $2.3 billion in 2015, on modest gross margin declines and slight growth in SG&A, leading to around 100 bps of EBITDA margin erosion to the low-13% range. Revenue is expected to decline around 1%–2% in 2017 on store closures and modestly negative comps. EBITDA is projected to be around $2.0 billion on sales declines and stable EBITDA margins. Revenue and EBITDA is projected to decline slightly annually beginning 2018, assuming no improvement to the challenging industry environment. Fitch expects annual FCF to be similar to the $490 million range in 2015, with some variability, depending on the timing of cash charges related to recent restructuring announcements. Capex, which was lowered to $525 million in 2016 from $730 million in 2015, is projected to remain in the mid-$500 million range. Fitch expects Gap will repay its $400 million term loan in 2017; no other debt repayment is assumed, aside from the company’s Japanese term loan due fiscal 2017. Excess FCF could be used to support the company’s ongoing share-repurchase program. Adjusted leverage, which increased to 3.4x in 2015 from around 3.0x in recent years, is expected to trend in the mid-3.0x range on slight EBITDA declines and stable debt levels following the $400 million term loan repayment.

Liquidity and Debt Structure Gap had cash and cash equivalents of $1,522 million as of Oct. 29, 2016, and full availability on its $500 million credit facility. Fitch expects total liquidity (cash and revolver availability) to be around $2.0 billion at year-end 2016, which will enable the company to pay down the $400 million unsecured term loan due October 2017.

Capital Structure ($ Mil., At Oct. 29, 2016) Description Unsecured Debt USD500 Mil. Senior Unsecured Revolver due 5/20/20 USD400 Mil. Senior Unsecured Term Loan due 10/15/17 JPY15 Bil. Senior Unsecured Term Loan due 1/15/18 5.95% Notes due 4/12/21 Total Unsecured Debt Total Debt

Amount

(%)

— 400.0 96.0 1,250.0 1,746.0 1,746.0

— 22.9 5.5 71.6 100.0 100.0

Source: Company filings, Fitch Ratings.

Liquidity

Scheduled Debt Maturities

($ Mil., At Oct. 29, 2016)

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

472 — — — 1,250 —

Cash Availability Under Credit Facilitya Total

1,522 500 2,022

a Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility, capital leases and other lines of credit. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — The Gap, Inc. ($ Mil., As of Oct. 29, 2016) Fisher Family

Public Shareholders

45%

55%

The Gap, Inc. (IDR — BB+/Stable) Debt Issue $500 Mil. Senior Unsecured Revolver due 5/1/20 $400 Mil. Senior Unsecured Term Loan due 10/15/17 5.95% Notes due 4/15/215 JPY15 Bil. Senior Unsecured Term Loan due 1/15/18a Total

Amount — 400 1,250 96 1,746

IDR BB+/RR4 — BB+/RR4 — —

Operating Subsidiaries aThe company has not indicated which entity has issued the JPY term loan. Fitch assumes the term loan is issued and/or guaranteed by The Gap, Inc. IDR – Issuer Default Rating. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — The Gap, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee

The Gap, Inc. Amended and Restated Revolving Credit Agreement dated 5/20/15 (Exhibit 10.2 to 10-Q filed 9/8/15) First Amendment to the Amended and Restated Revolving Credit Agreement dated 8/31/16 (Exhibit 10.2 to 10-Q filed 9/2/16) Senior unsecured revolving credit facility. 5/20/20 $500 Mil. Senior unsecured. Unsecured. Guaranteed by The Gap, Inc.

Financial Covenants Fixed-Charge Coverage Leverage Ratio

Consolidated fixed-charge coverage ratio shall be at least 2.0x so long as the facility is outstanding. Consolidated leverage shall not be greater than 2.25x so long as the facility is outstanding.

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Event Key Definitions Pricing Coupon Type/Index

Pricing Grid

Notable Permitted Debt: 1) Existing debt as of 5/20/15. 2) Capital leases not to exceed $100 Mil. 3) Debt secured by real property, up $600 Mil. 4) Secured debt of up to $500 Mil. 5) General carveout constituting of $500 Mil. Liens securing debt of up to $500 Mil.; liens upon real property of up to $600 Mil. Guarantees are allowed for debt that is permitted under the credit agreement.

A CoC is defined as the acquisition of more than 50% of voting stock by any person or if a majority of the board of directors changes over any two-year period. CoC constitutes an event of default. Investments permitted so long as the financial covenants, shown above, are complied with on a pro forma basis. Mergers allowed so long as the surviving entity is the company in addition to complying with permitted investment provisions. Carveouts: Real property sales as part of sale and leaseback allowed up to $600 Mil.; general carveout of up to 25% of consolidated total assets.

N.A.

Yes, for material indebtedness of more than $50 Mil. (no materiality threshold for senior notes, senior subordinated notes, subordinated discount notes, and the term loan facility). N.A. Yes. None. N.A. N.A.

Floating based off eurocurrency rate or base rate (BR). BR is the highest of (a) the federal funds rate plus 50 bps; (b) the prime rate as defined by Bank of America and (c) LIBOR plus 100 bps. Eurocurrency rate is either LIBOR for dollar, euro and sterling denominated loans and the respective Interbank Offering Rate or equivalent for loans in other currencies. Margin applied based on band assigned by senior rating and leverage ratio. If two testing bands differ, the rating will be assigned by the higher of the band unless the lower band is more than one level lower, the assigned rating will be one level above the lowest band within which the company lies. Senior Rating A–/A3 or Higher BBB+/Baa1 BBB/Baa2 BBB–/Baa3 BB+/Ba1 or Lower

Leverage Ratio Leverage < 1.25x Leverage < 1.25x Leverage < 1.25x 1.25x < Leverage < 1.50x Leverage > 1.50x

Eurocurrency Rate Loans (%) 0.90 1.00 1.10 1.30 1.50

Base Rate Loans (%) 0.00 0.00 0.10 0.30 0.50

N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — The Gap, Inc. Covenant Issuer(s) Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

Description The Gap, Inc. Indenture dated 4/12/11 (Exhibit 4.1 to 8-K filed 4/12/11) Supplemental Indenture dated 4/12/11 (Exhibit 4.2 filed 4/12/11) 5.95% senior unsecured notes. $1,250 Mil. 4/12/21 The notes are the company’s unsecured senior subordinated obligations. Unsecured. N.A.

None. The principal amount of debt secured by liens on principal property (defined as real estate and equipment with a net book value greater than 0.5% of CNTA) and the attributable value of sale-leaseback transactions, may not exceed the greater of 10% of CNTA and $600 Mil. This restriction does not include existing liens, liens to secure all or part of acquisition, construction, development or improvement of underlying property or liens on any property existing at acquisition thereof.

M&A, Investments Restriction Sale of Assets Restriction

The company is required to purchase the notes at 101% if a CoC occurs (50% ownership threshold, excluding the Fishers) and the company is downgraded to below investment-grade ratings by S&P and Moody’s or, if it is already below investment grade at the CoC event, the company is subsequently downgraded one notch by S&P and Moody’s. None. Sale-leasebacks are limited by the limitation on liens covenant described above.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability/Optional Prepayment Covenant Suspension

Yes, on debt of more than $50 Mil. None. None. None. Notes are redeemable at 100% of principal amount plus the present values of remaining scheduled payments of principal and interest, discounted at the Treasury rate plus 40 bps. None.

N.A. – Not applicable. CNTA – Consolidated net tangible assets. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — The Gap, Inc. 12 Months ($ Mil.) 1/28/12 Profitability (%) Operating EBITDAR Margin 22.0 Operating EBITDA Margin 13.8 Operating EBIT Margin 10.3 FFO Margin 9.6 FCF Margin 4.0 Return on Capital Employed 29.2 Gross Leverage (x) Total Adjusted Debt/Operating EBITDARa 3.5 FFO-Adjusted Leverage 4.3 FCF/Total Adjusted Debt (%) 5.2 Total Debt with Equity Credit/ a Operating EBITDA 0.8 Total Secured Debt/Operating EBITDAa — Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 5.6 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 2.9 FFO-Adjusted Net Leverage 3.6 Total Net Debt/(CFFO – Capex) (0.3) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 2.6 Operating EBITDA/Interest Paida 44.5 FFO Fixed-Charge Coverage 2.1 FFO Interest Coverage 31.8 CFFO/Capex 2.5 Debt Summary Total Debt with Equity Credit 1,665 Total Adjusted Debt with Equity Credit 11,225 Lease-Equivalent Debt 9,560 Other Off-Balance Sheet Debt — Interest (Paid) (45) Implied Cost of Debt (%) — Cash Flow Summary FFO 1,393 Change in Working Capital (Fitch Defined) (30) CFFO 1,363 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (548) Common Dividends (Paid) (236) FCF 579 Acquisitions and Divestitures — Net Debt Proceeds 1,662 Net Equity Proceeds (2,030) Other Investing and Financing Cash Flows 113 Total Change in Cash and Equivalents 324 Liquidity Readily Available Cash and Equivalents 943 Availability Under Committed Credit Lines 457 Not Readily Available Cash and Equivalents 943 Working Capital Net Working Capital (Fitch Defined) (449) Trade Accounts Receivable (Days) — Inventory Turnover (Days) 63.6 Trade Accounts Payable (Days) 42.0 Capital Intensity (%) 3.8

2/2/13

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

2/1/14 1/31/15

5/2/15

24.0 16.2 13.1 12.3 6.6 39.4

24.9 16.9 14.0 11.1 4.4 43.0

24.4 16.3 13.3 13.5 6.3 40.2

23.8 14.8 11.2 11.7 (1.0) 39.3

23.9 15.5 12.1 9.2 4.7 38.0

23.5 15.0 11.7 11.4 (5.3) 36.3

19.9 12.5 9.1 10.6 12.5 33.3

22.7 14.4 11.0 10.7 3.1 33.3

20.3 10.7 6.9 9.0 (1.8) 30.4

23.8 15.3 11.7 10.3 8.9 30.6

24.8 16.2 11.5 8.0 (3.7) 30.0

22.2 13.7 9.8 9.5 4.5 30.0

2.9 3.4 9.4

2.9 3.7 6.1

3.0 3.3 8.7

3.0 3.7 6.2

3.1 3.7 6.0

3.3 3.8 5.4

3.4 4.0 4.0

3.6 4.1 3.8

3.6 4.1 5.1

3.6 4.3 5.6

0.5 —

0.5 0.1

0.5 0.0

0.5 —

0.7 —

0.8 0.0

4.4

5.0

4.4

4.9

5.2

5.6

5.7

5.3

5.2

2.5 3.0 (0.2)

2.5 3.2 (0.1)

2.6 2.9 (0.1)

2.7 3.3 0.1

2.8 3.3 0.3

3.0 3.5 0.7

3.0 3.5 0.4

3.2 3.7 0.5

3.1 3.5 0.1

3.1 3.8 0.2

2.9 30.6 2.5 24.1 2.9

3.0 35.5 2.3 24.3 2.5

2.9 34.8 2.6 29.7 3.0

2.8 34.3 2.3 25.1 2.6

2.8 32.8 2.3 24.8 2.6

2.7 31.6 2.3 24.9 2.5

2.6 29.1 2.2 22.6 2.2

2.5 26.6 2.1 20.8 2.2

2.4 26.1 2.1 21.0 2.4

2.5 25.8 2.0 18.9 2.7

1,246 11,030 9,784 — (83) 5.7

1,394 11,626 10,232 — (77) 5.8

1,353 11,905 10,552 — (77) 5.6

1,352 11,904 10,552 — (77) 5.6

1,348 11,854 10,506 — (77) 5.6

1,752 12,258 10,506 — (76) 4.9

1,731 12,230 10,499 — (78) 5.1

1,731 12,235 10,504 — (78) 5.1

1,742 12,246 10,504 — (79) 5.1

1,745 12,249 10,504 — (80) 5.2

1,746 12,250 10,504 — (82) 4.7

1,920 16 1,936 — (659) (240) 1,037 (129) (419) (856) (58) (425)

1,798 (93) 1,705 — (670) (321) 714 — 144 (826) 18 50

2,212 (83) 2,129 — (714) (383) 1,032 — (21) (1,103) 97 5

429 (218) 211 — (150) (97) (36) — — (246) 1 (281)

357 74 431 — (151) (95) 185 — — (367) (9) (191)

438 (346) 92 — (204) (93) (205) — 400 (193) (3) (1)

464 396 860 — (221) (92) 547 — (21) (213) 15 328

1,688 (94) 1,594 — (726) (377) 491 — 379 (1,019) 4 (145)

308 (140) 168 — (139) (91) (62) — — 10 (5) (57)

396 170 566 — (131) (92) 343 — — 6 19 368

305 (239) 66 — (113) (92) (139) — — 9 (29) (159)

1,473 187 1,660 — (604) (367) 689 — (21) (188) 0 480

755 536

755 477

758 528

617 529

522 517

521 500

685 482

657 482

841 500

761 500

755

758

617

522

521

685

657

841

761

(478) — 67.7 44.0 4.2

(456) — 71.4 46.0 4.1

(304) — 68.0 42.2 4.3

(106) — 79.5 45.7 4.1

(155) — 74.3 44.7 3.9

174 — 93.2 49.5 5.3

531 — 57.6 34.2 5.0

531 — 68.1 40.4 4.6

(124) — 79.1 44.7 4.0

(336) — 73.2 45.9 3.4

(74) — 93.3 55.0 3.0

(74) — 88.7 52.3 3.9

EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the 11 months ended Dec. 31, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — The Gap, Inc. (Continued) 1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

14,549 (0.8) 3,197

15,651 7.6 3,761

16,148 3.2 4,014

16,435 1.8 4,002

3,657 (3.1) 871

3,898 (2.1) 931

3,857 (2.9) 908

4,385 (6.9) 874

15,797 (3.9) 3,583

3,438 (6.0) 697

3,851 (1.2) 918

3,798 (1.5) 942

15,472 (4.0) 3,432

3,197 2,002

3,761 2,538

4,014 2,735

4,002 2,683

871 541

931 603

908 580

874 546

3,583 2,270

697 369

918 590

942 614

3,432 2,119

2,002 1,496

2,538 2,055

2,735 2,265

2,683 2,183

541 408

603 473

580 453

546 398

2,270 1,732

369 237

590 450

614 437

2,119 1,522

(4.0) 3,036 36.2 (8.6) 5.7 8.7 60.9 11.2 108.3

5.0 3,095 39.4 (9.6) 5.4 8.3 79.2 15.2 136.4

2.0 3,164 39.0 (7.9) 5.1 7.9 79.5 16.3 142.6

0.0 3,280 38.3 (8.1) 5.4 8.7 80.8 16.4 142.8

(4.0) 3,309 37.8 49.7 5.0 8.7 81.4 16.6 112.8

(2.0) 3,309 37.7 44.7 5.1 8.4 82.6 15.5 116.2

(2.0) 3,346 37.5 47.2 4.1 7.7 73.2 13.1 160.6

(7.0) 3,275 33.2 36.6 5.4 9.0 71.2 12.3 149.3

(4.0) 3,275 36.4 (8.6) 5.4 9.0 71.2 12.3 134.9

(5.0) 3,276 35.2 55.0 5.1 9.0 67.4 10.8 105.3

(2.0) 3,273 37.7 45.5 5.1 8.1 66.2 9.2 93.6

(3.0) 3,281 39.1 42.5 4.1 7.0 63.4 8.4 63.8

(2.0) 3,281 39.1 42.5 4.1 7.0 63.4 8.4 63.8

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data Comparable Sales Growth (%)b No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

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Leveraged Finance Retailing / U.S.A.

GNC Holdings, Inc. Credit Profile Credit Opinion

Credit Profile Summary

GNC Corporation Long-Term Issuer Default Credit Opinion

b+*/negative

GNC Holdings, Inc. Long-Term Issuer Default Credit Opinion

b+*/negative

General Nutrition Centers, Inc. Long-Term Issuer Default Credit Opinion b+*/negative Senior Secured Revolving Credit Facility Credit Opinion bb+*/rr1* Senior Secured Term Loan Facility Credit Opinion bb+*/rr1* Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data GNC Holdings, Inc. FYE 12/31/15 ($ Mil.) Total Revenue 2,639.2 EBITDA 480.9 EBITDA Margin (%) 18.2 FCF 249.1 Total Adjusted Debt 3,864.1 Total Adjusted Debt/EBITDAR (x) 4.9 EBITDAR/(Interest + Rent) (x) 2.3 Same-Store Sales (%)a (1.7) Real Estate Owned (%) 0 No. of Storesb 9,090 a

LTM 9/30/16 2,588.3 407.9 15.8 143.4 3,955.2

Leading Share of Good Category: GNC Holdings, Inc. is a leading retailer of health and wellness products, including vitamins, minerals and herbal supplements (VMHS), and sports nutrition and diet products. Historically, the company has benefited from stable growth in the VMHS industry, brand leadership, and its broad store footprint in the U.S. and internationally. However, in recent years, the rise of alternative selling channels (including online) and deemphasis on sport-related products have caused GNC to experience market share erosion. Sales Deceleration: GNC’s sales softened in 2014, due to reduced promotions and share loss to alternative channels. Same-store sales (SSS) fell 2.8% and 1.7% in 2014 and 2015, respectively, worsening to negative 4.9% in the first nine months of 2016. These results follow positive trends for over five years, including 4.3% and 11.5% SSS growth in 2013 and 2012, respectively. Given accelerating weakness, sales growth could remain negative in 2017, but moderate from current levels given wellness category emphasis and a new loyalty program. Margin Erosion Follows Sales: While GNC’s gross profit benefited from reduced promotional activity, EBITDA margins declined along with SSS following peak 20.2% levels in 2013. EBITDA margins in 2015 narrowed to 18.2%, fell to 15.8% in the LTM ended Sept. 30, 2016, and are expected to be 15.1% for the full year. Fitch projects EBITDA to decline 27% to around $390 million in 2016 from peak 2013 levels of $532 million, and could remain range bound over the next two to three years. Increased Leverage: GNC’s adjusted leverage steadily increased to 5.0x in 2015 from 4.3x in 2012 on near-flat EBITDA and higher debt to support the company’s share-buyback program. Leverage in 2016 is expected to trend to the high-5.0x range on EBITDA erosion and debt issuance, and could remain at this level over the following 24–36 months on continued operating challenges. FCF after dividends could be used for continued share repurchases; no material debt paydown is assumed. Adequate Liquidity and Comfortable Maturities: GNC had $37 million in cash on hand and $157 million of availability under its recently upsized revolver as of Sept. 30, 2016. FCF, prior to refranchising proceeds — including around $40 million projected in 2016 — is expected to be in approximately $100 million over the next two to three years. GNC has no material debt maturities until a $1.2 billion term loan maturity in 2019.

5.6 2.0 (4.9) 0 9,019

Same-store sales for the LTM reflect the performance for the nine months ended Sept. 30, 2016. bNo. of stores included all store formats, including company-owned, franchise stores and Rite Aid store-instores.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on stabilization of EBITDA trends through sales improvement or expense management, which in concert with debt reduction, would drive leverage to around 5.0x. Negative Drivers: Negative credit profile drivers include further deterioration in top-line and EBITDA, resulting in sustained leverage near 6.0x.

Analysts David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — GNC Holdings, Inc. 2015A

2016F

2017F

Revenue Revenue Growth (%) a Same-Store Sales (%)

2,639 1.0 (1.7)

2,557 (3.1) (5.2)

2,506 (2.0) (0.4)

EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases

481 18.2 28 355 (46) 1.7 (60) 249 (480)

387 15.1 14 252 (50) 2.0 (63) 139 (250)

375 15.0 8 239 (50) 2.0 (66) 123 (100)

Total Debt b Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

1,505 3,864 5.0

1,580 3,935 5.8

1,563 3,917 5.8

($ Mil.)

2018F Comments 2,519 — 0.5 — (0.3) Assumes lessening, although continued, share loss. 381 — 15.1 — (2) — 234 — (50) — 2.0 (69) — 115 — (100) Buyback program forecast to continue. 1,549 — 3,903 — 5.8 —

Reflects domestic company-owned stores. bTotal Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Leading Player in Historically Strong Category GNC is a leading specialty retailer of health and wellness products, including VMHS, and sports nutrition and diet products. At $2.6 billion in 2015 revenue, GNC has an estimated 7% share of the approximately $40 billion U.S. industry. GNC operates and franchises stores in approximately 50 countries, but its retail and online presence is concentrated in the U.S. and Canada (over 90% of retail/franchise revenue). The company derives almost three-quarters of its revenue from company-owned stores and e-commerce, and the rest from global franchise activities and third-party contract manufacturing, which allow GNC to leverage its embedded manufacturing capacity. The company has a loyal customer base through its Gold Card program, which had 6.5 million customers at the end of 2015, versus 7.1 million at the end of 2014, generating 79% of annual company-owned retail revenue. The company sells both GNC-branded products and third-party products. Products with proprietary brands (e.g. Mega Men, Ultra Mega, GNC Total Lean, Pro Performance and Pro Performance AMP) accounted for approximately half of total retail sales in 2015, and are sold in GNC outlets and Rite Aid store-within-a-store locations. GNC’s current strategy is to evolve its sales mix toward wellness and natural/protein-based products, broadening reach into the faster-growth segments within VMHS. GNC had 9,019 locations as of Sept. 30, 2016, which include 7,028 in the U.S. and Canada (3,512 company-owned, 1,169 franchised and 2,347 locations within Rite Aid stores), and franchise operations in over 50 countries. Total locations declined modestly from 9,042 as of Sept. 29, 2015, due to international closures. The company recently focused expansion on its franchised store base and embarked upon a franchising program. The goal in refranchising is to reduce growth capital and the overall capital intensity of the business, while improving cash flow intensity. GNC opened just eight net new company-owned stores in the U.S. and Canada in the first nine months of 2016 while refranchising 80 stores net of franchise acquisitions.

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Leveraged Finance The company expects to achieve a more balanced mix of company-owned and franchised stores in the U.S. and Canada longer term, versus the 25% franchised penetration today. Fitch Ratings anticipates modest total store growth over time beginning in 2017, though given recent sales challenges, the company could explore a rationalization of the portfolio.

Segment Financial Data and Store Count â&#x20AC;&#x201D; GNC Holdings, Inc. ($ Mil.)

2010

2011

2012

2013

2014

2015a

Revenue Retail Franchise Manufacturing/Wholesale Total Net Sales

1,344 294 184 1,822

1,519 335 219 2,072

1,785 408 237 2,430

1,927 441 263 2,630

1,939 433 241 2,613

1,945 458 235 2,639

Revenue Growth (%) Retail Franchise Manufacturing/Wholesale Total Net Sales

7.0 11.1 (1.2) 6.7

13.0 14.1 18.8 13.7

17.6 21.9 8.2 17.3

7.9 7.9 11.1 8.2

0.6 (1.7) (8.3) (0.7)

0.3 5.9 (2.5) 1.0

73.8 16.1 10.1 100.0

73.3 16.2 10.6 100.0

73.5 16.8 9.7 100.0

73.3 16.7 10.0 100.0

74.2 16.6 9.2 100.0

73.7 17.4 8.9 100.0

EBIT (Before Warehouse/Distribution and Corporate Overhead Expenses) Retail 182 244 346 Franchise 94 111 137 Manufacturing/Wholesale 69 82 96 Total EBIT 346 437 578

360 156 105 621

349 157 90 596

308 165 90 563

EBITDA (Before Warehouse/Distribution and Corporate Overhead Expenses) Retail 208 270 375 Franchise 97 114 140 Manufacturing/Wholesale 81 94 107 Total EBITDA 386 477 621

391 159 116 666

384 160 101 645

342 168 101 610

EBITDA Growth (%) Retail Franchise Manufacturing/Wholesale Total EBITDA

17.4 14.6 (4.3) 11.5

29.5 17.4 16.1 23.6

39.1 22.2 14.0 30.1

4.3 14.0 8.2 7.2

(1.9) 0.8 (13.0) (3.2)

(10.9) 4.5 0.2 (5.3)

EBITDA Margin (%) Retail Franchise Manufacturing/Wholesale

15.5 33.1 43.8

17.7 34.1 42.8

21.0 34.2 45.2

20.3 36.1 44.0

19.8 37.0 41.7

17.6 36.6 42.9

EBITDA Contribution by Segment (%) Retail Franchise Manufacturing/Wholesale

59.2 27.6 23.0

60.8 25.8 21.2

64.1 23.9 18.3

62.3 25.3 18.4

59.5 24.9 15.6

56.0 27.5 16.5

2,917 2,340 2,003 7,260 5.6

3,046 2,514 2,125 7,685 10.1

3,188 2,779 2,181 8,148 11.5

3,342 3,036 2,215 8,593 4.3

3,497 3,210 2,269 8,976 (2.8)

3,594 3,169 2,327 9,090 (1.7)

Revenue Contribution by Segment (%) Retail Franchise Manufacturing/Wholesale Total Net Sales

Store Count (No.) Company-Owned Stores Franchise Stores Rite Aid Store-in-Stores Total Store Count Domestic Same Store Sales (%) a

LTM 2016 segment figures and EBIT calculations are unavailable given redefinition of reportable segments in secondquarter 2016. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recent Trends Despite continued industry growth, GNC’s company-owned SSS declined since 2014 due to increased competition from other retail and online channels, planned reductions in promotions yielding uncompetitive pricing and an industry shift toward natural/wellness products, where GNC historically had less presence. The stand-alone vitamin retail business held up despite increased discount and online presence due to both inventory breadth requirements and the industry’s reliance on service. The latter factor was key in sustaining growth at players such as GNC, whose service model provides product and regimen guidance to less knowledgeable customers. However, the proliferation of vitamin-related information online coupled with an increased vitamin focus by a number of competitors in the discount, grocery, drug retail and online spaces may be limiting GNC’s competitive advantage. As lower-priced competitors expand their presence in the space, GNC is challenged to maintain an appropriate price/value position versus peers. The company’s loyalty program, which provides customers with discounts across the product assortment, helped limit the pricing gap with peers and currently generates 79% of company-owned retail revenue. However, pricing perception for both loyalty members and nonmembers became a reason for customers to shift purchases away from GNC, causing market share loss. The company began a multipronged process to reformulate its loyalty program while reducing price points on key items. Following a period of negative SSS in 2014 and 2015, the company began initial work to revise its loyalty program in 2015, and started adjusting retail prices in early 2016. However, given weakening results into 2016, the company plans to intensify these efforts. GNC accelerated its price reductions in the second half of 2016 and launched My GNC Rewards, its new loyalty program, in late December 2016. The company also enacted a simplified pricing system across stores and e-commerce at the end of 2016. The company’s CEO resigned in July 2016 and was replaced on an interim basis by Robert F. Moran, an independent member of GNC’s board of directors and former CEO of PetSmart, Inc.

Historical Revenue and Margin Growth Trend — GNC (%) 40

Domestic Same-Store Sales Growth YoY Change in EBITDA Margin

YoY Growth in Franchise Revenue

30 20 10 0 (10) (20) 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 YoY – Year-over-year. Note: Franchise removed as reportable segment in second-quarter 2016. Source: Company filings, Fitch Ratings.

The company’s manufacturing/wholesale segment revenue declined 3% in 2015, but grew 3% during the first nine months of 2016. The division, which represented 9% of total revenue and 17% of EBITDA before corporate expenses, includes sales from third-party manufacturing contracts and sales to Rite Aid store-within-a-store locations, Sam’s Club, PetSmart and www.drugstore.com. GNC stores within Rite Aid locations are typically 400 square feet (sq ft)– 900 sq ft, versus 1,000 sq ft–2,000 sq ft for GNC stand-alone locations.

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Leveraged Finance The revenue decline in 2015 was mainly due to a third-party contract manufacturing sales decrease, as some wholesale partners de-emphasized owned-brand VMHS products. Given improving trends in recent quarters, Fitch forecasts modestly positive wholesale revenue growth over the next two to three years, as the segment benefits from overall growth in the category.

Industry Fundamentals and Secular Trends The approximately $40 billion VMHS industry proved to be recession resistant by growing at a midsingle-digit percentage rate through economic cycles. The consumable nature of the products and high frequency of usage as part of regular dietary regimens drive the stability and defensibility of the business. Given an aging U.S. population and increased consumer focus on personal health and wellness, Fitch expects the VMHS industry to continue midsingle-digit growth over the next several years, making it one of the faster growing segments within retail. Some segments of the industry were affected in recent years by negative media around FDA recalls, studies regarding the efficacy of certain product categories, and legal action taken by the Department of Justice and state authorities against product manufacturers and retailers. GNC recalled or removed several products from its shelves in response to legal mandate and/or negative publicity. Fitch believes these actions affected customer sentiment regarding VMHS, particularly in categories to which GNC is exposed. The risk of additional negative media and legal action is somewhat unique to this segment. Sales for VMHS pure-play retailers are somewhat resilient to competition from mass merchandisers and online players, due to the elevated service component of the industry and company-specific loyalty programs, which are highly valuable, especially in a recurring purchase model. However, recent SSS weakness, as noted previously, may indicate strengthened competition from alternate channels, due to promotional activity and an increased ability to research products online. Pure-play retailers will need to rely on enhanced service offerings and loyalty programs to maintain market share. While Fitch expects some improvement in sales trends over the next several years, nearly flat to low single-digit sales growth reflects continued share loss to these alternative channels.

Total Sales By Geography â&#x20AC;&#x201D; GNC Holdings, Inc. Revenue ($ Mil.) U.S. Foreign Total Net Sales Revenue Growth (%) U.S. Foreign Total Net Sales Revenue Contribution by Geography (%) U.S. Foreign

2010

2011

2012

2013

2014

2015

1,728 95 1,822

1,972 100 2,072

2,312 118 2,430

2,490 140 2,630

2,441 172 2,613

2,479 161 2,639

6.7 6.9 6.7

14.2 5.7 13.7

17.2 18.1 17.3

7.7 18.7 8.2

(2.0) 22.9 (0.7)

1.6 (6.8) 1.0

94.8 5.2

95.2 4.8

95.1 4.9

94.7 5.3

93.4 6.6

93.9 6.1

Source: Company filings, Fitch Ratings.

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Leveraged Finance Reasonably Well Positioned GNC is the largest stand-alone player in a highly fragmented and competitive industry. Strength was achieved through the company’s well-developed real estate strategy, brand leadership and focus on the historically popular sports category. Nearly 80% of sales are generated from members of GNC’s Gold Card discount program, illustrating strong relationships with GNC’s customer base. The Gold Card program also allowed GNC to build a database of consumer purchasing habits that can be mined to provide more predictive spend information and customization in the company’s direct marketing. GNC also established a relatively strong position in its GNC-branded label, e-commerce and international franchise businesses. The acquisitions of LuckyVitamin.com, DiscountSupplements.co.uk, and The Health Store give GNC leeway to compete in the lower price point third-party branded vitamin category, and therefore serve as a defense against increasing competition from online retailers and potential consumer trade-down. GNC can rely on all of these strengths as it revises its pricing structure, loyalty program and marketing strategies.

2017 Outlook GNC’s sales worsened in recent quarters, with an 8% revenue decline in the three months ended September 2016, following a slight decline in the first half of the year. Fitch expects 2016 revenue to decline in the 3%–5% range on continued SSS weakness in fourth-quarter 2016. EBITDA margins are projected to decline around 300 bps to around 15% from 17.8% in 2016. EBITDA is consequently expected to decline 15%–20% to around $390 million in 2016 from $480 million in 2015. FCF, which was $250 million in 2015, could be in the low- to mid-$100 million range in 2016, prior to an estimated $40 million in refranchising proceeds. The company purchased nearly $230 million of equity through the first nine months of 2016. Fitch expects the decline in EBITDA combined with higher debt to result in adjusted leverage in the high-5.0x range at the end of 2016, almost a turn higher than the 5.0x in 2015. Beginning in 2017, the combination of negative SSS, limited unit expansion and refranchising activity could yield sales declines in the 2%–4% range, improving toward flat over the next three years if the company can improve its pricing posture, loyalty offering and overall competitive positioning. However, Fitch projects the company will continue to lose share given the industry is forecast to continue its positive annual growth trend. EBITDA margins could decline in 2017 toward approximately 15% on negative SSS and price reductions, mitigated by a modestly higher mix of franchise fees. Near-flat EBITDA margins thereafter could yield EBITDA range bound near $380 million over the next two to three years. Annual FCF, prior to any refranchising proceeds, is expected to trend near $100 million, similar to 2016. FCF could be used to support the company’s share-buyback program. The company will be required to make a $10 million term loan prepayment in 2017 due to leverage-related covenants, but no other material debt repayments are expected to be made. Assuming the company does not issue incremental debt to execute further share buybacks, leverage could trend in the high-5.0x range. The company previously provided net debt/EBITDAR leverage target of 3.2x–3.4x, capitalizing rent at 5.0x, which equates to Fitch-defined leverage in the mid-4.0x range. However, the company exceeded this target beginning in late 2015 due to incremental debt issuance for share buybacks and EBITDA declines. Given significant buyback activity through the first nine months of 2015 and current EBITDA trends, Fitch does not expect the company to achieve its

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Leveraged Finance leverage target in the near term. However, a new permanent CEO could place greater emphasis on the company’s leverage targets longer term.

Liquidity and Debt Structure GNC’s capital structure consists of a $300 million revolver due September 2018 (recently upsized from $130 million and extended from March 2017), a $1.2 billion term loan due March 2019 and $287.5 million of 1.5% convertible senior notes due August 2020. The company had $37 million of cash on hand and $157 million available under its revolver as of Sept. 29, 2016. The term loan includes a covenant requiring the company to make an excess cash flow payment of approximately $10 million–$15 million in early 2017 based on senior secured leverage thresholds. GNC was owned by Apollo Management starting in 2003. The company was sold to Ontario Teachers’ Pension Plan and Ares Management (the sponsors) in 2007, when it was leveraged around 7.4x based on lease-adjusted debt/EBITDAR. The sponsors fully exited their investments since the IPO in April 2011.

Capital Structure ($ Mil., At Sept. 30, 2016) Description

Amount

(%)

Secured Debt $300 Mil. Revolver due 9/2/18 Senior Secured Term Loan due 3/4/19 Total Secured Debt

137.0 1,171.5 1,308.5

8.6 73.4 82.0

Unsecured Debt 1.500% Convertible Senior Notes due 8/15/20 Total Unsecured Debt Total Debt

287.5 287.5 1,595.5

14.8 14.8 100.0

Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Sept. 30, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Sept. 30, 2016) 4.4 141.4 1,161.6 287.5 0.0 0.0

Cash Revolver Availability Total

37.2 157.4 194.6

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility, mortgages and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis is based on a going concern value of $1.65 billion, versus approximately $530 million from an orderly liquidation of assets, which are composed primarily of inventory. Post-default EBITDA was estimated at $330 million, assuming 10%–15% of stores close with stabilized trends at the remainder of the chain. The analysis uses a 5.0x enterprise value/EBITDA multiple, near the midpoint of the typical 4.0x–6.0x range for retailers. The multiple considers GNC’s historically strong position in a good category and recent competitive encroachment by alternate channels. After deducting 10% for administrative claims, the remaining $1.5 billion would lead to outstanding recovery prospects (91%–100%) for the revolver and term loan, which are assigned a ‘bb+*/rr1*’.

Recovery Analysis — GNC Holdings, Inc. ($ Mil., Except Where Noted; Credit Opinion: b+*) Distressed Enterprise Value (EV) as a Going Concern (GC) GC EBITDA GC EV Multiple (x) EV on GC Basis

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

330 5.0 1,650

Liquidation Value (LV) Cash A/R Inventory Net PPE Total LV

Book Value 37.2 143.5 621.9 221.8 1,024.4

Advance Rate (%) 0 75 50 50 —

Available to Creditors — 107.6 310.9 110.9 529.4

1,650.0 165.0 1,485.0

Distribution of Value Secured Priority Sr. Secured Facility Sr. Secured Term Loan

Amount 300.0 1,171.5

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecureda

Value Recovered 300.0 1,171.5

Recovery (%) 100 100

Recovery Rating rr1* rr1*

Notching +3 +3

Credit Opinion bb+* bb+*

Recovery (%) 2

Recovery Rating —

Notching —

Credit Opinion —

1,485.0 1,471.5 13.5

Amount 869.8

Value Recovered 13.5

Includes senior unsecured notes and estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — General Nutrition Centers, Inc. ($ Mil., As of Sept. 30, 2016) GNC Holdings, Inc. (IDCO — b+*/negative) GNC Corporation (ParentCo) (IDCO — b+*/negative) Downstream guarantee of credit facilities General Nutrition Centers, Inc. IDCO — b+*/negative Debt Issue $300 Mil. Revolver due 9/2/18 $1.35 Bil. Term Loan Facility due 3/4/19 1.500% Convertible Senior Notes due 8/15/20 Total

Amount 137.0 1,171.0 287.5 1,595.5

CO bb+*/rr1* bb+*/rr1* — —

Upstream guarantee of credit facilities on senior secured basis. Subsidiary Guarantors

Nonguarantor Subsidiaries

IDCO – Issuer Default Credit Opinion. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — General Nutrition Centers, Inc. Overview Borrower Document Date and Location

Guarantee

General Nutrition Centers, Inc. Amending and restated credit agreement dated 11/26/13 (Exhibit 10.1 to 8-K filed 12/2/13) First amendment dated 12/9/13 (Exhibit 10.1 to 8-K filed 12/10/13) Replacement and incremental facility amendment dated 3/4/16 (Exhibit 10.1 to 8-K filed 3/9/16) Revolving credit facility Term loan facility 9/2/18 3/4/19 $300 Mil. $1,350 Mil. Senior secured. Secured by first-priority pledges (subject to permitted liens) of the borrower’s equity interests and the equity interests of the borrower’s domestic subsidiaries. Guaranteed by GNC Corporation (ParentCo) and the borrower’s existing and future domestic subsidiaries.

Financial Covenants Consolidated Senior Secured Leverage Ratio

If borrowings outstanding under the revolver exceed $25 Mil., None. consolidated senior secured leverage ratio shall be less than 4.25x.

Description of Debt Maturity Date Amount Ranking Security

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Equity Cure

Key Definition

Pricing

Coverage Ratio Debt: None. Notable Permitted Indebtedness: 1) Debt secured by permitted liens (listed in Limitation on Liens) not to exceed $25 Mil.; 2) indebtedness for excluded subs not to exceed $20 Mil.; 3) unsecured indebtedness as long as amount of debt of restricted subs that are not loan parties does not exceed $10 Mil. and pro forma consolidated total leverage ratio is ≤ 5.0 and still be in compliance with the financial covenant, pro forma; 4) foreign sub debt not to exceed $75 Mil.; 5) general purpose debt not to exceed $75 Mil.; 5) permitted term loan refinancing; 6) indebtedness of LOC issued to finance inventory as long as it is unsecured and does not exceed $5 Mil. 1) General purpose of $50 Mil.; 2) liens on property acquired from a new restricted subsidiary up to $60 Mil; 30 Liens securing new indebtedness permitted under debt incurrence covenant. Guarantee obligations are defined as debt and investments and hence governed by the debt and investment restrictions.

CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders, board of directors cease to consist of a majority of continuing directors, Parent ceases to own and control directly 100% of each class of capital stock of GNC free and clear of all liens (other than permitted liens), or Holdings ceases to beneficially own 100% of capital stock of Parent. CoC constitutes an event of default. 1) Loans and advances to employees, officers, directors, managers and consultants not to exceed $5 Mil.; 2) notes payables by franchisees to the borrower or any subsidiary guarantor up to $35 Mil.; 3) purchase or acquisition of property and assets or businesses to become wholly owned sub or a foreign sub as long as pro forma financial covenants (if in effect) are in compliance and the investments do not exceed $50 Mil.; 4) investment in foreign subsidiary not to exceed sum of $75 Mil., plus up to an additional $75 Mil.(as long as pro forma consolidated net senior secured leverage ratio ≤3.0x), plus mandatory prepayments of term loan; 5) promissory notes and other deferred payment obligations and noncash consideration to purchase permitted disposition up to $20 Mil.; 6) general purpose up to $50 Mil. General disposition of assets not to exceed $50 Mil.

RP Basket: None. Notable Permitted RPs: 1) Dividend to parent companies to purchase capital stock up to $5 Mil. in any fiscal year and $20 Mil. in the aggregate; 2) dividend to parent companies to pay cash dividends up to $50 Mil. plus any amount over $50 Mil. given pro forma consolidated total leverage shall not exceed 2.75x; 3) dividend to parent companies to pay cash dividends in amount up to the available basket (see definition below), as long as pro forma consolidated net total leverage ratio not to exceed 4.0x.

Yes for material debt (> $20 Mil.) of any loan party. Same as above. Yes — Provided in each four fiscal quarter period, there shall exist None. a period of at least two consecutive quarters in respect of which no cure contribution shall have been made, and the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with the financial covenant. Excluded Subsidiaries: Including primarily any foreign subsidiary, any domestic subsidiary that is a subsidiary of a foreign subsidiary, any restricted subsidiary that is a limited partnership of which the borrower or a guarantor does not constitute the limited partner, any unrestricted subsidiary, any subsidiary that is not a wholly owned subsidiary of ParentCo. Available Basket: Cumulative excess cash flow (net of sweep for term loan) plus equity contributions (net of equity cure contributions) plus amount equal to aggregate amount of all returns, repayments, interest, profits, distributions and income received in cash from investments permitted by the available basket, as defined minus cash dividends made by GNC in reliance on the available basket minus investments made permitted by the available basket minus any optional prepayment of junior material debt. Revolving Credit Facility: ABR: 1.25%; LIBOR: 2.25% Term Loan Facility: ABR: 1.50%; LIBOR: 2.50%

ABR – Alternate base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Financial Summary — GNC Holdings, Inc. 12 Three Months Months LTM 12/31/11 12/31/12 12/31/13 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 12/31/15 3/31/16 6/30/16 9/30/16 9/30/16 12 Months

($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalentsb Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

Three Months

26.9 16.9 14.7 10.1 6.3 14.0

30.4 19.9 17.9 13.1 5.5 19.3

30.6 20.2 18.3 12.1 5.0 20.0

30.1 19.1 17.0 13.5 6.7 18.0

29.7 18.7 16.6 13.0 14.0 17.9

30.4 19.5 17.4 13.3 5.8 17.9

29.7 18.7 16.5 13.7 9.7 17.6

27.7 15.8 13.5 9.1 8.2 18.0

29.4 18.2 16.1 12.4 9.4 18.0

27.2 16.2 14.1 14.4 17.6 17.7

28.1 17.1 15.0 5.3 (5.3) 16.8

25.5 13.8 11.3 11.2 1.7 15.0

27.2 15.8 13.5 10.0 5.5 15.0

4.6 5.3 5.1

4.3 5.1 4.3

4.4 5.6 3.7

4.6 5.3 4.8

4.8 5.7 4.7

4.8 5.5 6.0

4.9 5.7 6.1

5.0 5.7 6.4

5.0 5.8 6.4

5.2 5.8 6.9

5.4 6.3 4.9

5.6 6.5 3.6

2.6 2.6

2.3 2.3

2.5 2.5

2.7 2.7

2.8 2.7

3.0 2.4

3.1 2.5

3.4 2.8

3.7 3.0

3.9 3.2

7.6

7.2

7.7

7.0

7.1

6.5

6.4

6.3

7.3

8.0

4.4 5.1 5.9

4.0 4.8 5.2

4.1 5.2 6.0

4.4 5.1 5.2

4.6 5.4 5.1

4.6 5.3 4.4

4.7 5.4 4.4

4.9 5.7 4.7

5.1 5.7 4.6

5.3 6.3 6.3

5.6 6.4 7.8

2.1 5.5 1.8 4.2 4.0

2.5 10.7 2.1 8.0 5.3

2.6 13.1 2.0 8.8 4.7

2.3 10.2 2.1 8.2 4.3

2.3 10.5 1.9 7.7 4.6

2.3 10.4 2.0 8.3 6.1

2.3 10.0 2.0 7.8 7.5

2.2 9.4 1.9 7.4 7.7

2.3 11.2 2.0 8.6 7.7

2.2 8.6 2.0 7.2 7.8

2.1 7.8 1.8 5.9 6.5

2.0 6.9 1.7 5.4 4.9

902 2,556 1,654 — (64) 6.5

1,099 3,148 2,049 — (45) 4.5

1,347 3,517 2,170 — (41) 3.3

1,342 3,628 2,286 — (49) 3.6

1,341 3,701 2,359 — (47) 3.5

1,340 3,700 2,359 — (47) 3.5

1,463 3,822 2,359 — (49) 3.5

1,505 3,864 2,359 — (51) 3.6

1,505 3,864 2,359 — (43) 3.0

1,594 3,953 2,359 — (54) 3.7

1,647 4,006 2,359 — (57) 3.8

1,596 3,955 2,359 — (59) 3.9

209 (35) 175 — (44) — 131 (20) (160) (19)

317 (96) 221 — (42) (45) 134 — 196 (334)

318 (80) 238 — (50) (57) 130 (28) 246 (296)

353 (49) 304 — (70) (57) 176 (6) (5) (262)

87 30 117 — (8) (16) 94 — (1) (60)

91 (23) 67 — (13) (15) 39 — (1) (104)

92 (2) 91 — (10) (15) 65 — 122 (114)

56 24 80 0 (15) (14) 51 0 42 (199)

326 28 355 0 (46) (60) 249 0 161 (478)

97 46 142 — (11) (14) 118 (1) 89 (201)

36 (47) (11) — (10) (14) (35) (1) 51 (28)

70 (31) 39 — (15) (14) 11 (1) (49) 0

258 (9) 250 0 (51) (55) 143 (2) 132 (428)

2 (65)

34 30

15 68

5 (92)

1 33

(0) (66)

(10) 63

(1) (108)

(10) (77)

(1) 5

1 (13)

28 (11)

27 (127)

128 72

159 79

226 129

134 130

167 130

101 130

164 129

56 86

61 161

48 109

37 157

—

413 20.1 117.3 34.4 2.1

463 19.5 119.6 30.5 1.7

558 20.1 122.2 30.1 1.9

576 19.0 127.2 28.8 2.7

537 18.2 118.7 32.7 1.1

560 18.4 120.8 30.9 1.9

557 19.5 117.8 30.0 1.5

505 20.7 128.3 35.1 2.5

505 19.7 122.6 33.6 1.7

481 17.1 117.0 43.4 1.6

575 21.2 124.8 38.5 1.5

580 20.6 135.7 40.4 2.3

580 20.2 135.9 40.5 2.0

EBITDA/R after dividends to associates and minorities. bGNC does not disclose cash held away at international subsidiaries. cSame-store sales for the LTM reflect the performance for the nine months ended Sept. 30, 2016. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary â&#x20AC;&#x201D; GNC Holdings, Inc. (Continued) 12 Three Months Months LTM 12/31/11 12/31/12 12/31/13 12/31/14 3/31/15 6/30/15 9/30/15 12/31/15 12/31/15 3/31/16 6/30/16 9/30/16 9/30/16 12 Months

($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data c Same-Store Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

2,072 13.7 557

2,430 17.3 740

2,630 8.2 804

2,613 (0.7) 785

670 (1.0) 199

679 0.5 206

672 2.4 199

618 2.3 171

2,639 1.0 776

669 (0.2) 182

673 (0.8) 189

628 (6.6) 160

2,588 (1.4) 703

557 350

740 484

804 532

785 500

199 125

206 132

199 126

171 98

776 481

182 108

189 115

160 87

703 408

350 304

484 434

532 481

500 443

125 111

132 118

126 111

98 83

481 424

108 94

115 101

87 71

408 350

10.1 3,046 36.4 (12.2) 3.1 10.6 27.1 5.4 93.6

11.5 3,188 38.3 (12.2) 3.1 12.0 34.9 9.4 85.1

4.3 3,342 37.8 (11.6) 3.0 12.1 34.8 9.7 97.0

(2.8) 3,497 37.5 (11.7) 2.9 12.7 34.7 9.6 125.1

(4.1) 3,516 37.2 13.3 2.9 10.7 34.6 9.2 52.1

(2.8) 3,540 37.8 13.1 2.9 11.3 35.4 9.3 88.8

(0.3) 3,556 37.3 12.6 3.0 11.7 35.2 8.5 71.2

0.8 3,594 36.9 12.9 3.0 10.9 36.4 8.6 108.9

(1.7) 3,594 37.3 (12.8) 3.0 10.9 36.4 8.6 108.9

(2.6) 3,583 35.3 12.4 3.0 8.0 37.3 8.1 75.1

(3.7) 3,506 35.5 12.7 2.8 9.0 34.6 7.8 72.5

(8.5) 3,512 34.3 12.4 2.7 9.0 33.1 7.4 94.9

(4.9) 3,512 34.3 12.4 2.7 9.0 33.1 7.4 94.9

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Leveraged Finance Retailing / U.S.A.

The Gymboree Corporation Credit Profile Credit Opinion Long-Term Issuer Default Credit Opinion Senior Secured ABL and ABL Term Loan Credit Opinion Senior Secured Term Loan Credit Opinion Senior Unsecured Notes Credit Opinion

Credit Profile Summary cc* ccc+*/rr1* c*/rr5* c*/rr6*

Financial Data The Gymboree Corporation FYE LTM 1/30/16 10/29/16a ($ Mil.) Total Revenue 1,247.4 1,182.5 EBITDA 96.3 74.5 EBITDA Margin (%) 7.7 6.3 FCF 6.3 — Total Adjusted Debt 2,377.9 2,301.5 Total Adjusted Debt/EBITDAR (x) 9.2 9.7 EBITDAR/(Interest + Rent) (x) 1.0 1.0 Comparable Store Sales (%) 1.0 0.8 Real Estate Owned (%) — — No. of Stores 1,306 1,300 a

Figures for the LTM period are pro forma for the sale of Gymboree Play & Music business.

Top-Line Deterioration: The Gymboree Corporation’s comparable store sales (comps) trends have been negative for the last few years, with particular weakness at its core Gymboree brand, which accounts for approximately 64% of sales. Fitch Ratings attributes the decline to weak merchandising execution, what are likely perceived as high price points in a competitive and overcrowded value/mid-tier apparel space, and cannibalization from Crazy 8, the company’s own value concept. Modest Sales Expectations: Fitch expects fiscal 2017 (ended July) comps to be in the negative 3.0%–negative 4.0% range and negative 2.0% in fiscal 2018/2019. Given the significant decline in store-level sales productivity, Gymboree may have to accelerate store closings from the net 14–16 store closings expected in fiscal 2017, in Fitch’s view. Fitch consequently projects sales decline in the negative low- to midsingle digits over the next 24–36 months. Declining EBITDA: Fitch expects fiscal 2017 EBITDA to be around $65 million, and be rangebound at $50 million–$60 million in fiscal 2018/2019. This assumes gross margins are relatively flat and selling, general and administrative (SG&A) expenses are 2% lower annually in fiscal 2018/2019. Gymboree faces significant challenges in terms of rightsizing its store footprint and addressing issues around having the right product assortment at competitive prices, which could add further margin pressure. This brings into question the long-term viability of its business model. Debt Restructuring Due to Looming Maturity: Gymboree had approximately $102 million of liquidity as of Oct. 29, 2016, with $92 million in revolver availability. This excludes restricted cash of $96 million that can be applied toward the term loan paydown or capex. Fitch expects FCF to be negative $25 million–negative $30 million annually between fiscal 2017 and 2019, assuming annual capex of $20 million. While the company has sufficient liquidity to fund operations over the next 24 months, Fitch believes a debt restructuring is imminent given the $769 million secured term loan that matures in February 2018 and the $171 million senior unsecured notes due December 2018.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of positive comps and EBITDA to a level where the company is covering its fixed obligations and a successful refinancing of upcoming debt maturities. Negative Drivers: Negative credit profile drivers would include tightening liquidity and the inability to fund ongoing operations and/or refinance maturities in a timely fashion.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — The Gymboree Corporation ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

2015A

2017F

2018F

2019F

1,247 1.5 1.0 96 7.7 22 29 (21) 0 6 — 1,079 2,378 9.2

1,156 — (3.3) 68 5.9 (5) (7) (20) — (27) — 1,051 2,283 10.3

1,122 (0.3) (2.0) 63 5.7 (2) (5) (20) — (25) — 1,051 2,283 10.5

1,088 (0.3) (2.0) 59 5.4 (2) (6) (20) — (26) — 1,051 2,283 10.7

a Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Note: The company changed its fiscal year end to July versus January. 2015A data is for the year ended Jan. 30, 2016, but the forecasts are for fiscal periods ended July. Source: Fitch Ratings.

Business Profile Assessment Gymboree operates 1,300 stores across three retail brands, each at a distinct price point. Gymboree is the anchor brand (591 stores and 174 outlets as of Oct. 29, 2016); Janie and Jack (150 stores) is the premium price point offering with prices 30%−40% higher than Gymboree; while Crazy 8 (385 stores) is positioned as the value brand at initial price points 25%−30% lower than Gymboree. The company’s brand positioning is centered on cute, wholesome, age-appropriate fashion featuring head-to-toe outfitting. While the core product offering is for children ages four to five years, the assortment spans from newborn to 14 years old, depending on the store brand. Fitch estimates online penetration as a percent of total sales via its three websites (www.gymboree.com, www.janieandjack.com and www.crazy8.com) is somewhere in the midteens given it has typically contributed 100 bps–200 bps to total annual comps over the last few years. The company recently sold its Gymboree Play & Music brand, which offers directed parentchild developmental play programs under the Gymboree Play & Music brand, with 720 primarily franchised locations.

Modestly Negative Comps Trends Gymboree’s comps trends have been mostly negative for the last few years. Fitch attributes the decline to weak merchandising execution and what are likely perceived as high price points in a competitive and overcrowded value/mid-tier apparel space. Crazy 8, the company’s value concept, has also seen erratic comps performance. Fitch expects comps to be negative 3%–negative 4% in fiscal 2017. Comps at the company’s core Gymboree brand, which accounted for 64% of total LTM sales remain soft. Crazy 8, which accounts for 23% of revenue, has also seen erratic comps performance. The only bright spot has been Janie and Jack, which accounts for 13% of sales and has been trending positive for the last three years. However, given the persistently negative comps trend, overall sales productivity declined materially to $430 annual sales per square foot in 2015 from $530 in 2009, mainly due to the comps declines at Gymboree-branded stores and dilution from the Crazy 8 High-Yield Retail Checkout January 31, 2017

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Leveraged Finance format, which Fitch estimates generates sales per square foot in the low-$300 range. As a result of negative comps, top-line growth was primarily due to new store openings, with approximately 350 net new stores added between 2009 and 2015. Crazy 8, which generated approximately 23% of total sales and grew to a 400-store chain from only 65 stores in 2009, accounts for some of the decline in comps at Gymboree stores given there is a significant amount of overlap between store locations, with two-thirds of Crazy 8 stores overlapping with Gymboree and a similar demographic profile. Crazy 8 has also been dilutive to profitability given lower margins, although the gap to core Gymboree has likely narrowed given the significant comps deterioration in the Gymboree stores.

Fitch Estimates of Comps by Brand Quarter Ended a a 8/14 11/14

Quarter Ended 8/15 10/15

1/15

YE 1/15

5/15

40 87 233 360

133 275 764 1,173

34 66 160 260

34 59 162 255

Comments on Comps Trends on Earnings Calls Janie and Jack — LSD+ MSD+ HSD+ Crazy 8 — MSD– LSD– MSD+ Gymboree — LDD– Flat MSD+

— — —

Comps (%) Janie and Jack Crazy 8 Gymboree Total Comps

5 (3) (4) (3)

5 4 (2) 0

5/14

Sales by Brand ($ Mil.) Janie and Jack 31 Crazy 8 61 Gymboree 166 Total Retail Sales 258

2 (6) (13) (9)

30 59 163 252

1 (6) (13) (10)

32 68 203 303

5 (1) 0 1

8 4 5 5

Quarter Ended 4/16 7/16 10/16

1/16

YE 1/16

34 68 186 288

44 85 244 374

146 279 753 1,177

35 64 170 269

36 56 155 247

35 65 177 276

— — —

12 2 0 2

5 1 (6) (3)

11 1 6 5

8 2 0 1

5 (2) 6 4

5 (5) (2) (2)

4 (4) (6) (5)

Sales and comps are estimated based on commentary around comps. Comps – Comparable store sales. YE – Year end. LSD – Low single digit. MSD – Midsingle digit. LDD – Low double digit. HSD – High single-digit. + – Positive. – – Negative. Source: Company filings, Fitch Ratings estimates.

Fitch expects store openings in fiscal 2017 and beyond to be modest given liquidity constraints, and expects the company to potentially accelerate store closings, from the net 14–16 store closings expected in fiscal 2017. Gymboree has approximately 300 stores that have lease expirations and kick-out clauses annually, and Fitch estimates the approximate split between the two as 50/50. The company stated that although around 6% of its fleet is four-wall EBITDA negative during the LTM ended Oct. 29, 2016, closures of these stores would not have a material impact on EBITDA. Gymboree’s competitive differentiation has historically centered on its high-quality, branded apparel. However, consumers have many retail choices to outfit kids and infants, with competition from pure-play competitors, including BabyGap, GapKids, Old Navy, The Children’s Place and Carter’s, as well as department stores, off-price retailers, fast-fashion players with children’s presence, local specialty stores and mail-order/internet players. The significant growth in retail outlets relative to what Fitch estimates has been a relatively stagnant demand for kids’ and infant apparel over the past few years has put significant promotional pressure on the category. Gymboree has underperformed retailers such as Carter’s, which has seen average comps growth of 3.4% between 2009 and 2015. The Children’s Place’s comps declined at an average rate of 1.0%, but still outperformed Gymboree.

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Leveraged Finance Revenue and Store Growth Trends ($ Mil.)

2009

2010

2011

2012

2013

2014

2015

Retail Sales YoY Growth (%) Comparable Store Sales (%) Including Comparable Online Sales Excluding Comparable Online Sales Total Number of Stores Gymboree Stores Gymboree Outlet Stores Janie and Jack Shops Crazy 8 Stores International Gymboree Locations Total Contribution of Store Growth to Top Line (%) Annual Sales per Gross Square Foot ($) Net Sales per Average Store ($000)

1,002 1.4

1,059 5.8

1,164 9.9

1,233 5.9

1,192 (3.4)

1,173 (1.6)

1,177 0.4

(4.0) (6.0)

(2.0) (3.0)

4.0 3.0

(2.0) (4.0)

(6.0) (8.0)

(3.0) (4.0)

1.0 1.0

593 139 119 65 37 953 5.4 529 1,043

594 150 123 157 41 1,065 7.8 494 991

587 153 127 237 45 1,149 5.9 499 1,012

588 160 133 332 49 1,262 7.9 476 976

576 167 140 390 50 1,323 2.6 434 899

554 169 147 402 54 1,326 1.4 425 883

546 175 149 387 49 1,306 (0.6) 433 898

YoY – Year-over-year. Note: The company recently changes its fiscal year end to July. Information presented in this table is for fiscal years ending January. Source: Company filings, Fitch Ratings.

Gymboree faces significant challenges in terms of rightsizing its store count and continuing to address issues around having the right product assortment at competitive prices in a market that has become ever more competitive. Therefore, Fitch believes it will be difficult to post consistently positive comps in light of competition and mall traffic decline.

2017 Outlook Fitch expects fiscal 2017 (July) comps to be in the negative 3.0%–negative 4.0% range and negative 2.0% in fiscal 2018/2019. Historical top-line growth mainly came from new store openings. However, given the significant decline in store-level sales productivity, particularly at the Gymboree-branded stores, Fitch expects Gymboree may have to accelerate store closings from the net 14–16 store closings expected in fiscal 2017. Fitch expects fiscal 2017 EBITDA to be around $60 million and be range-bound at $50 million– $60 million, and to be range bound in fiscal 2018/2019. This assumes gross margins are relatively flat after declining about 50 bps–75 bps in fiscal 2016, and SG&A expenses are 2% lower annually in fiscal 2018/2019. Price investments to address competitive incursion and clear excess merchandise could further pressure merchandise margins.

Liquidity and Debt Structure Liquidity Is Adequate Gymboree had approximately $102 million of liquidity as of Oct. 29, 2016, with $92 million in revolver availability. This excludes restricted cash of $96 million that can be applied toward the term loan paydown or capex. Fitch expects FCF to be negative $25 million–negative $30 million annually between fiscal 2017 and 2019, assuming annual capex of $20 million. While the company has sufficient liquidity to fund operations over the next 24 months, Fitch believes a debt restructuring is imminent given the $769 million secured term loan that matures in February 2018 and the $171 million senior unsecured notes due December 2018. On July 15, 2016, the company sold the Gymboree Play & Music (GPPI) business to Zeavion Holding Pte. Ltd. Of the $128.1 million of proceeds received upon closing, approximately High-Yield Retail Checkout January 31, 2017

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Leveraged Finance $109.9 million of is restricted under the term loan to reduce the term loan, fund capex or pay income taxes of $30 million associated with the gain on the sale of GPPI. As of Oct. 29, 2016, the remaining balance of the restricted cash was $96.3 million.

Liquidity Analysis — The Gymboree Corporation ($ Mil.)

Quarter Ended 2/14 5/14 8/14 11/14 1/15 5/15 8/15 10/15 1/16 4/16 7/16 10/16

Cash

ABL Revolver Size

ABL Borrowing Base

ABL Borrowings

LOC

Revolver Availability

39.4 24.8 24.9 20.8 18.5 22.4 23.5 24.3 18.2 62.2 12.6 9.7

225.0 225.0 225.0 225.0 225.0 225.0 225.0 225.0 225.0 225.0 225.0 225.0

158.8 160.6 184.8 217.6 165.5 170.9 196.1 225.0 172.1 164.5 186.2 202.8

— 10.0 64.0 42.0 33.0 42.0 70.0 50.0 19.0 43.0 42.0 80.0

31.2 32.6 25.3 29.6 29.2 38.1 30.4 32.7 27.6 30.8 27.0 30.8

127.6 118.0 95.5 146.0 103.3 90.8 95.7 142.3 125.5 90.7 117.2 92.0

ABL Term Loan

Total Liquidity (Excluding Restricted Cash)

Restricted Cash

50.0 50.0 49.4

167.0 142.8 120.4 166.8 121.8 113.2 119.2 166.6 143.7 152.9 129.8 101.7

— — — — — — — — — — 107.1 96.3

ABL – Asset-based loan. FILO – First in, last out. Source: Company filings, Fitch Ratings.

Capital Structure Gymboree’s capital structure consists of a $225 million asset-based loan (ABL) revolver and a $49 million term loan — both maturing September 2020, with an accelerated maturity to December 2017 if the secured term loan is not successfully refinanced 60 days prior to its February 2018 maturity — a sizable $769 million secured term loan (February 2018) and a $171 million senior unsecured note issue (December 2018). The $225 million ABL revolver and the $49 million term loan have a first lien on receivables and inventory while holding a second lien on virtually all other assets, and are subject to customary borrowing base limitations. The term loan has standard 0.25% quarterly amortization payments on the original $820 million issue, with the balance due at maturity. From March to May 2016, the company repurchased $116.6 million in principal amount of its senior unsecured notes due December 2018 for $46.8 million in cash raised through the $50 million ABL term loan. $171 million of the notes remain outstanding post this repurchase.

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Leveraged Finance Capital Structure ($ Mil., At Oct. 29, 2016) Description

1/30/16

10/29/16

(%)

19.0 — 769.1 788.1

80.0 49.4 769.1 898.5

7.4 4.6 71.9 84.0

287.6 287.6 1,075.7

171.0 171.0 1,069.5

16.0 16.0 100.0

Secured Debt $225 Mil. ABL Revolver due 12/17/17a a ABL Term Loan due 12/17/17 Senior Secured Term Loan due February 2018 Total Secured Debt Unsecured Debt 9.125% Sr. Unsecured Notes due December 2018 Total Unsecured Debt Total Debt a

Reflects springing maturity given the company has to address the term loan due February 2018. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturitiesa

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 55.9 933.6 — — — —

Cash Revolver Availability Total

9.7 92.0 101.7

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Excludes revolver borrowings. The 2017 maturity includes a $49.4 Mil. ABL term loan due December 2017 to reflect the springing maturity. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch’s analysis of Gymboree’s recovery is based on a going concern EBITDA of approximately $65 million, using a valuation multiple of 5.0x. This yields an enterprise value (EV) of $325 million, greater than the estimated $220 million liquidation value of its primary assets — primarily inventory, with minimal value coming from receivables, and property, plant and equipment. After deducting 10% of the EV for administrative claims, approximately $270 million is left for creditors. The ABL (including ABL term loan) is expected to have outstanding recovery prospects (91%– 100%) and is assigned a ‘ccc+*/rr1*’. The term loan is expected to have below average recovery prospects (11%–30%) and is assigned a ‘c*/rr5*’. The senior unsecured notes are expected to have poor recovery prospects (0%–10%) and are assigned a ‘c*/rr6*’.

Recovery Analysis — Gymboree Corporation ($ Mil., Except Where Noted; Credit Opinion: cc*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Going Concern EBITDA GC EV Multiple (x) EV on GC Basis

65 5.0 325

Book Value

Advance Rate (%)

Available to Creditors

24.3 22.5 265.4 166.7 —

0 80 70 10 —

— 18.0 185.9 16.7 220.4

Cash A/R Inventory Net PPE Total LV

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims Distribution of Value Secured Priority Sr. Secured ABLa Sr. Secured Term Loan

325 33 293

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

207.5 769.1

207.5 85

100 11

rr1* rr5*

+3 –1

ccc+* c*

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

225.2 0.0 0.0

  

0.0 0.0 0.0

rr6*  

–1  

c*  

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Unsecured Priority Sr. Unsecuredb Unsecured Sr. Subordinated

293.0 293.0 

Fitch assumes the $225 Mil. credit facility is 70% drawn in a distressed scenario. This also includes the $50 Mil. ABL term loan. bIncludes estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — The Gymboree Corporation ($ Mil., As of Oct. 29, 2016) Baina 100% Giraffe Holding, Inc.

Giraffe Intermediate A, Inc.

Giraffe Intermediate B, Inc.

The Gymboree Corporation (CO — cc*) Debt Issue $225 Mil. Sr. Secured ABL Revolverb ABL Term Loanb Sr. Secured Term Loanc 9.125% Senior Unsecured Notes Total

Maturity December 2017 December 2017 February 2018 December 2018 —

Amount 80 49 769 171 1,069

CO ccc+*/rr1* ccc+*/rr1* c*/rr5* c*/rr6* —

Gymboree Retail Stores, Inc.

Gymboree Manufacturing, Inc.

Gymboree, Inc.d (Canadian and Delaware Corp.)

Gym Card, LLC

Gymboree Operations, Inc.

Gymboree Australia Pty, Ltd. (Australia Ltd. Co.)

S.C.C. Wholesale, Inc.

Gymboree Island, LLC (Puerto Rico LLC)

Gym-Mark, Inc.

Gymboree Korea Ltd. (Korea Co.)

aInvestment funds sponsored by Bain Capital and co-investors that acquired Gymboree in November 2010 at an approximately 7.0x multiple. bReflects springing maturity, given the company has to address the term loan due February 2018. cReflects the voluntary prepayment of $25 Mil. of the outstanding principal in November 2012. dGymboree, Inc. (New Brunswick)/Gymboree Canada, Inc. (a Delaware corporation), a dual status entity — not a domestic subsidiary. CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — The Gymboree Corporation Overview Borrower(s) Description of Debt

Document Date

Amount

Maturity Date

Ranking Security

Guarantee

Financial Covenants Fixed-Charge Coverage Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Prepayment of Debt

The Gymboree Corporation (Lead Borrower) and the other borrowers identified therein. Senior secured ABL facility of up to $225 Mil. Tranche A subject to a borrowing base equal to (i) 90% of eligible credit card receivables and (ii) 90.0%–92.5%, depending on the season, (For FILO borrowings: 92.5%–95.0% of cost of eligible inventory (net of inventory reserve) multiplied by the appraised value of eligible inventory plus (iii) 85% of face amount of eligible trade receivables, minus (iv) 100% of the then amount of availability reserves and (v) the ABL Term Loan. Original Credit Agreement dated 11/23/10 (Exhibit 10.10 to S-4 filed 5/16/11) Amended and Restated dated 3/30/12 (Exhibit 10.1 to 8-K filed 4/5/12) First Amendment to Amended and Restated Credit Agreement dated 9/24/15 (Exhibit 10.2 to 8-K filed 9/28/15) Second Amendment to Amended and Restated Credit Agreement dated 4/22/16 (Exhibit 10.1 to 8-K filed 4/26/16) • Tranche A: $219.0 Mil. (Additional commitments of $125 Mil. may be requested; minus the initial aggregate principal amount of the ABL Term Loan if any). • FILO Commitment: $6.0 Mil. • ABL Term loan: $50 Mil. The earlier of (i) 9/24/20 and (ii) the date that is 60 days before the scheduled final maturity date of any tranche of the term loan, or notes, unless such tranches are cumulatively equal to or less than $25.0 Mil. in the aggregate and a reserve against the borrowing base is imposed equal to the amount of such tranches. Senior secured. Secured by a (i) first-priority perfected security interest in the ABL priority collateral, including: cash, inventory, accounts receivable and credit card receivables of the loan parties. Loan parties include both borrowers as well as facility guarantors, (ii) second-priority security interest in substantially all other tangible and intangible assets, including real property and intellectual property and all capital stock held by Holdings. Guaranteed by Giraffe Intermediate B, Inc. (Holdings) and the subsidiary facility guarantors (including the material wholly owned domestic subsidiaries of the lead borrower).

Consolidated FCCR, to be equal to or greater than 1.0x during the continuance of a FCCR trigger event (means availability less than the higher of: (i) 10% of the lower of then FILO borrowing base and revolving credit ceiling, and (ii) $20 Mil.) Coverage Debt Ratio: None. Notable Permitted Debt Incurrence: Term loan facility debt not to exceed $820 Mil. plus $200 Mil. less any commitment increases under ABL (Tranche A); Senior Notes capped at $400 Mil. • Attributable debt in respect of capitalized leases provided the payment conditions are satisfied (please refer to definition at the bottom of this page); general carveout of $25 Mil. without satisfaction of the payment conditions. • No cap on subordinated debt and other unsecured non-amortizing loans provided payment conditions are met. • Debt carveout for the lead borrower and restricted subsidiaries of $90 Mil. • Debt carveout for restricted subsidiaries that are not loan parties is $40 Mil. The lead borrower and restricted subsidiaries are not permitted to create liens except permitted encumbrances, which include: existing liens on debt and refinancings thereof; liens securing certain new indebtedness permitted under debt incurrence covenant; and liens on property of any foreign subsidiary; general carveout of $60 Mil. for liens securing debt. Guarantees are defined as debt and hence governed by debt restriction. Also see Investments Restriction section below.

CoC is defined as occupancy of majority of board seats or acquisition of more than 50% voting stock by nonpermitted holder prior to a qualifying IPO (and 35% following a qualifying IPO), or if Holdings fails to own 100% of the capital stock of the lead borrower. A CoC constitutes an event of default. No specified limit provided the payment conditions (defined at the bottom of this page) are satisfied. Carveouts: Guarantees constituting permitted debt; permitted acquisitions; general carveout of $60 Mil. in aggregate (provided no event of default exists). Dispositions of assets and equity (including sale and leaseback) are permitted provided no event of default. Dispositions of noncore subsidiaries/business segments and of inventory related to store closures require application of the net proceeds toward repayment of the loans.

RP Basket: None. Notable Permitted RPs: Gymboree Corp. and its restricted subsidiaries may make RP to the holders of their respective capital stock • As long as the RP conditions are satisfied; • As long as (i) the pro forma availability condition is satisfied and (ii) no event of default then exists or arise therefrom; and (iii) Gymboree Corp. and its restricted subsidiaries may make additional RP to the holders of their respective capital stock, in an aggregate amount, which when added to the aggregate amount of voluntary prepayments/redemptions of debt as described below, do not exceed $40 Mil. As long as payment conditions are satisfied, voluntary prepayments, purchases, redemptions and defeasances of the senior notes, the term loan facility or any other permitted indebtedness, is permitted. As long as the pro forma availability condition is satisfied and no event of default then exists or would arise therefrom, an aggregate amount of $40 Mil. in voluntary prepayments is permitted, subject to reduction by any applicable RP amounts availed under the related carveout above.

ABL – Asset-based loan. FILO – First in, last out. FCCR – Fixed-charge coverage ratio. MAC – Material adverse change. ACH – Automated clearing house. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — The Gymboree Corporation (Continued) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure

Cash Dominion Event

Key Definitions

Pricing Tranche A

FILO

Yes, exceeding $25 Mil. No. As a representation and warranty; and under affirmative covenants Yes — Provided (a) the lead borrower identifies such cash equity contribution as a specified equity contribution; (b) in each period of four consecutive fiscal quarters, there shall be at least two fiscal quarters in which no specified equity contribution is made (c) no more than five specified equity contributions will be made in the aggregate (d) the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with fixed-charge coverage ratio of 1.0x. The company’s funds will be swept daily via ACH/wire into concentration accounts (maintained by the administrative agent and under the sole dominion of the collateral agent) to reduce the borrowings outstanding under the credit facility upon occurrence of a cash dominion event. Means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of $25 Mil. or 12.5% of the lesser of the then FILO borrowing base and the then revolving credit ceiling loan cap for five consecutive days. • Payment conditions: with respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability condition is met (see below); and (c) the consolidated FCCR, on a pro forma basis, is not less than 1.0x. Clause (c) is not applicable when pro forma availability is greater than 25% of lesser of FILO borrowing base and revolving credit ceiling. • RP payment conditions: with respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability condition is met (see below); and (c) the consolidated FCCR, on a pro forma basis, is not less than 1.1x. Not applicable when pro forma availability is greater than 25% of lesser of FILO borrowing base and revolving credit ceiling. • Pro forma availability condition: with respect to any specified payment, availability (on a pro forma basis) after giving effect to the specified payment and projected availability as of the end of each of the subsequent six fiscal months will, in each case, be equal to or greater than the greater of (a) $35 Mil. and (b) 15% of the lesser of FILO borrowing base and the revolving credit ceiling. Level I II III I II III

Average Daily Availability Greater than 66% Less than or equal to 66%, but greater than or equal to 33% Less than 33% Greater than 66% Less than or equal to 66%, but greater than or equal to 33% Less than 33%

LIBOR (%) 1.50 1.75 2.00 3.00 3.25 3.50

Prime Rate (%) 0.50 0.75 1.00 2.00 2.25 2.50

FILO – First in, last out. ABL – Asset-based lending. FCCR – Fixed-charge coverage ratio. MAC – Material adverse change. ACH – Automated clearing house. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — The Gymboree Corporation Overview Borrower(s) Description of Debt Document Date Original Size/Outstanding Maturity Date Ranking Security

Guarantee

Financial Covenants Maintenance Covenants Incurrence Covenants (a) Total Leverage Ratio

(b) Interest Coverage Ratio

Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Key Definitions

Pricing

The Gymboree Corporation Senior secured term loan Amended and Restated Credit Agreement dated 2/11/11 (Exhibit 10.9 to S-4 filed 5/16/11); Refinancing Amendment dated 2/11/11 (Ex.10.8) $820 Mil./$769 Mil. 2/23/18 Senior secured. Secured by a first-priority perfected security interest in substantially all tangible and intangible assets (other than ABL priority collateral) of the borrower and each restricted subsidiary that is a loan party (including capital stock and intercompany debt, equipment, investment property, contract rights, IP Rights, other general intangibles and material real estate) and a second-priority perfected security interest in the ABL priority collateral. Guaranteed by Giraffe Intermediate B, Inc. (Holdings) and the subsidiary facility guarantors (namely, the material wholly owned domestic subsidiaries of the Gymboree Corp.). Any subsidiary of the Gymboree Corp. that guarantees the ABL facility, any senior notes, or any refinancings thereof, or that is a co-borrower under the ABL facility shall also be a guarantor under the term loan.

None. Pro forma compliance with the financial ratios defined as compliance with both ratios described below in events leading toward new designation of restricted subsidiaries (and the incurrence or repayment of any indebtedness in connection therewith). 2/1/15–1/30/16: 4.75x 1/31/16–10/29/16: 4.50x 10/30/16–4/29/17: 4.25x Thereafter: 4.00x 2/1/15–1/30/16: 2.00x Thereafter: 2.25x

Coverage Debt Ratio: None. Notable Permitted Debt Incurrence: 1) Indebtedness incurred for any permitted acquisition and any permitted refinancing not to exceed $50 Mil. provided no event of default and total leverage ratio < 4.0 on a pro forma basis; 2) general indebtedness for the lead borrower and restricted subsidiaries not to exceed $90 Mil.; 3) indebtedness of the loan parties constituting the senior notes not to exceed $400 Mil.; 4) ABL facility borrowings not to exceed a) $225 Mil. plus b) $75 Mil. minus c) the excess of i) incremental term loans borrowed under the term loan facility over ii) $125 Mil., as well as permitted refinancing; 5) indebtedness for restricted subsidiaries that are not loan parties not to exceed $40 Mil.; 5) subordinated debt incurrence by loan parties is permitted provided no default and if Gymboree Corp. and its restricted subsidiaries are in pro forma compliance with the financial ratios as described in financial covenants section above; 6) capital lease indebtedness not to exceed $25 Mil. Loan parties not permitted to create liens except for permitted liens, which include: existing liens on debt and refinancings thereof; liens securing certain new indebtedness permitted under debt incurrence covenant; liens on property of any foreign subsidiary; general carveout of $60 Mil. for liens securing debt. Guarantees are defined as debt and hence governed by debt restriction. Also see Investments Restriction section below.

CoC is defined as more than 50% voting stock ceasing to be held by permitted holders prior to a qualifying IPO (and following a qualifying IPO the acquisition of a majority of board seats or 35% of voting stock by nonpermitted holders), or if Holdings fails to own 100% of the capital stock of the lead borrower. A CoC constitutes an event of default. Carveouts: Loans and advances to officers/employees up to $18 Mil; permitted acquisitions provided pro forma compliance with financial ratios; general carveout of an amount capped at the greater of $90 Mil. and 2.75% of total assets provided no event of default exists or will result therefrom. Asset dispositions of $250 Mil. permitted provided at least 75% of consideration is in form of cash and subject to no event of default. Additional carveout of $40 Mil. in sale-leasebacks.

RP Basket: Gymboree Corp. may make RP to Holdings (the proceeds of which may be utilized by Holdings to make additional RP) up to an aggregate amount equal to the sum of $40 Mil. plus the portion, if any, of the cumulative credit that it elects to apply, provided that no event of default exists or would result therefrom. Cumulative credit is determined (on a cumulative basis) as the sum of 50% of excess cash flow commencing from the closing date (provided that such amount shall be available to make an RP only if total leverage ratio at the time of such RP is less than or equal to 4.0x), subject to certain adjustments.

Yes, exceeding $25 Mil. No. As a representation and warranty. N.A. Cumulative credit - determined (on a cumulative basis) as the sum of 50% of excess cash flow commencing from the closing date (provided that such amount shall be available to make an RP only if total leverage ratio at the time of such RP is less than or equal to 4.0x), subject to certain adjustments (a) Eurodollar Term Loan — LIBOR + 3.50% per annum (1.5% LIBOR floor) and (b) ABR Term Loan — Base rate + 2.50% per annum.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. ABR – Alternate base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — The Gymboree Corporation Overview Issuer Description of Debt Document Date and Location Maturity Date Original Issue/Outstanding Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC) Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

The Gymboree Corporation (initial issuer was Giraffe Acquisition Corporation) 9.125% Senior Notes Due 2018 Indenture dated 11/23/10 filed as Exhibit 4.1 to S-4 dated 5/16/11 12/1/18 $400 Mil./$171 Mil. Senior unsecured obligations of the issuer ranking pari passu in right of payment to its senior indebtedness (including the credit facilities). None. Guaranteed on a senior unsecured basis by each direct/indirect domestic subsidiary of the Gymboree Corp. that is a guarantor or obligor under the senior credit facilities. Each guarantee of the notes will be effectively subordinated to the secured guarantees of the senior credit facilities to the extent of the value of the assets available.

Coverage Debt Ratio: Fixed-charge coverage ratio (FCCR, pro forma) is ≥ 2.0x.; indebtedness incurred by Restricted Subsidiaries that are not Guarantors must be ≤ $75.0 Mil. Notable Permitted Indebtedness: 1) i) Indebtedness incurred pursuant to the Revolving Credit Facility not to exceed the greater of a) $300 Mil. and b) the borrowing base and ii) indebtedness incurred pursuant to the Term Loan Facility does not exceed $1,020 Mil.; 2) indebtedness to finance the purchase, lease or improvement of property or equipment < $50 Mil.; 3) indebtedness to finance an acquisition given the issuer is above the FCCR pro forma; 4) foreign subsidiaries debt not to exceed greater of a) $50 Mil. and b) 2.35% of total assets of the foreign subsidiaries; 5) indebtedness of the issuer and its restricted subsidiaries not to exceed $100 Mil. Liens (other than permitted liens) on any debt issued by the issuer or any guarantor are not permitted without equally and ratable securing the notes contemporaneously. Carveouts: • Standard carveouts for existing liens and refinancings thereof; • Liens incurred to secure obligations permitted under the debt incurrence covenant provided that consolidated secured debt ratio does not exceed 3.50x. • General carveout of $15 Mil.

A CoC is defined as sale of substantially all assets of Gymboree Corp. and its subsidiaries, or acquisition of 50% or more of the voting stock of the issuer or any of its direct/indirect parents. There is a CoC put at 101. See Restricted Payments section Standard restrictions on asset sales above $15 Mil. threshold; in the event that sales proceeds exceed $25 Mil. and are not applied to repay loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer.

RP Basket: The sum of a) 50% of Consolidated Net Income since closing plus b) 100% of net cash proceeds of equity issuances as long as on a pro forma basis the FCCR ≥ 2.0. Notable Permitted RPs: General RPs not to exceed the greater of $60 Mil. and 2.85% of total assets.

No. Yes, exceeding $25 Mil. Redeemable, at the company’s option, in whole or in part, on and after Dec. 1, 2014 at the applicable redemption price below. Period Redemption Price 12 months after Dec 1, 2014 — 104.563% 12 months after Dec 1, 2015 — 102.281% 12 months after Dec 1, 2016+ — 100.000% N.A. Covenants related to debt incurrence, restricted payments, disposition of assets, limitation on guarantees of debt by restricted subsidiaries and offer to repurchase upon a change of control (but except the lien restrictions) will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If notes are subsequently downgraded below investment grade, the covenants shall be reinstated on that later date.

N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — The Gymboree Corporation 1/30/16

12 Months 1/30/16

22.2 8.9 5.6 6.0 6.7 3.9

21.8 11.4 8.7 6.2 9.5 5.8

20.7 7.7 4.4 0.5 0.5 5.8

21.3 7.0 3.5 (2.5) (0.6) 6.6

19.6 6.7 3.4 (0.5) 1.3 —

12.0 5.1 1.8 0.3 (18.2) 3.2

10.3 10.5 (1.0)

10.2 10.0 (0.9)

9.2 9.7 0.4

9.2 9.8 0.3

9.0 9.1 0.5

9.4 10.1 0.7

8.2 9.0 (3.3)

15.3 10.2

14.9 9.7

14.7 9.7

11.2 8.2

10.5 8.5

12.6 10.6

15.5 13.1

22.5

19.3

18.0

17.5

13.9

14.1

13.5

12.7

19.8

9.0 9.0 48.5

10.0 9.4 (21.1)

10.2 10.3 (32.0)

10.2 10.4 (48.0)

10.1 9.9 (52.4)

9.1 9.6 126.1

9.1 9.7 167.8

8.7 8.8 78.9

9.4 10.0 50.0

8.2 9.0 (20.7)

1.3 1.8 1.3 1.7 1.5

1.1 1.4 1.1 1.4 1.4

1.0 1.1 1.1 1.3 (0.7)

1.0 1.0 1.0 1.0 (0.4)

1.0 1.1 1.0 1.0 (0.1)

1.0 1.1 1.0 1.1 (0.1)

1.1 1.3 1.0 1.1 1.4

1.1 1.3 1.0 1.1 1.3

1.1 1.3 1.1 1.3 1.6

1.0 1.1 1.0 0.9 1.8

1.0 0.9 0.9 0.7 (1.0)

1,210 2,316 1,106 — (82) 6.8

1,138 2,304 1,166 — (79) 6.7

1,118 2,362 1,244 — (74) 6.5

1,150 2,455 1,305 — (73) 6.4

1,159 2,459 1,300 — (74) 6.4

1,187 2,487 1,300 — (74) 6.3

1,167 2,472 1,305 — (75) 6.4

1,078 2,378 1,300 — (75) 6.7

1,076 2,376 1,300 — (77) 6.9

1,032 2,256 1,224 — (72) —

1,069 1,682 612 — (73) 6.6

89 2 92 — (37) (12) 43 (1) (8)

59 15 74 — (48) (3) 23 — (69) —

28 47 75 — (53) (8) 15 — (25) —

23 (44) (22) — (32) (0) (54) — 32 —

(21) 19 (3) — (3)

18 7 26 — (5) 0 21 — (20) —

24 22 46 — (9) 0 37 0 (47) —

6 22 28 — (21) (0) 6 0 (30) —

(7) 9 2 — (4) (1) (2) — 48 —

(6) 52 46 — (26) (5) 15 127 (41) —

1 (46) (46) — (5)

(6) — 9 —

(13) (26) (39) — (4) (0) (44) — 28 —

13 46

2 (45)

16 6

0 (21)

1 4

17 1

0 1

3 (5)

22 (2)

(2) 44

(112) (10)

11 (3)

78 128

33 167

39 128

19 103

22 91

24 96

24 142

18 126

62 91

13 117

10 92

—

107

64 8.4 105.3 39.6 3.1

45 7.9 91.0 41.4 3.8

(5) 6.4 83.3 48.4 4.2

42 7.5 95.2 41.8 2.6

22 8.3 110.1 55.6 1.1

49 8.1 126.6 64.6 1.6

40 6.6 130.8 65.3 1.7

22 6.1 79.2 41.8 2.3

22 7.8 99.1 52.4 1.7

4 6.6 106.0 50.3 1.3

76 3.7 114.1 65.9 2.1

45 4.9 137.0 68.0 2.0

12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

Three Months

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15 10/31/15

24.7 13.1 8.2 7.5 3.6 5.0

22.6 11.2 6.6 4.6 1.8 4.4

20.8 8.3 4.5 2.2 1.2 3.2

19.7 6.5 2.9 1.8 (4.4) 2.7

19.8 5.1 1.2 (7.7) (2.1) 2.5

18.6 3.8 0.0 (4.9) (16.0) 2.9

7.9 7.5 1.8

8.0 8.1 1.0

9.1 9.2 0.6

10.1 9.5 (2.2)

10.3 10.4 (1.4)

7.8 5.1

8.0 5.4

10.9 7.5

14.5 9.7

12.0

13.4

13.3

7.6 7.2 20.6

7.9 8.0 42.6

1.3 1.9 1.4 2.1 2.5

Three Six Three Months Months Months b 4/30/16 7/30/16 10/29/16

(51) — 37 —

a EBITDA/R after dividends to associates and minorities. bThe company changed its fiscal year end to July versus January. Historical data through the fiscal year ended Jan. 30, 2016 are based on January fiscal years. The company provided six-month data for the fiscal year ended July 30, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — The Gymboree Corporation (Continued) 1/30/16

12 Months 1/30/16

305 (3.6) 68

392 4.5 85

1,247 1.5 259

285 3.3 61

1,221 — 240

280 (8.4) 33

51 10

68 27

85 45

259 96

61 20

240 82

33 14

14 3

10 0

27 17

45 34

96 55

20 10

82 41

14 5

0.0 1,322 38.2 27.0 3.7 7.3 24.4 (48.4) 29.3

2.0 1,317 36.8 25.6 3.2 6.2 25.1 (46.6) 42.8

(3.0) 1,315 40.2 20.0 2.9 5.8 26.0 (5.4) 50.8

5.0 1,306 40.1 9.0 3.7 7.0 29.8 (0.9) 84.3

1.0 1,306 39.0 (21.9) 3.7 7.0 29.8 (0.9) 51.8

4.0 1,303 40.9 15.6 3.8 8.1 29.4 3.9 35.4

1.0 1,299 37.4 (11.9) 3.2 5.5 26.2 9.3 59.0

(5.0) 1,300 38.2 13.3 2.8 5.6 21.0 9.2 58.5

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15 10/31/15

1,188 10.6 293

1,276 7.4 289

1,245 (2.4) 258

1,229 (1.3) 243

276 1.5 55

273 3.5 51

293 155

289 143

258 103

243 80

55 14

155 97

143 84

103 56

80 35

4.0 1,149 38.7 (13.5) 3.5 9.2 14.2 (2.1) 63.1

(2.0) 1,262 37.7 (15.0) 4.0 8.8 14.6 (0.4) 81.3

(6.0) 1,323 38.2 (17.1) 4.4 7.5 15.7 (11.0) 113.4

(3.0) 1,326 38.1 (20.4) 3.8 8.7 24.5 (48.3) 72.0

Three Six Three Months Months Months b 4/30/16 7/30/16 10/29/16

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Leveraged Finance Retailing / U.S.A.

Hanesbrands Inc. Credit Profile Credit Opinion

Credit Profile Summary

Hanesbrands Inc.

Leading Brands and Market Share: Hanesbrands Inc. has strong brand recognition and leading market share in the basic apparel industry. Hanes’ value-priced product offering, deep innovation capability and strong relationships with its top retail customers have enabled it to gain market share and drive improved profitability. Hanes’ acquisitions of Champion Europe S.p.A and Pacific Brands Limited in 2016 complement its existing product portfolio and strengthen leading market positions globally.

Long-Term Issuer Default bb+*/stable Credit Opinion Senior Secured Revolving Credit Facility Credit Opinion bbb–*/rr1* Senior Secured Term Loans Credit Opinion bbb–*/rr1* Senior Notes Credit Opinion bb+*/rr4* MFB International Holdings S.a.r.l. Long-Term Issuer Default Credit Opinion bb+*/stable Senior Secured Revolving Credit Facility Credit Opinion bbb–*/rr1* Senior Secured Term Loans Credit Opinion bbb–*/rr1* HBI Australia Acquisition Co. PTY LTD Long-Term Issuer Default Credit Opinion bb+*/stable Senior Secured Revolving Credit Facility Credit Opinion bbb–*/rr1* Senior Secured Term Loans Credit Opinion bbb–*/rr1* Hanesbrands Finance Luxembourg S.C.A. Senior Notes Credit Opinion bb+*/rr4* Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data

Acquisitions Augment Growth: These acquisitions are examples of the company’s focus on using M&A to supplement low single-digit organic sales growth and better leverage its supply chain infrastructure. Sales are expected to reach USD6.7 billion in 2017, compared with USD4.3 billion in 2010, due largely to M&A activity, while EBITDA is expected to cross USD1 billion, versus USD510 million in 2010. Given healthy FCF (after dividends) of USD400 million–USD450 million, Hanes can accommodate moderate-sized acquisitions within its current credit profile. Improved Operating Margins: EBITDA margin increased to 17.4% in 2015 from 11.8% in 2010 due to supply chain initiatives, acquisition synergies and cost controls. Fitch Ratings expects margins to remain flat to 2015, with further supply chain efficiencies and a gradual mix change toward higher priced products offset by the integration of lower margin Pacific Brands. Upside in reported margins could also be somewhat constrained in the near term due to high industry inventory levels. Improved Financial Flexibility: Adjusted debt/EBITDAR increased to 4.1x as of Oct. 1, 2016 from 3.1x at the end of 2015 due to the debt-financed acquisitions during the year. Adjusted leverage is expected to remain around 4.0x over the next 24–36 months — at the high end of Hanes’ long-term target for net debt to EBITDA of 2.0x–3.0x, or approximately 3.0x–4.0x on a lease-adjusted basis — absent any major debt-financed acquisition. Solid Liquidity: Hanes had USD1.0 billion of unused availability under its revolvers as of Oct. 1, 2016 and a nominal cash balance, net of cash held at foreign subsidiaries. Fitch expects FCF to be directed toward dividends, share repurchases and moderate-sized acquisitions. The company repurchased USD380 million of equity YTD Oct. 1, 2016, and Fitch expects management could execute debt-financed share buybacks in the absence of acquisition opportunities while managing leverage within its publicly stated target.

Credit Profile Drivers

Hanesbrands Inc. (USD Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x)

FYE 1/2/16 5,731.5 994.7 17.4 (33.7) 3,453.7

LTM 10/1/16 5,862.4 1,060.9 18.1 266.0 4,772.3

3.1

4.1

5.2

4.8

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Positive Drivers: Positive credit profile drivers include a sustained trend of positive sales and EBITDA growth, coupled with a commitment to maintaining net debt to EBITDA below 2.0x, or 3.0x on an adjusted debt/EBITDAR basis. Negative Drivers: Negative credit profile drivers include deterioration in the retail environment and operating trends such that organic growth becomes modestly negative, or large debtfinanced dividends/share repurchases that result in adjusted leverage increasing to over 4.0x on a sustained basis.

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Leveraged Finance Fitch Base Case Assumptions — Hanesbrands Inc. (USD Mil.) Revenue Revenue Growth (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenues (%) Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

2015A 5,732

2016F 6,152

2017F 6,664

7.6 995 17.4 (380) 227 (99) 1.7 (161) (34) (351) 2,625 3,454 3.1

7.3 1,065 17.3 (109) 762 (108) 1.8 (168) 376 (500) 4,167 5,012 4.3

8.3 1,147 17.2 (138) 802 (117) 1.8 (175) 510 (500) 4,117 4,980 4.0

2018F Comments 6,801 2016/2017 benefit from recent acquisitions. 2.1 — 1,184 — 17.4 — (29) — 947 — (119) — 1.8 (181) 648 (500) 4,050 4,929 3.8

— — — — — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Company filings, Fitch Ratings.

Business Profile Assessment Hanes manufactures, sources and sells basic apparel under the brand names of Hanes, Champion (C9 by Champion exclusively at Target Corp.), Playtex, Bali, L’eggs, Just My Size (Wal-Mart Stores, Inc. exclusive), Barely There, Maidenform and Wonderbra. The company also sells licensed collegiate logo apparel through its recent acquisition of Knights Holdco, Inc. The basic apparel industry is characterized by products sold with frequent replenishment, and is not primarily driven by fashion. Many of the products Hanes sells are purchased as frequently as health/beauty and other consumer products. The company has concentrated distribution through mass merchants, which represented 49% of 2015 sales. Other distribution channels include mid-tier domestic department stores and national chains (15%); embellishers, specialty retailers, wholesale clubs and sporting goods stores (9% in aggregate); international markets such as Canada, Japan, Mexico, Europe and Brazil (20%); and direct to consumers via its outlets and online (7%). The sales mix by channel is relatively stable, though mass merchants contributed more sales — 49% of net sales in 2015, versus 41% in 2011 — given tighter inventory control and continued promotional pressure at the national chains/department stores, and further consolidation of smaller specialty retailers. Hanes’ top 10 customers account for 56% of sales. The top three customers are Wal-Mart (23% of 2015 sales), Target (15%), and Kohl’s Corp. (5%). Hanes’ strong relationships with its top customers and deep innovation capability have enabled it to maintain and gain market share in a slow-growth environment.

Acquisitions Drive Growth

Analysts

Hanes is focused on acquisitions to drive growth and supply chain efficiencies. Management’s acquisition criteria focus on companies in its core categories that provide complementary revenue growth and cost synergy opportunities, and are quickly accretive to earnings. The company has completed five major acquisitions since 2013 that have added approximately USD2.4 billion in annualized sales and USD300 million in EBITDA.

JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Operating Segments, Management Strategy and Trends — Hanesbrands Inc. Segment Innerwear

% of Revenues/ a Operating Profit Primary Products 45.3/61.7 Intimate apparel, such as bras, panties, shapewear and hosiery; men’s underwear and kids’ underwear; socks.

Activewear

26.5/22.7

Direct to Consumer

5.8/1.5

International

22.4/14.1

Primary Brands Hanes, Playtex, Bali, Barely There, Just My Size, Wonderbra, Polo Ralph Lauren (licensed), Champion, L’eggs, Maidenform, Flexees, Lilyette, Self Expressions, Sweet Nothings, Donna Karen (licensed), DKNY (licensed). Activewear, such as Champion, Duofold, Gear performance T-shirts and for Sports, Hanes, Just shorts, fleece, sports bras My Size, Outer Banks, Champion, Hanes and thermals; Beefy-T, Knights Apparel, casualwear, such as T-shirts, fleece and sport various collegiate brands shirts. (licensed). Activewear, men’s Bali, Hanes, Playtex, underwear, kids’ Champion, Barely There, underwear, intimate L’eggs, Just My Size. apparel, socks, hosiery and casualwear. Activewear, men’s underwear, kids’ underwear, intimate apparel, socks, hosiery and casualwear.

Competitive Position Dominant share in dollar stores and mass merchants; 40% share in hosiery category as the sector starts to stabilize after secular decline for a decade.

Management Strategy Grow fast-growing categories such as men’s underwear via product innovation, drive higher margin core products and focus on inventory controls.

Exclusive brands at WMT and TGT; Champion grew by double digits in past six years.

Improve margins and grow units of higher margin products through supply chain initiatives and bolt-on acquisitions.

Sales and Margin Trends Flat to low single-digit organic sales growth; operating margin improved to high teens, driven by product pricing and mix.

Flat to low single-digit sales growth; operating margin improved to low teens. Recent weakness attributed to bankruptcy of certain sporting goods retailers. Growth slows down Operate 252 outlet stores, Essentially flat sales for following double-digit as well as websites and seven years to 2015; CAGR by leading brands catalogs. operating margin at early expansion stage. improved to high single digits given increased focus on profitable sales. Hanes, Champion, No. 1 market share in Pacific Brands acquisition Sales declines reversed Wonderbra, Playtex, intimates in France and provides exposure to by DBA acquisition in Australian and Asia, Stedman, Zorba, Rinbros, Spain, No. 2 share in 2014 and will benefit from Kendall, Sol y Oro, Bali, Italy. Category leader in increasing international the acquisitions in 2016; presence and creating Ritmo, DIM, Abanderado. men’s underwear in operating margin France and Spain, and in significant opportunity for projected to recover to hosiery in France and supply chain cost over 10%. Sales Germany. Largest savings. penetration should markets are Europe, approach 30% post the Japan, Canada, Mexico, Pacific Brands and Brazil and Australia. Champion Europe acquisitions.

Based on LTM as of Oct. 1, 2016; operating profit before general corporate expenses. WMT – Wal-Mart Stores, Inc. TGT – Target Corp. DBA – DBApparel of France. Source: Company filings, Fitch Ratings.

The company completed its all-cash acquisition of Pacific Brands in July 2016 for USD800 million, or about 10.0x expected 2016 EBITDA. Pacific Brands is a leading underwear and intimate apparel company in Australia with No. 1 or No. 2 share in most of its categories. Leading brands in its Underwear segment include Bonds and Berlei. The company also markets luxury linen, towels, bedding accessories and loungewear through its Sheridan business. Hanes projects Pacific Brands to generate about USD600 million and USD56 million in revenues and adjusted operating profit (9.3% operating margin), respectively, in 2016, excluding the noncore Tontine & Dunlop flooring business. Hanes expects to divest the Tontine & Dunlop business in early 2017, and announced the sale in December 2016. Approximately 40% of Pacific Brands’ revenues are generated via its direct segment, which is composed of online and more than 150 retail stores and shop-in-shops, while the remaining 60% are generated through the wholesale channel. Hanes believes there is significant opportunity for supply chain synergies by adding Pacific Brands’ Underwear business into Hanes’ existing Asia supply chain. Fitch believes the positive impact from supply chain savings will be mitigated by the addition of Pacific Brands’ high single-digit operating margin to Hanes’ midteens operating margin. Hanes acquired Champion Europe in June 2016 in all-cash transaction for approximately EUR200 million, or 10.0x expected 2016 EBITDA. Hanes expects Champion Europe to generate revenues and EBITDA of approximately EUR190 million (or around USD200 million) High-Yield Retail Checkout January 31, 2017

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Leveraged Finance and EUR20 million (or around USD21 million), respectively, in 2016. Through this acquisition, Hanes unifies the Champion brand globally, as Champion Europe owns the trademark for the Champion brand in Europe, the Middle East and Africa. The vast majority of revenues are generated in Italy and Greece, both through wholesale operations and a combined retail base of about 130 stores. The company completed its all-cash acquisition of Knights Apparel for USD200 million in total enterprise value, or approximately 8.0x the company’s EBITDA, on April 6, 2015. Knights Apparel is a sports apparel manufacturer, holding licenses from approximately 400 U.S. universities to produce and sell t-shirts, sweatshirts and other apparel bearing their logos into the mass retail channel, with a sales base of approximately USD180 million in 2015. At the time of acquisition, Hanes expected to drive approximately USD20 million in synergies from the approximately USD24 million EBITDA base. Hanes completed its acquisition of DBApparel of France (DBA) on Aug. 29, 2014, paying EUR297 million (or approximately USD392 million), or approximately 7.5x DBA’s EBITDA. DBA is a leading marketer of intimate apparel, hosiery and underwear in Europe, and had over USD875 million net sales and approximately USD125 million in operating profit at the time of acquisition. The company’s brand portfolio includes DIM, Playtex, Nur Die, Lovable, Abanderado and Wonderbra, which are top-tier brands in their markets and sold across a wide range of retail channels. The company expects to realize USD40 million of additional synergies in 2016, mostly from Knights Apparel and DBA, and expects the savings to flow from both SG&A and gross margin. Hanes completed its acquisition of Maidenform Brands, Inc. (MFB) on Oct. 7, 2013, for USD581 million, or approximately 9.5x 2012 EBITDA. At the time of acquisition, MFB had sales of around USD500 million and operating profit of USD80 million. The company sells bras, shapewear and panties under brands such as Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, as well as Donna Karan and DKNY intimate apparel under license. MFB has a particularly strong position in the shapewear business, which complements Hanes’ existing product portfolio and helps increase scale to serve retail customers.

Leading Brands and Share in a Competitive Sector Since its spinoff from Sara Lee Corp. in 2006, Hanes grew to be the leading player in innerwear categories, including bras, panties, men’s underwear, fleece, socks and hosiery. The company also improved its market position in the large T-shirts and activewear categories, through acquisitions and product innovations. The basic apparel market is highly competitive and evolving rapidly. Competition is generally based on brand name recognition, price, product quality, selection, service and purchasing convenience. The majority of Hanes’ core styles continue from year to year, with variations only in color, fabric or design details. However, products such as intimate apparel, activewear and sheer hosiery have more of an emphasis on style and innovation. A key differentiator for Hanes is its channel-agnostic approach, as products are available in broad variety of distribution channels and are very easy to purchase online given their basic and consistent nature. The company’s basic apparel positioning provides low susceptibility to changes in fashion trends and have allowed it to avoid the challenges faced by many retailers today. Relatively low sales exposure to the department store and national chains channel (15%) also provides Hanes protection from the recent volatility in those industry segments. Hanes’ key competition in branded products includes Fruit of the Loom (owned by Berkshire Hathaway Inc.); Victoria’s Secret (owned by L Brands, Inc.); and Jockey International, Inc. in High-Yield Retail Checkout January 31, 2017

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Leveraged Finance the innerwear segment. Hanes competes against a number of businesses that produce sweatshirts and related apparel as part of their broader product mix. Hanes also competes with the private labels marketed and sold by department stores, specialty stores and other retailers. National brands have gained share at the expense of private labels since 2008, as consumers’ pursuit of value has focused more on getting brand names for less rather than lowest prices. This change in consumer behavior has generally benefited value brands such as Hanes in gaining market share.

2017 Outlook After recent acquisitions, sales are expected to reach USD6.2 billion in 2016 and USD6.7 billion in 2017, versus USD5.7 billion in 2015. Fitch expects margins to remain flat to 2015, with further supply chain efficiencies and a gradual mix change toward higher priced products offset by the integration of lower margin Pacific Brands. Adjusted leverage is expected to remain around 4.0x over the next two years, after increasing to 4.1x as of Oct. 1, 2016 from 3.1x at the end of 2015, due to the recent debt-financed acquisitions. This is in line with Hanes’ long-term target for net debt to EBITDA of 2.0x–3.0x, or approximately 3.0x–4.0x on a lease-adjusted basis. Fitch expects management could execute debt-financed share buybacks in the absence of acquisition opportunities while managing leverage within its publicly stated target.

Liquidity and Debt Structure Hanes had USD450 million of cash and USD1.0 billion of unused availability under its three revolving credit facilities net of borrowings and outstanding letters of credit as of Oct. 1, 2016. Fitch expects the liquidity position to remain strong over the next two years, with annual projected FCF of USD400 million–USD450 million. The company issued USD1.8 billion in aggregate senior unsecured notes in April 2016 and used the proceeds to pay off the USD1 billion 6.375% senior unsecured notes due 2020 and a portion of outstanding revolver borrowings. Hanes amended its credit facility in July 2016 to issue an AUD200 million A-1 term loan facility due July 2019, an AUD200 million A-2 term loan facility due July 2021 and an AUD65 million revolving credit facility due July 2021. The company paid off the remaining USD115 million balance of its euro term loan due 2021 post the amendment. The company also issued USD561 million of 3.500% senior unsecured notes in June 2016. Proceeds from the Australian Term Loans A-1, A-2 and the 3.500% senior unsecured notes were used, together with cash on hand, to fund the acquisitions of Champion Europe and Pacific Brands. The Australian facilities are guaranteed by substantially all of the company’s existing and future direct and indirect U.S. subsidiaries, as well as certain indirect foreign subsidiaries, including Pacific Brands and substantially all of its Australian and New Zealand subsidiaries. The facilities have a valid and perfected first-priority lien and security interest in substantially all assets of Hanes and certain assets of the guarantors. The USD275 million accounts receivable securitization facility was amended to extend the termination date to March 2017 and change the borrowing capacity from fixed to variable. The facility is expected to be renewed annually.

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Leveraged Finance Capital Structure (USD Mil.) Description

1/2/16

10/1/16

(%)

Secured Debt USD1.0 Bil. Revolver due 4/29/20 a AUD65 Mil. Revolver due 7/7/21 A/R Securitization Facilityb a AUD200 Mil. Term Loan A-1 due 7/7/19 USD725 Mil. Term Loan A due 4/29/20 a AUD200 Mil. Term Loan A-2 due 7/7/21 USD500 Mil. Euro Term Loan due 8/29/21 USD425 Mil. Term Loan B due 4/29/22 Total Secured Debt

63.5 — 195.2 — 705.3 — 113.1 421.8 1,498.9

— — 244.1 153.8 669.1 153.8

— — 5.9 3.7 16.3 3.7

418.6 1,706.7

10.2 41.5

Unsecured Debt EUR100 Mil. Revolver due 9/9/17 6.375% Senior Unsecured Bonds due 12/15/20 4.625% Senior Unsecured Bonds due 5/15/24 3.500% Euro Senior Unsecured Bonds due 6/15/24 4.875% Senior Unsecured Bonds due 5/15/26 Other International Debt Total Unsecured Debt Total Debt

— 1,000.0 — — — 8.1 1,008.1 2,507.0

67.3 — 900.0 560.9 900.0 48.7 2,409.6 4,116.3

1.6 21.9 13.6 21.9 1.2 58.5 100.0

MFB International Holdings S.a.r.l., and HBI Australia Acquisition Co. PTY LTD are co-borrowers on the facilities with Hanesbrands, Inc. bAmended borrowing capacity from fixed to varying limit in March 2016. A/R – Accounts receivable. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

(USD Mil., At Oct. 1, 2016) 2017 2018 2019 2020 2021 Thereafter Note: Excludes borrowings under credit facilities. Source: Company filings, Fitch Ratings.

(USD Mil., At Oct. 1, 2016) 72.2 76.8 257.7 424.1 153.8 3,066.2

Cash Revolver Availability Total

450.2 1,000.0 1,450.2

Note: Revolver availability includes the EUR and AUD revolvers and is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb+*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned ‘bbb–*/rr1*’ recovery ratings to the senior secured USD revolver, senior secured AUD revolver, Term Loan A, Term Loan B, Australian Term Loan A-1 and Australian Term Loan A-2, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured notes are expected to achieve average recovery prospects (31%–50%) and are assigned a ‘bb+*/rr4*’.

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Leveraged Finance Appendix A Organizational Structure — Hanesbrands Inc. (USD Mil., As of Oct. 1, 2016) Directors and Executives

Public Shareholders

1.00%

99.00%

Hanesbrands Inc. (Parent Company) (CO — bb+*/stable) Debt Issue Amount CO USD1.0 Bil. Senior Secured Revolver due 4/29/20 0 bbb–*/rr1* AUD65 Mil. Secured Revolver due 7/7/21a 0 bbb–*/rr1* AUD Term Loan A-1 due 7/7/19a 154 bbb–*/rr1* Term Loan A due 4/29/20 669 bbb–*/rr1* AUD Term Loan A-2 due 7/7/21a 154 bbb–*/rr1* Term Loan B due 4/29/22 419 bbb–*/rr1* 4.625% Notes due 5/15/24 900 bb+*/rr4* 4.875% Notes due 5/15/26 900 bb+*/rr4* Other International Debt 49 Total 3,245 — Upstream guarantee of all debt obligations at parent company level

HBI Receivables LLCb Debt Issue A/R Sec. Facility due 3/15/17

Amount 244

Other Domestic Subsidiaries

Upstream guarantee of all debt obligations at parent company level

UPEL, Inc.

HBI International, LLC

70.42%

18.95%

Confecciones El Pedregal, Inc. 10.63%

Hanes Global Holdings Luxembourg S.a.r.l. Downstream guarantee from parent company

MFB International Holdings S.a.r.l. (CO — bb+*/stable) Amount CO 67 —

Debt Issue EUR100 Revolver due 9/9/17

Hanesbrands Finance Luxembourg S.C.A. Debt Issue Amount CO 3.5% Notes due 6/15/24 561 bb+*/rr4*

Upstream Guarantee

HBI Australia Acquisition Co. PTY LTD (CO — bb+*/stable)

Downstream Guarantee

aMFB International Holdings S.a.r.l., and HBI Australia Acquisition Co. PTY LTD are co-borrowers on the facilities with Hanesbrands, Inc. bHBI Receivables LLC is a wholly owned bankruptcy-remote subsidiary. CO – Credit Opinion. A/R – Accounts receivable. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Hanesbrands Inc. Overview Borrower Document Date and Location

Maturity Date Description of Debt Amount Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/ Voting Rights

Hanesbrands Inc., MFB International Holdings S.a.r.l., and HBI Australia Acquisition Co. PTY LTD First Amendment to the Third Amended and Restated Credit Agreement dated 5/5/15 (Exhibit 10.2 to 10-Q filed 7/31/15) Third Amended and Restated Credit Agreement dated 4/29/15 (Exhibit 10.1 to 8-K filed 4/30/15) Second Amendment and Joinder Agreement dated 10/23/15 (Exhibit 10.1 to 10-Q filed 10/29/15) Syndicated Facility Agreement dated 7/4/16 (Exhibit 10.2 to 10-Q filed 8/4/16) 4/29/20 for Revolving Loan Facility and Term Loan A; 4/29/22 for Term Loan B; 7/7/021 for the Australian Revolving Facility and Australian Term A-2 Loan; and 7/7/19 for the Australian Term A-1 Loan. Senior secured credit facility. USD1 Bil. for the revolver, USD725 Mil. for Term Loan A, USD425 Mil. for Term Loan B, AUD65 Mil. Australian Revolving Facility, AUD200 Mil. Australian Term A-1 Loan and AUD200 Mil. Australian Term A-2 Loan Senior secured. Secured by perfected first lien on substantially all present and future property and assets, real and personal, tangible and intangible, of the company and each guarantors and equity interests of substantially all of the company’s direct and indirect domestic subsidiaries and 65% of the voting securities of certain first-tier foreign subsidiaries. Revolver is guaranteed by substantially all of the company’s existing and future direct and indirect domestic subsidiaries. Term loan A and B are guaranteed by Hanesbrands and all of its existing and future direct and indirect domestic subsidiaries, and substantially all of MFB International Holdings’ direct and indirect subsidiaries. The Australian facilities are guaranteed by substantially all of the company’s existing and future direct and indirect U.S. subsidiaries as well as certain of the company’s indirect foreign subsidiaries, including Pacific Brands and substantially all of its Australian and New Zealand subsidiaries.

Coverage Ratio Debt: None. Notable Permitted Debt Incurrence: 1) Unsecured indebtedness of the obligors under the 2020 senior note not to exceed USD1.0 Bil.; 2) indebtedness from governmental/municipal bonds, deferred purchase of acquired property or financing of acquisition of equipment, and capitalized lease obligations not to exceed the greater of USD150 Mil. and 4% of total tangible assets; 3) foreign sub indebtedness to the parent borrower including investments made by the company and its subsidiary guarantors in such foreign subs limited to the greater of (i) USD400 Mil. and (ii) the sum of (a) 10.0% of total tangible assets plus (b) available retained excess cash flow; 4) subsidiary indebtedness existing at the time of acquisition not to exceed the greater of USD250 Mil. and 6.5% of total tangible assets; 5) the greater of USD500 Mil. and 15% of total tangible assets for indebtedness at foreign subs with a carveout of the greater of USD75 Mil. and 2% of total tangible assets for permitted acquisition by such foreign subs; 6) additional all-purpose debt not to exceed the greater of USD150 Mil. and 4% of total tangible assets. General carveout of the greater of USD100 Mil. and 3% of total tangible assets and permitted securitization programs of USD500 Mil. and AUD100 Mil., provided covenant compliance on pro forma basis. Same as limits on debt incurrence.

CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. Acquisitions allowed up to USD500 Mil. over the life of this agreement plus the available amount. General investment basket of the greater (i) USD150 Mil. and (ii) the sum of (a) 4% of total tangible assets plus (b) the available amount; investments in foreign subs including foreign sub indebtedness limited to the greater of (i) USD400 Mil. and (ii) the sum of (a) 10.0% of total tangible assets plus (b) the available amount. Asset dispositions permitted provided pro forma senior secured debt to total tangible assets ≤ 50%.

RP Basket: Available amount (USD400 Mil. plus 50% of consolidated net income). Notable Permitted RPs: An amount that does not cause the leverage ratio to exceed 3.75x.

No. Yes, exceeding USD75 Mil. None. None. 50% of total commitments. None.

MAC – Material adverse change. BR – Base rate. ECF – Excess cash flow. BBSY – Australian Bank Bill Swap Reference Rate. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Financial Covenant Summary — Hanesbrands Inc. (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment

≤ 4.00x; following any acquisition of more than USD200 Mil., temporarily increases to 4.5x for the 12-month period following such acquisition. ≥ 3.00x  

Callability/Optional Prepayment

ECF Sweep: 50% if leverage ≥ 2.5x; 25% if leverage < 2.5x but ≥ 2.0x; 0% if leverage < 2.0x. Asset Sales: 100% of net proceeds subject to reinvestment period Term Loan A amortizes at the following rates: Period Rate (%) First four quarters 1.250 Next four quarters 1.875 Next eight quarters 2.500 Each quarter thereafter 3.750 Term loan B amortizes 1% annually, with balance due at maturity. Optional prepayment with or without prepayment penalty.

Pricing Coupon Type/Index Pricing Grid

Term loan B priced at LIBOR + 250 bps or BR + 150 bps. Remaining facilities prices per grids below. Leverage Revolving Loans and Term Loan A

Amortization Schedule

≥ 4.00x < 4.00x but ≥ 3.25x < 3.25x but ≥ 2.50x < 2.50x Debt Rating (S&P/Moody’s) ≥ BBB+/Baa1 BBB/Baa2 BBB–/Baa3 BB+/Ba1 ≤ BB/Ba2

LIBOR + 200 bps or BR + 100 bps LIBOR + 175 bps or BR + 75 bps LIBOR + 150 bps or BR + 50 bps LIBOR + 125 bps or BR + 25 bps Australian Term A-1 Loans BBSY + 125 bps BBSY + 135 bps BBSY + 150 bps BBSY + 170 bps BBSY + 195 bps

Australian Term A-2 Loans BBSY + 155 bps BBSY + 165 bps BBSY + 180 bps BBSY + 200 bps BBSY + 225 bps

MAC – Material adverse change. BR – Base rate. ECF – Excess cash flow. BBSY – Australian Bank Bill Swap Reference Rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary â&#x20AC;&#x201D; Hanesbrands Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Hanesbrands Inc. Indenture dated 5/6/16 (Exhibit 4.1 to 8-K filed 5/6/16) 4.625% Senior Notes 4.875% Senior Notes 4.625% Senior Notes: 5/15/24 4.875% Senior Notes: 5/15/26 4.625% Senior Notes: USD900 Mil. 4.875% Senior Notes: USD900 Mil. Senior unsecured obligations ranking pari passu with existing and future unsubordinated indebtedness. None. Guaranteed by substantially all the domestic subsidiaries.

Limitation on Guarantees

None. Liens incurred in the ordinary course of business not to exceed USD100 Mil. Secured indebtedness of the company and its subsidiaries not to exceed the greater of USD3 billion or the amount that would cause the consolidated secured net debt ratio to exceed 3.25x. Guarantees are included under the definition of indebtedness and hence are governed by debt incurrence covenants.

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

CoC is defined as acquisition of over 50% of voting stock, but does not constitute an event of default. There is a CoC put at 101. None. None.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability

No. Yes, exceeding USD150 Mil. None. None. The company may redeem all or a portion of both notes at any time prior to three months before maturity date at a redemption price equal to 100% of the principal amount plus any applicable premium.

MAC â&#x20AC;&#x201C; Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bond Covenant Summary â&#x20AC;&#x201D; Hanesbrands Finance Luxembourg S.C.A. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Hanesbrands Finance Luxembourg S.C.A. Indenture dated 6/3/16 (Exhibit 4.1 to 8-K filed 6/3/16) 3.500% Senior Notes 6/15/24 EUR500 Mil. Senior unsecured obligations ranking pari passu with existing and future unsubordinated indebtedness. None. Guaranteed by Hanesbrands, Inc. substantially all subsidiaries of Hanesbrands, Inc.

Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

CoC is defined as acquisition of over 50% of voting stock, but does not constitute an event of default. There is a CoC put at 101. None. None.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability

No. Yes, exceeding USD150 Mil. None. None. The company may redeem all or a portion of the notes at any time prior to March 15, 2024 at a redemption price equal to 100% of the principal amount plus any applicable premium. After March 15, 2024, but before the maturity date, the company redeem all or a portion of the notes at a redemption price equal to 100% of the principal amount.

MAC â&#x20AC;&#x201C; Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Hanesbrands Inc. 12 Months 12/31/11 12/29/12 12/31/13 1/3/15 ($ Mil.) Profitability (x) Operating EBITDAR Margin 14.2 13.8 16.7 18.4 Operating EBITDA Margin 12.6 12.2 15.1 16.7 Operating EBIT Margin 10.7 10.2 13.1 14.9 FFO Margin 8.8 7.4 10.4 10.2 FCF Margin 1.7 11.2 10.6 6.1 Return on Capital Employed 16.3 15.7 20.8 23.3 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 4.0 3.4 3.0 2.8 FFO-Adjusted Leverage 4.2 4.0 3.5 3.8 FCF/Total Adjusted Debt (%) 3.0 24.2 21.4 12.0 Total Debt with Equity Credit/Operating EBITDAa 3.5 2.7 2.4 2.2 Total Secured Debt/Operating EBITDAa 0.3 0.1 0.4 0.4 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 17.4 3.6 3.7 5.1 Net Leverage (x) Total Adjusted Net Debt/Operating EBITDARa 3.9 3.3 2.8 2.5 FFO-Adjusted Net Leverage 4.2 3.9 3.3 3.4 Total Net Debt/(CFFO – Capex) 25.7 2.9 2.9 3.9 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a 3.1 3.2 4.5 5.6 Operating EBITDA/Interest Paida 4.2 4.4 7.2 10.4 FFO Fixed-Charge Coverage 2.9 2.7 3.8 4.1 FFO Interest Coverage 3.9 3.7 6.0 7.4 CFFO/Capex 1.9 13.4 13.6 7.9 Debt Summary Total Debt with Equity Credit 2,038 1,518 1,685 1,984 Total Adjusted Debt with Equity Credit 2,621 2,099 2,286 2,700 Lease-Equivalent Debt 583 581 601 717 Other Off-Balance Sheet Debt — — — — Interest (Paid) (140) (124) (96) (86) Implied Cost of Debt (%) 6.7 7.0 6.0 4.7 Cash Flow Summary FFO 406 333 482 543 Change in Working Capital (Fitch Defined) (238) 216 109 (35) CFFO 168 549 591 508 Non-Operating/Nonrecurring Cash Flow — — — — Capital (Expenditures) (90) (41) (44) (64) Common Dividends (Paid) — — (59) (120) FCF 78 508 488 324 Acquisitions and Divestitures (9) 13 (560) (360) Net Debt Proceeds (94) (520) 168 116 Net Equity Proceeds 17 9 5 — Other Investing and Financing Cash Flows (0) (1) (28) 45 Total Change in Cash and Equivalents (8) 7 73 124 Liquidity Readily Available Cash and Equivalents 20 23 21 21 Availability Under Committed Credit Lines 571 520 623 1,407 Not Readily Available Cash and Equivalents 15 20 95 219 Working Capital Net Working Capital (Fitch Defined) 1,457 1,084 1,081 1,092 Trade Accounts Receivable (Days) 37.1 40.8 45.6 46.1 Inventory Turnover (Days) 189.5 147.3 156.1 167.6 Trade Accounts Payable (Days) 53.2 47.4 56.7 67.7 Capital Intensity (%) 1.9 0.9 0.9 1.2

Three Months 4/4/15

7/4/15 10/3/15

12 Months 1/2/16 1/2/16

Three Months 4/2/16

LTM 7/2/16 10/1/16 10/1/16

15.5 13.4 11.4 6.5 (27.8) 22.4

21.0 19.3 17.6 6.4 (2.3) 22.2

19.2 17.6 16.0 15.9 5.5 21.6

20.3 18.4 16.4 12.6 17.7 22.7

19.2 17.4 15.5 10.6 (0.6) 22.7

16.7 14.6 12.7 8.8 (29.1) 21.5

23.3 21.6 19.9 12.3 6.7 19.8

18.5 17.4 15.9 12.1 15.5 19.8

19.8 18.1 16.4 11.6 4.5 19.8

3.1 4.1 3.0

3.3 5.1 1.0

3.3 4.5 (1.0)

3.1 4.2 (1.0)

3.8 4.9 (1.3)

4.1 4.9 1.7

4.1 5.2 5.6

2.5 0.8

2.7 1.0

2.8 1.1

2.6 1.1

3.3 2.2

3.7 1.4

3.9 1.6

9.9

12.7

16.8

14.9

19.6

13.5

9.0

2.8 3.8 9.1

3.0 4.6 13.1

3.1 4.2 21.9

2.9 3.8 18.1

3.5 4.5 27.4

3.6 4.2 13.1

3.7 4.7 8.5

5.1 8.9 3.9 6.5 3.5

5.0 8.6 3.2 5.2 2.8

5.0 8.3 3.7 5.9 2.2

5.0 8.4 3.7 6.1 2.3

5.2 9.4 3.9 6.7 2.3

4.9 8.2 3.8 6.2 2.2

4.9 7.9 4.1 6.5 3.9

4.8 7.5 3.8 5.8 5.7

2,302 3,131 829 — (103) 5.0

2,597 3,426 829 — (111) 5.0

2,779 3,608 829 — (119) 4.7

2,625 3,454 829 — (118) 5.1

2,625 3,454 829 — (106) 4.6

3,362 4,191 829 — (123) 4.3

3,875 4,704 829 — (130) 4.0

4,116 4,772 656 — (142) 4.1

78 (338) (259) — (36) (40) (336) — 377 — (4) 37

97 (71) 26 — (20) (41) (35) (193) 286 — (20) 38

254 (108) 146 — (18) (40) 88 1 178 (306) 9 (31)

178 136 314 — (26) (40) 249 0 (154) (45) (15) 35

607 (380) 227 — (99) (161) (34) (193) 687 (351) (30) 79

107 (392) (285) — (28) (43) (355) 8 737 (380) 4 13

181 (26) 156 — (15) (42) 99 (186) 495 0 (80) 329

212 125 337 — (23) (42) 273 (717) 235 0 (2) (211)

679 (156) 522 — (91) (165) 266 (894) 1,312 (425) (93) 166

20 500 257

20 982 295

21 830 264

20 984 299

20 921 299

20 182 312

21 986 640

20 1,082 430

1,333 53.1 203.5 73.7 3.0

1,468 49.4 171.4 64.2 1.3

1,509 48.1 162.8 57.3 1.1

1,362 43.4 191.3 71.0 1.8

1,362 43.3 187.5 69.5 1.7

1,701 53.3 234.2 63.1 2.3

1,675 52.4 197.3 65.3 1.0

1,546 49.1 164.3 62.1 1.3

1,546 59.9 201.9 76.3 1.6

EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Hanesbrands Inc. (Continued) 4/4/15

7/4/15 10/3/15

12 Months 1/2/16 1/2/16

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

12/31/11 12/29/12 12/31/13 1/3/15

Three Months 4/2/16

LTM 7/2/16 10/1/16 10/1/16

4,637 7.2 658

4,526 (2.4) 626

4,628 2.3 773

5,325 15.1 981

1,209 14.1 188

1,522 13.4 319

1,591 13.6 305

1,410 (7.4) 286

5,732 7.6 1,098

1,219 0.8 203

1,473 (3.2) 343

1,761 10.7 327

5,862 0.3 1,159

658 585

626 554

773 698

981 892

188 162

319 293

305 279

286 260

1,098 995

203 177

343 317

327 306

1,159 1,061

585 494

554 461

698 607

892 794

162 137

293 267

279 254

260 232

995 891

177 155

317 293

306 279

1,061 959

33.2 (8.9) 1.9 6.9 20.9 6.6 118.3

31.4 (8.0) 2.5 7.7 22.2 4.5 52.0

35.2 (9.5) 2.3 6.4 23.4 8.1 57.3

37.1 (9.6) 2.2 5.4 26.2 7.7 84.6

38.1 28.1 2.0 5.6 24.5 7.7 148.0

39.1 21.8 2.0 5.3 23.2 6.1 75.7

37.0 20.0 2.0 5.7 24.3 6.9 70.3

39.4 23.1 1.9 5.2 25.5 7.6 579.8

38.4 (11.5) 1.9 5.2 25.5 7.6 124.0

37.9 28.3 1.8 6.7 23.5 7.8 122.1

37.8 27.8 1.8 5.3 21.1 7.4 61.7

37.6 19.0 1.8 4.8 19.9 6.9 84.6

EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

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Leveraged Finance Retailing / U.S.A.

J. C. Penney Company, Inc. Full Rating Report Key Rating Drivers

Ratings J. C. Penney Company, Inc. Long-Term IDR

B+

J. C. Penney Corporation, Inc. Long-Term IDR Bank Credit Facility Senior Term Loan Senior Unsecured Notes

B+ BB+/RR1 BB+/RR1 B+/RR4

$1 Billion EBITDA Achieved: J. C. Penney Company, Inc. demonstrated a meaningful turnaround in its business over the last three years, with EBITDA improving to $750 million in 2015 — adding back $45 million in noncash equity compensation — from $275 million in 2014. Weaker than expected comparable store sales (comps) in 2016, at flat versus positive 3%–4% expectations, have been offset by continued cost reductions and will enable the company to achieve its $1 billion EBITDA target for 2016.

IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data J. C. Penney Company, Inc.

($ Mil.) Total Revenue EBITDAa EBITDA Margin(%)a FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)a EBITDAR/ (Interest + Rent) (x)a Comparable Store Sales (%)b Real Estate Owned (%) No. of Stores

FYE 1/30/16 12,625.0 748.0

LTM 10/29/16 12,582.0 978.0

5.9 120 7,002.0

7.8 87 7,032.0

6.9

5.6

1.5

2.0

4.5

0.3

41 1,021

41 1,014

EBITDA excludes noncash pension expense and is adjusted for stock-based compensation and restructuring charges. b Comparable store sales for the LTM reflects the nine-month period ended Oct. 29, 2016.

EBITDA Could Be Range-Bound: Fitch Ratings expects J. C. Penney to sustain flat to modestly negative comps in 2017/2018, given the ongoing traffic challenges at mid-tier mallbased apparel retailers, as volume continues to shift online, and to discount and off-price channels. Gross margin improvement through increased private brand penetration and benefit from merchandising system/supply chain/pricing optimization, is likely to be offset by investments in online, growing the appliance business and lower prices. Fitch therefore expects EBITDA to trend between $900 million and $1 billion annually over the next 24–36 months. Positive FCF Enables Debt Paydown: Total liquidity (cash and revolver availability) at Oct. 29, 2016 was about $2.0 billion. Fitch expects FCF generation to be over $200 million in 2016 and around $150 million thereafter on higher capex, offset somewhat by lower interest expense due to debt reduction. Fitch expects J. C. Penney to use FCF and cash on hand to pay down debt maturities of approximately $300 million annually over the next 24 months. Leverage Expected to Trend to 5.0x: Adjusted debt/EBITDAR was 5.7x at Oct. 29, 2016, and is expected to be in the low-5.0x range at the end of 2016 and trend toward 5.0x by 2018 if EBITDA remains around $1 billion and J. C. Penney pays down $600 million in upcoming debt maturities over the next two years.

Rating Sensitivities Positive Rating Action: A positive rating action could occur if J. C. Penney continues to generate 2%–3% comps growth, EBITDA exceeds $1 billion, the company pays down upcoming unsecured debt maturities and leverage moves toward to the mid-4.0x range. Negative Rating Action: A negative rating action could occur if comps and margin trends stall, or on lower than expected FCF that prevents the company from paying down $300 million in debt annually, causing leverage to remain in the mid-5.0x range.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — J. C. Penney Company, Inc. ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA

2015A 12,625 3.0 4.5 748

2016F 12,534 (0.7) (0.1) 1,028

2017F 12,509 (0.2) 0.0 990

2018F 12,484 (0.2) 0.0 981

EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex

5.9 116 440 (320)

8.2 (17) 626 (400)

7.9 (21) 608 (470)

7.9 (21) 619 (470)

Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt

2.5 — 120 — 4,866

3.2 — 226 — 4,755

3.8 — 138 — 4,484

3.8 — 149 — 4,142

Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

7,002 6.9

6,891 5.3

6,620 5.3

6,278 5.0

Comments — — — EBITDA improvement in 2016 is driven entirely by SG&A expense reductions. Assume flat gross margin and relatively flat SG&A in 2017 and 2018. — — — Capex is projected to grow in line with company guidance. — — — — Debt reduction reflects paydown of upcoming debt maturities in 2017/2018 — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. SG&A – Selling, general and administrative. Source: Fitch Ratings.

Business Profile Assessment $1 Billion EBITDA on Target in 2016 J. C. Penney has seen a strong recovery in EBITDA since 2013, with EBITDA projected to reach $1 billion in 2016. Comps returned to positive territory in fourth-quarter 2013 and continued on a positive trajectory through fourth-quarter 2015. The material gross margin improvement to 36% in 2015 from 29.4% in 2013 was made through improved clearance and promotional selling margin performance, improved performance in private brands and key value items, and better in-stock positions. Meanwhile, selling, general and administrative (SG&A) expenses declined significantly, primarily through lower store expenses, advertising costs and corporate overhead.

Comps Versus Industry (%)

J.C. Penney

Middle Market

10 0 (10) (20) (30) (40)

E – Estimated. Note: Middle market reflects the sales-weighted comparable store sales (comps) performance of Bon-Ton, Dillard's, J.C. Penney, Kohl's and Macy's. Source: Company filings, Fitch Ratings.

The path envisioned to get to the $1 billion target has been different than the company envisioned in 2014, with lower than expected comps growth being offset by more significant SG&A expense reduction. J. C. Penney targeted 5% annual comps growth, gross margin of approximately 36% and leveraging expenses on a relatively flat 2013 base of $2.1 billion. However, comps have grown at a CAGR of 2% on a trough 2013 sales base of $11.9 billion, High-Yield Retail Checkout January 31, 2017

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Leveraged Finance reflecting the challenge of rebuilding sales volume in the difficult mid-tier mall-based apparel space. J. C. Penney has to date been able to offset the comps miss with SG&A expense reduction. While comps and gross margin are expected to be essentially flat in 2016, Fitch expects J. C. Penney to generate EBITDA of $1 billion in 2016, versus $748 million in 2015 (adding back noncash stock-based compensation expense) on $300 million SG&A expense reduction.

2019 EBITDA Target of $1.6 Billion Likely Challenging At its August 2016 Analyst Day, J. C. Penney outlined its strategy to increase comps by 3% annually and grow EBITDA to $1.2 billion in 2017 and $1.6 billion in 2019. The company identified $1.2 billion–$1.7 billion in incremental sales opportunity in the areas of value, beauty, special sizes and home, as shown in the Sales Opportunities 2016–2019 table on the next page. While J. C. Penney could see growth in some of these categories, Fitch expects underlying store traffic and core apparel sales to decline in the low to midsingle-digit range at mall-based mid-tier department stores, as volume continues to shift to off-mall channels, such as online, discount and off-price retailers. Therefore, Fitch expects J. C. Penney’s comps to be in the +/–1% range. The impact of accelerated store closures at competitors such as Sears Holdings Corporation and Macy’s Inc. remains an unknown for J. C. Penney. While the company could benefit from reduced department store supply, store closures could exacerbate traffic challenges at affected malls, negatively affecting certain J. C. Penney locations.

Operating Targets: October 2014 Analyst Day — J.C. Penney Company, Inc. 2014–2017 ($ Mil.) Sales Gross Profit Gross Margin (%) SG&Aa EBITDA EBITDA Margin (%)

2011

2014

2017

CAGR (%)

17,260 6,425 37.2 5,109 1,316 7.6

12,257 4,261 34.8 3,993 277 2.3

14,500 5,300 36.6 4,100 1,200 8.3

5.8 — — — 63.0 —

Increase 2,243 1,039 179 bps Modestly up 923 Approximately 600 bps

Excludes depreciation and amortization, noncash pension expense and other restructuring charges. SG&A – Selling, general and administrative. Source: J.C. Penney’s October 2014 Analyst Day Presentation.

Operating Targets: August 2016 Analyst Day — J.C. Penney Company, Inc. ($ Mil.)

2015

2016 Range

2016 Guidance

2019E Rangea

2016–2019

Sales Comps (%) Gross Profit Gross Margin (%) b SG&A SG&A/Ratio (%) EBITDA EBITDA Margin (%)

12,625 4.5 4,551 36.0 3,828 30.3 715 5.7

12,926–13,051 3.0–4.0 4,666–4,738 36.1–36.3 3,666–3,738 28.4–28.6 1,000 7.7–7.7

— 3.0–4.0 10–30 bps — Down — 1,000 —

14,124–14,124 3.0–3.0 5,205–2,240 36.9–37.1 3,702–3,667 26.21–25.96 1,502–2,573 10.4–11.1

— 3.0% CAGR 75 bps–100 bps — 215 bps–240 bps leverage — — —

a 2019 management expectations are built on the low end of 2016 guidance on sales and gross margin. bExcludes depreciation and amortization, noncash pension expense and other restructuring charges. E – Estimate. Comps – Comparable store sales. SG&A – Selling, general and administrative. Source: J.C. Penney’s August 2016 Analyst Day Presentation.

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Leveraged Finance Revenue Opportunities 2016–2019 — J.C. Penney Company, Inc. Strategic Focus Value

Beauty

Special Sizes

Home Refresh

Total Revenue Opportunity

Revenue Opportunity Areas $200 Mil.–$300 Mil. • Private Brands: Take private brands penetration from 52% in 2015, to 55%–60% in 2016 and 65%–70% in 2018/2019. • Exclusive Partnerships • Loyalty Program • Marketing Efficiencies $400 Mil.–$500 Mil. • Women’s Apparel • Sephora • Salon by InStyle • Center Core $100 Mil.–$200 Mil. • The Foundry • Boutique+ • Junior Plus • Boys Husky and Girls Plus • Intimates • Footwear $500 Mil.–$700 Mil. • Appliances • Window Coverings • Soft Home • Ashley Furniture • Empire Flooring $1.2 Bil.–$1.7 Bil. — or 3%–4% CAGR

Source: J.C. Penney’s August 2016 Analyst Day Presentation.

Gross margin improvement through increased private brand penetration and merchandising system/supply chain/pricing optimization is likely to be offset by reinvestments in price/value and growth in its online and appliance businesses, which both carry lower gross margin. Fitch views net reduction in SG&A expense as unsustainable given the ongoing investments needed for omnichannel initiatives and headwinds from higher wage and healthcare costs. Fitch consequently expects comps to be flat and EBITDA to be range-bound in the $900 million–$1 billion range.

Revenue and Comps Revenue (LHS)

($ Bil.)

Comps (RHS)

(%)

(10)

(20) (30)

0 2008

2009

2010

2011

2012

2013

2014

2015

2016E

Comps – Comparable store sales. E – Estimated. Source: Company filings, Fitch Ratings.

J. C. Penney expects gross capex to grow to around $470 million in 2017 from an expected $400 million in 2016, and to remain around that level thereafter. After a relatively flat store base from 2008 to 2013, J. C. Penney closed 32 underperforming stores in 2014 and 41 stores in 2015. Fitch expects further store closings over the next few years given a continued decline in mall traffic. J. C. Penney is investing in its omnichannel operations — having completed the rollout of “buy online, pick up in store” to the entire chain in 2016 — the company is now beginning to roll out its ship-from-store strategy aimed toward minimizing delivery time for online orders.

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Leveraged Finance Capex ($ Mil.)

Capex

Capex as % of Sales

(%)

1,500

9.0

1,200

7.5 6.0

900

4.5 600

3.0

300

1.5

0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

E – Estimated. Source: Company filings, Fitch Ratings.

Liquidity and Debt Structure J. C. Penney had cash and cash equivalents of $183 million as of Oct. 29, 2016, and $1.8 billion available under its $2.35 billion credit facility. Fitch expects total liquidity (cash and revolver availability) to be over $2.5 billion at year-end 2016, which will enable the company to address total unsecured debt maturities of approximately $600 million through 2018. The company upsized its credit facility to $2.35 billion in December 2015 from $1.85 billion previously, and used borrowings under its credit facility to prepay and retire $494 million outstanding principal of the term loan due in June 2019. In June 2016, the company refinanced its $2.2 billion real estate term loan due May 2018 by entering into an amended and restated $1.699 billion term loan due June 2023 and the issuance of $500 million 5.875% senior secured notes due June 2023. FCF was positive $120 million in 2015, better than break-even results in 2014. Fitch expects FCF generation to be over $200 million in 2016 and around $150 million thereafter on higher capex, offset somewhat by lower interest expense due to debt reduction. On Jan 3, 2017, J. C. Penney announced it completed the sale of its Home Office building and surrounding 45 acres of land in Plano, TX, to Dreien Opportunity Partners, LLC, general partner of Silos Opportunity Partners, LP, for a gross sale price of $353 million before closing and transaction costs. Upon the transfer of ownership, J. C. Penney will lease back approximately 65% of the building, leaving the remaining square footage available for new tenants. The building lease expense is expected to be offset by a reduction in maintenance costs, property taxes and interest expense as a result of paying down debt with proceeds from the transaction. As a result, the reduction in debt could be higher than the $600 million based on upcoming debt maturities — including amortization — Fitch has projected for 2017 and 2018.

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Leveraged Finance Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $2.35 Bil. Senior Secured Revolver due 6/20/19 $1.69 Bil. Senior Secured Term Loan due 6/23/23 5.875% Senior Secured Notes due 6/23/23 Total Secured Debt

162 1,677 500 2,339

3.3 34.5 10.3 48.1

Unsecured Debt 7.950% Debentures due 4/1/17 5.750% Notes due 2/15/18 8.125% Notes due 10/1/19 5.650% Notes due 6/1/20 7.125% Debentures due 11/15/23 6.900% Notes due 8/15/26 6.375% Notes due 10/15/36 7.400% Debentures due 4/1/37 7.625% Notes due 3/1/97a Total Unsecured Debt Capital Leases Total Debt

220 265 400 400 10 2 388 313 500 2,498 24 4,861

4.5 5.5 8.2 8.2 0.2 0.0 8.0 6.4 10.3 51.4 0.5 100.0

Notes guaranteed by J. C. Penney Company, Inc. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 262 307 442 442 42 3,180

Cash Revolver Availability Total

183 1,767 1,950

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis For issuers with Issuer Default Ratings (IDRs) at ‘B+’ and below, Fitch performs a recovery analysis for each class of obligations of the issuer. The issue ratings are derived from the IDR and the relevant Recovery Rating (RR) and notching, based on Fitch’s recovery analysis that places a liquidation value under a distressed scenario of approximately $6.0 billion as of Oct. 29, 2016 for J. C. Penney. J. C. Penney’s $2.35 billion senior secured asset-backed loan (ABL) facility that matures in June 2019 is rated ‘BB+/RR1’, which indicates outstanding recovery prospects (91%–100%) in a distressed scenario. The facility is secured by a first-lien priority on inventory and receivables, with borrowings subject to a borrowing base. Any proceeds of the collateral will be applied first to the satisfaction of all obligations under the revolving facility. J. C. Penney is required to maintain a minimum excess availability at all times of not less than (a) $200 million in the event that 10% of the line cap (the lesser of total commitments under the credit facility or the borrowing base) is equal to or greater than $200 million or (b) the greater of (i) 10% of line cap and (ii) $150 million in the event that 10% of the line cap is less than $200 million. The $1.68 billion term loan and $500 million senior secured notes due June 2023 are also expected to have outstanding recovery prospects of 91%–100%, leading to a ‘BB+/RR1’ rating. Both the term loan facility and senior secured notes are secured by (a) first-lien mortgages on

Recovery Analysis — J. C. Penney Company, Inc. ($ Mil., Except Where Noted; IDR: B+) Distressed Enterprise Value (EV) as a Going Concern (GC) GC EBITDA GC EV Multiple (x) EV on GC Basis

750 4.0 3,000

Liquidation Value (LV)

Book Value

Advance Rate (%)

Avail. to Creditors

Cash A/R Inventory Net PPE Total LV

183 — 3,500 4,651 —

0 80 70 75 —

— — 2,450 3,500 6,084

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

5,950 595 5,355

Distribution of Value Secured Priority Sr. Secured Credit Facilitya Sr. Secured Term Loan Sr. Secured Notes Concession Payment Availability Adjusted LV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecuredb Unsecured Sr. Subordinated Subordinated Sr. Equity

Amount

Value Recovered

1,645 1,677 500

Recovery (%) Recovery Rating

Notching

Rating

RR1 RR1 RR1

+3 +3 +3

BB+ BB+ BB+

Recovery (%) Recovery Rating

Notching

Rating

0    

B+    

100 100 100

5,475.3 3,822.0 1,653.3

Amount

Value Recovered

3,397 0 0 0 0

1,533    

45 0 0 0 0

RR4    

a Fitch assumes the $2.35 Bil. credit facility is 70% drawn in a distressed scenario. bIncludes estimated operating lease claims. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. Source: Fitch Ratings.

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Leveraged Finance 285 owned and ground-leased stores (subject to certain restrictions primarily related to Principal Property owned by J. C. Penney Corporation, Inc.) and nine owned distribution centers; (b) a first lien on intellectual property (trademarks including J. C. Penney, Liz Claiborne, St. John’s Bay and Arizona), machinery and equipment; (c) a stock pledge of J. C. Penney Corporation and all of its material subsidiaries and all intercompany debt; and (d) second lien on inventory and accounts receivable that back the ABL facility. The term loan and senior secured notes rank parri passu in terms of priority of payment. The $2.6 billion of senior unsecured notes are rated ‘B+/RR4’, indicating average recovery prospects (31%–50%).

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Leveraged Finance Appendix A Organizational Structure — J.C. Penney Company, Inc. ($ Mil., As of Oct. 29, 2016) Directors and Management 1.3%

JCP Savings, Profit Sharing and Stock Ownership Plan

Other Public Shareholders

4.7%

94.0%

J.C. Penney Company, Inc. (Holdco) IDR — B+/Stable (Co-Borrower and Guarantor of ABL/Guarantor of Term Loan/ Co-Obligor on All Unsecured Notes) J. C. Penney Corporation, Inc. (Opco) (IDR — B+/Stable) Debt Issue $2.35 Bil. Senior Secured Credit Facility due 6/20/19 $1.69 Bil. Senior Secured Term Loan due June 2023 5.875% Senior Secured Notes due June 2023 7.950% Debentures due 4/1/17 5.750% Senior Unsecured Notes due 2/15/18 8.125% Senior Unsecured Notes due 10/1/19 5.650% Senior Unsecured Notes due 6/1/20 7.125% Debentures due 11/15/23 6.900% Notes due 8/15/26 6.375% Senior Unsecured Notes due 10/15/36 7.400% Debentures due 4/1/37 7.625% Notes due 3/1/97a Total

JCP Realty, Inc./ Other Immaterial Subsidiaries

Amount 162 1,677 500 220 265 400 400 10 2 388 313 500 4,837

J.C. Penney Purchasing Corporation (Co-Borrower and Guarantor of ABL/Guarantor of Term Loan)

LT IDR BB+/RR1 BB+/RR1 BB+/RR1 B+/RR4 B+/RR4 B+/RR4 B+/RR4 B+/RR4 B+/RR4 B+/RR4 B+/RR4 B+/RR4 —

Guarantees and Secured Stock Pledge

JCP Real Estate Holdings, Inc. (Guarantor of ABL/Term Loan) J.C. Penney Properties, Inc. (Guarantor of ABL/Term Loan)

aNotes

are guaranteed by J. C. Penney Company, Inc. IDR – Issuer Default Rating. ABL – Asset-based loan credit facility. Note: Ownership figures are as of March 11, 2016. Source: Company filings, Fitch Ratings.

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Leveraged Finance Real Estate Collateral Overview The text and charts related to the real estate collateral and appraisal are taken from the J. C. Penney 8-K filing dated May 14, 2013, when the company was in the process of securing its $2.25 billion secured term loan due May 2018. The information has not been updated since and is provided for informational purposes. At the time of the transaction, J. C. Penney’s real estate portfolio consisted of 306 owned stores, 123 ground-leased stores, 675 leased stores, 15 distribution centers (six leased, nine owned), the home office, affiliated land in Plano, TX, and miscellaneous other real estate assets. • Cushman & Wakefield performed appraisals that concluded $3.3 billion of total appraised value for the owned and ground-leased stores and $762 million of total appraised value for the owned distribution centers and the home office. • The term loan collateral included 379 owned and ground-leased properties (including stores, distribution centers and home office) with an appraised value of $3.3 billion and estimated dark value of $1.7 billion. The term loan had perfected mortgages on approximately 327 properties with an appraised value of $3.2 billion, including 317 owned and ground-leased stores with an appraised value of $2,547 million (or $8 million per store). Fifty-two owned and ground-leased stores with fair market value of less than $2 million were not required to be mortgaged. Fitch estimated these properties had a total value of $50 million–$80 million, or $1.0 million–$1.5 million per store. In addition, the nine distribution centers and home office (except for certain land) were appraised at $698 million. • Fitch estimates J. C. Penney had about 60 stores at the J. C. Penney Corporation, Inc. level with an appraised value of approximately $650 million that remain unencumbered, as they cannot be pledged, given each property has a book value of more than $7.4 million (and therefore comes under the definition of Principal Property under the bond covenants).

J.C. Penney Owned and Ground-Leased Real Estate Overview ($ Mil.) Stores at J.C. Penney Corporation, Inc. Ownership Owned Ground-Leased Total

Count

Appraised Valuea

72 31 103

708 266 974

J.C. Penney Corporation, Inc. (OpCo) $1.85 Bil.Senior Secured ABL due June 2019 $500 Mil.Senior Secured TL Facility due June 2019 $2.25 Bil.Senior Secured TL due May 2018 $2.60 Bil. Unsecured Notes

Mortgaged Properties at J.C. Penney Corp:. 37 stores with appraised value of $322 Mil. Stores at J.C. Penney Properties, Inc. Appraised Ownership Count Valuea Owned Ground-Leased Total

234 89 323

1,929 395 2,324

Guarantees and Stock Pledges for New $2,250 Mil. Senior Secured Term Loan JCP Real Estate Holdings, Inc. Guarantor of ABL/Term Loan

Mortgaged Properties at JCP Properties: 280 stores with appraised value of $2,225 Mil. Distribution Centers and Home Officeb Ownership Owned

Count

Appraised Valuea

762

J.C. Penney Properties, Inc. Guarantor of ABL/Term Loan

Mortgaged Properties: All distribution centers and home office (except for certain land) with appraised value of $698 Mil. aAppraised values based on reports provided by Cushman & Wakefield dated May 10, 2013. bHome office owned by J.C. Penney Corporation, Inc. Note: The chart demonstrates entities with material properties and excludes other material and immaterial subs. Includes de minimis properties with fair market values below $2 million. Excludes three properties in JCP Puerto Rico. ABL – Asset-backed facility. TL – Term loan. Source: J.C. Penney 8-K filing dated May 14, 2013.

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Leveraged Finance J.C. Penney Real Estate Portfolio Store Category Stores by Ownership Owned Ground Leased Leased Total Stores

Count

Square Feet

Lit Appraised Value ($)

Dark Appraised Value ($)

306 123 673 1,102

40,372,552 15,425,653 55,262,593 111,060,798

2,641,805,000 680,342,000  3,322,147,000

1,520,270,000 297,431,000  1,817,701,000

16,641,652 20,971,787 5,531,785 12,652,981 16,995,286 72,793,491

1,424,042,000 1,140,390,000 168,470,000 589,245,000 762,400,000 4,084,547,000

913,826,000 589,895,000 52,560,000 261,420,000 385,300,000 2,203,001,000

Properties by Mall Grade (Owned and Ground Leased Only) A 105 B 148 C/D 44 Not Rated or Non-Mall 132 a Other 10 Total Owned and Ground Leased Properties 439 a

Includes distribution centers, home office and affiliated land. Mall grades based on Green Street Advisors Mall Database. Appraised values based on reports provided by Cushman & Wakefield dated May 10, 2013. Source: J.C. Penney 8-K filing dated May 14, 2013.

Real Estate Appraisal Methodology by Cushman Valuation Methodology For owned properties and properties with ground leases with terms greater than 30 years, Cushman employed a direct capitalization approach. For ground-leased properties with remaining terms of less than 30 years, Cushman employed a discounted cash flow approach. Asset quality, mall location and quality, local market conditions, and the length of the remaining lease term were used to determine capitalization rates and discount rates. Market rent was determined by analyzing rent comparables and by looking at rent-to-sales and total occupancy cost ratios based on projected sales levels. Higher ranked stores were considered more productive assets and were afforded a higher rent-to-sales ratio.

Dark Value Estimates The dark valuation methodology accounts for deductions for rent loss, expenses borne by the landlord during lease-up, tenant improvements and leasing commissions. Wider cap rates (100 bps–200 bps) were used to account for the higher risk associated with stores assumed to be vacant and to afford entrepreneurial profit for investors.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — J. C. Penney Corporation, Inc. Overview Borrower Document Date and Location

Description of Debt Maturity Date Amount ($ Mil.) Ranking Security Guarantee

Financial Covenants Minimum Excess Availability

Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Cash Dominion Event

J. C. Penney Company, Inc. (HoldCo); J. C. Penney Corporation, Inc.; J. C. Penney Purchasing Corporation Credit Agreement dated 6/20/14 (Exhibit 10.1 to 8-K filed 6/23/14) Guarantee and Collateral Agreement dated 6/20/14 (Exhibit 10.2 to 8-K filed 6/23/14) Amendment No. 1 to Credit Agreement dated 12/10/15 (Exhibit 10.1 to 8-K filed 12/11/15) Asset-based revolving credit facility subject to a borrowing base consists of (i) 85% of eligible accounts receivables; (ii) 90% of eligible credit card receivables; and (iii) 90% of NOLV of eligible inventory valued at cost, minus term loan balance and reserves. 6/20/19 $2,350 Mil. ($750 Mil. sublimit for letter of credit) Senior. Secured by a lien on the inventory (except for consignment inventory), accounts receivable, and deposit accounts and cash credited thereto, of the loan parties and the other subsidiary guarantors pursuant to a guarantee and collateral agreement dated 6/20/14. Guaranteed by the borrowers and certain of the company’s indirect wholly owned subsidiaries that are not borrowers under the credit agreement.

Loan parties shall maintain minimum excess availability at all times of not less than (a) $200 Mil. in the event that 10% of the line cap (the lesser of total commitments under the credit facility or the borrowing base) is equal to or greater than $200 Mil. or (b) the greater of (i) 10% of line cap and (ii) $150 Mil. in the event that 10% of the line cap is less than $200 Mil.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) $2.25 Bil. indebtedness basket to be secured by a second lien on the ABL collateral or a first lien on other assets including real property and intellectual property, provided such indebtedness shall not mature and require scheduled principal payments on or prior to 90 days after 6/20/19 and any scheduled principal payments shall not exceed the lesser of 10% of initial principal amount of such incremental indebtedness and $100 Mil.; 2) debt for PP&E up to $500 Mil.; 3) acquisition debt for new restricted subsidiaries up to $500 Mil., subject to pro forma fixed-charge coverage ratio (FCCR) ≥ 1.1x; and 4) additional all-purpose up to $250 Mil. Carveouts: $50 Mil. for liens arising out of conditional sale, title retention, consignment (including “sale or return” arrangements) or similar arrangements for the sale of goods entered into by the parent borrower or any of its subsidiaries; other liens (other than liens on any collateral other than specified involuntary liens securing obligations up to $20 Mil.) incurred including sale leasebacks limited to 12.50% of net tangible assets and total book value of all assets subject to such liens not to exceed $225 Mil.; liens on fixed or capital assets acquired, constructed or improved not to exceed 100% of the cost of acquiring, constructing or improving such fixed or capital assets and such security interests shall not apply to any other property or assets of the company or any subsidiaries. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

RP Basket: None. Notable Permitted RP: None. Special Situation: No restriction if excess availability exceeds the greater of 25% of the revolving credit line cap and $400 Mil.

Yes, exceeding $100 Mil. N.A. None. None. None. The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility if there is a) an occurrence and continuance of an EoD and b) availability is less than the greater of (i) 12.5% of revolving credit line cap and (ii) $175 Mil.

NOLV – Net orderly liquidation value. ABL – Asset-based loan. PP&E – Property, plant and equipment. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Covenant Summary — J. C. Penney Corporation, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security

Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Key Definitions

J. C. Penney Corporation, Inc. Credit and Guaranty Agreement dated 5/22/13 (Exhibit 10.3 to 10-Q filed 9/10/13) Amended and Restated Credit and Guaranty Agreement dated 6/26/16 (Exhibit 10.1 to 8-K filed 6/24/16) Senior secured term loan. 6/23/23 $1,677 Mil. Senior. Secured by (a) first-lien mortgages on 285 owned and ground-leased stores (subject to certain restrictions primarily related to principal property owned by J. C. Penney Corporation, Inc.) and nine owned distribution centers; (b) a first lien on intellectual property (trademarks including J. C. Penney, Liz Claiborne, St. John’s Bay and Arizona), machinery and equipment; (c) a stock pledge of J. C. Penney Corporation and all of its material subsidiaries and all intercompany debt; and (d) second lien on inventory and accounts receivable that back the $2.35 Bil. ABL revolver. Guaranteed on a senior basis by J. C. Penney Company, Inc. (HoldCo) and all material subsidiaries of J. C. Penney Corporation, Inc.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) Debt for PP&E up to $750 Mil.; and 2) acquisition debt for new restricted subsidiaries up to $500 Mil., subject to pro forma FCCR ≥ 1.1x; and 3) additional all-purpose up to $500 Mil. Generally not allowed other than existing liens and additional secured debt not to exceed the greater of $250 Mil. and 5% of stockholder’s equity at a fiscal quarter end. Guarantees are included under the definition of both indebtedness and investments, and hence are governed by both related covenants.

CoC is defined as acquisition of more than 42.5% of voting stock and constitutes an event of default (EoD). The acquisition by a financial institution of equity interests in HoldCo acquired by such financial institution pursuant to an underwriting arrangement in the ordinary course of its business shall not constitute a CoC. $300 Mil. permitted investments provided that no EoD and pro forma FCCR for the test period is greater than 1.1x; $200 Mil. for investments in nonloan parties; general carveout of $200 Mil. $75 Mil. for mortgage on real property constituting collateral; sales, transfers and other dispositions (including permitted sale/leaseback transactions) of assets not constituting collateral provided that no EoD and such sale is made for fair market value and for at least 75% of consideration shall be in cash; sale of noncore business segment provided no EoD and the EBITDA attributable to the business not to exceed $100 Mil.; sales, transfers and other dispositions of assets (other than equity interests in a material subsidiary) plus aggregate cash consideration received from sale and leaseback transactions are limited to 7.5% of net tangible assets, under which sale and leaseback transactions are capped at $500 Mil. in aggregate fair market value, provided no EoD and net asset sale proceeds shall be applied to prepay the loans or make permitted reinvestments.

RP Basket: $100 Mil. if FCCR is not less than 1.1x and $600 Mil. if FCCR is equal to or greater than 2.5x. Notable Permitted RP: None.

Yes, exceeding $100 Mil. N.A. None. None. None. Material subsidiary means any subsidiary of HoldCo that had net tangible assets representing more than 3% (or in the case of JCP Realty, Inc. and its subsidiaries, 5%) of the total net tangible assets of HoldCo and its subsidiaries, as of the date of the most recent financial statements.

ABL – Asset-based loan. PP&E – Property, plant and equipment. FCCR – Fixed-charge coverage ratio. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement/Term Loan Financial Covenant Summary — J. C. Penney Corporation, Inc. Financial Covenants (Incurrence) Leverage (Maximum)

Asset Coverage Net Worth (Minimum)

Total Debt/EBITDA: None. Senior Secured Leverage: None. Fixed-Charge Coverage Ratio: ABL revolver requires a minimum fixed-charge coverage ratio of 1.0x only if the availability falls below the greater of (i) 10% of the lesser of line cap or borrowing base and (ii) $125 Mil. None. 

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. Quarterly amortization in the amount of $10.6 Mil. beginning 9/30/16. None.

Coverage (Minimum)

Pricing ABL Revolver

Term Loan

Quarterly Average Excess Availability (% of Revolving Commitment) ≥ 66.67% ≥ 33.33% but < 66.67% < 33.33% L+500 (with 1% LIBOR floor).

Applicable Rate LIBOR + 250 bps or BR + 150 bps LIBOR + 275 bps or BR + 175 bps LIBOR + 300 bps or BR + 200 bps

ABL – Asset-based loan. BR – Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — J. C. Penney Corporation, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount ($ Mil.) Ranking Security

Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP) Other Cross-Default Cross Acceleration Callability

MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

J. C. Penney Corporation, Inc. Indenture dated 6/23/16 (Exhibit 4.1 to 8-K filed 6/24/16) 5.875% senior secured notes. 7/1/23 500 Senior. Secured by (a) first-lien mortgages on 285 owned and ground leased stores (subject to certain restrictions primarily related to principal property owned by J. C. Penney Corporation, Inc.) and nine owned distribution centers; (b) a first lien on intellectual property (trademarks including J. C. Penney, Liz Claiborne, St. John’s Bay and Arizona), machinery and equipment; (c) a stock pledge of J. C. Penney Corporation and all of its material subsidiaries and all intercompany debt; and (d) second-lien on inventory and accounts receivable that back the $2.35 Bil. ABL revolver. Guaranteed on a senior basis by J. C. Penney Company, Inc. (HoldCo) and all material subsidiaries of J. C. Penney Corporation, Inc.

None. Liens permitted as long as the senior secured leverage ratio does not exceed 2.75x, consolidated adjusted EBITDA is at least $1 Bil., and collateral coverage ratio is at least 1.2x. General carveout of the greater of $250 Mil. and 5% of stockholder’s equity at a fiscal quarter end. If any domestic subsidiary of the issuer guarantees or becomes a borrower in respect of the obligations under the ABL credit agreement, term loan agreement or any other facility evidencing term loan/notes secured obligations, then the domestic subsidiary will become a guarantor under the notes.

CoC includes sale of substantially all assets or acquisition of more than 50% voting stock by outsiders. When this occurs, there is a call option at 101%. None. At least 75% of the proceeds received from asset dispositions must be in the form of cash, and 100% of the proceeds must either be invested or applied toward redeeming the notes or repaying any other term loan/secured obligations within one year.

None.

N.A. Yes, if total accelerated debt is more than $100 Mil. At any time prior to July 1, 2019, the company may redeem up to 35% of the aggregate principal amount at a redemption price of 105.875%, provided at least 65% of the aggregate principal amount remains outstanding immediately following the redemption. On or after July 1, 2019, the company may redeem all or part of the notes at the following redemption prices: 2019 — 102.938% 2020 — 101.469% 2021 and thereafter — 100.000% No MAC clause. No. None. No.

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Bond Covenant Summary — J. C. Penney Corporation, Inc. Overview Issuer Document Date and Location

Description of Debt

Original Issue/Outstanding

Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

J. C. Penney Corporation, Inc., with J.C, Penney Company, Inc. as co-obligor Indenture dated 4/1/94 (Exhibit 4(a) to S-3 filed 4/26/94) First Supplemental Indenture dated 1/27/02 (Exhibit 4(p) to 10-K filed 4/25/02) Second Supplemental dated 7/26/02 (Exhibit 4 to 10-Q filed 9/6/02) 8.125% Senior Unsecured Notes Indenture dated 9/15/14 (Exhibit 4.1 to 8-K filed 9/15/14); First Supplemental Indenture to 8.125 Senior Unsecured Notes dated 9/15/2014 (Exhibit 4.2 to 8-K filed 9/15/14) 7.950% Debentures due 4/1/17 5.750% Senior Unsecured Notes due 2/15/18 8.125% Senior Unsecured Notes due 10/1/19 5.650% Senior Unsecured Notes due 6/1/20 6.900% Notes due 8/15/26 6.375% Senior Unsecured Notes due 10/15/36 7.400% Debentures due 4/1/37 7.625% Notes due 3/01/97 7.950% Notes  $300 Mil./$220 Mil. 5.750% Notes  $300 Mil./$265 Mil. 8.125% Notes  $400 Mil./$400 Mil. 5.650% Notes  $400 Mil./$400 Mil. 6.900% Notes  $119.195 Mil./$2 Mil. 6.375% Notes  $700 Mil./$388 Mil. 7.400% Notes  $400 Mil./$313 Mil. 7.625% Notes  $500 Mil./$500 Mil. Senior. Unsecured. The 7.625% Notes due 2097 are guaranteed by JCP Company, Inc.

No limitation. Indebtedness secured by mortgages including attributable debt pursuant to sale-leaseback transactions shall not exceed 5% of stockholders’ equity. Lien restriction principally covers real estate liens (store, warehouse or distribution center and excludes home office and some other misc. property).with net book value of more than 0.25% of stockholder’s equity. None.

M&A, Investments Restriction Sale of Assets Restriction

The 5.75% notes due 2018, 8.125% due 2019, 5.65% Notes due 2020 and 6.375% Notes due 2036 have CoC put at 101 with change of control (50% voting interest) plus downgrade to below investment grade by all three rating agencies. No limitation. No limitation.

Restricted Payments Restricted Payments (RP)

No limitation.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Covenant Suspension

No. No. None. None. None.

MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Financial Summary — J. C. Penney Company, Inc. 12 Months 1/28/12 ($ Mil.) Profitability (%) Operating EBITDAR Margin 9.6 Operating EBITDA Margin 7.7 Operating EBIT Margin 4.7 FFO Margin 3.5 FCF Margin 0.0 Return on Capital Employed 8.5 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 3.4 FFO-Adjusted Leverage 5.0 FCF/Total Adjusted Debt (%) 0.1 Total Debt with Equity Credit/ a Operating EBITDA 2.3 Total Secured Debt/Operating EBITDAa 0.0 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 11.2 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 2.5 FFO-Adjusted Net Leverage 3.6 Total Net Debt/(CFFO – Capex) 8.6 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 3.0 Operating EBITDA/Interest Paida 5.9 FFO Fixed-Charge Coverage 2.1 FFO Interest Coverage 3.6 CFFO/Capex 1.3 Debt Summary Total Debt with Equity Credit 3,102 Total Adjusted Debt with Equity Credit 5,686 Lease-Equivalent Debt 2,584 Other Off-Balance Sheet Debt — Interest (Paid) (227) Implied Cost of Debt (%) 7.3 Cash Flow Summary FFO 597 Change in Working Capital (Fitch Defined) 223 CFFO 820 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (634) Common Dividends (Paid) (178) FCF 8 Acquisitions and Divestitures (268) Net Debt Proceeds — Net Equity Proceeds (832) Other Investing and Financing Cash Flows (23) Total Change in Cash and Equivalents (1,115) Liquidity Readily Available Cash and Equivalents 1,507 Availability Under Committed Credit Lines 1,106 Not Readily Available Cash and Equivalents — Working Capital Net Working Capital (Fitch Defined) 391 Trade Accounts Receivable (Days) — Inventory Turnover (Days) 98.2 Trade Accounts Payable (Days) 34.4 Capital Intensity (%) 3.7

12 Three Months Months 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

2/2/13

2/1/14 1/31/15

5/2/15

0.3 (2.1) (6.3) (5.6) (7.0) (10.3)

(2.8) (5.3) (10.4) (8.5) (23.3) (15.3)

4.6 2.2 (2.9) (0.8) (0.1) (4.2)

5.6 3.2 (2.2) (4.7) (9.5) (2.2)

7.4 5.0 (0.3) 6.2 (1.8) (0.9)

6.4 4.1 (1.1) 3.5 (11.2) 0.1

11.5 9.8 5.9 4.5 19.3 4.6

8.0 5.9 1.0 2.6 1.0 1.7

8.2 5.8 0.3 0.1 (15.4) 5.7

10.6 8.3 3.1 4.0 2.2 7.2

8.7 6.3 1.1 2.0 (11.0) 8.2

9.9 7.8 2.9 2.8 0.7 8.2

147.6 (29.5) (16.6)

(24.2) (27.4) (34.6)

13.7 12.9 (0.2)

10.3 10.4 0.9

9.0 8.3 (0.8)

8.2 7.0 (0.1)

6.9 7.3 1.7

6.4 6.4 (0.6)

5.9 6.7 1.1

5.6 7.3 1.2

(10.9) (0.4)

(8.9) (3.7)

19.7 10.1

12.2 0.1

9.8 5.1

8.4 4.4

6.5 3.0

4.7 2.1

4.2 1.9

4.1 2.0

(10.7)

(3.2)

27.6

21.3

34.2

27.9

18.1

30.9

20.1

19.9

122.5 (24.5) (2.5)

(19.6) (22.2) (1.5)

11.3 10.7 (315.2)

8.9 8.9 66.1

7.9 7.3 (68.7)

7.5 6.4 (665.0)

6.6 7.0 38.1

6.0 6.4 33.1

6.0 6.0 (108.1)

5.5 6.3 56.7

5.5 7.1 54.2

0.1 (1.2) (0.3) (2.2) (0.0)

(0.5) (1.5) (0.4) (1.4) (1.9)

0.8 0.7 0.9 0.8 0.9

1.1 1.1 1.1 1.1 1.3

1.2 1.3 1.3 1.5 0.8

1.4 1.7 1.7 2.1 1.0

1.6 2.0 1.5 1.9 1.4

1.7 2.2 1.7 2.3 0.9

1.9 2.5 1.6 2.1 1.2

2.0 2.8 1.6 2.0 1.2

2,982 5,462 2,480 — (230) 7.6

5,601 8,001 2,400 — (414) 9.6

5,416 7,768 2,352 — (401) 7.3

5,405 7,541 2,136 — (401) 7.3

5,298 7,434 2,136 — (402) 7.5

5,293 7,429 2,136 — (370) 6.9

4,866 7,002 2,136 — (369) 7.2

4,848 6,984 2,136 — (365) 7.1

4,792 6,928 2,136 — (369) 7.3

4,896 7,032 2,136 — (344) 6.8

(725) 715 (10) — (810) (86) (906) (9) (250) 71 517 (577)

(1,006) (808) (1,814) — (951) — (2,765) — 2,545 793 12 585

(93) 332 239 — (252) — (13) — (195) — 11 (197)

(133) (93) (226) — (46) — (272) — (11) — 9 (274)

177 (135) 42 — (95) — (53) — (25) — 7 (71)

101 (333) (232) — (93) — (325) — (11) — 1 (335)

179 677 856 — (86) — 770 — (506) — (2) 262

324 116 440 — (320) — 120 — (553) — 15 (418)

4 (398) (394) — (39) — (433) — (76) 1 23 (485)

116 70 186 — (121) — 65 — (5) — (46) 14

58 (251) (193) — (122) — (315) — 68 1 — (246)

357 98 455 — (368) — 87 — (519) 2 (25) (455)

930 1,241

1,515 506

1,318 773

1,044 1,211

973 1,325

638 1,371

900 1,568

415 1,920

429 1,944

183 1,767

—

(216) — 97.5 48.4 6.2

789 — 128.0 41.4 8.0

467 — 121.1 45.5 2.1

720 — 139.3 52.7 1.6

713 — 149.4 55.8 3.3

970 — 181.9 72.0 3.2

436 — 93.0 31.6 2.2

436 — 123.0 41.8 2.5

805 — 146.8 49.9 1.4

766 — 146.3 53.7 4.1

1,028 — 185.1 74.9 4.3

1,028 — 167.3 67.7 2.9

EBITDA/R after dividends to associates and minorities. bComparable store sales for the LTM period reflect the nine-months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — J. C. Penney Company, Inc. (Continued) 1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

12 Three Months Months 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

17,260 (2.8) 1,651

12,985 (24.8) 37

11,859 (8.7) (331)

12,257 3.4 569

2,857 2.0 159

2,875 2.7 212

2,897 4.8 187

3,996 2.6 458

12,625 3.0 1,015

2,811 (1.6) 230

2,918 1.5 310

2,857 (1.4) 248

12,582 0.5 1,245

1,651 1,328

37 (273)

(331) (631)

569 275

159 92

212 145

187 120

458 391

1,015 748

230 163

310 243

248 181

1,245 978

1,328 810

(273) (816)

(631) (1,232)

275 (356)

92 (62)

145 (8)

120 (32)

391 234

748 132

163 9

243 90

181 32

978 365

0.2 1,102 37.2 (2.5) 3.7 10.6 15.9 (1.3) 122.4

(25.2) 1,104 32.5 2.4 3.7 7.5 (8.2) (10.1) 149.2

(7.4) 1,094 29.4 7.5 2.9 8.8 (10.7) (11.8) 158.2

4.4 1,062 34.8 4.3 3.0 8.0 (0.8) (7.4) 39.9

3.4 1,027 36.4 138.1 2.8 7.5 1.5 (5.7) 29.9

4.1 1,020 37.0 136.2 2.6 7.1 2.9 (5.4) 62.1

6.4 1,020 37.3 130.9 2.2 5.5 4.2 (4.7) 61.2

4.1 1,021 34.1 97.8 3.0 8.7 10.0 (5.4) 54.8

4.5 1,021 36.0 3.1 3.0 8.7 6.5 (5.4) 51.9

(0.4) 1,014 36.2 132.6 2.8 8.1 11.3 (4.5) 25.3

2.2 1,014 37.1 126.5 2.7 7.4 13.2 (3.6) 79.1

(0.8) 1,014 37.2 126.7 2.2 5.4 14.1 (2.7) 81.9

0.3 1,014 37.2 126.7 2.2 5.4 14.1 (2.7) 81.9

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

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Leveraged Finance Retailing / U.S.A.

J.Crew Group, Inc. Credit Profile Credit Opinion

Credit Profile Summary

J.Crew Group, Inc. Long-Term Issuer Default Credit Opinion ABL Revolving Credit Facility Credit Opinion Senior Secured Term Loan Credit Opinion

ccc*/ negative b*/rr1* ccc+*/rr3*

Chinos Intermediate Holdings A, Inc. Long-Term Issuer Default Credit Opinion Senior PIK Toggle Notes Credit Opinion

ccc*/ negative cc*/rr6*

ABL – Asset-based loan. PIK – Pay in kind. Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

EBITDA Halved: Since peaking at $354 million in 2012 and 2013, J.Crew Group, Inc.’s EBITDA fell precipitously to $188 million in 2015 and is expected to be approximately $150 million in 2016. Negative comparable store sales (comps) at J.Crew stores have led the decline, causing a heightened promotional cadence to clear inventory. Reduced merchandise margins, in conjunction with fixed-cost deleverage, have caused EBITDA margins to fall to 7.5% in 2015 and a projected 6.0% in 2016 from 14.6% in 2013. Comps Declines Largely Self-Inflicted: Fitch Ratings believes the comps decline stemmed from fashion misses combined with elevated price points at a time when the market increasingly traded out of mid-tier apparel in favor of either value-priced channels — including fast fashion and off-price — or high-end retailers. Lack of fashion product momentum has exacerbated comps challenges for many apparel retailers. Growth in its online business and in Madewell have somewhat offset the significant decline of in-store sales at the J.Crew brand. No Easy Fix: Over the past 18 months, J.Crew has replaced key personnel, targeted an improved pricing perception through mix, reduced inventory and refocused the assortment toward classic pieces. These efforts have not reversed top-line trends, as companywide comps declined 7%, yielding a 13% decline in EBITDA through the first three quarters of 2016. Fitch believes more aggressive changes are needed, including lower initial prices, to improve sales trends, especially as industrywide headwinds are not expected to materially improve. EBITDA Could Trend Toward $100 Million: Given the high fashion content and overall weakness in the mid-apparel market, Fitch assumes overall comps to decline 3%–5% annually over the next two years. EBITDA is expected to be around $100 million in 2017, barring significant gross margin improvement or expense reduction. Trend-right merchandise at more compelling prices could stabilize top-line, but downside risk remains on weak execution and apparel demand.

Financial Data J.Crew Group, Inc. FYE LTM 1/30/16 10/29/16 ($ Mil.) Total Revenue 2,505.8 2,441.4 EBITDA 188.3 168.9 EBITDA Margin (%) 7.5 6.9 FCF (6.3) 24.4 Total Adjusted Debta 3,547.0 3,585.2 Total Adjusted a Debt/EBITDAR (x) 9.5 10.1 EBITDAR/(Interest + Rent) (x) 1.4 1.4 Comparable Store b Sales (%) (8.4) (7.2) Real Estate Owned (%) 2 DCs 2 DCs No. of Stores 551 571 a Includes holdco notes. bComparable store sales include direct sales growth. Figure for LTM reflects the performance for the nine months ended Oct. 29, 2016. DC – Distribution center.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com

Adequate Near-Term Liquidity: J.Crew had $367 in total liquidity as of Oct. 29, 2016. Fitch expects negative $20 million of FCF in 2016, given payment-in-kind (PIK) interest payments on its holding company (holdco) notes. Liquidly could tighten if EBITDA trends toward $100 million, as FCF is expected to be negative $50 million–$60 million, even as the company continues to PIK interest on the holdco notes. Heightened Debt Restructuring Risk: Given elevated leverage, deteriorating operating trends and negative cash flow projections, debt restructuring risk is increasing in advance of J.Crew’s May 2019 holdco note maturity ($567 million due). The company reportedly spun a significant portion of its intellectual property into a separate unrestricted subsidiary recently, which could possibly be used for a debt exchange or liquidity source. However, given lack of public details, Fitch has not factored the implications of this spin into its recovery analysis.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include a sustained trend of positive comps, substantial gross margin improvement, and EBITDA growth to a level where it can continue to fund its operations and meet its fixed obligations with internally generated cash flow. Negative Drivers: Negative credit profile drivers would include further deterioration in comps and EBITDA leading to heightened restructuring concerns.

JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — J.Crew Group, Inc. ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debta b Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

2015A

2016F

2017F

2018F

2,506 (2.9) (8.4) 188 7.5 12 136 (104) 4.1 (38) (6) — 2,061 3,548 9.5

2,398 (4.3) (7.4) 145 6.1 4 69 (90) 4.2 — (21) — 2,121 3,756 10.7

2,314 (3.5) (5.0) 103 4.5 3 26 (90) 4.3 — (64) — 2,193 3,976 12.2

2,284 (1.3) (3.0) 88 3.9 1 9 (90) 4.4 — (81) — 2,260 4,203 12.7

Debt assumes the holdco notes will continue to receive PIK interest payments. bTotal Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. PIK – Payment-in-kind. Source: Fitch Ratings.

Business Profile Assessment Upon his arrival at J.Crew in 2002, CEO Millard “Mickey” Drexler steadily elevated the brand through increasingly editorial merchandising and styling, high-touch and personalized customer service, and upscale store environments in store locations chosen to cater to high-end customers. While the company had the occasional fashion misstep over the years, revenue and EBITDA generally snapped back from prior hiccups. As shown in the Historical Comps, Direct Sales Growth and Margin Trends chart below, the company experienced meaningful recession-related downturns in 2008–2009 and 2010–2011. However, since peaking at $354 million in 2012 and 2013, EBITDA has fallen precipitously to $245 million in 2014, $188 million in 2015 and is projected around $150 million in 2016. Negative comps have led the decline, causing excess inventory to require a heightened promotional cadence to clear merchandise. Reduced merchandise margins in conjunction with fixed-cost deleverage have caused EBITDA margins to fall to a projected 6.0% in 2016 from a peak of 14.6% in 2013.

Historical Comps, Direct Sales Growth and Margin Trends YoY Change in Gross Margin (bps)

Comps

Direct Sales Growth

(%) 45

(bps) 1,800

1,200

600

(15)

(600)

(30)

(1,200)

(45)

(1,800)

Comps – Comparable store sales. YoY – Year-over-year. Note: Only comparable company sales (including comps, direct sales and shipping and handling fees) are reported since second-quarter 2012. Gross margin for certain periods are adjusted for inventory step-up amortization and amortization of favorable/unfavorable leases. The company changed its reportable segments starting with year-end 2014 and direct sales are no longer broken out. Source: Company filings, Fitch Ratings.

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Leveraged Finance Fitch believes the comps decline has stemmed from the following factors.

Industry Challenges Mid-tier, mall-based apparel retailers across both department store and specialty formats have seen comps erosion due to several interrelated challenges. Lack of compelling fashion products, divergence of discretionary budgets to areas such as travel and experiences, reduced leisure time spent shopping in malls and spending moving online are together leading to traffic and sales declines across the industry. Many industry players are closing stores, diverting investments to online and omnichannel infrastructure, and repurposing existing retail square footage to drive traffic and/or support omnichannel models. Given its mall focus, J.Crew is susceptible to all of the above sector challenges.

Apparel Price Bifurcation Fitch believes customers are increasingly price bifurcating their apparel and accessories purchases. The rise of fast-fashion retailers allows customers to buy trend-right merchandise of acceptable quality at prices significantly lower than mid-tier mall competitors, including specialty stores and department stores. Continued acceptance of, and therefore growth in, the off-price channel is further pressuring mid-tier apparel competitors. Fitch believes customers are also trading up for investment pieces at high-end retailers, which are aspirational in terms of either quality or brand value. As a result, mid-tier players such as J.Crew have seen growth stagnate as they fall victim to simultaneous trade-down and trade-up. J.Crew has responded to some extent by focusing growth on its Factory/Mercantile concept, though expansion here may only exacerbate sales declines at the core J.Crew brand.

Fashion Misses J.Crew increasingly added editorial styles to its mix, as opposed to more basic items such as single-colored sweaters and khakis, over the years. The company is consequently more levered to fashion hits and misses. J.Crew has generally been able to lead fashion trends for its highly loyal customer base. However, the company’s fashion assortment has not resonated with customers for the last three to four years. In an increasingly competitive market, customers have looked elsewhere for fashion leadership.

Price Ceiling Hit J.Crew’s brand elevation encompassed improvements to both style and product quality. This elevation led to increased retail prices over time, which historically supported sales and EBITDA growth. However, in recent years, market perception of J.Crew’s pricing has turned negative, and this combined with fashion missteps has led to material comps declines at its J.Crew branded stores.

Athleisure as Primary Fashion Trend The most significant fashion trend in recent years has been athleisure, the rise of activewear use outside an exercise context — especially yoga wear — whether it be to social occasions or the office. J.Crew purposely avoided this trend until 2016, when it introduced a small collection of pieces in collaboration with New Balance. While consumers may eventually return to the core categories that J.Crew offers, the company’s revenue is currently being negatively affected by its lack of significant athleisure assortment.

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Leveraged Finance Promotions as Presumed Destiny The combination of the above issues in confluence with J.Crew’s high inventory position resulted in excess promotional activity to clear merchandise. Fitch believes J.Crew has entered a vicious cycle where lack of product excitement and high retail prices have stifled demand early in a fashion season. J.Crew is consequently forced to discount its merchandise, training customers to wait for promotions later in the season. Once customers perceive a brand to be over-inventoried and in the mode of promotions, it can be very difficult to retrain their mindsets to purchase at full price. Senior management has been slow to fully acknowledge the underlying issues and make changes required to improve the sales trend. The company made some changes in the past 18 months, including replacing key personnel (including the head of women’s design), targeting an improved pricing perception through mix, reducing inventory and refocusing the assortment toward classic pieces. These efforts have not reversed top-line trends, as companywide comps declined 7%, yielding a 13% decline in EBITDA during the first three quarters of 2016. While reduced inventories allowed the company to produce significant merchandise margin expansion and near-flat year-over-year EBITDA on negative 8% comps in the second quarter of 2016, gross margins resumed their negative trajectory in the third quarter, declining 54 bps against the same period in 2015. As a result, EBITDA in the third quarter declined 25% and is expected to decline around 15% in 2016. Fitch believes more aggressive changes are needed, including trend-right merchandise at lower initial prices to reverse negative sales trends and materially reduced inventory levels to improve gross margins.

Company Description J.Crew is a specialty apparel and accessories retailer that sells women’s, men’s and children’s apparel under the brand names J.Crew, crewcuts and Madewell, a women-exclusive concept introduced in 2006. J.Crew operated 286 J.Crew retail stores, 110 Madewell stores and 175 factory stores in the U.S., Canada, France, Hong Kong and the U.K. as of Oct. 29, 2016. All retail and factory stores are leased with terms of 5–15 years. Through 2014, J.Crew provided a breakdown of its in-store sales versus sales generated through its direct (internet and catalogue) channel. Direct sales, which carry lower fixed costs,

Contribution to Comps from Stores and Direct 2008

2009

2010

2011

2012

2013

2014

Store Sales Direct Sales Total Retail Sales

($ Mil.)

974.3 408.9 1,383.2

1,110.9 428.2 1,539.1

1,192.9 490.6 1,683.5

1,280.7 545.7 1,826.4

1,546.6 651.5 2,198.1

1,638.2 755.9 2,394.1

1,714.3 826.1 2,540.4

YoY Growth (%) Store Sales Direct Sales Total Retail Sales

6.5 8.3 7.0

14.0 4.7 11.3

7.4 14.6 9.4

7.4 11.2 8.5

20.8 19.4 20.4

5.9 16.0 8.9

4.6 9.3 6.1

Direct Sales Penetration (%)

29.6

27.8

29.1

29.9

29.6

31.6

32.5

Total Company Comps (%) Direct Sales Contribution to Comps Store-Level Contribution to Comps

(0.2) 2.4 (2.6)

3.9 1.4 2.5

6.7 4.1 2.6

3.0 3.3 (0.3)

12.6 5.8 6.8

3.1 4.7 (1.6)

(0.7) 2.9 (3.6)

Implied Comps at Retail Stores

(3.7)

3.6

3.7

(0.4)

9.7

(2.3)

(5.3)

Comps – Comparable store sales. Source: Company reports, Fitch Ratings.

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Leveraged Finance helped offset weak store-level sales and provided an outlet to clear excess inventory in 2013/2014. At more than 30% of total sales, J.Crewâ&#x20AC;&#x2122;s direct channel represents one of the highest online penetrations across the retail space. While the company no longer breaks out direct sales, the negative 9%â&#x20AC;&#x201C;negative 10% comps at J.Crew in 2015 and 2016 suggest J.Crew direct sales are also running negative. Starting in fourth-quarter 2014, J.Crew changed its reportable segments from Stores and Direct into one reportable segment that reflects its two main operating formats, J.Crew and Madewell. Madewell offers modern, denim-based clothing, as well as shoes and accessories for women that emanate a downtown-cool vibe, and has been a strong growth concept. Madewell represented approximately 15% of total company sales in the LTM ending Oct. 29, 2016, versus just 3% in 2010. Fitch expects Madewell to generate approximately $350 million in revenue in 2016 and grow to approximately $400 million over the next 24 months. This is based on low single-digit comps and 6%â&#x20AC;&#x201C;7% contribution from 10 store openings annually.

Continued Store Expansion Despite negative store-level comps, management accelerated the growth of its store base between 2013 and 2015, adding an average of 50 stores annually, up from 39 in 2012 and 29 in 2011. However, the company slowed net new store openings to 19 in 2016. Fitch expects J.Crew to continue to open stores at this pace, but believes the company may have to pull back on openings and its international expansion plans to preserve liquidity and in concert with broader industry trends. The store openings are primarily concentrated between the Madewell and Mercantile banners. Internationally, J.Crew is building its presence in Canada, opened its first two stores in Hong Kong in May 2014 and opened its first store in Paris in first-quarter 2015. The company had 31 international locations at the end of 2015. The company moved its factory offering beyond outlet centers through the launch of J.Crew Mercantile stores in July 2015. The J.Crew Mercantile stores feature an assortment of J.Crew factory merchandise and are located in strip and other outdoor centers. The company plans to end 2016 with about 40 Mercantile stores, including 10 stores that are being converted from current Factory stores or J.Crew retail stores. The expansion of this format may exacerbate sales declines at the core J.Crew brand.

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Leveraged Finance Breakdown by Brand, Store Type and Merchandise 2010

2011

2012

2013

2014

LTM 2015 10/29/16

1,632 52 39 1,722

1,741 86 29 1,855

2,066 132 30 2,228

2,213 181 34 2,428

2,295 245 39 2,580

2,147 301 58 2,506

— — — —

6.7 66.2 (26.3) 7.7

18.7 54.1 3.5 20.1

7.1 37.5 15.5 9.0

3.7 35.2 14.9 6.2

% of Total Net Sales J.Crew Madewell Other

94.8 3.0 2.3

93.8 4.6 1.5

92.8 5.9 1.3

91.1 7.5 1.4

Comps Growth (%)a J.Crew Madewell Total

— — 6.7

— — 3.3

12.4 16.6 12.6

Store Count J.Crew Retail Stores J.Crew Factory Stores Madewell Total Store Count YoY Change Sales/Gross Square Foot ($)b

228 85 20 333 12 601

234 96 32 362 29 618

62.0 21.0 5.0 12.0 100.0

58.0 23.0 6.0 13.0 100.0

Net Sales by Brand ($ Mil.) J.Crew Madewell Other Total Net Sales YoY Growth (%) J.Crew Madewell Other Total Net Sales

Merchandise Breakdown (%)c Women’s Apparel Men’s Apparel Children’s Apparel Accessories Total

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

2,050 331 60 2,442

621 74 11 705

509 62 11 582

507 68 19 594

527 79 14 619

605 93 14 711

481 73 14 568

477 78 15 570

488 88 17 593

(6.5) 22.7 47.8 (2.9)

(5.2) 17.5 9.1 (2.3)

(0.1) 33.4 15.8 2.8

(5.2) 32.5 30.2 (1.7)

(9.7) 21.5 90.1 (5.4)

(8.6) 13.7 43.8 (5.5)

(2.6) 25.9 26.4 0.8

(5.5) 17.1 27.7 (2.5)

(5.9) 15.3 (22.9) (4.0)

(7.4) 11.8 24.6 (4.2)

89.0 9.5 1.5

85.7 12.0 2.3

84.0 13.6 2.5

88.0 10.4 1.6

87.4 10.6 1.9

85.3 11.4 3.2

85.1 12.7 2.2

85.0 13.0 2.0

84.7 12.8 2.5

83.7 13.7 2.6

82.3 14.8 2.9

2.7 9.1 3.1

(1.9) 14.1 (0.7)

(9.9) 7.8 (8.2)

(8.7) 4.2 (7.2)

(5.0) 14.0 (3.0)

(9.6) 11.6 (7.9)

(13.4) 8.1 (11.4)

(12.0) 1.0 (10.6)

(5.0) 12.0 (4.0)

(8.0) 5.9 (6.5)

(9.0) 2.8 (7.6)

(9.2) 4.1 (7.5)

247 106 48 401 39 686

265 121 65 451 50 671

280 139 85 504 53 618

287 151 103 541 37 540

286 143 110 539 — —

280 139 85 504 — —

283 142 87 512 — —

283 147 89 519 — —

286 153 97 536 — —

287 151 103 541 — —

287 142 106 535 — —

287 143 107 537 — —

286 143 110 539 — —

57.0 24.0 6.0 13.0 100.0

55.0 25.0 6.0 14.0 100.0

54.0 26.0 7.0 13.0 100.0

53.0 24.0 7.0 16.0 100.0

55.0 22.0 8.0 15.0 100.0

49.0 30.0 7.0 14.0 100.0

55.0 24.0 8.0 13.0 100.0

55.0 25.0 6.0 14.0 100.0

55.0 22.0 8.0 15.0 100.0

56.0 21.0 8.0 15.0 100.0

55.0 23.0 7.0 15.0 100.0

55.0 22.0 8.0 15.0 100.0

Figures for the LTM reflect the performance for the nine months ended Oct. 29, 2016. bSales/Gross Square Foot are for J.Crew only starting in 2014. cMerchandise breakdown for the LTM is for the nine months ended Oct. 29, 2016. YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

2017 Outlook Fitch expects J.Crew’s total revenue to decline 3.5% in 2017, after an anticipated 4.0%–4.5% decline in 2016 to $2.4 billion. This reflects comps of negative 3%–5% with a modest contribution from new store openings. J. Crew brand sales are expected to decline 6% to $1.9 billion, while Madewell sales are expected to grow 8% to $370 million, or 16% of total sales. Trend-right merchandise at more compelling prices could stabilize top-line, but downside risk remains on weak execution and overall weak apparel demand. Fitch has assumed 20 net new store openings in 2017, similar to the openings in 2016. Fitch expects 2017 EBITDA to be around $100 million, barring significant gross margin improvement or expense reduction. Fitch has projected a 30-bps decline in gross margin in 2017, similar to the full-year rate projected for 2016, and selling, general and administrative expenses to be flat to up modestly due to new store openings. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Fitch expects 2017 FCF — net of capex to $90 million and excluding any holdco dividend payments and neutral working capital swings — to be approximately negative $65 million. This compares with our expectation for FCF to decline by $20 million in 2016.

Liquidity and Debt Structure Adequate Liquidity, No Near-Term Maturities J.Crew has adequate liquidity, with $38.5 million of cash and $329 million of revolver availability as of Oct. 29, 2016. The availability on the revolver is net of $21 million of letters of credit. J.Crew has unsecured, demand letter of credit facilities with HSBC and Bank of America that provide for the issuance of up to $50 million and $20 million, respectively, of documentary letters of credit on a no-fee basis. Outstanding documentary letters of credit were $16.8 million and availability was $53.2 million in the aggregate under these facilities on Oct. 29, 2016.

Liquidity Analysis — J.Crew Group, Inc. ($ Mil.) 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Cash Facility Size Borrowings 157 59 74 80 111 64 41 47 88 55 49 38

250 250 250 250 300 300 300 350 350 350 350 350

0 0 0 0 0 0 10 20 0 0 0 0

LOC

Revolver Availability Total Liquidity

8 8 11 11 13 12 18 18 19 21 23 21

242 242 239 239 287 288 272 312 331 329 311 329

399 301 313 319 398 352 313 359 419 384 361 367

EBITDA 354 318 302 273 241 222 195 185 188 188 186 169

LTM CFFO 232 154 162 193 157 175 139 120 136 130 129 109

Capex

FCF

(131) (129) (130) (131) (128) (120) (112) (104) (104) (104) (94) (84)

101 6 13 42 3 28 (19) (30) (6) 7 35 24

CFFO – Cash flow from operations. Source: Company filings, Fitch Ratings.

Capital Structure In addition to the holdco notes, J.Crew’s capital structure consists of a $350 million assetbased loan (ABL) revolver and a $1.56 billion term loan facility. The revolver, which was upsized by $50 million in December 2015, is secured by a first lien on inventory and accounts receivable (A/R); a second lien on all other tangible and intangible assets, including owned real property and IP; and a second-priority pledge of 100% of U.S. subsidiaries stock and 65% of foreign subsidiaries stock. The ABL facility is guaranteed by J.Crew’s parent and certain existing and future domestic restricted subsidiaries on a secured basis. The term loan facility is secured by a first lien on all other tangible and intangible assets, including owned real property and intellectual property; a first-priority pledge of 100% of U.S. subsidiaries stock and 65% of foreign subsidiaries stock; and a second lien on inventory and A/R.

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Leveraged Finance Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $350 Mil. ABL Revolver due 11/17/21 $1.56 Bil. Senior Secured Term Loan Facility due 3/5/21 Total Secured Debt

— 1,531.7 1,531.7

— 73.0 73.0

Unsecured Debt a 7.750%/8.500% Holdco Senior PIK Toggle Notes due 5/1/19 Total Unsecured Debt Total Debt

566.5 566.5 2,098.2

27.0 27.0 100.0

Holdco note principal was increased by $23.1 Mil. to reflect the May 1, 2017 interest payment the company intends to pay in kind at the PIK interest rate of 8.500%. ABL – Asset-based loan. PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 15.7 15.7 582.2 15.7 1,461.2 —

Cash Revolver Availability Total

38.4 329.0 367.4

Note: Revolver availability is net of letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Includes $567 Mil. holdco notes. Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

High Leverage TPG Capital Group and Leonard Green & Partners, L.P. acquired J.Crew in March 2011 for approximately $3.1 billion, or 10.8x 2010 adjusted EBITDA of $291 million, with pro forma leverage of 6.7x. An entity controlled by these two sponsors owns approximately 89% of the outstanding stock. Mickey Drexler continues as chairman and CEO, and maintains a significant equity investment in the company. Adjusted leverage increased to 10.0x at Oct. 29, 2016, from 9.5x at year-end 2015 (Jan. 30, 2016) due to a 10% decline in LTM EBITDA and an increase in debt. Leverage includes the $567 million of 7.75%/8.50% senior pay-in-kind (PIK) toggle notes due May 1, 2019 (holdco notes) at indirect holding company Chinos Intermediate Holdings A, Inc. Proceeds from the $500 million issuance were used to fund a $490 million dividend to the sponsors and management in November 2013. The holdco notes are senior unsecured obligations of Chinos Intermediate Holdings A, structurally subordinated to all of the liabilities of the issuers’ subsidiaries and are not guaranteed. These notes are not on J.Crew’s financial statements, but dividends from J.Crew fund annual interest payments on the notes, which are paid semiannually. Fitch consequently includes the holdco notes in J.Crew’s debt and leverage calculations. The company has to date elected to pay in kind three interest payments, including the May 2017 payment, at the PIK interest rate of 8.50%.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis assumes an enterprise value (EV) of $1.2 billion, based on a postdefault going concern EBITDA of $200 million and a 6.0x EV multiple (EV/EBITDA). The 6.0x multiple puts an 8.0x–10.0x multiple on the Madewell business and acknowledges the high online penetration of the overall business, which should be multiple enhancing. Fitch expects Madewell to generate approximately $350 million in revenue, or 15% of total revenue in 2016, and grow to approximately $400 million over the next 24 months. Assuming this is a mid-teens EBITDA margin business, EBITDA contribution could be $50 million– $60 million. Applying an 8.0x–10.0x multiple on the business yields a valuation of $400 million– $600 million for the business. This would value the J.Crew business (including online) at $600 million–$800 million, or a multiple of 4.5x–5.5x. Applying the $1.2 billion EV across the capital structure results in outstanding recovery prospects (91%–100%) for the ABL revolver given its first lien security interest in the current assets, which is assigned a ‘b*/rr1*’. Fitch expects the $1.56 billion term loan facility to have good recovery prospects (51%–70%) given it is secured by a first lien on all other tangible and intangible assets, including owned real property and intellectual property, a first-priority pledge of 100% of stock of U.S. subsidiaries and 65% of foreign subsidiaries, and a second lien on inventory and A/R. The term loan is assigned ‘ccc+*/rr3*. Fitch projects poor recovery prospects (0%–10%) for the holdco notes, which are unsecured and unguaranteed, and are assigned a ‘cc*/rr6*’.

Recovery Analysis — J.Crew Group, Inc. ($ Mil., Except Where Noted; Credit Opinion: ccc*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Going Concern EBITDA GC EV Multiple (x) Distressed EV on GC Basis

200 6.0 1,200

Book Value Advance Rate (%) Avail. to Creditors

Cash A/R Inventory Net PPE Total LV

38.4 — 446.3 371.3 —

0 80 70 10 —

  312.4 37.1 349.6

1,200 120 1,080

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

245.0 1,531.7 0

245.0 835.0 

100 55 0

rr1* rr3* —

+3 +1 —

b* ccc+* —

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

62.0 0 566.5

  

0 0 0

0  rr6*

  –2

  cc*

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Unsecured Priority Sr. Unsecuredb Unsecured Sr. Subordinatedc

1,080 1,080 —

Fitch assumes the $350 Mil. credit facility is 70% drawn in a distressed scenario. bSenior unsecured debt includes estimated operating lease claims. cSenior subordinated debt includes the holdco payment-in-kind (PIK) toggle notes, as it is structurally subordinated to the subsidiary debt at the J.Crew Group, Inc. level and is not guaranteed by any subsidiaries. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-backed loan. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance In December 2016, the company reportedly spun out a significant portion of its intellectual property to a new, unrestricted subsidiary. The intellectual property, previously part of the security package for the companyâ&#x20AC;&#x2122;s term loan, could now be used to issue new debt to improve the companyâ&#x20AC;&#x2122;s liquidity and/or conduct a debt exchange of the holdco notes and/or term loans. Term loan holders have reportedly engaged legal resources to examine options, as this move could subordinate the term loan to newly issued secured debt. However, given lack of public details, Fitch has not factored the implications of this spin into its recovery analysis.

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Leveraged Finance Appendix A Organizational Structure — J. Crew Group, Inc. ($ Mil., As of Oct. 29, 2016) TPG

Leonard Green

Management

24.0%

65.0%

11.0%

Chinos Holdings, Inc. 100.0% Chinos Intermediate Holdings A, Inc. (CO — ccc*/negative) Debt Issue 7.750%/8.500% Senior PIK Toggle Notes Due 5/1/19a

Amount 566.5

CO cc*/rr6*

Amount — 1,531.7 1,531.7

CO b*/rr1* ccc+*/rr3* —

J. Crew Group, Inc. (JCG) (CO — ccc*/negative) Debt Issue $350 Mil. ABL Revolver due 11/17/21 $1.56 Bil. Senior Secured Term Loan due 3/5/21 Total

Subsidiary Guarantors

Nonguarantor Subsidiaries

aHoldco

note principal was increased by $23.1 Mil.to reflect the May 2017 interest payment that the company intends to pay in kind at the PIK interest rate of 8.500%. CO – Credit Opinion. PIK – Payment in kind. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — J.Crew Group, Inc. Overview Borrower Document Date and Location

Description of Debt Maturity Date Amount Ranking Security Guarantee Financial Covenants Fixed-Charge Coverage

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights Pricing Coupon Type/Index ABL Revolver

J.Crew Group, Inc. (J.Crew) Credit Agreement dated 3/3/11 (Exhibit 10.1 to 8-K filed 3/20/11) First Amendment to Credit Agreement (Exhibit 10.1 to 8-K filed 10/11/12) Second Amendment to Credit Agreement dated 3/5/14 (Exhibit 10.1 to 8-K filed 3/1/14) Third Amendment to Credit Agreement dated 12/10/14 (Exhibit 10.1 to 8-K filed 12/1/14) Fourth Amendment to Credit Agreement dated 12/17/15 (Exhibit 10.1 to 8-K filed 12/18/15) Fifth Amendment to Credit Agreement dated 11/17/16 (Exhibit 10.1 to 10-Q filed 11/22/16) ABL revolver 11/17/21 $350 Mil. subject to borrowing base (90% of credit card receivables plus 85% accounts plus 90% [or 92.5% in high season] of NRV of inventory). Senior secured. First lien on inventory and A/R; second lien on all other tangible and intangible assets, including owned real property and IP; second-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Guaranteed by J.Crew’s immediate parent and all domestic restricted subsidiaries on a secured basis.

A minimum FCCR of 1.0x is required, if excess availability is less than the greater of 10.0% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base, or $20 Mil.

$75 Mil. incremental borrowings; up to $1,875 Mil. for term loan facility; up to the greater of $50 Mil. and 1.75% of total assets for debt to finance acquisition of fixed or capital assets or attributable indebtedness for sale-leaseback transactions; $25 Mil. for foreign subsidiary debt; $50 Mil. for debt to finance inventory purchase; $50 Mil. for debt incurred or refinanced for an entity becoming restricted subsidiary, provided debt secured by current asset collateral limited to $25 Mil.; general carveout for borrower and restricted subsidiaries up to the greater of $100 Mil. and 3.25% of total assets, provided indebtedness incurred by nonloan parties limited to the greater of $25 Mil. and 1.0% of total assets; unsecured debt permitted provided a) no event of default; b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit (lesser of revolver commitment and borrowing base) and $30 Mil.; and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x. General carveout of $50 Mil. Guarantee obligations are defined as debt and investments and hence, governed by the debt and investment restrictions.

CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. Investments in restricted subsidiaries limited to $37.5 Mil.; general carveout up to $50 Mil., provided a) no event of default; b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit and $30 Mil.; and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x. Not permitted unless 75% of proceeds in cash (or permitted asset swap) provided any noncash consideration of the asset sale is less than the greater of $25 Mil. or 1.0% of total assets; proceeds more than $100 Mil. need to be reinvested; sale of Madewell assets provided pro forma total leverage is less than or equal to 6.0x.

Carveouts: RP permitted provided a) pro forma leverage is less than or equal to 6.0x, b) pro forma excess availability is greater than 15% of maximum credit and $30 Mil., and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.1x; $15 Mil. per year ($25 Mil. post-IPO) for equity purchases from employees (with any unused amount permitted to roll over for two years); dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; proceeds from the sale of Madewell; general carveout of $25 Mil. provided a) no event of default, b) pro forma excess availability is greater than or equal to the greater of 15% of maximum credit and $30 Mil., and c) either pro forma excess availability is greater than 25% of maximum credit or pro forma FCCR is greater than or equal to 1.0x.

Yes, upon payment default in any other debt above $35 Mil. threshold. Same as above. None. None. None. More than 50%.

Floating based off either LIBOR (1% floor) or base rate Avg. Historical Excess Availability > $175 Mil. < $175 Mil. but > $75 Mil. < $75 Mil.

Applicable Margin 1.250% LIBOR or 0.250% Base Rate 1.500% LIBOR or 0.500% Base Rate 1.750% LIBOR or 0.750% Base Rate

ABL – Asset-based loan. NRV – Net realizable value. A/R – Accounts receivable. FCCR – Fixed-charge coverage ratio. MAC – Material adverse charge. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — J.Crew Group, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

J.Crew Group, Inc. Amended and Restated Credit Agreement dated 3/5/14 (Exhibit 10.2 to 8-K filed 3/11/14) Senior secured term loan facility 3/5/21 $1,567 Mil. Senior secured. First lien on all other tangible and intangible assets including owned real property and IP; first-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs; Second lien on inventory and A/R. Guaranteed by J.Crew’s immediate parent and all domestic restricted subsidiaries on a secured basis.

Permitted Ratio Debt: Debt that is unsecured and matures at least 181 days after the maturity of the term loan, assuming the total leverage ratio (debt/EBITDA) is less than or equal to 6.0x. Other Carveouts: $375 Mil. for ABL facilities; up to the greater of $50 Mil. and 1.75% of total assets for debt to finance acquisition of fixed or capital assets or attributable indebtedness for sale-leaseback transactions; $25 Mil. for foreign subsidiary debt; $50 Mil. for LOCs to finance inventory purchase; $50 Mil. for debt incurred or refinanced for an entity becoming restricted subsidiary; general carveout for borrower and restricted subsidiaries up to the greater of $100 Mil. and 3.25% of total assets, provided indebtedness incurred by nonloan parties limited to the greater of $25 Mil. and 1.0% of total assets. Borrower may request additional tranches of loans under the term loan of up to $200 Mil., provided the total senior secured leverage ratio is less than or equal to 3.75x, among other conditions. General carveout up to the greater of $50 Mil. or 1.75% of total assets. Guarantee obligations are defined as indebtedness and, hence, governed by the debt incurrence restrictions.

CoC is defined as acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. General carveout up to $100 Mil. or 3.25% of total assets. Other Carveouts: Investments made by loan parties in persons that do not become loan parties shall not exceed the greater of $75 Mil. and 2.5% of total assets, and the available amount, provided the pro forma total leverage ratio is less than or equal to 6.0x; loans to officers up to $20 Mil.; intercompany loans up to the greater of $400 Mil. or 4% of total assets, or the available amount. Carveouts: For dispositions of more than $15 Mil., 75% of proceeds must be in cash (or permitted asset swap) and any noncash consideration of the asset sale must be less than the greater of $25 Mil. or 1.0% of total assets, provided proceeds in excess of $100 Mil. shall be used to repay loans and may not be reinvested in the business; sale of Madewell assets provided the pro forma total leverage ratio is less than or equal to 6.0x.

Carveouts: General carveout, assuming no event of default, of up to 2.5% of total assets and, provided the pro forma total leverage ratio is less than or equal to 6.0x, the available amount, defined as $65 Mil. plus 50% of net income beginning on 2/2/14; $15 Mil. per year ($25 Mil. post-IPO) for equity purchases from employees (with any unused amount permitted to roll over for two years); dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; proceeds from the sale of Madewell.

Yes ($35 Mil. threshold). N.A. Yes. None. None. More than 50%.

A/R – Accounts receivable. ABL – Asset-based loan. MAC – Material adverse charge. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — J.Crew Group, Inc. (Continued) Financial Covenants Maintenance Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule Callability/Optional Prepayment

Pricing Coupon Type/Index Pricing Grid Term Loan

— — — —

Mandatory prepayment proceeds from: • 50% of excess cash flow (reduced to 25% if senior secured net leverage is less than or equal to 3.25x but greater than 2.75x, and reduced to 0% if leverage is less than or equal to 2.75x). • Asset sales: 100% of net proceeds. • New debt: 100% of net proceeds. J.Crew must make principal payments equal to 0.25% of the $1.567 Bil. outstanding under the term loan, or $3.9 Mil., on the last business day of January, April, July and October, beginning in July 2014. Optional prepayment without prepayment penalty pursuant to a repricing transaction before 3/5/15, shall be subject to a 1% prepayment premium.

Floating based off either LIBOR (1% floor) or base rate Moody’s Corporate Family Rating 'B1' or better Less than 'B1'

Applicable Margin 2.750% LIBOR or 1.750% Base Rate 3.000% LIBOR or 2.000% Base Rate

A/R – Accounts receivable. ABL – Asset-based loan. MAC – Material adverse charge. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Financial Summary — J.Crew Group, Inc. 12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) Total Adjusted Debt/Operating EBITDARa FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

20.8 14.8 10.9 6.3 (1.0) 10.5

21.8 15.9 12.2 8.4 (6.1) 8.5

21.1 14.6 10.7 8.7 4.2 8.1

16.3 9.5 5.1 6.5 0.1 4.5

15.4 7.4 2.4 4.6 (7.4) 4.2

14.2 6.4 1.4 1.8 (4.8) 3.1

18.6 11.1 6.2 8.9 0.0 3.8

12.0 5.5 1.1 4.5 9.2 3.8

14.9 7.5 2.7 4.9 (0.3) 3.8

15.6 7.5 2.3 3.6 (5.2) 4.5

14.5 6.3 1.2 4.1 (0.2) 4.5

16.5 8.7 3.6 4.5 (1.7) 4.6

14.5 6.9 2.0 4.2 1.0 4.6

6.4 8.8 (0.7)

6.5 7.5 (4.3)

6.5 7.2 3.0

8.2 7.9 0.1

8.7 8.6 0.9

9.2 9.1 (0.4)

9.2 9.0 (0.7)

9.5 9.3 (0.2)

9.5 9.5 0.2

9.6 9.2 1.0

10.1 10.0 0.7

5.8 4.3

5.9 3.3

5.8 3.3

8.4 6.3

9.1 6.8

10.4 7.7

10.9 8.1

10.9 8.2

11.1 8.2

11.2 8.2

12.4 9.1

15.4

16.1

12.9

16.8

14.7

16.1

16.4

16.3

16.9

16.1

17.1

5.9 8.0 27.6

6.3 7.4 32.3

6.2 6.9 18.9

7.9 7.7 64.1

8.5 8.4 33.2

9.1 9.0 63.8

9.1 8.9 96.8

9.2 9.1 61.9

9.4 9.4 79.0

9.4 9.0 58.4

10.0 9.9 84.5

2.3 4.9 1.7 3.1 1.5

2.1 3.6 1.8 2.9 1.5

2.0 3.8 1.8 3.3 1.8

1.6 2.6 1.6 2.8 1.2

1.6 3.0 1.6 3.0 1.5

1.5 2.6 1.5 2.7 1.3

1.4 2.5 1.5 2.7 1.2

1.4 2.5 1.5 2.7 1.3

1.4 2.6 1.4 2.6 1.2

1.4 2.5 1.5 2.7 1.4

1.4 2.4 1.4 2.4 1.3

1,594 2,484 890 — (56) —

2,079 3,138 1,059 — (99) 5.4

2,067 3,331 1,264 — (92) 4.4

2,048 3,444 1,395 — (93) 4.5

2,051 3,538 1,487 — (76) 3.7

2,057 3,544 1,487 — (75) 3.7

2,063 3,550 1,487 — (75) 3.6

2,061 3,548 1,487 — (74) 3.6

2,079 3,566 1,487 — (73) 3.6

2,075 3,562 1,487 — (74) 3.6

2,098 3,585 1,487 — (72) 3.4

117

187

212

168

124

102

28 145 — (96) (68) (18) (2,982) 1,594 1,172

7 194 — (132) (197) (135) — (15) (0)

20 232 — (131) — 101 — (12) (1)

(10) 158 — (128) (28) 3 — (20) —

(32) (5) — (18) (19) (43) — (4) —

7 17 — (27) (19) (29) — 6 —

(22) 33 — (33) (0) 0 — 6 —

59 90 — (25) 0 65 — (24) —

12 136 — (104) (38) (6) — (16) —

(31) (11) — (19) — (30) — (4) —

(7) 16 — (17) — (1) — (4) —

(14) 13 — (23) — (10) — 0 —

7 109 — (84) 0 24 — (32) —

74 (160)

(3) (153)

0 88

(28) (46)

0 (47)

(0) (23)

(0) 6

(1) 40

(1) (23)

0 (33)

(1) (6)

(1) (11)

(2) (9)

222 241

68 244

157 242

111 287

64 288

41 272

47 262

88 331

55 329

49 327

38 329

—

85 — 82.6 53.8 5.2

125 — 78.3 41.6 5.9

117 — 90.8 60.8 5.4

123 — 83.5 55.4 5.0

154 — 101.0 63.0 3.2

137 — 95.4 63.7 4.6

184 — 114.3 70.8 5.3

111 — 70.6 47.1 3.5

111 — 84.4 56.3 4.1

155 — 97.2 58.6 3.4

140 — 96.1 61.7 3.0

191 — 109.4 62.6 3.9

191 — 103.7 59.3 3.5

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Leveraged Finance Financial Summary — J.Crew Group, Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

1,855 7.7 386

2,228 20.1 486

2,428 9.0 512

2,580 6.2 419

582 (1.7) 90

594 (5.4) 84

619 (5.5) 115

711 0.8 86

2,506 (2.9) 374

567 (2.5) 89

570 (4.0) 83

593 (4.2) 98

2,441 (2.4) 355

386 275

486 354

512 354

419 245

90 43

84 38

115 69

86 39

374 188

89 42

83 36

98 51

355 169

275 202

354 272

354 259

245 131

43 14

38 9

69 38

39 8

188 69

42 13

36 7

51 22

169 50

1.0 362 42.2 (17.0) 4.4 6.8 11.3 (0.1) 150.4

12.6 401 44.4 (17.7) 4.7 8.8 15.1 2.8 182.2

2.9 451 41.4 (15.3) 4.0 6.0 15.1 2.4 153.4

(0.7) 504 37.6 (16.9) 4.4 6.6 14.8 (22.3) 130.5

(7.9) 512 37.2 33.4 3.9 6.3 18.4 (45.2) 73.6

(11.4) 519 34.3 34.1 3.9 5.8 17.3 (46.6) 106.9

(10.6) 536 38.6 32.6 3.3 5.3 33.2 (77.8) 124.9

(4.0) 551 33.3 20.0 4.3 6.5 19.7 (82.0) 92.5

(8.4) 551 35.7 (18.2) 4.3 6.5 19.7 (82.0) 99.7

(6.5) 557 36.1 34.5 4.1 6.8 19.5 (53.4) 72.7

(9.0) 565 35.7 31.7 4.0 6.3 19.6 (53.8) 64.0

(8.0) 571 38.1 28.1 3.5 6.2 18.0 (2.1) 84.8

(7.2) 571 38.1 28.1 3.5 6.2 18.0 (2.1) 84.8

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Leveraged Finance Retailing / U.S.A.

Kate Spade & Company Credit Profile Credit Profile Summary

Credit Opinion Long-Term Issuer Default Credit Opinion Senior Secured Credit Facility Credit Opinion Senior Secured Term Loan Credit Opinion

bb*/stable bb+*/rr1* bb+*/rr1*

Financial Data Kate Spade & Company ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comparable Store Sales (%)a No. of Stores

FYE 1/2/16 1,242.7 205.4 16.5 50.5 1,121.8

LTM 10/1/16 1,339.6 245.0 18.3 114.5 1,118.9

3.8

3.3

2.9

3.3

12.5 255

8.9 268

a Comparable store sales including e-commerce for the LTM period reflects the performance for the nine months ended Oct. 1, 2016.

Continued Strong Comps Growth: Kate Spade & Company’s comparable store sales (comps) including e-commerce moderated to the midsingle-digit level in the past two quarters from double digit growth previously. Fitch Ratings expects comps to be in the 8%–9% range in 2016, with midsingle-digit growth thereafter. Comps were affected by a decline in U.S. tourist traffic related to the stronger dollar, although Kate Spade’s sales trend is substantially above its larger peers in the entry luxury accessories/apparel space. Margin Benefits from Premium Focus: Since shedding its lower margin brands (Liz Claiborne/Juicy Couture) in 2013, Kate Spade’s EBITDA margin expanded to approximately 16.5% in 2015 from 7.7% in 2013, and grew to 18.3% for the LTM ending Oct. 1, 2016. Fitch believes the focus on the premium kate spade new york brand will allow EBITDA margin to sustain in the 18%–19% range. International operations should also positively affect margins as that segment matures and contributes more significantly to company EBITDA. Improving Leverage: Adjusted debt/EBITDAR decreased to 3.8x at the end of 2015, compared with 4.6x at the end of 2014 and 6.1x at the end of 2013. The reduction is due to a 3.6% increase in EBITDA to $205 million in 2015 from $151 million in 2014, driven by strong revenue growth and margin expansion. With expectations of continued revenue and EBITDA expansion on favorable industry trends and recent product expansions, Fitch expects leverage could trend toward approximately 3.0x over the next 24 months, assuming no debt issuance. Adequate Liquidity and Improving FCF: Kate Spade had $308 million of cash on hand and revolver availability of $190 million as of Oct. 1, 2016. FCF was negative prior to 2015 due partially to discontinued operations, but turned positive at $50 million in 2015. Fitch expects Kate Spade to generate $150 million–$200 million in FCF annually over the next few years as EBITDA trends toward approximately $300 million. Risk as Monobrand Specialty Retailer: While the kate spade new york brand has produced a significantly positive growth trajectory, the company’s reliance on a single high-fashion brand poses risk. Kate Spade’s risk is heightened due to somewhat narrow product focus, with 70% of sales from handbags and small leather goods. Kate Spade is addressing product diversification through the 14 new categories launched in 2015. These new categories have generally performed well, and 30%–50% of customers in the categories were completely new to the Kate Spade brand.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include continued midsingle-digit comps growth, EBITDA margin sustained in the high teens, sustained positive FCF and adjusted leverage moving below 3.0x. A clearly defined financial policy would also be a positive credit profile driver.

Analysts JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

Negative Drivers: Negative credit profile drivers would include a sharp reduction in the company’s comps trajectory, a deteriorating EBITDA margin or an aggressive financial policy, any of which would drive sustained leverage above 4.0x.

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Kate Spade & Company ($ Mil.) Revenue Revenue Growth (%)

2015A 1,243 9.1

2016F 1,386 11.6

2017F 1,522 9.8

2018F 1,660 9.1

Comparable Store Sales (%)

12.5

8.3

5.5

5.0

EBITDA EBITDA Margin (%)

205 16.5

257 18.6

285 18.7

315 19.0

Working Capital Change Cash Flow from Operations Capex Capex/Revenue (%) Dividends FCF Before Discontinued Operations Discontinued Operations

(26) 121 (55) 4.4 —

(10) 228 (70) 5.0 —

(5) 261 (100) 6.6 —

(5) 291 (115) 6.9 —

66 (15)

158 —

161 —

176 —

FCF Share Repurchases Total Debt Total Adjusted Debta Adjusted Debt/EBITDAR (x)

51 — 402 1,121 3.8

158 — 398 1,117 3.2

161 — 394 1,166 3.1

176 — 390 1,215 2.9

Comments — Growth driven by product category and geographic expansion. Comps trending lower due to expected slowdown in U.S. luxury sales. — Margin improvement from less planned promotional activity and the international business maturing. — — — — — Related to sale of Lucky Brand and Juicy Couture, and closure of Kate Spade Saturday and Jack Spade stores. — — — — Assumes no change in debt.

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Business Profile Assessment Kate Spade is a global specialty soft goods retailer that designs and markets women’s, men’s and children’s accessories and apparel under the kate spade new york and Jack Spade brands. While approximately 70% of the company’s 2015 sales were driven by handbags and small leather goods, the company has recently sought to diversify its mix through product introductions in other accessories, apparel and home categories. Products are sold through wholly owned specialty retail and outlet stores and wholesale distribution at select specialty retail and upscale department stores, such as Nordstrom, Saks Fifth Avenue, Neiman Marcus and Bloomingdales. Approximately 75% of Kate Spade’s sales are generated in the direct-to-consumer segment, while the remaining 25% comes from the wholesale and licensing channels. Approximately 20% of sales are generated online. Kate Spade operated 133 specialty stores, 81 outlet stores and 54 concessions as of Oct. 1, 2016. Specialty and outlet stores are operated under various company-owned and licensed trademarks. Concession stores are either owned or leased by a third-party department store or specialty store retailer. North America represents approximately 83% of total sales. As a company, Kate Spade has seen significant evolution over the last decade. The kate spade new york brand was purchased in 2006 by Liz Claiborne Inc., whose $5 billion revenue base dwarfed Kate Spade’s $84 million in annual sales at that time. In subsequent years, Liz Claiborne disposed of its entire portfolio except Kate Spade, eventually renaming the company to Kate Spade & Company in 2014. Brands sold during this time included Ellen Tracy, Mexx, Enyce, Liz Claiborne, Lucky Brand and Juicy Couture. Cash from dispositions was partially used to reduce debt, which declined to $385 million at the end of 2013 from $565 million at the end of 2010. Kate Spade retained certain licensee rights for disposed brands, and manufactures jewelry and apparel as part its Adelington Group, which generates 2% of Kate Spade’s sales. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Segment Data — Kate Spade & Company 2008

2009

2010

2011

2012

2013

2014

2015

LTM 10/1/16

Net Sales ($ Mil.) Mexx Lucky Brand Juicy Couture Kate Spadea Kate Spade International Adelington Design Group and Partnered Brands Total Sales

1,203.0 476.8 604.6 126.0 — 1,575.0 3,985.4

831.2 439.6 539.9 141.2 — 1,059.0 3,011.6

731.8 386.9 566.8 184.3 — 630.3 2,500.1

— 418.2 530.7 312.9 — 256.9 1,518.7

— 461.7 498.6 461.9 — 82.8 1,505.0

— — 461.6 743.2 — 60.2 1,265.0

— — — 891.8 213.6 33.3 1,138.7

— — — 1,031.1 188.2 23.4 1,243.7

— — — 1,121.1 195.4 23.2 1,339.7

Net Sales Growth YoY (%) Mexx Lucky Brand Juicy Couture Kate Spadea Kate Spade International Adelington Design Group and Partnered Brands Total Sales Growth

(3.9) 13.1 22.4 39.2 — (32.1) (12.9)

(30.8) (7.8) (10.7) 12.1 — (32.8) (24.4)

(12.0) (12.0) 5.0 30.5 — (40.5) (17.0)

— 8.1 (6.4) 69.8 — (59.2) (39.3)

— 10.4 (6.0) 47.6 — (67.8) (0.9)

— — (7.4) 60.9 — (27.3) (16.0)

— — — 20.0 — (44.7) (10.0)

— — — 15.6 (11.9) (29.5) 9.1

— — — 8.7 3.8 (1.1) 7.8

Average Total Retail Square Footage (000) Mexx Lucky Brand Juicy Couture Kate Spadea Kate Spade International

1,432 511 240 117 —

1,498 584 325 146 —

1,552 586 369 141 —

— 565 419 148 —

— 560 428 170 —

— — 415 263 —

— — — 315 94

— — — 362 73

— — — — —

444 603 986 616 —

325 421 804 538 —

265 365 745 666 —

— 420 674 934 —

— 440 685 1,016 —

— — 644 1,212 —

— — — 1,437 1,711

— — — 1,496 1,634

— — — — —

136 100 241 477

157 101 206 464

172 93 138 403

— — — —

193 39 232

194 46 240

189 38 227

179 42 221

177 47 224

— — —

62 33 0 33

66 33 0 99

74 52 5 131

78 51 5 134

78 54 2 134

74 53 — 127

— — — —

48 28 0 76

38 29 0 67

44 29 0 73

50 29 0 79

89 32 32 153

118 51 43 212

108 58 — 166

104 64 — 168

108 67 — 175

— — — —

42 15 54 111

22 13 52 87

25 14 54 93

Sales Per Average Square Foot ($) Mexx Lucky Brand Juicy Couture Kate Spadea Kate Spade International Store Count Mexx Specialty Outlet Concession Total Lucky Brand Specialty Outlet Total Juicy Couture Specialty Outlet Concession Total Kate Spadea Specialty Outlet Concession Total Kate Spade International Specialty Outlet Concession Total a

Kate Spade did not break out international sales prior to 2014. Kate Spade North America includes Kate Spade Saturday and Jack Spade. YoY – Year over year. Source: Company filings, Fitch Ratings.

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Leveraged Finance Strong Brand Foundation Kate Spade grew brand revenues at a compound annual rate of nearly 40% from 2010 to 2015. Growth was predicated on square footage growth in the U.S., international expansion, and double-digit annual comps between 2010 and 2015. Strong product resonance with customers and category expansion also drove the strong growth, which was supported by a generally growing market for handbags and accessories. The company recently scaled back promotional activity through the reduction of its ecommerce flash sales activity by 30%–40% and reduced participation in department store sales. The goal of this strategy is to solidify Kate Spade’s brand perception in the premium/luxury category while improving merchandise margin. As a consequence of reduced promotions, comps moderated to 12.5% in 2015 from 25%–30% in each of the three prior years. Comps slowed further in 2016 to the midsingle digits in the second and third quarters, exacerbated by weak tourist traffic due to the stronger U.S. dollar, which began to affect the company in the fourth quarter of 2015. However, comps still remain significantly above peers given a lower revenue base (see the Primary Competitors — Kate Spade & Company table).

Comparable Direct-to-Consumer Salesa (%) MEXXb Lucky Brand Juicy Coutureb Kate Spade Kate Spade Excluding E-Commerce

2008

2009

2010

2011

2012

2013

2014

2015

9M16

(10.1) (5.5) 0.0 (9.6)

(10.3) (16.2) (12.0) (6.8)

(4.2) (11.7) (0.5) 36.0

— 15.6 (7.1) 68.9

— 10.0 (3.5) 29.5

— — (0.6) 28.2

— — — 25.9

— — — 12.5

— — — 8.9

—

23.6

N.A.

16.3

23.1

9.4

2.5

Comparable direct-to-consumer sales include concession comparable store sales for MEXX in 2010, and Juicy Couture in 2011 and 2012. bIncludes e-commerce sales beginning in 2010. N.A. – Not available. Source: Company filings, Fitch Ratings.

Long-Term Goals The company’s long-term target is to generate $4 billion in annual revenue at retail, compared with $2 billion in 2015. The company’s strategies to continue growth include further geographic expansion, omnichannel offerings, product category extensions and a micro-assortment strategy to merchandise stores to local tastes. Fitch believes Kate Spade’s strategies will drive revenue gains, but expects comps to moderate to the midsingle digits during the next few years as market share gains become increasingly challenging. The uncertain economic environment and sluggish tourist spending that led to a discernable slowdown in sales at luxury players, such as Neiman Marcus Group LTD LLC and Tiffany & Co., and aspirational luxury brands, such as Kate Spade, are expected to persist in the near term. Geographic expansion will occur both domestically and internationally as the company expands its footprint in existing and new markets. Kate Spade expects to open approximately 20 companyowned stores per year globally from a base of approximately 270 expected at the end of 2016. While the company generally operates its domestic locations, international expansion includes a mix of company-owned stores, operations through joint ventures and wholesaling to local operators. Fitch views the partnered approach positively, as it partially hedges operational risks in new markets and reduces start-up and fixed costs associated with opening new stores. Fitch expects EBITDA margin improvement as the international segment matures and the company leverages fixed costs. The international segment contributed $18 million to total EBITDA in 2015, compared with $1 million in 2014, which equates to an EBITDA margin of around 10%. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Beyond new units, sales growth is expected to result from expanded product offerings in complementary categories, such as small leather goods and new product categories outside core handbags. The company launched 14 new categories in 2015 and new lines in existing categories. The recently launched Broome Street collection caters to consumers looking for casual ready-to-wear merchandise Kate Spade did not previously offer. The Madison Avenue collection caters to women who seek a more elevated offering from the company and are willing to spend more than $350 on a handbag. Micro-assortment and product expansion efforts within the core category, such as small leather goods, also successfully contributed to add-on purchases and increased store productivity. The company’s line extensions into categories outside its core business generally saw strong comps in 2016, and these launches were also successful at introducing the Kate Spade brand to new consumers, who represented 30%–50% of customers in these new categories.

Kate Spade Product Offering Expansion Product Swimwear Childrenswear Watch Childrenswear — Japan Baby Collection Housewares — All in Good Taste Yoga Sleepwear, Loungewear and Bridal Home — Four New Home Licenses DWI Holdings (Bed and Bath) EJ Victor (Furniture) JAIPUR (Rugs) Kravet (Fabrics and Wallpaper) Connected Wearables Fragrance

Release Date Late 2014 through licensing with Swimwear Anywhere February 2015 February 2015 through licensing with Fossil Group Fall 2015 through partnership with Narumiya August 2015 August 2015, distribution in 430 Macy’s department stores Spring 2016, collaboration with Beyond Yoga Spring 2016 through licensing with Carole Hochman 2016

Fall 2016 through licensing with Fossil Group Fall 2016 through licensing with Perfume Centers of America

Source: Company filings, Fitch Ratings.

Kate Spade closed its 10 Jack Spade stores and discontinued its Kate Spade Saturday brand, closing its 16 stores, after only launching the brand in 2013. While the pace of product expansion over the last year is somewhat aggressive, Fitch believes Kate Spade is now focused on growing these categories organically, with future product expansions expected to be more moderately paced. While the partnered and licensed approach to expansion reduces execution risk, overexpansion could be detrimental to the brand image.

2017 Outlook Fitch expects comps to be in the midsingle digits over the next 24 months, as the recent moderation in sales growth continues due to the increasing challenge of achieving market share gains and a global slowdown in luxury sales. Assuming annual opening of about 20 new company-owned units globally over the next three years, Fitch expects total revenue to grow 9%–10% in 2017 and thereafter. EBITDA margins are expected to sustain in the 18%–19% range, higher than 16.5% in 2015 due to the reduction in planned promotions, store-level assorting efforts and fixed-cost leverage. These assumptions yield EBITDA of approximately $280 million in 2017, trending toward the low $300 million range thereafter. Fitch expects adjusted leverage to decline to approximately 3.0x from 3.8x in 2015 over the next 12–24 months as a result of continued EBITDA growth.

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Leveraged Finance Primary Competitors — Kate Spade & Company (%)

2011

2012

2013

2014

2015

LTMa

Revenue ($ Mil.) Kate Spadeb Coachc Michael Korsd Ralph Laurene

313 4,763 1,302 6,860

462 5,075 2,182 6,945

743 4,806 3,311 7,450

1,105 4,191 4,371 7,620

1,219 4,492 4,712 7,405

1,317 4,499 4,672 7,289

Revenue Growth Kate Spadeb Coachc Michael Korsd Ralph Laurene

69.8 14.5 62.1 21.2

47.6 6.6 67.5 1.2

60.8 (5.3) 51.8 7.3

48.7 (12.8) 32.0 2.3

10.3 7.2 7.8 (2.8)

8.0 0.2 (0.8) (1.6)

EBITDA ($ Mil.) Kate Spadeb Coachc Michael Korsd Ralph Laurene

57 1,752 316 1,386

95 1,861 706 1,505

130 1,536 1,118 1,519

144 1,069 1,445 1,452

174 1,082 1,418 1,205

259 1,085 1,306 999

EBITDA Growth Kate Spadeb Coachc Michael Korsd Ralph Laurene

— 14.8 89.8 21.6

65.6 6.2 123.7 8.6

37.4 (17.5) 58.4 0.9

10.2 (30.4) 29.2 (4.4)

20.9 1.2 (1.9) (17.0)

48.8 0.3 (7.9) (17.1)

EBITDA Margin Kate Spadeb Coachc Michael Korsd Ralph Laurene

18.3 36.8 24.2 20.2

20.6 36.7 32.4 21.7

21.8 32.0 33.8 20.4

13.0 25.5 33.1 19.1

14.3 24.1 30.1 16.3

19.7 24.1 28.0 13.7

Comps Kate Spadeb Coachc Michael Korsd Ralph Laurene

68.9 6.6 39.2 14.0

29.5 0.3 40.1 3.0

28.2 (14.6) 26.2 0.0

25.9 (22.0) 10.3 (1.0)

12.6 (3.3) (4.2) (3.0)

8.9 1.9 (6.4) (8.0)

a LTM period for Kate Spade, Coach, Michael Kors and Ralph Lauren is as of Oct. 1, 2016. bKate Spade segment only includes the Kate Spade brand segment. Comps for the LTM period is for the nine months ending Oct. 1, 2016. cCoach fiscal year ends in June, thus figures are as of June of the succeeding year to align with peers. Comps includes North America only. Comps for the LTM period are for the three months ended Oct. 1, 2016. dMichael Kors year end is as of the end of March. Comps are on a constant currency basis for 2015 and LTM. Comps for LTM period are for the six months ended Oct. 1, 2016. eRalph Lauren comps are on a constant currency basis. Comps for the LTM period are for the six months ended Oct. 1, 2016. N.A. – Not available. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

Liquidity and Debt Structure Adequate Liquidity The cash balance of $308 million and revolver availability of $190 million as of Oct. 1, 2016 provide sufficient liquidity for the company in the short to medium term. After dropping to about $55 million in 2015, capex is expected to be about $70 million in 2016 and approximately $100 million thereafter as the company opens approximately 20 stores annually. Fitch expects FCF to grow to the $150 million–$200 million range over the next few years from $50 million in 2015 due to the improved profitability of existing stores and geographic expansion abroad.

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Leveraged Finance Capital Structure Kate Spade’s debt structure consists of a $200 million asset-based loan (ABL) credit facility and a $392 million term loan. Availability on the ABL facility is based on the lesser of $200 million and a borrowing base computed monthly, and is composed of eligible cash, accounts receivable and inventory. The ABL also includes a swingline subfacility of $30 million, a multicurrency subfacility of $35 million and the option to expand the facility by up to $100 million under certain conditions. Up to $125 million of the ABL facility is available for the issuance of letters of credit, and standby letters of credit may not exceed $40 million. The ABL is guaranteed by substantially all of the company’s current domestic subsidiaries and is secured by a first-priority lien on substantially all the assets of the company and the guarantors other than trademark collateral that secures the term loan facility. The term loan is guaranteed by all of the company’s existing material domestic subsidiaries and is secured by a first-priority lien on the Kate Spade trademark and certain related rights owned by the company and the guarantors. The term loan also has a second-priority lien on the ABL collateral. The term loan is subject to amortization payments of $1 million per quarter and bears interest at a rate equal to LIBOR plus 3%, subject to a 1% LIBOR floor.

Capital Structure ($ Mil., At Oct. 1, 2016) Description

Amount

(%)

Secured Debt $200 Mil. ABL Revolver due 5/16/19 $400 Mil. Term Loan due 4/10/21 Total Secured Debt

0.0 392.0 392.0

0.0 98.0 98.0

Unsecured Debt Capital Lease Obligations Total Unsecured Debt Total Debt

7.7 7.7 399.7

2.0 2.0 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 1, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 1, 2016) 4.0 4.0 4.0 4.0 375.0 —

Cash Revolver Availability Total

308.1 189.6 497.7

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings.

Source: Company filings, Fitch Ratings.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned a ‘bb+*/rr1*’ to the senior secured revolver and term loan, indicating outstanding recovery prospects (91%–100%) in the event of default. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Appendix A Organizational Structure — Kate Spade & Company ($ Mil., As of Oct. 1, 2016) Public Shareholdersa

Management

< 99%

> 1%

Kate Spade & Company (CO — bb*/stable) (Borrower) Debt Issue $200 Mil. Revolver due May 5/16/19 Term Loan due 4/10/21 Capital Leases Total

Kate Spade Canada Inc. Kate Spade UK Limited (Guarantors)

Amount Outstanding 0 386 8 394

CO bb+*/rr1* bb+*/rr1* — —

Other Domestic and International Subsidiaries

aAs of April 2016, public shareholders with ownership of 10% or more include FMR LLC and Goldman Sachs Asset Management. CO – Credit Opinion. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Key Historical Events â&#x20AC;&#x201D; Kate Spade & Company Sold global Mexx business to affiliates of Gores Group, LLC for $85 Mil. in October 2011; remaining 18.75% indirect interest later sold in July 2013

Kate Spade founded by Kate Brosnahan Spade, former editor at Mademoiselle magazine Launched Jack Spade

1993

1996

1997

Company opens its first store in New York

2006 Kate Spade acquired by Liz Clairborne, Inc. in December 2006 for approximately $124 Mil.

2011

Juicy Couture sold to Authentic Brands Group (affiliate of Leonard Green & Partners) for $195 Mil.

2012 Global trademark rights for the Liz Claiborne brands and trademark rights for U.S. and Puerto Rico for the Monet brand sold to J.C. Penney for $267.5 Mil.

2013

Lucky Brand sold to Leonard Green & Partners for $225 Mil. in February 2014

2014

2015 Kate Spade Saturday discontinued, and closed all Jack Spade stores in the first half of 2015

Sold Kensie, Kensie Girl and Mac & Jac trademarks to affiliate of Bluestar Alliance LLC in October 2011. Also sold Dana Buchman trademark to Kohlâ&#x20AC;&#x2122;s Corp. in October 2011. Both transactions generated aggregate cash proceeds of $39.8 Mil. Source: Fitch Ratings, company presentations.

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Leveraged Finance Appendix C Bank Agreement Covenant Summary — Kate Spade & Company Overview Borrower Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction Restricted Payments: Restricted Payments (RP)

Other: Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Kate Spade & Company, Kate Spade UK and Kate Spade Canada Credit Agreement dated 5/16/14 (Exhibit 10.1 to 10-Q filed 8/12/14) 5/16/19 Senior Secured ABL Revolver USD200 Mil., with the Canadian sublimit of CAD20 Mil. and the U.K. sublimit of GBP30 Mil. Senior secured. Bifurcated lien with the term loan. Second lien on trademarks and other related rights, and first lien on the rest of the assets. The facility is guaranteed by all restricted subsidiaries. However, the Canadian subs only guarantee the Canadian portion and the U.K. subs only guarantee the U.K. portion.

Coverage Ratio Debt: Unsecured debt allowed in case (a) availability is more than the greater of 15% of borrowing base and USD25 Mil. and the fixed-charge coverage ratio is more than 1.0x; or (b) availability is more than the greater of 20% of borrowing base and USD35 Mil. Notable Permitted Debt: Additional unsecured debt allowed up to USD75 Mil. Additional lien basket is USD30 Mil. Consistent with limitations on debt incurrence.

Event of default. Defined as sale of substantially all assets or change of ownership of more than 50% voting stocks. Investments are allowed in case (a) availability is more than the greater of 12.5% of borrowing base and USD20 Mil. and the fixedcharge coverage ratio is more than 1.0x or (b) availability is more than the greater of 17.5% of borrowing base and USD30 Mil. After one year, the proceeds from the sale need be applied to repay the term loan.

RP Basket: No limit in case (a) availability is more than the greater of 15% of borrowing base and USD25 Mil. and the fixed-charge coverage ratio is more than 1.0x; or (b) availability is more than the greater of 20% of borrowing base and USD35 Mil. Notable Permitted Payments: Additional all-purpose up to USD10 Mil. per year.

Yes, for any amount USD20 Mil. or greater. N.A. MAC clause is only a condition for executing the agreement. N.A. No. Lenders holding more than 50% of the aggregate commitments.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Kate Spade & Company (Continued) Financial Covenants First-Lien Secured Net Leverage (Maximum)

—

Coverage (Minimum)

1.0x if availability is less than the greater of 10% of borrowing base and USD15 Mil.

Current Ratio (Minimum)

—

Excess Availability (Minimum)

—

Net Worth (Minimum)

—

Principal Repayments Mandatory/Tax Prepayment

—

Amortization Schedule

—

Callability/Optional Prepayment

Prepayment is allowed at any time.

Pricing Coupon Type/Index

Pricing varies depending on availability and types of drawing.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Term Loan Covenant Summary — Kate Spade & Company Overview Borrower Document Date and Location Maturity Date Description of Debt Amount ($ Mil.) Ranking Security Guarantee Debt Restrictions Debt Incurrence

Kate Spade & Company Credit Agreement dated 4/10/14 (Exhibit 10.2 to 10-Q filed 5/14/14) 4/10/21 Senior Secured Term Loan $400 Mil. Senior secured. Bifurcated lien with the ABL facility. First lien on trademarks and other related rights, and second lien on the rest of the assets. The facility is guaranteed by all restricted subsidiaries

Limitation on Liens Limitation on Guarantees

Coverage Ratio Debt: Allowed as long as fixed-charge coverage ratio is more than 2.0x. Notable Permitted Debt: 1) Debt incurred in sale and leasebacks up to the greater of $25 Mil. and 2.75% of consolidated total assets; 2) acquisition debt allowed if i) fixed-charge ratio is more than 2.0x or ii) the pro forma fixed-charge ratio is greater; 3) additional all-purpose debt up to $25 Mil. Additional lien basket is $25 Mil. Consistent with limitations on debt incurrence.

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Event of default. Defined as sale of substantially all assets or change of ownership of more than 50% voting stocks. General permitted investment basket up to the greater of $35 Mil. and 4% of consolidated total assets. After one year, the proceeds from the sale need be applied to repay the term loan.

Restricted Payments: Restricted Payments (RP)

Other: Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

RP Basket: 50% of net income starting in April 2014 and conditioned upon fixed-charge coverage ratio is more than 2.0x. Notable Permitted Payments: Additional all-purpose payments up the greater of $20 Mil. and 2.25% of consolidated total assets.

Yes, for any amount $20 Mil. or greater. N.A. MAC clause is only a condition for executing the agreement. N.A. No. Lenders holding more than 50% of the aggregate commitments.

ABL – Asset-based loan. MAC – Material adverse change. N.A. – Not applicable. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Covenant Summary — Kate Spade & Company (Continued) Financial Covenants First-Lien Secured Net Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Excess Availability (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment Pricing Coupon Type/Index

— — — — —

50% of excess cash flow if consolidated net total debt ratio is more than 2.75x; 25% between 2.75x and 2.25x; and 0% if less than 2.25x. 0.25% of the principal amount annually. Prepayment is allowed at any time with 1% prepayment premium on the amount prepaid.

Eurodollar Term Loan, LIBOR + 3% ABR Term Loan, LIBOR + 2%

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Financial Summary — Kate Spade & Company 12 Months ($ Mil.) 12/31/11 12/29/12 12/28/13 Profitability (%) Operating EBITDAR Margin 14.6 16.5 16.3 Operating EBITDA Margin 6.1 7.7 7.7 Operating EBIT Margin 0.5 2.7 3.0 FFO Margin (1.3) 2.8 2.0 FCF Margin (6.0) (4.7) (8.1) Return on Capital Employed 1.2 8.1 7.4 Gross Leverage (x) Total Adjusted Debt/Operating EBITDARa 6.7 5.9 6.1 FFO-Adjusted Leverage 9.3 6.9 7.1 FCF/Total Adjusted Debt (%) (6.2) (4.9) (8.1) Total Debt with Equity Credit/ Operating EBITDAa 4.8 3.5 4.0 Total Secured Debt/Operating EBITDAa 2.5 3.3 4.0 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 8.5 19.8 49.4 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 5.8 5.7 5.5 FFO-Adjusted Net Leverage 8.2 6.6 6.4 Total Net Debt/(CFFO – Capex) 5.8 (6.0) (3.2) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a 1.2 1.4 1.4 Operating EBITDA/Interest Paida 1.9 3.0 2.2 FFO Fixed-Charge Coverage 0.9 1.2 1.2 FFO Interest Coverage 0.6 2.1 1.6 CFFO/Capex 1.6 0.3 (0.1) Debt Summary Total Debt with Equity Credit 446 406 394 Total Adjusted Debt with Equity Credit 1,472 1,464 1,265 Lease-Equivalent Debt 1,026 1,058 870 Other Off-Balance Sheet Debt — — — Interest (Paid) (49.3) (38.7) (43.6) Implied Cost of Debt (%) 9.6 9.1 10.9 Cash Flow Summary FFO (20) 42 25 Change in Working Capital (Fitch Defined) 139 (17) (30) CFFO 119 25 (5) Non-Operating/Nonrecurring Cash Flow (136) (13) (19) Capital (Expenditures) (74) (83) (78) Common Dividends (Paid) — — — FCF (91) (71) (102) Acquisitions and Divestitures 310 (41) 193 Net Debt Proceeds (114) 2 7 Net Equity Proceeds 0 6 5 Other Investing and Financing Cash Flows 52 (16) (32) Total Change in Cash and Equivalents 157 (121) 71 Liquidity Readily Available Cash and Equivalents 180 59 130 Availability Under Committed Credit Lines 316 322 347 Not Readily Available Cash and Equivalents — — — Working Capital Net Working Capital (Fitch Defined) (38) (40) (62) Trade Accounts Receivable (Days) 28.7 29.5 25.8 Inventory Turnover (Days) 99.5 121.6 124.9 Trade Accounts Payable (Days) 74.1 96.3 96.5 Capital Intensity (%) 4.8 5.5 6.2

Three Months 7/4/15 10/3/15

12 Months 1/2/16 1/2/16

Three Months 4/2/16

LTM 7/2/16 10/1/16 10/1/16

1/3/15

4/4/15

20.9 13.3 9.0 9.9 (7.0) 17.0

19.1 10.3 5.5 (5.2) (22.7) 18.2

23.6 15.6 11.5 13.5 10.5 19.7

22.4 14.2 9.7 8.6 (3.1) 22.4

27.5 22.3 19.2 24.0 21.5 22.4

23.8 16.5 12.5 11.8 4.1 22.4

21.8 13.6 9.4 (2.4) (9.2) 24.8

24.3 17.3 13.4 14.6 15.0 25.4

25.1 18.0 14.0 26.1 (0.2) 27.0

25.0 18.3 14.6 16.8 8.6 27.0

4.6 4.7 (7.2)

4.6 4.6 (0.9)

4.3 4.9 (1.5)

4.0 4.8 2.8

3.8 4.4 4.9

3.8 4.5 4.5

3.7 4.2 7.9

3.5 4.1 9.5

3.3 3.4 10.2

2.7 2.6

2.6 2.5

2.3 2.3

2.1 2.1

2.0 2.0

1.9 1.9

1.8 1.8

1.6 1.6

29.2

11.7

9.0

7.8

7.0

7.2

6.0

5.5

5.3

3.9 3.9 (4.6)

3.7 3.8 23.2

3.4 3.9 4.7

3.2 3.9 3.4

2.8 3.2 1.5

2.8 3.3 1.6

2.8 3.2 1.5

2.6 3.0 0.8

2.4 2.5 0.8

2.0 4.4 1.9 4.3 0.5

2.0 4.2 2.0 4.2 1.1

2.5 10.0 2.2 8.0 1.5

2.7 11.2 2.2 8.3 1.8

2.9 15.4 2.5 12.4 2.3

2.9 15.4 2.4 12.0 2.2

2.9 12.4 2.5 10.1 2.8

3.0 13.2 2.6 10.7 3.1

3.3 18.8 3.2 18.3 3.5

411 1,107 696 — (34.1) 8.5

412 1,131 719 — (37.6) 9.3

403 1,122 719 — (17.4) 4.3

402 1,121 719 — (17.2) 4.2

402 1,121 719 — (13.3) 3.3

403 1,122 719 — (13.3) 3.3

401 1,120 719 — (17.4) 4.3

400 1,119 719 — (17.2) 4.3

400 1,119 719 — (13.0) 3.2

113 (68) 45 (30) (94) — (79) (32) 8 42 115 54

(13) (24) (37) (6) (15) — (58) — 1 2 83 29

38 9 47 (4) (13) — 30 — (9) 0 (2) 19

24 (14) 10 (1) (17) — (9) — (1) 0 (2) (12)

103 3 106 (4) (9) — 92 1 (0) 0 (10) 83

147 (26) 121 (15) (55) — 50 1 (9) 2 69 114

(7) (7) (13) — (12) — (25) — (2) 0 (10) (37)

47 17 63 (1) (15) — 48 — (1) 0 (1) 46

82 (71) 12 (1) (12) — (1) — (0) 2 0 2

225 (57) 168 (5) (48) — 115 1 (4) 2 (21) 93

184 181

213 181

231 189

220 189

298 189

261 189

307 189

308 190

—

17 28.9 126.0 70.4 8.2

30 25.6 163.3 86.5 5.7

20 20.9 154.6 83.5 4.8

29 19.1 207.9 110.6 6.3

28 20.3 101.1 57.6 2.2

28 28.4 143.3 81.7 4.4

72 22.5 189.2 85.6 4.3

60 18.1 151.7 73.9 4.6

94 19.8 183.8 84.4 3.7

94 19.0 179.7 82.5 3.6

EBITDA/R after dividends to associates and minorities. bComparable store sales including e-commerce for the LTM period reflects the performance for the nine months ended Oct. 1, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Kate Spade & Company (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data Comparable Sales Growth (%)b No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

12/31/11 12/29/12 12/28/13

1/3/15

4/4/15

7/4/15 10/3/15

12 Months 1/2/16 1/2/16

Three Months 4/2/16

LTM 7/2/16 10/1/16 10/1/16

1,519 (39.3) 221

1,505 (0.9) 248

1,265 (16.0) 207

1,139 (10.0) 238

255 (22.2) 49

281 5.7 66

277 10.7 62

429 45.9 118

1,243 9.1 295

274 7.5 60

320 13.7 78

317 14.1 79

1,340 20.9 335

221 93

248 115

207 98

238 151

49 26

66 44

62 40

118 95

295 205

60 37

78 55

79 57

335 245

93 7

115 41

98 38

151 103

26 14

44 32

40 27

95 82

205 155

37 26

55 43

57 44

245 196

68.9 79 53.3 (37.1) 3.7 4.9 40.1 (18.1) 85.7

29.5 153 56.0 (38.7) 3.0 3.8 62.0 (8.3) 111.3

28.2 212 57.4 (42.6) 2.9 3.8 40.6 7.5 130.3

25.9 277 59.7 (35.4) 2.9 5.2 31.1 17.2 193.2

9.0 242 60.6 10.7 2.3 4.3 35.9 6.7 117.7

10.0 250 61.0 11.4 2.2 4.1 37.8 8.1 114.5

15.7 249 61.2 12.4 1.7 3.2 40.3 8.9 138.7

14.0 255 60.2 (0.4) 2.5 4.5 37.9 1.7 72.1

12.5 255 60.7 (34.2) 2.5 4.5 37.8 1.7 110.3

19.0 260 61.8 11.5 2.2 4.9 38.5 8.8 102.5

4.0 267 59.7 9.5 2.4 4.8 37.9 10.3 117.9

6.7 268 59.4 11.3 2.0 4.4 38.3 12.3 94.7

8.9 268 59.4 11.3 2.0 4.4 38.3 12.3 94.7

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Leveraged Finance Retailing / U.S.A.

L Brands, Inc. Full Rating Report Key Rating Drivers

Ratings Long-Term IDR BB+ Secured Bank Credit Facility BBB–/RR1 Senior Guaranteed Unsecured Notes BB+/RR4 Senior Nonguaranteed Unsecured Notes BB/RR5 IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data L Brands, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCFa Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comparable Store Sales (%)b No. of Storesc

FYE LTM 1/30/16 10/29/16 12,154.0 12,479.6 2,704.0 2,675.5 22.2 548

21.4 311

11,201.0

11,527

3.3

3.4

3.3

3.1

5.0 3,005

1.0 3,073

FCF is before special dividends. Comparable store sales for the LTM reflects the performance for the three months ended Oct. 29, 2016. c Company-owned stores. b

Dominant Market Positions: L Brands, Inc. is the dominant player in intimate apparel and a major player in personal care and beauty products through its two main brands, Victoria’s Secret and Bath & Body Works. The company’s track record of consistent growth demonstrates its strong customer loyalty and ability to introduce compelling, unique merchandise despite challenges across the mid-tier mall retail space. Margin stability demonstrates the company’s pricing power and ability to drive traffic without markdowns. Solid Financial Performance: L Brands’ strong top-line growth is driven by robust comparable store sales (comps), which averaged 5% over the five years through 2015. Beyond the modestly negative impact of L Brands’ decision to eliminate swimwear and other apparel categories (4% of total sales) at Victoria’s Secret in 2016/2017, Fitch Ratings expects sustainable comps growth in the 2%–3% range, with EBITDA margins at approximately 20%– 22% over the next three years, consistent with the past four years. Diverse but Seasonal Business: Products are sold through retail stores (approximately 84% of total sales) and online/catalogs (16% of total sales). Victoria’s Secret, including its PINK brand, represents approximately 63% of EBITDA, while Bath & Body Works represents about 37%. The growth of PINK concept stores in the U.S. and international expansion could drive sustainable top-line growth in the midsingle-digit range. The business relies heavily on the fourth quarter, when it generates about 50% of EBITDA and essentially all its FCF. Shareholder-Friendly Posture: L Brands is committed to returning cash to shareholders through share repurchases and dividends. The company returned over $7 billion in cash to shareholders in the five years ending 2015, utilizing approximately $5 billion of FCF before dividends and funding the remainder with debt. An additional $1.5 billion was returned to shareholders via share repurchases and dividends through the first three quarters of 2016. This commitment to high levels of shareholder return is a rating constraint for the company. Reasonable Leverage, Strong Liquidity: Lease-adjusted leverage was relatively modest at 3.4x as of Oct. 29, 2016. Fitch expects the company to maintain a leverage profile of approximately mid-3.0x given EBITDA growth and potential debt issuances to fund dividends and share buybacks. The company has a strong liquidity position and comfortable maturity profile. Fitch considers refinancing risk low given L Brands’ strong business profile, favorable operating trends and reasonable leverage.

Rating Sensitivities Positive Rating Action: A positive rating action would require both the continuation of positive operating trends and a public commitment to maintaining financial leverage around low 3.0x.

Analysts David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

Negative Rating Action: A negative rating action could be driven by a trend of negative comps and/or margin compression from fashion misses, execution missteps or loss of competitive traction. A larger than expected debt-financed share repurchase or special dividend, or weakness in operations that lead to leverage rising to 4.0x would be negative for the rating.

JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — L Brands, Inc. ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%)

2015A 12,154 6.1 5.0 2,704 22.2

2016F 12,524 3.0 1.7 2,594 20.7

2017F 12,837 2.5 1.0 2,705 21.1

2018F 13,350 4.0 2.5 2,882 21.6

Working Capital Change Cash Flow from Operations Capex

(53) 1,869 (727)

(44) 1,606 (1,000)

(13) 1,700 (1,000)

(10) 1,832 (1,000)

Capex/Revenue (%) Dividends

6.0 (1,171)

8.0 (1,100)

7.8 (770)

7.5 (847)

FCF Share Repurchases Total Debt Total Adjusted Debta Adjusted Debt/EBITDAR (x)

548 (483) 5,721 11,201 3.3

(94) (600) 6,099 11,853 3.6

(70) (600) 6,499 12,541 3.6

(15) (600) 6,899 13,243 3.6

Comments — — 2017 affected by category eliminations in 2016. — 2016 decline due to markdowns associated with category eliminations. — — Increased beginning 2016 on accelerated square-footage expansion and remodel activity. — Dividends include special dividends in 2015 and 2016. FCF excludes special dividends. — Forecast to grow commensurate with EBITDA. — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Comps – Comparable store sales. Source: Fitch Ratings.

Business Profile Assessment L Brands is a specialty retailer focused on women’s intimate apparel and beauty and personal care with dominant market shares in the U.S. Two brands, Victoria’s Secret (1,130 U.S. stores, 46 Canadian stores and 17 U.K. stores; 29 Beauty and Accessories stores in China, including approximately 141 PINK stores globally as of Oct. 29, 2016) and Bath & Body Works (1,592 U.S. stores and 102 Canadian stores as of Oct. 29, 2016), generate the vast majority of operating profits. Core products include bras, panties and loungewear on the intimate apparel side, and antibacterial and home fragrance product lines on the personal care and beauty side. Products are purchased through contract manufacturers and imports, and directly from thirdparty manufacturers. Fitch believes both flagship concepts are strong, particularly Victoria’s Secret, which represents nearly two-thirds of profitability. The company sees the potential to grow its Victoria’s Secret footprint in the U.S. on the 2015 base of 6.9 million square feet, supported by the rollout of its PINK concept within existing stores. The company’s targeted growth of PINK in the U.S. — which could approach $3 billion in revenue over the next few years from an estimated $2.5 billion currently — and continued international expansion, if executed successfully, could drive top-line growth in the midsingledigit range and enable the company to maintain its targeted high-teens EBIT margin. EBIT margin was 17.8% for the LTM ended Oct. 29, 2016, after adding back noncash stock-based compensation expense. Management has repositioned its La Senza intimate apparel store base — less than 2.5% of annual sales — with an improved merchandise assortment, while aggressively closing underperforming stores. Profitability in 2016 and 2017 is expected to be negatively affected by the company’s recent actions at Victoria’s Secret to streamline operations, and investments to grow China as a company-operated market rather than a franchised one. The company is eliminating certain merchandise categories, such as swimwear and certain apparel categories, representing a total of $525 million in volume (4% of total sales) beginning in mid-2016. Fitch consequently expects 2016 revenue growth to be up around 3% on 1%–2% comps and 4% square footage High-Yield Retail Checkout January 31, 2017

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Leveraged Finance growth, while 2017 comps could remain in the 1%–2% range due to swimwear/apparel volume loss. The combination of lower than average comps, margin deleverage on inventory clearance activity and investments in the China rollout is projected to yield a 3%–5% decline in EBITDA in 2016 to around $2.6 billion from $2.7 billion in 2015. EBITDA in 2017 is expected to return to approximately $2.7 billion, and EBITDA margin is expected to remain in excess of 20% in both 2016 and 2017.

Two Flagship Brands and a Meaningful Direct Business Fitch views the business profile favorably given the company’s focus on its two profitable flagship brands, a strong direct business and a growing international footprint. Both concepts have been successful in maintaining a steady flow of unique, compelling merchandise, which has fueled strong comps growth, enhanced customer loyalty and limited markdown activity.

Historical Comps and Store Growth — L Brands, Inc. Fiscal Year Ended

1/30/10

1/29/11

1/28/12

2/2/13

2/1/14

1/31/15

1/30/16

LTM 10/29/16

Comps (%) Victoria’s Secret Bath & Body Works Totala

(6.0) (1.0) (4.0)

14.0 5.0 9.0

14.0 6.0 10.0

7.0 7.0 6.0

2.0b 1.0b 2.0

3.0b 6.0b 4.0

5.0b 5.0b 5.0

0.0b 4.0b 1.0

1,040 1,627 258 11 31 4 —

1,028 1,606 252 11 59 12 —

1,017 1,587 230 19 69 19 —

1,019 1,571 158 29 71 26 2

1,060 1,559 157 29 79 34 5

1,098 1,558 145 29 88 41 10

1,118 1,574 126 29 98 46 14

1,130 1,592 128 29 102 46 17

— 2,971

— 2,968

— 2,941

— 2,876

— 2,923

— 2,969

— 3,005

29 3,073

581 587

663 620

754 658

817 718

824 725

836 774

864 815

— —

Company-Owned Store Count Victoria’s Secret U.S. Bath & Body Works U.S. La Senza Henri Bendel Bath & Body Works Canada Victoria’s Secret Canada Victoria’s Secret U.K. Victoria’s Secret Beauty and Accessories Total U.S. Sales per Square Feet Victoria’s Secret Bath & Body Works a

Total comps includes Victoria’s Secret U.S., Victoria’s Secret Canada, Bath & Body Works U.S., Bath & Body Works Canada, Victoria’s Secret U.K., La Senza and Henri Bendel. bIncludes company-owned stores in both U.S. and Canada.for nine months ended Oct. 29, 2016. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

While L Brands is not a luxury player, per se, and has offerings across price points, it shares some similar characteristics with luxury names. These companies tend to have stronger pricing power because their differentiation is anchored around the brand name and a loyal customer who is less likely to substitute away to a different offering at a lower price point.

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Leveraged Finance Business Segments — L Brands, Inc. a

2014

5,368 1,516 — 2,868b 250 c 222 d 549 10,773

5,700 1,507 — 3,048b 302 c 336 d 561 11,454

6,112 1,560 — 3,225 b 362 c 385 d 510 12,154

6,183 1,623 — 3,339b 413 c 411 d 511 12,480

9.1 2.3 — 8.5 — — (14.8) 0.9

7.8 (4.8) — (1.2) — — NM 3.0

6.2 (0.6) — 6.3 20.8 51.4 2.2 6.3

7.2 3.5 — 5.8 19.9 14.6 (9.1) 6.1

3.4 9.3 — 6.3 24.8 8.4 (0.6) 5.5

44.0 15.0 4.0 25.8 — — 11.1 100.0

47.6 15.2 0.0 27.7 — — 9.4 100.0

49.8 14.1 0.0 26.6 2.3 2.1 5.1 100.0

49.8 13.2 0.0 26.6 2.6 2.9 4.9 100.0

50.3 12.8 0.0 26.5 3.0 3.2 4.2 100.0

49.5 13.0 0.0 26.8 3.3 3.3 4.1 100.0

888 464 — (68) 1,284

1,081 513 — (47) 1,546

1,188 604 — (85) 1,707

1,153 648 38 (96) 1,743

1,271 737 78 (133) 1,953

1,391 858 88 (145) 2,192

1,273 892 58 (130) 2,093

EBITDAf Victoria’s Secret Bath & Body Works Victoria’s Secret & Bath & Body Works International Other Total

1,023 519 — 101 1,643

1,223 565 — 115 1,902

1,336 657 — 68 2,061

1,328 713 47 23 2,111

1,469 802 94 (14) 2,351

1,609 928 104 (34) 2,607

— — — — —

EBITDA Growth YoY (%)e Victoria’s Secret Bath & Body Works Victoria’s Secret & Bath & Body Works International Other Total

44.5 24.7 — 9.5 35.1

19.5 8.9 — 13.8 15.8

9.3 16.3 — (40.8) 8.4

NM NM NM NM NM

10.6 12.5 100.0 (160.9) 11.4

9.5 15.7 10.6 142.9 10.9

— — — — —

EBITDA Contribution (%)e Victoria’s Secret Bath & Body Works Victoria’s Secret & Bath & Body Works International Other Total

62.3 31.6 — 6.1 100.0

64.3 29.7 — 6.0 100.0

64.8 31.9 — 3.3 100.0

62.9 33.8 2.2 1.1 100.0

62.5 34.1 4.0 (0.6) 100.0

61.7 35.6 4.0 (1.3) 100.0

— — — — —

($ Mil.)

2010

2011

2012

Sales Victoria’s Secret Victoria’s Secret Direct La Senza Bath & Body Works Bath & Body Works Direct Victoria’s Secret & Bath & Body Works International Other Total

4,018 1,502 398 2,515 — — 1,180 9,613

4,564 1,557 415 2,674 — — 1,154 10,364

4,981 1,593 — 2,902 — — 983 10,459

Sales Growth YoY (%) Victoria’s Secret Victoria’s Secret Direct La Senza Bath & Body Works Bath & Body Works Direct Victoria’s Secret & Bath & Body Works International Other Total

14.9 8.2 (5.9) 5.5 — — 25.3 11.4

13.6 3.7 4.2 6.3 — — (2.2) 7.8

Sales Mix (%)e Victoria’s Secret Victoria’s Secret Direct La Senza Bath & Body Works Bath & Body Works Direct Victoria’s Secret & Bath & Body Works International Other Total

41.8 15.6 4.1 26.2 — — 12.3 100.0

Operating Incomee Victoria’s Secret Bath & Body Works Victoria’s Secret & Bath & Body Works International Other Total

2013

2015 LTM 10/29/16 b

Restated amounts from 2014 10-K used for comparability. bIncludes company-owned stores in both U.S. and Canada. cIncludes company-owned and partner-operated stores outside of the U.S. and Canada. dNo longer includes international operations of Victoria’s Secret and Bath & Body Works. eReflects the reporting change in segments for 2013 and 2014. fSegment EBITDA calculated as segment operating income adjusted for one-time expenses plus depreciation and amortization. Reflects the reporting change in segments for 2013 and 2014. YoY – Year over year. NM – Not meaningful. N.A. – Not available. Note: Other includes corporate, Mast Global, Henri Bendel and international operations including La Senza, with the exception of 2013 and 2014, which do not include international operations. 2012 operating income excludes several one-time items related to goodwill impairment and restructuring of La Senza (including expense associated with store closures), and the divestiture of third-party apparel sourcing business. 2011 operating income is also adjusted for expense associated with the charitable contribution to The L Brands Foundation. Source: Company filings, Fitch Ratings.

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Leveraged Finance 2017 Outlook Fitch expects L Brands can sustain average comps growth in the 2%–3% range and EBITDA margin at approximately 20%–22% over the next three years. Comps in 2016–2017 could be pressured due to the company’s decision to eliminate swimwear and certain other apparel categories in mid-2016, and Fitch currently projects 1%–2% comps in both 2016 and 2017. EBITDA, which was $2.7 billion in 2015 and grew steadily from $2.0 billion in 2011, is projected to be around $2.6 billion in 2016 due to markdowns associated with category exits; selling, general and administrative investments; higher occupancy and the strong U.S. dollar. These negative effects — primarily on gross margin — are partially mitigated by headcount reductions the company announced early in 2016. Following the modest EBITDA decline in 2016, Fitch projects annual EBITDA increases in the midsingle digits beginning 2017. Fitch expects the company will continue to generate strong cash flow and apply it toward dividends and share repurchases, similar to its historical endeavors. Fitch expects 2016 capex to increase to $1 billion from $727 million in 2015, reflecting new store constructions; square footage expansions of existing stores (including the addition of PINK square footage); an increase in remodeling activity; and investments in technology, logistics and facilities. Capex is projected to remain around $1 billion beginning in 2017. Total square footage is expected to increase 3%–4% annually. As a result of modest EBITDA declines and capex increase, Fitch expects annual FCF after regular dividends to be near flat or modestly negative in 2016 and 2017, improving toward $100 million thereafter. This forecast assumes regular dividends of approximately $700 million in 2016, which grow at 10% thereafter. Fitch anticipates leverage to remain around mid-3.0x as the company could continue to support regular dividend growth, special dividends and share repurchases through incremental debt issuance.

Liquidity and Debt Structure Rating Affected by Shareholder-Friendly Posture L Brands is committed to returning cash to shareholders through share repurchases and dividends. The company returned over $7 billion in cash to shareholders in the five years ending 2015, utilizing approximately $5 billion of FCF before dividends and funding the remainder with debt. An additional $1.5 billion was returned to shareholders through the first three quarters of 2016. This commitment to high levels of shareholder return is a rating constraint for the company. Total lease-adjusted leverage was at 3.4x as of Oct. 29, 2016. Fitch expects L Brands to deploy excess cash and potentially execute more debt-financed share repurchases and special dividends while maintaining mid-3.0x leverage metrics.

Capital Structure The company’s debt structure is composed of a secured $1.0 billion credit facility, guaranteed senior unsecured notes and unguaranteed notes. The revolver contains fixed-charge coverage (not less than 1.75x) and debt-to-EBITDA (not exceeding 4.0x) financial covenants. Restricted payments may be made if debt to EBITDA is less than 3.0x. Seven bond issues benefit from guarantees — the 2019 notes, 2020 notes, 2021 notes, 2022 notes, 2023 notes, 2035 notes and recently issued 2036 notes. Fitch rates these notes at ‘BB+/RR4’, the same as the Issuer Default Rating (IDR). The notes are guaranteed on a full High-Yield Retail Checkout January 31, 2017

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Leveraged Finance and unconditional basis by the material domestic subsidiaries. The guarantors represent more than 90% of the assets owned by the company’s domestic subsidiaries — other than real property, certain other assets, and intercompany investments and balances — and more than 95% of the accounts receivable and inventory directly owned by the domestic subsidiaries. The remaining bond tranches are not guaranteed. Fitch notes this distinction by rating these issues at ‘BB/RR5’, one notch below the IDR and guaranteed bonds.

Strong Liquidity, Manageable Maturities L Brands’ liquidity is strong, supported by a cash balance of $2.5 billion at the end of 2015 ($650 million as of Oct. 29, 2016, L Brands’ seasonal working capital peak) and the company’s $1.0 billion revolving credit facility. The company held $282 million of its reported cash at foreign subsidiaries as of Oct. 29, 2016. The company has a comfortable maturity profile, staggered over many years. Fitch considers refinancing risk low given the strong business profile, favorable operating trends and reasonable leverage.

Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

0.0 0.0

500.0 400.0 1,000.0 1,000.0 500.0 1,000.0 700.0

8.7 6.9 17.3 17.3 8.7 17.3 12.1

350.0 300.0 23.0 5,773.0 5,773.0

6.1 5.2 0.4 100.0 100.0

Secured Debt $1 Bil. Revolver expiring July 2019 Total Secured Debt Unsecured Debt Guaranteed Notes 8.500% Sr. Unsecured Notes due June 2019 7.000% Sr. Unsecured Notes due May 2020 6.625% Sr. Unsecured Notes due April 2021 5.625% Sr. Unsecured Notes due February 2022 5.625% Sr. Unsecured Notes due October 2023 6.875% Sr. Unsecured Notes due November 2035 6.750% Sr. Unsecured Notes due July 2036 Nonguaranteed Notes 6.950% Sr. Unsecured Notes due March 2033 7.600% Sr. Unsecured Notes due July 2037 Senior Unsecured Foreign Facilities Total Unsecured Debt Total Debt Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) — — 500 400 1,000 3,850

Cash Revolver Availability Total

654.0 992.0 1,646.0

Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘BB+’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch rates the senior secured revolver ‘BBB–/RR1’, indicating outstanding recovery prospects (91%–100%) in the event of default. The guaranteed senior unsecured debt are rated ‘BB+/RR4’, indicating average recovery (31%–50%) prospects. The senior unsecured notes that are not guaranteed are rated one notch lower than the IDR at ‘BB/RR5’.

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Leveraged Finance Appendix A Organizational Structure — L Brands, Inc. ($ Mil., As of Oct. 29, 2016) L Brands, Inc. (IDR — BB+/Stable) Debt Issue $1,000 Mil. Senior Secured Revolver Due 7/18/19 8.500% Senior Unsecured Notes Due 6/15/19 (Guaranteed) 7.000% Senior Unsecured Notes Due 5/1/20 (Guaranteed) 6.625% Senior Unsecured Notes Due 4/1/21 (Guaranteed) 5.625% Senior Unsecured Notes Due 2/15/22 (Guaranteed) 5.625% Senior Unsecured Notes Due 10/15/23 (Guaranteed) 6.950% Senior Unsecured Notes Due 3/1/33 6.875% Senior Unsecured Notes Due 11/1/35 (Guaranteed) 6.750% Senior Unsecured Notes Due 7/1/36 (Guaranteed) 7.600% Senior Unsecured Notes Due 7/15/37 Total

Nonguarantor Subsidiaries

Amount 0 500 400 1,000 1,000 500 1,000 350 700 300 5,750

IDR BBB–/RR1 BB+/RR4 BB+/RR4 BB+/RR4 BB+/RR4 BB+/RR4 BB+/RR4 BB/RR5 BB+/RR4 BB/RR5 —

Upstream Guarantees

Guarantor Subsidiariesa

aThe guarantor subsidiaries represent: substantially all of the sales of the company’s domestic subsidiaries; more than 90% of the assets owned by the company’s domestic subsidiaries, other than real property, certain other assets, and intercompany investments and balances; and more than 95% of the accounts receivable and inventory directly owned by the company’s domestic subsidiaries. IDR – Issuer Default Rating. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — L Brands, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security

Guarantee

Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

L Brands, Inc.; L (Overseas) Holdings LP; Canadian Retail Holdings Corporation; Victoria’s Secret UK Limited; Mast Industries (Far East) Limited. Amended and Restated Five -Year Revolving Credit Agreement dated 7/18/14 (Exhibit 4.1 to 8-K filed 7/23/14). Senior secured revolving credit facility. 7/18/19 USD1,000 Mil. (up to GBP50 Mil. of sublimit to the U.K. borrower and up to CAD100 Mil. of sublimit to the Canadian borrower) — increase in commitments up to USD500 Mil. Senior. Secured by 90% of consolidated assets (excluding real estate) and 95% of consolidated domestic inventory and receivables. Collateral shall be released in the event of a rating upgrade to low ‘BBB’ or better by two rating agencies; further automatic reinstatement in the event of a ratings downgrade to ‘BB+’ or lower by two rating agencies or ‘BB’ or lower by one rating agency. Guaranteed on secured basis by all material domestic subsidiaries. Guarantee shall be released in the event of rating upgrade to low ‘BBB’ or better by two rating agencies.

Additional all-purpose debt up to USD225 Mil. for subsidiary indebtedness only. General carveout of USD750 Mil., provided that no more than USD50 Mil. of such obligations are secured by inventory; carveout of USD750 Mil. on second lien basis, provided later maturing date, no scheduled repayment prior to the credit facility’s maturity date and less restrictive terms. Guarantee is included under the definition of investments and, hence, is governed by the investment-related covenants.

A CoC is defined as the acquisition of more than 30% voting stock or occupation of a majority of seats on the board by nonpermitted holders and constitutes an event of default. Carveout of USD200 Mil. in aggregate, but the limitation on amount can be removed if consolidated debt to EBITDA for the most recent four-quarter period is less than 3.0x and no event of default exists. None.

RP Basket: None. Notable Permitted Restricted Payment: Greater of USD500 Mil. and 7.5% of total assets per year, but the limitation on the amount can be removed if pro forma consolidated debt to EBITDA for the most recent four-quarter period is less than 3.0x and there is no event of default.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, exceeding USD100 Mil. N.A. None. None. RP covenant falls away in the event of rating upgrade to low ‘BBB’. 50% of total commitment.

Financial Covenants Maintenance Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

Consolidated debt to consolidated EBITDA must not exceed 4.0x. Fixed-charge coverage (consolidated EBITDAR to consolidated fixed charges) not less than 1.75x.  

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. None. None.

Pricing Coupon Type/Index Pricing Grid (Rating-Based Grid)

Currently LIBOR + 1.50%; commitment fee equals 0.30% per annum, subject to rating-based pricing grid. Issuer Default Ratings Applicable Rate and Commitment Fee More than or equal to ‘Baa2 and ‘BBB’ LIBOR + 100; 0.25% LIBOR + 125; 0.25% Equal to ‘Baa3’ and ‘BBB−’ Equal to ‘Ba1’ and ‘BB+’ LIBOR + 150; 0.30% Less than or equal to ‘Ba2’ and ‘BB’ LIBOR + 175; 0.35%

MAC − Material adverse change. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Guaranteed Bonds Covenant Summary — L Brands, Inc. Overview Issuer Document Date and Location

L Brands, Inc. Indenture dated 6/19/09 (Exhibit 4.1 to 8-K filed 6/24/09)

Base indenture dated 3/15/88 (Exhibit 4.1 to S-3 filed 5/22/03). First supplemental indenture dated 5/31/05 (Exhibit 4.1.2 to S-3 filed 6/6/05). Second supplemental indenture dated 7/14/07 (Exhibit 4.1.4 to S-3 dated 10/1/07) Unsecured notes. 7.000% notes — $400 Mil. 6.625% notes — $1,000 Mil. 5.625% notes — $1,000 Mil. 5.625% notes — $500 Mil. 7.000% notes — 5/1/20 6.625% notes — 4/1/21 5.625% notes — 2/15/22 5.625% notes — 10/15/23

Description of Debt Amount

8.500% unsecured notes. $500 Mil.

Maturity Date

6/15/19

Ranking Security Guarantee

Senior. Unsecured. Guaranteed on senior unsecured basis by all material domestic subsidiaries that guarantee the senior credit facility.

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees

None. Equal and ratable senior liens permitted. None.

Acquisitions/Divestitures Change of Control (CoC)

Sale of Assets Restriction

A CoC is defined as the acquisition of more than 50% voting stock or occupation of a majority of seats on the board by nonpermitted holders. In the event of a CoC and rating downgrade to below investment grade, or if rated below investment grade at time of CoC, there is a required put at 101. Permitted only if the company becomes the continuing corporation or the successor corporation assumes the obligations of the debt securities. None.

Restricted Payments Restricted Payments (RP)

None.

M&A, Investments Restriction

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback

None. None. None. Maximum 35% with proceeds of equity offer @ 108.5% until June 15, 2012.

7.000% notes: maximum 35% with proceeds of equity offer @ 107% until May 1, 2013. 6.625% notes due 2021: maximum 35% with proceeds of equity offer @ 106.625% until April 1, 2014. 5.625% notes due 2022: maximum 35% with proceeds of equity offer @ 105.625% until Feb. 15, 2015. 5.625% notes due 2023: maximum 35% with proceeds of equity offer @ 105.625% until Oct. 15, 2016.

MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Guaranteed Bond Covenant Summary â&#x20AC;&#x201D; L Brands, Inc. Covenant Issuer Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee

L Brands, Inc. Indenture dated 10/30/15 (Exhibit 4.1 to 8-K filed 11/3/15). 6.875% unsecured notes. $1.0 Bil. 11/1/35 Senior. Unsecured. Guaranteed on senior unsecured basis by all material domestic subsidiaries that guarantee the senior credit facility.

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees

None. Equal and ratable senior liens permitted but no liens on capital stock of significant subsidiaries. None.

Acquisitions/Divestitures Change of Control (CoC)

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause

None. None. None.

M&A, Investments Restriction

MAC â&#x2C6;&#x2019; Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Guaranteed Bond Covenant Summary â&#x20AC;&#x201D; L Brands, Inc. Covenant Issuer Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee

L Brands, Inc. Indenture dated 6/16/16 (Exhibit 4.1 to 8-K filed 6/16/16). First Supplemental Indenture dated 6/16/16 (Exhibit 4.2 to 8-K filed 6/16/16). 6.750% unsecured notes. $700 Mil. 7/1/36 Senior. Unsecured. Guaranteed on senior unsecured basis by all material domestic subsidiaries that guarantee the senior credit facility.

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees

None. Equal and ratable senior liens permitted but no liens on capital stock of significant subsidiaries. None.

Acquisitions/Divestitures Change of Control (CoC)

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause

None. None. None.

M&A, Investments Restriction

MAC â&#x2C6;&#x2019; Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Nonguaranteed Bonds Covenant Summary — L Brands, Inc. Overview Issuer Document Date and Location

Ranking Security Guarantee

L Brands, Inc. Base indenture dated 2/19/03, filed as exhibit 4 to form S-4 dated 4/18/03. First supplemental indenture dated 5/31/05, filed as exhibit 4.1.2 to form S-3 dated 6/6/05. Second supplemental indenture dated 7/17/07, filed as exhibit 4.1.4 to form S-3 dated 10/1/07. Third supplemental indenture dated 5/4/10, filed as exhibit 4.1.4 to form S-3 dated 11/5/10. Senior unsecured notes. 6.950% notes  $350 Mil./3/1/33. 7.600% notes  $300 Mil./7/15/37 Senior. Unsecured. Unguaranteed.

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees

None. None. None.

Description of Debt Original Issue/Maturity

Acquisitions/Divestitures Change of Control (CoC)

Sale of Assets Restriction

A CoC is defined as the acquisition of more than 50% voting stock or occupation of a majority of seats on the board by nonpermitted holders. In the event of a CoC and rating downgrade to below investment grade or if rated below investment grade at time of CoC, there is a required put at 101. Permitted only if the company becomes the continuing corporation or the successor corporation assumes the obligations of the debt securities. None.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback

None. None. None. None.

M&A, Investments Restriction

MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix F Financial Summary — L Brands, Inc. 12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

24.1 18.8 15.4 12.9 (2.9) 33.5

25.9 20.4 17.0 13.3 (6.6) 39.3

26.1 20.4 17.0 13.5 1.9 37.1

27.0 21.3 17.8 13.8 3.3 36.4

26.7 19.9 15.8 8.2 (40.7) 40.1

25.4 19.2 15.4 10.2 5.8 40.1

25.5 18.6 14.6 11.0 (20.3) 37.4

31.5 27.6 25.1 26.5 30.5 36.7

27.9 22.2 18.8 15.8 (0.2) 36.7

25.6 18.7 14.5 6.1 (40.2) 41.0

25.1 18.9 15.0 13.4 1.8 41.5

23.6 16.6 11.9 7.9 (23.5) 37.3

27.1 21.4 17.8 15.3 (2.1) 37.3

3.2 3.8 (3.8)

3.4 4.0 (7.5)

3.5 4.2 2.1

3.2 3.9 3.8

3.3 3.9 (0.1)

3.2 3.9 (0.9)

3.5 4.1 (1.6)

3.3 3.8 (0.2)

3.3 3.8 (0.3)

3.4 3.9 (0.5)

3.4 3.8 (1.4)

3.4 3.8 (2.3)

1.8 —

2.1 —

2.3 —

2.0 —

1.9 —

2.2 —

2.1 0.0

2.2 0.0

5.7

6.8

8.4

5.8

6.1

6.2

6.9

6.1

6.3

6.5

6.8

3.0 3.6 3.8

3.2 3.9 5.3

3.0 3.6 6.5

2.7 3.3 3.1

3.1 3.7 4.2

3.1 3.7 4.3

3.1 3.7 5.0

2.7 3.1 3.1

3.1 3.6 4.3

3.1 3.5 4.6

3.3 3.7 5.5

3.2 8.7 2.7 7.0 3.0

3.2 7.7 2.6 6.1 2.3

3.1 7.3 2.6 5.9 1.8

3.2 7.4 2.6 5.8 2.5

3.2 7.8 2.7 6.2 2.5

3.2 7.9 2.7 6.3 2.4

3.3 8.2 2.8 6.6 2.3

3.3 8.1 2.9 6.8 2.6

3.4 8.5 2.9 7.1 2.6

3.2 7.7 2.8 6.3 2.4

3.2 7.2 2.8 6.3 2.2

3.1 6.8 2.7 5.9 2.0

3,538 7,930 4,392 — (225) 7.4

4,477 9,117 4,640 — (276) 6.9

4,976 9,880 4,904 — (300) 6.3

4,765 9,941 5,176 — (328) 6.7

4,760 10,240 5,480 — (320) 6.6

4,759 10,239 5,480 — (316) 6.5

5,766 11,246 5,480 — (315) 5.9

5,721 11,201 5,480 — (334) 6.4

5,721 11,201 5,480 — (317) 6.0

5,726 11,480 5,754 — (351) 6.7

5,719 11,473 5,754 — (374) 7.1

5,773 11,527 5,754 — (392) 6.8

1,339 1,396 (73) (45) 1,266 1,351 — — (426) (588) (1,144) (1,449) (304) (686) 124 — 981 928 (1,115) (577) 119 173 (195) (162)

1,458 (210) 1,248 — (691) (349) 208 — 495 (28) 71 746

1,584 202 1,786 — (715) (691) 380 — (213) (53) 48 162

207 (363) (156) — (132) (734) (1,022) — — (95) 85 (1,032)

281 250 531 — (226) (146) 159 — — (177) 149 131

272 (385) (113) — (245) (146) (504) — 988 (60) 107 531

1,163 445 1,608 — (124) (145) 1,339 — 7 (118) 10 1,238

1,922 (53) 1,869 — (727) (1,171) (29) — 995 (450) 351 867

160 (274) (114) — (187) (750) (1,051) (31) 6 (250) 45 (1,281)

386 149 535 — (310) (173) 52 0 (46) (122) 122 6

204 (309) (105) — (328) (173) (606) (2) 6 (21) 4 (619)

1,913 11 1,924 — (949) (1,241) (266) (33) (27) (511) 181 (656)

374 987

422 988

1,353 992

1,469 1,000

453 1,000

505 1,000

1,087 981

2,192 992

890 992

892 992

372 992

561

351

166

212

246

325

224

356

377

381

282

(95) 7.7 57.9 31.3 4.1

(141) 7.1 60.7 32.7 5.6

23 8.3 67.0 34.5 6.4

(225) 8.0 56.9 33.7 6.2

16 8.6 70.4 39.5 5.3

(202) 8.4 60.3 39.5 8.2

186 10.3 100.5 56.6 9.9

191 5.3 42.2 25.1 2.8

191 7.8 58.9 35.1 6.0

(38) 8.6 73.0 41.5 7.2

(202) 8.3 61.0 40.2 10.7

105 11.3 95.5 55.6 12.7

105 9.5 82.7 48.2 7.6

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Leveraged Finance Financial Summary — L Brands, Inc. (Continued) 2/1/14 1/31/15

5/2/15

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

10,773 3.0 2,809

11,454 6.3 3,088

2,512 5.1 670

2,765 3.4 701

2,482 7.0 633

4,395 8.0 1,384

12,154 6.1 3,389

2,614 4.1 668

2,890 4.5 725

2,581 4.0 609

12,480 5.5 3,386

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital Return on Assets Capex/Depreciation

1/28/12

2/2/13

10,364 10,459 7.8 0.9 2,502 2,714

Three Months

2,502 1,953

2,714 2,134

2,809 2,196

3,088 2,441

670 499

701 530

633 462

1,384 1,213

3,389 2,704

668 489

725 545

609 429

3,386 2,676

1,953 1,597

2,134 1,780

2,196 1,828

2,441 2,043

499 398

530 427

462 362

1,213 1,102

2,704 2,289

489 379

545 433

429 308

2,676 2,222

10.0 2,941 39.3 (8.0) 6.3 11.6 58.4 13.9 119.7

6.0 2,876 42.3 (8.1) 6.0 11.2 68.2 12.5 166.1

2.0 2,923 41.1 (5.2) 5.4 10.6 53.0 12.5 187.8

4.0 2,969 42.0 (4.3) 6.4 10.8 56.2 13.8 179.6

5.0 2,966 42.0 65.6 5.9 10.5 66.0 17.1 130.7

4.0 2,976 40.3 57.4 6.1 9.3 67.6 16.9 219.4

7.0 3,003 41.5 67.7 4.2 7.4 55.6 14.8 245.0

6.0 3,005 45.6 30.7 6.2 10.4 54.4 14.8 111.7

5.0 3,005 42.8 (5.5) 6.2 10.4 54.4 14.8 175.2

3.0 3,038 40.3 66.8 5.6 9.8 63.9 15.6 170.0

3.0 3,052 38.5 66.0 6.0 9.1 64.9 16.0 276.8

2.0 3,073 39.7 79.5 4.4 7.6 64.0 15.2 271.1

1.0 3,073 39.7 79.5 4.4 7.6 64.0 15.2 271.1

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Leveraged Finance Retailing / U.S.A.

Levi Strauss & Co. Full Rating Report Key Rating Drivers

Ratings Long-Term IDR Revolving Credit Facility Senior Unsecured Notes

BB BBB– BB

IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data Levi Strauss & Co. FYE LTM ($ Mil.) 11/30/15 8/28/16 Total Revenues 4,494.5 4,538.4 EBITDA 593.0 602.4 EBITDA Margin (%) 13.2 13.3 FCF 66.0 40.1 Total Adjusted Debt 2,705.9 2,680.8 Adjusted Debt/EBITDAR (x) 3.4 3.4 EBITDAR/(Interest + Rents) (x) 2.9 3.1 No. of Storesa 2,756 2,871 a

Includes franchised and companyoperated locations.

Stable Top Line: Levi Strauss & Co.’s constant currency top line is stable, with 1%–2% annual sales growth expected beginning in fiscal 2017 (ends November 2017), following expected low single-digit growth in 2016 and 1% constant-currency growth in 2015. Revenue in the Americas (61% of total sales) is projected to grow around 2% annually, in line with the apparel sector, while international revenue could grow 2%–3% as the company expands its presence across newer markets, including Russia, India and China, and categories in existing markets. Improving EBITDA Story: Fitch Ratings expects 3%–4% annual EBITDA growth beginning 2017 from the projected $600 million in 2016, predicated on modest sales growth, fixed-cost leverage and benefits from the cost-reduction program management announced early 2014. Selling, general and administrative (SG&A) spend should be near flat to 2013 levels in 2017, when the program is fully realized, despite higher sales. This assumes approximately $150 million of net savings, yielding EBITDA upside if the company achieves the high end of its targeted $175 million–$200 million range. Reasonable Credit Metrics: Levi should end fiscal 2016 with leverage around 3.3x, significantly lower than 5.0x in 2012, as adjusted debt declined 18% to $2.6 billion and EBITDA grew 29% to a projected $600 million. Leverage could trend toward 3.0x over the next three years on projected EBITDA growth. Fitch expects minimal debt paydown following the 2016 repayment of Levi’s $33 million eurobonds, as the company could direct cash flow toward the company’s growth initiatives, dividend program and tuck-in M&A. Good Liquidity: Levi had $272 million of cash on hand and $665 million of revolver availability at Aug. 28, 2016. Cash should approach $400 million by the end of 2016 due to working capital seasonality. Annual FCF after dividends is projected around $150 million in 2016 and around $200 million beginning in 2017, assuming 10%–20% annual growth in the company’s dividend ($60 million in 2016). Following the repayment of Levi’s $40 million in eurobonds in fourthquarter 2016, Levi’s next debt maturity is $525 million of unsecured notes due 2022.

Rating Sensitivities Positive Rating Action: A positive rating action would be considered if Levi sustained 3%–5% revenue growth and/or mid-teens EBITDA margins, or if FCF deployment to debt paydown results in leverage trending to around 3.0x. Negative Rating Action: A negative rating action would be considered if EBITDA margin remains under pressure longer term due to soft sales trends and increased investment in marketing/promotion, resulting in adjusted debt/EBITDAR increasing toward 4.0x.

Analysts David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Levi Strauss & Co. ($ Mil., Year Ended November) Revenue Revenue Growth (%) Americas Europe Asia Pacific EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Adjusted Debt/EBITDAR (x)

2015A 4,494 (5.5) (4.8) (11.1)

2016F 4,544 1.1 (1.5) 5.4

2017F 4,629 1.9 1.5 2.0

2018F 4,730 2.2 2.0 2.0

0.5

4.7

3.0

593 13.2 (92) 218 (102) 2.3 (50) 66 (4) 1,165 2,705 3.4

597 13.1 (57) 316 (115) 2.5 (60) 141 0 1,063 2,634 3.3

615 13.3 22 408 (117) 2.5 (70) 221 0 1,063 2,665 3.3

640 13.5 (10) 393 (120) 2.5 (80) 194 0 1,063 2,698 3.2

Comments — — — 2015/2016 affected by the strong U.S. dollar. 2015/2016 affected by the strong U.S. dollar. — — — — — — — — — — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Company filings, Fitch Ratings

Business Profile Assessment Wide Geographic Scope Levi is a privately held company headquartered in San Francisco. It is one of the world’s largest branded apparel companies, with 2015 revenues of $4.5 billion. Levi sells its branded products in more than 110 countries through 50,000 retail outlets, including nearly 2,900 stores dedicated to Levi brands, of which almost 700 are company operated, with the remainder franchised. Geographically, approximately 58% of Levi’s revenues are generated in the Americas, 25% in Europe and 17% in Asia-Pacific. In the first nine months of 2016, constant currency revenue grew 3.7%, while reported revenue rose 1.4% to $3.3 billion. Growth was achieved through constant currency gains of 8.8% in Europe and 9.1% in Asia, on both strength in the wholesale channel and expansion in Levi’s retail/e-commerce business. However, in the Americas, sales declined by 1.3% — flat in constant currency — in the first nine months of 2016 as weakness in the U.S. wholesale channel was mitigated by growth in the U.S. retail/e-commerce business and expansion in Mexico. Declines in the U.S. wholesale channel mirror broader challenges in the midmarket apparel sector, though Levi performed somewhat better than other fashion brands given its more replenishment-oriented business. Fitch projects consolidated sales will track slightly positive for the full year, or up 2%–3% in constant currency, to a reported $4.5 billion. Levi’s revenue is projected to grow around 2% annually over the next two to three years, assuming currency rates are unchanged from current levels. Operating margins before unallocated corporate expenses were in the mid to high teens in all three geographic segments in 2015 and the first nine months of 2016. Margins in the first nine months of 2016 were up in Europe but down 100 bps– 200 bps in the Americas and Asia due to the negative impact of the strong U.S. dollar on gross margin, and higher investments in advertising (Americas) and retail expansion (Asia). Company EBITDA margins improved in each of the past four years on ongoing cost reductions, including the global productivity High-Yield Retail Checkout January 31, 2017

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Leveraged Finance initiative begun in 2014 and discussed below. Fitch expects EBITDA margins to expand modestly to approximately mid-13% over the next three years from 13.2% in 2015 on revenue growth and relatively faster growth in Levi’s higher margin company-owned retail/e-commerce business, which currently represents about 26% of sales.

Segment Data — Levi Strauss & Co. 11/30/08 11/29/09 11/28/10 11/27/11 11/25/12 11/24/13 11/30/14 11/29/15 Revenue ($ Mil.) Americas Europe Asia-Pacific Total Revenue Growth YoY (%) Americas Europe Asia-Pacific Total

LTM 8/28/16

2,476 1,196 729 4,401

2,358 1,042 706 4,106

2,549 1,105 756 4,411

2,716 1,174 872 4,762

2,749 1,103 758 4,610

2,851 1,104 727 4,682

2,863 1,143 748 4,754

2,726 1,016 752 4,495

2,402 1,059 778 4,239

(4.1) 8.7 7.0 0.9

(4.8) (12.8) (3.1) (6.7)

8.1 6.1 7.1 7.4

6.5 6.2 15.2 8.0

1.2 (6.0) (13.1) (3.2)

3.7 0.0 (4.0) 1.5

0.4 3.6 2.8 1.5

(4.8) (11.1) 0.5 (5.5)

(11.9) 4.1 3.6 (5.7)

7.1 7.5 0.3 6.0

6.2 3.2 10.4 6.2

1.9 1.9 (10.9) (0.4)

3.7 (2.1) 0.4 1.8

1.0 4.1 6.7 2.6

(2.7) 7.7 7.7 1.2

(1.4) 7.0 11.7 2.7

Revenue Growth YoY — Constant Currency (%) Americas 6.2 (3.2) Europe 3.2 (3.3) Asia-Pacific 10.4 (0.9) Total 6.2 (2.9) Revenue Contribution (%) Americas Europe Asia-Pacific Total

56.3 27.2 16.6 100.0

57.4 25.4 17.2 100.0

57.8 25.1 17.1 100.0

57.0 24.7 18.3 100.0

59.7 23.9 16.4 100.0

60.9 23.6 15.5 100.0

60.2 24.1 15.7 100.0

60.7 22.6 16.7 100.0

56.7 25.0 18.4 100.0

Operating Income ($ Mil.) Americas Europe Asia-Pacific Total Corporate Expenses Total

347 257 100 704 (179) 525

346 155 91 592 (214) 378

403 164 86 652 (271) 381

394 182 108 684 (348) 336

432 178 67 677 (343) 334

511 168 124 802 (336) 466

531 181 109 821 (507) 314

524 184 122 830 (399) 431

494 198 115 807 (327) 481

Operating Margins (%) Americas Europe Asia-Pacific Total Corporate Expenses Total

14.0 21.6 13.7 16.0 (4.1) 11.9

14.7 14.9 12.9 14.4 (5.2) 9.2

15.8 14.8 11.4 14.8 (6.1) 8.6

14.5 15.5 12.4 14.4 (7.3) 7.1

15.7 16.2 8.8 14.7 (7.4) 7.2

17.9 15.2 17.0 17.1 (7.2) 9.9

18.5 15.8 14.5 17.3 (10.7) 6.6

19.2 18.1 16.2 18.5 (8.9) 9.6

20.6 18.7 14.8 19.1 (7.7) 11.3

Operating Income Contribution (%) Americas 49.3 Europe 36.6 Asia-Pacific 14.1 Total 100.0

58.5 26.1 15.4 100.0

61.7 25.1 13.2 100.0

57.6 26.6 15.8 100.0

63.8 26.3 9.9 100.0

63.7 20.9 15.4 100.0

64.7 22.1 13.2 100.0

63.1 22.2 14.7 100.0

61.2 24.5 14.3 100.0

YoY – Year over year. Source: Company filings, Fitch Ratings.

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Leveraged Finance The company’s three key brands are Levi’s (85% of 2014 sales), the khaki-focused Dockers (11%, sold mainly in the U.S.) and Signature by Levi Strauss & Co. (4%). The company launched Levi’s Revel line for women in fourth-quarter 2013, which is sold only in the company retail stores and not through wholesale. The Levi’s brand was the main growth driver over the past five years, though the mix of the three brands was stable in 2015. Pants, including jeans, casual pants and dress pants, represented 81% of total units sold, and men’s products accounted for 77% of total net sales in fiscal 2015.

Sales Breakdown — Levi Strauss & Co. 2008

2009

2010

2011

2012

2013

2014

2015

85 15 100

84 16 100

83 17 100

86 14 100

85 15 100

82 18 100

81 19 100

Category Men’s Other Total

75 25 100

73 27 100

72 28 100

75 25 100

78 22 100

77 23 100

Brand Levi’s Brand Dockers Signature by Levi/Denizen Total

76 18 6 100

79 16 5 100

81 15 4 100

83 12 5 100

84 12 4 100

85 11 4 100

85 10 5 100

Channel Online + Company Stores Multibrand Retailers Total

8 92 100

11 89 100

15 85 100

18 82 100

21 79 100

22 78 100

25 75 100

26 74 100

(%) Product Pants Other Total

Source: Company filings, Fitch Ratings.

Growth Strategy Management has outlined three strategic initiatives that should provide some top-line support over time in the context of a mature business. The first is to drive the profitable core businesses and brands. The core businesses are the Levi’s men’s bottoms business globally, the Dockers brand in the U.S. and key global wholesale accounts, such as with J.C. Penney Company, Inc. The second initiative is to expand beyond the core to build a more balanced portfolio. Businesses to expand include men’s tops and outerwear, women’s and key emerging markets such as Russia, India and China. Levi’s newer women’s line Revel supported growth, especially in the key emerging markets. Levi also plans to grow its company-owned and omnichannel presence. The company’s own retail stores and online business accounted for 26% of sales in 2015, with multibrand retailers and franchised Levi’s locations accounting for the remaining 74%. Online sales were around 3% of total company sales. Levi plans to grow its company-owned and online penetration rates through retail unit expansion and investments in its e-commerce operations to improve the online customer experience and functionality.

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Leveraged Finance Manufacturing/Distribution Approximately 97% of Levi’s products are made by independent contract manufacturers in approximately 30 countries around the world. As a result, Levi’s corporate focus is product design, marketing and distribution. The distribution strategy is three-pronged, split among wholesale stores (department stores and other chains); franchised and other stores (more than 1,400 international stores dedicated to Levi’s brands, plus around 400 dedicated shop-in-shops operated directly by Levi); and 671 company-operated stores in the Americas, Europe and Asia-Pacific as of August 2016. Sales to the top 10 wholesale customers accounted for 31% of total net revenues in each of the last three years, although no customer represented 10% or more of net revenues.

Global Productivity Initiative Levi announced the Global Productivity Initiative in 2015, with a goal to reduce expenses by $175 million–$200 million annualized by the end of 2016. Expense reductions were achieved through streamlining business processes and finding efficiency opportunities throughout the enterprise. Fitch expects the company to realize at least $150 million in savings by 2017, resulting in 2017 SG&A projected to be flat to 2013, at $1.9 billion. SG&A is expected to increase modestly less than revenue growth beginning in 2018.

2017 Outlook With reported revenue up 1.4% through the first nine months of 2016 (up 3.7% constant currency), Fitch projects Levi will report slightly positive revenue growth for the full year. Assuming currency exchange rates remain at current levels, Fitch expects Levi’s revenue to grow around 2% annually beginning 2017. Higher growth is projected in the less mature European and Asian markets, with lower growth levels in the Americas, especially given the ongoing challenges faced by mid-tier apparel retailers in the U.S. EBITDA margins, which are expected to be around low 13% in 2016, could expand to around mid-13% over the next three years on benefits from the global productivity initiative and faster growth in the company’s higher margin company-owned business segments. EBITDA could consequently expand to $600 million in 2016 and toward $650 million over the next three years from $593 million in 2015. Fitch expects FCF to be approximately $200 million annually beginning in 2017, although FCF is projected at around $150 million in 2016 due to an inventory build related to wholesale weakness in the U.S. and growth initiatives abroad. Dividends, which are $60 million in 2016, are expected to grow 10%–20% annually. Levi could use its FCF for further growth initiatives, such as tuck-in M&A. Debt repayment beyond $40 million of eurobonds in 2016 is not expected. Leverage is forecast to be 3.3x in 2016, similar to 3.4x in 2015, but significantly below 2012’s 5.0x. Leverage could moderate further toward 3.0x over the next 24–36 months on EBITDA expansion.

Liquidity and Debt Structure Levi’s liquidity is adequate, supported by cash on hand of $272 million and revolver availability of $665 million as of Aug. 28, 2016. Fitch assumes approximately one-third of Levi’s cash is held overseas given company commentary in annual reports. The $850 million revolving credit facility is secured by U.S. and Canadian inventories, receivables, and the U.S. Levi trademark, and benefits from upstream guarantees from the domestic operating companies.

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Leveraged Finance The company amended and restated its credit facility in March 2014, extending the maturity through March 2019. The amendment also increased the amount secured by the U.S. Levi’s trademarks to $350 million from $250 million on the maximum availability of $850 million. The interest rate for borrowings under the credit facility was reduced to LIBOR plus 125 bps– 200 bps from LIBOR plus 150 bps–275 bps, depending on borrowing base availability. The range of the rate for undrawn availability was reduced to 25 bps–30 bps from 37.5 bps– 50.0 bps, depending on the company’s credit ratings. Availability is subject to a borrowing base, essentially defined as 95% of credit card receivables, plus 85% of net eligible accounts receivable, plus 50% of raw materials inventory, plus the trademark component, plus 95% of finished goods inventory, plus 100% of cash in the collateral account. The borrowing base totaled $749 million as of Aug. 28, 2016, which after netting $30 million of borrowings and $54 million for letters of credit, left net availability of $665 million.

Capital Structure ($ Mil., At Aug. 28, 2016) Description

Amount

(%)

30.0 14.8 44.8

2.6 1.3 3.9

31.2 39.8 525.0 500.0 1,096.0 1,140.8

2.7 3.5 46.1 43.8 96.1 100.0

Secured $850 Mil. ABL Revolver due 3/21/19 Capital Leases Total Secured Unsecured Short-Term Borrowings (International Subsidiaries) 4.250% Yen Eurobonds due 11/22/16a 6.875% Senior Notes due 5/1/22 5.000% Senior Notes due 5/1/25 Total Unsecured Total a

Subsequent to quarter end on Aug. 28, 2016, Levi’s paid down full $39.8 Mil. principal amount. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Aug. 28, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Aug. 28, 2016) 31.2     1,025.0

Cash Revolver Availability Total

271.6 665.0 936.6

Note: Revolver availability is net of borrowings and outstanding letters of credit. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility. Source: Company filings, Fitch Ratings.

Debt Structure The company has a total of $1.1 billion of senior notes due 2016–2025. As shown in the organizational structure chart in Appendix A, substantially all borrowing takes place at the Levi level. Levi is the parent and U.S. operating company. Borrowings under small, country-specific revolving credit facilities at subsidiary levels — totaling $31 million — are structurally senior to Levi’s unsecured obligations for the assets at those subsidiaries. The maturity schedule is very manageable, with the nearest maturity being $525 million of notes in 2022; the company repaid its $40 million in eurobonds, which matured in fourth-quarter 2016.

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Leveraged Finance The notes contain limitation-on-liens covenants that would permit secured debt up to approximately $2 billion — equal to 3.25x EBITDA plus 5% of consolidated net tangible assets — less the revolver commitment of $850 million, for a net amount of approximately $1.2 billion. The restricted payments basket in the note indentures is currently in excess of $700 million.

Pension Liability Levi has several noncontributory retirement plans covering mostly U.S.-based, eligible employees. The company was $356 million underfunded on a GAAP basis at year-end 2015, compared with a $411 million funding deficit at year-end 2014. The company contributed $37 million to the plans in 2015 and estimates it will contribute $33 million to its pension plans in 2016. The liability for other post-retirement benefits totaled $118 million at year-end 2015.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘BB’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned a ‘BBB–/RR1’ rating to the senior secured revolver, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured eurobonds and senior notes are expected to have average recovery prospects (31%–50%) and are rated ‘BB/RR4’.

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Leveraged Finance Appendix A Organizational Structure — Levi Strauss & Co. ($ Mil., As of Nov. 22, 2016a) Haas Family

Levi Strauss & Co. (U.S. Operating Company) (IDR — BB/Stable) Debt Issue $850 Mil. Credit Facility due 2019 6.875% Senior Notes due 2022 5.000% Senior Notes due 2025 Total Debt

Domestic Subsidiaries of LS & Co.b (Guarantors of Credit Facility)

Amount 30 525 500 1,055

Rating BBB–/RR1 BB/RR4 BB/RR4 —

Levi Strauss International

Other International Subsidiaries Levi Strauss & Co. (Canada) Inc. (Co-Borrowers Under Credit Facility)

Debt Issue Short-Term Borrowings

Amount 31

aSubsequent

to quarter end on Aug. 28, 2016, Levi’s paid down $39.8 Mil. principal amount of yen-denominated eurobonds. bDomestic subsidiaries hold primarily retail operations. IDR – Issuer Default Rating. Source: Company reports, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Levi Strauss & Co. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security

Guarantee

Financial Covenants Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Levi Strauss & Co. (LS & Co.) and Levi Strauss & Co. (Canada) Inc. (LS Canada) Document dated 9/30/11 (Exhibit 10.1 to 8-K filed 9/30/11) Amended and Restated Credit Agreement dated 3/21/14 (Exhibit 10.1 to 8-K filed 3/24/14) Five-year senior secured revolving credit facility. 3/21/19 $850 Mil., of which $800 Mil. is denominated in U.S. dollars and available to the U.S. borrower (LS & Co.), and $50 Mil. denominated in U.S. dollars or Canadian dollars, and available to either borrower. Up to $350 Mil. available for LOCs. Senior Secured. The facility is secured by first perfected security interest in A/R, goods and inventory in the U.S. and certain U.S. trademarks ($350 Mil.) associated with the Levi’s brand. Additionally, the obligations of LS Canada are secured by Canadian A/R, goods, inventory and other Canadian assets. The lien on the U.S. Levi’s trademarks and related intellectual property may be released at the company’s discretion, as long as it meets certain conditions; such release would reduce the borrowing base. Both borrowers are unconditionally guaranteed by LS & Co.’s domestic subsidiaries. The Canadian borrower is further guaranteed by LS & Co. and the Canadian subsidiaries of LS & Co. (other than the Canadian borrower).

Coverage Ratio Debt: None. Notable Permitted Debt Incurrence: 1) Indebtedness of the U.S. borrower and its subsidiaries secured by liens permitted by not to exceed $200 Mil.; 2) as long as the minimum intercompany transaction requirement is met (unless pro forma availability is not less than the greater of [x] $75.0 Mil. and [y] 10% of the line cap, in which case, the minimum intercompany transaction requirement need not be met), indebtedness of the U.S. borrower and its subsidiaries to LSIFCS, or any other affiliate of the U.S. borrower and LSIFCS, or any other affiliate of the U.S. borrower providing services similar to the services provided by LSIFCS in the ordinary course of business; 3) indebtedness of the U.S. borrower and its subsidiaries of real estate financing transactions and permitted refinancing indebtedness not to exceed $350 Mil.; 4) indebtedness of the U.S. borrower and its subsidiaries in the form of equipment financing transactions and any permitted refinancing indebtedness not to exceed $350 Mil.; 5) capital lease obligations not to exceed $100 Mil.; 6) indebtedness incurred for an acquisition under the U.S. borrower as long as pro forma FCCR or the FCCR ≥ 1.0X; 7) general purpose debt not to exceed the greater of a) $200 Mil. and b) 10% of consolidated net tangible assets of U.S. borrower. Liens on assets not securing debt are limited to the greater of (a) $1.6 Bil. minus the total revolving commitments, and (b) the amount that would cause the secured leverage ratio to exceed 3.25x. In addition, there is a general carveout of 5% of consolidated net tangible assets. Governed by the limitation on investments covenant (see below).

Prior to the first public equity offering, the permitted transferees cease to own a majority of the voting stock. After the first public equity offering, a person or group obtains 35% voting power, and the permitted transferees own less than the other person or group. 1) Other investments by the U.S. borrower and its subsidiaries in any subsidiary of the U.S. borrower not to exceed greater of a) $100 Mil. and b) 15% of line cap; 2) other investments by the U.S. borrower and its subsidiaries not to exceed $40 Mil., and pro forma LTM FCCR ≥ 1.0x.; 3) investments by the U.S. borrower or any domestic subsidiary in short-term investments not to exceed $10 Mil. 1) Standard limitations noted; 2) disposition of A/R and other payment obligations no to exceed $75 Mil.; 3) limited to $50 Mil. per year, of which at least 75% received shall be cash; 4) sales of art and archived material limited to $15 Mil.

RP Basket: None. Notable Permitted RPs: 1) Purchase of equity interests from employees not to exceed $20 Mil. in any 12-month period; 2) permitted if there is no event of default, and on a pro forma basis after giving effect to such payment, average availability for the 30-day period immediately preceding the date of such transaction or payment (or declaration of payment) is the greater of $125 Mil. and 17.5% of the line cap.

Yes, exceeding $50 Mil. No. The company must represent before each borrowing that there has been no material adverse change. None. None. > 50% of total commitments or loans outstanding.

A/R − Accounts receivable. LSIFCS – Levi Strauss International Group Finance Coordination Services. FCCR – Fixed-charge coverage ratio. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Levi Strauss & Co. (Continued)

Current Ratio (Minimum) Net Worth (Minimum)

Maintenance Incurrence None. FCCR. FCCR ≥ 1.0x when revolver availability is less than the greater of $65 Mil. or 10% of the line cap (the lesser of the aggregate commitments and the borrowing base).  

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. None. Voluntary prepayments are permitted.

Financial Covenants Leverage (Maximum) Coverage (Minimum)

Pricing Coupon Type/Index Pricing Grid

Floating based off LIBOR Average Availability ≥ 66.7% of line cap < 66.7% but ≥ 33.3% of line cap < 33.3% of line cap

Applicable Margin — Trademark/Nontrademark Loans 125 bps/125 bps 150 bps/150 bps 200 bps/175 bps

A/R − Accounts receivable. LSIFCS – Levi Strauss International Group Finance Coordination Services. FCCR – Fixed-charge coverage ratio. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Levi Strauss & Co. Overview Issuer Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Financial Covenants Debt Restrictions Debt Incurrence

Limitation on Liens

Levi Strauss & Co. (LS & Co.) Indenture dated 5/8/12 (Exhibit 4.1 to 8-K filed 5/11/12) 6.875% senior notes 5/1/22 USD535 Mil.

Coverage Ratio Debt: Pro forma FCCR > 2.0x. Notable Permitted Debt: 1) Debt incurred under any credit facilities at the greater of USD1.6 Bil. and 85% of A/R plus 60% of inventory; 2) general debt amounting to the greater of USD150 Mil. and 7.5% of CNTA; 3) debt of foreign subs not to exceed USD150 Mil.; 4) debt incurred for acquisition as long as pro forma FCCR ≥ 1.75x. Liens are subject to a maximum consolidated secured leverage ratio of 3.5x plus liens on assets up to the greater of (USD125 Mil. and 5% of CNTA) plus any additional amount permitted by credit facilities.

Indenture dated 11/2296 (Exhibit 4.2 to S-4 filed 5/4/00) JPY20 Bil. 4.25% bonds 11/12/16 JPY20 Bil. Senior. Unsecured. None.

Coverage Ratio Debt: None. Notable Permitted Debt: None.

Coverage Ratio Debt: Pro forma FCCR > 2.0x . Notable Permitted Debt: 1) Debt incurred under any credit facilities at the greater of USD1.9 Bil. and 85% of A/R plus 60% of inventory; 2) general debt amounting to the greater of USD200 Mil. and 12% of CNTA; 3) debt of foreign subs not to exceed USD200 Mil.; 4) debt incurred for acquisition as long as pro form a FCCR ≥1.75x. Notes shall be equally and ratably secured Liens are subject to a maximum consolidated if liens on principal properties (BV > 1% of secured leverage ratio of 3.5x plus liens on CNTA) exceed 10% of CNTA. assets up to the greater of (USD250 Mil. and 15% of CNTA) plus any additional amount permitted by credit facilities.

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC)

M&A, Investments Restriction

Sale of Assets Restriction

Indenture dated 4/27/15 (Exhibit 4.1 to 8-K filed 4/27/15) 5.000% senior notes 5/1/25 USD500 Mil.

None.

CoC is defined as acquisition of majority of voting stock or gaining majority control of the board of directors, and would trigger a put at 101. Merger or the transfer of all or substantially all property is allowed if the surviving entity is LS & Co. or if the new entity is organized under U.S. laws, provided no EoD. Permitted investments limited to the greater of USD180 Mil. and 7.5% of CNTA. Asset sales permitted provided they are at FMV, with at least 75% of consideration in cash (or purchaser assumes company’s liabilities). The proceeds may be used to repay senior debt or reinvest in business within 360 days. Excess proceeds above USD50 Mil. must be used to redeem the notes. Sale leasebacks need to meet the limitations on liens, debt incurrence and asset disposition.

None.

Merger or the transfer of all or substantially all property is allowed if the surviving entity is LS & Co. or if the new entity is organized under U.S. laws, provided no EoD.

Sale leasebacks subject to lien restriction. Asset sales permitted provided they are at FMV, with at least 75% of consideration in cash (or purchaser assumes company’s liabilities). The proceeds may be used to repay senior debt or reinvest in business within 360 days. Excess proceeds above USD100 Mil. must be used to redeem the notes. Sale leasebacks need to meet the limitations on liens, debt incurrence and asset disposition.

FCCR − Fixed-charge coverage ratio. A/R − Accounts receivable. CNTA – Consolidated net tangible assets. BV – Book value. EoD − Event of default. FMV − Fair market value. MAC − Material adverse change. MW − Make-whole. Continued on next page. Source: Company filings, Fitch Ratings.

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256

Leveraged Finance Bond Covenant Summary — Levi Strauss & Co. (Continued) Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Callability/Equity Clawback

Covenant Suspension

RP Basket: 50% of consolidated net RP Basket: None. income plus 100% of proceeds from equity Notable Permitted RPs: None. issuance. Notable Permitted RPs: 1) USD617 Mil. (RP availability under 7 5/8% notes due 2020); 2) annual share repurchases of up to USD25 Mil. or USD50 Mil. including carryover; 3) general purpose RPs of up to USD75 Mil.; 4) annual dividend following an IPO limited to 6% of IPO proceeds (included in RP basket).

RP Basket: 50% of consolidated net income plus 100% of proceeds from equity issuance. Subject to FCCR > 2.0x Notable Permitted RPs: 1) USD30 Mil. in any fiscal year or USD60 Mil. including carryover for share repurchases; 2) general purpose of USD150 Mil.; 3) additional payment allowed as long as consolidated total leverage ratio is less than 2.5x

No. Yes, exceeding USD50 Mil.

2017  103.438% 2018  102.292% 2019  101.146% 2020 and thereafter  100.000% Covenants related to debt incurrence, RP and asset sales are suspended if upgraded to investment grade by both Moody’s and S&P.

No. Yes, exceeding USD25 Mil. None. Redeemable at the greater of par and or MW + 25 bps thereafter.

—

2020  102.500% 2021  101.667% 2022  100.833% 2023 and thereafter  100.000%. Covenants related to debt incurrence, RP and asset sales are suspended if upgraded to investment grade by both Moody’s and S&P.

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Leveraged Finance Appendix D Financial Summary — Levi Strauss & Co. 12 Months 11/27/11 11/25/12 11/24/13 11/30/14 ($ Mil.) Profitability (%) Operating EBITDAR Margin 13.6 14.1 16.7 16.6 Operating EBITDA Margin 9.9 10.0 12.6 12.5 Operating EBIT Margin 7.4 7.4 10.1 10.2 FFO Margin 3.9 5.4 8.7 6.7 FCF Margin (3.2) 9.3 6.3 2.7 Return on Capital Employed 14.4 14.2 20.1 22.1 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 5.3 5.0 4.0 3.5 FFO-Adjusted Leverage 7.0 5.7 4.3 4.5 FCF/Total Adjusted Debt (%) (4.4) 13.3 9.5 4.7 Total Debt with Equity Credit/ a Operating EBITDA 4.3 3.7 2.6 2.1 Total Secured Debt/Operating EBITDAa 0.2 0.0 0.0 0.0 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 73.5 5.1 6.1 7.9 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 5.0 4.5 3.6 3.3 FFO-Adjusted Net Leverage 6.6 5.2 3.9 4.2 Total Net Debt/(CFFO – Capex) (13.8) 3.3 3.9 6.5 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 2.1 2.1 2.5 2.6 Operating EBITDA/Interest Paida 3.6 3.6 4.8 5.4 FFO Fixed-Charge Coverage 1.6 1.8 2.3 2.0 FFO Interest Coverage 2.4 2.9 4.3 3.9 CFFO/Capex 0.0 6.3 4.5 3.2 Debt Summary Total Debt with Equity Credit 1,976 1,731 1,557 1,236 Total Adjusted Debt with Equity Credit 3,373 3,220 3,113 2,780 Lease-Equivalent Debt 1,397 1,489 1,556 1,544 Other Off-Balance Sheet Debt — — — — Interest (Paid) (129) (129) (122) (110) Implied Cost of Debt (%) 6.7 6.9 7.4 7.9 Cash Flow Summary FFO 180 251 406 319 Change in Working Capital (Fitch Defined) (178) 280 5 (86) CFFO 2 531 411 233 Non-Operating/Nonrecurring Cash Flow — — — — Capital (Expenditures) (131) (84) (92) (73) Common Dividends (Paid) (20) (20) (25) (30) FCF (149) 427 294 130 Acquisitions and Divestitures — — — — Net Debt Proceeds 109 (224) (199) (306) Net Equity Proceeds (0) (1) (6) (5) Other Investing and Financing Cash Flows (25) (1) (7) (10) Total Change in Cash and Equivalents (65) 202 83 (191) Liquidity Readily Available Cash and Equivalents 137 271 326 199 Availability Under Committed Credit Lines 495 616 635 790 Not Readily Available Cash and Equivalents 68 135 163 99 Working Capital Net Working Capital (Fitch Defined) 551 284 308 654 Trade Accounts Receivable (Days) 51.1 39.6 34.8 37.0 Inventory Turnover (Days) 90.4 78.6 94.5 91.2 Trade Accounts Payable (Days) 30.3 34.2 39.8 35.6 Capital Intensity (%) 2.8 1.8 2.0 1.5

12 Three Months Months LTM 3/1/15 5/31/15 8/30/15 11/29/15 11/29/15 2/28/16 5/29/16 8/28/16 8/28/16 Three Months

18.8 14.2 11.7 (1.6) 1.6 20.9

13.8 9.0 6.6 1.2 (0.7) 21.1

18.0 13.8 11.6 11.3 (1.4) 21.7

18.8 15.1 13.0 14.4 5.6 24.1

17.5 13.2 10.9 6.9 1.5 24.1

18.2 13.6 11.3 9.9 1.5 24.4

13.6 8.8 6.3 5.8 (1.9) 24.1

18.8 14.8 12.6 11.2 (2.4) 24.1

17.5 13.3 11.0 10.6 0.9 24.1

3.5 5.0 4.9

3.7 5.6 4.8

3.7 5.2 4.5

3.4 4.7 2.4

3.4 3.8 2.4

3.5 3.7 1.9

3.4 3.6 1.5

2.0 0.0

2.2 0.0

2.0 0.2

1.9 0.1

2.0 0.2

1.9 0.1

7.6

7.3

7.5

8.8

8.6

9.0

9.2

3.3 4.7 5.8

3.3 5.0 5.1

3.3 4.7 5.4

3.2 4.3 8.2

3.2 3.5 8.1

3.2 3.4 8.5

3.1 3.4 9.6

2.5 5.1 1.8 3.1 3.2

2.6 5.8 1.7 3.2 3.2

2.6 6.0 1.8 3.6 2.9

2.9 7.6 2.1 5.0 2.1

2.9 7.6 2.6 6.6 2.0

3.0 8.5 2.8 7.9 2.1

3.1 8.9 2.8 8.1 1.9

1,137 2,677 1,540 — (110) 8.1

1,203 2,743 1,540 — (93) 7.0

1,209 2,749 1,540 — (93) 7.0

1,165 2,705 1,540 — (78) 6.5

1,113 2,653 1,540 — (77) 6.8

1,198 2,738 1,540 — (69) 5.7

1,141 2,681 1,540 — (68) 5.8

(16)

129

186

311

105

132

482

54 38 — (21) — 16 — (97) —

52 65 — (22) (50) (7) (0) 85 (2)

(121) 8 — (23) 0 (15) (2) 5 (0)

(78) 108 0 (36) 0 72 0 (31) (2)

(92) 218 0 (102) (50) 66 (2) (39) (4)

(59) 46 — (31) — 15 0 (74) —

(2) 57 — (16) (60) (19) 17 83 (1)

(133) (0) — (28) 0 (28) (0) (66) (0)

(271) 211 0 (111) (60) 40 17 (89) (3)

(15) (96)

7 82

1 (12)

7 46

(0) 20

11 (47)

9 88

7 (88)

34 (1)

135 791

108 674

112 549

212 659

181 740

240 666

181 665

106

120

591 31.5 103.1 34.3 2.0

541 29.0 107.7 42.2 2.2

638 34.6 106.8 44.1 2.0

427 34.9 87.1 34.2 2.8

427 40.5 99.5 39.1 2.3

394 33.1 134.1 48.4 2.9

431 29.8 143.9 51.4 1.6

570 33.8 129.3 41.0 2.3

570 35.8 140.5 44.5 2.4

a EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Levi Strauss & Co. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital Return on Assets Capex/Depreciation

12 Three Months Months LTM 3/1/15 5/31/15 8/30/15 11/29/15 11/29/15 2/28/16 5/29/16 8/28/16 8/28/16 Three Months

11/27/11 11/25/12 11/24/13 11/30/14 4,674 6.0 637

4,610 (1.4) 649

4,682 1.6 784

4,754 1.5 788

1,055 (6.6) 198

1,012 (6.4) 139

1,142 (1.1) 206

1,285 (7.4) 242

4,494 (5.5) 785

1,057 0.1 192

1,012 (0.1) 137

1,185 3.8 223

4,538 (1.3) 795

637 463

649 463

784 589

788 595

198 150

139 91

206 158

242 194

785 593

192 144

137 89

223 175

795 602

463 345

463 340

589 474

595 485

150 123

91 67

158 133

194 167

593 491

144 119

89 64

175 150

602 500

47.2 (30.9) 4.0 12.1 28.6 4.2 110.9

47.7 (30.4) 4.6 10.7 32.2 4.5 68.4

50.2 (30.7) 3.9 9.2 37.8 7.3 79.3

49.4 (30.9) 4.0 10.2 46.3 3.6 67.0

50.9 (3.9) 4.0 12.0 47.9 3.5 79.9

49.4 (6.2) 3.8 9.7 43.6 3.5 91.7

50.2 (5.7) 3.4 8.3 43.4 3.6 93.1

51.2 (10.3) 3.7 9.3 43.7 7.3 135.0

50.5 (31.6) 3.7 9.3 43.7 7.3 100.3

53.0 (5.2) 3.0 8.3 45.0 8.3 122.4

51.1 (6.9) 2.8 7.8 41.3 8.8 64.9

50.0 (4.9) 2.6 8.2 41.2 9.9 108.2

a EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

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Leveraged Finance Retailing / U.S.A.

The Michaels Companies, Inc. Credit Profile Credit Opinion

Credit Profile Summary

The Michaels Companies, Inc.

Category Leader: The Michaels Companies, Inc. is the leader in arts and crafts retail. The company has been resilient to discounters given the breadth/depth of merchandise required in this category and customer loyalty-driving initiatives such as in-store classes. Michaels has succeeded against online retailers due to the low average ticket, which makes shipping economics difficult, and customers’ desire to handle products before purchase. Michaels’ customer service focus has also helped it defend share from both of these threats.

Long-Term Issuer Default Credit Opinion

b+*/stable

Michaels Stores, Inc. Long-Term Issuer Default Credit Opinion Senior Secured Credit Facility Credit Opinion Senior Secured Term Loan Credit Opinion

b+*/stable bb+*/rr1* bb*/rr2*

Senior Subordinated Notes

b–*/rr6*

Financial Data The Michaels Companies, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comparable Store Sales (%)a Real Estate Owned No. of Stores

FYE LTM 1/30/16 10/29/16 4,912.8 5,128.9 850.4 846.9 17.3 16.5 379.6 516.3 5,897.0 6,101.3 4.8

4.9

2.4

2.0

1.8 0 1,345

(0.2) 0 1,368

Comparable store sales for the LTM reflect the performance for the nine months ended Oct. 29, 2016.

Analysts JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Recent Traffic Challenges: Michaels’ comparable store sales (comps) turned negative in the second half of 2016 due to a choppier than expected retail environment and traffic challenges similar to other retail categories. The company also reported an increased level of promotional activity industrywide. While the craft category has seen strong growth over the last several years, these recent traffic trends could indicate a shift in consumer spending toward other entertainment/hobby categories and/or increased housing and healthcare costs. Near-Term EBITDA Headwinds: Fitch Ratings expects comps to be flat to modestly negative in 2016 and 2017 as traffic challenges continue to persist. EBITDA margins, which expanded to 17.3% in 2015 from 15.8% in 2010 on improved sales productivity and fixed-cost leverage, are expected to be 15.5%–16.0% due to gross margin impact from expected promotional activity. Fitch expects EBITDA to decline to about $810 million in 2017, but trend back toward the mid-$800 million range thereafter as comps return to the low single digits. Reduced Leverage Post 2014 IPO: Michaels redeemed $181 million of the 7.50%/8.25% payment-in-kind notes in May 2015 and made a voluntary payment of $150 million on the term loan in December 2015, reducing adjusted leverage to 4.8x in 2015 from 5.9x in 2013. Fitch expects leverage to remain around 5.0x over the next two to three years, assuming no debtfinanced share buybacks or acquisitions. Good FCF Profile: Michaels consistently generated positive FCF over the last four years, supported by strong EBITDA growth and moderate capex needs. Fitch expects FCF to be in the $350 million–$400 million range and anticipates it will be applied to share repurchases. Michaels could also use its FCF and/or cash on the balance sheet for additional moderatesized acquisitions, such as the 2016 acquisition of Lamrite West, Inc. for $150 million. Comfortable Liquidity and Maturities: Liquidity is solid, with $150 million of cash and $793 million in revolver availability at the end of third-quarter 2016. The maturity schedule is light, with the nearest maturity being the subordinated notes in 2020. Given the company’s category leadership and positive operating trends, Fitch believes refinancing risk is low.

Credit Profile Drivers Positive Drivers: Comps returning to the positive low single-digit range and a high-teens EBITDA margin leading to leverage sustained under 5.0x would be a positive credit profile driver. Negative Drivers: Negative credit profile drivers include increasing operating or competitive pressures that could cause comps to be sustained in the negative low single digits, leading to margin pressure and a weakening of cash flow and credit metrics, with adjusted leverage sustaining above the mid-5.0x range. 260

Leveraged Finance Fitch Base Case Assumptions — The Michaels Companies, Inc. ($ Mil.) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

2015A

2016F

2017F

2018F

4,913 3.7 1.8 850 17.3 (42) 504 (124) 2.5 (1) 380 (22) 2,792 5,897 4.8

5,205 6.0 (0.7) 867 16.7 (33) 500 (120) 2.3 — 380 (200) 2,767 6,089 4.7

5,200 (0.1) 0.0 813 15.6 (4) 477 (120) 2.3 — 357 (200) 2,742 6,197 5.0

5,314 2.2 1.0 837 15.7 (9) 490 (122) 2.3 — 368 (200) 2,717 6,310 4.9

Comments — — — — — — — — — — — — — Reflects increased rent expense. Assumes no increase in book debt.

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Michaels is the largest national arts and crafts specialty retailer, with 1,221 stores in the U.S. and Canada as of Oct. 29, 2016. The merchandise offering includes a wide assortment of products for general and children’s crafts (51% of 2015 sales), home décor and seasonal (20%), framing (19%) and papercrafting (10%). The company also operates 112 Aaron Brothers stores, focused on framing and art supplies. With the February 2016 acquisition of Lamrite West, Michaels now owns 35 Pat Catan’s stores, which are located primarily in Ohio and are larger than Michaels stores, and the international wholesale business under the Darice brand name. Darice’s position as a large supplier to craft industry participants such as Hobby Lobby Stores, Inc.; Wal-Mart Stores Inc.; and Target Corp. provides Michaels unique insight into the competitive landscape that lacks meaningful public disclosure. Management believes the combined U.S. and Canadian markets can support a total footprint of 1,500 Michaels stores, or 300 units above its current base. Fitch projects the company will continue to add to its store base in the low single-digit percentage range annually. Substantially all stores are leased, with the majority having lease terms of about 10 years. The company completed an IPO in July 2014, but Bain Capital Partners, LLC and The Blackstone Group together still own approximately 45% of the outstanding shares after a series of secondary offerings.

Traffic Trends Indicate General Resiliency Michaels’ business profile is highly resilient, as customers continue to pursue their low-ticket hobbies, home décor/seasonal projects and items needed for kids’ school tasks. These types of traffic-generating occasions tend to be recurring and skew toward the nondiscretionary. A healthy long-term trend in comps is a function of the company’s merchandise offering, strong brand name and loyal customer base. Comps sales over the past several years were uneven due to product popularity trends that created some volatility. More recently, a choppier than expected retail environment and traffic challenges similar to other retail categories has also affected comps. Based on the industry insight gained from the Darice wholesale business, the company believes High-Yield Retail Checkout January 31, 2017

261

Leveraged Finance the softness in the craft industry was more broad-based and affected a number of players. One area of moderate concern is the level of promotional activity undertaken by Michaels’ competitors. Promotions have not been effective at driving sales in this sector, making this a potential concern if sustained longer term. Fitch expects these challenges to persist in 2017 and expects Michaels to report flat to modestly negative comps in 2016 and 2017. The company saw strong EBITDA margin expansion between 2008 and 2015 to 17.3% from 12.6%, primarily on gross margin expansion. Enhanced private-label offerings and an emphasis on direct import were key drivers, in addition to fixed-cost leverage. Private brands were 53% of total sales in 2015, and are expected to grow from that level on the back of the Lamrite West acquisition. EBITDA margin contracted slightly to 16.5% in the LTM ended Oct. 29, 2016, driven by gross margin declines and expense deleverage on lower comps. Fitch expects EBITDA to be around 15.5%–16.0% over the next two to three years based on lower comps and gross margin impact from promotional activity.

Breakdown Across Stores, Geography and Merchandise ($ Mil.)

2009

2010

2011

2012

2013

2014

2015

LTM 10/29/16

Total Net Sales YoY Growth (%)

3,888 1.9

4,031 3.7

4,210 4.4

4,408 4.7

4,570 3.7

4,738 3.7

4,913 3.7

5,129 6.0

Sales Contribution by Category (%) General Crafts 44.0 Home Décor and Seasonal 21.0 Framing 18.0 Papercrafting 17.0 Total 100.0

44.4 20.0 19.7 15.9 100.0

45.3 19.9 19.1 15.7 100.0

47.2 20.2 19.0 13.6 100.0

51.9 19.6 18.9 9.6 100.0

50.8 20.5 19.1 9.6 100.0

50.6 20.4 18.9 10.1 100.0

— — — — —

(2.9) 3.2 0.2

1.2 1.3 2.5

1.2 2.0 3.2

0.7 0.8 1.5

3.3 (0.4) 2.9

N.A. N.A. 1.7

N.A. N.A. 1.8

N.A. N.A. —

3,572 316 3,888

3,673 358 4,031

3,825 385 4,210

3,989 419 4,408

4,132 438 4,570

4,277 461 4,738

4,473 439 4,913

4,682 447 5,129

1.6 5.3

2.8 13.3

4.1 7.5

4.3 8.8

3.6 4.5

3.5 5.3

4.6 (4.7)

10.7 (1.9)

Sales Contribution by Geography (%) U.S. 92.0 Canada 8.0 Total 100.0

91.0 9.0 100.0

90.9 9.1 100.0

90.5 9.5 100.0

90.4 9.6 100.0

90.3 9.7 100.0

91.1 8.9 100.0

91.3 8.7 100.0

Store Count Michaels Stores YoY Change

1,023 14

1,045 22

1,064 19

1,099 35

1,136 37

1,168 32

1,196 28

1,221 25

152 (9)

137 (15)

134 (3)

125 (9)

121 (4)

120 (1)

117 (3)

112 (5)

Pat Catan’s Stores YoY Change

— —

35 —

Total Store Count

1,175

1,182

1,198

1,224

1,257

1,288

1,313

1,368

Comps (%) Ticket Transactions Total Net Sales by Geography U.S. Canada Total YoY Growth (%) U.S. Canada

Aaron Brothers Stores YoY Change

YoY – Year-over-year. Comps – Comparable store sales. N.A. – Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance Dominant Player in a Niche, Fragmented Category Michaels competes with other specialty retailers, including A.C. Moore Arts & Crafts (over 130 stores), Jo-Ann Fabric and Craft (850 stores) and Hobby Lobby (over 700 stores), with the greatest merchandise overlap in that order. The company also competes with discounters WalMart and Target, particularly for high-turning items that may be more price sensitive, such as glue or other basic supplies. However, Fitch does not believe mass merchants are a pressing competitive threat, because they concentrate on a small number of high turning SKUs and do not offer the depth and breadth of assortment found at a Michaels store. Mom-and-pop retailers similarly cannot match Michaels’ broad selection. Michaels also competes with online retailers, including Amazon.com. Fitch believes Michaels is insulated from online competition due to the low average ticket of purchases — making shipping economics challenging — and the in-person nature of many purchases, both for product inspection and to expedite the transaction.

2017 Outlook Given challenging traffic trends and increased promotional activity in 2016, Fitch expects some of these dynamics to persist into 2017, reducing potential upside on comps and margins. Fitch expects Michaels’ comps to be flat to modestly negative in 2016 and 2017. Fitch expects comps to be in the positive low single digits beyond 2017 and expects EBITDA to decline around 6% to $810 million in 2017 from an expected $860 million in 2016, before returning to the around mid-$800 million in 2018. Fitch expects annual FCF to be in the $350 million– $400 million range, and anticipates the company will direct FCF toward share repurchases. Adjusted leverage is expected to remain at around 5.0x over the next 24–36 months.

Liquidity and Debt Structure Liquidity is solid, with $150 million of cash and $793 million in revolver availability as of Oct. 29, 2016. The nearest maturity is in 2020, when the $510 million subordinated notes come due. Given the company’s category leadership and positive operating trends, Fitch believes ongoing refinancing risk is low. Michaels FinCo, Inc. issued $800 million of holding company (holdco) notes in July 2013, with the proceeds used to fund a cash dividend to the parent’s equityholders. Michaels redeemed $439 million of the holdco notes with proceeds from its IPO in July 2014. The company repaid an additional $180 million of holdco notes during the fourth quarter of 2014, and the remaining $181 million was redeemed in May 2015. In June 2014, Michaels Stores, Inc. (MSI), a subsidiary of Michaels, issued an additional $250 million of 5.875% senior subordinated notes maturing in November 2020. In July 2014, MSI also issued an additional $850 million of debt under its existing term loan facility maturing in January 2020, bringing the total term loan to $2.5 billion. The proceeds from these issues were used to fully redeem the $1 billion of 7.75% senior unsecured notes due 2018, and to pay the make-whole premium. Michaels amended its credit facility in May 2016 to increase the size to $850 million from $650 million and extend the maturity from September 2017 to May 2021. The company amended the term loan facility in September 2016 to extend the maturity to January 2023.

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Leveraged Finance The revolver is subject to a borrowing base consisting of 90% of eligible inventories and receivables, and has a second lien on all other tangible and intangible assets. The term loan has a second-priority interest in inventory and accounts receivable, and a first lien on all other assets. There are no maintenance covenants.

Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $850 Mil. ABL Revolver due 5/27/21 Senior Secured Term Loan due 1/28/23 Total Secured Debt

— 2,269.7 2,269.7

— 81.6 81.6

Unsecured Debt 5.875% Sr. Subordinated Notes due 12/15/20 Total Unsecured Debt Total Debt

510.0 510.0 2,779.7

18.4 18.4 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 24.6 24.6 24.6 534.6 24.6 2,164.4

Cash Revolver Availability Total

150.0 792.7 942.7

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis is based on a going concern value of $2.6 billion, versus approximately $1.1 billion from an orderly liquidation of assets, which are composed primarily of inventory. Post-default EBITDA was estimated at $475 million, assuming approximately onethird of stores close, productivity reductions at the remaining stores and minimal sales recapture online. After deducting 10% for administrative claims, the remaining $2.3 billion would lead to outstanding recovery prospects (91%–100%) for the ABL revolver, which is assigned a ‘bb+*/rr1*’ and superior recovery prospects (71%–90%) for the term loan lenders, which is assigned a ‘bb*/rr2*’. The unsecured creditors would be expected to have poor recovery prospects (0%–10%) and thus, the notes are assigned a ‘b–*/rr6*’.

Recovery Analysis — The Michaels Companies, Inc. ($ Mil., Except Where Noted: Credit Opinion: b+*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Projected Post-Default EBITDA GC EV Multiple (x) Distressed EV on GC Basis

475 5.5 2,610

Cash A/R Inventory Net PPE Total LV

Available to Creditors

Book Value Advance Rate (%) 150.0  1,394.1 412.2 —

  975.9 82.4 1,058.3

0 80 50 20 —

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims Distribution of Value Secured Priority

2,610 261 2,349

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

595.0 2,269.7

595.0 1,756.3

100 77

rr1* rr2*

+3 +2

bb+* bb*

Sr. Secured Facilitya Sr. Secured Term Loan Concession Payment Availability Table

Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Unsecured Priority Sr. Unsecuredb Sr. Subordinated Subordinated

2,349.3 2,349.3 

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

129.4 510.0 —

  

 rr6* 

 –2 

 b–* 

Fitch assumes the $850 Mil. credit facility is 70% drawn in a distressed scenario. bReflects estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — The Michaels Companies, Inc. ($ Mil., As of Oct. 29, 2016) Price T. Rowe Associates

Bain

11%

Public Shareholders

26%

Blackstone

42%

Management and Directors

19%

The Michaels Companies, Inc. (CO — b+*/stable)

Michaels FinCo Holdings, LLC

Michaels Funding, Inc.

Michaels FinCo, Inc.

Michaels Stores, Inc. (CO — b+*/stable) Debt Issue $850 Mil. Senior Secured ABL Facility Senior Secured Term Loan 5.875% Senior Subordinated Notes Total

Nonguarantor Subsidiaries

Maturity 5/27/21 1/28/23 12/15/20 —

Amount — 2,270 510 2,780

CO bb+*/rr1* bb*/rr2* b–*/rr6* —

Subsidiary Guarantors

CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Michaels Stores, Inc. Overview Borrower Document Date and Location

Description of Debt

Maturity Date Amount Ranking Security Guarantee Financial Covenants Fixed-Charge Coverage

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Event

Key Definitions

Pricing Coupon Type/Index Pricing Grid

Michaels Stores, Inc. Second Amended and Restated Credit Agreement dated 9/17/12 (exhibit 10.1 to 8-K filed 9/18/12), previously amended and restated as of 2/15/10. First Amendment to Second Amended and Restated Credit Agreement dated 6/6/14 (exhibit 10.2 to 8-K filed 6/11/14). Third Amended and Restated Credit Agreement dated 5/27/16 (exhibit 10.1 to 8-K filed 5/27/16). Senior secured asset-based revolving credit facility subject to a borrowing base equal to the sum of (i) 90% of eligible credit card receivables and debit card receivables, plus (ii) 85% of eligible trade receivables, plus (iii) 90% (increasing to 92.5% for the period commencing Oct. 1 and ending Dec. 31 of each year) of the appraised net orderly liquidation value of eligible inventory, plus (iv) 90% (increasing to 92.5% for the period commencing Oct. 1 and ending Dec. 31 of each year) of the lesser of (x) the appraised net orderly liquidation value of inventory supported by eligible letters of credit and (y) the face amount of eligible letters of credit. 5/27/21 $850 Mil. Senior secured. Secured by a first lien on A/R and inventory, second lien on all other tangible and intangible assets; second-priority pledge of 100% of stock of U.S. subsidiaries and 65% of foreign subsidiaries. Guaranteed by all existing subsidiaries on a senior secured basis.

Consolidated fixed-charge coverage ratio shall be at least 1.0x if excess availability of the revolver is less than the greater of (i) 10% of loan cap (lesser of then borrowing base or total commitments), and (ii) $50 Mil. for 30 consecutive days.

No cap on subordinated debt and other unsecured non-amortizing debt provided the payment conditions are satisfied (please refer to definition at the bottom of this page); no cap on unsecured debt owed to the sponsor and/or other stockholders of the parent and their respective affiliates provided payment in cash of principal or interest does not exceed 10% per annum prior to the revolver maturity date; no cap on holding company debt; general carveout of $300 Mil. General carveout of $50 Mil. Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions.

A CoC is defined as the acquisition of more than 50% of voting stock by nonpermitted holders and constitutes an event of default. General carveout of $50 Mil. Carveouts: Store closures and related inventory dispositions are limited to 10% in any fiscal year and to 25% in aggregate; dispositions of property other than inventory, accounts and IP are limited to $250 Mil. in any fiscal year or $500 Mil. in aggregate, provided no event of default.

Carveouts: Share repurchase from parent no greater than $45 Mil. per calendar year. The unused amounts can be carried over but no greater than $90 Mil. per calendar year. RPs are made to the holding company with proceeds from permitted holding company debt.

Yes, for material indebtedness of more than $75 Mil. (no materiality threshold for senior subordinated notes, and the term loan facility). N.A. Yes. None. The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility upon occurrence of a cash dominion event, which means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of 10.0% of loan cap or $50 Mil. for five consecutive days. Payment Conditions: With respect to a specified payment (a) no event of default exists or would arise therefrom; (b) pro forma availability will be equal to or greater than 12.5% of the loan cap for each of the six fiscal months following, and (c) either revolver availability immediately following the specified payment is greater than 15% or pro forma consolidated fixed charge coverage ratio is no less than 1.0x.

Floating based off LIBOR or PR. ABL Facility: LIBOR + 125 bps−150 bps or PR + 25 bps−50 bps, depending on average daily availability. Commitment Fee: 0.250%.

A/R − Accounts receivable. N.A. – Not applicable. MAC − Material adverse change. PR – Prime rate. ABL − Asset-based loans. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Michaels Stores, Inc. Overview Borrower Document Date and Location

Description of Debt Maturity Date Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Michaels Stores, Inc. Amended and Restated Credit Agreement dated 1/28/13 (exhibit 10.1 to 8-K filed 2/1/13). First Amendment to Amended and Restated Credit Agreement dated 6/10/14 (exhibit 10.3 to 8-K filed 6/11/14). Second Amendment to Amended and Restated Credit Agreement dated 9/28/16 (Exhibit 10.1 to 8-K filed 9/30/16). Senior secured term loan. 1/28/23 $2,270 Mil./$2,436 Mil. Senior secured. Secured by a first lien on all other tangible and intangible assets, first-priority pledge of 100% of stock of U.S. subsidiaries and 65% of foreign subsidiaries, second lien on A/R and inventory. Guaranteed by all existing subsidiaries on a senior secured basis.

Ratio Debt: The borrower may incur debt if the pro forma fixed-charge coverage ratio is greater than 2.0x provided debt issued by restricted subsidiaries that are not guarantors shall not exceed $250 Mil. at any time. Carveouts: ABL loan up to the greater of $1.2 Bil. or 90% of A/R plus 90% of inventory (at net appraised orderly liquidation value); incremental term loan commitment of $500 Mil. provided pro forma consolidated secured debt ratio is no more than 3.25x; debt to finance property or equipment purchase up to the greater of $125 Mil. and 6.5% of total assets; foreign subsidiary debt up to the greater of $125 Mil. and 6.5% of total assets of the subsidiary; $150 Mil. for debt assumed in an acquisition or incurred to refund debt for an acquisition; general carveout of $200 Mil. Liens securing new indebtedness permitted under debt incurrence covenant provided no event of default and pro forma consolidated secured debt ratio is no greater than 3.25x; general carveout of $50 Mil. Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions.

A CoC is defined as the acquisition of more than 50% of voting stock by nonpermitted holders and constitutes an event of default. Investments in similar businesses having aggregate fair market value up to the greater of $125 Mil. and 6.5% of total assets; other investments not to exceed the greater of $150 Mil. and 7.9% of total assets. Permitted as long as at least 75% of total consideration is in cash and noncash consideration is no more than 7.5% of total assets.

RP Basket: Assuming no event of default and a pro forma fixed-charge coverage ratio of at least 2.0x, 50% of consolidated net income beginning Oct. 28, 2012, plus 100% of proceeds from equity issuances. Carveouts: There is a general carveout of $100 Mil.; investment in unrestricted subsidiaries having a fair market value no greater than $100 Mil. is permitted; dividends post-IPO of up to 6% of IPO proceeds; share repurchases up to $30 Mil. annually, and $60 Mil. post-IPO, with unused amounts carrying forward to succeeding calendar years, subject to a maximum of $60 Mil. ($120 Mil. post-IPO) in any given calendar year; and other restricted payments so long as no event of default has occurred and the consolidated total leverage ratio is less than or equal to 3.75x.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, for material indebtedness (more than $75 Mil.). N.A. Yes. None. None. 50% of total commitments.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

 —  

Principal Repayments Mandatory/Tax Prepayment

Callability/Optional Prepayment Pricing Coupon Type/Index Pricing Grid

50% of excess cash flow, with a stepdown to 25% if total leverage is less than 6.0x, then 0% if total leverage is less than 5.0x; 100% of net proceeds from asset sale subject to company’s reinvestment rights; 100% of net proceeds from debt issuance other than debt permitted under the credit facilities. Optional prepayment with or without prepayment penalty.

Floating based off LIBOR or BR. Term Loan: LIBOR + 275 bps or BR + 175 bps (incremental term loan priced at L + 300 with 1% LIBOR floor); term loan pricing is subject to a stepdown of 25 bps if consolidated secured debt ratio is less than 1.50x.

A/R − Accounts receivable. ABL − Asset-based loans. N.A. – Not applicable. MAC − Material adverse change. BR − Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Michaels Stores, Inc. Covenant Issuer(s) Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability/Optional Prepayment

Covenant Suspension

Description Michaels Stores, Inc. Indenture dated 12/19/13 (Exhibit 4.1 of 8-K filed 12/19/13) Supplemental Indenture dated 6/5/14 2014 (Exhibit 10.1 to 8-K filed 6/11/14) 5.875% senior subordinated notes. $510 Mil. Dec. 15, 2020 The notes are the company’s and the guarantors’ unsecured senior subordinated obligations. Unsecured. The notes are guaranteed, jointly and severally, fully and unconditionally, on an unsecured senior subordinated basis, by each of the company’s subsidiaries that guarantee indebtedness under the company’s senior secured term loan credit facility and senior secured revolving credit facility.

Company may issue debt or preferred stock if the pro forma fixed-charge coverage ratio is more than or equal to 2.0x for the company and restricted subsidiaries; debt of nonguarantor subsidiaries limited to $275 Mil; debt of nonguarantor restricted subs limited to greater of $125 Mil. or 8% of total assets; debt to finance property or equipment purchase limited to $125 Mil. or 8% of total assets; debt assumed in an acquisition or incurred to refund debt for an acquisition limited to $150 Mil. Issuer may not incur any lien (except permitted liens) that secures obligations under any indebtedness ranking pari passu with or subordinated to the notes on any asset or property of the issuer. There is a general carveout of $50 Mil.

A CoC is defined as the acquisition of more than 50% of voting stock and it triggers an offer to purchase the notes at 101. Carveouts for Permitted Investments: Investments in similar businesses of up to the greater of $150 Mil. and 9.5% of total assets; loans and advances to officers/employees up to $15 Mil. Standard restrictions on asset sales of at least $30 Mil.

Ratio Test: RPs are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x fixed-charge coverage ratio debt test. RP Basket: Cumulative sum of 50% consolidated net income commencing July 30, 2006 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: Share repurchases up to $30 Mil. in any year ($60 Mil. post-IPO), with unused amounts carried over to succeeding years of up to $60 Mil. ($120 Mil. post-IPO); dividend payment subject to fixed-charge coverage ratio of at least 2x; investments in unrestricted subs of up to $100 Mil.; general carveout of $100 Mil.; any restricted payment so long as the pro forma consolidated total leverage ratio is less than or equal to 3.25x.

None. Yes, on debt of more than $85 Mil. None. Until Dec. 15, 2016, the company may use the proceeds of an equity offering to redeem up to 40% of the principal amount at 105.875% of principal plus accrued and unpaid interest. Redeemable, at the company’s option, in whole or in part, prior to 12/15/16 at the principal amount plus the applicable premium. On and after Dec. 15, 2016, the company may redeem all or part of the notes at the following prices beginning on dates set forth below: 12/15/16 102.938% 12/15/17 101.469% 12/15/18 and thereafter 100.000%. Covenants related to debt incurrence, restricted payments, disposition of assets, CoC and mergers will be suspended if (a) the notes have investment-grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — The Michaels Companies, Inc. 12 Months

12 Months

Three Months

2/1/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15 10/31/15

Operating EBITDAR Margin

24.2

24.3

24.5

24.6

25.2

22.9

Operating EBITDA Margin

16.0

16.3

16.4

16.6

16.2

13.0

Operating EBIT Margin

13.6

14.1

14.3

13.6

FFO Margin

9.1

8.6

8.5

9.6

FCF Margin

7.1

4.0

(9.4)

—

Total Adjusted Debt/Operating EBITDARa

2.7

FFO-Adjusted Leverage

3.0

Three Months

LTM

1/30/16

4/30/16

24.4

27.1

25.2

25.0

21.1

23.3

24.5

16.1

21.3

17.3

16.0

11.3

14.8

16.5

10.2

13.6

19.6

15.0

13.5

8.6

12.5

14.3

7.2

(3.9)

16.6

18.6

11.1

7.4

0.4

11.2

10.5

6.4

(10.3)

(4.0)

5.8

27.5

7.7

(3.4)

(2.3)

9.5

10.1

76.5

64.4

66.7

65.4

67.8

65.9

68.8

67.8

63.6

5.5

5.9

5.3

5.1

5.0

4.8

4.9

6.0

7.1

5.8

6.1

5.7

5.5

5.1

5.3

10.9

3.0

(6.4)

4.9

4.7

5.6

4.7

6.4

7.4

7.6

8.5

Total Debt with Equity Credit/Operating EBITDAa

—

4.2

4.9

4.0

3.7

3.6

3.3

3.2

3.3

Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex)

—

2.1

3.1

2.8

3.0

2.9

2.7

2.6

2.7

($ Mil.)

7/30/16 10/29/16 10/29/16

Profitability (%)

Return on Capital Employed Gross Leverage (x)

FCF/Total Adjusted Debt (%)

4.3

11.1

9.4

9.1

9.2

8.4

9.0

7.7

7.2

7.1

6.6

Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa

—

5.4

5.7

5.0

5.1

4.9

4.4

4.7

4.8

FFO-Adjusted Net Leverage

—

6.0

6.8

5.4

5.9

6.0

5.6

5.2

5.4

5.1

5.2

Total Net Debt/(CFFO – Capex)

—

17.1

10.3

9.1

9.7

8.5

9.9

6.3

5.8

5.2

Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a

1.9

1.8

2.0

1.9

2.1

2.2

2.3

2.4

2.3

2.1

2.0

Operating EBITDA/Interest Paida

3.3

3.0

4.1

3.4

4.4

5.3

5.6

6.6

5.6

4.4

4.0

FFO Fixed-Charge Coverage

1.7

1.6

1.7

1.8

1.9

2.0

2.1

2.0

1.9

FFO Interest Coverage

2.9

2.6

3.1

2.9

3.5

4.0

4.6

5.2

4.6

4.1

3.5

CFFO/Capex

3.8

2.4

4.0

3.2

3.1

3.5

3.3

4.1

5.4

5.7

5.4

Debt Summary Total Debt with Equity Credit

—

3,041

3,694

3,149

3,143

2,980

2,950

2,792

2,786

2,822

2,780

Total Adjusted Debt with Equity Credit

2,760

5,881

6,654

6,165

6,248

6,085

6,054

5,897

6,108

6,143

6,101

Lease-Equivalent Debt

2,760

2,840

2,960

3,016

3,105

3,322

—

(201)

(239)

(183)

(234)

(180)

(153)

(146)

(129)

(153)

(195)

(213)

—

5.4

6.8

5.3

4.8

4.6

4.4

5.2

6.7

7.4

385

381

390

456

(39)

194

313

546

137

540

(82)

(15)

(154)

(99)

183

(42)

(110)

(4)

409

299

449

441

(76)

(11)

497

504

(24)

(1)

161

633

Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures

—

(109)

(124)

(112)

(138)

(35)

(28)

(26)

(34)

(124)

(15)

(24)

(44)

(116)

—

(766)

(1)

(0)

300

175

(429)

302

(112)

(39)

462

380

(39)

(24)

117

516

—

(145)

(7)

(151)

(241)

(465)

636

(606)

(11)

(172)

(22)

(154)

(359)

(6)

(42)

(166)

Net Equity Proceeds

—

(3)

452

(28)

(52)

(62)

(30)

(173)

Other Investing and Financing Cash Flows

(7)

(25)

(21)

(9)

—

(5)

(0)

(10)

Total Change in Cash and Equivalents

(315)

183

139

(106)

(202)

295

(238)

(57)

Readily Available Cash and Equivalents

—

239

378

273

111

375

136

112

Availability Under Committed Credit Lines

—

588

591

564

587

586

551

793

Not Readily Available Cash and Equivalents

—

Net Working Capital (Fitch Defined)

—

232

124

119

287

305

349

394

357

363

339

Trade Accounts Receivable (Days)

—

1.9

2.3

2.7

2.6

Inventory Turnover (Days)

—

119.0

119.7

123.3

139.5

158.2

163.5

90.7

124.3

137.8

153.6

165.1

163.3

—

36.3

48.9

57.5

52.0

61.7

71.3

41.4

56.7

48.7

62.0

84.6

83.7

2.6

2.8

2.5

2.9

3.2

2.9

2.3

2.0

2.5

1.3

2.2

3.6

2.3

Net Debt Proceeds

Liquidity

Working Capital

Trade Accounts Payable (Days) Capital Intensity (%) a

EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — The Michaels Companies, Inc. (Continued) 12 Months

12 Months

Three Months

LTM

2/1/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15

10/31/15

1/30/16

4/30/16

7/30/16

10/29/16

4,210

4,408

4,570

4,738

1,078

984

1,168

1,682

4,913

1,159

1,060

1,227

5,129

—

4.7

3.7

2.4

3.8

3.4

4.6

3.7

7.5

7.7

5.0

6.0

Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities

1,018

1,073

1,120

1,164

272

225

286

456

1,239

289

224

286

1,255

1,018

1,073

1,120

1,164

272

225

286

456

1,239

289

224

286

1,255

Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities

673

718

750

787

175

128

189

359

850

186

120

182

847

673

718

750

787

175

128

189

359

850

186

120

182

847

Operating EBIT

572

621

644

676

147

100

159

330

736

156

154

731

($ Mil.) Income Statement Revenue Revenue Growth (%)

Sector-Specific Data Comparable Sales Growth (%)b No. of Stores Gross Margin

3.2

1.5

2.9

1.7

0.3

1.6

1.5

3.1

1.8

0.9

0.7

(2.0)

(0.2)

1,198

1,224

1,257

1,288

1,295

1,304

1,314

1,313

1,352

1,356

1,368

39.9

40.0

39.9

40.1

41.0

37.9

39.8

40.9

40.1

40.4

36.7

38.1

(26.3)

(18.3)

(17.9)

(17.7)

8.6

12.3

6.8

(0.4)

(17.9)

8.0

9.6

8.1

Inventory Turnover

—

3.1

3.0

2.9

2.7

2.3

2.9

2.8

2.7

2.2

Accounts Payable Turnover

—

10.0

7.5

6.3

7.8

6.9

5.2

6.4

8.0

6.6

4.4

Return on Invested Capital (%)

—

132.4

111.2

101.4

95.3

108.8

104.8

105.2

103.4

102.1

101.7

SG&A/Revenues

Return on Assets (%) Capex/Depreciation (%)

—

12.9

13.4

10.8

14.0

18.9

17.5

17.9

18.9

18.3

16.0

107.9

127.8

105.7

124.3

125.1

101.0

90.0

116.4

108.0

49.8

81.8

155.1

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271

Leveraged Finance Retailing / U.S.A.

Neiman Marcus Group LTD LLC Credit Profile Credit Opinion

Credit Profile Summary

Neiman Marcus Group LTD LLC

Comps Declines on Luxury Weakness: Comparable store sales (comps) trends decelerated markedly beginning fiscal (July) 2015 after several years of positive midsingle-digit comps, and have averaged negative 5% over the last five quarters. The decline reflects some weakness in U.S. luxury spending, exacerbated by merchandise systems issues, the adverse impact of the strong dollar on tourist traffic in key gateway markets and the impact of lower crude oil prices on the net worth of many of Neiman Marcus Group LTD LLC’s core customers.

Long-Term Issuer Default Credit Opinion b–*/stable Asset-Based Revolving Credit Facility Credit Opinion bb–*/rr1* Secured Term Loan Credit Opinion b*/rr3* Senior Unsecured Notes and Senior PIK Toggle Notes Credit Opinion ccc*/rr6* The Neiman Marcus Group, LLC Long-Term Issuer Default Credit Opinion Senior Debentures Credit Opinion

b–*/stable b*/rr3*

PIK – Pay-in-kind.

Somewhat Protected Business Model: While the business is expected to remain soft near term, Neiman’s real estate portfolio, customer and vendor relationships, and omnichannel model should enable it to be somewhat insulated, although not immune, from broader market shifts. Weakening sales suggest Neiman is being affected by both direct-to-consumer efforts by vendors and recent entrants to the online-only luxury channel. Neiman will therefore need to incorporate the changing customer shopping behavior into its business model.

EBITDA Trending Toward $500 Million: Fitch expects comps to decline 5% in fiscal 2017 and EBITDA to decline 10% to about $500 million from $560 million in fiscal 2016 and almost $690 million in fiscal 2015. This reflects the sales deceleration, higher markdowns and promotional costs incurred due to lower expected volumes and merchandising system issues. EBITDA could be range-bound around the $500 million level, assuming comps near flat on average.

Financial Data

Fitch expects liquidity to be adequate over the next 24 months. However, should comps remain in the negative midsingle digits into 2018, Neiman could pay in kind interest on $600 million notes due 2021 and pull back on capex — which is heavily weighted toward store remodels — to preserve liquidity.

Neiman Marcus Group LTD LLC FYE LTM 7/30/16 10/29/16 ($ Mil.) Total Revenue 4,949.5 4,863.7 EBITDA 559.0 518.2 EBITDA Margin (%) 11.3 10.7 FCF 9.1 28.9 Total Adjusted Debt 5,674.3 5,856.9 Total Adjusted Debt/EBITDAR (x) 8.4 9.2 EBITDAR/(Interest + Rent) (x) 1.7 1.6 Comparable Store a Sales (%) (4.1) (8.0) Real Estate Owned (%)b 57 57 No. of Storesc 86 86 a

Comparable store sales for the LTM reflect the performance for the three months ended Oct. 29, 2016. bReflects Neiman Marcus full-line stores. The two Bergdorf Goodman stores, Last Call and CUSP stores are 100% leased. cExcludes CUSP stores.

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Negative FCF, but Adequate Liquidity: Neiman had approximately $42 million in cash on hand and $455 million of availability under its asset-based loan (ABL) revolver as of Oct. 29, 2016, reflecting seasonal working capital buildup. Total liquidity is projected at over $600 million at the end of fiscal 2017 (July). Fitch expects FCF to be negative $30 million–$40 million in fiscal 2017 and modestly positive thereafter, assuming annual interest expense of approximately $270 million and gross capex of $200 million, and prior to any material swings in working capital.

Increase in Leverage: Fitch expects Neiman’s adjusted debt/EBITDAR, which was 9.2x in the LTM, to remain around that level given expectations of near-flat EBITDA beyond fiscal 2017, unless comps turn materially positive.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers include the resumption of positive comps, which could lead EBITDA tracking toward the mid-$600 million range. Negative Drivers: Negative credit profile drivers would include the continuation of negative comps trends that indicate longer term business model issues, leading to a significant weakening in cash flow and liquidity.

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Leveraged Finance Fitch Base Case Assumptions — Neiman Marcus Group LTD LLC ($ Mil., Year Ended July) Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

2016A

2017F

2018F

2019F

4,949 (2.9) (4.1) 559 11.3 (15) 311 (301) 6.1 — 9 — 4,719 5,674 8.4

4,746 (4.1) (5.0) 504 10.6 (39) 196 (230) 4.8 — (34) — 4,770 5,756 9.2

4,706 (0.8) (1.2) 494 10.5 (4) 222 (200) 4.2 — 22 — 4,740 5,776 9.3

4,797 1.9 1.6 504 10.5 9 246 (200) 4.2 — 46 — 4,711 5,798 9.1

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Strong Dollar and Weak Crude Oil Prices Hit Luxury Sales Comps trends decelerated markedly over the last five quarters — turning negative 8.0% in the company’s fiscal first quarter ended Oct. 29, 2016 — after sustaining positive midsingle-digit comps for a number of years. This reflects the adverse impact of the strong dollar on international tourist traffic in key gateway markets of South Florida; New York City; Las Vegas; Washington, D.C., San Francisco and Hawaii, which together account for 25% of full-line square footage. Fitch estimates the two Bergdorf stores in New York alone account for approximately 12% of Neiman’s total revenue. Some of Neiman’s customers have been taking advantage of the strong U.S. dollar and are shopping abroad for luxury products. Neiman also believes it is feeling the negative effects of lower crude oil prices, as many of its customers have direct or indirect oil and gas investments. Lower prices for crude oil adversely affect oil company profits and the personal balance sheet and investment portfolios of those who work for or invest in these companies. Neiman operates seven stores, or 20% of its fullline square footage, in its core Texas market. Beyond these cyclical issues, Fitch believes domestic spending on luxury goods has shown signs of a slowdown, given data points from manufacturers and retailers that operate beyond tourist- and oil-affected markets. The slowdown is somewhat counterintuitive given rising asset values in equity, housing and other markets, and could relate to broader shifts in spend toward services, travel and experiences. The lack of a strong fashion product cycle in several years is also a concern for Neiman, whose business model requires customers to speed apparel replacement cycles due to the desire to follow fashion trends.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

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Fitch expects comps in the second quarter ended January 2017 to be similar to the first quarter, with the above issues compounded by the overall weakness in seasonal apparel sales this holiday season and significant inventory buildup. Fitch expects comps to trend in the negative low single digits through the remainder of fiscal 2017 and 2018, and to turn modestly positive in fiscal 2019, barring any prolonged weakness in the luxury apparel and accessories market.

273

Leveraged Finance Somewhat Protected Market Position Neiman is the country’s premier luxury department store chain, with LTM revenue of $4.9 billion as of Oct. 29, 2016. Despite occasional cyclical challenges, such as the current period of negative comps, Fitch believes Neiman’s business model is somewhat protected longer term due to a number of factors. First, Neiman is a limited-distribution model, given only 42 full-line Neiman stores (53% of revenue) plus New York’s trophy Bergdorf Goodman stores (12%) are generally located in the country’s high-end and most productive malls and shopping districts. Superior and limited real estate positioning protects the company from secular challenges occurring through much of the U.S. mall landscape. Second, Neiman offers narrowly distributed and sought-after brands, and has long-standing and strategic vendor relationships. Neiman is considered one of few retailers of scale which carry a differentiated array of luxury, high-quality and fashion-forward apparel and accessories brands. As such, the company is a vital distribution channel for many of its key vendors. Third, the company has built a loyal customer base, through best-in-class merchandising, luxurious shopping environments and a relationship-driven sales focus. Members of the company’s InCircle rewards loyalty program generate around 36% of the company’s revenue. Fourth, the company has an established omnichannel model, allowing it to service the customer in a variety of channels and formats. The company’s direct business — online operations and catalogs — under the Neiman Marcus, Bergdorf Goodman and Horchow (selling furniture and other home-related products) names, currently accounts for 30% of total sales, giving Neiman the highest online penetration among all the major department stores. As a result of these factors, Fitch believes Neiman Marcus has the business model attributes needed to weather both its current challenges and secular pressures facing mall-based department store and apparel retailers. While Fitch expects the U.S. mall landscape to see significant developments over the next few years following continued Sears closings, recently

Snapshot of High-End Department Stores Revenues ($ Mil.) Nordstrom YoY Growth (%) Neiman Marcusa YoY Growth (%) Saks YoY Growth (%) Department Stores (Incl. L.D.) YoY Growth (%) Comps Sales by Year (%) Nordstrom Neiman Marcusa Saksb Sales per Sq Ft ($) Nordstrom Neiman Marcusa Saksc EBITDA Margins (%) Nordstrom Neiman Marcusa Saks

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

LTM 10/29/16

8,561 10.9 4,243 9.4 2,940 5.8 218,132 (1.0)

8,828 3.1 4,561 7.5 3,283 11.7 213,941 (1.9)

8,272 (6.3) 4,160 (8.8) 3,030 (7.7) 202,144 (5.5)

8,258 (0.2) 3,549 (14.7) 2,632 (13.1) 189,283 (6.4)

9,310 12.7 3,820 7.6 2,786 5.9 187,058 (1.2)

10,497 12.7 4,186 9.6 3 8.2 185,609 (0.8)

11,762 12.1 4,494 7.4 3,148 4.4 179,362 (3.4)

12,166 3.4 4,779 6.3 N.A. N.A. 172,371 (3.9)

13,110 7.6 4,986 2.9 N.A. N.A. 170,421 (1.1)

14,095 7.5 5,039 1.1 N.A. N.A. 167,079 (2.0)

14,399 3.7 4,863 (4.2) N.A. N.A. 161,472 (4.0)

7.5 6.8 4.9

3.9 5.7 11.7

(9.0) (11.4) (6.1)

(4.2) (15.8) (14.7)

8.1 6.9 6.4

7.2 9.4 9.5

7.3 6.2 3.2

2.5 5.1 3.1

4.0 5.5 2.1

2.7 (1.1) (1.0)

0.2 (4.7) (4.0)

423 624 395

435 650 444

388 553 417

368 453 356

397 482 379

431 525 419

470 542 437

474 567 N.A.

493 580 N.A.

507 570 N.A.

501 533 N.A.

16.3 15.4 5.9

16.2 15.5 7.5

12.6 11.0 0.9

12.9 10.3 4.8

15.3 12.8 8.6

15.4 13.5 9.7

15.0 13.8 9.1

14.8 14.4 N.A.

14.5 13.6 N.A

12.8 12.6 N.A.

11.8 10.6 N.A.

a Neiman Marcus’ figures have been adjusted to reflect fiscal years ending January. bSaks’ comps for the LTM are for the nine months ended Oct. 29, 2016. cSaks’ data is based on Fitch’s estimates and includes the New York flagship store. YoY – Year over year. L.D. − Leased department store space. Comps – Comparable store sales. Sq Ft – Square foot. N.A. − Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance announced Macy’s closures and potential large-scale closures by other struggling players, Neiman’s real estate portfolio, customer and vendor relationships, and omnichannel model should enable it to be somewhat insulated, although not immune, from broader market shifts. Neiman’s in-store comps have decelerated significantly, averaging only 1% between fiscal 2013 and 2015, and negative 8% over the last five quarters. Its direct sales growth, which was holding up in the mid-teens range between fiscals 2013 and 2015, grew only 4.4% in fiscal 2016 and was flat in the first quarter of fiscal 2017. Weakening sales suggest Neiman is being affected by both direct-to-consumer efforts by vendors and recent entrants to the online-only luxury channel. As mentioned in recent earnings calls, information proliferation online has created improved cross-channel price transparency and allows customers to more easily seek value with less regard for brand or channel. Luxury customers, like those in other apparel price tiers, are buying with more of a wear-now intent, responding to wardrobe needs or fashion trends experienced in real time. This has somewhat disrupted the luxury model of refilling a wardrobe early in a given season. Neiman will need to incorporate the changing customer shopping behavior into its business model and recently made some senior management changes (CMO, CIO and interim CFO). The company is introducing more exclusive product in its stores and on its websites, and is working with its vendors to rethink its merchandise-delivery strategy. These strategies will likely take several quarters to materialize; as a result, it could be a long climb back to the $650 million–$700 million EBITDA level. Operating margin for the online business, as last reported in fiscal 2014, was healthy in the mid-teens and running above the store operations, although the profitability has likely been negatively affected by infrastructure investments and free shipping. Neiman highlighted in its fiscal first-quarter 2016 earnings call that online and in-store merchandise margins were comparable. The direct business has allowed Neiman to offer customers in-store services such as cross-channel product lookup and shipping, which reduces revenue lost to store out-of-

Segment Revenue and Profit Breakdown — Neiman Marcus Group LTD LLC 2006 2007 2008 2009 2010 2011 2012 ($ Mil., Fiscal Years Ended July) Net Sales Retail 3,375 3,675 3,853 2,991 3,011 3,245 3,467 Direct 655 715 747 652 682 757 879 Total 4,106 4,390 4,601 3,643 3,693 4,002 4,345 YoY Growth (%) Retail 8.8 8.9 4.9 (22.4) 0.7 7.8 6.8 Direct 10.7 9.2 4.5 (12.8) 4.6 11.0 16.1 Total 7.4 6.9 4.8 (20.8) 1.4 8.4 8.6 Segment as % of Total Sales Retail 82.2 83.7 83.8 82.1 81.5 81.1 79.8 Direct 16.0 16.3 16.2 17.9 18.5 18.9 20.2 Operating Income (Before Allocation of Corporate Expenses and Amortization of Intangible Assets) Retail 404 491 477 124 273 345 391 Direct 98 116 118 73 113 113 132 Total 502 606 594 198 385 458 524 Operating Margin (%) Retail 12.0 13.4 12.4 4.2 9.1 10.6 11.3 Direct 15.0 16.2 15.7 11.2 16.5 14.9 15.1 Total 12.2 13.8 12.9 5.4 10.4 11.4 12.0 Segment as % of Total Operating Profit Retail 80.5 80.9 80.2 62.9 70.8 75.3 74.7 Direct 19.6 19.1 19.8 37.1 29.2 24.7 25.3

2013

2014

2015

LTM 2016 10/29/16

3,617 1,031 4,648

3,691 1,149 4,839

3,763 1,332 5,095

3,513 1,436 4,949

3,403 1,436 4,839

4.3 17.4 7.0

2.0 11.3 4.1

2.0 16.0 5.3

(6.6) 7.8 (2.9)

(7.8) 3.8 (4.6)

77.8 22.2

76.3 23.7

73.9 26.1

71.0 26.1

70.3 29.7

411 158 569

427 161 588

N.A. N.A. N.A.

11.4 15.3 12.2

11.6 14.0 12.2

N.A. N.A. N.A.

72.3 27.7

72.6 27.4

N.A. N.A.

YoY – Year-over-year. N.A. – Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance stocks and enhances customer loyalty. Neiman is also present in the off-price channel, with 42 clearance centers (Neiman Last Call) and five CUSP stores generating 6% of company revenue.

Breakdown of Retail and Direct Revenues by Channel — Neiman Marcus Group LTD LLC ($ Mil., Except Sales per Sq Ft Data, Fiscal Years Ended July)

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Retail Revenues Neiman Marcus Neiman Marcus — Full Line (Estimate) Sales/Sq Ft (Estimate) Neiman Marcus Last Call/CUSP (Estimate) Sales/Sq Ft (Estimate) Bergdorf Goodman — (Estimate) Sales/ Sq Ft Direct Revenues Internet Catalog (Not Reported Separately Since Fiscal 2012) % of Total Revenue Retail Neiman Marcus Neiman Marcus — Full Line (Estimate) Neiman Marcus Last Call/CUSP (Estimate) Bergdorf Goodman — (Estimate) Direct Internet Catalog (Not Reported Separately Since Fiscal 2012) YoY Growth (%) Retail Neiman Marcus Neiman Marcus — Full Line (Estimate) Neiman Marcus Last Call/CUSP (Estimate) Bergdorf Goodman — (Estimate) Direct Internet Catalog (Not Reported Separately Since Fiscal 2012) Comps Retail — (Estimate) Direct Total

3,675 3,145 2,952 574 194 359 529 1,675 715 498 217

3,853 3,275 3,002 563 273 433 578 1,829 747 565 182

2,991 2,540 2,313 420 227 307 452 1,429 652 518 134

3,011 2,520 2,251 404 269 323 491 1,553 682 574 108

3,245 2,700 2,426 436 274 315 545 1,725 757 654 103

3,467 2,882 2,585 461 296 328 585 1,851 879 879 —

3,617 3,013 2,657 475 355 372 604 1,911 1,031 1,031 —

3,691 3,064 2,753 499 311 309 627 1,984 1,148 1,148 —

3,763 3,123 2,799 508 325 305 640 2,024 1,332 1,332 —

3,513 2,916 2,627 472 289 268 597 1,890 1,436 1,436 —

83.7 71.6 67.2 4.4 12.1 16.3 11.4 4.9

83.8 71.2 65.3 5.9 12.6 16.2 12.3 4.0

82.1 69.7 63.5 6.2 12.4 17.9 14.2 3.7

81.5 68.2 60.9 7.3 13.3 18.5 15.5 2.9

81.1 67.5 60.6 6.9 13.6 18.9 16.3 2.6

79.8 66.3 59.5 6.8 13.5 20.2 20.2 —

77.8 64.8 57.2 7.6 13.0 22.2 22.2 —

76.3 63.3 56.9 6.4 13.0 23.7 23.7 —

73.9 61.3 54.9 6.4 12.6 26.1 26.1 —

71.0 58.9 53.1 5.8 12.1 29.0 29.0 —

8.9 8.0 7.6 15.1 14.4 9.2 22.8 (13.0)

4.9 4.1 1.7 40.9 9.2 4.5 13.4 (16.0)

(22.4) (22.5) (23.0) (17.0) (21.8) (12.8) (8.3) (26.5)

0.7 (0.8) (2.7) 18.9 8.7 4.6 10.8 (19.4)

7.8 7.1 7.8 1.8 11.1 11.0 13.9 (4.3)

6.8 6.7 6.6 8.0 7.3 16.1 34.4 —

4.3 4.6 2.8 20.0 3.2 17.4 17.4 —

2.0 1.7 3.6 (12.6) 3.8 11.4 11.4 —

2.0 2.0 1.7 4.5 2.0 16.0 16.0 —

(6.6) (6.6) (6.1) (10.9) (6.6) 7.8 7.8 —

6.2 9.2 6.7

1.3 3.8 1.7

(23.2) (12.2) (21.4)

(1.2) 4.6 (0.1)

7.5 11.0 8.1

6.0 16.1 7.9

2.2 15.7 4.9

3.4 12.9 5.5

2.6 13.0 3.9

(7.2) 4.4 (4.1)

Sq Ft – Square foot. YoY – Year-over-year. Comps – Comparable store sales. Source: Company filings, Fitch Ratings.

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Leveraged Finance Capital Spending Initiatives Neiman ramped up gross capex to $301 million in fiscal 2016 and $271 million in fiscal 2015, compared with $140 million–$180 million over the prior three fiscal years. The company currently projects gross capex of $210 million–$230 million in fiscal 2017. The decline from the prior year reflects the investments that have already been made in new store openings, NMG One merchandising system and other technology initiatives. Besides a new store planned in Fort Worth, TX, for February 2017 — which is a replacement unit — Neiman plans to open its first Neiman Marcus store in Manhattan during calendar 2018, located in Hudson Yards, a new development on the west side of New York City. This announcement comes as part of its plan to expand its market share in New York, which the company is undertaking through its Roosevelt Field store opening in Garden City (Long Island) in 2016 and by embarking on a five-year plan to modernize the Bergdorf Goodman stores. Neiman invested $1.0 billion in gross capex between fiscals 2011 and 2016, primarily related to: • The construction of new stores in Walnut Creek, CA (opened in fiscal 2012) and Garden City, NY (opened in fiscal 2016) and a distribution facility in Pittston, PA. • Investments in online platforms, and technology and information systems. • Enhancements to merchandising and store systems. • The remodel of the Bergdorf Goodman men’s and women’s stores on Fifth Avenue in New York City and Neiman Marcus stores in Bal Harbour, FL; Chicago; Oak Brook, IL; and Beverly Hills, CA. Fitch views Neiman as having the flexibility to pull back on capex, particularly remodeling spend, should sales remain materially weak beyond 2017. The company has also made select M&A investments to grow its platform. The company acquired MyTheresa, a luxury retailer headquartered in Munich, Germany, in October 2014. The operations of MyTheresa are primarily conducted through the MyTheresa.com global luxury website. The key categories are women’s ready to wear, shoes, handbags and accessories. The company’s annual revenues were approximately $130 million at the time of the acquisition. The purchase price paid to acquire MyTheresa, net of cash acquired, was $181.7 million, which the company financed through a combination of cash and debt. The acquisition is part of Neiman’s strategic steps toward serving more customers internationally.

Capital Spending Gross Capex

($ Mil.)

Capex as % of Sales

(%)

350

7.0

300

6.0

250

5.0

200

4.0

150

3.0

100

2.0

1.0

0.0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017E

E – Estimate. Source: Company filings, Fitch Ratings.

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Leveraged Finance EBITDA Could Decline to $500 Million in Fiscal 2017 EBITDA is expected to decline to about $500 million in fiscal 2017 from $559 million in fiscal 2016 due to the decline in revenue and gross margin compression, given higher markdowns and promotional costs incurred from lower expected volumes. Gross margin declined 244 bps in fiscal 2016 and another 167 bps in the first quarter of fiscal 2017, primarily due to heightened markdown pressure. Fitch expects gross margin to decline 75 bps to 100 bps in fiscal 2017. EBITDA is expected to remain flat in fiscal 2018, assuming low single-digit negative comps and flat gross margins. Luxury retailers typically have flexible cost structures, driven by commission-based selling expenses. As seen in fiscal 2016, selling, general and administrative (SG&A) expense (including depreciation and amortization) growth was essentially flat after averaging midsingledigit increases over the prior five years. Fitch projects SG&A to decline around 2% in fiscal 2017 given our comps expectations.

Comps Sales, Comps Inventory and Gross Margin Relationship Gross Margin Change (LHS)

Comps Sales (RHS)

Comps Inventory, Beg. (RHS)

(bps) 800

(%) 20

400

(400)

(10)

(800)

(20)

Comps â&#x20AC;&#x201C; Comparable store sales. Note: Data shown are calendarized with fiscal years ending January. Source: Company filings, Fitch Ratings.

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Leveraged Finance Liquidity and Debt Structure Negative FCF, but Adequate Liquidity Neiman’s total liquidity as of Oct. 29, 2016 was $497 million — reflecting $42 million in cash on hand and $455 million of availability under its ABL — compared with $529 million in the yearago period. The availability in both periods reflects seasonal working capital buildup. Fitch expects liquidity to be adequate over the next 24 months, with total liquidity at the end of fiscal 2017 (ending July) projected to be over $600 million. FCF is projected to be negative $30 million–$40 million in fiscal 2017 and modestly positive thereafter, assuming annual interest expense of approximately $270 million and gross capex of $200 million, and prior to any material swings in working capital. Additional liquidity could be obtained if the company elects to pay in kind the interest on its $600 million senior payment-in-kind (PIK) toggle notes, similar to what it did during the recession in 2009. Paying the interest in kind at a rate of 9.5%, versus with cash at 8.75%, would increase Neiman’s liquidity position by $53 million annually. The company could also scale back on its capex by moderating its remodeling activity. Fitch expects Neiman’s adjusted debt/EBITDAR, which was 9.2x LTM, to remain around that level given expectations of near-flat EBITDA beyond fiscal 2017, unless comps turn materially positive.

ABL Availability — Neiman Marcus Group LTD LLC ($ Mil.)

Cash

Facility Size

Borrowings

LOC

Revolver Availabilitya

Total Liquidity

EBITDA

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

147.2 115.8 196.5 81.6 127.1 82.2 73.0 58.6 56.9 76.3 61.8 42.1

800 800 800 900 900 900 900 900 900 900 900 900

0.0 45.0 0.0 230.0 125.0 150.0 130.0 340.0 165.0 265.0 165.0 355.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

720.0 675.0 720.0 580.0 685.0 660.0 680.0 470.0 645.0 545.0 645.0 455.0

867.2 790.8 916.5 661.6 812.1 742.2 753.0 528.6 701.9 621.3 706.8 497.1

488.2 676.3 677.4 668.9 678.7 690.1 687.8 660.7 636.7 603.2 559.0 517.9

LTM CFFO

Capex

FCF

302.3 217.2 295.7 184.2 285.6 317.4 228.4 185.5 224.9 256.0 282.0 292.2

(142.7) (154.5) (174.0) (194.4) (223.9) (245.4) (270.5) (289.1) (304.8) (319.4) (301.4) (291.9)

159.6 62.7 121.7 (10.2) 61.7 72.0 (42.1) (103.5) (79.9) (63.5) (19.5) 0.3

Net of minimum availability at 10% of the line cap required at all times. ABL – Asset-based loan. CFFO – Cash flow from operations. Source: Company filings, Fitch Ratings.

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Leveraged Finance Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $900 Mil. Asset-Based Revolver due 7/25/21 $2,950 Mil. Secured Term Loan Facility due 10/25/20 7.125% Senior Debentures due 6/1/28 Total Secured Debt

355.0 2,861.7 125.0 3,341.7

7.2 58.4 2.6 68.2

Unsecured Debt 8.000% Senior Unsecured Notes due 10/15/21 8.750%/9.500% Senior PIK Toggle Notes due 10/15/21 Total Unsecured Debt Total Debt

960.0 600.0 1,560.0 4,901.7

19.6 12.2 31.8 100.0

PIK â&#x20AC;&#x201C; Payment-in-kind. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 29.5 29.5 29.5 2,751.1 1,560.0 125.0

Cash Revolver Availability Total

42.1 455.0 497.1

Source: Company filings, Fitch Ratings.

Note: Exclude borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Higher Leverage Following 2013 Buyout Ares Management LLC and the Canada Pension Plan Investment Board acquired Neiman for $6.0 billion in October 2013, or 9.1x Neiman’s fiscal 2013 EBITDA of $658 million. Pro forma adjusted leverage was 7.1x, reflecting approximately $2 billion of incremental debt used to finance the company’s acquisition. This compares with 4.6x for fiscal 2013 under the prior capital structure (pre-IPO). The previous sponsors, Texas Pacific Group and Warburg Pincus, acquired Neiman in October 2005 for $5.1 billion, at a slightly higher EBITDA multiple of 9.7x fiscal 2005 EBITDA of $528 million, with pro forma leverage of 6.4x. Both the 2005 and 2013 LBOs consisted of PIK debt, and both PIK issues were relatively junior in the capital structures. The 2005 PIK issue terms provided greater flexibility for making payments in kind over the first five years, while the payment terms in the 2013 PIK issue have more stringent cash-pay requirements, consistent with the prevailing market overall. Neiman elected to pay in kind for three successive quarters beginning in January 2009 on the 2005 PIK notes in light of the dislocation in credit markets, although its liquidity position was fairly strong. The company announced in August 2015 it filed a registration statement with the SEC for a proposed IPO, which was withdrawn in January 2017.

LBO Debt Structure Comparison — Neiman Marcus Group LTD LLC Amount ($ Mil.)

(%)

2005 LBO

$800 Mil. Senior Secured Revolving Credit Facility due 10/25/18 Senior Secured Term Loan Facility due 10/25/20 7.125% Senior Debentures due 6/1/28 8.000% Senior Unsecured Notes due 2021 8.750%/9.500% Senior PIK Toggle Notes due 2021 Total Debt

75 2,950 125 960 600 4,710

2 63 3 20 13 100

EBITDAa Rent Expenseb Total Leverage (x) Interest Coverage (All Cash Interest, x)

671.5 104.6 7.1 2.5

2013 LBO

Amount ($ Mil.)

(%)

$600 Mil. Senior Secured Revolving Credit Facility due 2013 Senior Secured Term Loan Facility due 2013 7.125% Senior Debentures due 6/1/28 9.000%/9.750% Senior PIK Toggle Notes due 2015 10.375% Senior Subordinated Notes due 2015 Total Debt

150 1,975 125 700 500 3,450

4 57 4 20 14 100

EBITDA Rent Expense Total Leverage (x) Interest Coverage (All Cash Interest, x)

528.0 66.1 6.4 2.4

EBITDA reflects the reversal of the reduction in rent expense related to the amortization of historical allowances received from developers in connection with the construction of Neiman stores and the reversal of the amortization of previously unrecognized actuarial losses related to certain long-term benefit plans. It also excludes advisory and management fees paid to the prior sponsors. bRent expense excludes the amortization of historical deferred real estate credits that will be eliminated in connection with purchase accounting. PIK – Payment-in-kind. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis assumes an enterprise value (EV) of $2.4 billion for Neiman in a distressed scenario. This is based on a going concern EBITDA of approximately $400 million, which assumes a 20% decline in revenue from the current level of $4.9 billion and a 10% EBITDA margin — valued at a 6.0x multiple. The EV multiple applied is below the current trading market multiples of comparable luxury retail peers, but in line with the 5.0x–6.0x Fitch assumes for recovery analysis in the retail sector. Applying this EV across the capital structure results in outstanding recovery prospects (91%– 100%) for the revolving credit facility, which is assigned a ‘bb–*/rr1*’. The credit facility is secured by a first lien on inventory and cash of Neiman and the subsidiary guarantors, and a second lien on real estate, capital stock, and all other tangible and intangible assets, including a significant portion of Neiman’s owned real property — which currently consists of approximately half of Neiman’s full-line retail stores — and equipment. The $2.9 billion term loan and the $125 million of 7.125% secured debentures are secured by a first lien on the company’s fixed and intangible assets, and a second lien on inventory and cash. They are expected to have good recovery prospects (51%–70%) and are assigned a ‘b*/rr3*’. The $960 million 8% senior unsecured notes and $600 million 8.750%/9.500% senior PIK toggle notes, both due October 2021, have poor recovery prospects (less than 10%) and are assigned a ‘ccc*/rr6*’.

Recovery Analysis — Neiman Marcus Group LTD LLC ($ Mil., Except Where Noted; Credit Opinion: b–*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Going Concern EBITDA GC EV Multiple (x) EV on GC Basis

400 6.0 2,400

Cash A/R Inventory Net PPE Total LV

Book Value

Advance Rate (%)

Available to Creditors

42.1 0.0 1,325.1 1,607.5 —

0 80 70 50 —

— — 927.5 803.7 1,731.3

Value Available for Claims Distribution Greater of GC or LV Less Administrative Claims (10%) Adjusted LV Available for Claims Distribution of Value Secured Priority Sr. Secured Facilitya $2,950 Mil. Secured Term Loan Facility due 10/25/20 7.125% Senior Debentures due 6/1/28

Amount Value Recovered

2,400.0 240.0 2,160.0

Recovery (%)

Recovery Rating

Notching

Credit Opinion

630.0

100

rr1*

bb–*

2,861.7 125.0

1,466.3 63.8

51 0

rr3* 

+1 

b* 

Amount Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

  

0 0 0

rr6* — —

–2 — —

ccc* — —

Concession Payment Availability Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Unsecured Priority Sr. Unsecuredb Unsecured Sr. Subordinated

2,160.0 2,160.0 

1,643.3 0.0 0.0

Fitch assumes the $900 Mil. credit facility is 70% drawn in a distressed scenario. bIncludes senior unsecured notes and estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — Neiman Marcus Group LTD LLC ($ Mil., As of Oct. 29, 2016) Sponsor Fundsa

Neiman Marcus Group, Inc. (Parent Company) Mariposa Intermediate Holdings LLC (Guarantor of NMG’s Senior Secured Credit Facilities) Neiman Marcus Group LTD LLC (CO — b–*/stable) Debt Issue $900 Mil. Asset-Based Revolver due 7/25/21 (Co-Borrower)b $2,950 Mil. Secured Term Loan Facility due 10/25/20 8.000% Senior Unsecured Notes due 10/15/21 (Co-Issuer) 8.750%/9.500% Senior PIK Toggle Notes due 10/15/21 (Co-Issuer) Total

Amount 355 2,862 960 600 4,777

CO bb–*/rr1* b*/rr3* ccc*/rr6* ccc*/rr6* — Guarantee

Mariposa Borrower, Inc. (Co-Issuer of Unsecured Notes, Guarantor of ABL and Term Loan)

Guarantor Subsidiariesc

The Neiman Marcus Group, LLC (CO — b–*/stable) Debt Issue 7.125% Senior Debentures due 6/1/28

Amount 125

CO b*/rr3*

Nonguarantor Subsidiaries

aSponsor

Funds consist of Ares Management LLC and Canada Pension Plan Investment Board. bNeiman Marcus Group LTD LLC is a co-borrower of the asset-based revolver with certain other subsidiaries. cGuarantor subsidiaries will guarantee all of NMG and its subsidiaries’ current and future debt obligations. Neiman Marcus Group LTD LLC has pledged assets that secure the senior secured facilities, to secure the obligations under the existing 7.125% senior debentures due 2028. Bergdorf Goodman, Inc.; NM Nevada Trust; and NMG Germany GmbH are nonguarantors of the 2028 notes. The guarantor subsidiaries account for substantially all of the company’s revenues and EBITDA and hold substantially all the net assets and liabilities. CO – Credit Opinion. PIK – Payment-in-kind. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Neiman Marcus Group LTD LLC Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security

Guarantee

Financial Covenants Fixed-Charge Coverage

Neiman Marcus Group LTD LLC Revolving Credit Agreement dated 10/25/13 (Exhibit 10.2 to 8-K filed 10/29/13). First Amendment to Revolving Credit Agreement 10/10/14 (Exhibit 10.1 to 8-K filed 10/16/14). Second Amendment to Revolving Credit Agreement 10/27/16 (Exhibit 10.1 to 8-K filed 10/27/16). Senior secured revolving credit facility subject to a borrowing base equal to the sum of (a) 90% of the net orderly liquidation value of eligible inventory, (b) 90% of eligible credit card accounts and (c) 100% of all eligible cash held, less certain reserves. 7/25/21 or 7/25/20 if obligations under the senior secured term loan or any permitted financing thereof have not been repaid or the maturity date thereof has not been extended to 10/25/21 or later. $900 Mil. Senior secured. First lien on inventory and A/R; second lien on all other tangible and intangible assets (including owned real property); second-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Note: the applicable value of stock pledge is limited to 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of Neiman. Guaranteed by the parent company, the borrower, and certain of its existing and future domestic subsidiaries (including Bergdorf Goodman, Inc., through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

A minimum fixed-charge coverage ratio (FCCR) of 1.0x, tested only if excess availability is less than the greater of (i) 10.0% of the lesser of (a) the aggregate revolving commitments and (ii) the borrowing base, and (ii) $50 Mil.

Debt Restrictions Debt Incurrence

Ratio Debt: Debt permitted provided interest coverage ratio is 2.0x or greater on a pro forma basis, provided that the aggregate principal amount of ratio debt incurred by restricted subsidiaries that are not guarantors may not exceed $100 Mil. at any time outstanding. Carveouts: Up to $200 Mil. of additional revolving facility commitments and/or incremental term loans; secured debt up to $3.6 Bil. plus incremental term loans or incremental equivalent term debt provided that pro forma senior secured first lien net leverage ratio ≤ 4.25x or total net leverage ratio ≤ 7.00x if incremental term loans are secured on a junior basis to the existing term loans; capital lease obligations or purchase money debt to finance purchase, lease or improvement of fixed or capital assets not to exceed the greater of $200 Mil. and 2.25% of consolidated total assets; $75 Mil. for debt incurred or refinanced for a permitted acquisition or an entity to become restricted subsidiary provided no event of default immediately before or would result therefrom and pro forma interest coverage ratio would increase; debt or guarantees of indebtedness of joint ventures not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; foreign subsidiary debt not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; unsecured debt permitted provided the payment conditions are satisfied (please refer to definition at the bottom of this page) and for which the maturity date is six months after the revolver’s latest maturity date; debt incurred by a receivables subsidiary in a qualified receivables financing; hedge agreements; other junior debt subject to a junior lien intercreditor agreement; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets. Limitation on Liens Liens securing new indebtedness permitted under debt incurrence covenant; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets. Limitation on Guarantees Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants. Acquisitions/Divestitures Change of Control (CoC) CoC is defined as acquisition of over 50% voting stock prior to an IPO or 35% of voting interest after IPO and constitutes an event of default. M&A, Investments Intercompany investments among the borrower and the restricted subsidiaries not to exceed the greater of $50 Mil. and 0.5% of consolidated Restriction total assets; investments in foreign subsidiaries not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; additional investments permitted provided the payment conditions are satisfied; general carveout of $75 Mil. (including general carveout for restricted payments and prepayment of junior debt). Permitted acquisitions provided the payment conditions are satisfied. Sale of Assets Standard restrictions on asset sales above $10 Mil. threshold provided any noncash consideration outstanding at any time not to exceed the Restriction greater of $125 Mil. or 1.50% of consolidated total assets; general carveout of $10 Mil.

Restricted Payments Restricted Payments (RP) Prepayment of Debt

RP means dividends and share repurchase and is permitted provided payment conditions are satisfied. Carveouts: $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; general carveout of $75 Mil. (including general carveout for investments and prepayment of junior debt). Prepayment of junior debt limited to $75 Mil. when taken together with the general basket for investments and RPs; additional payments permitted if immediately before and after such payment, the payment conditions are satisfied.

A/R – Accounts receivable. N.A. – Not applicable. MAC – Material adverse change. ABL – Asset-based revolver. BR – Base rate. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Neiman Marcus Group LTD LLC (Continued) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure

Cash Dominion Event

Key Definitions

Pricing

Yes, exceeding $50 Mil. N.A. As a representation and warranty, and under affirmative covenants. Yes, permitted provided (a) there shall be at least two fiscal quarters in any period of four consecutive quarters that a cure right has not been exercised and in aggregate no more than five “cure rights” shall be exercised, (b) the cure amount shall be no greater than the amount required for purposes of complying with the financial performance covenant (i.e. FCCR shall be at least 1.0x if excess availability is less than the greater of $50 Mil. and 10.0% of the line cap then in effect for 20 consecutive days). The company’s funds will be swept daily to reduce the borrowings outstanding under the ABL revolver if borrowings availability falls below designated thresholds. This means either (a) the occurrence and continuance of any specified default, or (b) the borrower’s failure to maintain availability of at least the greater of $50 Mil. or 10% of the line cap for five consecutive days. Payment Conditions: With respect to a specified transaction or payment (a) no event of default has occurred and is continuing; (b) pro forma excess availability in the 30-day period preceding and on the date of the transaction or payment would exceed the greater of 15% of the line cap (lesser of the total revolver commitments and borrowing base then in effect) and $90 Mil.; and (c) pro forma consolidated FCCR is not less than 1.0x, provided that the FCCR test will not be required if pro forma excess availability in the 30-day period preceding and on the date of the transaction or payment would exceed the greater of 25% of the line cap (lesser of the total commitments or borrowing base) and $200 Mil. LIBOR + 175 bps–200 bps or BR + 75 bps–100 bps, subject to levels of average historical excess availability; commitment fee of 0.250%– 0.375% per annum.

A/R – Accounts receivable. N.A. – Not applicable. MAC – Material adverse change. ABL – Asset-based revolver. BR – Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Neiman Marcus Group LTD LLC Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Issued/Outstanding Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Prepayment of Debt

Other Cross-Default Cross-Acceleration MAC Clause Key Definitions

Neiman Marcus Group LTD LLC Term Loan Credit Agreement dated as of 10/25/13 (Exhibit 10.1 to 8-K filed 10/29/13). Term Loan Refinancing Amendment dated 3/13/14 (Exhibit 10.1 to 8-K filed 3/13/14). Senior secured term loan facility 10/25/20 $2,950 Mil./$2,862 Mil. Senior secured. Second lien on inventory and A/R; first lien on all other tangible and intangible assets (including owned real property); first-priority pledge of 100% of stock of U.S. subs and 65% of foreign subs. Guaranteed by the parent co, the borrower, and certain of its existing and future domestic subsidiaries (including Bergdorf Goodman, Inc. through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

CoC is defined as acquisition of over 50% voting stock prior to an IPO or 35% of voting interest after IPO and constitutes an event of default. Intercompany investments among the borrower and the restricted subsidiaries not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; investments in foreign subsidiaries not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; general carveout up to the greater of $150 Mil. and 1.75% of consolidated total assets (including general carveouts for restricted payments and prepayment of junior debt). Standard restrictions on asset sales above $10 Mil. threshold provided any noncash consideration outstanding at any time not to exceed the greater of $125 Mil. or 1.50% of consolidated total assets; general carveout of $10 Mil.

RP means dividends and share repurchase. Carveouts: Any RP up to the available amount (defined at the bottom of this page) provided no event of default is continuing immediately prior to such RP or would result therefrom and pro forma interest coverage ratio would be at least 2.0x; $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; additional RP up to the greater of $100 Mil. or 1.15% of consolidated total assets (including general carveouts for investment and prepayment of junior debt). Payments of junior debt limited to the available amount on the date of payments provided no event of default is continuing or result therefrom and pro forma total net leverage ratio is equal to or less than 4.5x; additional payments of junior debt limited to the greater of $100 Mil. or 1.15% of consolidated total assets when taken together with the general basket for investments and RPs; additional payments permitted if immediately before and after such payment, the payment conditions are satisfied.

Yes, exceeding $50 Mil. N.A. As a representation and warranty, and under affirmative covenants. Available Amount: Sum of (a) $200 Mil., (b) cumulative retained excess cash flow amount (measured annually), (c) cumulative amount of cash proceeds from equity issuance, capital contribution and debt issuance to the holding company, (d) cash received from the sale of equity interest of any unrestricted subsidiary or dividend and other distribution by such unrestricted subsidiary, and (e) any mandatory prepayment declined by lender, less than the use of available amount since closing date.

A/R – Accounts receivable. ABL – Asset-based lending. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Neiman Marcus Group LTD LLC (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule Callability/Optional Prepayment Pricing Coupon Type/Index

None. None.  

Excess Cash Flow (ECF): 50% of ECF if senior secured first lien net leverage ratio > 4.0x, or 25% if leverage ratio ≤ 4.0x, but > 3.5x, or 0% if leverage ratio is ≤ 3.5x. 100% of net proceeds from asset sales and debt issuances shall be used to prepay term loan. Term loan amortizes at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. Permitted at any time without premium or penalty.

Floating based on LIBOR (L) or Base Rate (BR) Applicable Rate L + 300 bps–325 bps (1.0% L floor) or BR + 200 bps–225 bps, subject to senior secured first lien net leverage ratio.

A/R – Accounts receivable. ABL – Asset-based lending. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — The Neiman Marcus Group LLC Overview Issuer Document Date and Location

Description of Debt Maturity Date Original Issue/Outstanding Ranking Security

Guarantee

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

The Neiman Marcus Group LLC Indenture dated 5/27/98 (Exhibit 4.1 to 10-K filed 10/29/98) First Supplemental Indenture dated 7/11/06 (Exhibit 4.1 to 8-K filed 7/11/06) Second Supplemental Indenture dated 8/14/06 (Exhibit 4.1 to 8-K filed 8/15/06) 7.125% senior secured debentures 6/1/28 $125 Mil./$125 Mil. Senior secured. Secured equally and ratably by a first-lien security interest on certain collateral subject to liens granted under Neiman’s senior secured credit facilities constituting (a) first priority pledge of 100% of stock of U.S. subs and 65% of foreign subs and (b) certain of Neiman’s principal properties that include approximately half of Neiman’s full-line stores, in each case, to the extent required by the terms of the indenture (pari passu with senior secured term loan facility). The collateral securing the 2028 debentures will be released upon the release of liens on such collateral under Neiman’s senior secured credit facilities and any other debt secured by such collateral. Guaranteed on a senior unsecured basis by the parent company, but not Bergdorf Goodman, Inc. and NM Nevada Trust that provide guarantees to the credit facilities and senior notes.

Senior debt incurrence subject to lien restriction. Limited to 15% of consolidated total assets. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

None. None. Sale and leasebacks of principal properties not permitted unless proceeds shall be used within 180 days to repay debt and transaction subject to lien restriction.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability

No. Yes, exceeding $15 Mil. None. None. Callable at the greater of par and make-whole + 20 bps at any time

MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bond Covenant Summary — Neiman Marcus Group LTD LLC Overview Issuer Document Date and Location

Description of Debt Maturity Date Original Issue/Outstanding Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

Neiman Marcus Group LTD LLC and Mariposa Borrower, Inc. (as co-issuers) Senior Cash Pay Notes Indenture dated 10/21/13 Senior PIK Toggle Notes Indenture dated 10/21/13 (Exhibit 4.1 to 8-K filed 10/29/13) (Exhibit 4.2 to 8-K filed 10/29/13) First Supplemental Indenture dated 10/25/13 First Supplemental Indenture dated 10/25/13 (Exhibit 4.3 to 8-K filed 10/29/13) (Exhibit 4.4 to 8-K filed 10/29/13) 8.000% senior cash pay notes 8.750%/9.500% senior PIK toggle notes 10/15/21 10/15/21 $960 Mil./$960 Mil. $600 Mil./$600 Mil. Senior unsecured obligations of the issuer pari passu in right of payments to its senior indebtedness. Unsecured. Guaranteed on a senior unsecured basis by the parent company, the issuer, and certain of its existing and future domestic subsidiaries (including Bergdorf Goodman, Inc., through which Neiman conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust, which holds legal title to certain real property and intangible assets used by the company in conducting its operations).

Ratio Debt: Debt permitted provided interest coverage ratio is 2.0x or greater on a pro forma basis, provided that the aggregate principal amount of ratio debt incurred by restricted subsidiaries that are not guarantors may not exceed the greater of $100 Mil. and 1.15% of consolidated total assets at any time outstanding. Carveouts: ABL revolver debt including incremental facility not to exceed the greater of $1.1 Bil. and borrowing base; senior secured debt not to exceed the sum of $2.95 Bil. plus the greater of $650 Mil. and such amount that would not result in the senior secured net leverage ratio to be equal or greater than the ratio calculated at the closing date of the notes; capital lease obligations or purchase money debt to finance purchase, lease or improvement of fixed or capital assets not to exceed the greater of $200 Mil. and 2.25% of consolidated total assets; $125 Mil. for debt incurred to acquire any assets or for an entity to become restricted subsidiary provided pro forma interest coverage ratio would increase; debt or guarantees of indebtedness of joint ventures not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; foreign subsidiary debt not to exceed the greater of $50 Mil. and 0.5% of consolidated total assets; debt incurred by a receivables subsidiary in a qualified receivables financing; hedge agreements; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets. Liens securing new indebtedness permitted under debt incurrence covenant; general carveout up to the greater of $250 Mil. and 2.75% of consolidated total assets. Guarantees are included under the definition of indebtedness hence are governed by related debt covenant.

A CoC is defined as sale of substantially all assets of the company and its restricted subsidiaries, or acquisition of more than 50% voting stock of the company. There is a CoC put at 101. Investments in a similar business not to exceed the greater of $100 Mil. and 1.15% of consolidated total assets; general carveout up to the greater of $150 Mil. and 1.75% of consolidated total assets. Standard restrictions on asset sales above $25 Mil. threshold provided any noncash consideration outstanding at any time not to exceed the greater of $125 Mil. or 1.50% of consolidated total assets; in the event that sales proceeds exceed collateral value by more than $50 Mil. and are not applied to repay loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer.

RP means (i) any dividend (ii) stock repurchase (iii) prepayment of subordinated debt and (iv) restricted investments. Ratio Test: RP are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x interest coverage ratio debt test. RP Basket: Determined as cumulative sum of $200 Mil. plus 50% consolidated net income commencing 8/4/13 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: $30 Mil. per year for equity purchases from employees; dividends post an IPO up to 6% of net cash proceeds; cash proceeds from equity contributions and sale of stock; any additional RP permitted provided pro forma total net leverage ratio not to exceed 3.5x and no event of default is continuing or would result therefrom; additional RP up to the greater of $100 Mil. or 1.15% of consolidated total assets provided no event of default is continuing or would result therefrom.

No. Yes, exceeding $15 Mil. Redeemable, at the company’s option, in whole or in part, on and Redeemable, at the company’s option, in whole or in part, on and after 10/15/16, at the applicable redemption price below. after 10/15/16, at the applicable redemption price below. 2016: 106.000% 2016: 106.563% 2017: 104.000% 2017: 104.375% 2018: 102.000% 2018: 102.188% 2019+: 100.000% 2019+: 100.000% Max. 40% of the issue can be redeemed @ 108.000% with Max. 40% of the issue can be redeemed @ 108.750% with proceeds from an IPO on or before 10/15/16. proceeds from an IPO on or before 10/15/16. Covenants related to debt incurrence, restricted payments, asset sales, limitation on transactions with affiliates, future guarantors and incurrence interest coverage ratio test pro forma for an acquisition, and offer to repurchase upon a change of control will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

PIK – Payment-in-kind. ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Neiman Marcus Group LTD LLC 12 Three Months Months 8/2/14 11/1/14 1/31/15 5/2/15

($ Mil.) Profitability (%) Operating EBITDAR Margin 16.1 Operating EBITDA Margin 14.0 Operating EBIT Margin 10.9 FFO Margin 6.2 FCF Margin 2.5 Return on Capital Employed 8.5 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 7.0 FFO-Adjusted Leverage 9.0 FCF/Total Adjusted Debt (%) 2.2 Total Debt with Equity Credit/ a Operating EBITDA 6.8 Total Secured Debt/Operating EBITDAa 4.5 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 24.1 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 6.7 FFO-Adjusted Net Leverage 8.7 Total Net Debt/(CFFO – Capex) 36.3 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense) a 2.6 Operating EBITDA/Interest Paida 3.4 FFO Fixed-Charge Coverage 2.0 FFO Interest Coverage 2.5 CFFO/Capex 1.7 Debt Summary Total Debt with Equity Credit 4,610 Total Adjusted Debt with Equity Credit 5,440 Lease-Equivalent Debt 830 Other Off-Balance Sheet Debt — Interest (Paid) (200) Implied Cost of Debt (%) 5.5 Cash Flow Summary FFO 300 Change in Working Capital (Fitch Defined) (4) CFFO 296 Non-Operating/Nonrecurring Cash Flow — Capital (Expenditures) (174) Common Dividends (Paid) — FCF 122 Acquisitions and Divestitures (3,389) Net Debt Proceeds 1,913 Net Equity Proceeds — Other Investing and Financing Cash Flows 1,414 Total Change in Cash and Equivalents 60 Liquidity Readily Available Cash and Equivalents 196 Availability Under Committed Credit Lines 720 Not Readily Available Cash and Equivalents — Working Capital Net Working Capital (Fitch Defined) 242 Trade Accounts Receivable (Days) — Inventory Turnover (Days) 125.2 Trade Accounts Payable (Days) 43.9 Capital Intensity (%) 3.6

12 12 Three Three Months Months Months Months LTM 8/1/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 7/30/16 10/29/16 10/29/16

18.1 15.7 12.0 6.8 (13.1) 6.3

15.1 13.2 10.2 6.7 10.4 6.5

18.8 16.4 12.4 10.5 (5.1) 6.5

11.3 8.7 4.5 1.4 1.6 6.3

15.8 13.5 9.9 6.4 (0.8) 6.3

16.1 13.6 8.8 6.4 (18.6) 5.6

13.8 11.9 8.2 5.9 12.2 5.3

16.7 14.2 9.1 10.9 (3.9) 4.7

7.9 5.1 0.0 0.5 5.5 4.3

13.7 11.3 6.7 6.6 0.2 4.3

13.7 10.9 5.6 3.9 (18.3) 3.7

13.1 10.7 6.0 5.4 0.6 3.7

7.4 8.3 (0.2)

7.2 6.9 1.1

7.1 6.5 1.3

7.0 7.9 (0.7)

7.5 8.3 (1.8)

7.5 9.5 (1.4)

8.0 9.7 (1.1)

8.4 8.4 (0.3)

8.4 8.0 0.2

9.2 9.0 0.0

9.2 8.6 0.5

7.2 4.8

7.0 4.6

6.9 4.6

6.8 4.5

7.4 5.0

8.0 5.4

8.4 5.7

9.5 6.5

59.6

32.9

30.6

75.3

431.2

152.2

107.4

57.3

44.1

48.7

39.3

7.3 8.2 (465.5)

7.0 6.7 74.5

7.0 6.4 64.7

6.9 6.9 7.8 7.8 (110.2) (110.2)

7.4 8.2 (46.9)

7.4 9.4 (58.5)

7.9 8.4 9.6 8.3 (74.9) (239.9)

8.3 9.1 7.9 8.9 509.2 12,822.2

9.1 8.5 167.9

2.1 2.6 1.9 2.3 0.9

1.6 1.8 1.7 1.9 1.3

1.7 1.9 1.8 2.1 1.3

2.1 2.6 1.8 2.2 0.8

2.0 2.5 1.8 2.2 0.6

2.6 3.7 2.1 2.8 0.7

2.5 3.5 2.1 2.8 0.8

1.7 2.1 1.8 2.1 0.9

1.7 2.1 1.8 2.2 1.0

1.6 1.9 1.7 2.0 1.0

1.6 1.9 1.8 2.1 1.1

4,833 5,769 937 — (257) 5.4

4,720 5,657 937 — (370) 7.9

4,738 5,675 937 — (363) 7.7

4,711 5,648 937 — (267) 5.7

4,711 5,648 937 — (267) —

4,913 5,850 937 — (268) 5.5

4,731 5,668 937 — (170) 3.6

4,826 5,763 937 — (171) 3.6

4,719 5,729 1,010 — (269) 5.7

4,719 5,674 955 — (269) 5.7

4,902 5,857 955 — (268) 5.5

81 (180) (99) — (56) — (156) (182) 223 — (0) (115)

102 119 221 — (63) — 158 0 (112) — (0) 46

128 (127) 1 — (64) — (63) 0 18 — 0 (45)

17 89 106 — (87) — 18 — (27) — — (9)

327 (98) 228 — (270) — (42) (182) 101 — (0) (124)

75 (217) (142) — (75) — (217) — 203 — — (14)

88 172 260 — (79) — 182 (1) (182) — — (2)

128 (96) 32 — (78) — (46) 0 93 — (27) 19

6 126 132 — (69) — 62 0 (107) — 2 (43)

325 (15) 311 — (301) — 9 (1) 6 — (25) (11)

42 (174) (132) — (65) — (197) — 183 — (5) (20)

292 29 321 — (292) — 29 (1) (14) — (30) (17)

82 580 —

127 685 —

82 660 —

73 680 —

59 470 —

57 645 —

76 545 —

62 645 —

42 455 —

426 — 157.3 46.0 4.8

314 — 98.5 27.2 4.1

435 — 141.0 33.7 5.2

346 — 129.4 38.4 7.5

346 — 127.9 38.0 5.3

558 — 165.1 39.5 6.4

352 — 102.2 25.2 5.3

450 — 145.4 32.0 6.7

315 — 97.1 27.4 6.2

315 — 115.7 32.7 6.1

492 — 170.4 44.7 6.1

492 — 147.7 38.6 6.0

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Leveraged Finance Financial Summary — Neiman Marcus Group LTD LLC (Continued) ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Three Months Months 8/2/14 11/1/14 1/31/15 5/2/15

12 12 Three Three Months Months Months Months LTM 8/1/15 8/1/15 10/31/15 1/30/16 4/30/16 7/30/16 7/30/16 10/29/16 10/29/16

4,839 4.1 781

1,186 5.1 215

1,522 6.2 230

1,220 4.8 229

1,167 4.9 131

5,095 5.3 805

1,165 (1.8) 188

1,487 (2.3) 206

1,169 (4.2) 195

1,128 (3.3) 89

4,949 (2.9) 678

1,079 (7.4) 148

4,864 (4.1) 638

781 677

215 186

230 200

229 200

131 102

805 688

188 159

206 176

195 166

89 58

678 559

148 118

638 518

677 530

186 142

200 155

200 152

102 53

688 502

159 103

176 123

166 106

58 1

559 332

118 61

518 290

5.5 81 35.5 3.0 2.9 8.3 10.5 (1.7) 117.9

5.5 84 38.6 91.0 2.5 8.5 9.9 (1.1) 129.5

5.6 85 33.3 69.6 2.9 10.5 10.2 0.0 140.1

4.5 85 38.6 90.8 2.8 11.6 10.3 0.2 132.3

1.9 84 31.2 99.0 2.9 9.6 10.1 0.2 178.4

3.9 84 35.3 2.5 2.9 9.6 10.1 0.2 77.9

(5.6) 86 36.8 100.0 2.4 10.2 9.2 0.0 82.4

(2.4) 85 31.0 79.2 2.8 11.5 8.9 (0.2) 90.1

(5.0) 86 36.4 103.8 2.8 12.5 8.0 (0.4) 84.0

(4.1) 86 7.5 114.0 3.2 11.2 8.0 (5.3) 76.3

(4.1) 86 28.3 5.2 3.2 11.2 8.0 (4.9) 83.1

(8.0) 86 35.1 118.2 2.7 10.1 7.0 (5.3) 72.5

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Leveraged Finance Retailing / U.S.A.

Party City Holdco, Inc. Credit Profile Credit Opinion

Credit Profile Summary

Party City Holdco, Inc.

Category Leader: With 921 stores, Party City Holdco, Inc. is the primary national player in the approximately $10 billion party-supply industry, generating $2.3 billion in 2015 revenue across its stores (65% of revenue), online platform (6%) and wholesale operations (29%). Sales are resilient to discount competition given the breadth of merchandise required in this category. Online penetration in the category remains relatively low due to low average tickets and customers’ desire to see and handle products before purchase.

Long-Term Issuer Default Credit Opinion

b*/stable

Party City Holdings, Inc. Long-Term Issuer Default Credit Opinion Senior Secured ABL Revolver Credit Opinion Senior Secured Term Loan Credit Opinion Senior Subordinated Notes Credit Opinion

b*/stable bb*/rr1* b+*/rr3* ccc+*/rr6*

Financial Data Party City Holdco, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comps (%)a No. of Stores

FYE LTM 12/31/15 9/30/16 2,294.5 2,315.6 360.8 374.8 15.7 16.2 1.4 194.1 3,601.3 3,670.9 6.1

6.1

1.6 1.5 912

1.9 1.2 921

Comps for the LTM reflect the performance for the nine months ended Sept. 30, 2016.

Consistent EBITDA Growth: Revenue grew at a 7.5% CAGR for the five years ending 2015. Annual comparable retail same-store sales (comps) have been positive since 2010, proving the consistency and resiliency of the Party City model. Comps grew 1.5% in 2015 and were up 1.2% for the first nine months of 2016. Improved sourcing, reduced product costs and fixedcost leverage allowed EBITDA margins to expand to 15.7% in 2015 from 10.1% in 2012. Fitch Ratings expects low single-digit comps and flat to modest EBITDA margin expansion. Vertical Integration: The company’s wholesale operation manufactures 20% of products sold at Party City stores and generates nearly $700 million in sales to external customers. Through increased manufacturing capabilities, tuck-in acquisitions and new brand licensing partnerships, the company believes it can grow wholesale revenue while expanding the penetration of internally manufactured product at retail toward 50%. Higher levels of internally sourced product could materially benefit gross margins over the next several years. Good Cash Flow Profile: Party City consistently generated positive cash flow for the last three years, supported by strong EBITDA growth. This enabled the self-funding of store growth (around 25 stores opened per year) and bolt-on acquisitions of party-supply manufacturers, franchisees and small party retail chains. Cash was also used for sponsor dividends before the company’s 2015 IPO. The use of FCF for acquisitions is expected to continue along with debt prepayments as the company aims to reduce leverage. Targeting Reduced Leverage: Fitch expects leverage to be in line with Party City’s targeted net debt/EBITDA of 4.2x and around 3.5x at year-end 2016 and 2017, respectively, versus 4.6x in 2015. These targets equate to a Fitch-calculated 6.0x and mid-5.0x, respectively. Leverage reduction will result from EBITDA expansion and debt paydown. Once leverage is in its targeted range, the company expects to use surplus cash to continue expansion, and if growth opportunities are limited, return cash to shareholders.

Credit Profile Drivers Positive Drivers: The continuation of current operating trends and application of FCF to reduce lease-adjusted leverage toward 5.0x would be a positive credit profile driver. Negative Drivers: Negative credit profile drivers include weak operating trends, which would yield minimal FCF and reduced financial flexibility.

Analysts David Silverman +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Party City Holdco, Inc. 2015A

2016F

2017F

2,295 1.0

2,272 (1.0)

2,317 2.0

361 15.7 (61) 80 (79) — 1

363 16.0 (12) 190 (78) — 112

375 16.2 (9) 201 (80) — 122

Net Acquisitions Total Debt

(23) 1,797

(40) 1,747

(20) 1,647

Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

3,601 6.1

3,605 6.1

3,561 5.8

($ Mil.) Revenue Revenue Growth (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Dividends FCF

2018F Comments 2,375 — 2.5 2016 affected by weak Halloween. 387 — 16.3 — (11) — 208 — (82) — — — 126 2015 affected by one-time cash charges. (20) — 1,544 FCF assumed to be directed to debt reduction. 3,515 — 5.5 —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment Party City is the leading party-supply retailer in the U.S., with 921 stores at the end of September 2016 ($1,501 million of sales in 2015, 65% of total), e-commerce operations ($140 million of sales, 6% of total), and a large wholesale operation ($654 million of sales, 29% of total) that supplies retail operations and third parties. International sales were a stable 15% share of total sales in 2015 and 2014. Party City is the only national party-supply retailer in the U.S., with no direct domestic competitor with any significant scale. Party City primarily competes with mass merchandisers, dollar stores, craft stores, grocers, greeting card retailers and online-only players. It is also a supplier of some of these competitors through its wholesale business. The wholesale business is highly fragmented, with no company offering the breadth of product categories offered by Party City. The retail segment as of Sept. 30, 2016, consisted of 737 company-owned stores in North America, approximately 50 of which were in Canada, and 184 franchise locations. The company also operates temporary stores during the Halloween season, offering costumes and holiday-appropriate décor. Stores generally range in size from 11,000 to 14,000 square feet. The company opened around 25 stores annually in recent years and is likely to continue this pace of expansion. Product categories include tableware, costumes, balloons, party decorations and seasonal décor. Many stores have dedicated departments for party favors, custom invitations and candy. The company sells branded, private label and licensed products. The company has remained resilient to discount competition due to the breadth of inventory required to be a product authority in its category, similar to categories such as auto parts and crafting. The average Party City store holds 30,000 stock keeping units (SKUs) versus under 2,000 party-supply SKUs for dollar stores and less than 1,000 for mass-market merchandisers. These competitors concentrate on a smaller number of high-turning SKUs. Due to its broader focus, Party City has a competitive advantage as a one-stop shop for customers seeking a wide variety of supply options and color/style combinations. Party City’s online channel offers an even higher SKU count of around 80,000, including incremental categories and products that can be personalized before they are shipped to customers.

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Leveraged Finance Party City’s e-commerce operations represent 6% of total sales, or 10% of retail sales. Online penetration in the party-supply category remains lower than the retail average due to both low average tickets, which make shipping economics challenging, and customers’ desire to inspect products in person before purchase. Party City’s e-commerce average tickets are significantly higher than the in-store average, as purchases are more skewed toward complete party sets and likely benefit from the higher SKU count. Approximately 50% and 25% of online traffic and sales, respectively, are generated from mobile devices, and Fitch expects mobile penetration to increase generally across the retail sector over the next few years. The wholesale division sells both white-label (private label) and licensed products, and has strategies to grow both segments. The division’s goal is to expand its white-label program with more retailers, and the company recently established a relationship to wholesale Staples, Inc. party-supply and related inventory. Party City’s licensing partners include Walt Disney Co.; Mattel, Inc. and major professional sports leagues. The company seeks new partnerships for both the wholesale and retail channels, and will expand its existing Warner Brothers costume partnership in 2017 to include Batman, Superman and Wonder Woman. Party City has an acquisition strategy across both the retail and wholesale businesses. The company seeks accretive, tuck-in acquisitions of smaller party-supply chains (which are then converted to the Party City brand), Party City franchised locations and manufacturers that expand Party City’s manufacturing capacity and breadth. The company is likely to continue using a portion of its FCF to make opportunistic purchases of complementary businesses over the next several years. A significant 25% of revenue is generated during the five weeks preceding Halloween, including through Party City’s temporary Halloween City stores. An exogenous shock during this period, severe weather such as a severe hurricane or an adverse calendar shift could have a negative impact on operations and cash flows. Lost sales due to some macro factors are not expected to be recovered following the Halloween holiday. Halloween was on a Monday in 2016, as opposed to a Saturday in 2015, which led to lower Halloween-related spending and sales declines at Party City.

Operating Performance Party City grew revenue to $2.3 billion in 2015 from $1.9 billion in 2012, a CAGR of 6.5%, through store openings, comps growth, wholesale expansion and acquisitions. Acquisitions included the 50-unit iParty chain for $38 million in May 2013, metallic balloon distributor U.S. Balloon for $10 million in October 2014, and 23 franchise stores in Arizona and New Mexico for $28 million in December 2015 and January 2016. Margins expanded through gross margin improvement from increased internal manufacturing/ sourcing and expense leverage, with selling, general and administrative expense dollars remaining relatively stable despite revenue growth. Margin improvement led to EBITDA expansion to $361 million in 2015 from $193 million in 2012.

Management Strategy Management intends to grow organically, and through manufacturing operation acquisitions to source product and small chain acquisitions. Store count is likely to expand by around 25 stores per year, in line with recent history, with modestly positive comps over time. The company also plans to grow comps by improving brand image, executing merchandising initiatives to drive margins and expanding remodeling efforts. International growth is intended to outpace domestic growth given lower market shares outside the U.S. E-commerce could grow somewhat faster than retail from a much smaller base, in line with overall e-commerce trends. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Breakdown Across Segments and Geography 2011

2012

2013

2014

2015

LTM 9/30/16

584.9 1,287.1 1,872.0

582.8 1,331.0 1,913.8

592.8 1,452.4 2,045.1

646.4 1,624.9 2,271.3

653.6 1,640.9 2294.5

635.9 1,679.7 2,316.6

31.2 68.7 100.0

30.5 69.5 100.0

29.0 71.0 100.0

28.5 71.5 100.0

27.4 72.6 100.0

24.2 15.8 17.1

(0.4) 1.9 2.2

1.7 9.1 6.8

9.0 11.9 11.1

1.1 1.0 1.1

(3.2) 1.2 0.0

9.5

1.8

2.9

5.8

1.5

1.2

1,638.7 233.3 1,872.0

1,675.0 238.8 1,913.8

1,775.2 269.9 2,045.1

1,949.9 321.3 2,271.3

1,957.2 337.3 2,294.5

— — —

YoY Growth (%) U.S. RoW

8.3 111.9

2.2 2.2

6.0 12.8

9.8 19.4

0.5 4.6

— —

Sales Contribution by Geography (%) U.S. RoW Total

87.5 12.5 100.0

86.8 13.2 100.0

85.8 14.2 100.0

85.3 14.7 100.0

— — 100.0

— —

850 —

880 30

901 21

912 11

921 13

($ Mil.) Sales Contribution by Category Wholesale Retail Total Sales Contribution by Category (%) Wholesale Retail Total YoY Growth (%) Wholesale Retail Total Comps (%) Total Sales Contribution by Geography U.S. RoW Total

Store Count Stores YoY Change

YoY – Year-over-year. Comps – Comparable store sales. RoW – Rest of world. Note: LTM comps are for the three quarters ending September 2016. Store count data for 2011 not available. Source: Company filings.

Twenty percent of Party City’s retail SKUs are currently manufactured by the company’s wholesale arm, while 55% are sourced from third parties and distributed by the wholesale division. The company refers to this 75% of internally sourced inventory as “share of shelf”, with the remainder of inventory sourced and distributed by third parties. The company plans to grow its penetration of internally manufactured goods at retail toward 50%, with another 30% of retail internally distributed, for 80% share of shelf. This share-of-shelf expansion and increase in internally manufactured inventory could benefit gross margins by up to 200 bps over time. Increased penetration of internally manufactured retail inventory will be partially accomplished through acquisitions. The recent acquisitions of ACIM USA for $12 million in August 2015 and Festival SA for $5 million in March 2016 are expected to increase share of shelf substantially.

2017 Outlook Following a year negatively affected by a Halloween calendar shift, Fitch expects Party City to return to moderate top-line growth beginning in 2017, given 3%–4% consumer spending growth and continued benign competitive dynamics. The combination of low single-digit growth High-Yield Retail Checkout January 31, 2017

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Leveraged Finance across comps and wholesale expansion, coupled with approximately 25 new stores (2%–3% unit growth) per year, could yield around 2%–3% growth in annual revenue, reaching $2.3 billion in 2017 and $2.4 billion by 2018. EBITDA margins are expected to improve around 20 bps annually from the forecast 16.0% rate in 2016 on increased penetration of internally sourced goods and fixed-cost leverage from positive comps. EBITDA is consequently projected to increase to approximately $375 million in 2017 and toward $400 million thereafter from approximately $360 million in 2015. FCF after dividends, which ranged between break-even and $75 million over the past three years, is projected to reach approximately $100 million in 2016 and trend in the low $100 million range in 2017 and thereafter. FCF in 2016 should improve due to no sponsor dividends and reduced interest expense resulting from the company’s recent debt paydown and refinancing activity. FCF could be deployed toward tuck-in acquisitions or debt repayment. Party City is targeting 4.2x net debt leverage at the end of 2016, which equates to Fitch-defined leverage in the 6.0x range. Fitch’s EBITDA calculations vary somewhat to Party City-defined EBITDA due to fewer expense add-backs. Debt paydown is expected to be concentrated in the fourth quarter due to the company’s cash flow seasonality. The company is also targeting net leverage of around 3.5x by the end of 2017, or Fitch-defined leverage around mid-5.0x. Fitch views these targets as achievable.

Liquidity and Debt Structure Thomas H. Lee Partners took a 70% stake in Party City for $2.7 billion in 2012, with existing shareholders Advent International (24%) and minority investors/management (6%) holding the remaining equity. The investment was funded with $1.525 billion of asset-backed loan (ABL) revolver and term loan facilities, and $700 million of 8.875% pay-in-kind notes. The company went public in 2015, with Thomas H. Lee Partners still owning 55% and Advent International

Capital Structure ($ Mil., Pro Forma At Sept. 30, 2016) Description

Amount

(%)

Secured Debt $540 Mil. ABL Revolver due 8/19/20 Senior Secured Term Loan due 8/19/22 Total Secured Debt

308.1 1,226.6 1,534.7

16.3 65.0 81.4

Unsecured Debt 6.125% Sr. Subordinated Notes due 8/15/23 Total Unsecured Debt Capital Leases Total Debt

350.0 350.0 1.5 1,886.2

18.6 18.6 0.1 100.0

ABL – Asset-based loan. Note: Pro forma for the drawing of ABL used to repay term loan. Percentages may not add due to rounding. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., Pro Forma At Sept. 30, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., Pro Forma At Sept. 30, 2016) 3.1 3.1 3.1 3.1 3.1 1,561.1

Note: Excludes borrowings under credit facility. Pro forma for subsequent prepayment of term loan. Source: Company filings, Fitch Ratings.

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Cash Revolver Availability Total

47.6 305.0 352.6

Note: Revolver availability is net of borrowings and letters of credit outstanding. Pro forma for subsequent drawing of ABL. Source: Company filings, Fitch Ratings.

296

Leveraged Finance owning 19% of the stock as of November 2016. IPO proceeds were used to repay the balance on the companyâ&#x20AC;&#x2122;s pay-in-kind notes. Liquidity is adequate, with $47.6 million of cash and $405.0 million in revolver availability as of Sept. 30, 2016. The nearest maturity is in 2020, when the $540 million ABL revolver expires. Given the companyâ&#x20AC;&#x2122;s category leadership, positive operating trends and cash flow generation, and limited maturities prior to 2020, Fitch believes ongoing refinancing risk is low. Party City Holdings Inc. (PCHI) entered a new credit agreement on Aug. 15, 2015, consisting of a $1,340 million senior secured term loan and a $640 million senior secured ABL revolving loan facility, which includes a $40 million first-in, last-out facility. The ABL maximum is the lesser of $540 million or the maximum borrowing base, except during the seasonal peak, when it temporarily increases to $640 million. In August 2015, PCHI also issued $350 million of 6.125% senior notes due 2023 used along with proceeds from the new term loan to repay existing debt. Party City amended its credit agreement in October 2016 by drawing $100 million on its ABL, prepaying the term loan by that amount, and then replacing its term loan with a new term loan at the same principal amount. Under this amendment, the applicable margin for both base rate loans and LIBOR loans was reduced by 25 bps. While the refinancing does reduce liquidity somewhat in the near term, Fitch expects the company could direct fourth-quarter debt paydown toward revolver borrowings, improving liquidity into 2017. Pro forma for the October refinancing, the availability of the ABL revolver would be $305.0 million in September 2016.

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Leveraged Finance Recovery Analysis Fitch’s recovery analysis is based on a going concern value of $1.4 billion, versus approximately $680 million from an orderly liquidation of assets, which is composed primarily of inventory. Post-default EBITDA was estimated at around $250 million, assuming approximately one-third of stores close, and weak sales and margins following a default due to a weak retail environment. A multiple of 5.5x is applied, at the higher end of the 4.0x–6.0x multiple range observed in Fitch retail case studies, given the company’s leading market position in party products. After deducting 10% for administrative claims, the remaining $1.2 billion would lead to outstanding recovery prospects (91%–100%) for the ABL revolver, which is assigned a ‘bb*/rr1*’ and good recovery prospects (51%–70%) for the term loan, which is assigned a ‘b+*/rr3*’. The unsecured creditors would be expected to have poor recovery prospects (0%– 10%), thus the notes are assigned a ‘ccc+*/rr6*’. Pro forma debt figures following term loan repayment in October 2016 are assumed.

Recovery Analysis — Party City Holdco, Inc. ($ Mil., Except Where Noted: Credit Opinion: b*) Liquidation Value (LV)

Distressed Enterprise Value (EV) as a Going Concern (GC) Projected Post-Default EBITDA GC EV Multiple (x) Distressed EV on GC Basis

250.0 5.5 1,375.0

Book Value

Advance Rate (%)

Avail. to Creditors

47.6 177.9 683.7 282.7 —

0 80 70 20 —

 142.3 478.6 56.5 677.4

Cash A/R Inventory Net PPE Total LV

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

1,375.0 137.5 1,237.5

Distribution of Value Secured Priority Sr. Secured Facilitya Sr. Secured Term Loan

Amount

Value Recovered

Recovery (%)

401.1 1,226.6

401.1 836.4

100 68

Recovery Rating rr1* rr3*

Notching +3 +1

Credit Opinion bb* b+*

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority b

Sr. Unsecured Sr. Subordinated Subordinated

836.4 836.4 

Amount

Value Recovered

Recovery (%)

75.2 350.0 —

  

Recovery Rating  rr6* 

Notching  –2 

Credit Opinion  ccc+* 

Fitch assumes the credit facility is 70% drawn in a distressed scenario. The credit facility reflects a weighted average $573 Mil. commitment as the commitment is $640 Mil. July–October and $540 Mil. otherwise. bReflects estimated operating lease claims. A/R – Accounts receivable. PPE – Property, plant and equipment. Note: Please refer to the front page of the issuer Credit Profile report for disclaimers with regard to Credit Opinions. Source: Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — Party City Holdco, Inc. ($ Mil., As of Sept. 30, 2016) Thomas H. Lee Partners 55%

Advent International 19%

Public Shareholders 26%

Party City Holdco, Inc. (IDCO — b*) PC Nextco Holdings, LLC PC Intermediate Holdings, Inc. Downstream Guarantee

Party City Holdings, Inc. (IDCO — b*) Debt Issue $540 Mil. Senior Secured ABL Revolver due 8/19/20 $1,340 Mil. Senior Secured Term Loan due 8/19/22 6.125% Senior Subordinated Notes due 8/15/23 (Guaranteed) Capital Leases Total

Nonguarantor Subsidiaries

Amount 308.1 1,226.6 350.0 1.5 1,886.6

IDCO bb*/rr1* b+*/rr3* ccc+*/rr6* — —

Upstream Guarantees

Guarantor Subsidiaries

IDCO – Issuer Default Credit Opinion. ABL – Asset-based loan. Note: Debt figures are pro forma to reflect the drawing of the ABL to repay the term loan subsequent to Sept. 30, 2016. Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Party City Holdings, Inc. Overview Borrowers Document Date and Location Description of Debt

Maturity Date Amount Ranking Security Guarantee

Financial Covenants Fixed-Charge Coverage

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Event

Key Definitions

Pricing Coupon Type/Index Pricing Grid

PC Intermediate Holdings, Inc., Party City Holdings Inc. and Party City Corporation. Credit Agreement date 8/19/15 (Exhibit 10.3 to 8-K filed 8/21/15) Senior secured asset-based revolving credit facility subject to a borrowing base equal to 90% of eligible trade receivables plus 90% of eligible credit/debit card receivables plus 90%–92.5%, depending on the time of year, of eligible inventory at net appraised orderly liquidation value and letters of credit minus the difference between the outstanding FILO loan and the FILO borrowing base (if positive). There is also a FILO facility that is subject to a borrowing base equal to 5% of eligible trade receivables plus 5% of eligible credit/debit card receivables plus 5% of eligible inventor at net appraised orderly liquidation value and letters of credit. 8/19/20 for the FILO and ABL Facility $500 Mil. for the ABL, seasonally increased to $600 Mil. between July 1 and October 31 of each calendar year, and $40 Mil. for the FILO Facility. Senior secured. Secured by a first lien on A/R and inventory, second lien on all other tangible and intangible assets. Guaranteed by all material, wholly owned domestic subsidiaries on a senior secured basis. An immaterial subsidiary is defined as a subsidiary that constitutes less than 4% of consolidated total assets and 4% of consolidated revenue; the maximum consolidated total assets and revenue these subsidiaries can represent in aggregate is 5%.

Notable Permitted Debt: 1) $350 Mil. senior unsecured notes, $1,340 Mil. term loan facility and any incremental debt permitted to be incurred by the term loan documents. 2) Capital leases not to exceed the greater of $65 Mil. and 2% of total assets. 3) Indebtedness of subsidiaries that are not loan parties not to exceed the greater of $100 Mil. and 3% of total assets. 4) Acquisition associated debt as long as the pro forma total leverage ratio does not exceed 6.0x. 5) Unsecured debt as long as leverage is below 6.0x, not to exceed the greater of $100 Mil. and 3.0% of total assets. 6) General carveout constituting the greater of $150 Mil. and 4.5% of total assets. 7) Any debt with respect to a transaction provided there is no event of default, excess availability is greater than 12.5% of the total line cap, and the fixed charge coverage ratio is at least 1.0x. If debt is secured, shall mature at least 91 days after the ABL. General carveout of the greater of $65 Mil. and 2% of total assets. Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions.

A CoC is defined as the acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. Acquisitions allowed if payment conditions, defined below, are satisfied. Acquisitions over $15 Mil. individually and $50 Mil. in aggregate in a given year do not need to satisfy payment conditions. Total consideration paid to nonguarantors limited to the greater of $150 Mil. and 4.75% of total assets. General investment carveout of the greater of $50 Mil. and 1.5% of total assets. Carveouts: Store closures and related inventory dispositions are limited to 20% in any fiscal year provided that the ABL cap exceeds 10%. Also permitted as long as at least 75% of total consideration is in cash and noncash consideration is no more than the greater of $25 Mil and 0.75% of total assets. General carveout of the greater of $30 Mil and 1% of total assets per annum.

Carveouts: Share repurchase of employee equity interests, no greater than $25 Mil. per fiscal year. The unused amounts can be carried over. RPs are also permitted so long as the payment conditions, as defined below, are met.

Yes, for material indebtedness of more than $50 Mil. N.A. Yes. Not more than in two quarter in any period of four quarters and no more than five times over the life of the facilities. Cure amount applied to EBITDA for calculation purposes. The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility upon occurrence of a cash dominion event, which means either (i) the occurrence and continuance of any specified default, or (ii) the borrowers’ failure to maintain availability of at least the greater of 10% of loan cap or $40 Mil. for five consecutive days. Payment Conditions: With respect to a specified payment (a) no event of default exists or would arise therefrom; (b) availability will be equal to or greater than 12.5% of the loan cap for the last 90 days; and (c) either revolver availability immediately following the specified payment is greater than 15% or pro forma consolidated fixed-charge coverage ratio is no less than 1.0x.

Floating based off LIBOR or ABR. The ABR is the highest of (a) the prime rate as defined by JP Morgan; (b) the federal funds rate plus 50 bps and; (c) LIBOR plus 100 bps. ABL Facility: LIBOR + 125 bps−150 bps or ABR + 25 bps−50 bps, depending on average daily availability. FILO: LIBOR + 250 bps or ABR + 150 bps. Commitment Fee: 0.250%–0.375% based on usage.

FILO – First in, last out. ABL − Asset-based loan. A/R − Accounts receivable. N.A. – Not applicable. MAC − Material adverse change. ABR – Alternate base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Party City Holdings, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

PC Intermediate Holdings, Inc., Party City Holdings Inc. and Party City Corporation. Credit Agreement date 8/19/15 (Exhibit 10.1 to 8-K filed 8/21/15) First Amendment to Credit Agreement dated 10/20/16 (Exhibit 10.1 to 8-K filed 10/24/16) Senior secured term loan 8/19/22 $1,226.6 Mil. Senior secured. Secured by a first lien on all other tangible and intangible assets, second lien on A/R and inventory. Guaranteed by all material, wholly owned domestic subsidiaries on a senior secured basis. An immaterial subsidiary is defined as a subsidiary that constitutes less than 4% of consolidated total assets and 4% of consolidated revenue; the maximum consolidated total assets and revenue these subsidiaries can represent in aggregate is 5%.

Notable Permitted Debt: 1) $350 Mil. senior unsecured notes and $640 Mil. ABL and FILO facility. 2) Capital leases not to exceed the greater of $65 Mil. and 2% of total assets. 3) Indebtedness of subsidiaries that are not loan parties not to exceed the greater of $100 Mil. and 3% of total assets. 4) Acquisition associated debt as long as the pro forma total leverage ratio does not exceed 6.0x. 5) Pari passu debt so long a pro forma leverage is below 4.25x; unsecured debt as long as leverage is below 6.0x, both together not to exceed the greater of $100 Mil. and 3.0% of total assets. 6) General carveout constituting the greater of $150 Mil. and 4.5% of total assets. General carveout of the greater of $65 Mil. and 2% of total assets. Guarantees are defined as debt and investments and hence governed by the debt and investment restrictions.

A CoC is defined as the acquisition of more than 35% of voting stock by nonpermitted holders and constitutes an event of default. Total acquisition consideration paid to nonguarantors limited to the greater of $175 Mil. and 5.25% of total assets; exception made if acquisition funded from issuance of equity. General investment carveout of the greater of $115 Mil. and 3.5% of total assets. Carveouts: Store closures and related inventory dispositions are limited to 20% in any fiscal year provided that the ABL cap exceeds 10%. Also permitted as long as at least 75% of total consideration is in cash and noncash consideration is no more than the greater of $25 Mil. and 0.75% of total assets. General carveout of the greater of $30 Mil. and 1% of total assets per annum.

Carveouts: There is a general carveout of the greater of $50 Mil. and 1.5% of total assets per annum; dividends of 6% of current market capitalization allowed; share repurchases of employee equity interest up to $25 Mil. annually, with unused amounts carrying forward to succeeding calendar years. Other restricted payments so long as no event of default has occurred and the consolidated total leverage ratio is less than or equal to 4.0x.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

Yes, for material indebtedness (more than $50 Mil.). N.A. Yes. None. None. 50% of total commitments.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

— — — —

Principal Repayments Mandatory/Tax Prepayment

Callability/Optional Prepayment Pricing Coupon Type/Index Pricing Grid

50% of excess cash flow, with a stepdown to 25% if total leverage is less than 3.5x, then 0% if total leverage is less than 2.5x; 100% of net proceeds from asset sales subject to company’s reinvestment rights and a de minimis amount of $15 Mil. per transaction and $25 Mil. in a fiscal year; 100% of net proceeds from debt issuance other than debt permitted under the credit facilities. Optional prepayment with or without prepayment penalty.

Floating based off LIBOR or ABR. The ABR is the highest of (a) the PR as defined by JP Morgan; (b) the federal funds rate plus 50 bps; (c) LIBOR plus 100 bps and; (d) 200 bps. Term Loan: LIBOR + 300 bps or ABR + 200 bps.

A/R − Accounts receivable. ABL − Asset-based loans. FILO – First in, last out. N.A. – Not applicable. MAC − Material adverse change. ABR – Alternate base rate. PR − Prime rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Party City Holdings, Inc. Covenant Issuer(s) Document Date and Location Description of Debt Amount Maturity Date Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability/Optional Prepayment

Covenant Suspension

Description Party City Holdings, Inc. Indenture dated 8/19/15 (Exhibit 4.1 to 8-K filed 8/21/15) 6.125% senior subordinated notes $350 Mil. 8/15/23 The notes are the company’s and the guarantors’ unsecured senior subordinated obligations. Unsecured. The notes are guaranteed, jointly and severally, fully and unconditionally, on an unsecured senior subordinated basis, by each of the company’s subsidiaries that guarantee indebtedness under the company’s senior secured term loan credit facility and senior secured revolving credit facility.

Company may issue debt or preferred stock if the pro forma fixed-charge coverage ratio is more than or equal to 2.0x for the company and restricted subsidiaries; debt of nonguarantor restricted subs limited to greater of $115 Mil. or 3.25% of total assets; debt to finance property or equipment purchase limited to the greater of $75 Mil. or 2.25% of total assets. Issuer may incur liens to secure indebtedness so long as the pro forma secured debt ratio is below 4.25x. There is a general carveout of the greater of $65 Mil. and 2% of total assets.

A CoC is defined as the acquisition of more than 50% of voting power and it triggers an offer to purchase the notes at 101. Carveouts for Permitted Investments: Investments in similar businesses of up to the greater of $115 Mil. and 3.5% of total assets provided the entity hence becomes a restricted subsidiary. General carveout of the greater of $115 Mil. and 3.5% of assets. If proceeds net of reinvestments and secured debt prepayments exceed $40 Mil. then issuer will offer to pay down the notes above that amount.

RPs are permitted provided the do not exceed the greater of $85 Mil. and 2.5% or so long as the pro forma debt ratio is less than 4.0x.

Yes, on debt of more than $65 Mil. N.A. None. Until Aug. 15, 2018, the company may use the proceeds of an equity offering to redeem up to 40% of the principal amount at 106.125% of principal plus accrued and unpaid interest. Redeemable, at the company’s option, in whole or in part, prior to 12/15/16 at the principal amount plus the applicable premium. On and after 12/15/16, the company may redeem all or part of the notes at the following prices beginning on dates set forth below: 8/15/18 — 103.063% 8/15/19 — 101.531% 8/15/20 and thereafter — 100.000%. Covenants related to debt incurrence, restricted payments, disposition of assets, change of control and mergers will be suspended if (a) the notes have investment-grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Party City Holdings Inc. 12 Months 12/31/12 12/31/13 12/31/14 ($ Mil.) Profitability (%) Operating EBITDAR Margin 19.6 22.9 24.5 Operating EBITDA Margin 10.1 13.1 15.0 Operating EBIT Margin 5.7 8.4 11.4 FFO Margin 3.6 5.8 8.3 FCF Margin (3.9) 3.6 2.6 Return on Capital Employed — 5.8 8.7 Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR 8.8 7.4 7.0 FFO-Adjusted Leverage 10.4 7.8 7.1 FCF/Total Adjusted Debt (%) (2.2) 2.2 1.5 Total Debt with Equity Credit/ a Operating EBITDA 9.6 6.9 6.3 Total Secured Debt/Operating EBITDAa 5.7 4.1 3.2 Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) 30.8 12.5 12.7 Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa 8.8 7.3 6.9 FFO-Adjusted Net Leverage 10.3 7.7 7.0 Total Net Debt/(CFFO – Capex) (24.6) 24.3 23.4 Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a 1.5 1.5 1.5 Operating EBITDA/Interest Paida 2.9 2.2 2.3 FFO Fixed-Charge Coverage 1.3 1.4 1.5 FFO Interest Coverage 2.0 2.0 2.3 CFFO/Capex (0.6) 2.2 2.1 Debt Summary Total Debt with Equity Credit 1,852 1,838 2,151 Total Adjusted Debt with Equity Credit 3,305 3,442 3,884 Lease-Equivalent Debt 1,454 1,604 1,733 Other Off-Balance Sheet Debt — — — Interest (Paid) (67) (121) (146) Implied Cost of Debt (%) — 6.6 7.3 Cash Flow Summary FFO 69 119 188 Change in Working Capital (Fitch Defined) (98) 16 (20) CFFO (29) 136 168 Non-Operating/Nonrecurring Cash Flow — — — Capital (Expenditures) (45) (61) (78) Common Dividends (Paid) — — (32) FCF (74) 75 58 Acquisitions and Divestitures (1,565) (52) (12) Net Debt Proceeds 860 (19) (25) Net Equity Proceeds 809 1 1 Other Investing and Financing Cash Flows (31) (0) (0) Total Change in Cash and Equivalents (1) 5 22 Liquidity Readily Available Cash and Equivalents 21 25 47 Availability Under Committed Credit Lines 359 347 357 Not Readily Available Cash and Equivalentsb — — — Working Capital Net Working Capital (Fitch Defined) 381 367 412 Trade Accounts Receivable (Days) 25 25 23 Inventory Turnover (Days) 154 152 155 Trade Accounts Payable (Days) 37 44 39 Capital Intensity (%) 2.4 3.0 3.4

12 Months 9/30/15 12/31/15 12/31/15

Three Months

Three Months 3/31/16

6/30/16

9/30/16

LTM 9/30/16

25.6 15.7 12.2 6.1 0.1 9.6

21.7 9.4 4.8 5.4 (7.0) 9.5

26.7 15.8 11.9 9.3 11.3 9.7

20.5 10.4 6.8 7.4 (10.9) 10.2

25.9 16.2 12.6 9.9 8.4 10.2

6.1 7.1 0.0

6.2 7.5 2.0

6.1 6.9 3.3

6.1 6.8 5.3

5.7 3.7

5.0 4.0

5.1 4.2

4.9 3.9

5.0 4.0

15.0

17.4

15.8

15.9

12.2

10.4

8.7

6.5 6.7 24.6

6.3 6.8 77.6

6.5 7.5 (736.5)

6.1 7.0 1,260.1

6.1 7.0 1,264.6

6.2 7.4 24.8

6.0 6.8 14.7

6.0 6.7 9.4

1.6 2.5 1.5 2.4 2.0

1.6 2.4 1.4 2.1 1.3

1.6 2.5 1.4 2.0 1.0

1.7 3.2 1.4 2.4 1.9

1.8 3.4 1.6 2.8 2.5

1.9 4.3 1.7 3.6 3.6

1,924 3,728 1,804 — (140) 7.3

1,871 3,675 1,804 — (149) 7.9

2,042 3,847 1,804 — (140) 6.9

1,791 3,595 1,804 — (143) 8.0

1,797 3,601 1,804 — (143) 7.3

1,845 3,650 1,804 — (111) 5.9

1,800 3,605 1,804 — (109) 5.9

1,867 3,671 1,804 — (87) 4.5

15 (106) (91) — (13) — (104) (8) 106 — (5) (11)

8 23 31 — (19) 0 12 (0) (404) 397 1 7

4 (108) (105) — (30) — (135) (10) 169 (0) (13) 11

114 130 245 — (17) 0 228 (4) (234) 0 (1) (11)

141 (61) 80 — (79) — 1 (23) (363) 397 (17) (4)

25 (37) (13) — (20) — (32) (29) 50 0 0 (10)

48 27 75 — (16) — 59 (3) (46) 0 (1) 9

41 (80) (39) — (22) — (61) 0 65 1 (0) 6

229 40 268 — (74) 0 194 (36) (164) 1 (1) (6)

36 400

43 400

54 400

43 385

33 359

42 374

48 405

—

481 25 177 28 2.8

439 21 188 47 3.9

506 31 170 50 5.4

439 15 123 24 2.1

439 21 151 30 3.4

471 23 184 31 4.3

452 20 184 44 3.1

509 29 173 48 3.9

509 28 183 51 3.2

3/31/15

6/30/15

21.8 9.6 5.2 3.2 (22.5) 8.9

25.9 14.5 10.5 1.6 2.4 9.1

19.6 9.5 5.9 0.6 (24.3) 9.5

31.8 24.6 21.9 14.7 29.2 9.5

6.6 6.7 1.7

6.4 6.9 0.2

6.6 7.6 (0.1)

5.6 3.1

5.3 3.0

12.6

EBITDA/R after dividends to associates and minorities. bParty City does not disclose cash held away at international subsidiaries. cSame-store sales for the LTM reflect the nine months ended Sept. 30, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Party City Holdings Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data c Comparable Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Months 9/30/15 12/31/15 12/31/15

Three Months

12/31/12 12/31/13 12/31/14

3/31/15

6/30/15

Three Months 3/31/16

6/30/16

9/30/16

LTM 9/30/16

1,914 2.2 375

2,045 6.9 468

2,271 11.1 557

462 6.7 101

496 0.8 128

555 2.3 109

782 (2.8) 248

2,295 1.0 586

458 (0.9) 99

519 4.8 138

557 0.3 114

2,316 (0.1) 600

375 193

468 267

557 341

101 44

128 72

109 53

248 192

586 361

99 43

138 82

114 58

600 375

193 110

267 172

341 258

44 24

72 52

53 33

192 171

361 280

43 22

82 62

58 38

375 293

1.8 850 36.8 0.2 2.4 9.8 11.0 (0.6) 54.0

2.9 880 38.4 0.6 2.4 8.4 14.0 0.4 64.7

5.8 901 39.8 0.8 2.3 9.4 17.8 2.1 94.4

5.2 898 36.7 39.9 2.4 15.2 17.5 2.3 63.1

1.2 902 39.7 39.3 2.2 8.9 18.1 1.4 97.6

(3.6) 908 34.9 39.3 2.0 7.0 17.4 0.1 152.5

2.8 912 47.1 27.4 2.4 12.2 18.7 0.3 80.2

1.5 912 40.4 2.0 2.4 12.2 18.7 0.3 97.9

(1.5) 912 37.4 48.3 2.3 14.0 18.2 0.6 93.5

3.8 912 41.2 42.7 2.2 9.1 18.8 1.9 79.9

1.2 921 36.0 40.7 2.0 7.2 18.5 3.4 107.9

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Leveraged Finance Retailing / U.S.A.

PVH Corp. Credit Profile Credit Opinion

Credit Profile Summary

Long-Term Issuer Credit Opinion Senior Secured Revolver Credit Opinion Senior Secured Term Loan Credit Opinion Senior Secured Debentures Credit Opinion Senior Unsecured Notes Credit Opinion

bb*/stable bb+*/rr1* bb+*/rr1* bb+*/rr1* bb*/rr4*

Financial Data PVH Corp. (USD Mil.) Total Revenues EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Adjusted Debt/EBITDAR (x) EBITDAR/Interest + Rents (x)

Strong Portfolio of Brands: With annual revenues of USD8 billion, PVH Corp. is a leading international apparel company with a strong portfolio of brands, including Tommy Hilfiger and Calvin Klein, which represent 43% and 38% of the company’s sales, respectively. PVH has a strong international presence that contributes 45% of the company’s total revenues and provides diversification benefits in an industry characterized by high cyclicality and variations in fashion and consumer preferences.

FYE LTM 1/31/16 10/30/16 8,020.3 8,207.9 1,123.3 1,124.7 14.0 13.7 623.3 819.1 7,715.4 7,836.4 4.6

4.6

2.5

Organic Growth Solid: Constant currency revenues were up 4% in the nine months ended Oct. 30, 2016, or 3% including FX impact. Repositioning of Calvin Klein’s underwear and jeanswear businesses and wholesale growth at Calvin Klein and Tommy Hilfiger have driven top line, mitigating recent pressure at the company’s U.S. retail stores. Fitch Ratings expects constant currency growth to remain in the low single digits for the next two to three years. EBITDA is expected to remain flat at around USD1.1 billion in 2016 as results continue to be negatively affected by the stronger U.S. dollar. Diverse Channel and Geographic Presence: PVH’s channel agnostic approach and diversified geographic presence has insulated it from the recent traffic challenges faced by North American department stores and specialty retailers. The company’s exposure to Macy’s, Inc. is limited to less than 10% of revenues and mitigated by presence in the off-price and online channels, which continue to see good growth. Both Calvin Klein and Tommy Hilfiger have performed well in China and Europe due to their premium positioning. Business Transformation a Long-Term Positive: In recent years, the company purchased Tommy Hilfiger (2010), sold G.H. Bass (2013), bought Calvin Klein licensee Warnaco (2013) and exited the IZOD retail business (2015). PVH recently consolidated its Asian joint venture to have direct control over the business expansion and entered into a licensing agreement with G-III Apparel Group, LTD to develop the womenswear business for Tommy Hilfiger. This transformation has allowed PVH to build scale and focus selling efforts on key brands. Improving Financial Leverage: PVH is projected to generate FCF of approximately USD500 million in 2016 and approximately USD600 million annually thereafter. FCF is expected to be used for share repurchases and smaller licensee acquisitions. Fitch expects adjusted debt/EBITDAR to approach mid-4x on EBITDA improvement and term loan amortization. Management targets debt/EBITDA of about 2.5x, which equates to adjusted debt/EBITDAR of around 4.5x.

Credit Profile Drivers Positive Drivers: Positive credit drivers include improvements in top-line growth and margins leading to a sustainable improvement in adjusted leverage to below 4.0x. However, this is not expected due to management’s leverage targets. Analysts JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com

Negative Drivers: Negative credit drivers include flat to modestly negative organic growth, or a more aggressive financial policy that causes adjusted debt/EBITDAR to remain above the mid4x range.

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — PVH Corp. (USD Mil.) Revenue Revenue Growth (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations Capex Capex/Revenues (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Adjusted Debt/EBITDAR (x)

2015A

2016F

2017F

8,020 (2.7) 1,123 14.0 (4) 900 (264) 3.3 (13) 623 (138) 3,231 7,715 4.6

8,187 2.1 1,080 13.2 (46) 798 (270) 3.3 (13) 515 (300) 3,354 7,971 4.8

8,351 2.0 1,096 13.1 (10) 848 (276) 3.3 (14) 559 (300) 3,237 7,993 4.7

2018F Comments 8,601 3.0 1,157 13.5 (17) 911 (284) 3.3 (14) 613 (400) 3,061 7,960 4.5

— — — — — — — — — — — — — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Revenue Breakdown (LTM Ended Oct. 30, 2016) Tommy Hilfiger International 23%

Tommy Hilfiger North America 20%

Calvin Klein North America 21%

Heritage Brands 19%

Calvin Klein International 17%

Source: Company filings, Fitch Ratings.

EBIT Breakdown (LTM Ended Oct. 30, 2016) Tommy Hilfiger International 25%

Tommy Hilfiger North America 15%

Heritage Brands 11%

Calvin Klein North America 25%

Calvin Klein International 24%

Business Profile Assessment Strong Brand Portfolio PVH is a major global apparel company, operating three businesses: Tommy Hilfiger, Calvin Klein and Heritage Brands. The company produces dress shirts, neckwear, sportswear, womenswear and footwear through its owned and licensed brands, and licenses its owned brands for a variety of products. The company’s revenues for the LTM ended Nov. 1, 2015, were divided 42% Tommy Hilfiger, 38% Calvin Klein and 19% Heritage Brands. Calvin Klein is the company’s most profitable brand, with LTM EBIT margin of 14.8% as of Oct. 30, 2016, versus Tommy Hilfiger at 12.6% and Heritage Brands at 6.8%. PVH’s 2015 revenue mix was 55% domestic and 45% international. The international portion increased from 11% in 2009 due to the Tommy Hilfiger and Warnaco acquisitions. PVH’s largest customer is Macy’s, which accounts for less than 10% of its sales. The company’s low exposure to challenged department store and specialty retailers, and good exposure to offprice and online provides insulation from recent deceleration in mall traffic trends. PVH utilizes its online partners, such as Amazon, Inc., to sell its core products, while selling its fashion products through partners such as Macy’s or through its own stores. The company’s growth strategy centers on the Tommy Hilfiger and Calvin Klein businesses, especially in international markets. PVH’s Warnaco acquisition in 2013 provided the company with a stronger platform internationally, especially in key markets within Asia and Latin America. The company has focused much of its growth strategy on innerwear (basic undergarments) and denim within both the Calvin Klein and Tommy Hilfiger brands. Management’s strategy for Heritage Brands, which includes Van Heusen, IZOD and Speedo, among others, is to improve profitability through actions such as reducing retail footprint.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Segment Data Revenue (USD Mil.) Calvin Klein North America Calvin Klein International Total Calvin Klein Tommy Hilfiger North America Tommy Hilfiger International Total Tommy Hilfiger Heritage Brand Wholesale Heritage Brand Retail Total Heritage Brands Total Revenue Growth (%) Calvin Klein North America Calvin Klein International Total Calvin Klein Tommy Hilfiger North America Tommy Hilfiger International Total Tommy Hilfiger Heritage Brand Wholesale Heritage Brand Retail Total Heritage Brands Total Revenue Contribution (%) Calvin Klein North America Calvin Klein International Total Calvin Klein Tommy Hilfiger North America Tommy Hilfiger International Total Tommy Hilfiger Heritage Brand Wholesale Heritage Brand Retail Total Heritage Brands Total EBIT Margin (%) Calvin Klein North America Calvin Klein International Total Calvin Klein Tommy Hilfiger North America Tommy Hilfiger International Total Tommy Hilfiger Heritage Brand Wholesale Heritage Brand Retail Total Heritage Brands Total Pre-Corporate Corporate Total EBIT Contribution (%) Calvin Klein North America Calvin Klein International Total Calvin Klein Tommy Hilfiger North America Tommy Hilfiger International Total Tommy Hilfiger Heritage Brand Wholesale Heritage Brand Retail Total Heritage Brands Total Pre-Corporate

2010

2011

2012

2013

2014

2015

LTM 10/30/16

— — 934 904 1,041 1,945 1,113 645 1,758 4,637

832 233 1,065 1,298 1,753 3,051 1,122 652 1,775 5,891

907 243 1,150 1,430 1,787 3,217 1,012 664 1,676 6,043

1,473 1,324 2,797 1,542 1,891 3,433 1,440 547 1,987 8,216

1,551 1,308 2,859 1,636 1,946 3,582 1,445 356 1,801 8,241

1,635 1,288 2,923 1,623 1,747 3,370 1,410 319 1,728 8,020

1,740 1,406 3,146 1,582 1,902 3,483 1,316 262 1,577 8,207

— — 16.6 — — — 13.3 4.7 10.0 93.3

— — 14.1 43.5 68.4 56.8 0.8 1.2 0.9 27.0

9.0 4.4 8.0 10.2 1.9 5.4 (9.8) 1.7 (5.6) 2.6

62.3 432.0 140.5 7.9 5.8 6.7 42.2 (17.6) 18.6 35.5

5.3 1.1 3.3 6.1 2.9 4.3 0.4 (35.0) (9.4) 0.7

5.4 (1.5) 2.2 (0.8) (10.2) (5.9) (2.5) (10.4) (4.0) (2.7)

11.3 11.9 11.6 11.6 8.3 2.9 (7.8) (24.4) (11.0) 2.9

0.0 0.0 20.1 19.5 22.4 42.0 24.0 13.9 37.9 100.0

14.1 4.0 18.1 22.0 29.8 51.8 19.1 11.1 30.1 100.0

15.0 4.0 19.0 23.7 29.6 53.2 16.7 11.0 27.7 100.0

18.0 15.8 33.8 18.8 23.1 41.9 17.6 6.7 24.3 100.0

18.8 15.9 34.7 19.8 23.6 43.5 17.5 4.3 21.8 100.0

20.4 16.1 36.4 20.2 21.8 42.0 17.6 4.0 21.5 100.0

21.2 17.1 38.3 19.3 23.2 42.4 16.0 3.2 19.2 100.0

— — 26.4 9.9 11.0 10.5 11.6 7.0 9.9 13.5 (1.6) 11.8

21.5 42.5 26.1 9.7 12.9 11.6 8.7 4.4 7.2 12.9 (1.4) 11.4

20.1 42.2 24.7 14.0 13.2 13.6 10.0 2.0 6.8 13.8 (1.4) 12.4

17.3 13.7 15.6 14.9 13.1 13.9 11.0 (0.8) 7.8 13.0 (1.2) 11.8

15.5 12.4 14.0 15.0 13.6 14.2 7.9 (0.8) 6.2 12.4 (1.2) 11.2

14.4 15.5 14.9 10.9 12.9 11.9 8.2 2.2 7.1 11.9 (1.4) 10.5

13.5 15.9 14.6 9.2 12.6 11.1 7.5 3.2 6.8 11.6 (1.3) 10.3

— — 39.4 14.3 18.3 32.7 20.7 7.3 27.9 100.0

23.6 13.1 36.7 16.6 29.9 46.6 12.9 3.8 16.8 100.0

21.8 12.3 34.1 24.0 28.3 52.2 12.1 1.6 13.7 100.0

23.9 16.6 40.5 21.7 23.3 45.0 14.9 (0.4) 14.5 100.0

23.4 15.8 39.3 24.0 25.8 49.8 11.2 (0.3) 10.9 100.0

24.5 20.8 45.3 18.5 23.5 41.9 12.0 0.7 12.7 100.0

24.7 23.6 48.2 15.3 25.2 40.5 10.4 0.9 11.3 100.0

Source: Company filings, Fitch Ratings.

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Leveraged Finance Calvin Klein PVH’s Calvin Klein business accounted for 38% of consolidated sales and 48% of EBIT in the LTM ending Oct. 30, 2016. This segment includes the jeans and underwear business acquired from Warnaco; a wholesale dress furnishings and men’s better sportswear business; the Calvin Klein outlet retail business; and the Calvin Klein Collection high-end apparel and accessories business, which is sold at wholesale and at the flagship store in New York City. Calvin Klein continues to license women’s dresses and suits, men’s tailored clothing and other categories. The Warnaco acquisition gave PVH greater control over Calvin Klein, allowing it to execute a broad, global strategy of repositioning and growth. Marketing efforts target an elevated brand position through consistent messaging across platforms, including digital, traditional media and celebrity associations. The elevated positioning has helped PVH turn around the brand’s stagnant denim sales in the U.S. and Europe. The company is also increasing its penetration of apparel, including innerwear, across these relatively mature markets. PVH believes Calvin Klein has ample runway for growth in Europe given its current size of USD600 million in retail sales versus about USD2 billion for Tommy Hilfiger. Calvin Klein is around 50%–100% larger than Tommy Hilfiger in all other markets, and the company believes it can achieve strong growth in Europe through the launch of women’s sportswear and further development of its men’s sportswear and tailored clothing businesses. Asia, Latin America and Mexico are considered growth markets, with the company expanding across categories and exploring both wholesale and retail opportunities. The company is leveraging Tommy Hilfiger’s strong international platform to help grow the Calvin Klein brand, particularly in Europe. PVH appointed designer Raf Simons as chief creative officer of Calvin Klein in August 2016 as part of the repositioning efforts. PVH’s Calvin Klein efforts were successful in 2016, with constant currency sales up 11% through the first three quarters of the year. YTD growth was pronounced in Europe and Asia, with relative softness in the U.S. retail business in concert with broader domestic apparel trends. Fitch expects U.S. softness to continue, with near-flat to slightly positive sales growth expected domestically for Calvin Klein. PVH’s ability to fill its international business by growing new markets and expanding category presence in existing markets should drive midsingle-digit constant currency growth over the next 24–36 months. Combined with flat to positive low single-digit growth in North America, this should yield low single-digit growth globally for the Calvin Klein brand.

Tommy Hilfiger Tommy Hilfiger, which PVH acquired in 2010 and essentially doubled PVH’s size, accounted for 42% of revenues and 41% of EBIT in the LTM ending Oct. 30, 2016. Tommy Hilfiger has a strong international presence, particularly in Europe, where it makes up approximately 50% of brand sales internationally. The brand is distributed in more than 90 countries and through more than 1,600 Tommy Hilfiger retail stores worldwide, in addition to an exclusive relationship with Macy’s for sportswear in the U.S. The company recently entered into a licensing relationship with G-III for the design, production and distribution of Tommy Hilfiger womenswear. PVH hopes to leverage G-III’s expertise and scale to grow its womenswear line. While Tommy Hilfiger continues to grow market share in most international markets, the company is executing a brand repositioning in its relatively mature U.S. business. To revitalize sales, PVH is elevating the brand through product quality, remodeling activity to improve instore presentation and increased marketing spend. Global constant currency brand revenue is up 5% through the first three quarters of 2016, driven by the international segment. Reported High-Yield Retail Checkout January 31, 2017

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Leveraged Finance international grew 12%, while North America grew about 3.5% in the same period. Fitch expects midsingle-digit international growth (constant currency) mitigated by slight declines in the U.S. over the next several years, yielding low single-digit growth globally for the brand.

Heritage Brands The Heritage Brands business accounted for 19% of revenues and 11% of EBIT in the LTM ended Oct. 30, 2016. This business owns the IZOD, Van Heusen and Arrow apparel brands, and Warner’s and Olga (women’s intimates) brands. The company also manufactures apparel for licensed brands including Speedo, CHAPS, Geoffrey Beene, several Kenneth Cole Brands, MICHAEL Michael Kors and Michael Kors Collection. Eighty three percent of revenue in the LTM ending Oct. 30, 2016 was wholesale, with the remainder generated at PVH-operated Van Heusen retail stores. The company has underscored its focus on the Calvin Klein and Tommy Hilfiger brands in recent years by selling the G.H. Bass & Co. business in November 2013 and the closure of the 120-store IZOD retail division third-quarter 2015. The company continues to invest in the wholesale business within Heritage Brands. Current strategies include product innovations within dress furnishings, such as the Van Heusen Flex Collar introduced last year, and expansion of the Speedo brand beyond its core competitive swim market. Heritage Brands’ sales declined 11% for the first nine months of 2016 due to the closure of the IZOD retail stores and weakness in the Van Heusen stores, where comparable store sales were down 9%. Fitch expects there could be further declines as the company cycles through these store closures and competes in a still-challenging apparel market.

2017 Outlook International expansion at both Calvin Klein and Tommy Hilfiger should enable low single-digit constant currency growth for PVH over the next 24–36 months. Fitch expects continued softness at PVH’s North American retail stores will be offset by strong growth in the wholesale channels. PVH’s internal initiatives and less mature position in many international markets should also support growth. Reported EBITDA is projected to reach USD1.2 billion in 2018, an improvement from USD1.1 billion projected in 2016 and 2017, but near-flat to 2013–2014 results, mostly due to currency pressure. PVH is projected to generate FCF of USD500 million in 2016 and approximately USD600 million annually thereafter. Fitch expects the company to pay about USD120 million and USD180 million in term loan amortization payments in 2017 and 2018, respectively. Following these required payments, Fitch projects minimal debt paydown as the company reaches its targeted debt/EBITDA ratio of 2.5x, or adjusted debt/EBITDAR of around 4.5x. Fitch expects PVH to use excess FCF for share repurchases or small acquisitions to bring Tommy Hilfiger and Calvin Klein licensees in house.

Liquidity and Debt Structure PVH has strong liquidity, supported by available cash of USD662 million and revolver availability of USD663 million as of Oct. 30, 2016. The maturity schedule is manageable, with term loan amortization over the next four years, and the maturity of the revolver and Term Loan A in May 2021. PVH amended and extended its bank facilities during May 2016, providing for an additional USD582 million of loans under the Term Loan A and repayment of the outstanding

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Leveraged Finance USD572 million Term Loan B. Maturities of the USD696 million revolver and Term Loan were extended to May 2021 from February 2019. The company also issued 3.625% senior unsecured euro notes totaling EUR350 million (or USD377 million) in June 2016 to take advantage of the favorable interest rate environment. Proceeds of the notes were used for general corporate purposes.

Capital Structure Following the refinancing and subsequent debt repayment, PVH’s capital structure includes senior secured credit facilities composed of USD696 million revolvers and USD2.1 billion outstanding on Term Loan A. The company made a voluntary repayment on the term loan in the amount of USD251 million in the nine months ended Oct. 30, 2016. PVH and Tommy Hilfiger B.V. are the two borrowers under the credit facility. The term loans are U.S. dollar denominated, and the revolver includes a USD475 million U.S. dollar facility, a USD25 million facility available in U.S. or Canadian dollars, and a EUR186 million facility available in multiple currencies. PVH also has USD100 million of 7.750% secured debentures due 2023, USD700 million of 4.500% senior unsecured notes due 2022 and USD377 million of 3.625% senior unsecured notes due 2014. The senior secured credit facilities and the 7.750% debentures due 2023 are equally and ratably secured by a first-priority lien on substantially all of the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, except with respect to the stock and assets of the Calvin Klein subsidiaries, as discussed below.

Capital Structure (USD Mil., At Oct. 30, 2016) Description

Amount

(%)

Secured Debt $696 Mil. Secured Revolver due 5/19/21 Senior Secured Term Loan A due 5/19/21 7.750% Debentures due 11/15/23 Total Secured

0.0 2,138.0 100.0 2,238.0

0.0 63.8 3.0 66.8

Unsecured Debt 4.500% Sr. Unsecured Notes due 12/15/22 3.625% Sr. Unsecured Notes due 6/15/24 Capital Leases Total Unsecured Foreign Bank Facilities Total Debt

700.0 375.6 18.0 1,093.6 21.0 3,352.6

20.9 11.2 0.5 32.6 0.6 100.0

Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

(USD Mil., At Oct. 30, 2016) 2017 2018 2019 2020 2021 Thereafter

(USD Mil., At Oct. 30, 2016) 117.4 146.7 205.4 234.7 1,404.4 1,175.6

Cash Revolver Availability Total Liquidity

662.4 662.8 1,325.2

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance The obligations under the credit facility of both PVH (the domestic borrower) and Tommy Hilfiger B.V. (the foreign borrower) are jointly and severally, irrevocably and unconditionally guaranteed by substantially all U.S. subsidiaries. The borrowings of Tommy Hilfiger B.V. are also guaranteed by PVH and Tommy Hilfiger Europe B.V. The U.S. guarantors granted a first-priority lien on substantially all of their respective assets, including a pledge of stock of their U.S. subsidiaries and up to 66% of certain first-tier foreign subsidiaries.

Contingent Liabilities PVH is obligated to make contingent purchase price payments to Mr. Calvin Klein with respect to sales through Feb. 12, 2018. These payments are calculated at 1.15% of total worldwide sales of Calvin Klein branded products (as defined), and totaled USD51 million in 2015. The company expects payments in 2016 to be approximately USD53 million. The payments are guaranteed by the Calvin Klein subsidiaries and secured by a pledge of the equity interests in the Calvin Klein subsidiaries and a first-priority lien on substantially all of the domestic Calvin Klein subsidiaries’ assets. These liens, which are also the liens granted to the 7.750% debentures, are senior to the liens granted to the credit facility on these assets.

Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned a ‘bb+*/rr1*’ to the senior secured revolver, Term Loan A and the senior secured debentures, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured notes are expected to have average recovery prospects (31%–50%) and are assigned ‘bb*/rr4*’.

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Leveraged Finance Appendix A Organizational Structure — PVH Corp. ($ Mil., As of Oct. 30, 2016) Public

PVH Corp.a (U.S. Borrowing Entity) (CO — bb*/stable) Debt Issue $750 Mil. Secured Revolver due 5/19/21 Senior Secured Term Loan A due 5/19/21 7.750% Debentures due 11/15/23 Total Secured

Other U.S. Guarantorsb

Amount — 2,138 100 2,238

CO bb+*/rr1* bb+*/rr1* bb+*/rr1* —

4.500% Senior Unsecured Notes due 12/15/22 3.625% Senior Unsecured Notes due 6/15/24 Capital Leases Total Unsecured

700 376 18 1,094

bb*/rr4* bb*/rr4* — —

Total

3,332

—

Calvin Klein, Inc.b,c

Tommy Hilfiger, B.V.d (Co-Borrower on Credit Facility)

The Warnaco Group, Inc.b

Tommy Hilfiger Europe B.V. aBorrowings under the credit facility are guaranteed by substantially all U.S. subsidiaries. In addition to the debt presented, the company has $21 Mil. outstanding under various foreign bank facilities. bU.S. subsidiary guarantors have granted a first-priority lien on substantially all subsidiary assets. cObligations to make contingent purchase price payments to Mr. Calvin Klein (through Feb. 12, 2018) are guaranteed by Calvin Klein, Inc. and its subsidiaries, and are secured by a first-priority lien on all of Calvin Klein’s domestic assets and the stock of its subsidiaries. These liens are senior to the lien granted to the credit facility. dBorrowings under the credit facility by Tommy Hilfiger B.V. are guaranteed by PVH Corp., the U.S. guarantor subsidiaries and Tommy Hilfiger Europe B.V. CO – Credit Opinion. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company reports, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — PVH Corp. Overview Borrower Document Date and Location Maturity Date

Description of Debt Amount

Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

PVH Corp. (U.S. borrower) and Tommy Hilfiger B.V. (European borrower) Amended and Restated Credit Agreement dated 3/21/14 (Exhibit 10.1 to 10-Q filed 6/12/14) Second Amendment to Credit Agreement dated 5/19/16 (Exhibit 10.1 to 10-Q filed 9/1/16) Facility Type: Maturity Date Revolver: 5/19/21 Term A: 5/19/21 Senior secured credit facilities with USD686 Mil. revolver and USD2.3 Bil. in U.S. dollar term loans. The revolver includes a USD475 Mil. U.S. dollar facility, a USD25 Mil. U.S. or Canadian facility, and a EUR186 Mil. facility available in multiple currencies. Facility Type: Commitment/ Outstanding Revolver: USD686 Mil./USD0 Mil. Term A: USD2,347 Mil./USD2,138 Mil. The facility ranks at least equally in right of payment with all unsecured and unsubordinated obligations other than with respect to the contingent purchase price payments owed Mr. Calvin Klein and the 2023 debentures. The senior secured credit facilities and the 7 3/4% debentures due 2023 are equally and ratably secured by a first-priority lien on substantially all of the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, except that liens on the stock and assets of the Calvin Klein subsidiaries granted to the debentures and to Mr. Calvin Klein (with respect to the contingent purchase price payments owed to him) are senior to such liens granted to the credit facilities (see Guarantee section below). The obligations of PVH Corp. are jointly and severally, irrevocably and unconditionally guaranteed by substantially all U.S. subsidiaries. The borrowings of Tommy Hilfiger B.V. are guaranteed by PVH Corp. and Tommy Hilfiger Europe B.V. PVH and the U.S. subsidiary guarantors granted a security interest in certain of their assets as collateral for their obligations. PVH’s obligation to make contingent purchase price payments to Mr. Calvin Klein is guaranteed by the Calvin Klein subsidiaries and is secured by a pledge of all of the equity interests in the Calvin Klein subsidiaries and a first-priority lien on substantially all of the domestic Calvin Klein subsidiaries’ assets. These liens, and the liens granted to the 7 3/4% debentures, are senior to the liens granted to the credit facility.

PVH may incur unsecured debt provided the debt matures three months after the term loans. Capital leases or secured purchase money indebtedness limited to USD150 Mil. (or 1.5% of consolidated total assets, if greater). Other indebtedness of subsidiaries up to USD175 Mil. (or 2.0% of consolidated total assets, if greater), is permitted. Other indebtedness of any group member up to USD375 Mil. (or 3.50% of consolidated total assets, if greater) is permitted. Liens are limited to USD200 Mil. (or 1.75% of consolidated total assets, if greater). Consistent with limitations on debt incurrence.

A CoC, defined as a person or group acquiring a 35% or more voting interest, or gaining power to appoint a majority of the board of directors, or PVH ceases to own 100% of Tommy Hilfiger B.V., constitutes an event of default. PVH may make loans to employees/directors of up to USD15 Mil. In the case of an acquisition in excess of USD40 Mil., PVH must demonstrate compliance with the interest coverage and leverage covenants. PVH may make other investments up to USD275 Mil. (or 2.50% of consolidated total assets, if greater). Investments in JVs are limited to USD100 Mil. (or 1.0% of consolidated total assets, if greater) plus dividends received from the JV. Other investments permitted so long as no event of default has occurred and net leverage ratio is not greater than 3.5x on a pro forma basis. Asset sales are limited to 2.0% of consolidated total assets, and the total of all asset sales in a calendar year are limited to 5.0% of consolidated total assets. The proceeds must be applied to repayment of the term loan within 10 days, or invested in other assets within 365 days. Sale-leasebacks limited to USD75 Mil. (or 0.75% of consolidated total assets, if greater) provided that no event of default has occurred and net leverage ratio is not greater than 3.5x on a pro forma basis.

PVH may purchase stock or stock options from employees of up to USD15 Mil. per year. Dividends are limited to USD0.20/share of common stock, and the equivalent amount for the convertible preferred. Other RPs are limited to USD200 Mil. (or 1.75% of consolidated total assets, if greater) plus, if the incurrence test is satisfied (defined as consolidated total net debt to consolidated adjusted EBITDA for the most recent four quarters of 4x or less), the available amount as defined. Other RPs permitted so long as no event of default has occurred and net leverage ratio is not greater than 3.5x on a pro forma basis.

Yes, with threshold amount of USD75 Mil. N.A. The borrower must represent and warranty prior to each credit extension that there has been no material adverse effect. None. None. > 50% of term loan and revolving commitment.

JV – Joint venture. MAC – Material adverse change. N.A. – Not applicable. BR – Base rate. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Financial Covenant Summary — PVH Corp. (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule

Callability/Optional Prepayment Pricing Coupon Type/Index Pricing Grid

Consolidated net debt/consolidated adjusted EBITDA of 4.0x. Increases to 4.5x during any acquisition period. Consolidated adjusted EBITDA/consolidated cash interest expense of 5.0x. — —

Mandatory prepayment with x% of proceeds from: • Excess cash: x = 50%, which steps down to 25% if the leverage ratio is less than 3.0x but greater than or equal to 2.5x, and to 0% if the leverage ratio is less than 2.5x. • Asset sale: x = 100% of net proceeds. • New debt: x = 100% of net proceeds. Date Term A (USD Mil.) 6/30/16–3/31/18 29.3 6/30/18–3/31/19 44.0 6/30/19–3/31/21 58.7 Optional prepayment without prepayment penalty.

Tranche A term loans and revolving loans float based off adjusted eurocurrency rate or base rate. Leverage Ratio Applicable Rate > 4.0:1 Adjusted eurocurrency rate + 200 bps or BR + 100 bps > 3.0:1 but ≤ 4.0:1 Adjusted eurocurrency rate + 175 bps or BR + 75 bps > 2.0:1 but ≤ 3.0:1 Adjusted eurocurrency rate + 150 bps or BR + 50 bps ≤ 2.0:1 Adjusted eurocurrency rate + 125 bps or BR + 25 bps

JV – Joint venture. MAC – Material adverse change. N.A. – Not applicable. BR – Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Senior Secured Debentures Covenant Summary — PVH Corp. Overview Issuer Document Date and Location

Maturity Date Description of Debt Amount Ranking Security

Guarantee Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Covenant Suspension

PVH Corp. Base indenture dated 11/4/93. First Supplemental dated 10/17/02 (Exhibit 4.15 to 10-Q filed 12/13/02). Second Supplemental dated 2/12/03 (Exhibit 4.2 to 10-Q filed 2/26/03). Third Supplemental dated 5/6/10 (Exhibit 4.16 to 10-Q filed 9/10/10). Fourth Supplemental dated 2/2/13 (Exhibit 4.11 to 10-Q filed 6/13/13). 11/15/23 7.750% debentures USD100 Mil. Senior secured. The debentures and the senior secured credit facilities are equally and ratably secured by a first-priority lien on substantially all of the borrower’s assets and a pledge of the stock of the borrower’s subsidiaries, with the exception that the liens granted to the debentures on the stock and assets of the Calvin Klein subsidiaries are senior to the liens on such assets granted to the credit facility and equal to the liens granted to Mr. Calvin Klein. None.

Debt of domestic subsidiaries is limited to 5% of consolidated net tangible assets. Liens on property of the company or any subsidiary or stock of subsidiaries, together with the attributable value of sale-leaseback transactions, are limited to 10% of consolidated net tangible assets. None.

None. Standard restrictions on consolidations, mergers and sales of assets. Sale-leasebacks are limited by the limitation on liens provision, and proceeds must be applied within 180 days to the purchase of fixed assets or the retirement of the debentures.

In the event of a designated RP event, defined as an RP causing consolidated net worth to drop to less than USD175 Mil. plus 50% of cumulative consolidated net income or less 100% of consolidated net loss, this gives the holder the option to put the bonds back to the company at 100%.

No. Yes, with a threshold of USD25 Mil. None. None. None.

MAC — Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Senior Unsecured Notes Covenant Summary — PVH Corp. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Limitation on Liens Change of Control (CoC) Limitation on Guarantees M&A, Investments Restriction Sale of Assets Restriction Acquisitions/Divestitures Change of Control (CoC) Restricted Payments M&A, Investments Restriction Restricted Payments (RP) Sale of Assets Restriction Other Cross Default Cross Acceleration Restricted Payments MAC Clause Restricted Payments (RP) Equity Clawback

PVH Corp. 12/20/12(Exhibit (Exhibit4.1 4.1toto8-K 8-Kdated filed 12/20/12). Indenture dated 6/20/16 6/20/16). 12/15/22 7/15/24 4.500% senior notes 3.625% USD700 Mil. EUR350 Senior unsecured. None. None.

PVH may incur debt if the pro forma consolidated coverage ratio (EBITDA/interest) is greater than 2.0x. In addition, permitted debt None. includes purchase money indebtedness capital lease obligations to USD225.0 acquire or construct property up to the greater of Liens securing indebtedness of a foreignand subsidiary up to the greater of Mil. and 2.0% of total assets are permitted. USD175.0 Mil. and 1.5% of total assets; indebtedness of a foreign restricted subsidiary or Calvin Klein company up to the greater of Consistent with limitations on debt incurrence. USD225.0 Mil. and 2.0% of total assets; and other indebtedness which does not exceed the greater of USD440.0 Mil. or 4.0% of total assets. Liens securing debt under any credit facility are permitted so long as the senior secured leverage ratio is not greater than 3.5x. In addition, during a period when covenants are suspended, may incur secured debt an amount up to 3.5% of board total assets. If someone acquires more thanthe 50% of the voting stock or the PVH continuing directors cease to in constitute a majority of the of Consistent with limitations debt incurrence. directors, the notes may beon put at 101. None. Sale-leasebacks limited to the greater of USD90 Mil. and 1.0% of total assets, plus an amount that would be permitted per the limitation onacquires debt andmore liensthan covenants. If someone 50% of the voting stock or the continuing directors cease to constitute a majority of the board of directors, the notes may be put at 101. Permitted investments include the greater of USD375.0 Mil. and 3.5% of total assets. None. Proceeds from asset sales must be used to repay senior indebtedness or invest in additional assets within one year. Proceeds not applied as such, in excess of USD75 Mil., must be used to offer to repurchase the notes at par. Sale-leasebacks limited to the greater of USD90 Mil. and 1.0% of total assets, plus an amount that would be permitted per the limitation on debt and liens covenants. No. Yes, with a threshold of USD75 Mil. None. RPs limited to the sum of 50% of cumulative net income (subtracting 100% of net losses), plus USD75 Mil., plus other amounts that, None. as of Oct. 28, 2012, totaled USD500 Mil. In addition, PVH may pay dividends of up to USD0.20/share on each of its common and preferred shares, and may repurchase shares in an amount up to USD15 Mil. annually.

MAC – Material adverse change. Source: Company filings, Fitch Ratings. Other Cross Default No. Cross Acceleration Yes, with a threshold of USD75 Mil. MAC Clause None. Equity Clawback None. Covenant Suspension Provided notes have investment-grade ratings from S&P and Moody’s and no event of default exists, certain covenants (debt incurrence, RPs, asset sales, limitation on liens) cease to apply. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — PVH Corp. 12 Months

12 Months

Three Months

Three Months 5/1/16 7/31/16

LTM

1/29/12

2/3/13

2/2/14

2/1/15

5/3/15

8/2/15

11/1/15

1/31/16

Operating EBITDAR Margin

20.9

22.6

22.3

21.8

21.3

20.9

22.9

18.9

21.0

18.9

21.5

22.7

20.5

Operating EBITDA Margin

14.4

15.2

14.9

14.6

13.8

13.3

16.4

12.3

14.0

11.6

14.2

16.4

13.7

Operating EBIT Margin

12.1

12.9

12.4

11.7

10.6

10.0

13.5

8.9

10.8

7.9

9.9

12.6

10.0

FFO Margin

10.1

8.0

5.2

11.2

10.7

12.1

12.9

9.4

11.3

9.4

10.5

14.1

10.9

FCF Margin

5.3

5.8

0.7

6.3

0.3

11.1

(0.3)

19.7

7.8

3.0

12.4

4.7

10.0

12.4

12.6

12.2

9.9

8.7

8.6

8.3

9.3

8.6

8.5

Total Adjusted Debt/Operating EBITDARa

4.2

4.3

4.8

4.6

4.7

4.8

4.6

4.7

4.6

FFO-Adjusted Leverage

4.8

5.8

7.4

5.0

4.7

4.8

4.9

5.1

5.0

FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa

5.9

0.6

6.3

7.9

8.6

7.5

8.1

8.8

9.0

10.5

2.5

3.3

3.0

3.2

3.1

3.2

2.9

3.1

3.0

Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex)

1.5

1.0

2.0

2.2

2.3

2.4

2.2

2.3

2.0

7.4

7.3

13.2

7.4

6.5

6.2

6.7

6.4

6.1

6.2

5.6

Total Adjusted Net Debt/Operating EBITDARa

4.0

3.8

4.8

4.6

4.7

4.8

4.5

4.6

4.5

4.6

FFO-Adjusted Net Leverage

4.6

5.1

7.3

5.0

4.7

4.6

4.7

4.9

5.0

4.9

Total Net Debt/(CFFO – Capex)

5.9

4.7

57.4

6.5

5.3

4.8

5.5

4.9

4.5

4.3

3.9

Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a

2.5

2.4

2.5

2.4

2.5

Operating EBITDA/Interest Paida

7.6

9.5

7.2

8.5

8.4

8.5

8.7

10.7

9.4

9.6

9.5

FFO Fixed-Charge Coverage

2.2

1.9

1.5

2.2

2.4

2.3

FFO Interest Coverage

6.3

6.0

3.4

7.5

8.3

8.8

8.9

9.6

8.6

8.4

8.5

CFFO/Capex

2.9

2.7

1.3

3.1

3.6

3.7

3.4

3.6

3.7

4.2

Total Debt with Equity Credit

2,131

2,342

3,995

3,565

3,500

3,382

3,367

3,231

3,150

3,405

3,352

Total Adjusted Debt with Equity Credit

5,222

5,911

8,794

8,311

7,984

7,866

7,851

7,715

7,634

7,889

7,836

Lease-Equivalent Debt

3,090

3,570

4,799

4,746

4,484

—

(111)

(97)

(171)

(142)

(132)

(127)

(121)

(105)

(116)

(119)

4.7

4.3

5.4

3.7

3.5

3.4

3.1

3.5

3.4

3.5

3.5 898

($ Mil.)

10/30/16 10/30/16

Profitability (%)

Return on Capital Employed Gross Leverage (x)

Net Leverage (x)

Debt Summary

Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow

595

485

422

920

201

226

279

199

904

180

202

316

(104)

(117)

(131)

(140)

(214)

313

(4)

(71)

(148)

192

491

570

305

789

263

512

900

109

300

169

1,089

—

(170)

(211)

(237)

(256)

(49)

(52)

(68)

(95)

(264)

(46)

(57)

(60)

(258)

Common Dividends (Paid)

(11)

(12)

(13)

(6)

(3)

(13)

(6)

(3)

(12)

FCF

310

348

521

207

(6)

417

623

240

106

819

Acquisitions and Divestitures

(85)

(38)

(1,821)

(14)

—

(158)

(141)

(453)

387

1,356

(515)

(50)

(120)

(17)

(153)

(340)

(39)

(164)

320

(36)

(1)

(10)

(6)

(16)

(60)

(49)

(131)

(52)

(82)

(96)

(279)

Capital (Expenditures)

Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows

(56)

(38)

(108)

(10)

(24)

(14)

(27)

(75)

365

(409)

(70)

(266)

659

(406)

(114)

(60)

(97)

187

(191)

377

(79)

293

Readily Available Cash and Equivalents

233

655

126

106

285

118

Availability Under Committed Credit Lines

378

408

694

713

710

712

719

722

665

662

663

—

237

467

389

330

409

303

450

322

457

544

Net Working Capital (Fitch Defined)

354

273

584

673

812

775

958

647

716

647

733

Trade Accounts Receivable (Days)

104

115

120

117

116

145

113

114

124

127

142

108

118

Total Change in Cash and Equivalents Liquidity

Not Readily Available Cash and Equivalents Working Capital

Inventory Turnover (Days) Trade Accounts Payable (Days)

Capital Intensity (%)

2.9

3.5

2.9

3.1

2.6

2.8

3.1

4.5

3.3

2.4

2.9

2.7

3.1

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Leveraged Finance Financial Summary — PVH Corp. (Continued) 12 Months

12 Months

Three Months

Three Months 5/1/16 7/31/16

LTM

1/29/12

2/3/13

2/2/14

2/1/15

5/3/15

8/2/15

11/1/15

1/31/16

5,891

6,043

8,186

8,241

1,879

1,864

2,165

2,113

8,020

1,918

1,933

2,244

27.0

2.6

35.5

0.7

(4.3)

(5.6)

(3.1)

2.1

(2.7)

2.0

3.7

2.9

Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities

1,234

1,366

1,823

1,794

400

389

496

399

1,684

363

415

508

1,685

1,234

1,366

1,823

1,794

400

389

496

399

1,684

363

415

510

1,686

Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities

847

920

1,223

1,201

260

249

356

259

1,123

223

275

368

1,125

847

920

1,223

1,201

260

249

356

259

1,123

223

275

369

1,126

Operating EBIT

715

780

1,017

962

199

186

293

189

866

152

192

284

817

($ Mil.)

10/30/16 10/30/16

Income Statement Revenue Revenue Growth (%)

8,208

Sector-Specific Data Gross Margin (%)

52.0

53.8

52.6

51.6

53.2

51.1

50.8

51.6

52.5

53.7

53.2

(32.1)

(31.6)

(31.5)

(32.1)

(2.7)

(5.2)

(3.8)

(8.2)

(32.0)

(5.5)

(5.7)

(7.2)

Inventory Turnover

3.5

3.2

3.0

3.1

3.3

2.7

2.9

3.0

2.8

3.1

Accounts Payable Turnover

7.7

7.4

6.7

6.9

9.4

7.0

7.7

6.1

7.8

6.2

7.8

22.7

21.9

19.4

19.6

18.2

18.0

17.3

18.3

17.2

16.9

SG&A/Revenues (%)

Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

4.7

5.6

1.2

4.0

4.9

4.7

5.4

6.3

6.1

5.3

128.7

150.0

115.0

107.0

79.5

83.2

108.1

134.7

102.5

65.0

68.9

71.3

EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

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Leveraged Finance Retailing / U.S.A.

Sally Beauty Holdings, Inc. Credit Profile Credit Profile Summary

Credit Opinion Long-Term Issuer Default Credit Opinion Senior Secured Credit Facility Credit Opinion Senior Unsecured Notes Credit Opinion

bb*/stable bb+*/rr1* bb*/rr4*

Financial Data Sally Beauty Holdings, Inc. FYE 9/30/15 ($ Mil.) Total Revenue 3,834.3 EBITDA 612.4 EBITDA Margin (%) 16.0 FCF 194.3 Total Adjusted Debt 3,573.2 Total Adjusted Debt/EBITDAR (x) 4.3 EBITDAR/(Interest + Rent) (x) 2.5 Same-Store Sales (%) 2.9 Real Estate Owned (%) 0 No. of Stores 4,792

FYE 9/30/16 3,952.6 625.8 15.8 199.8 3,650.1 4.3 2.3 2.9 0 4,937

Resilient Industry: The salon products industry has shown stable and consistent growth, driven by the consumable nature of the products and the recurring nature of their use. Spending on salon services and products is generally nondiscretionary and subject to limited economic cyclicality, intense price competition or seasonal swings. Sally Beauty Holdings, Inc. is in a good position to capitalize on this as it caters to both consumers and salon professionals. Strong Business Profile: Sally has proven to be among the most resilient businesses in the retail sector. Limited overlap of products with other retail formats, tiered pricing for loyalty members and salon professionals, and distribution relationships with salons have differentiated the company from its peers. Exclusive-label product penetration at 46% of revenues is also a key driver of the company’s competitive resilience and strong mid-teens EBITDA margins. Hybrid Model Adds Diversity: The company caters to both retail consumers and salon professionals. Approximately 63% of EBITDA is derived from the retail segment, while the remaining 37% is generated by the distribution segment, which includes professional-only merchandise not available at retail stores. Approximately half of all revenues are generated by salon professionals for whom Sally is a preferred vendor due to product assortment, pricing arrangements and service. Recent Traffic Slowdown: Sally Beauty Supply (SBS) same-store sales decelerated to 1.3% and 0.8% in the third and fourth quarters of fiscal 2016, respectively, from around 2% previously, due to disruption from store remodels and marketing systems changes. While traffic challenges appear to be more broad based across the Retail sector, Fitch Ratings believes beauty is a strong category with good growth and should allow SBS to generate comparable store sales (comps) in the 1.0%–1.5% range. Good Top-Line Growth: Fitch expects Sally’s top line to grow 2.0%–2.5% annually over the next two to three years, with consolidated same-stores sales in the 1.5%–2.0% range. Fitch expects EBITDA to remain near-flat in fiscal 2017 at about $620 million and trend toward $650 million thereafter. Fitch expects EBITDA margins to remain near their current mid-teens range. Stable Credit Metrics: Total liquidity including revolver availability is comfortable at $565 million as of Sept. 30, 2016. Fitch expects annual FCF to increase to the mid-$200 million range as capex moderates in fiscal 2017 post store remodels. Fitch expects FCF will be used to fund share repurchases and opportunistic bolt-on acquisitions, and expects Sally to maintain leverage at its target of net debt/EBITDA of 2.75x, or 4.3x–4.4x on an adjusted debt/EBITDAR basis.

Credit Profile Drivers

Analysts JJ Boparai +1 212 908-0543 jj.boparai@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

High-Yield Retail Checkout January 31, 2017

Positive Drivers: Positive credit profile drivers include better than expected operating trends or stated intent to apply a sizable portion of FCF toward debt reduction, resulting in adjusted debt/EBITDAR sustained below 4.0x. Negative Drivers: Negative credit profile drivers would include deteriorating operating momentum, loss of a major supplier, aggressive shareholder-friendly activity or a sizable debtfinanced acquisition that could result in weakening credit metrics, with adjusted debt/EBITDAR increasing to over 4.5x. 319

Leveraged Finance Fitch Base Case Assumptions — Sally Beauty Holdings, Inc. ($ Mil., Year Ended Sept. 30) Revenue Revenue Growth (%) Same-Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

2016A

2017F

2018F

2019F

3,953 3.1 2.9 626 15.8 (12) 351 (151) 3.8 — 200 (207) 1,802 3,650 4.3

4,052 2.5 2.0 619 15.3 1 389 (135) 3.3 — 254 (250) 1,802 3,724 4.3

4,145 2.3 1.8 623 15.0 (11) 369 (130) 3.1 — 239 (250) 1,802 3,801 4.4

4,242 2.3 1.8 635 15.0 (11) 377 (130) 3.1 — 247 (250) 1,802 3,881 4.3

Comments — — — — — — — — — — — — — — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Company Filings, Fitch Ratings.

Business Profile Assessment Competitively and Demographically Advantaged Sally is an international specialty retailer (SBS, 63% of EBITDA prior to corporate expenses) and retailer/distributor of professional beauty supplies (Beauty Systems Group or BSG, 37% of EBITDA). Between SBS and BSG, the company sells and distributes via a network of over 4,900 company-operated and 182 franchised units. While both segments have a retail presence, with SBS operating around 3,700 stores and BSG operating around 1,200 stores, BSG also has a network of about 940 sales consultants that sell directly to salon operators. Sally’s stores are located throughout the U.S. (including Puerto Rico), as well as the U.K., Belgium, Canada, Chile, Mexico, France, Ireland, Spain, Germany and the Netherlands. Sally derives 24% of revenues from outside the U.S. and is continuously taking advantage of preexisting global supplier relationships to grow its footprint into markets that are similarly fragmented, though less saturated, than the U.S. market. Sally sees international expansion as a key growth driver, and has grown its non-U.S. company-operated store footprint by almost 60% over the past six years.

Sally Beauty Supply On the SBS side of the business, Ulta is Sally’s main pure-play beauty competitor with salonquality products. Ulta is larger than SBS, with about $4.5 billion in sales for the LTM ended Oct. 29, 2016. Other competitors are primarily small, regional retail participants. Approximately 46% of product sales in the U.S. are derived from exclusive brands unique to Sally. SBS also competes with supermarkets, drug stores and other small chains that have similar or substitute products, but not the same assortment. Retail customers generate approximately 76% of SBS’s sales, while professional stylists and small salons make up the remaining 24%. SBS caters to its customers and differentiates itself from competitors by offering three tiers of pricing: list price, which is standard pricing; Beauty Club price, which is offered to customers who have a Sally Beauty Club card; and ProCard pricing, which is offered to licensed salon professionals only.

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Leveraged Finance Segment Breakdown — Sally Beauty Holdings, Inc. Percentage of Fiscal 2016 Revenue/ Division EBITDA Description Retail — 60/63 More than 3,700 retail stores Sally Beauty (about 76% in the U.S.) selling Supply hair, skin, nail and other beauty merchandise. Products are professional quality at moderate price points, and are not available at mass. Distribution — 40/37 A mix of stores and consultants Beauty Systems that sell professional-only merchandise not available at Group (BSG) retail stores. As a percentage of segment sales, stores (CosmoProf) are 67%, distributor sales consultants are 25% and franchise stores are 8%.

Brands Clairol, CHI, Conair, Ion (exclusive label).

Avg. Store Size 1,700 sq ft, 90% selling space.

Different assortment versus Sally 2,600 sq ft Beauty Stores. Matrix, Redken, Paul Mitchell, etc. Most merchandise is sold under exclusive distribution agreements, whereby BSG is designated as the sole distributor in a certain geographic area.

Customers Competitors 76% retail consumers/ Ulta; small regional 24% salon professionals. retail participants in addition to drug stores, mass merchants, supermarkets and department stores. Salons and professional stylists.

Only national distributor of professional brands. Next largest is SalonCentric, a division of L’Oréal USA, Inc.

Sq ft – Square feet. Source: Company filings, Fitch Ratings.

Beauty Systems Group On the BSG side, the fragmentation of the beauty supply industry presents a favorable framework for Sally’s competitive positioning. It is cost prohibitive for a small salon with just a few employees to have a direct supply line from the manufacturer, so BSG essentially acts as their just-in-time inventory supplier. Sally’s 940 sales consultants mainly cater to the salons and generate about 25% of BSG’s revenues. The number of small- to medium-sized salons utilizing Sally’s network of sales consultants has been shrinking as more stylists transition to renting working spaces and operating independently. Independent stylists, who have smaller average tickets, tend to bypass the consultants and shop at BSG’s network of approximately 1,200 stores, which accounts for 67% of BSG sales. BSG is consequently well positioned to take advantage of the evolving consumer base. SalonCentric, the professional products distribution operation of L’Oréal USA, Inc., is the closest direct competitor, with more than 565 stores and a network of consultants.

Insulation from Online/Discount Incursion The beauty industry has been relatively insulated from online and discount competition due to the experiential nature of the shopping experience (including product sampling), the presence of knowledgeable associates in store and breadth of SKUs. Sally’s brick-and-mortar strategy has further benefited from its unique product mix, which is skewed toward salon products, with hair care representing 47% at SBS and hair color accounting for 68% of sales at BSG. BSG’s selling model, where about 25% of the segments revenues are generated via sales consultants, also provides some protection from online competition. While the company has room to drive online growth through its Sally Beauty and Loxa Beauty websites, online penetration is expected to remain low relative to other beauty players given Sally’s product and customer mix.

Supplier Concentration a Potential Issue The company’s five largest suppliers — Coty, Inc. (which includes formerly owned Procter & Gamble Company’s [P&G] business units), the Professional Products Division of L’Oréal, John Paul Mitchell Systems, Conair Corporation and Shiseido Cosmetics (America) Limited — accounted for approximately 38% of consolidated merchandise purchases. Three of these suppliers accounted for approximately 37% of BSG merchandise purchases in fiscal 2016, High-Yield Retail Checkout January 31, 2017

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Leveraged Finance which was approximately 15% of consolidated revenues. Coty is now the company’s largest supplier after acquiring P&G’s beauty brands in 2015. Sally’s high supplier concentration leaves it exposed to meaningful and sudden reductions in revenues, such as the supply pullback Sally experienced following L’Oreal’s 2007 decision to emphasize its own launch of professional sales channel.

Growth Strategy The company continues to eye expansion opportunities both organically and via bolt-on acquisitions, but remains cautious on emerging market challenges. The company expects organic store growth of 2%–3% annually, with store growth in both the domestic and international businesses. Historically, the bolt-on acquisitions have primarily been on the BSG side, where the company continues to acquire small regional distributors of professional products. Sally ramped up capex in fiscal 2016 to $150 million from about $110 million previously to upgrade the “shopability” of its stores. The company refreshed about 1,500 U.S. SBS stores through this initiative during the year. Investments in the stores include installation of nail studios and impulse kiosks, and updated packaging for private brands. The company also invested in sophisticated customer relationship management (CRM) systems to aid with new digital marketing campaigns. While traffic trends have been generally strong in the beauty and salon industries, Sally noted some disruption to consumers from the store remodels and a CRM vendor change during the back half of 2016. The company does not expect any major changes in fiscal 2017 that could cause further negative impact. Capex is expected to decline to about $135 million in 2017 as the store refreshes are largely completed.

Solid Financial Performance Sally’s consolidated top line has been consistently positive over the last few years, with samestore sales ranging between 2% and 3%, including in 2008–2009, demonstrating Sally’s resilience to economic cyclicality. Over the eight-year period from fiscal 2008, consolidated same-store sales averaged 3.3%, total sales increased 5.1% and EBITDA increased by a strong 7.9% CAGR. Lease-adjusted leverage has come down by two turns since the 2006 separation transaction from former parent Alberto-Culver Company. Sally has recently seen some weakness in the SBS same-store sales, which decelerated to positive 1.3% and 0.8% in the third and fourth quarters of fiscal 2016, respectively, from approximately 2% generated previously. The company attributed the slowdown to weaker traffic trends, temporary disruption from store remodels and changes in marketing strategies. Trends in the beauty category remain strong, with prestige sales growth of 7% in 2015 and mass sales growth of 2%, per NPD Group data. Retailers such as Ulta, where comps averaged 10% over the last five years, and Sephora have been able to drive strong growth on the back of these trends. Fitch expects Sally to generate consolidated same-store sales of about 2.0% over the next two years. Sally has demonstrated an ability to generate strong and steady FCF, which has grown to an average of $215 million over the last four years. FCF of $200 million in 2016 was essentially flat to the prior year as the company accelerated capex for store remodels and technology initiatives. With an EBITDA base at over $600 million and fixed obligations (interest, capex, taxes) in the $370 million–$380 million range, Fitch expects the company to generate annual

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Leveraged Finance FCF in the mid-$200 million range, with working capital a modest use of funds. There is minimal seasonality in the business; FCF is comfortably positive in each quarter of the year.

Quarterly Revenue and Unit Growth Trend â&#x20AC;&#x201D; Sally Beauty Holdings, Inc. Revenue ($ Mil.) Sally Beauty Supply Beauty Systems Group Total Revenue Revenue Growth (%) Sally Beauty Supply Beauty Systems Group Total Revenue Growth Same-Store Sales (%) Sally Beauty Supply Beauty Systems Group Consolidated Number of Stores (Excluding Franchised Units) Sally Beauty Supply Beauty Systems Group Total Units Total Unit Growth (%)

12/31/14

3/31/15

6/30/15

9/30/15

FYE 9/30/15

12/31/15

3/31/16

6/30/16

9/30/16

FYE 9/30/16

586.5 377.9 964.5

572.1 365.6 937.8

588.6 379.3 967.9

582.3 381.9 964.2

2,329.5 1,504.8 3,834.3

596.0 402.1 998.0

587.6 392.4 980.1

597.1 401.1 998.2

583.9 392.5 976.4

2,364.5 1,588.1 3,952.6

2.3 3.0 2.6

0.4 4.5 2.0

0.7 4.0 2.0

0.2 5.2 2.1

0.9 4.2 2.2

1.6 6.4 3.5

2.7 7.3 4.5

1.4 5.7 3.1

0.3 2.8 1.3

1.5 5.5 3.1

1.6 3.9 2.3

1.4 5.9 2.8

2.0 5.6 3.1

1.8 7.4 3.2

1.7 5.7 2.9

2.4 7.2 3.9

2.3 7.7 4.0

1.3 5.4 2.5

0.8 1.9 0.8

1.7 5.5 2.9

3,586 1,109 4,695 4.0

3,612 1,112 4,724 3.8

3,636 1,118 4,754 3.4

3,655 1,137 4,792 3.1

3,693 1,141 4,834 3.0

3,714 1,148 4,862 2.9

3,732 1,157 4,889 2.8

3,763 1,174 4,937 3.0

Source: Company filings, Fitch Ratings.

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Leveraged Finance Key Operating Metrics by Segment â&#x20AC;&#x201D; Sally Beauty Holdings, Inc. ($ Mil., Fiscal Year Ended September) Net Sales Sally Beauty Supply Beauty Systems Group Total Net Sales as % of Total Sally Beauty Supply Beauty Systems Group Same-Store Sales (%) Sally Beauty Supply Beauty Systems Group Total Gross Profit Sally Beauty Supply Beauty Systems Group Total Gross Margin (%) Sally Beauty Supply Beauty Systems Group Total EBIT Sally Beauty Supply Beauty Systems Group Segment Operating Profit Unallocated Expenses Total Operating Earnings EBITDA Sally Beauty Supply Beauty Systems Group Consolidated EBITDA Margin (%) Sally Beauty Supply Beauty Systems Group Total EBITDA (Before Corporate Expenses) as % of Total Sally Beauty Supply Beauty Systems Group Capex Sally Beauty Supply Beauty Systems Group Corporate Total Geographic Breakdown Net Sales U.S. Foreign As a % of Total Sales U.S. Foreign Number of Stores (Excluding Franchised Units) U.S. International Total Sally Beauty Supply Units Beauty Systems Group Total

2008

2009

2010

2011

2012

2013

2014

2015

2016

1,672.9 975.3 2,648.2

1,695.7 940.9 2,636.6

1,834.6 1,081.5 2,916.1

2,012.4 1,256.7 3,269.1

2,198.5 1,325.2 3,523.6

2,230.0 1,392.2 3,622.2

2,308.7 1,444.8 3,753.5

2,329.5 1,504.8 3,834.3

2,364.5 1,588.1 3,952.6

63.2 36.8

64.3 35.7

62.9 37.1

61.6 38.4

62.4 37.6

61.6 38.4

61.5 38.5

60.8 39.2

59.8 40.2

1.2 6.9 2.6

2.1 1.0 1.8

4.1 6.2 4.6

6.3 5.5 6.1

6.5 6.1 6.4

(0.6) 4.2 0.8

1.3 3.5 2.0

1.7 5.7 2.9

1.7 5.5 2.9

858.4 376.2 1,234.6

878.7 364.6 1,243.3

976.4 428.0 1,404.4

1,087.7 506.9 1,594.6

1,199.3 543.9 1,743.3

1,223.4 571.9 1,795.3

1,265.8 594.4 1,860.2

1,276.5 621.3 1,897.8

1,305.2 659.1 1,964.3

51.3 38.6 46.6

51.8 38.7 47.2

53.2 39.6 48.2

54.0 40.3 48.8

54.6 41.0 49.5

54.9 41.1 49.6

54.8 41.1 49.6

54.8 41.3 49.5

55.2 41.5 49.7

285.6 80.9 366.5 (66.5) 300.0

283.9 91.6 375.5 (70.0) 305.5

320.5 112.5 433.0 (79.2) 353.7

381.0 145.7 526.6 (83.8) 442.8

439.7 182.7 622.4 (96.0) 526.4

437.0 200.5 637.5 (97.9) 539.6

431.7 217.0 648.6 (119.5) 529.1

412.4 231.2 643.5 (119.5) 524.0

409.8 254.5 664.3 (138.8) 525.5

308.7 101.6 348.6

308.0 110.3 352.5

346.9 132.6 404.9

409.7 170.8 502.5

471.1 208.7 591.1

474.1 225.5 611.8

472.7 243.8 608.8

458.0 259.8 613.4

465.2 284.5 625.1

18.5 10.4 13.2

18.2 11.7 13.4

18.9 12.3 13.9

20.4 13.6 15.4

21.4 15.7 16.8

21.3 16.2 16.9

20.5 16.9 16.2

19.7 17.3 16.0

19.7 17.9 15.8

75.2 24.8

73.6 26.4

72.3 27.7

70.6 29.4

69.3 30.7

67.8 32.2

66.0 34.0

63.8 36.2

62.1 37.9

22.1 18.7 4.8 45.6

23.2 8.5 5.6 37.3

30.4 11.3 7.1 48.7

34.9 14.1 10.9 60.0

42.2 12.0 15.0 69.1

60.6 15.7 8.6 84.9

43.1 19.2 14.5 76.8

66.0 16.8 23.8 106.5

95.6 24.0 31.6 151.2

2,170.7 477.5

2,202.2 434.4

2,402.1 514.0

2,688.1 581.1

2,886.0 637.7

2,944.0 678.3

3,031.0 722.5

3,145.9 688.4

691.0 3,952.6

82.0 18.0

83.5 16.5

82.4 17.6

82.2 17.8

81.9 18.1

81.3 18.7

80.8 19.2

82.0 18.0

82.5 17.5

2,348 472 2,820 760 3,580

2,391 507 2,898 829 3,727

2,468 538 3,006 868 3,874

2,550 583 3,133 995 4,128

2,638 646 3,284 1,031 4,315

2,710 693 3,403 1,084 4,487

2,793 751 3,544 1,103 4,647

2,868 787 3,655 1,137 4,792

2,917 846 3,763 1,174 4,937

Source: Company filings, Fitch Ratings.

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Leveraged Finance 2017 Outlook Fitch expects Sally to grow sales at 2.5% to $4 billion in fiscal 2017 (ends September 2017), with 2.0% same-store sales growth and modest contribution from new store openings. Revenue is expected to grow around 2.0%–2.5% annually beyond fiscal 2017. Fitch expects EBITDA to remain essentially flat in fiscal 2017 at about $620 million as near-flat gross margins are offset by increased selling, general and administrative expenses related to marketing spend. Fitch expects EBITDA to trend toward $650 million beyond fiscal 2017. Annual FCF around mid-$200 million is expected to be directed primarily toward share repurchases, with a portion allocated toward opportunistic bolt-on acquisitions and greenfield growth in international markets. Fitch expects Sally to maintain leverage at its targeted 2.75x net debt/EBITDA, or 4.3x–4.4x adjusted debt/EBITDAR, over the next two to three years. The company has maintained leverage at this level for the past four years.

Liquidity and Debt Structure The company had $86 million of cash on the balance sheet and $478 million available under its $500 million asset-based loan (ABL) facility as of Sept. 30, 2016. In the first quarter of 2016, Sally issued $750 million senior unsecured notes due December 2025 and used net proceeds, together with cash on hand and borrowings under the ABL facility, to redeem all $750 million of the 6.875% senior unsecured notes due November 2019. The company has no debt maturities until June 2022, when $850 million 5.750% senior unsecured notes are due.

Capital Structure ($ Mil., At Sept. 30, 2016) Description

Amount

(%)

— —

850.0 200.0 750.0 2.1 1,802.1 1,802.1

47.2 11.1 41.6 0.1 100.0 100.0

Secured Debt $500 Mil. ABL Revolver due July 2018 Total Secured Debt Unsecured Debt 5.750% Sr. Unsecured Notes due June 2022 5.500% Sr. Unsecured Notes due November 2023 5.625% Sr. Unsecured Notes due December 2025 Capital Leases Total Unsecured Debt Total Debt ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Sept. 30, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Sept. 30, 2016) — — — — — 1,800.0

Cash Revolver Availability Total

86.6 478.4 565.0

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch does not employ a waterfall recovery analysis for issuers assigned ‘bb*’. The further up the speculative-grade continuum a rating moves, the more compressed the notching between the specific classes of issuances becomes. Fitch assigned ‘bb+*/rr1*’ to the senior secured ABL revolver, indicating outstanding recovery prospects (91%–100%) in the event of default. The unsecured debt is expected to achieve average recovery (31%‒50%) and was assigned ‘bb*/rr4*’.

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Leveraged Finance Appendix A Organizational Structure — Sally Holdings, LLC ($ Mil., As of Sept. 30, 2016) Sally Beauty Holdings, Inc. (Sally Beauty) (CO — bb*/stable) Sally Investment Holdings LLC (Sally Investment) Sally Holdings LLC (Sally Holdings) Debt Issue Maturity $500 Mil. Sr. Secured ABL Revolver July 2018 5.750% Senior Notes Due 2022 June 2022 5.500% Senior Notes Due 2023 November 2023 5.625% Senior Notes Due 2025 December 2025 Total Debt —

Beauty Systems Group LLC (Co-Borrower under ABL)

Legal Entities

Sally Beauty Supply LLC (Co-Borrower under ABL)

Amount 0 850 200 750 1,800

CO bb+*/rr1* bb*/rr4* bb*/rr4* bb*/rr4* —

Sally Capital Inc. (Co-Issuer for Notes)

Sally Beauty Distribution LLC

Sally Beauty Intl. Finance LLC

Sally Beauty Distribution of Ohio, Inc.

Beauty Holding LLC

Sally Beauty Int’l. Inc.

Other Domestic Subsidiaries

Sally Beauty Int’l. Holdings, C.V. (Netherlands)

Sally Beauty Worldwide Holdings, BV

SBH Netherlands Cooperatief UA

SBH Finance B.V (Netherlands) (Foreign Borrower under ABL)

Beauty Systems Group (Canada), Inc. (Delaware) (Canadian Borrower under ABL)

Guarantors

CO – Credit Opinion. ABL – Asset-based loans. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Fitch Ratings, company reports.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Sally Holdings LLC Overview Borrower(s) Description of Debt

Document Date

Amount Maturity Date Ranking Security Guarantee

Financial Covenants Fixed-Charge Coverage

Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees

Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC (as Domestic Borrowers); Beauty Systems Group (Canada), Inc. (as Canadian Borrower); SBH Finance B.V (as Foreign Borrower). Senior secured revolving asset-based loan facility of $500 Mil. subject to a borrowing base equal to (i) 90% of eligible credit card receivables and (ii) 90% of cost of eligible inventory (net of inventory reserve) multiplied by the appraised value of eligible inventory plus (iii) face amount of eligible trade receivables multiplied by the receivables advance rate (of 80% or 85% based on reporting requirements then in effect), minus (iv) 100% of the then amount of availability reserves. Second Amendment to Credit Agreement dated 7/26/13 (Exhibit 4.3 to 10-K filed 11/14/13) Credit Agreement dated 11/12/10 (Exhibit 4.13 to 10-Q filed 2/3/11) Amendment No. 1 to Credit Agreement dated 6/8/12 (Exhibit 4.1 to 8-K filed 6/14/12) $500 Mil. full commitment with a sublimit of $25 Mil. for Canadian facility. $200 Mil. accordion feature for domestic (and $25 Mil. for Canadian) facility subject to no default. 7/26/18 Senior secured. Secured by a first lien on inventory, accounts receivable and credit card receivables of the related loan parties (domestic or Canadian). Loan parties includes both borrowers as well as guarantors of the obligations. Guaranteed by parents Sally Beauty Holdings, Inc., and Sally Investment Holdings LLC, as well as by material wholly owned domestic subsidiaries of the domestic borrowers (see org chart); Canadian subsidiaries, organized under the laws of Canada, will guarantee the obligations under the Canadian credit facility (there are presently no Canadian guarantors).

Consolidated fixed-charge coverage ratio (FCCR), calculated on a TTM basis to be equal to or greater than 1.0x during the continuance of a covenant compliance event (means either [a] that an event of default has occurred and is continuing, or [b] excess availability is less than the greater of 10% of the borrowing base, or $40 Mil.).

Ratio Debt: Secured debt permitted provided secured leverage ratio does not exceed 4.0x on a pro forma basis. Carveouts: No restriction on unsecured and/or subordinated debt incurrence Loan parties not permitted for create liens except permitted encumbrances, which include: existing liens on debt and refinancings thereof; liens on intellectual property; and liens securing new indebtedness permitted under debt incurrence covenant (purchase money debt, capital leases and ratio debt). Guarantees are defined as debt and hence governed by debt restriction. Also see Investments Restriction section below.

Acquisitions/Divestitures Change of Control (CoC) CoC is defined as occupancy of majority of board seats or acquisition of more than 50% voting stock, and constitutes an event of default. Investments Restriction Unlimited amount permitted provided the acquisition/investment payment conditions are satisfied (i) no event of default (ii) excess availability for the 45-day period preceding, and on the date of, such transaction or payment was equal to or greater than 15% of the loan cap. Note: If acquisition/investment payment conditions cannot be met but the excess availability condition is met, the amount in any fiscal year is capped at $30 Mil. Carveouts: Guarantees of secured debt permitted under debt covenant; general carveout of $2.5 Mil. in any fiscal year provided no event of default exists. Permitted Acquisitions: Total consideration paid for permitted acquisitions in any fiscal year is limited to $30 Mil. as long as pro forma excess availability is equal to or greater than 15% of the loan cap. Sale of Assets Restriction Dispositions of assets and equity (including sale and leaseback) are permitted provided no event of default and the net proceeds are used to repay the loans. Restricted Payments Restricted Payments (RP)

Prepayment of Debt

RP: Means (i) any dividend (other than payable in capital stock of any loan party) with respect to capital stock and (ii) stock repurchase. Ratio Test: Sally Holdings LLC (the Parent) may pay cash dividends and distributions to Sally Investment Holdings LLC (Intermediate Holdco) for distribution to Sally Beauty Holdings, Inc. (Holdings) to enable Holdings to pay cash dividends and repurchase its stock up to: (a) an amount such that consolidated FCCR is equal to or greater than 1.10x (on a pro forma basis) provided that no default or event of default exists or would arise therefrom, and pro forma excess availability for the 45-day period preceding, and on the date of, such payment must equal or be greater than 20% of the loan cap for 45 days prior to the RP; or (b) RP amount is not limited by the FCCR test if pro forma excess availability for the 45-day period preceding (and on the date of) is equal to or greater than the lesser of $150 Mil. or 30% of the borrowing base. For RP up to $30 Mil. in any fiscal year, excess availability must equal or exceed the lesser of $75 Mil. or 15% of borrowing base for 45 days preceding; or for RP in excess of $30 Mil. in any fiscal year, excess availability must equal or exceed the lesser of $100 Mil. or 20% of borrowing base for 45 days preceding and consolidated FCCR shall be at least 1.1x. Carveouts: Parent may make cash distributions to Holdings and Intermediate Holdco in amount sufficient to cover their expenses (other than taxes) incurred in ordinary course of business. Voluntary redemption, retirement, or prepayment of debt is permitted provided no default or event of default exists or would arise therefrom, and pro forma excess availability for the 45-day period preceding, and on the date of, such payment was equal to or greater than 20% of the loan cap.

MAC – Material adverse change. ACH – Automated clearing house transfers. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — Sally Holdings LLC (Continued) Other Cross-Default Cross-Acceleration MAC Clause Equity Cure

Yes for material debt (> $20 Mil.) of any loan party. Same as above. As a representation and warranty Yes — Provided (a) the parent identifies such cash equity contribution as a specified equity contribution; (b) in each four fiscal quarter period, there shall exist a period of at least two consecutive quarters in respect of which no specified equity contribution shall have been made, (c) the amount of any contribution included in the calculation of consolidated EBITDA shall be limited to the amount required to effect compliance with FCCR of 1.0x. Trigger (or Cash Dominion) The company’s funds will be swept daily via ACH/wire into concentration accounts (maintained by the administrative agent and under the Event sole dominion of the collateral agent) to reduce the borrowings outstanding under the credit facility upon occurrence of a trigger event. Means either (i) the occurrence and continuance of an event of default, or (ii) the borrowers’ failure to maintain excess availability of at least the greater of $40 Mil. or 15% of the loan cap for 45 consecutive days. Loan Cap: Represents the lesser of (a) total commitments and (b) borrowing base. Key Definitions Excess Availability: Difference between (a) the loan cap and (b) the outstanding credit extensions to the borrowers. MAC – Material adverse change. ACH – Automated clearing house transfers. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Sally Holdings LLC Overview Issuer Description of Debt Document Date and Location

Maturity Date

Original Issue/Outstanding

Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Sally Holdings LLC (issuer) and Sally Capital Inc. (as co-issuer) 5.750% senior notes, 5.500% senior notes and 5.625% senior notes Indenture dated 5/18/12 filed as Exhibit 4.1 to 8-K dated 5/18/12 Supplemental Indenture dated 5/18/12 filed as Exhibit 4.2 to 8-K dated 5/18/12 Second Supplemental Indenture dated 10/29/13 filed as Exhibit 4.2 to 8-K dated 10/29/13 Third Supplemental Indenture dated 12/3/15 filed as Exhibit 4.2 to 8-K dated 12/31/15 5.750% Senior Notes: 6/1/22 5.500% Senior Notes: 11/1/23 5.625% Senior Notes: 12/1/25 5.750% Senior Notes: $850 Mil./$850 Mil. 5.500% Senior Notes: $200 Mil./$200 Mil. 5.625% Senior Notes: $750 Mil./$750 Mil. Senior unsecured obligations of the issuer. None. Guaranteed on a senior unsecured basis by parents Sally Beauty Holdings, Inc. and Sally Investment Holdings LLC, as well as by each subsidiary guarantor of the issuer, jointly and severally, with all other subsidiary guarantors. Subsidiary guarantor is a domestic restricted subsidiary of Sally Holdings LLC (other than Sally Capital Inc.).

Ratio Debt: Sally Holdings LLC and restricted subsidiaries may incur debt if consolidated coverage ratio (pro forma) is greater than 2.0x. Carveouts: Credit facility debt (term, ABL, other) provided total aggregate amount outstanding does not exceed $1.2 Bil. plus the greater of $400 Mil. and borrowing base less debt incurred by special purpose domestic subsidiaries. Borrowing base is defined as 80% of the book value of inventory plus 85% of the book value of receivables of the issuer and 100% of cash and equivalents of the issuer and its domestic subsidiaries. • Capital leases and purchase money debt capped at the higher of $100 Mil. and 11.5% of consolidated tangible assets; • General carveout amount equal to the greater of $85 Mil. and 9.75% of consolidated tangible assets. Liens (other than permitted liens) on debt issued by the issuer or any restricted subsidiary are not permitted without equally and ratable securing the notes contemporaneously. Carveouts: Standard carveouts for existing liens and refinancings thereof; general carveout of $25 Mil.

A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the borrower or holdco or constitution of the board of directors changes so permitted holders lose control and may constitute an event of default (if section 7.1 requirements are not met). There is a CoC put at 101. See Restricted Payments section. Standard restrictions on asset sales; in the event that sales proceeds exceed collateral value by more than $30 Mil. and are not applied to repay loans or reinvest in additional assets within 365 days, they shall be applied to repay the notes subject to an offer.

RP: Means (i) any dividend (ii) stock repurchase (iii) prepayment of subordinated debt and (iv) restricted investments. Ratio Test: RP are permitted provided (i) no event of default (ii) borrower can incur $1 of debt under the 2.0x consolidated coverage ratio debt test. RP Basket: Determined as cumulative sum of 50% consolidated net income commencing 7/1/06 plus 100% of the net proceeds from an equity issuance and other adjustments. Carveouts: • General carveout equal to the greater of $50 Mil. and 5.75% consolidated tangible assets; • Additional RP provided consolidated leverage ratio is less than 3.25x (after giving effect to such RP including any debt incurred to finance such payment) and no event of default exists.

ABL – Asset-based loan. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bond Covenant Summary — Sally Holdings LLC (Continued) Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

Yes, upon a payment default on final maturity on any material debt (> $40 Mil.) of issuer or restricted subsidiary. Yes, if agreed to by holders of at least 30% of principal then outstanding. 5.750% notes: noncallable until 6/1/17. Thereafter, redeemable, at the company’s option, in whole or in part, on and after 6/1/17 at the applicable redemption price below: 2017: 102.875% 2018: 101.917% 2019: 100.958% 2020+: 100.000% 5.500% notes: noncallable until 11/1/18. Thereafter, redeemable, at the company’s option, in whole or in part, on and after 11/1/18 at the applicable redemption price below: 2018: 102.750% 2019: 101.833% 2020: 100.917% 2021+: 100.000% 5.625% notes: noncallable until 12/1/20. Thereafter, redeemable, at the company’s option, in whole or in part, on and after 12/1/20 at the applicable redemption price below: 2020: 102.813% 2021: 101.875% 2022: 100.938% 2023+: 100.000% Max. 35% of the issue can be redeemed with proceeds from an IPO @ 105.750% on or before 6/1/15 for the 5.750% notes and @105.500% on or before 11/1/16 for the 5.500% notes. Covenants related to debt incurrence, restricted payments and disposition of assets (but excluding lien restrictions) will be suspended if (a) the notes have investment grade ratings by two rating agencies and (b) there is no event of default. If any of these conditions fails to be met at a subsequent date, the covenants shall be reinstated on that later date.

ABL – Asset-based loans. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Sally Beauty Holdings, Inc. 12 12 Three Months Months Months 9/30/12 9/30/13 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 9/30/16 12 Months

Three Months

22.3 16.8 14.9 9.7 6.5 36.8

22.6 16.9 14.9 10.5 6.2 36.0

22.1 16.3 14.2 9.2 6.4 35.8

20.8 15.0 12.9 9.9 4.0 31.9

22.4 16.5 14.2 8.3 10.5 32.1

22.4 16.6 14.3 9.0 (0.1) 32.1

21.6 15.8 13.2 10.1 6.0 33.0

21.8 16.0 13.6 9.3 5.1 33.0

21.7 15.9 13.6 12.2 2.9 32.8

21.2 15.4 12.9 7.9 11.2 32.7

22.2 16.4 13.9 8.8 (0.1) 31.5

21.5 15.6 12.8 7.8 6.3 32.4

21.7 15.8 13.3 9.2 5.1 32.4

4.0 4.9 7.2

4.1 4.8 6.8

4.3 5.3 6.7

4.4 6.4 6.4

4.3 6.1 6.9

4.3 6.2 6.4

4.3 5.2 5.4

4.3 4.8 5.1

4.3 4.8 5.4

4.3 5.0 5.5

2.7 0.0

2.8 0.0

3.0 0.0

2.9 0.0

2.8 0.0

2.9 0.0

7.5

7.7

7.8

8.0

7.7

7.9

8.6

8.9

8.6

8.5

3.7 4.6 6.0

4.0 4.8 7.3

4.2 5.1 7.1

4.1 6.1 7.0

4.0 5.7 6.3

4.0 5.8 6.8

4.1 4.9 8.5

4.2 4.7 9.3

4.2 4.7 8.8

4.2 4.7 8.7

4.2 4.9 8.6

2.6 5.4 2.1 4.1 4.3

2.6 5.8 2.2 4.6 3.7

2.5 5.7 2.1 4.2 4.1

3.5 30.4 2.3 17.1 3.8

3.5 31.0 2.4 18.5 4.0

3.4 30.7 2.4 18.0 3.4

2.5 5.4 2.1 4.2 2.8

2.3 4.4 2.0 3.7 2.4

2.3 4.3 2.0 3.7 2.4

2.3 4.5 2.0 3.8 2.3

2.3 4.5 2.0 3.6 2.3

1,617 3,176 1,559 — (110) 7.3

1,691 3,340 1,650 — (106) 6.4

1,812 3,556 1,744 — (108) 6.2

1,811 3,597 1,786 — (20) 1.1

1,810 3,596 1,786 — (20) 1.1

1,810 3,595 1,786 — (20) 1.1

1,788 3,573 1,786 — (113) 6.3

1,783 3,631 1,848 — (144) 8.0

1,803 3,651 1,848 — (144) 8.0

1,802 3,650 1,848 — (139) 7.7

340 (43) 298 — (69) — 228 (44) 180 (172) (16) 177

381 (71) 310 — (85) — 226 (22) 74 (484) 14 (193)

344 (29) 316 — (77) — 239 (5) 122 (307) 10 59

96 (39) 57 — (19) — 38 (0) 30 16 84

78 40 117 — (19) — 99 (2) (0) (46) 4 55

87 (55) 32 — (33) — (1) (1) (0) (6) 1 (7)

97 (4) 94 — (36) — 58 (4) (0) (152) (2) (99)

358 (57) 301 — (107) — 194 (6) (1) (173) 20 33

122 (53) 69 — (41) — 29 (2) (26) (60) (13) (73)

78 65 143 — (33) — 110 0 (0) (92) 3 21

88 (51) 37 — (37) — (1) 3 (0) 2 (2) 2

76 26 102 — (40) — 62 (24) (0) (42) (0) (4)

363 (12) 351 — (151) — 200 (24) (27) (191) (12) (53)

240 378

47 382

107 476

191 500

246 478

239 477

140 477

67 479

89 478

91 478

87 478

—

332 6 151 54 2.0

407 6 161 55 2.3

444 5 160 50 2.0

459 4 154 49 1.9

414 4 160 54 2.0

470 5 162 53 3.4

449 5 163 51 3.7

449 5 167 52 2.8

513 4 163 50 4.1

452 4 165 52 3.4

493 4 164 51 3.7

468 4 166 50 4.1

468 4 167 50 3.8

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Leveraged Finance Financial Summary — Sally Beauty Holdings, Inc. (Continued) 12 12 Three Months Months Months 9/30/12 9/30/13 9/30/14 12/31/14 3/31/15 6/30/15 9/30/15 9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 9/30/16 12 Months

($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Same-Store Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

3,524 7.8 786

3,622 2.8 818

3,753 3.6 829

964 2.6 201

938 2.0 210

968 2.0 216

964 2.1 208

3,834 2.2 836

998 3.5 217

980 4.5 208

998 3.1 221

976 1.3 210

3,953 3.1 857

786 591

818 612

829 611

201 145

210 154

216 161

208 153

836 612

217 159

208 150

221 164

210 153

857 626

591 526

612 540

611 532

145 124

154 133

161 138

153 127

612 523

159 136

150 127

164 138

153 125

626 526

6.4 4,315 49.5 (28.8) 2.4 6.8 48.0 11.3 106.8

0.8 4,487 49.6 (28.3) 2.3 6.7 53.8 13.4 117.6

2.0 4,647 49.6 (26.9) 2.3 7.3 51.2 12.1 96.4

2.3 4,695 49.1 (9.6) 2.3 7.2 47.9 11.6 91.4

2.8 4,724 49.8 (8.5) 2.3 6.8 48.5 11.5 88.3

3.1 4,754 49.7 (7.3) 2.2 6.7 46.2 11.0 147.4

3.5 4,792 49.3 (5.4) 2.2 7.0 50.1 11.2 142.3

2.9 4,792 49.5 (26.5) 2.2 7.0 50.1 11.2 119.2

3.9 4,834 49.5 (5.4) 2.1 7.0 52.0 10.9 173.5

4.0 4,862 49.7 (4.4) 2.2 6.9 51.7 10.7 139.5

2.5 4,889 50.0 (2.7) 2.2 7.1 49.8 10.8 146.1

0.8 4,937 49.5 (1.2) 2.2 7.3 49.6 10.5 149.0

2.9 4,937 49.7 (25.8) 2.2 7.3 49.6 10.5 151.7

EBITDA/R after dividends to associates and minorities. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

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333

Leveraged Finance Retailing / U.S.A.

Sears Holdings Corporation Full Rating Report Key Rating Drivers

Ratings Sears Holdings Corporation Long-Term IDR Second Second-Lien Notes Senior Unsecured Notes

CC CCC+/RR1 C/RR6

Sears, Roebuck and Co. Long-Term IDR

Negative $1 Billion EBITDA in 2016/2017: Fitch Ratings expects Sears Holdings Corporation’s comparable store sales (comps) to be around negative 8% in 2016 and in the negative mid to high single-digit range in 2017. Overall top-line is expected to decline 12%–13% in both years as Sears continues to close stores. Fitch consequently expects EBITDA to be negative $950 million–negative $1 billion in 2016/2017, compared with a loss of $836 million in 2015.

Sears Roebuck Acceptance Corp. (SRAC) Long-Term IDR a Secured Bank Facility Secured First Lien Term Loansa Senior Unsecured Notes Short-Term IDR Commercial Paper

CC CCC+/RR1 CCC+/RR1 C/RR6 C C

Kmart Holding Corporation Long-Term IDR

Significant Cash Burn: Sears’ interest expense, capex and pension plan contributions are expected to total $800 million in 2016 and potentially $1 billion in 2017. Fitch expects cash burn (cash flow from operations [CFFO] after capex and pension contributions) of $1.6 billion in 2016 and $1.8 billion in 2017, assuming $250 million in annual working capital benefit from store closings and less inventory buys. Sears will have to raise approximately $2 billion in liquidity in 2017, roughly in line with the annual average over the past five years.

Kmart Corporation Long-Term IDR CC Secured Bank Facilitya CCC+/RR1 Secured First-Lien Term Loansa CCC+/RR1 a

SRAC and Kmart are co-borrowers. IDR – Issuer Default Rating.

Liquidity Actions YTD: Sears entered into a $500 million real estate-backed loan in early January 2017; $321 million is funded. The company also expects proceeds of $525 million from the announced sale of its Craftsman brand to Stanley Black & Decker, Inc. The ability and magnitude of expected proceeds that Sears can use to fund its liquidity needs will depend on amending the asset-backed securitization transactions between KCD IP, LLC and Sears Reinsurance Company Ltd and its negotiations with the Pension Benefit Guaranty Corp.

Rating Outlook —

Financial Data Sears Holdings Corporation FYE ($ Mil.) 1/30/16 Total Revenue 25,146.0 EBITDA (836.0) EBITDA Margin (%) NM FCF (2,378.0) Total Adjusted Debt 8,744.0 Total Adjusted Debt/EBITDAR (x) NM EBITDAR/(Interest + Rent) (x) NM Comparable Store Sales (%)a (9.2) Real Estate Owned (%)b 27 No. of Stores 1,672 a

LTM 10/29/16 23,389.0 (884.0) NM (1,695.0) 10,088.5 NM NM (6.2) 26 1,503

Comparable store sales for LTM data reflects performance for the nine months ended Oct. 29, 2016. bReal estate owned reflects owned full-line Sears and Kmart stores (excludes U.S. specialty stores, a majority of which are leased). NM – Not meaningful.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com

Potential Sources of Liquidity: Fitch estimates Sears still owns about 190 unencumbered Kmart discount and Sears full-line mall stores. Sears recently indicated its board of directors established a special committee to market certain real estate properties with the goal of raising over $1 billion. Sears continues to explore strategic initiatives for its Kenmore and DieHard brands, and Sears Home Services and Sears Auto Centers businesses. Sears also expects to generate a significant amount of cash from the liquidation of the inventory and assets from its recently announced 150 store closings. Shrinking Assets Fund Operations: Sears injected almost $12 billion in liquidity between 2012 to 2016 to fund ongoing operations given material declines in internally generated cash flow. This includes $5.6 billion from real estate-related transactions, including loans secured by properties, with the remainder resulting from debt issuance and expense, and working capital reductions. Restructuring Risk: Fitch believes restructuring risk for Sears remains high over the next 12–24 months given the significant cash burn and reduced sources of liquidity.

Rating Sensitivities Positive Rating Action: A positive rating action could result from a sustained improvement in comps and EBITDA to a level where the company is covering its fixed obligations. This is not anticipated at this time. Negative Rating Action: A negative rating action could result if Sears is unable to inject the liquidity needed to fund ongoing operations.

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Sears Holdings Corporation ($ Mil.)

2015A

2016F

2017F

2018F

Revenue Revenue Growth (%) Comparable Store Sales (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

25,146 (19.4) (9.2) (836) NM (276) (2,167) (211) 0.8 — (2,378) — 2,988 8,756 NM

22,117 (12.0) (8.0) (940) NM 243 (1,398) (175) 0.8 — (1,573) — 4,837 10,917 NM

19,171 (13.3) (6.2) (981) NM 258 (1,613) (150) 0.8 — (1,763) — 5,521 11,601 NM

17,620 (8.1) (5.0) (1,051) NM 235 (1,791) (150) 0.9 — (1,941) — 6,409 12,489 NM

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. NM – Not meaningful. Source: Fitch Ratings.

Business Profile Assessment The magnitude of Sears’ decline in profitability and lack of visibility to turn operations around remains a significant concern. Fitch expects EBITDA to be negative $950 million–negative $1 billion in 2016/2017, compared with a loss of $836 million in 2015. Fitch expects total comps to be around negative 8% in 2016, reflecting an almost 9% decline at Sears stores and 7% decline at Kmart units. Fitch projects a 7% decline at Sears stores and 5% at Kmart for 2017. Overall top-line is expected to decline 12%–13% in both years as Sears continues to close stores. The company will end with approximately 635 Sears full-line stores and 693 Kmart stores — including its latest round of announcements in January — down 10% and 26%, respectively versus year-end 2015. Fitch expects Sears’ interest expense, capex and pension plan contributions to total $800 million in 2016 and potentially $1 billion in 2017. Fitch expects cash burn (CFFO after capex and pension contributions) of $1.6 billion in 2016 and $1.8 billion in 2017, assuming $250 million in annual working capital benefit from store closings and less inventory buys. Fitch consequently estimates Sears will have to raise approximately $2 billion in liquidity in 2017, roughly in line with the annual average over the past five years.

Asset Divestitures and Other Liquidity Initiatives Sears has undertaken a number of real estate transactions, spun off various businesses, reduced inventory buys and further cut costs since 2012 to inject liquidity into the business.

Funding 2017 Liquidity Needs Real Estate-Backed Loan Sears entered into a $500 million real estate backed loan in early January 2017, secured by real estate properties valued at over $800 million. On the announcement date, $321 million of the loan was funded, with the remainder available for draw in the future. The loan is secured by mortgages on 46 real properties, and will be secured by additional real properties if the remaining $179 million is drawn.

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335

Leveraged Finance Additional Real Estate Proceeds Fitch estimates Sears still owns approximately 190 unencumbered Kmart discount and Sears full-line mall stores, excluding 125 Sears full-line mall stores in a bankruptcy-remote vehicle and 20 specialty stores. Sears owned 171 full line store Sears stores and 87 Kmart stores, or 258 units, as of Oct. 29, 2016. Of these, 21 properties have been pledged to the $500 million short-term loan due July 2017 and 46 properties were recently pledged toward the $321 million funded portion of the $500 million real estate-backed loan due July 2020. An unspecified amount of real estate collateralizes the $300 million junior-lien lien term loan facility due July 2020 and additional property would have to be pledged toward the $179 million unfunded portion of the new $500 million real estate facility. Sears recently indicated its board of directors established a special committee to market certain real estate properties with the goal of raising over $1 billion. Sale of Craftsman Brands Sears entered into a definitive agreement with Stanley Black & Decker for the sale of its Craftsman business, with the transaction expected to close sometime in 2017. Under the terms of the agreement, Stanley Black & Decker will pay Sears $525 million at closing of the sale and $250 million at end of year three, and a 15-year royalty stream on all third-party Craftsman sales to new customers (2.5% through 2020, 3.0% through January 2023, and 3.5% thereafter). Sears will continue sourcing and selling Craftsman-branded products in all its retail channels under a perpetual license agreement that will be royalty free for 15 years, then 3% thereafter. The ability and magnitude of expected proceeds that Sears can use to fund its liquidity needs in 2017 will depend on amending the asset-backed securitization transactions between KCD IP, LLC and Sears Reinsurance Company Ltd., and its negotiations with the Pension Benefit Guaranty Corp. (PBGC). In March 2016, Sears agreed to provide PBGC a springing lien on the Kenmore, Craftsman and DieHard brands as part of its agreement with the organization to address its underfunded pension plan. Sears continues to explore strategic initiatives for its Kenmore and DieHard brands, and Sears Home Services and Sears Auto Centers businesses. Close Unprofitable Stores Sears announced it will close an additional 150 unprofitable stores, composed of 108 Kmart and 42 Sears stores. These stores collectively generated about $1.2 billion in LTM sales and an adjusted EBITDA loss of approximately $60 million. Sears expects to generate a significant amount of cash from the liquidation of the inventory and related assets of these stores. Fitch has projected $250 million in annual working capital benefit in 2016 and 2017 due to these liquidation sales, as well as pulling back on inventory given materially negative comps, although realized figures could potentially be higher.

2016 Recap — $1.6 Billion in Liquidity

• • •

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$750 million term loan due July 2020 entered into in April 2016 on the existing credit agreement. This is secured by the same collateral as the $1,971 million revolving credit facility and $975 million term loan due June 2018. $500 million short-term loan due July 2017 entered into in April 2016 and provided by affiliates of ESL Investments, Inc. The loan is secured by a first lien on 21 properties. $300 million secured junior-lien term loan due July 2020 entered into September 2016 and provided by affiliates of ESL Investments. The term loan is secured by a junior lien against inventory, receivables and other working capital. 336

Leveraged Finance 2015 Recap — $3.1 Billion in Liquidity

•

$429 million from real estate joint ventures (JVs) formed with General Growth Properties, Inc. (GGP); Simon Property Group, Inc.; and The Macerich Company in April 2015. Under the terms of the transactions, Sears’ contributed a total of 31 properties into the JVs in exchange for a 50% interest in each of the JVs and $429 million in cash. $2.7 billion in gross cash proceeds from the rights offering and sale-leaseback transaction with Seritage Growth Properties in July 2015. Sears sold 235 properties to Seritage along with its 50% interest in the JVs mentioned above. Sears entered into agreements with Seritage and the JVs, under which it leases 252 of the properties (three stores were recaptured by Seritage in the first quarter of 2016), with the remaining 11 properties being leased by Seritage to third parties.

2014 Recap — $2.3 Billion in Liquidity

• • •

• •

$500 million exit dividend from the separation of Lands’ End. $358 million from real estate transactions. A $400 million secured short-term loan from entities affiliated with controlling shareholder ESL, put in place in mid-September to fund holiday inventory buildup. The loan was guaranteed by Sears and secured by a first-priority lien on 25 real properties owned by Sears. $380 million from its rights offering for its shares in Sears Canada, in which Sears had a 51% stake, of which $168 million was received in the third quarter. $625 million of 8% senior unsecured notes with a warrants offer announced on Oct. 20, 2014 and completed in mid-November.

Sears also benefited from an approximately $500 million reduction in net working capital as it cut back on inventory buys and closed unproductive stores.

2013 Recap — $2 Billion in Liquidity

• • • •

$1 billion through real estate transactions: $300 million in real estate proceeds; $400 million from the Sears Canada five-store lease transaction in November; and $300 million from the Sears Canada sale of JV interest in January 2014. $1 billion five-year secured term loan using the accordion feature of its domestic assetbased lending facility executed in October 2013. Reduction in peak working capital of $320 million during the peak working capital season, with domestic inventory down approximately $620 million. $200 million in fixed-cost reductions.

2012 Recap — $2.5 Billion in Liquidity

•

• •

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Sears announced in April 2012 the sale of 11 Sears stores to GGP for $270 million. The leased Ala Moana property in Hawaii accounted for the majority of the sale price — which was more than $200 million according to GGP, as disclosed in their first-quarter conference call — valuing the remaining 10 owned and leased properties at $6 million– $7 million each. Sears Canada received CAD170 million in cash proceeds for the surrender and early termination of the leases on three properties under an agreement with The Cadillac Fairview Corporation Limited in the first quarter. Sears separated its Sears Hometown and Outlet businesses and certain hardware stores by transferring direct ownership of these businesses together as a separate company to its shareholders. Sears received cash proceeds of approximately $447 million, or approximately 6.0x EBITDA, when the transaction closed in third-quarter 2012. These assets represented approximately $2.3 billion–$2.6 billion in revenue, $70 million– 337

Leveraged Finance • •

$80 million in EBITDA and $350 million–$400 million in assets, including $325 million– $375 million of net inventory in 2011. Sears reduced its peak working capital by $583 million in 2012 on both store closings ($200 million) and reduced buying ($383 million in the domestic segment). Total domestic inventory was down $972 million at the end of the third quarter. The company reduced expenses by approximately $570 million in 2012.

Liquidity and Debt Structure Sears had total liquidity of $432 million as of Oct. 29, 2016, consisting of $258 million cash and $174 million available under its credit facility. The $174 million available on the $1,971 million domestic credit facility reflected $370 million of borrowings and $660 million of letters of credit outstanding, the effect of the springing fixed-charge coverage ratio covenant of $200 million, and another $567 million that was not available due to the borrowing base limitation. See the Business Profile Assessment section for FCF projections and liquidity needs.

Capital Structure Pro Forma 10/29/16a

At 1/30/16 Description Secured Debt $1,971 Mil. Secured Revolver Due 7/20/20b First-Lien Term Loan Facility Due 6/30/18b.c First-Lien Term Loan Facility due 7/20/20b,c First-Lien Secured Loan Facility 7/7/17 First-Lien Secured Loan Facility 7/20/20a Second-Lien Notes Due 10/15/18 Junior-Lien Term Loan Facility Due 7/20/20c Total Secured Debt Unsecured Debt Unsecured CP 8.000% Senior Subordinated Notes due 2019 6.500%–7.500% SRAC Notes Due 2017–2043 Other Notes/Mortgages Total Unsecured Debt Capital Leases Total Debt

Location

($ Mil.)

(%)

($ Mil.)

(%)

SRAC/Kmart SRAC SRAC Sears, Roebuck & Co./Kmart Sears, Roebuck & Co./Kmart Holdings SRAC/Kmart —

797 980 — — — 302 — 2,079

24.7 30.3 — — — 9.3 — 64.4

370 973 750 500 321 302 300 3,516

7.6 19.9 15.4 10.2 6.6 6.2 6.1 72.0

SRAC Holdings SRAC SRAC — — —

— 625 327 4 956 195 3,230

— 19.3 10.1 0.1 29.6 6.0 100.0

248 625 327 4 1,204 164 4,884

5.1 12.8 6.7 0.1 24.7 3.6 100.0

In early January 2017, Sears entered into a $500 Mil. real estate-backed loan, secured by real estate properties valued at over $800 Mil. $321 Mil. of the loan was funded on the announcement date.bSRAC and Kmart are co-borrowers. Sears reflects the debt under SRAC in its 10-K filing. However, the borrowers are SRAC and Kmart Corporation. SRAC – Sears Roebuck Acceptance Corp. Source: Company filings, Fitch Ratings. c

Scheduled Debt Maturities

Liquidity

($ Mil., Pro Forma At Oct. 29, 2016) 2017 2018 2019 2020 Thereafter

($ Mil., At Oct. 29, 2016) 553 1,262 625 1,371 294

Cash Revolver Availability Total

258 174 432

Source: Company filings, Fitch Ratings.

Note: Excludes any revolver and commercial paper borrowings and capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Considerations for Issue-Specific Ratings In accordance with Fitch’s Recovery Rating (RR) methodology, Fitch has assigned RRs based on the company’s ‘CC’ Issuer Default Rating (IDR). Fitch’s recovery analysis assumes a liquidation value under a distressed scenario of approximately $5.6 billion (low seasonal inventory) to $6.3 billion (peak seasonal inventory) on domestic inventory; receivables; and property, plant and equipment. Fitch valued the 258 properties Sears still owns — excluding 125 Sears full-line mall stores in a bankruptcy-remote vehicle and 20 specialty stores — at a similar price per square foot as the 235 properties sold under the Seritage transaction in 2015, which puts the total valuation at around $2.5 billion. The $1,971 million domestic senior secured credit facility, under which Sears Roebuck Acceptance Corp. (SRAC) and Kmart Holding Corporation (Kmart) are the borrowers, is rated ‘CCC+/RR1’, indicating outstanding (90%–100%) recovery prospects in a distressed scenario. Holdings provides a downstream guarantee to both SRAC and Kmart borrowings, and there are cross-guarantees between SRAC and Kmart. The facility is also guaranteed by direct and indirect wholly owned domestic subsidiaries of Holdings, which own assets that collateralize the facility. The facility is secured primarily by inventory and pharmacy and credit card receivables, Fitch projects inventory will range from $4 billion at the end of 2016 to $4.5 billion around holiday peak levels, although the ultimate level will depend on store closing liquidation sales and how much inventory buys are pulled back due to declining comps. Pharmacy and credit card receivables are estimated to be $0.3 billion–$0.4 billion. The $975 million first-lien senior secured term loan due June 2018 and $750 million first-lien secured term loan due July 2020 are also rated ‘CCC+/RR1’, as they are secured by a first lien on the same collateral and guaranteed by the same subsidiaries of the company that guarantee the revolving facility. Under the guarantee and collateral agreement, the revolving lenders will have priority of payment from the collateral over the first-lien term loan lenders. The remaining $302 million second-lien notes due October 2018 at Holdings, which have a second lien on the same collateral package as the credit facility and first-lien term loans, are rated ‘CCC+/RR1’. The notes contain provisions that require Holdings to maintain minimum collateral coverage for total debt secured by the collateral securing the notes — failing which, Holdings has to offer to buy notes sufficient to cure the deficiency at 101% — that provide downside protection. The $327 million senior unsecured notes at SRAC and the 8% $625 million unsecured notes due 2019 at Holdings are rated ‘C/RR6’, given poor recovery prospects (0%–10%). Fitch assumes a material portion of the unencumbered real estate will be used to raise additional liquidity to fund operations. Sears recently indicated its board of directors has established a special committee to market certain real estate properties with the goal of raising over $1 billion to fund operations. Sears could also continue to use real estate to secure additional debt. Therefore, Fitch has taken $1 billion out of the estimated value of the real estate to reflect our view that this value would not be available as collateral against existing unsecured notes. Recovery to the senior unsecured notes also takes into account potential sizable claims under operating lease obligations and the company’s underfunded pension plan.

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Leveraged Finance Recovery Analysis — Sears Holdings Corporation ($ Mil., Except Where Noted; IDR: CC) a

Distressed Enterprise Value (EV) as a Going Concern (GC) GC EBITDA GC EV Multiple (x) EV on GC Basis

Liquidation Value (LV) of Assets — — —

Cash A/R Inventory Net PPE Total LV

Book Value

Advance Rate (%)

Available to Creditors

258.0 372.0 5,000.0 2,392.0 —

0 80 70 63 —

 297.6 3,500.0 1,500.0 5,297.6

Value Available for Claims Distribution Greater of GC or LV Less Administrative Claims (10%) Adjusted LV Available for Claims

5,297.6 529.8 4,767.8

Distribution of Value Secured Priority b

Sr. Secured Revolver Sr. Secured First-Lien Term Loans Sr. Secured Second-Lien Notes Sr. Secured Second-Lien Term Loan Secured Loan Facility (due July 2017) Secured Loan Facility (due July 2020)

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

1,241.7 1,722.5 302.0 300.0 500.0 500.0

100 100 100 100 100 100

RR1 RR1 RR1 — — —

+3 +3 +3 — — —

CCC+ CCC+ CCC+ — — —

Concession Payment Availability Table Adjusted LV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority

Amount

5,667.8 4,566.2 1,101.6 Concession Allocation (%)

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

Sr. Unsecured 3,113.3 100 201.6 6 RR6 –1 C Unsecured 625.0  0 0 RR6 –1 C Sr. Subordinated 0.0  0 0   —    Subordinated 0.0 0 0 —    Sr. Equity 0.0 0 0 — a Liquidation value reflects domestic assets held at guarantor subsidiaries. Fitch has valued the 258 properties that Sears still owns — excluding 125 Sears full-line mall stores in a bankruptcy-remote vehicle and 27 specialty stores — at a similar price per square foot as the 235 properties sold under the Seritage transaction in 2015, which puts the total valuation at around $2.5 Bil. Sears recently indicated its board of directors has established a special committee to market certain real estate properties with the goal of raising over $1 Bil. to fund operations. Sears could also continue to use real estate to secure additional debt. Therefore, Fitch has taken $1 Bil. out of the value of the real estate to reflect our view that this value would not be available as collateral against existing unsecured notes. bAssumes the revolver is drawn up to 70% of the line cap. cThe senior unsecured claims include SRAC unsecured debt, the amount of Sears’ pension underfunding levels as of Jan. 30 2016, and estimated operating lease claims. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. FILO – First in last out. Source: Fitch Ratings.

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Leveraged Finance Market Share Losses Continue Since Kmart and Sears, Roebuck and Co. merged under the newly created entity Sears Holdings Corporation in March 2005, the company has been underperforming its largest retail peers within the department store, discount and big-box specialty retail segments. The combined domestic entity lost $22.7 billion, or close to 47% of its 2006 domestic revenue base of $47 billion, excluding Orchard Hardware, through 2015. Fitch expects overall top-line to decline by another 12%–13% annually in 2016 and 2017, with 2017 revenue projected at $19 billion. The top-line weakness reflects years of underinvestment in stores, competitive pressures, inconsistent merchandising execution and the lack of a long-term retail strategy. Using an industry composite based on Sears’ domestic sales mix, industry sales were down an estimated 8% over 2008–2015, or a CAGR decline of 1.2%. During this seven-year period, Sears’ sales were down 41%, or a CAGR decline of approximately 7.2%. The decline in Kmart’s sales has been even more pronounced relative to its industry peers. Using a composite of general merchandise, food and drugstore sales for Kmart, industry sales were up 26% between 2008 and 2015, or 3.4% CAGR. In contrast, Kmart’s sales were down 37%, or a CAGR decline of approximately 6.4%.

Sears Domestic and Kmart Category Breakdown Sears Domestic

Kmart YTD YTD 2015 10/30/15 10/29/16

2011

2012

2013

2014

13,022 5,471 41 3,115 21,649

11,870 5,434 38 3,635 20,977

9,355 5,197 16 4,630 19,198

8,903 3,673 12 4,448 17,036

7,915 2,907 9 4,127 14,958

5,704 1,917 5 3,155 10,781

Mix of Business (%) Hardlines Apparel and Soft Home Food and Drug Service and Other

60.2 25.3 0.2 14.4

56.6 25.9 0.2 17.3

48.7 27.1 0.1 24.1

52.3 21.6 0.1 26.1

52.9 19.4 0.1 27.6

YoY Growth (%) Hardlines Apparel and Soft Home Food and Drug Service and Other Total

(4.9) 0.3 7.9 0.8 (2.8)

(8.8) (0.7) (7.3) 16.7 (3.1)

(21.2) (4.4) (57.9) 27.4 (8.5)

(4.8) (29.3) (25.0) (3.9) (11.3)

(11.1) (20.9) (25.0) (7.2) (12.2)

Mix of Business ($ Mil.) Hardlines Apparel and Soft Home Food and Drug Service and Other Total

YTD YTD 2015 10/30/15 10/29/16

2011

2012

2013

2014

5,228 1,681 4 2,925 9,838

4,765 4,723 5,705 92 15,285

4,486 4,588 5,398 95 14,567

4,037 4,298 4,772 87 13,194

3,605 4,049 4,326 94 12,074

2,936 3,434 3,735 83 10,188

1,986 2,274 2,749 53 7,062

1,722 2,127 2,349 50 6,248

52.9 17.8 0.0 29.3

53.1 17.1 0.0 29.7

31.2 30.9 37.3 0.6

30.8 31.5 37.1 0.7

30.6 32.6 36.2 0.7

29.9 33.5 35.8 0.8

28.8 33.7 36.7 0.8

28.1 32.2 38.9 0.8

27.6 34.0 37.6 0.8

(12.8) (25.2) (16.7) (6.5) (13.6)

(8.3) (12.3) (20.0) (7.3) (8.7)

(2.3) (1.8) (1.8) (3.2) (2.0)

(5.9) (2.9) (5.4) 3.3 (4.7)

(10.0) (6.3) (11.6) (8.4) (9.4)

(10.7) (5.8) (9.3) 8.0 (8.5)

(18.6) (15.2) (13.7) (11.7) (15.6)

(20.6) (16.6) (15.0) (15.9) (17.2)

(13.3) (6.5) (14.6) (5.7) (11.5)

YoY – Year-over-year. Note: Hardlines consist of appliances, consumer electronics, lawn and garden, tools and hardware, automotive parts, household goods, toys, housewares and sporting goods. Apparel and Soft Home includes women’s, men’s, kids, footwear, jewelry, accessories and soft home. Food and Drug consists of grocery and household, pharmacy and drugstore. Service and Other includes repair, installation and automotive service, and extended contract revenue. Source: Company filings, Fitch Ratings.

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Leveraged Finance Kmart Sales Trend Versus Industry Composite (%) 10

Composite Industry Growth Rate 4.7

4.1

Kmart Growth Rate

Kmart Share of Composite Industry

4.0

3.8

3.5

3.2

2.8

2.5

2.1

2009

2010

2011

2012

2013

2014

2015

5 0 (5) (10) (15) (20) 2007

2008

Source: The composite index is based on Fitch's estimates of Kmart's sales mix over the eight-year period and created using the U.S. Census Bureau categorization of retail sales by industry segment.

Sears Domestic Sales Trend Versus Industry Composite (2007â&#x20AC;&#x201C;2015) Composite Industry Growth Rate (%) 30

22.3

21.0

21.3

Sears Domestic Growth Rate 19.9

19.2

18.6

Sears Share of Composite Industry

17.2

15.3

13.5

2013

2014

2015

20 10 0 (10) (20) 2007

2008

2009

2010

2011

2012

Source: The composite index is based on Fitch's estimates of Sears' domestic sales mix over the eight-year period and was created using the U.S. Census Bureau categorization of retail sales by industry segment.

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Leveraged Finance Sears Segment Data (USD Mil., Unless Otherwise Indicated) Revenues Sears Domestic Kmart Sears Canada Total

2008

2009

2010

2011a

2012

2013

2014

2015

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

25,315 23,672 22,937 21,649 20,977 19,198 17,036 14,958 16,219 15,743 15,595 15,285 14,567 13,194 12,074 10,188 5,236 4,628 4,796 4,633 4,310 3,796 2,088 — 46,770 44,043 43,328 41,567 39,854 36,188 31,198 25,146

3,526 2,356 — 5,882

3,752 2,459 — 6,211

3,503 2,247 — 5,750

4,177 3,126 — 7,303

3,255 2,139 — 5,394

3,442 2,221 — 5,663

3,141 1,888 — 5,029

Revenue Growth (%) Sears Domestic Kmart Sears Canada Total

(9.1) (6.0) (6.5) (7.8)

(6.5) (2.9) (11.6) (5.8)

(3.1) (0.9) 3.6 (1.6)

(2.8) (2.0) (3.4) (1.6)

(5.4) (4.7) (7.0) (5.3)

(8.5) (9.4) (11.9) (9.2)

(11.3) (8.5) (45.0) (13.8)

(12.2) (15.6) — (19.4)

(17.7) (18.7) — (25.3)

(12.9) (15.9) — (22.5)

(9.9) (17.0) — (20.2)

(8.2) (11.9) — (9.8)

(7.7) (9.2) — (8.3)

(8.3) (9.7) — (8.8)

(10.3) (16.0) — (12.5)

Comparable Store Sales (%) Sears Domestic Kmart Total (Domestic) Sears Canada (CAD)

(9.5) (6.1) (8.0) (1.6)

(8.7) (0.8) (5.1) (6.9)

(3.6) 0.7 (1.6) (4.0)

(3.0) (1.4) (2.2) (7.7)

(1.4) (3.7) (2.5) (5.6)

(4.1) (3.6) (3.8) (2.7)

(2.1) (1.4) (1.8) (5.7)

(11.1) (7.3) (9.2) —

(14.5) (7.0) (10.9) —

(14.0) (7.3) (10.8) —

(9.6) (7.5) (8.6) —

(6.9) (7.2) (7.1) —

(5.0) (7.1) (6.1) —

(7.0) (3.3) (5.2) —

(10.0) (4.4) (7.4) —

Gross Margin (%) Sears Domestic Kmart Sears Canada Total

28.6 23.3 31.4 27.1

29.7 23.6 32.3 27.8

28.7 24.6 30.5 27.4

26.8 22.7 28.8 25.5

28.0 23.4 28.7 26.4

25.4 21.4 26.8 24.2

24.0 21.2 24.0 22.9

24.5 21.1 — 23.1

28.4 22.0 — 25.8

24.7 20.7 — 23.1

22.5 21.1 — 21.9

22.7 20.7 — 21.8

23.7 18.9 — 21.8

23.2 20.8 — 22.2

21.6 15.0 — 19.1

(107) (17) 7 (67)

110 31 91 72

(99) 98 (180) (37)

(178) (192) (171) (184)

104 71 (14) 78

(259) (169) (189) (219)

(142) (19) (276) (129)

51 (15) — 19

346 149 — 261

208 80 — 140

(28) 35 — (25)

(263) (257) — (258)

(461) (310) — (399)

(147) 6 — (85)

(91) (606) — (282)

7,179 6,694 6,621 6,397 6,095 3,572 3,509 3,471 3,444 3,355 1,308 1,142 1,244 1,366 1,265 12,059 11,345 11,336 11,177 10,715

5,596 3,123 1,105 9,824

4,944 2,872 622 8,438

4,577 2,491 — 7,068

1,182 599 — 1,781

1,166 609 — 1,775

1,083 605 — 1,688

1,146 678 — 1,824

967 486 — 1,453

1,004 539 — 1,543

959 469 — 1,428

(225) (722) (858) (913) 54 (258) (311) (345) (30) (89) (120) — (201) (1,069) (1,289) (1,258)

(182) (81) — (263)

(240) (100) — (340)

(294) (132) — (426)

(197) (32) — (229)

(194) (82) — (276)

(205) (78) — (283)

(280) (186) — (466)

Gross Profit YoY Change (bps) Sears Domestic Kmart Sears Canada Total SG&A (Excluding Noncash or One-Time Items) Sears Domestic Kmart Sears Canada Total Operating Income Sears Domestic Kmart Sears Canada Total Excluding One-Time Items

56 211 336 603

331 212 353 896

(42) 367 219 544

(597) 23 (2) (576)

Adjusted EBITDA Sears Domestic Kmart Sears Canada Total EBITDA

780 349 455 1,584

1,003 364 455 1,822

614 519 320 1,453

4 172 101 277

356 201 69 626

(211) (129 3 (337)

(431) (216) (71) (718)

(563) (273) — (836)

(80) (61) — (141)

(145) (81) — (226)

(217) (115) — (332)

(121) (16) — (137)

(118) (63) — (181)

(128) (63) — (191)

(206) (169) — (375)

Store Info. (Units) Sears Domestic Sears Full-Line Storesb Sears Essentials/Grandsb Total Full-Line Specialty Stores Total Sears Domestic Kmart Stores

856 73 929 1,233 2,162 1,368

848 60 908 1,284 2,192 1,327

842 52 894 1,354 2,248 1,307

832 35 867 1,338 2,205 1,305

788 10 798 54 852 1,221

768 10 778 50 828 1,152

709 8 717 29 746 979

705 — 705 26 731 941

715 — 715 28 743 973

711 — 711 28 739 963

708 — 708 27 735 952

705 — 705 26 731 941

700 — 700 26 726 896

683 — 683 26 709 883

676 — 676 26 702 801

2011 full-year figures exclude Orchard Hardware, including any YoY calculations. bFull-line stores includes Essentials/Grands stores beginning 2015. YoY – Year-over-year. SG&A – Selling, general and administrative. Source: Company filings, Fitch Ratings.

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Leveraged Finance Accelerated Store Closings/Divestitures The company closed or divested a net 651 big box locations between 2008 and 2015, resulting in a square footage decline of approximately 26% (24% reduction in Sears square footage and 31% reduction in Kmart square footage). About half (317 units) of the closed or divested stores were leased stores. Sears owned approximately 420 of its big boxes — 97 Kmart discount stores and supercenters and 322 domestic Sears full-line stores and Essentials/Grand stores — or approximately 30% of its 2015 domestic square footage. The company closed 29 Sears locations and 140 Kmart locations during the first three quarters of 2016. Sears announced in January 2017 it would close another 42 Sears locations and 108 Kmart locations. The 71 Sears closings and the 248 Kmart closings would amount to total square footage decline of approximately 19% in 2016 (10% reduction in Sears square footage and 26% reduction in Kmart square footage).

Domestic Big-Box Square Footage Reduction: 2008–2015a Format

2008 Average Total Units Sq Ft (000) Sq Ft (000)

2015 Average Total Units Sq Ft (000) Sq Ft (000)

Sears Full-Line Stores Grand Essentials Kmart Discount Stores Kmart Supercenters Total Net Reduction in Sq Ft (%)

856 73 1,321 47 2,297 —

705 — 941 — 1,646 —

133 115 92 166 — —

113,848 8,395 121,532 7,802 251,577 —

138 — 95 — — —

97,290 — 89,395 — 186,685 —

Total Unit Closings 2008–2015 (224) — (427) — (651) (25.8)

Excludes stores related to 2012 spinoff of Sears Hometown and Outlet Stores businesses and certain hardware stores. Note: Grand essentials and Kmart Supercenters are no longer broken out beginning in 2015. Sq Ft – Square feet. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure — Sears Holdings Corporation ($ Mil., Pro Forma As of Oct. 29, 2016) Ownership Structurea ESL Investments, Inc. Fairholme Capital Management Other Board Members Other Public Shareholders

(%) 54.6 25.0 1.0 19.4

100% Sears Holding Corporation (SHLD) (IDR — CC) Debt Issue Amount 6.625% Second-Lien Secured Notes due 10/15/18 302 8.000% Senior Unsecured Notes due 2019 625 Total 927 Other Claims: Underfunded Pension Plans — Consolidated Revenue Consolidated Adjusted EBITDAb Consolidated Debt/EBITDAR

23,389 (884) NM Downstream guarantee of ABL

Sears, Roebuck & Co. (IDR — CC) Owns 171 full-line Sears Domestic and Sears Essentials and 20 specialty storesc Claims: Operating leases/underfunded pension plans

Rating CCC+/RR1 C/RR6 — —

Kmart Holding Corp. (IDR — CC) Owns 87 stores (discount stores and eight supercenters) Claims: Operating leases/underfunded pension plan

100%

Sears Roebuck Acceptance Corp. (SRAC) (LT IDR — CC; ST IDR — C) Debt Issue Amount Rating Secured First-Lien Term Loan due 6/30/18d 973 CCC+/RR1 Secured First-Lien Term Loan due 7/20/20d 750 CCC+/RR1 Secured Junior-Lien Term Loan due 7/20/20d 300 NR Unsecured Commercial Paper 248 C 6.500%–7.500% Notes due 2017–2043 327 C/RR6 Total 2,598 —

Cross-guarantee under ABL

Kmart Corporation (IDR — CC/Negative)

Downstream guarantee of all SRAC’s senior notes

Sears, Roebuck & Co./Kmart Corporation (and Other Subsidiaries) Sears DC Corp. (IDR — NR)

100%

Sears Canada Co. (IDR — NR)

12%

Debt Issue $300 Mil. ABL Facility due 2019 Total

Amount Rating 0 NR 0 —

Co-borrowers under $1.971 Bil. ABL revolver due 2020 Entity-level financial data Legal entity (issuer, borrower or guarantor)

Debt Issue $500 Mil. Secured Loan Facility due 7/7/17 $500 Mil. Secured Loan Facility due 7/20/20 Total

Amount Rating 500 NR 321 NR 721 —

Sears, Roebuck & Co., Kmart Corporation, and other direct and indirect subsidiaries of SHLD have pledged 21 properties to the 2017 loan and 46 properties to the 2020 loan

$1,971 Mil. ABL (CCC+/RR1)

Subsidiary guarantee (secured) of a) ABL on first-priority basis, and b) SHLD notes on second-priority basis. Guarantor Subsidiariese Revenue EBITDA A/R Inventory A/P Total Assets Total Debt

23,483 (2,210) 351 5,032 1,556 35,543 4,982

Nonguarantor Subsidiariesf Revenue EBITDA A/R Inventory A/P Total Assets Total Debt

2,793 826 21 — — 32,120 —

aOwnership

figures as of March 21, 2016. bAdjusted EBITDA adds back noncash pension expense, closed store reserve and severance. cExcludes 125 Sears full-line stores that were contributed to a bankruptcy-remote structure, real estate mortgage investment conduit (REMIC) in November 2003. Of the 258 total Sears full-line and Kmart stores, approximately 190 stores remain unencumbered after pledging 21 stores to the $500 Mil. secured loan facility due July 2017 and 46 stores to the $321 Mil. secured loan facility due July 2020. dSears reflects the debt under SRAC in its 10-K filing. However, the borrowers are SRAC and Kmart Corporation. eData is presented pre-intercompany eliminations between parent, guarantor subsidiaries and nonguarantor subsidiaries. fIncludes Sears, Roebuck & Co.; Kmart Holding Corp.; SRAC; and Kmart Corporation, but excludes affiliates that do not own collateral. Note: In early January 2017, Sears entered into a $500 Mil. real estate backed loan, secured by real estate properties valued at over $800 Mil. $321 Mil. of the loan was funded on the announcement date. IDR – Issuer Default Rating. RR – Recovery Rating. NM – Not meaningful. LT – Long-term. ST – Short-term. ABL – Asset-based loan. NR – Not rated. A/R – Accounts receivable. A/P – Accounts payable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — SRAC and Kmart Corp. Overview Borrower Document Date and Location

Description of Debt

Amount ($ Mil.)

Maturity Date

Ranking Security Guarantee

Financial Covenants Fixed-Charge Coverage Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Acquisitions/Divestitures Change of Control (CoC) M&A Restriction Investment Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Sears Roebuck Acceptance Corp. (SRAC) and Kmart Corp. Second Amended and Restated Credit Agreement dated 4/8/11 (exhibit 10.3 to 10-Q filed 5/19/11). Second Amended and Restated Guarantee and Collateral Agreement dated 4/8/11 (exhibit 10.4 to 10-Q filed 5/19/11). First Amendment to the Second Amended and Restated Credit Agreement dated 10/2/13 (exhibit 10.1 to 8-K filed 10/2/13). Third Amended and Restated Credit Agreement dated 7/21/15 (exhibit 10.2 to 10-Q filed 8/20/15) First Amendment to Third Amended and Restated Credit Agreement dated 4/8/16 (exhibit 10.2 to 8-K filed 4/12/16) • $1,971 Mil. asset-based revolving credit facility (ABL revolver) subject to a borrowing base equal to 85% of eligible credit card receivables and 85% of eligible pharmacy receivables at such time plus the lesser of (i) 70% of the net eligible inventory and (ii) 80% of the net orderly liquidation value, minus 100% of the availability reserves at such time. • $1.0 Bil. senior secured term loan due 2018 and $750 Mil. term loan due 2020. Commitment Outstanding (As of 10/29/16) ABL Revolver 1,971 370 Term loan 1,000 973 Term loan 750 750 $1,971 Mil. ABL revolver: 7/20/20 $1 Bil. Term loan: 6/30/18 $750 Mil. Term Loan: 7/20/20 Senior secured. Secured by a first lien on the domestic inventory, credit card accounts receivable and pharmacy receivables owned by the borrowers and subsidiary guarantors. Borrowers under the facility are SRAC and Kmart. The holding company (Sears Holding Corp. [SHLD]) provides a downstream guarantee of both SRAC and Kmart’s borrowings, and there are cross-guarantees between SRAC and Kmart. The facility is also guaranteed by each of the subsidiary guarantors (direct/indirect wholly owned domestic subsidiaries of SHLD that owns inventory, credit card accounts, receivables, pharmacy receivables and other collateral).

> 1.0x springing when excess availability is less than the greater of 10% of the line cap and $200 Mil.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) $1 Bil. incremental revolver or term loan (currently exhausted with a new $1 Bil. term loan); 2) $100 Mil. for debt of SHLD or of any nonborrowing subsidiary, provided pro forma capped excess availability is more than or equal to 15% of line cap and the pro forma fixed-charge coverage ratio is more than or equal to 1.0x; sale-leaseback of assets not constituting collateral; 3) junior secured notes up to $2 Bil.; 4) unlimited debt with maturity after 7/20/20, and with repayment not exceeding 1% of original amount per annum; and 5) additional all-purpose debt up to $750 Mil. Notable Permitted Liens: Second-priority lien up to $2 Bil. provided no event of default and pro forma excess availability (line cap less outstanding) is more than or equal to 15% of the line cap. Guarantees of operating leases and other nondebt obligations are included under the definition of investments and, hence, are governed by the related covenants.

A CoC constitutes an event of default and is defined as acquisition of more than 35% voting stock of SHLD by nonpermitted holders, or SHLD ceasing to own 100% of voting stock of Sears, Roebuck & Co and Kmart Holding Corp. Acquisition is permitted provided i) no event of default exists, ii) pro forma capped excess availability is more than or equal to 15% of line cap, and iii) the pro forma fixed-charge coverage ratio is more than or equal to 1.0x. Notable Carveouts: $100 Mil. investment in nonborrowing subsidiaries, provided pro forma capped excess availability is more than or equal to 15% of line cap and the pro forma fixed-charge coverage ratio is more than or equal to 1.0x. There is a general investment carveout of $250 Mil. Restrictions on Store Closings: No more than 250 full-line Sears or Kmart stores per quarter or 500 full-line Sears or Kmart stores every four consecutive quarters without the consent of the co-collateral agents.

RP Basket: $1.5 Bil., conditioned on 1) excess availability is over 50% of the line cap and 2) no more than $1 Bil. in the LTM. Notable Permitted Payments: 1) Additional all-purpose payments, provided the sum of pro forma capped excess availability and pro forma suppressed availability (limited to 5% of line cap) is more than or equal to 15% of line cap and the pro forma fixed-charge ratio is more than or equal to 1.05x; and 2) payments are also permitted from the net proceeds of any common stock issuances and any permitted dispositions as long as a) pro-forma capped excess availability is at least 15% of the line cap and b) shall not exceed in any 12 consecutive months 75% of the net proceeds; provided that RPs made pursuant to this clause in cash during any 12 consecutive month period shall not exceed $125 Bil.

N.A. – Not applicable. MAC − Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — SRAC and Kmart Corp. (Continued) Other Cross-Default Cross-Acceleration MAC Clause Covenant Suspension Applicability of Covenants Cash Dominion Event

Important Definitions Line Cap Capped Excess Availability Suppressed Availability

Yes, exceeding $50 Mil. N.A. None. None. Covenants apply to SHLD, the borrowers and any subsidiaries thereof (except Sears Canada Co. or any of its subsidiaries). The company’s funds will be swept daily to reduce the borrowings outstanding under the credit facility if borrowing availability falls below designated thresholds. This means either a) the occurrence and continuance of an event of default, or b) the sum of capped excess availability and suppressed availability (limited to 2.5% of line cap) at any time is less than the greater of 12.5% of the line cap and $175 Mil. for three days (whether or not consecutive) during any 30-day period.

Lesser of (i) aggregate commitments plus the principal amount of incremental term loans and (ii) borrowing base. Lesser of (i) line cap less outstanding, and (ii) borrowing base less outstanding less principal of pari passu notes. Borrowing base less sum of (i) aggregate commitments, (ii) principal of incremental term loans and (iii) principal of pari passu notes.

N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

Bank Agreement Financial Covenant Summary — SRAC and Kmart Corp. Financial Covenants (Maintenance) Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

None. Fixed-Charge Coverage: More than or equal to 1.0x as of the last day of any fiscal quarter, if capped excess availability (the lesser of line cap and borrowing base less outstanding) is less than the greater of 10% of line cap or $200 Mil. — —

Principal Repayments Mandatory/Tax Prepayment Amortization Schedule Callability/Optional Prepayment

None. None. Optional prepayment with or without prepayment penalty.

Pricing Coupon Type/Index ABL Revolver

Term Loan

LIBOR or BR based floating rate. Consolidated Leverage Ratio Applicable Margin More than or equal to 3.0x LIBOR + 250 bps or BR + 150 bps More than or equal to 2.0x but less than 3.0x LIBOR + 225 bps or BR + 125 bps Less than 2.0x LIBOR + 200 bps or BR + 100 bps Commitment Fee: 0.375%–0.625% per annum based on average daily available commitments. LIBOR + 450 bps (with 1% LIBOR floor) or BR + 350 bps.

ABL – Asset-based loan. BR – Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary  Sears Holdings Corporation (SHLD) Overview Issuer Document Date and Location Description of Debt Maturity Date Original Issue/Outstanding ($ Mil.) Ranking Security

Guarantee

Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees Collateral Coverage Event/Offer

Acquisitions/Divestitures Change of Control (CoC)

Sears Holding Corporation (SHLD) Indenture dated Oct. 12, 2010 (exhibit 4.1 to 8-K filed Oct. 15, 2010). 6.625% senior secured notes (second lien). Oct. 15, 2018 1,250/302 Senior. Second lien security interest in domestic inventory and credit card accounts receivables, and the obligations under certain banking and cash-management arrangements. The security interest will be automatically released if the corporate family rating is upgraded to low ‘BBB’ and there is no event of default (satisfaction of the prior two conditions being defined as a fall-away event). Upstream guarantee by SHLD’s guarantor subsidiaries but junior to the guarantee obligations under the revolving credit facility. The guarantees will be automatically released if the corporate family rating is upgraded to low ‘BBB’ and there is no event of default.

None except noted under lien restrictions. Prior to a fall-away event, secured debt up to borrowing base (defined as 90% of accounts receivable of the issuer and guarantors plus 65% of inventory) less the amount of notes outstanding is permitted. This can be incurred by SHLD or any restricted subsidiary, under (a) the 2009 credit agreement (subject to a $2.45 Bil. cap) and (b) any additional first lien obligations, provided that the aggregate amount of commitments under (a) and (b) does not exceed the borrowing base requirement. Following a fall-away event, secured debt up to 15% of SHLD’s consolidated net tangible assets will be permitted. None. If the borrowing base is less than the principal amount of SHLD’s consolidated debt that is secured by liens on the collateral that also secures the notes as of the last day of any two consecutive quarters (collateral coverage event), SHLD must offer to purchase an amount of notes sufficient to cure the collateral coverage shortfall at 101% of their principal amount, plus accrued and unpaid interest.

M&A, Investments Restriction Sale of Assets Restriction

A CoC is defined as acquisition of more than 50% voting stock but does not constitute an event of default. There is a CoC put at 101 only upon a CoC triggering event, which is defined as occurrence of both a) a CoC and b) a downgrade to below investment grade by two of the three rating agencies. None. Standard restrictions on asset sales.

Restricted Payments Restricted Payments

None.

Other Cross-Default Cross-Acceleration Callability MAC Clause Equity Clawback Covenant Suspension

No. No. Callable at Treasury rate + 50 bps. None. None. None.

MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bond Covenant Summary — Sears Roebuck Acceptance Corp. (SRAC) Overview Issuer Document Date

Sears Roebuck Acceptance Corp. (SRAC)

Base indenture dated 5/15/95 (exhibit 4[a] to S-3/A filed 2/27/96). Bond Covenant Summary — Sears Holdings Corporation (SHLD) Base indenture dated 10/1/02 (exhibit 4[e] to S-3 filed 10/2/02). Overview Issuer Maturity Date Document Date and Location Description Description of of Debt Debt Original ($ Mil.) Maturity Issue/Outstanding Date Ranking Original Issue/Outstanding ($ Mil.) Security Ranking Guarantee Security

Financial GuaranteeCovenants Fixed-Charge Coverage

Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change Control Limitationofon Guarantees M&A, Investments Collateral CoverageRestriction Event/Offer Sale of Assets Restriction Restricted Payments Restricted Payments Acquisitions/Divestitures Change of Control (CoC) Other Cross-Default M&A, Investments Restriction Cross-Acceleration Sale Assets Restriction MAC of Clause

First supplemental indenture dated 11/3/03 (exhibit 4[e] to S-3 filed 11/3/03). Guarantee SRAC debt by Sears, Roebuck and Co., dated 3/14/04 (S-3 filed 3/12/04). Sears Holding agreement Corporationof(SHLD) Variousdated notes10/12/10 due 2014–2043. Indenture (exhibit 4.1 to 8-K filed 10/15/10). Senior unsecured notes. 6.625% senior secured notes (second lien). 4,000/327 10/15/18 Senior. 1,250/302 Unsecured. Senior. Sears, Roebuck Co. (Sears) as intermediary holding provides a downstream guarantee on the notes, andbanking Sears Second-lien securityand interest in domestic inventory and creditcompany card accounts receivables, and the obligations under certain retain 100% ownership of SRAC. andmust cash-management arrangements. The security interest will be automatically released if the corporate family rating is upgraded to low ‘BBB’ and there is no event of default (satisfaction of the prior two conditions being defined as a fall-away event). Upstream guarantee by SHLD’s guarantor subsidiaries but junior to the guarantee obligations under the revolving credit facility. TheThe guarantees be automatically released if the corporate family rating is upgraded toratio low ‘BBB’ and there no event 1995 andwill 2002 indentures provide for SRAC to maintain a fixed-charge coverage of more than or is equal to 1.1x for of default. any fiscal quarter.

None except noted under lien restrictions. None. Prior to a fall-away event, secured debt up to borrowing base (defined as 90% of accounts receivable of the issuer and guarantors None. plusNone. 65% of inventory) less the amount of notes outstanding is permitted. This can be incurred by SHLD or any restricted subsidiary, under (a) the 2009 credit agreement (subject to a $2.45 Bil. cap) and (b) any additional first-lien obligations, provided that the aggregate amount of commitments under (a) and (b) does not exceed the borrowing base requirement. Following a fall-away event, secured debt up to 15% of SHLD’s consolidated net tangible assets will be permitted. None. None. None. If the borrowing base is less than the principal amount of SHLD’s consolidated debt that is secured by liens on the collateral thatNone. also secures the notes as of the last day of any two consecutive quarters (collateral coverage event), SHLD must offer to purchase an amount of notes sufficient to cure the collateral coverage shortfall at 101% of their principal amount, plus accrued and unpaid interest. None. A CoC is defined as acquisition of more than 50% voting stock, but does not constitute an event of default. There is a CoC put at 101 only upon a CoC triggering event, which is defined as occurrence of both a) a CoC and b) a downgrade to below investment grade No.by two of the three rating agencies. None. Yes, exceeding $100 Mil. Standard None. restrictions on asset sales. None. None. None.

Equity Clawback Restricted Payments Covenant Suspension Restricted Payments MAC – Material adverse change. Source: Company filings, Fitch Ratings. Other Cross-Default No. Cross-Acceleration No. Callability Callable at Treasury rate + 50 bps. MAC Clause None. Equity Clawback None. Covenant Suspension None. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Sears Holdings Corporation 2/1/14 1/31/15

5/2/15

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

3.7 1.6 (0.5) (1.5) (1.8) (1.6)

1.2 (0.9) (2.9) (3.7) (4.6) (10.1)

0.0 (2.3) (4.1) (6.3) (5.3) (15.0)

0.7 (2.4) (4.5) (8.3) (9.8) (14.6)

(0.7) (3.6) (5.5) (5.5) (5.5) (13.3)

(2.6) (5.8) (7.4) (11.0) (22.4) (15.9)

0.6 (1.9) (3.1) (5.9) (2.4) (19.3)

(0.5) (3.3) (5.0) (7.5) (9.5) (19.3)

(0.0) (3.4) (5.1) (11.7) (14.1) (18.4)

(0.2) (3.4) (5.0) (4.8) 0.8 (18.2)

(3.9) (7.5) (9.3) (12.5) (16.1) (22.0)

(0.7) (3.8) (5.4) (8.4) (7.2) (22.0)

9.0 32.3 (6.8)

6.6 29.6 (7.4)

23.2 (19.1) (16.0)

798.0 (8.5) (17.3)

108.8 (10.4) (16.6)

51.7 (11.4) (19.1)

59.1 (13.0) (19.9)

(76.1) (9.5) (27.2)

(61.7) (8.7) (26.8)

(77.9) (9.7) (23.3)

(61.9) (10.2) (16.8)

12.0 5.8

4.9 2.6

(13.1) (7.9)

(5.4) (3.5)

(6.1) (3.3)

(5.7) (2.7)

(5.0) (3.7)

(3.6) (2.7)

(4.3) (3.4)

(4.3) (3.3)

(4.9) (3.8)

88.4

61.6

(15.8)

(10.2)

(10.9)

(9.1)

(8.7)

(5.3)

(5.2)

(6.4)

(10.4)

8.4 30.0 (3.7)

6.2 27.7 (3.7)

20.9 (17.2) (2.2)

777.2 (8.3) (2.1)

105.6 (10.1) (2.2)

41.1 (9.1) (0.8)

57.1 (12.5) (1.5)

(74.1) (9.3) (1.2)

(59.8) (8.4) (1.4)

(75.6) (9.4) (1.5)

(60.3) (9.9) (2.4)

1.1 1.3 0.3 (2.4) (0.7)

1.4 3.2 0.3 (2.6) (0.8)

0.5 (1.6) (0.6) (6.4) (3.4)

0.0 (3.1) (1.2) (8.1) (5.1)

0.1 (2.8) (1.0) (7.3) (5.6)

0.2 (2.2) (0.8) (6.0) (6.4)

0.2 (2.5) (0.7) (6.1) (6.8)

(0.1) (3.3) (0.9) (6.5) (10.3)

(0.2) (3.8) (1.2) (7.9) (11.4)

(0.1) (2.9) (1.0) (5.8) (9.9)

(0.2) (3.6) (1.0) (6.9) (8.7)

3,493 10,341 6,848 — (223) 6.3

3,120 9,848 6,728 — (199) 6.0

4,249 10,465 6,216 — (206) 5.6

3,800 9,576 5,776 — (230) 5.7

3,888 9,656 5,768 — (226) 5.6

3,144 8,912 5,768 — (252) 6.8

2,881 8,649 5,768 — (228) 5.8

2,988 8,756 5,768 — (252) 7.4

3,789 9,557 5,768 — (230) 6.0

3,581 9,349 5,768 — (290) 8.6

4,321 4,321 10,089 10,089 5,768 5,768 — — (247) (247) 6.9 6.9

(718) 411 (307) 32 (432) — (707) — 308 (183) (30) (612)

(613) (1,325) (1,950) 310 216 563 (303) (1,109) (1,387) — — — (378) (329) (270) (50) (233) — (731) (1,671) (1,657) — — — (411) 1,149 (172) — — — 1,004 941 1,051 (138) 419 (778)

(488) (47) (535) — (44) — (579) — 81 — 534 36

(342) (633) 45 (589) (297) (1,222) — — (42) (66) — — (339) (1,288) — — (733) (264) — — 2,605 27 1,533 (1,525)

(428) (1,891) 315 (276) (113) (2,167) — — (59) (211) — — (172) (2,378) — — 94 (822) — — 22 3,188 (56) (12)

(629) (93) (722) — (40) — (762) 38 793 — (21) 48

(270) 352 82 — (35) — 47 176 (233) — 0 (10)

(631) (1,958) (137) 437 (768) (1,521) — — (40) (174) — — (808) (1,695) 60 274 739 1,393 — — (9) (8) (18) (36)

747 2,226

609 2,274

1,028 885

250 808

286 726

1,819 1,200

294 963

238 316

286 265

276 191

258 174

—

6,190 6.1 99.1 34.3 1.0

5,432 5.8 94.0 34.3 0.9

5,091 5.6 93.6 33.2 0.9

3,751 5.0 75.0 24.6 0.9

3,843 7.3 104.2 34.8 0.7

3,784 6.7 94.7 32.1 0.7

4,388 7.4 124.5 46.0 1.1

4,017 5.2 81.5 24.8 0.8

4,017 6.1 97.6 29.7 0.8

4,128 7.3 107.3 28.5 0.7

3,729 6.2 95.7 27.5 0.6

3,848 6.7 111.4 34.4 0.8

3,848 5.8 99.8 30.9 0.7

12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

1/28/12

2/2/13

2.8 0.7 (1.4) (1.7) (1.7) (4.1)

Three Months

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Leveraged Finance Financial Summary — Sears Holdings Corporation (Continued) 1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

41,567 (4.1) 1,147

39,854 (4.1) 1,482

36,188 (9.2) 452

31,198 (13.8) 12

5,882 (25.3) 39

6,211 (22.5) (46)

5,750 (20.2) (152)

7,303 (9.8) 43

25,146 (19.4) (115)

5,394 (8.3) (1)

5,663 (8.8) (11)

5,029 (12.5) (195)

23,389 (9.8) (163)

1,147 291

1,482 641

452 (325)

12 (710)

39 (141)

(46) (226)

(152) (332)

43 (137)

(115) (836)

(1) (181)

(11) (191)

(195) (375)

(163) (884)

291 (562)

641 (189)

(325) (1,057)

(710) (1,291)

(141) (263)

(226) (340)

(332) (426)

(137) (229)

(836) (1,258)

(181) (276)

(191) (283)

(375) (466)

(884) (1,254)

(2.2) 4,010 26.0 (11.0) 3.7 10.6 4.0 (15.0) 51.0

(2.5) 2,548 26.4 (11.7) 3.9 10.6 11.1 (4.8) 45.5

(3.8) 2,429 24.2 (12.2) 3.9 11.0 (4.7) (7.5) 44.9

(1.8) 1,725 22.9 (12.8) 4.9 14.8 (20.0) (12.7) 46.5

(10.9) 1,716 25.8 43.7 4.4 13.3 (17.0) (11.9) 36.1

(10.8) 1,702 23.1 15.4 4.2 12.2 (15.1) (6.1) 36.8

(8.6) 1,687 21.9 17.0 3.2 8.6 (19.6) (5.5) 70.2

(7.1) 1,672 21.8 11.1 3.7 12.3 (52.4) (10.0) 64.1

(9.2) 1,672 23.1 (17.6) 3.7 12.3 (52.4) (10.0) 50.0

(6.1) 1,622 21.8 19.8 3.8 14.4 (38.5) (11.6) 42.1

(5.2) 1,592 22.2 16.3 4.0 14.0 (55.5) (17.9) 38.0

(7.4) 1,503 19.1 19.2 3.7 11.8 (56.4) (20.2) 44.0

(6.2) 1,503 19.1 19.2 3.7 11.8 (56.4) (20.2) 44.0

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

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Leveraged Finance Retailing / U.S.A.

Staples, Inc. Full Rating Report Key Rating Drivers

Ratings Long-Term IDR Short-Term IDR Revolving Credit Facility Senior Unsecured Notes

BB+ B BB+/RR4 BB+/RR4

IDR – Issuer Default Rating.

Rating Outlook Stable

Financial Data Staples, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/ (Interest + Rent) (x) Comparable Store Sales (%)a No. of Stores

FYE 1/31/16 21,059.0 1,405.0 6.7 289.0 6,563.0

LTM 10/29/16 20,475.0 1,390.0 6.8 271.0 6,579.0

3.1

3.2

2.8

2.6

(3.0) 1,907

(3.0) 1,872

Comparable store sales for the LTM period reflect the nine-month period ended Oct. 29, 2016. This reflects the North American segment, including online.

Significant Headwinds Continue: Staples, Inc. has faced numerous challenges in recent years, including workplace digitalization, saturation of technology adoption and online share shift led by newer competitors such as Amazon. North American retail/online comparable store sales (comps) fell 2%–4% annually beginning in 2012, and the division’s EBITDA margin fell to 6.8% in 2015 from a 2011 peak of 10.6%. Fitch Ratings expects the secular pressures will continue while Amazon poses an increasing competitive threat as it expands Amazon Business. Turnaround Initiatives: To combat these challenges, the company reduced its global store base by nearly 400 units (17%) during 2012–2015, with another expected 50 closings in 2016. The company also sharpened selling efforts around less-pressured categories, such as janitorial supplies, and reduced expenses by $750 million during 2013–2015. Despite these efforts, total company EBITDA will decline to a projected $1.4 billion in 2016 (flat to 2015) from a peak of $2.3 billion in 2011, with EBITDA margins falling to 6.9% from 9.0%. Intensified Focus Post Office Depot: Following the FTC’s successful block of Staples’ proposed acquisition of rival Office Depot in May 2016, the company announced a number of initiatives, showing a continuation of its existing strategies. The company plans to reduce costs by an additional $300 million by 2018 while remaining focused on expanding sales in newer categories. Staples also announced the sale of its U.K. retail assets and the sale of an 85% interest in its other European assets, which Fitch estimates generate negligible EBITDA. Flat EBITDA Expectations: While Staples’ efforts have mitigated declines, secular and competitive pressures will likely continue. Negative retail sales and nearly flat commercial sales — yielding annual revenue around $18 billion post the European business sale — coupled with price investments should be mitigated by incremental expense savings. EBITDA is therefore forecast to remain around $1.4 billion over the next two to three years, with margins improving to the mid-7.0% level from the current high-6.0% level due to European asset sales. Flat to Deteriorating Credit Metrics: Total adjusted debt/EBITDAR increased to 3.1x in 2015 from 2.8x–2.9x in 2010–2013 on a nearly 40% EBITDA decline from the 2010 peak, mitigated somewhat by lower adjusted debt from reduced rent expense (store closures). Given nearly flat EBITDA expectations over the next two to three years, adjusted leverage is expected to trend in the 3.2x–3.4x range over the forecast horizon, which Fitch views as representative of a ‘BB+’ rating for a secularly challenged retailer.

Rating Sensitivities Positive Rating Action: A positive rating action could occur if there is a stabilization of top-line trends, the resumption of positive EBITDA momentum and maintenance of adjusted debt/ EBITDAR at or under 3.0x.

Analysts

Negative Rating Action: A negative rating action could occur if negative sales and margin trends continue and declines in EBITDA drive adjusted leverage above the mid-3.0x range.

David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com Monica Aggarwal, CFA +1 212 908-0262 monica.aggarwal@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Staples, Inc. 2015A 21,059

2016F 20,296

2017F 17,995

Revenue Growth (%) Comparable Store Sales (%) EBITDA

(6.4) (3.0) 1,405

(3.6) (3.0) 1,404

(11.3) (1.0) 1,353

EBITDA Margin (%) Working Capital Change Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt a Total Adjusted Debt Total Adjusted Debt/EBITDAR (x)

6.7 172 978 (381) 1.8 (308) 289 — 1,035 6,563 3.1

6.9 (9) 1,235 (400) 2.0 (310) 275 — 1,235 6,611 3.2

7.5 (127) 897 (400) 2.2 (310) 187 — 1,237 6,613 3.3

($ Mil.) Revenue

2018F Comments 17,911 $2.1 billion reduction in 2017 from international asset sales. (0.5) — (1.0) — 1,332 Sale of international assets expected to have minimal EBITDA impact. 7.4 — 4 — 1,011 — (400) — 2.2 — (310) — 301 — — — 1,237 — 6,613 — 3.3 —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Assessment and Outlook Company Overview Staples opened its first office products superstore in 1986, and is now the world’s largest office product supply company, operating through three business segments: North American Stores and Online, North American Commercial and International. Staples’ North American retail business developed organically, while its delivery business and international operations grew in part through acquisitions. The company’s largest acquisition was Corporate Express N.V., which was acquired in July 2008 for approximately $4.4 billion. The acquisition added a contract delivery business in Europe and Canada, and strengthened Staples’ existing contract business in the U.S. The acquisition also extended Staples’ geographic reach to Australia and New Zealand. A number of economic, secular and competitive pressures have challenged Staples’ profitability since 2007. The global financial crisis caused North American comps to turn negative in North America and Europe in 2007 and 2008, respectively. While comps in North America improved to flat in 2011, that year proved to be both the last year of non-negative North American comps and the company’s peak EBITDA at $2.3 billion. Since then, the company has faced increased financial pressure from the impact of the ongoing digitization of the workplace on core office supplies, which today represents around half of Staples’ volume. Sales of business technology products — approximately 15% of current sales — remain weak, declining for the past several years due to a slowing replacement cycle and saturation of key products, such as laptops and tablets. Staples is responding to these challenges by reducing store counts and expenses, focusing on less challenged product lines and geographies, and attempting industry consolidation. Staples’ store count declined to 1,907 at year-end 2015 from a peak of 2,295 at year-end 2011, a reduction of 388 (17%) as the company closed unprofitable stores and generally reduced its retail footprint. The company also eliminated $200 million in annualized expenses in 2013 and another $550 million in 2014–2015. Savings were achieved through store closures, organizational High-Yield Retail Checkout January 31, 2017

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Leveraged Finance streamlining, product cost reduction and supply chain efficiencies. These savings have provided Staples the opportunity to invest in both lower prices and growth initiatives, especially growth in new categories. Given the decline in traditional office products categories, Staples has focused on expanding sales in categories beyond office supplies, such as furniture, facility/breakroom supplies and safety supplies. Sales in categories beyond office supplies constituted approximately half of North American Commercial sales by the end of 2015. Despite these efforts, consolidated EBITDA declined each year to $1.4 billion in 2015 from a peak of $2.3 billion in 2011, with $1.4 billion projected in 2016. As described in more detail in the Segment Performance section, North American Retail and Online was most affected, with EBITDA falling to approximately $650 million in 2015 from $1.25 billion in 2011 on negative comps and store closures. During the same period, North American commercial EBITDA fell to approximately $750 million from approximately $785 million on EBITDA margin declines, mitigated by modest sales growth. EBITDA in the International business fell to around $40 million from approximately $235 million on weak sales and the negative impact of the strong U.S. dollar. Staples announced in February 2015 its intention to acquire Office Depot, the second such attempt to combine with the No. 2 player in 20 years. The merger was successfully contested by the FTC and blocked in May 2016 given concerns regarding high pro forma share of the corporate client market. The failed acquisition attempt followed the Office Depot/OfficeMax merger in 2013, leading to the current concentration of two large office supplies retailers in the sector, notwithstanding the entrance of Amazon in the space through the online channel. Following the Office Depot merger termination, Staples unveiled its Staples 20/20 program, which continues many of its recent strategies. Staples 20/20 involves incremental closures of 50 North American stores in 2016, increased selling efforts around midmarket businesses and further expansion of non-office supply categories. The program’s goal is to move the penetration of delivered sales (versus in-store sales) to 80% in 2020 from around 60% today, and to increase the penetration of non-office supply sales to 60% from 50% currently. Staples 20/20 also includes a $300 million annual expense reduction by 2018. Cost initiatives include rationalizing discounting efforts, improving its supply chain and finding operational efficiencies. The company now sees additional opportunities in the highly fragmented midmarket — businesses with 10–200 employees — a market it estimates to be worth $80 billion. Staples estimates approximately $70 billion of this $80 billion market consists of beyond office supplies categories, which will help the company reach its target of over 60% of sales in these categories by 2020. Staples also plans to shed most non-North American assets, which generate around $3 billion in annual revenue, given challenged business performance and minimal income contribution. In line with this goal, the company announced in November 2016 the sale of its U.K. retail division (around $300 million in sales) to Hilco Capital. The company announced in December 2016 the sale of an 85% equity stake in its other European businesses (around $1.8 billion in sales) to an affiliate of Cerberus Capital Management. Other recent initiatives include the appointment of Shira Goodman as CEO in September 2016. Ms. Goodman served as interim CEO starting in May 2016 and has over 20 years’ experience within the company, in roles such as running the North American business, marketing and human resources. Ms. Goodman succeeded Ron Sargent, who was CEO since 2002 and was the company’s second CEO following founder Tom Stemberg.

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Leveraged Finance Staples Store Count North America

International

(No. of Stores) 2,500 2,000 1,500 1,000 500 0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Company filings.

Continued Structural Challenges Expected Staples estimates the global office supply market to be $350 billion, of which its share is 7%. However, Staples has an approximately 50% share of the estimated $14.7 billion U.S. office supply and stationary store market, with Office Depot/OfficeMax holding another 40% share. Office supply store sales fell steadily since peaking at $23 billion in 2007, on both negative comps and store closures. Office supply store data does not capture the sale of office supplies through other retail channels, such as general merchandise discounters, warehouse clubs or supermarkets, nor the online market, which is dominated by Amazon. It also excludes the contract delivery segment, of which Staples and Office Depot/OfficeMax have a smaller share, given the existence of many small regional contract delivery firms.

Sales of Three Largest Retail Players (North America) Staples

($ Bil.) 25

Office Max

Office Depot

20 15 10 5 0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Note: Office Max was acquired by Office Depot in late 2013. Source: Company Filings.

The growth of online sellers such as Amazon is a threat to retail- and delivery-oriented industry participants, forcing them to invest in their own online businesses and reduce prices to be competitive. Amazon has been less of a threat to contract delivery businesses that cater to larger businesses, which require more specialized services with generally reduced prices. However, Amazon’s recent investments into its contract stationer business will make it a significantly greater threat over the next several years. Demand for office products is driven by the business cycle and the secular trend to digital from paper. The office supply market is mature and, in some categories, in the early stages of decline. The market for traditional office supplies — half of which is paper, ink and toner — is declining around 1%–2% per year. Fitch expects the market for core office products to continue to modestly decline over the next several years. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance Office machines (printers and fax machines) are declining at a faster rate, as are desktop and laptop computers. Weak long-term demand in these core categories is driving office product suppliers into other categories, such as facilities and break room supplies, and into higher margin services. Fitch projects office-oriented technology products will decline in the low to midsingle digits over the next 24–36 months.

Main Players' Store Count Staples (Store Count) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2006

2007

2008

2009

Office Depot

2010

2011

OfficeMax

2012

2013

2014

2015

3Q16

Note: Office Depot acquired OfficeMax in 2013. Source: Company Filings.

Industry challenges have caused players to reduce their North American store footprint over time. Staples reduced store count to 1,607 in 2015, from a peak of 1,917 in 2011. Office Depot and Office Max, which merged in 2013, have reduced stores to 1,564 from a combined 2,109 in 2011. Total store count for the main industry players has consequently declined from a peak of 4,044 in 2010 to 3,171 at the end of 2015, and is expected to be around 3,000 at the end of fiscal 2016. As North American retail sales decline, both Staples and Office Depot/Office Max have become more dependent on their contract divisions to protect overall EBITDA. Staples North American Commercial division has gone from 32.3% of sales in 2011 to 39.7% of sales in 2015, while Office Depot/Office Max’s North American Business Solutions has gone from 30.7% of sales in 2011 (on a pro forma basis) to 39.4% of sales in 2015.

Office Products Players Business Mix — Staples, Inc. 2011

2015

($ Mil.)

(% of Total)

($ Mil.)

(% of Total)

Staples North American Stores and Online North American Commercial International Total

11,742.0 7,974.9 4,947.9 24,664.8

47.6 32.3 20.1 100.0

9,539.0 8,361.0 3,160.0 21,060.0

45.3 39.7 15.0 100.0

Office Depot North American Retail North American Business Solutions International Total

4,870.2 3,262.0 3,357.3 11,489.5

42.4 28.4 29.2 100.0

— — — —

3,497.1 3,624.1 7,121.2

49.1 50.9 100.0

— — —

8,367.3 5,711.3 4,532.1 18,610.7

45.0 30.7 24.4 100.0

6,004.0 5,708.0 2,773.0 14,485.0

41.4 39.4 19.1 100.0

OfficeMax Retail Contract Total Office Depot/OfficeMax North American Retail North American Business Solutions International Total Source: Company filings, Fitch Ratings.

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Leveraged Finance Staples Regional Comparable Sales Performance North America

(%)

Europe

4 2 0 (2) (4) (6) (8) (10) 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

3Q16

Source: Company filings.

Segment Performance North American Retail and Online As a result of the global financial crisis, retail comps turned negative in North America in 2007 at negative 9%. While comps improved gradually over the following years and were flat in 2011, comps have generally been in the negative 2%–negative 4% range beginning 2012. Negative comps, coupled with store closures but mitigated by growth online, resulted in sales declining to $9.5 billion in 2015 from $11.7 billion in 2011, and a projected $9.0 billion in 2016. Sales declines led to EBITDA margins declining to the high-6.0% range in 2015 from 10.6% of sales in 2011. EBITDA declined to approximately $650 million in 2015 from a peak EBITDA of $1.25 billion in 2011.

North American Commercial Commercial division trends in recent years were significantly more stable than retail, due in part to beyond office supply category expansion and the ability to attract new customers from a relatively smaller base. Sales increased 1%–3% in three of the last four years, with a 0.8% decline in 2013 due to an extra week in the prior year. Sales trended to $8.4 billion in 2015 from $8.0 billion in 2011, though they are projected to be modestly down at $8.3 billion in 2016. While sales trends generally remained positive, EBITDA somewhat declined to approximately $750 million in 2015 from around $785 million in 2011 as margins trended to around 9.0% from 9.8% on promotional activity and increased investments in its sales force.

International Operations Staples’ International division saw the most dramatic declines in reported sales and EBITDA due to weak economies, store closures and the negative impact of the strong U.S. dollar in more recent years. Revenue declined to $3.2 billion in 2015 and is projected at $3.0 billion in 2016, down from $4.4 billion in 2011. EBITDA similarly fell to approximately $40 million in 2015 from around $235 million in 2011. Given the company’s recent efforts to dispose of its international business, Fitch projects the division to contribute around $600 million to sales and produce negligible EBITDA beginning 2017.

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Leveraged Finance Segment Data — Staples, Inc. (%) Sales ($ Mil.) North American Stores and Online North American Commercial International Total

2011

2012

2013

2014

2015

LTM 3Q16

11,742 7,975 4,948 24,665

11,828 8,108 4,444 24,381

11,103 8,043 3,970 23,114

10,449 8,271 3,773 22,492

9,538 8,361 3,160 21,059

9,175 8,301 2,999 20,475

YOY Growth North American Stores and Online North American Commercial International Total

1.7 1.8 4.0 2.2

0.7 1.7 (10.2) (1.2)

(6.1) (0.8) (10.7) (5.2)

(5.9) 2.8 (4.9) (2.7)

(8.7) 1.1 (16.2) (6.4)

(10.3) 0.2 (16.9) (7.4)

Sales Breakdown North American Stores and Online North American Commercial International Total

48.0 32.0 20.0 100.0

49.0 33.0 18.0 100.0

48.0 35.0 17.0 100.0

47.0 37.0 16.0 100.0

45.0 40.0 15.0 100.0

EBITDA ($ Mil.) North American Stores and Online North American Commercial International Total

1,247 786 236 2,268

1,209 804 120 2.133.2

959 728 94 1,780

697 711 72 1,480

651 746 40 1,437

— — — —

EBITDA Margin North American Stores and Online North American Commercial International Total

10.6 9.8 4.8 9.2

10.2 9.9 2.7 8.7

8.6 9.0 2.4 7.7

6.7 8.6 1.9 6.6

6.8 8.9 1.3 6.8

— — — —

EBITDA Breakdown North American Stores and Online North American Commercial International Total

55.0 35.0 10.0 100.0

57.0 38.0 6.0 100.0

54.0 41.0 5.0 100.0

47.0 48.0 5.0 100.0

45.0 52.0 3.0 100.0

— — — —

YoY – Year over year. Source: Company filings, Fitch Ratings.

2017 Outlook With little change expected to Staples’ secular backdrop and competitive environment, Fitch expects 2017 results to be similar to 2016 projections of low single-digit declines in North American sales and nearly flat EBITDA of $1.4 billion. Fitch projects modestly negative North American retail comps in 2017, and expects the impact of 2015 store closures to drive low single-digit sales declines in the North American Stores and Online division. North American Contract sales are expected to be nearly flat, and Fitch expects international operations to decline from $3.0 billion to around $800 million due to the sale of the European businesses. Companywide sales are consequently expected to decline in the mid-teens to approximately $18 billion, or down modestly excluding international operations both years. Fitch expects sales to remain at around $18 billion annually over the rating horizon. EBITDA margins are projected to improve to around 7.5% in 2017 from around 7% in 2016 due to the reduction in international sales, which generate minimal EBITDA. EBITDA margins of the remaining businesses are expected to be similar to 2016. Expense reductions achieved in the company’s Staples 20/20 program are expected to be reinvested into growth initiatives and

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Leveraged Finance lower prices. Given modestly negative sales, EBITDA could decline modestly to $1.3 billion from an expected $1.4 billion in 2016 and remain in this range thereafter. FCF after the company’s approximately $400 million annual dividend is projected to trend toward the low $300 million range in 2018, modestly higher than the $250 million–$275 million expected in 2016, prior to one-time Office Depot acquisition and termination payments, on lower cash restructuring charges. FCF is expected to remain at these levels beginning 2018 and could be used to resume the company’s share repurchase program, which was suspended in 2015. Adjusted leverage throughout the rating horizon is projected to be around 3.3x, given nearly flat debt and EBITDA expectations.

Liquidity and Debt Structure Staples had cash and cash equivalents of $1,076 million as of Oct. 29, 2016, and $996 million available under its $1 billion credit facility, net of $4 million in outstanding letters of credit. In November 2016, Staples entered into a new $1 billion credit agreement expiring November 2022, which replaced its existing credit facility. Fitch expects total liquidity (cash and revolver availability) to be over $2.0 billion at year-end 2016, which will enable the company to address total unsecured debt maturities of $500 million in January 2018.

Capital Structure ($ Mil., As of Oct. 29, 2016) Description Unsecured Debt $1,000 Mil. Commercial Paper Program $1,000 Mil. Senior Unsecured Revolver due 11/22/22 2.75% Notes due 1/12/18 4.38% Notes due 1/12/23 Total Unsecured Debt Capital Leases and Other Total Debt

Amount

(%)

— — 500.0 500.0 1,000.0 51.0 1,051.0

— — 47.6 47.6 95.1 4.9 100.0

Note: Percentages may not add due to rounding. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., As of Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., As of Oct. 29, 2016) 500 — — — — 500

Cash Availability Under Credit Facilitya Total

1,076 996 2,072

Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Note: Excludes borrowings under credit facility, capital leases and other lines of credit. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix A Organization Structure — Staples, Inc. ($ Mil., As of Oct. 29, 2016) Staples, Inc. (IDR — BB+/Stable) (Short-Term IDR — B) Debt Issue Commercial Paper $1.0 Bil. Revolving Credit Facility due November 2022 2.750% Notes due January 2018 4.375% Notes due January 2023 Capital Lease Obligations and Other Notes Payable Total

Amount 0 0 500 500 51 1,051

Rating B BB+/RR4 BB+/RR4 BB+/RR4 NR —

Operating Subsidiaries

IDR – Issuer Default Rating. NR – Not rated. Note: The revolver and notes do not benefit from upstream guarantees. Source: Company reports, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary —Staples, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Financial Covenants Fixed-Charge Coverage Adjusted Funded Debt-to-EBITDAR Ratio Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Staples, Inc. Credit Agreement dated 11/22/16 (Exhibit 10.1 to 10-Q filed 11/22/16) Senior credit facility with an accordion feature in which the revolver can be increased to $1.5 billion upon the request of the company and the agreement of the lenders. 11/22/22 $1,000 Mil. Senior unsecured. None. None.

Consolidated fixed-charge coverage ratio shall be at least 1.5x so long as any loan or letter of credit is outstanding under the facility. Adjusted funded debt to EBITDAR will not exceed 3.5x so long as any loan or letter of credit is outstanding under the facility. Domestic subsidiary debt limited to 15% of stockholders’ equity, and securitization transactions limited to $300 Mil. Standard language noted. Consistent with limitations on debt incurrence.

A CoC is defined as the acquisition of more than 50% of voting stock by any person or if a majority of the board of directors changes over any two-year period. CoC constitutes an event of default. Investments in more than 50% equity interest of a person as long as the business is similar and there is no event of default. Investments in less than 50% of equity interest of a person as long as the business is similar and all allowable Investments do not exceed 65% of Stockholders Equity. Distributions as long as there is no Event of Default. General carveout of $100 Mil. Sale leasebacks of up to 15% of consolidated total assets are permitted. Sale of receivables pursuant a securitization transaction also permitted.

Restricted Payments Restricted Payments (RP)

Not permitted if an event of default has occurred or would occur as a result of the distribution.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Event Key Definitions

None. Yes, for material indebtedness of more than $100 Mil. None. None. None. Adjusted Funded Debt: Rental expense for the LTM multiplied by five plus total drawn debt.

Pricing Coupon Type/Index

Pricing Grid

Floating based off eurocurrency rate or BR. BR is the highest of (a) the federal funds rate plus 50 bps; (b) the prime rate as defined by Bank of America and (c) LIBOR plus 100 bps. Eurocurrency rate is either LIBOR for dollar-, euro- and sterling-denominated loans and the respective Interbank Offering Rate or equivalent for loans in other currencies. Margin applied based on band assigned by senior rating. Senior Rating Eurocurrency Rate Loans (%) BR Loans (%) A–/A3 or higher 0.900 0.000 BBB+/Baa1 1.000 0.000 BBB/Baa2 1.100 0.100 1.300 0.300 BBB−/Baa3 BB+/Ba1 or lower 1.500 0.500

BR – Base rate. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Bond Covenant Summary — Staples, Inc. Covenant Issuer(s) Document Date and Location

Description of Debt Amount Maturity Date Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC)

Description Staples, Inc. Indenture dated 1/15/9 (Exhibit 4.1 to 8-K filed 1/21/9) Supplemental Indenture dated 1/12/13 (Exhibit 4.1 to 8-K filed 1/15/13) Supplemental Indenture dated 1/12/13(Exhibit 4.2 to 8-K filed 1/15/13) 2.75% senior notes 4.375% senior notes $500 Mil. $500 Mil. 1/12/18 1/12/23 Senior. Unsecured. None.

None. The principal amount of debt secured by liens on principal property (defined as real estate and equipment with a net book value greater than 1% of CNTA), and the attributable value of sale-leaseback transactions, may not exceed 15% of CNTA.

M&A, Investments Restriction Sale of Assets Restriction

The company is required to purchase the notes at 101% if a CoC occurs (50% ownership threshold), and the company is downgraded to below investment grade by S&P and Moody’s. Standard language noted. Sale-leasebacks are limited by the limitation on liens covenant described above.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Callability/Optional Prepayment Covenant Suspension

None. None. None. None. Notes are redeemable at 100% of principal amount plus the present values of remaining scheduled payments of principal and interest, discounted at the adjusted Treasury rate plus 30 bps for the 2018 notes and 37.5 bps for the 2023 notes. None.

CNTA – Consolidated net tangible assets. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Financial Summary — Staples, Inc. 12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

Three Months 8/1/15 10/31/15

12 Months 1/30/16 1/30/16

Three Months 4/30/16

LTM 7/30/16 10/29/16 10/29/16

2/2/13

2/1/14

1/31/15

5/2/15

12.2 8.8 6.8 5.7 2.4 19.1

11.2 7.7 5.7 5.3 1.8 16.9

10.0 6.6 4.5 5.6 1.7 13.8

9.1 5.8 3.6 3.7 3.1 13.5

8.7 5.2 2.9 0.1 (3.1) 13.9

11.7 8.6 6.6 8.0 4.4 13.7

10.1 6.8 4.7 2.9 0.6 13.6

10.0 6.7 4.5 3.8 1.4 13.6

9.4 6.0 3.8 4.9 3.0 11.5

9.0 5.3 3.0 (1.2) (8.9) 14.6

12.1 8.9 6.8 8.6 9.5 14.4

10.2 6.8 4.6 3.9 1.3 14.4

2.9 3.6 6.6

2.9 3.5 5.6

3.2 3.5 5.2

3.0 3.3 4.6

3.0 3.6 5.2

3.0 3.5 2.4

3.1 4.0 4.4

3.1 4.2 4.4

4.3 5.3 3.1

3.2 4.1 0.2

3.2 4.1 4.1

0.9 0.0

0.6 0.0

0.7 0.0

0.8 —

0.7 —

0.7 0.0

2.5 1.8

0.9 0.0

0.8 0.0

5.1

4.9

5.0

4.9

4.8

5.6

5.1

7.1

6.7

5.2

2.5 3.1 0.8

2.7 3.3 0.8

2.9 3.2 0.7

2.6 2.9 0.5

2.7 3.2 0.8

2.7 3.1 0.5

2.7 3.5 0.4

2.7 3.7 0.4

3.9 4.7 4.3

2.9 3.7 1.4

2.6 3.4 (0.0)

2.9 12.4 2.4 9.0 3.5

2.8 13.9 2.3 10.5 3.0

2.8 29.5 2.5 25.7 2.9

2.8 27.9 2.5 23.7 2.6

2.8 19.8 2.3 15.1 2.7

2.7 14.3 2.3 11.3 2.2

2.5 10.1 2.0 6.8 2.6

2.8 28.7 2.1 17.4 2.6

2.4 8.5 2.0 6.2 2.6

2.5 9.4 1.9 6.3 1.9

2.6 11.7 2.0 7.7 2.8

1,989 8,700 6,711 — (172) 8.5

1,104 7,515 6,411 — (128) 8.3

1,116 7,256 6,140 — (51) 4.6

1,113 6,641 5,528 — (53) 4.6

1,108 6,636 5,528 — (75) 6.7

1,035 6,563 5,528 — (103) 9.5

1,035 6,563 5,528 — (139) 12.9

1,035 6,563 5,528 — (49) 4.6

3,506 9,034 5,528 — (165) 7.1

1,222 6,750 5,528 — (148) 12.7

1,051 6,579 5,528 — (119) 11.4

1,381 (162) 1,219 — (350) (294) 575 (2) (87) (423) 7 70

1,225 (117) 1,108 — (371) (313) 425 (87) (872) (259) (39) (833)

1,249 (206) 1,043 — (361) (307) 375 (78) (27) (159) 16 127

196 104 300 — (60) (76) 164 (9) 1 2 10 168

7 (7) 0 — (78) (77) (155) (12) 2 0 (19) (184)

450 (47) 403 — (77) (78) 248 (2) 1 (1) (75) 171

153 122 275 0 (166) (77) 32 30 (96) 16 61 43

806 172 978 0 (381) (308) 289 7 (92) 17 (23) 198

249 27 276 — (44) (78) 154 — — (3) (30) 121

(58) (229) (287) — (58) (77) (422) 83 180 7 (19) (171)

460 181 641 — (56) (78) 507 0 (193) (2) (11) 301

804 101 905 0 (324) (310) 271 113 (109) 18 1 294

749 1,206

212 1,060

301 1,062

422 1,065

382 1,066

465 1,135

486 1,086

489 1,000

294 1,000

440 996

585

281

326

373

229

317

339

457

481

636

828 27.2 47.2 38.7 1.4

903 29.0 49.8 42.7 1.6

873 31.3 47.0 40.9 1.6

778 31.9 50.8 46.7 1.1

900 33.9 57.8 52.2 1.6

817 31.7 47.7 44.7 1.4

730 32.4 48.1 43.9 3.2

730 32.9 48.8 44.5 1.8

625 32.6 49.1 47.9 0.9

849 34.2 56.5 51.8 1.2

666 31.3 46.4 46.6 1.0

666 33.2 48.6 48.7 1.6

a EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the nine months ended Oct. 29, 2016. This reflects the North American segment, including online. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Staples, Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

12 Months 1/30/16 1/30/16

Three Months 4/30/16

LTM 7/30/16 10/29/16 10/29/16

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15 10/31/15

24,381 (2.6) 2,972

23,114 (5.2) 2,582

22,492 (2.7) 2,257

5,262 (6.9) 480

4,937 (5.4) 432

5,593 (6.2) 654

5,267 (6.9) 531

21,059 (6.4) 2,096

5,101 (3.1) 478

4,752 (3.7) 426

5,355 (4.3) 647

20,475 (4.5) 2,081

2,972 2,133

2,582 1,780

2,257 1,490

480 307

432 259

654 481

531 358

2,096 1,405

478 305

426 253

647 474

2,081 1,390

2,133 1,646

1,780 1,322

1,490 1,023

307 189

259 145

481 370

358 246

1,405 950

305 192

253 143

474 365

1,390 946

(2.0) 2,215 26.6 (11.8) 7.7 9.4 30.6 (1.7) 71.7

(4.0) 2,169 26.1 (12.3) 7.3 8.6 29.3 5.5 92.2

(2.0) 1,983 25.9 (13.8) 7.8 8.9 27.9 1.6 89.1

(3.0) 1,956 25.6 9.2 7.4 8.1 27.3 1.1 59.4

(2.0) 1,937 25.6 9.7 6.8 7.6 27.6 0.7 80.4

(2.0) 1,919 27.2 7.5 7.3 7.8 26.9 0.5 81.9

(4.0) 1,907 26.2 8.5 7.5 8.2 25.6 3.7 172.9

(3.0) 1,907 26.2 (14.2) 7.5 8.2 25.6 3.7 98.2

(3.0) 1,893 25.2 8.9 7.4 7.6 18.3 2.8 44.9

(4.0) 1,888 25.1 9.1 6.9 7.5 28.4 (4.7) 61.1

(3.0) 1,872 26.9 6.5 7.5 7.5 28.7 (4.9) 58.9

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Leveraged Finance Retailing / U.S.A.

SUPERVALU Inc. Full Rating Report Key Rating Drivers

Ratings Long-Term IDR ABL Facility Term Loan Senior Unsecured

B BB/RR1 BB/RR1 B–/RR5

IDR – Issuer Default Rating. ABL – Asset-based loan. RR – Recovery Rating.

Rating Outlook

Save-A-Lot Divestiture: SUPERVALU Inc. completed the sale of its Save-A-Lot hard discount chain on Dec. 5, 2016 for $1.365 billion, or nearly 7.0x LTM Sept. 10, 2016 EBITDA. Save-A-Lot represented 26%, or $4.6 billion, of SVU’s sales and 29%, or $213 million, of its EBITDA in fiscal 2016 (February). SVU used net proceeds from the divestiture to make $832 million of mandatory term loan debt repayments, and to pay off a $260 million asset-based loan (ABL) revolver balance and for a $25 million voluntary pension contribution. Pro forma debt and total adjusted debt/EBITDAR as of Dec. 5, 2016 were approximately $1.5 billion and 3.7x, respectively.

Stable

Financial Data SUPERVALU Inc. FYE LTMa 2/27/16 12/3/16 ($ Mil.) Total Revenue 17,529 16,010 EBITDA 797 673 EBITDA Margin (%) 4.5 4.2 FCF 163 172 b Total Debt 2,574 2,594 Total Adjusted Debt 3,862 3,882 Total Adjusted Debt/EBITDAR (x) 4.0 4.7 EBITDAR/ (Interest + Rent) (x) 2.8 2.6 Identical Store Sales c (%) — Retail Food (2.5) (5.3) Identical Stores Sales (%) — Save-A-Lot Network (1.4) — Real Estate Owned (%)d 17 N.A. Number of Storese 1,560 217 a

LTM excludes Save-A-Lot results for Dec. 3 quarter, because it was classified as discontinued operations but does not reflect the debt paydown. Save-A-Lot was sold on Dec. 5, 2016. bExcludes unamortized debt discounts and financing costs. cLTM identical store sales is a third-quarter figure. dNot available, excluding Save-A-Lot. Represents total retail square footage. eContinuing operations only. Number of stores excludes Save-A-Lot. N.A. – Not available.

Two-Thirds Wholesale and One-Third Retail: Post the sale of Save-A-Lot, SVU’s approximately $12.5 billion of sales and $500 million of EBITDA are two-thirds grocery wholesale distribution and one-third retail. These businesses continue to have long-term challenges, and Fitch Ratings expects EBITDA declines to persist over the intermediate term. Wholesale Revenue, Margin Pressure: Segment sales declined in fiscal 2015 and 2016 due to customer losses. However, new business wins in fiscal 2017 are estimated to contribute about $1 billion of annualized revenue (13% on current $7.7 billion annual sales) in fiscal 2018 and SVU is focused on retaining existing customers. Nevertheless, Fitch believes SVU will have to offset 2%–3% customer attrition caused by consolidation and restructuring in the grocery industry with new business to maintain its wholesale revenue base. Fitch anticipates margin pressure as new large contracts come at a lower margin. Recent challenges transitioning new customers onto its distribution network resulted in higher labor and third-party freight expenses. Fitch projects segment EBITDA to approximate $265 million in fiscal 2019, versus $267 million for the LTM. Declining Retail Share, Profitability: Identical store (ID) sales for SVU’s retail banners — 217 stores at fiscal third quarter — were mostly negative for the past few years, falling 5.3% through the first three quarters of fiscal 2017. Fitch expects midsingle-digit declines will continue in fiscal 2018 despite moderating deflation due to weak share positions and increased competitive openings, and SVU’s retail banners continue to be share donors over the intermediate term. Fitch projects segment EBITDA will fall below $100 million by fiscal 2019 from $181 million for the LTM. Leverage to Creep Up: Despite modestly lower leverage following the divestiture of Save-ALot due to meaningful debt reduction, Fitch expects SVU’s leverage to increase toward the mid-4x range, with consolidated EBITDA falling to around $400 million by fiscal 2019 from an LTM pro forma level of $520 million. As such, the company’s credit profile is expected to remain weak over the intermediate term.

Rating Sensitivities

Analysts Carla Norfleet Taylor, CFA +1 312 368-3195 carla.norfleettaylor@fitchratings.com Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com

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Positive Rating Action: Future developments that may, individually or collectively, lead to an upgrade include stable market share trends, total adjusted debt/EBITDAR sustained below 4.0x, relatively stable margins and positive FCF. Negative Rating Action: Future developments that may, individually or collectively, lead to a downgrade include consistently weak top-line performance across each of the company’s businesses and margin contraction that leads to negligible or negative FCF.

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Leveraged Finance Fitch Base Case Forecast — SUPERVALU Inc. 2016A 17,529

2017F 15,000

2018F 13,340

2019F 13,160

Revenue Growth (%) Wholesale Revenue

(1.6) 7,935

(14.4) 7,774

(11.1) 8,823

(1.4) 8,823

Retail Revenue ID Sales (%) — Retail Food

4,769 (2.4)

4,570 (5.5)

4,387 (4.0)

4,256 (3.0)

EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations Capex

797 4.5 (60) 421 (261)

600 4.0 25 360 (230)

420 3.2 20 270 (200)

400 3.0 — 240 (200)

Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt

1.5 — 163 — 2,574

1.5 — 130 — 1,490

1.5 — 70 — 1,430

1.5 — 40 — 1,370

Total Adjusted Debtb Adjusted Debt/EBITDAR (x)

3,862 4.0

2,530 3.5

2,230 4.3

2,170 4.4

($ Mil., Fiscal Year Ended February) Revenue a

Assumptions Reflects sale of Save-A-Lot at the end of 3Q17. — $1 Bil. of annualized new wholesale segment revenue in fiscal 2018. — Share losses projected to continue. — — — — Capex declines after sale of Save-A-Lot. — — — — Debt declines due to term loan amortization and excess cash flow mandatory debt payments. — —

Reflects divestiture of Save-A-Lot, which was classified as discontinued operations in third-quarter 2017. bIncludes rent expense capitalized at 8.0x. A – Actual. F – Forecast. ID – Identical store. Note: 2017 includes two quarters of Save-ALot results. Source: Fitch Ratings.

Business Profile Assessment Weak Revenue and Profit Growth Prospects Following the Dec. 5, 2016 sale of Save-A-Lot, wholesale distribution represents roughly twothirds of SVU’s sales and EBITDA, while retail grocery represents the remaining one-third. Fitch is negative on the long-term growth prospects for these businesses due to revenue and margin pressures, and consolidation and restructuring activity within the industry. Revenue for these segments declined at a 1% four-year CAGR through fiscal 2016 due to volatile ID sales in retail and customer losses at wholesale. Operating earnings, after adjustments related to segment reclassification, grew for retail but were down 2% for wholesale. Excluding Save-A-Lot, Fitch projects consolidated EBITDA of $495 million in fiscal 2017, a decline of 15% from fiscal 2016 EBITDA of $584 million. Fitch projects consolidated EBITDA could decline to approximately $420 million in fiscal 2019. This expectation assumes SVU is able to offset wholesale customer losses in the 2%–3% range, which could occur as the supermarket industry continues to consolidate, with lower margin new business wins resulting in flat revenue and lower profitability for the wholesale segment. Fitch also expects low- to midsingle-digit retail ID sales declines to continue, with gross margins declining due to price investments. Fitch anticipates leverage will gradually increase toward the mid-4x range over the next three years due to declining EBITDA. The sensitivity analysis below illustrates potential EBITDA generation, depending on revenue growth and margin level. We calculated rent-adjusted leverage at the resulting EBITDA levels and debt assumptions.

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Leveraged Finance Legacy Business EBITDA and Total Adjusted Debt/ EBITDAR Sensitivity Pro Forma Fiscal 2017 Forecast — Excluding Save-A-Lot ($ Mil.) Revenue EBITDA 12,510 495 Three-Year CAGR Revenue Growth % EBITDA Margin (%) (2.0) (1.0) 0.0 1.0 2.0

3.00 353 364 375 386 398

3.25 382 394 406 419 431

3.50 412 425 438 451 464

3.75 441 455 469 483 497

Margin (%) 4

Rent 98

Total Adjusted Debt/EBITDAR (x) Total Debt ($ Mil.) 4.00 497 498 500 502 503

1,000 4.0 3.9 3.8 3.7 3.6

1,250 4.2 4.1 4.0 3.9 3.8

1,500 4.5 4.4 4.3 4.2 4.1

1,750 4.7 4.6 4.5 4.4 4.3

2,000 4.7 4.7 4.7 4.6 4.6

Source: Fitch Ratings.

Segment Analysis SVU has two operating segments post the sale of Save-A-Lot: Wholesale (grocery distribution), and Retail Food (traditional supermarket). Prior to the sale of Save-A-Lot, segment-level contribution to SVU’s fiscal 2016 revenue and EBITDA were as follows: Wholesale (45% and 38%), Retail (27% and 33%) and Save-A-Lot (26% and 29%), with corporate revenue representing the remaining approximately 2% of revenue. Operating margins were 2.9%, 2.8% and 2.0% for the Wholesale, Save-A-Lot and Retail segments, respectively. SVU’s aggregate merchandise mix was 64% nonperishable grocery, 29% perishable grocery, 3% pharmacy and 4% services in fiscal 2016. SVU’s consolidated revenue had a flat four-year CAGR ended fiscal 2016, with modest declines in the Retail and Wholesale segments offsetting growth at Save-A-Lot. Consolidated EBITDA grew at a 3% CAGR due to transition service agreement (TSA)-related revenue and earnings (offset against corporate expenses) as segment-level EBITDA was negatively affected by weak top-line performance and gross margin pressure. The table on the next page presents SVU’s historical segment results, including Save-A-Lot.

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Leveraged Finance Segments — SUPERVALU Inc. 2/25/12

2/23/13

2/22/14

2/28/15

2/27/16

YTD 3Q16 12/3/15

YTD 3Q17 12/3/16

4,921 4,221 8,194 — 17,336

4,736 4,195 8,166 — 17,097

4,651 4,228 8,036 240 17,155

4,879 4,613 8,134 194 17,820

4,769 4,623 7,935 202 17,529

3,662 — 6,195 159 10,016

3,524 — 5,912 137 9,573

Revenue Growth (%) Retail Save-A-Lot Wholesale Corporate Total

(2.6) 8.5 (2.6) — (0.1)

(3.8) (0.6) (0.3) — (1.4)

(1.8) 0.8 (1.6) — 0.3

4.9 9.1 1.2 (19.2) 3.9

(2.3) 0.2 (2.4) 4.1 (1.6)

— — — — —

(3.8) — (4.6) (13.8) (4.4)

EBITDA Post Adjustmentsb Retail Save-A-Lot Wholesale Corporate and Other Adjustments Total

292 292 326 (196) 714

275 246 286 (154) 653

278 241 294 1 814

294 221 292 — 807

248 213 285 51 797

183 — 223 33 439

116 — 205 63 384

EBITDA Margin (%) Retail Save-A-Lot Wholesale Total

5.9 6.9 4.0 4.1

5.8 5.9 3.5 3.8

6.0 5.7 3.7 4.7

6.0 4.8 3.6 4.5

5.2 4.6 3.6 4.5

5.0 — 3.6 4.3

3.3 — 3.5 4.0

EBITDA Breakdown (Excl. Corporate Segment) (%) Retail Save-A-Lot Wholesale Total

32 32 36 100

35 30 35 100

34 30 36 100

37 27 36 100

33 29 38 100

45 — 55 100

36 — 64 100

($ Mil., Pro Forma for NAI Salea) Revenues Retail Save-A-Lot Wholesale Corporate Total

a Includes transition services agreement (TSA) fees. bAdjusted for unusual items. Stock-based compensation is included in the Corporate and Other Adjustments line. TSA expenses and fees, and pension costs for inactive participants are restated into corporate expenses. $60 Mil. of one-time TSA fees in fiscal 2014 are excluded. Fiscal 2016 sales declined 1% excluding the 53rd week in fiscal 2015. Save-A-Lot fiscal 2016 EBITDA per Form 10 filed August 2016 was $219 Mil. Save-A-Lot segment information no longer reported as of 3Q17. NAI – New Albertson’s, Inc. Source: Company filings, Fitch Ratings.

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Leveraged Finance Category Sales Data 2014

2015

2016

($ Mil.)

(%)

($ Mil.)

(%)

($ Mil.)

(%)

2,600 1,463 491 67 30 4,651

56 31 11 1 1 100

2,677 1,574 510 83 35 4,879

55 32 10 2 1 100

2,607 1,549 511 67 35 4,769

55 32 11 1 1 100

Save-A-Lot Nonperishable Grocery Perishable Grocery Services to Licensees and Other Total

2,829 1,399 — 4,228

67 33 — 100

2,986 1,627 — 4,613

65 35 — 100

2,956 1,597 70 4,623

64 35 2 100

Wholesale Business Nonperishable Grocery Perishable Grocery Services Total

6,000 1,951 85 8,036

75 24 1 100

5,939 2,099 96 8,134

73 26 1 100

5,753 2,025 157 7,935

73 26 2 100

240 17,155

— —

194 17,820

— —

202 17,529

— —

(Years Ending February) Retail Nonperishable Grocery Perishable Grocery Pharmacy Fuel Other Total

Corporate Services Total Sales

Note: Fitch does not restate prior-year numbers. SVU began to break out revenue from services to licensees in 2016. Source: Company filings.

Retail Grocery The retail segment, which accounted for 33% of EBITDA in fiscal 2016, operated 198 supermarkets under the banners shown in the Store Banners table below. Following the divestiture of Save-A-Lot, Retail grocery will represent approximately one-third of SVU’s EBITDA. These stores are SVU’s legacy supermarket assets, down from 1,065 stores prior to the March 2013 sale of New Albertson’s, Inc. Eighty-four percent of its retail square footage is leased. SVU has the leading position in the Minneapolis/St. Paul and Fargo, ND, markets, but smaller shares in its other three markets.

Store Banners (As of Feb. 27, 2016) Banner Cub Foods Farm Fresh

Type Value Positioned Traditional Supermarket

Shop ‘n Save Shoppers Food & Pharmacy

Basic Grocery Value Positioned

Hornbacher’s Rainbow Total Supermarkets

Traditional Supermarket Value Positioned —

Locations Minneapolis/St. Paul Hampton Roads; Richmond, VA; Elizabeth City, NC St. Louis Baltimore; Northern Virginia; Washington, D.C. North Dakota, Minnesota Minneapolis/St. Paul —

Save-A-Lot — Owned Save-A-Lot — Licensed Total Save-A-Lot

Hard Discount — —

Total Stores

—

Market Stores Position 51 1 41 3 42 54

3 3–4

8 2 198

1 —

Primarily East of Mississippi — —

463 897 1,360

— — —

—

1,558

—

Note: Excludes 30 franchised Cub Foods stores. Source: Company filings, Fitch Ratings.

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Leveraged Finance Identical Store Sales: Lower Retail Customer Counts Retail segment sales have been declining at a low- to midsingle-digit rate since fiscal 2016 due mainly to negative ID sales and customer counts, indicating a loss of market share. Sales declines were due mainly to lower customer counts stemming from new entrants in SVU’s core markets and less competitive pricing. SVU reduced promotional activity due to gross margin pressures in pharmacy. However, as seen in the Category Sales Data table, pharmacy represented less than 3% of Retail segment sales in fiscal 2016. Deflation in protein and dairy also negatively affected ID sales. SVU is working on a number of initiatives to increase sales trends in its Retail segment. The company wants to drive profitable sales growth by investing in price, improving the quality of fresh meat and produce offerings, increasing sales of private-label products, reducing shrink and remodeling stores. The company increased promotional activity in the fourth quarter of fiscal 2016, continues to remodel stores, is utilizing Instacart delivery services in certain markets, and is focused on growing its private brands Culinary Circle and Wild Harvest, which represent over 20% of sales. However, Fitch projects ID sales will decline approximately 5.5% in fiscal 2017 and 4.0% in fiscal 2018, with customer counts continuing to decline and the slight improvement due mainly to easing deflationary pressure. Market share losses are expected to continue due to competitive pressures and weakening market share positions at most of its banners.

Identical Store Sales Trends (%) Retail Food ID Customer Count ID Basket

2013 1Q14 2Q14 3Q14 4Q14 (2.4) (3.0) (0.9) (1.9) 0.2 (1.9) (2.6) (0.7) (2.5) (0.6) (0.5) (0.4) (0.2) 0.6 0.8

Save-A-Lot (Network) Save-A-Lot (Corporate) ID Customer Count ID Basket

(3.3) (5.1) (4.1) (1.0)

(1.9) (1.2) — —

(0.3) 4.6 1.4 3.2

1.7 5.4 4.1 1.3

2.1 4.6 1.4 3.2

2014 1Q15 2Q15 3Q15 4Q15 (1.5) 0.6 0.4 2.3 1.1 (1.7) 2.5 1.4 3.1 2.8 0.2 (1.9) (1.0) (0.8) (1.7) 0.2 2.6 0.7 1.9

5.6 7.2 6.1 1.1

6.5 8.2 6.4 1.8

6.9 8.5 5.1 3.2

3.6 6.6 4.0 2.6

2015 1Q16 2Q16 3Q16 4Q16 1.0 (0.3) (3.3) (2.6) (3.9) 2.4 (0.4) (4.2) (4.3) (4.2) (1.4) 0.1 0.2 1.7 0.3 5.8 7.6 5.4 2.1

0.6 2.8 0.4 2.4

(1.6) 0.9 (1.2) 2.1

(3.4) (0.4) 1.1 (1.5)

(2.2) (1.3) (0.2) (1.1)

2016 1Q17 2Q17 3Q17 (2.5) (4.5) (5.9) (5.7) (3.2) (4.1) (5.2) (3.8) 0.7 (0.4) (0.7) (1.9) (1.4) 0.6 (0.7) 1.3

(1.4) (1.0) 0.7 (1.7)

(5.2) (5.0) (3.2) (1.8)

— — — —

ID – Identical store. Source: Company filings, earnings transcripts.

Food-at-Home Inflation (%) 7.5 6.0 4.5 3.0 1.5 0.0

E – Estimate. Source: U.S. Department of Labor, U.S. Deptartment of Agriculture.

SVU’s retail segment primarily competes against traditional regional and national grocery chains such as Hy-Vee Foods and Kroger. Secondary competitors include big box stores or supercenters such as Walmart, dollar stores such as Dollar Tree, specialty formats such as Whole Foods Market and hard discount chains such as Aldi. SVU’s ability to differentiate itself

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Leveraged Finance depends on a combination of price competitiveness, quality, customer service, convenience and product assortment. SVU views its retail segment as a complement to its wholesale business and continues to invest in its retail operations. It acquired 22 Food Lion stores from Ahold Delhaize, which it expects to rebrand as Shop ‘n Save and eventually sell the stores to existing wholesale customers, resulting in increased wholesale revenue. Fitch projects segment EBITDA will decline nearly 40% to roughly $150 million in fiscal 2017 and about 30% to rough $100 million in fiscal 2018, with lower sales and continued gross margin pressure not being fully offset by cost reductions.

Wholesale Distribution The wholesale segment, formerly known as the Independent Business segment, operates one of the five largest wholesale grocery distribution business in the U.S. and served 1,796 stores nationally and another 232 stores secondarily at Feb. 27, 2016. The segment accounted for 38% of SVU’s EBITDA in fiscal 2016. Following the divestiture of Save-A-Lot, the wholesale business will represent approximately two-thirds of SVU’s EBITDA. Sales in the wholesale segment were negatively affected by customer loss and lower sales to existing customers due in part to product deflation. Revenue declined 2.4% in fiscal 2016 — down 1% adjusting for the extra week in 2015 — and 1% on a CAGR basis since 2012. Segment EBITDA was $285 million in fiscal 2016, down from more than $300 million in fiscal 2012. Fitch projects EBITDA will decline about 5% to roughly $265 million in fiscal 2017 and to remain relatively flat by fiscal 2019, given lower margin new business wins and the temporary increase in costs related to distribution center staffing and the use of third-party freight providers that began in the December 2016 quarter. SVU’s wholesale segment competes with traditional grocery wholesalers and specialty wholesalers on price, quality, assortment, schedule and reliability of deliveries and services, service fees and distribution facility locations. SVU is focused on retaining and growing its sales with existing customers, winning new accounts and leveraging the company’s privatelabel products, which are marketed under the Essential Everyday, Equaline, Wild Harvest and Culinary Circle brands. SVU is also enhancing its back-office technology to expand services offered to retail grocers, including digital marketing, data analytics, promotion management, point-of-service equipment and e-commerce. Fitch believes SVU’s efforts are gaining traction under the direction of CEO Mark Gross (see Management and Board Structure section), who joined in February 2016, as SVU announced several new long-term supply agreements YTD. Arrangements are with The Fresh Market (approximately 184 stores), Indiana-based Marsh Supermarkets (approximately 70 stores) and America’s Food Basket. Fitch anticipates this new business will contribute about $1 billion in annualized revenue in fiscal 2018.

TSA Wind-Down Pressures Earnings SVU has transition servicing agreements with Albertsons Companies, LLC and several of its subsidiaries. SVU began reporting income from the TSA as an offset to corporate expenses in fiscal 2014. Fees from SVU’s TSAs totaled roughly $200 million in fiscal 2016. SVU has not disclosed the actual costs associated with providing these services or the breakdown of those costs, but indicated the TSA fees exceeded the related costs. However, this income is expected to decline as the agreements expire.

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Leveraged Finance Fitch believes the wind-down of SVU’s various TSAs presents modest risk to EBITDA. The company plans to mitigate the loss of the majority of these revenues through firmwide cost reductions and additional revenue streams. SVU also entered into a five-year professional servicing agreement with Save-A-Lot following the sale. SVU will continue providing back-office services to Save-A-lot, which should help offset these losses.

Management and Board Structure SVU appointed Mark Gross president and CEO on Feb. 5, 2016, after the retirement of former president and CEO Sam Duncan. Prior to joining SVU, Gross was president of Surry Investment Advisors LLC, an advisory firm Gross founded to provide consulting services to grocery distributors and retailers. From 1997 to 2006, Gross held various leadership positions at C&S Wholesale Grocers, including co-president of C&S’s overall operations, CFO, general counsel and president of its affiliated retail grocery operations. In addition to appointing a new CEO, SVU promoted Bruce Besanko to the newly created role of executive vice president and COO. Besanko also assumed the role of CFO. Fitch does not anticipate any significant changes to SVU’s financial strategy as a result of these management changes, but the company is now more focused on growing its wholesale operations. SVU’s board of directors remains mainly independent. Directors and executive officers as a group own 1.5% of SVU’s outstanding stock.

Board of Directors Name Gerald Storch Mark Gross Frank Savage Matthew Pendo Eric Johnson Francesca Ruiz de Luzuriaga Wayne Sales Donald Chappel Irwin Cohen Philip Francis Mary A. Winston

Position Non-Executive Chairman President and CEO Director Director Director Director Director Director Director Director Director

Affiliation CEO, Hudson’s Bay Company SUPERVALU Senior Advisor, Lazard Ltd. Managing Dir., Oaktree Capital CEO, Baldwin Richardson Foods Independent Business Consultant Former CEO, Canadian Tire CFO, The Williams Companies Retired Partner, Deloitte & Touche Former CEO, PetSmart Former CFO of Family Dollar

Source: Company filings.

Save-A-Lot Divestiture SVU completed the sale of Save-A-Lot on Dec. 5, 2016 for $1.365 billion, or nearly 7.0x $194 million of EBITDA for the LTM ended Sept. 10, 2016. The hard discount chain of more than 1,350 stores accounted for 26%, or $4.6 billion, of SVU’s $17.5 billion of sales and 29%, or $213 million, of its $797 million of EBITDA in fiscal 2016. Save-A-Lot’s EBITDA declined from roughly $250 million in 2012 due to negative ID sales and new store opening expenses over the past two years. Revenue grew at a low single-digit rate due to new store growth. Fitch viewed the divestiture as neutral to SVU’s ratings, as the reduction in EBITDA was offset with debt reduction. However, business risk increased given the company no longer benefits from the positive long-term growth prospects for the hard discount channel.

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Leveraged Finance As seen in the table below, transaction multiples in the food retail industry since 2011 averaged approximately 8.0x compared with the 7.0x multiple SVU received for Save-A-Lot.

Food Retailer Select M&A Activity (USD Mil.) Date 1997 1998 1998 1998 1999 1999 2004 2006 2006 2007

Acquirer Safeway Ahold Kroger Safeway Safeway Albertson’s Albertson’s a SUPERVALU a Cerberus KKR

2007 Apollo Global Management Smart & Final 2007 Whole Foods Wild Oats 2007 A&P Pathmark Average Multiple 1997–2007

Discounter Specialty Supermarket

Seller Publicly Held Publicly Held Publicly Held Publicly Held Publicly Held Publicly Held J Sainsbury Publicly Held Publicly Held Publicly Held Groupe Casino/Public Publicly Held Yucaipa

2011 2012 2012 2012 2013 2013 2013

BJ’s Wholesale Club 99 Cents Only Winn-Dixie Smart & Final New Albertsons, Inc. Delhaize Banners Safeway’s Canadian Stores

Wholesale Club Dollar Store Supermarket Discounter Supermarket Supermarket Supermarket

Publicly Held Publicly Held Publicly Held Apollo SUPERVALU Delhaize Safeway Inc.

Harris Teeter Safeway Inc. Family Dollar Roundy’s Delhaize The Fresh Market

Supermarket Supermarket Dollar Store Supermarket Supermarket Specialty

Publicly Held Publicly Held Publicly Held Publicly Held Publicly Held Publicly Held

Leonard Green/CVC Ares Management Bi-Lo Ares Management Cerberus Bi-Lo Sobeys Inc.

2014 Kroger 2015 Cerberus 2015 Dollar Tree 2015 Kroger 2016 Royal Ahold 2016 Apollo Global Management Average Multiple 2011–2016

Target 70% of Vons Giant Food Fred Meyer Dominick’s Randall’s American Stores Shaw’s Part of Albertsons Part of Albertsons Dollar General

Format Supermarket Supermarket Supercenter Supermarket Supermarket Supermarket Supermarket Supermarket Supermarket Dollar Store

EV Multiple (x) 8.9 9.0 11.8 9.4 N.A. 8.9 N.A. 6.1 6.1 12.3

EV 3,030 2,516 14,726 1,594 1,786 12,251 2,478 15,121 15,121 7,300 774 632 1,251

10.8 12.7 10.3 10.0

2,516 1,600 435 975 3,300 602 5,800 (CAD Mil.) 2,458 10,720 9,100 785 11,473 1,334

6.9 N.A. 4.2 N.A. 3.7 N.A. 10.7

7.2 6.5 11.0 6.9 10.0 11.4 7.9

Reflects combined purchase of Albertsons by SUPERVALU and Cerbus. bCombined market capitalization. EV – Enterprise value. N.A. – Not available. Source: Bloomberg, company reports, Fitch Ratings.

Fiscal 2017 and 2018 Outlook Fitch projects Retail segment EBITDA of about $150 million and $100 million in fiscal 2017 and 2018, respectively, with retail ID sales continuing to decline at a midsingle-digit rate. Wholesale EBITDA is projected to approximate $265 million in fiscal 2017 and $270 million in fiscal 2018, with segment margins declining to the low-3% range over time due to lower margin new business and recent challenges transitioning new customers onto its distribution network. Fitch’s wholesale revenue and EBITDA assumptions consider SVU’s ability to grow its wholesale business over the near term, given recent new business wins and management’s goal of replacing volumes associated with lost customers by the end of fiscal 2017. Forecasts also incorporate SVU’s plans to offset most of its lost TSA revenue with cost reductions. EBITDA and total adjusted debt/EBITDAR are approximately $520 million and 3.7x, respectively, post the sale of Save-A-Lot at Dec. 5, 2016. Fitch projects EBITDA excluding Save-A-Lot will decline to about $500 million in fiscal 2017 and fall about 15% to $420 million in fiscal 2018. Total adjusted debt/EBITDAR is forecast at 4.3x for fiscal 2018, up from LTM pro

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Leveraged Finance forma leverage of 3.7x. Fitch projects FCF of about $70 million for fiscal 2018. FCF should be supported by reduced interest and capex following the divestiture of Save-A-Lot.

Liquidity and Debt Structure Adequate Liquidity SVU’s liquidity is adequate, supported by a $1 billion ABL credit facility due the earlier of February 2021 or 90 days prior to the term loan maturity in March 2019, if still outstanding. Fitch projects FCF will remain positive post Save-A-Lot, approximating $70 million in fiscal 2018. SVU does not pay a dividend, though permitted under its debt facilities.

Debt Structure SVU’s debt structure changed significantly over the past decade due to the acquisition and subsequent divestiture of certain Albertson’s banners. Total debt pro forma for debt reduction following the sale of Save-A-Lot is $1.5 billion. SVU had approximately $2.6 billion of debt at the quarter ended Dec. 3, 2016, consisting of $260 million of ABL borrowings, $1.4 billion of secured term loans, $400 million of senior unsecured notes due June 2021, $350 million of senior unsecured notes due November 2022 and approximately $230 million of capital leases. The closest upcoming maturity is in 2019, when the ABL facility and term loan mature. SVU used net proceeds from the divestiture to make $832 million of mandatory term loan debt repayments and to pay off a $260 million ABL revolver balance. Pro forma debt is approximately $1.5 billion. The term loan amortizes at 1% of original principal per year (or $15 million), but the company must prepay the term loan in the amount of 50% of excess cash flow when the secured leverage ratio is greater than 2.0x, 25% when secured leverage is between 1.5x and 2.0x, and 0% if below 1.5x. The secured leverage ratio, including capital leases, was 1.5x at Dec. 5, 2016, as the majority of net proceeds from the sale of Save-A-Lot were used for debt reduction.

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Leveraged Finance Capital Structurea ($ Mil., At Dec. 5, 2016) Description

Amount

(%)

— 524 524

— 35 35

400 350 750 218 1,492

27 23 50 15 100

Secured Debt $1 Bil. Revolving ABL Facility Maturing February 2021 Secured Term Loan Facility Maturing March 2019 Total Secured Debt Unsecured Debt 6.750% Senior Unsecured Notes Maturing June 2021 7.750% Senior Unsecured Notes Maturing November 2022 Total Unsecured Debt Capital Leases and Other Total Debt (Including Capital Leases)b a

Pro forma for Save-A-Lot Divestiture. Includes $37 Mil. of net debt financing costs and $2 Mil. of original debt discount on debt. ABL – Asset-based loan. Source: Company filings.

Debt Maturitiesa

Liquiditya

($ Mil., At Dec. 5, 2016) 2017 2018 2019 2020 2021 Thereafter a

($ Mil., At Dec. 5, 2016) — — 524 — 400 350

Cash Revolver Availability Total

227 935 1,162

Pro forma for the $260 Mil. revolver paydown and an approximate $180 Mil. of remaining cash proceeds from sale of Save-A-Lot. Source: Company filings.

Pro forma for debt paydown following sale of Save-ALot. Note: Calendar years. Excludes capital leases. Source: Company filings, Fitch Ratings.

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Leveraged Finance Pension Liability SVU’s company-sponsored pension plan (single-employer pension plan) remains with SVU following the sale of NAI, and is closed to new participants. The company’s defined benefit pension (DB) plan was 80% funded with a funding shortfall of $545 million, or 20%, at Feb. 27, 2016. SVU expects to voluntarily contribute $30 million–$35 million to its DB plans in fiscal 2017, after contributing $27 million in fiscal 2016 and $165 million to the plans in fiscal 2015.

MEPP Liability SVU also participates in multiemployer pension plans (MEPP), to which it contributed $43 million in fiscal 2016, $39 million in 2015, and plans to contribute $40 million–$50 million in fiscal 2017. SVU estimates its portion of the underfunding of these plans totaled $587 million as of Feb. 27, 2016, an increase of $140 million versus Feb. 28, 2015 due to lower returns.

Recovery Analysis Fitch’s ratings on individual debt issues are based on the Issuer Default Rating and the expected recovery in a distressed scenario. Fitch allocated an assumed going concern enterprise value after administrative claims of approximately $1.6 billion ($1.4 billion after administrative claims), excluding Save-A-Lot, across SVU’s capital structure. Fitch arrived at this valuation by multiplying an assumed post-default EBITDA of approximately $400 million by a 4.0x multiple. The post-default EBITDA assumes total revenue of about $13 billion and an EBITDA margin around 3%. SVU’s $1 billion revolving ABL facility, which is assumed to be 70% drawn, is backed by inventories, receivables and prescription files, which Fitch collectively values at $1.1 billion. The term loan, which has a balance of $524 million due to debt reduction from Save-A-Lot sale proceeds, is backed by real estate and equipment with a book value of $497 million. As such, both facilities are assumed to receive a full recovery, leading to a rating on both facilities of ‘BB/RR1’. The senior unsecured notes are rated ‘B–/RR5’, implying 11%–30% recovery in a going concern scenario. Fitch believes in a liquidation scenario, SVU’s company pension plan and its portion of the underfunded multiemployer pension plans would rank ahead of the senior unsecured notes given the unique structural priorities available to the PBGC and pension plan fiduciaries. Therefore, in a liquidation scenario, there would be no recovery to the senior notes. At Feb. 27, 2016, SVU’s pension plan was underfunded by $545 million, and the company’s estimated share of the underfunded multiemployer pension plans for which it participates was $587 million. Due to a remeasurement of plan assets and liabilities at the end of the fiscal third quarter, SVU indicated the funded status for its single-employer pension plan improved by approximately $150 million. Nonetheless, Fitch anticipates there would be no recovery to the senior notes in a liquidation scenario.

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Leveraged Finance Recovery Analysis — SUPERVALU Inc. ($ Mil., Except Where Noted; IDR: B) Distressed Enterprise Value (EV) as a Going Concern (GC) GC EBITDA GC EV Multiple (x) EV on GC Basis

400 4.0 1,600

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

1,600 160 1,440

Liquidation Value (LV) Cash A/R a Inventory b Pharmacy Scripts c Net PPE Total LV

Book Value 47 440 800 159 1,014 —

Advance Rate (%) 0 80 70 100 49 —

Available to Creditors 0 352 560 159 500 1,571

Distribution of Value Secured Priority Sr. Secured ABL Revolverd Sr. Secured Term Loan (Pro forma)

Amount 700 524

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims Concession Allocation (0%) Value to be Distributed to Senior Unsecured Claims

Unsecured Priority Sr. Unsecurede Unsecured Sr. Subordinated Subordinated Sr. Equity

Amount 819 — — — —

Value Recovered 700 524

Recovery (%) 100 100

Recovery Rating RR1 RR1

Notching +3 +3

Rating BB BB

Notching –1 — — — —

Rating B– — — — —

1,440 1,224 216 — 216 Value Recovered 216 — — — —

Recovery (%) 26 — — — —

Recovery Rating RR5 — — — —

Reflects assumed normalized inventory level to exclude seasonal working capital. bPharmacy scripts valuation assumes 198 pharmacies times 1,400 script files/store week times $11/script. cPPE advance rate considers $500 Mil. of book value term loan real estate collateral excluding Save-A-Lot and Fitch’s estimate of fair market value. dAssumes $1 Bil. ABL facility and 70% draw down. eSenior unsecured debt is composed of $750 Mil. of notes plus one-third of operating and capital lease rents as of the latest 10-K filing. IDR – Issuer Default Rating. A/R – Accounts receivable. PPE – Property, plant and equipment. ABL – Asset-based loan. BV – Book value. Source: Fitch Ratings

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Leveraged Finance Appendix A Organizational Structure — SUPERVALU Inc. ($ Mil., Pro Forma, As of Dec. 5, 2016) Public Shareholders

SUPERVALU Inc. (IDR — B/Stable) Debt Issue $1.0 Bil. ABL Facility $1.5 Bil. Term Loan Facility Total Secured Debt 6.750% Senior Unsecured Notes 7.750% Senior Unsecured Notes Total Senior Unsecured Debt Capital Leases and Other Total SUPERVALU Inc. Debt

Retail Fooda

Wholesale

Maturity Date 2/3/21 3/21/19 — 6/1/21 11/15/22 — — —

Amount — 524 524 400 350 750 218 1,492

Rating BB/RR1 BB/RR1 — B–/RR5 B–/RR5 — — —

Upstream Senior Unsecured Guaranteed

Corporate

aContains

SUPERVALU’s five traditional supermarket banners: Cub Foods, Farm Fresh, Shop ‘n Save, Shopper’s Food and Hornbachers. IDR – Issuer Default Rating. ABL – Asset-based loan. RR – Recovery Rating. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — SUPERVALU Inc. Overview Borrowers Document Date and Location

Maturity Date Description of Debt

Amount

Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

SUPERVALU Inc. as lead borrower and 19 of its subsidiaries. 3/21/13 (Exhibit 10.3 to 8-K dated 3/26/13) 4/17/14 Amendment (Exhibit 10.1 to 8-K dated 4/18/14) 9/30/14 Amendment No. 2 (Exhibit 10.1 to 8-K dated 9/30/14) 2/3/16 Amendment No. 3 (Exhibit 10.1 to 8-K dated 2/4/16) Facility Type: Asset-based revolver. Maturity Date: Earlier of 1) 2/3/21, and 2) 90 days prior to term loan maturity, if any outstanding then. $1.0 Bil. asset-based revolving credit facility, subject to borrowing base. There is a springing reserve provision, whereby a reserve is placed against availability on the facility in the amount of any material indebtedness (defined as in excess of $50 Mil.) that is due within 30 days of the date the reserve is established. Facility Type: Revolver. Commitment: $1.0 Bil. (Letter of credit limit of $400 Mil.), incremental allowed up to $250 Mil. Outstanding: $260 Mil. outstanding as of 12/3/16. Senior secured. The loan parties have granted a first-priority security interest in their inventories, receivables and prescription files. In addition, there is a second lien on term loan collateral (limited by limitation on liens covenants in bond indentures). If the separation of Save-A-Lot is consummated, certain security interests will be released. The facility is guaranteed on an unsecured basis by all restricted subs that are not borrowers. If the separation of Save-A-Lot is consummated, certain guarantees will be released.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) Purchase money indebtedness, capital leases and debt to finance real estate improvements of up to $300 Mil. in aggregate and $100 Mil. in any given year; 2) term loan debt not to exceed $2.0 Bil.; 3) customer support transactions debt up to $250 Mil.; 4) unsecured debt that matures at least 91 days after 2/21/19, and has less restrictive covenants than the term loan; 5) receivables financing subsidiary of up to $200 Mil.; 6) letters of credit issued under commercial letter of credit facility not to exceed $15 Mil.; 7) obligations under swap contract given the aggregate swap termination value does not exceed $25 Mil.; 8) allpurpose up to $30 Mil. Permitted encumbrances include a general $30 Mil. carveout. Consistent with limitations on debt incurrence.

In the event of a change of control (defined as 35% voting control or, for the Cerberus investor group, 50% voting control), all amounts owed become immediately due and payable. If no cash dominion event exists, investments in cash of up to $125 Mil. at any one time are permitted unless no loans are then outstanding. A cash dominion event is defined as the existence of an event of default, or excess availability falls below 15% for three days, or below 12.5% at any time. 1) Store closures and related inventory liquidations net of store openings may not exceed 7.5% of total stores in any given fiscal year, and not exceed 15% of existing stores in the aggregate; 2) customer support transactions not to exceed $250 Mil.; 3) up to a certain percentage of assets of Moran Foods LLC (Save-A-Lot); 4) the sale of all or substantially all of the equity or assets of Moran Foods LLC (Save-A-Lot) is permitted, provided that excess availability is at least 25%, the FCCR is at least 1.0x, and the total leverage ratio is not more than 4.25x; 5) sale leasebacks are permitted if sold at fair market value and, if a cash dominion even exists, the proceeds are used to repay the ABL obligations; 6) sale of prescription files limited to $12.5 Mil. in any fiscal year; 7) dispositions from store conversion transaction, given that together with store closings minus new stores does not exceed 7.5% of stores in the beginning of that fiscal year and does not exceed 15% of stores as of the closing date, and other customary item.

RP Basket: None. Notable Permitted Restricted Payments: Dividends and share repurchases of up to $75 Mil. in a given fiscal year and not to exceed $175 Mil. are permitted, provided that no cash dominion event (as defined in the agreement) occurs. Net cash proceeds from the disposition of Save-A-Lot retained interest after requirements related to debt repayment are made. Special Situation: No restriction on payments, if (1) the excess availability exceeds 22.5% and pro forma FCCR exceeds 1.0x or (2) the excess availability exceeds 35%.

Yes, exceeding $50 Mil. N.A. A material adverse effect is an event of default. No. No. Lenders holding more than 50% of the aggregate commitments.

FCCR – Fixed-charge coverage ratio. ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement Covenant Summary — SUPERVALU Inc. (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

— Consolidated FCCR — —

1.0x (springing when the excess availability is below 10%)

Principal Repayments Mandatory/Tax Prepayment — Amortization Schedule — Callability/Optional Prepayment — Pricing Coupon Type/Index Pricing Grid

Floating based off LIBOR Quarterly Average Excess Availability Greater than 66.67% Greater than 33.33% but less than 66.67% Less than 33.33%

Applicable Rate LIBOR + 125 bps LIBOR + 150 bps LIBOR + 175 bps

FCCR – Fixed-charge coverage ratio. ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Term Loan Covenant Summary — SUPERVALU Inc. Overview Borrower Document Date and Location

Maturity Date Description of Debt Amount

Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross Acceleration MAC Clause Equity Cure Covenant Suspension Required Lenders/Voting Rights

SUPERVALU Inc. 3/21/13 (Exhibit 10.1 to 8-K dated 5/22/13) 1/31/14 Second Amendment (Exhibit 10.1 to 8-K dated 1/31/14) 5/20/16 Third Amendment (Exhibit 10.1 to 8-K dated 5/20/16) Facility Type: Term Loan Facility. Maturity Date: 3/21/19. $1.5 Bil. secured term loan facility. Facility Type: Term loan facility. Commitment: $1.5 Bil., with incremental allowed up to $500 Mil. Outstanding: $1.356 Bil. at 12/3/16. Senior secured. The term loan parties have granted a perfected, first-priority mortgage lien and security interest in Moran Foods, LLC (parent of Save-A-Lot) until the termination of the spin period, certain of their owned or ground leased real estate and the equipment located on such real estate, and intellectual property. In addition, there is a second-priority security interest in the collateral securing the ABL agreement. The facility is guaranteed on an unsecured basis by SVU’s material, wholly owned domestic subsidiaries. Includes Save-A-Lot until the termination of the spin period (as defined by the agreement).

Coverage Ratio Debt: Subject to total leverage ratio < 4.0x, with a sublimit of $150 Mil. in restricted subsidiaries. Notable Permitted Debt: 1) Purchase money indebtedness, capital leases and debt to finance real estate improvements of up to $300 Mil. in aggregate and $100 Mil. in any given year; 2) receivables financing of up to $200 Mil.; 3) customer support transactions debt up to $250 Mil.; 4) obligations under swap contract given the aggregate swap termination value does not exceed $25 Mil.; 5) additional all-purpose up to $30 Mil.; and 6) until the termination of the spin period, the incurrence by any Save-A-Lot subsidiary, Moran Foods, proceeds of which are maintained in a deposit account and used exclusively to make the SUPERVALU payment (as defined by the agreement) or to prepay or mandatorily redeem the Save-A-Lot debt in full. Permitted encumbrances include a general $30 Mil. carveout and liens on any Save-A-Lot assets and equity interests (other than the Save-A-Lot retained interest) arising substantially concurrently with the consummation of the distribution. Consistent with limitations on debt incurrence.

In the event of a CoC (defined as 35% voting control or, for the Cerberus investor group, 50% voting control), all amounts owed become immediately due and payable. 1) Permitted investments include a general carveout of $100 Mil., plus the cumulative credit amount (as defined) provided that the pro forma total debt/EBITDA does not exceed 4.0x; and 2) SVU may acquire all or substantially all of the assets, or 100% of the equity, of a company in a similar line of business if total debt/EBITDA on a pro forma basis does not exceed 4.0x. 1) Store closures and related inventory liquidations net of store openings may not exceed 7.5% of total stores in any given fiscal year, and not exceed 15% of existing stores in aggregate; 2) customer support transactions not to exceed $250 Mil.; 3) sale of prescription files limited to $12.5 Mil.in any fiscal year; 4) SVU may sell Moran Foods, LLC, provided it does not trigger an event of default, conflict with the terms of any material indebtedness or constitute a change of control. Permitted dispositions include the disposition of any Save-A-Lot Interest or Save-A-Lot Retain Interest (See Mandatory/Tax Prepayment).

RP Basket: RP not to exceed the cumulative credit which equals a) retained excess cash flow plus b) equity issuance proceeds minus c) restricted payments already made, given that the total leverage ratio less than 3.5x, on a pro forma basis. Notable Permitted Payment: Additional all-purpose payments, including prepayments for other debt, not to exceed $175 Mil.; net cash proceeds of a Moran Foods sale, the disposition of Save-A-Lot retained interest that is not required to be applied to prepay the term loans.

Yes, with a threshold of $50 Mil. N.A. No. No. No. Lenders representing more than 50% of the sum of all loans outstanding.

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Covenant Summary — SUPERVALU Inc. (Continued) Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum) Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule

Callability/Optional Prepayment Pricing Coupon Type/Index

Pricing Grid

— — — —

Mandatory prepayment with proceeds from: Excess cash flow: up to 50% (subject to leverage test). Definition of excess cash flow amended to account for the amount of SUPERVALU payment and net cash proceeds from the disposition of any Save-A-Lot retained interest. Priority collateral sale or other asset sale in excess of $5 Mil.: 100% of net proceeds if not reinvested in productive assets within 365 days. Within 10 days of receipt of proceeds from the Moran LLC (Save-A-Lot) sale, the SUPERVALU payment, any disposition of Save-A-Lot retained interest: 100% of first $750 Mil. of net proceeds and 50% of remaining proceeds in an amount to reduce total secured leverage ratio to 1.5x. Date Term Loan Facility Quarterly through 12/31/18 $3.75 Mil. At maturity Balance due Optional prepayment.

LIBOR + 450 bps (with a floor on LIBOR of 1.0%). The applicable margin increases by 25 bps if after the third amendment effective date, the corporate credit rating is not at least ‘B1/B+’, the term loan ratings is not at least ‘Ba3/BB–’, and the Recovery Ratings with respect to the term loan is at least ‘2’ at certain rating agencies. —

ABL – Asset-based loan. N.A. – Not applicable. MAC – Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Bond Covenant Summary — SUPERVALU Inc. Overview Issuer Document Date and Location

Description of Debt Maturity Date Original Issue/Outstanding Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP) Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback

Covenant Suspension

SUPERVALU Inc. Indenture dated 7/1/87 (Exhibit 4.1 to S-3 filed under Registration No. 33-52422) First Supplemental Indenture dated 8/1/90 (Exhibit 4.2 to S-3 filed under Registration No. 33-52422) Second Supplemental Indenture dated 10/1/92 (Exhibit 4.1 to 8-K filed 11/13/92) Third Supplemental Indenture dated 9/1/95 (Exhibit 4.1 to 8-K filed 10/2/95) Fourth Supplemental Indenture dated 8/4/99 (Exhibit 4.2 to 10-Q filed 9/11/99) Fifth Supplemental Indenture dated 9/17/99 (Exhibit 4.3 to 10-Q filed 9/11/99) Senior unsecured notes. $400 Mil. of 6.750% notes due 6/1/21. $350 Mil. of 7.750% notes due 11/1522. 6.750% notes: $400 Bil./$400 Mil. 7.750% notes: $350 Bil./$350 Mil. Senior unsecured. None. The notes are not guaranteed.

No. Liens on operating properties (BV greater than 0.65% of consolidated net tangible assets) limited to greater of $200 Mil. or 10% of consolidated net tangible assets. Subsidiaries may not guarantee other debt without fully and unconditionally guaranteeing the notes on a senior basis.

The notes can be put at 101 with change of control (40% voting interest). None. Sale leasebacks are permitted insofar they (a) comply with the limitation on liens restriction, or (b) the proceeds, within six months are applied to the purchase of operating assets or the repayment of debt under this indenture, or debt that is pari passu with debt under this indenture.

No.

No. Yes, exceeding $100 Mil. No. Prior to 6/1/16, the company may redeem up to 35% of the aggregate principal amount of the 6.75% notes due 2021 with the proceeds of certain equity offerings at a redemption price of 106.750%, provided that 65% of the notes remain outstanding after the redemption. Prior to 11/15/17, the company may redeem up to 35% of the aggregate principal amount of the 7.75% notes due 2022 with the proceeds of certain equity offerings at a redemption price of 107.750%, provided that 65% of the notes remain outstanding after the redemption. No.

BV – Book value. MAC – Materially adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Financial Summary — SUPERVALU Inc. 2/23/13

2/22/14

2/28/15

6/20/15

9/12/15

12/5/15

2/27/16

12 Months 2/27/16

4.6 3.8 1.7 2.4 3.7 3.8

5.5 4.7 3.0 1.8 (47.2) 10.7

5.4 4.5 2.9 2.1 0.9 17.9

5.4 4.6 3.1 2.3 1.2 19.8

5.2 4.2 2.7 2.7 3.0 19.9

5.5 4.5 3.0 3.3 (2.3) 18.5

5.8 4.7 3.1 3.0 2.0 18.1

5.5 4.5 3.0 2.7 0.9 18.1

5.1 4.3 2.7 3.0 1.2 17.7

5.0 3.9 2.3 3.2 2.7 17.1

5.0 3.6 2.0 (3.3) (2.4) 17.4

5.2 4.2 2.6 1.9 1.1 17.4

5.1 5.2 15.9

4.1 5.8 (2.1)

4.1 5.6 4.3

4.1 5.6 5.3

4.1 5.4 6.9

4.1 4.8 7.9

4.0 4.7 4.4

4.0 4.7 4.2

4.1 4.5 4.3

4.1 4.3 4.0

4.7 6.2 4.4

4.5 2.2

3.4 2.1

3.3 2.0

3.2 2.3

3.3 2.3

3.2 2.2

3.9 2.8

12.4

25.1

16.0

13.7

11.1

10.1

11.8

12.0

11.7

12.2

14.6

5.0 5.1 15.1

4.0 5.6 135.5

4.0 5.5 28.0

3.9 5.4 19.0

3.8 5.0 12.2

3.9 4.7 10.8

4.0 4.6 15.2

4.0 4.7 15.7

4.0 4.4 15.1

4.0 4.2 16.5

4.6 6.1 24.3

2.1 2.8 2.1 2.7 1.8

2.6 3.6 1.9 2.4 1.2

2.9 4.5 2.1 3.1 1.4

2.9 4.5 2.1 3.1 1.5

2.9 4.6 2.2 3.2 1.8

2.8 4.3 2.3 3.4 2.0

2.8 4.5 2.4 3.8 1.6

2.8 4.5 2.4 3.7 1.6

2.8 4.6 2.6 4.1 1.6

2.7 4.4 2.6 4.1 1.5

2.6 4.1 1.9 2.9 1.5

2,929 3,993 1,064 — (232) 7.5

2,793 3,865 1,072 — (227) 7.9

2,736 3,968 1,232 — (180) 6.5

2,720 4,008 1,288 — (184) 6.7

2,720 4,008 1,288 — (182) 6.6

2,720 4,008 1,288 — (194) 6.5

2,574 3,862 1,288 — (176) 6.6

2,530 3,820 1,290 — (168) 6.4

2,427 3,717 1,290 — (170) 6.6

2,594 3,884 1,290 — (162) 6.1

405 12 417 481 (228) (37) 633 — (386) — (255) (8)

299 (179) 120 (101) (111) — (92) — (123) 177 (28) (66)

373 (40) 333 75 (239) — 169 (55) (50) 7 (40) 31

125 (14) 111 1 (49) — 63 (1) (17) 2 (24) 23

110 55 165 0 (45) — 120 (5) (10) 7 (2) 110

135 (157) (22) 3 (75) — (94) (3) (8) 1 (3) (107)

117 56 173 (1) (92) — 80 7 (148) 0 (16) (77)

481 (60) 421 3 (261) — 163 (2) (183) 10 (45) (57)

158 (39) 119 (59) — 60 (2) (51) — (5) 2

123 28 151 3 (51) — 103 (3) (102) — 0 (2)

(98) (31) (129) 66 (8) — (71) (12) 154 3 (67) 7

300 14 314 68 (210) — 172 (10) (147) 3 (88) (70)

72 1,185

83 786

114 924

137 927

247 877

134 931

57 793

59 736

57 835

64 675

—

(44) 9.9 21.1 26.9 1.3

121 10.5 21.5 26.0 0.6

141 9.9 23.6 26.8 1.3

183 8.1 19.8 22.1 0.9

143 10.9 26.4 30.4 1.1

268 10.6 30.0 30.7 1.8

187 10.3 27.8 30.0 2.3

187 9.4 25.3 27.3 1.5

226 8.1 22.0 23.1 1.1

199 11.2 29.2 31.9 1.3

338 14.3 42.2 40.5 0.3

338 10.9 32.5 31.2 1.3

12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

Three Months

Three Months 6/18/16

9/10/16

12/3/16

LTM 12/3/16

EBITDA/R after dividends to associates and minorities. bLTM Identical Store Sales is a third-quarter figure. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — SUPERVALU Inc. (Continued) 2/23/13

2/22/14

2/28/15

6/20/15

9/12/15

12/5/15

2/27/16

12 Months 2/27/16

17,139 (1.1) 783

17,155 0.1 888

17,820 3.9 961

5,407 3.3 291

4,062 1.1 212

4,114 (2.1) 227

3,946 (9.6) 227

17,529 (1.6) 958

5,196 (3.9) 266

3,865 (4.9) 192

3,003 (27.0) 149

16,010 (10.8) 835

783 653

888 814

961 807

291 251

212 172

227 187

958 797

264 224

189 153

148 109

829 673

653 288

814 512

807 522

251 168

172 108

182 123

187 122

797 521

222 138

150 90

108 61

668 411

(2.4) 1,522 13.6 (2.0) 17.3 13.6 27.6 (13.3) 62.5

(1.5) 1,520 10.0 0.0 17.0 14.0 30.0 0.0 40.0

1.0 1,528 10.0 0.0 15.5 13.6 30.0 0.0 80.0

(0.3) 1,532 15.0 14.6 15.2 13.6 32.7 4.7 59.0

(3.3) 1,541 14.4 23.5 15.1 13.1 32.3 4.6 70.3

(2.6) 1,536 14.6 23.8 13.1 12.7 31.4 3.6 117.2

(3.9) 1,560 15.0 23.7 14.4 13.4 32.0 4.1 141.5

(2.5) 1,560 10.0 0.0 14.4 13.4 30.0 0.0 90.0

(4.5) 1,569 10.0 20.0 13.7 13.0 30.0 0.0 70.0

(5.9) 1,567 10.0 30.0 13.6 12.5 30.0 0.0 80.0

(5.7) 217 10.0 40.0 11.2 11.7 20.0 0.0 80.0

(5.3) 217 10.0 40.0 11.2 11.7 20.0 0.0 80.0

12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Identical Store Sales (%) No. of Stores Gross Margin (%) SG&A/Revenues (%) Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

Three Months

Three Months 6/18/16

9/10/16

12/3/16

LTM 12/3/16

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Leveraged Finance Retailing / U.S.A.

Tailored Brands, Inc. Credit Profile Credit Opinions

Credit Profile Summary

Tailored Brands, Inc. Long-Term Issuer Default Credit Opinion

b*/positive

The Men’s Wearhouse, Inc. Long-Term Issuer Default Credit Opinion

b*/positive

Senior Secured ABL Revolver bb*/rr1* Senior Secured Term Loan Credit Opinion bb*/rr1* Senior Unsecured Notes Credit Opinion ccc+*/rr6* ABL – Asset-based loan. Credit Opinions (COs) are provided primarily for the purposes of their inclusion in CLO transactions rated by Fitch. COs are not ratings. COs use a published rating scale, but either omit certain analytical characteristics of a rating, or match them to a lower standard than in a credit rating. The limitations compared to a rating could include: “point-in-time” coverage, limited information availability and review, an abbreviated review process in certain cases, and reduced robustness of outlooks and watch status. These limitations are consistent with the terms of their application within a pooled asset context, and are clearly signaled in the notation used to identify COs. For more information, please consult our list of published Credit Opinions.

Financial Data Tailored Brands, Inc. FYE LTM 1/30/16 10/29/16 ($ Mil.) Total Revenue 3,496.3 3,411.1 EBITDA 385.7 361.2 EBITDA Margin (%) 11.0 10.6 FCF (18.8) 51.5 Total Adjusted Debt 3,807.1 3,774.8 Total Adjusted Debt/EBITDAR (x) 5.8 6.0 EBITDAR/ (Interest + Rent) (x) 1.7 1.7 Men’s Wearhouse a Comparable Sales (%) 4.9 (0.1) Jos A Bank Comparable Sales (%) (16.4) (14.2) No. of Stores b 1,724 1,710 a

Comparable sales for the LTM reflect the performance for the nine months ended Sept. 30, 2016. bIncludes Tuxedo Shops at Macy’s.

Jos. A. Bank’s Difficult Transition: After acquiring Jos. A. Bank Clothiers, Inc. in 2014, Tailored Brands, Inc.’s management’s strategy to improve margins by reducing call-to-action promotions resulted in traffic declines and weak comparable store sales (comps). Comps were negative 16% in 2015 and negative 14% through the first nine months of 2016, although trends improved in recent quarters and comps could be nearly flat in 2017. The strategy was successful in raising gross margin through higher average prices, though traffic declines were more than expected. Sales Obscure Acquisition Synergies: Despite traffic declines, Tailored Brands realized $75 million in annualized cost synergies from the acquisition by the end of 2015. In response to weak sales, the company announced in early 2016 accelerated store closures and actions to reduce expenses by an additional $85 million by the end of 2017. Fitch Ratings expects 2016 EBITDA to trough around $370 million and improve toward the $400 million range thereafter, compared with pro forma EBITDA of approximately $415 million at the time of the acquisition. Reasonably Well-Positioned Brands: The company operates two of the only national men’sonly specialty apparel retailers, with a primarily off-mall footprint and merchandise with less fashion risk, such as replenishment-oriented suiting and officewear. These factors limit its exposure to sector challenges, which center on mall-based women’s fashion. Tailored Brands differentiates itself within its competitive set through national advertising, exclusive brands and investments in services businesses (tailoring, formalwear rental, etc.). Positive Cash and Comfortable Liquidity: Tailored Brands had $35 million of cash on hand and $427 million of credit facility availability as of Oct. 29, 2016. FCF after dividends was positive before the Jos. A. Bank acquisition, but was modestly negative the past two years on integration expenses. Fitch expects Tailored Brands to generate around $50 million in FCF in 2016 on working capital benefits, with FCF improving toward $100 million by 2019 on modest EBITDA improvement and the completion of cash charges. Leverage Expected to Trend to Mid-5.0x: Adjusted leverage rose to the high-5.0x range in 2015 and 2016 (projected) from 3.3x in 2014, post its acquisition with Jos. A. Bank. Leverage could decline to the mid-5.0x range over the next two to three years given projected EBITDA stabilization and debt paydown.

Credit Profile Drivers Positive Drivers: Positive credit profile drivers are centered on a turnaround at Jos. A. Bank yielding sustained top-line growth in the low single digits and EBITDA growth in the midsingle digits, driving adjusted leverage below the mid-5.0x range. Negative Drivers: Negative credit profile drivers include continued negative Jos. A. Bank trends beyond 2016, leading to EBITDA declining below the mid-$300 million range, which would yield persistently negative FCF.

Analysts David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Tailored Brands, Inc. 2015A 3,496 7.5

2016F 3,398 (2.8)

2017F 3,405 0.2

2018F 3,460 1.6

6.5

(0.6)

1.0

1.5

(15.7) 386 11.0 (64) 132

(14.4) 358 10.5 26 287

(5.0) 361 10.6 (7) 217

1.0 372 10.8 (5) 231

Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt

(115) 3.3 (35) (19) — 1,656

(115) 3.4 (35) 137 — 1,588

(115) 3.4 (35) 67 — 1,520

(115) 3.3 (35) 81 — 1,449

Total Adjusted Debta Adjusted Debt/EBITDAR (x)

3,807 5.8

3,740 6.0

3,348 5.7

3,332 5.5

($ Mil.) Revenue Revenue Growth (%) Men’s Wearhouse Revenue Growth (%) Jos. A. Bank Revenue Growth (%) EBITDA EBITDA Margin (%) Working Capital Change Cash Flow from Operations

Comments — — — Improvements seen in second-half 2016. — — — Negatively affected by integration charges in 2015 and positively affected by tax refund in 2016. — — — — FCF expected to be used for debt paydown. — —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. Source: Fitch Ratings.

Business Profile Following its June 2014 acquisition of Jos. A. Bank, Tailored Brands became the third-largest retailer in the U.S. men’s apparel space, trailing Macy’s Inc. and Kohl’s Corp., and with similar market share as J. C. Penney Company, Inc., per its internal estimates. The company operated 1,710 stores as of Oct. 30, 2016, primarily under the Men’s Wearhouse and Jos. A. Bank brands, and including 170 stores-within-stores at Macy’s providing formalwear rentals. The company is uniquely positioned as a retailer of men’s apparel, limiting exposure to fashion trends, which are significantly more volatile in women’s fashion. The company’s revenue mix in 2015 was 41% tailored clothing — including suits, sport coats and slacks — and 31% nontailored clothing. Formalwear rentals represented 13% of sales; sales to corporate accounts generated 7%; and alterations, women’s apparel and dry cleaning services made up the remaining 8%. Approximately half of the company’s assortment is replenishment product, with the remainder fashion merchandise. The company operates under several brands, including Men’s Wearhouse (including tuxedo rental and dry cleaning locations, 51% of 2015 revenue), Jos. A. Bank (25%), K&G (10%) and Moore’s The Suit People Inc. (6%). All stores are located in the U.S. except the Moore’s chain, which is in Canada. The company’s exposure to traditional enclosed malls is limited, with approximately one-third of units in lifestyle/power centers and less than 20% of units in malls. The company competes with a variety of men’s apparel businesses, including department stores, and other specialty stores including fast-fashion players, off-price retailers and onlineonly retailers. The company has established several points of competitive differentiation. Tailored Brands operates as a portfolio of men’s-only retailers, which is unique among its competitive set. It also offers a robust suite of services, including formalwear rentals and tailoring, and has developed key strategic partnerships with wedding-related brands to build its rental business. Much of the company’s merchandise is exclusive to Tailored Brands, with approximately 70% of Men’s Wearhouse and nearly 100% of Jos. A. Bank inventory unavailable to customers elsewhere. To High-Yield Retail Checkout January 31, 2017

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Leveraged Finance support this differentiating factor, Men’s Wearhouse purchased the Joseph Abboud brand in 2013 for $97.5 million in cash, to relaunch as an exclusive brand for Men’s Wearhouse and Jos. A. Bank. The company also has exclusive brand right offerings, including Pronto Uomo and Vera Wang for tuxedos. The Men’s Wearhouse brand has performed well in recent years despite dislocation in the midtier apparel sector. Industry challenges centered on lack of fashion excitement and diversion of discretionary spend to services and entertainment, which has slowed apparel replenishment cycles. Fast-fashion players used their efficient supply chains to quickly manufacture trendright product and take share from traditional mid-tier competitors. These challenges were exacerbated by mall traffic weakness, which negatively affected impulse purchases and helped online-only retailers gain traction. Men’s Wearhouse is able to avoid many of these challenges given its focus on male customers, replenishment-oriented and need-based products/services, and off-mall presence. Tailored Brands is less affected by online incursion than many of its peers. The company’s assortment of tailored clothing increases the importance of an in-person shopping experience to assess fit and post-purchase alteration needs. While a majority of purchases at the company are researched online before a store visit, Fitch expects Tailored Brands to be relatively insulated from market share loss to the online channel. While Men’s Wearhouse’s annual comps were positive starting in 2010, Jos. A. Bank reported several years of flat or negative comps prior to the acquisition, including negative 3.7% and negative 2.5% in 2013 and 2014, respectively. The opportunity to use Men’s Wearhouse’s competitive advantages to reverse Jos. A. Bank’s revenue slide was a key reason behind the 2014 acquisition. However, promotional changes enacted following the acquisition only exacerbated Jos. A. Bank’s revenue trend, with EBITDA decline mitigated somewhat by gross margin enhancement.

Jos. A. Bank Acquisition Tailored Brands (at the time Men’s Wearhouse, Inc.) purchased Jos. A. Bank in June 2014 after protracted negotiations for approximately $1.8 billion in cash, or 10.0x LTM EBITDA. At $1 billion of sales in 2013, Jos. A. Bank added over 40% to Men’s Wearhouse’s $2.5 billion revenue base. The strategy behind the acquisition was to combine two similar concepts, allowing operational synergies in merchandising and marketing to generate approximately $50 million in EBITDA through sales acceleration. The company targeted $100 million in annualized cost synergies, and plans to realize the full amount by the end of 2017. It realized $75 million in annualized synergies at the end of 2015, and expects to end 2016 at an $85 million run rate. Cost synergies were achieved in a number of functional areas across the company. Tailored Brands generated cost of goods sold savings through supplier consolidation, leveraging company size and sharing best practices. The company also reduced spend in duplicative departments, including finance, legal and HR, as well as centralized nonmerchandise purchasing. Centralizing tailoring operations and insourcing tuxedo rentals was an opportunity unique to this combination given the particular business models. Finally, the company found marketing synergies from leveraging company scale in advertising purchases and sharing best practices. Together with accelerated revenue growth, these synergies were targeted to drive 2017 sales of $3.7 billion and EBITDA over $630 million, versus 2013 pro forma sales and EBITDA of approximately $3.5 billion and $415 million, respectively.

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Leveraged Finance Management significantly reduced the number of events at Jos. A. Bank in 2015 where customers could purchase one item and receive two or three for free as part of a strategy to improve gross margins and wean customers off purchasing only during promotional periods. This reduction in promotional events negatively affected Jos. A. Bank’s sales significantly more than anticipated, with comps of negative 9%, negative 15%, negative 32%, negative 16%, negative 16%, and negative 10% for the six quarters ending third-quarter 2016, respectively. Men’s Wearhouse comps averaged 2% during this period, suggesting the weakness is brandspecific and not borne out of sector challenges. Fitch believes it is unlikely Jos. A. Bank’s sales were picked up by a competitor, but rather, the lack of call-to-action promotions may have delayed replenishment purchases, potentially creating pent-up demand for the brand’s products. As the brand cycles through more than a year of the reduced event strategy, comps could improve in 2017 to nearly flat or modestly positive. Tailored Brands enacted a series of expense-management initiatives in early 2016 in response to sales weakness. The company reviewed its organizational structure and believes it can eliminate $50 million of additional expenses through efficiencies. The company will also close approximately 250 stores in 2016, including 85–90 underperforming Jos. A. Bank stores, 100– 110 tuxedo rental locations and the company’s entire 58-unit outlet division. The Jos. A. Bank closures could have limited EBITDA impact given low profitability and opportunity to transfer sales to nearby locations. The tuxedo rental closures are commensurate with the company’s rollout of Macy’s store-within-stores, suggesting minimal impact. The outlet segment produced negative profitability, and the company determined it could liquidate merchandise elsewhere at better margins.

Store Formats Overview — Tailored Brands, Inc. Division Men’s Wearhouse Men’s Wearhouse and Tuxb

Jos. A. Bank

Moore’s

No. Avg. Store Storesa Size (Sq Ft) Description 713 5,624 Broad selection of exclusive and non-exclusive merchandise at regular and 231 754 sale prices, including suits and suit separates (43% of total assortment), dress shirts and pants (18%), shoes and accessories (18%), sportswear and sports coats (20%), and overcoats (1%). Located in neighborhood, power and lifestyle centers. 550 4,706 Exclusive brand name only; about one-third of the stores are located in lifestyle/power centers; another one-third in neighborhood centers, malls and on the street; the rest are positioned in strip and power centers. 126

K&G

Twin Hill (U.S.)/ Alexandra and Yaffy (U.K.)

—

6,262 Located in Canada, Moore’s offers the same broad selection of assortments and targets similar customers as Men’s Wearhouse. Stores are primarily located in regional strip and specialty retail shopping centers. 23,350 Operates in a superstore format with a broad offering across major categories. K&G carries apparel and accessories comparable in quality to traditional department stores, at up to a 70% discount to the department stores prices. — These labels offer corporate clothing uniforms and work-wear to workforces through managed corporate accounts, catalogs and the internet. Alexandra and Yaffy is 86% owned by Men’s Wearhouse.

Target Customer Male consumers of ages 25–55 who are style conscious and contemporary, with an annual household income of $75,000. Traditional and conservative men aged 35–59, with an annual household income of $100,000– $125,000. Target customer is similar to Men’s Wearhouse. K&G targets a more price-sensitive consumer than Men’s Wearhouse or Moore’s. Target customers are corporations and businesses with uniformed staff.

a As of Oct. 29, 2016. bMen’s Wearhouse signed a 10-year agreement with Macy’s in June 2015 to operate men’s tuxedo rental shops inside 300 Macy’s stores. The company operated 170 of these stores as of Oct. 29, 2016. Sq ft – Square feet. Source: Company filings, Fitch Ratings.

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Leveraged Finance 2017 Outlook Fitch expects Tailored Brands to report 2016 sales around $3.4 billion, a low single-digit decline compared with the $3.5 billion reported in 2015. The projected decline is due to approximately negative 10% comps at Jos. A. Bank and store closures. Men’s Wearhouse comps and sales are expected to be near-flat to 2015. EBITDA is forecast to decline around 5% to around $365 million, with margins moderating to the mid-10% range in 2016 from approximately 11.0% in 2015. The company is expected to benefit from incremental Jos. A. Bank synergies, and recently announced efficiency efforts mitigating margin deterioration. Fitch expects 2017 revenue to be nearly flat to 2016 as modestly positive comps at Men’s Wearhouse are mitigated by nearly flat to slightly negative comps at Jos. A. Bank and the impact of 2016 store closures. Revenue growth could be modestly positive beginning 2018, driven by comps growth at Men’s Wearhouse. EBITDA margins are expected to be nearly flat in 2017, as expense-management efforts and synergies mitigate fixed-cost inflation. As a result, 2017 EBITDA is expected to be near 2016 levels of around $365 million. Beginning in 2018, EBITDA margin could rise toward 11.0% on positive comps, yielding EBITDA trending toward $400 million. FCF, which was modestly negative the past two years on integration-related expenses, is expected to be approximately $70 million in 2016 — prior to a one-time tax refund of approximately $60 million — and to improve toward $100 million annually over the next two to three years on improved EBITDA and lower cash charges related to restructuring and store closures. Annual capex is assumed to remain near the projected $115 million for 2016 over the next two to three years. Management indicated an intention to pay down $75 million of its term loan in 2015, but elected not to make this payment due to operational challenges. However, through the first nine months of 2016, the company repaid $41 million of its term loan and retired $25 million of senior notes. The company indicated all FCF will be directed toward debt paydown over the next several years as the company targets 3.0x lease-adjusted leverage. This target equates to Fitch-defined leverage in the low-4.0x range given the company’s capitalization of leases at 5.0x compared to Fitch at 8.0x. Assuming the company uses FCF to reduce debt, Fitch-defined adjusted leverage could decline to the mid-5.0x range by 2018, compared with a 2016 yearend adjusted leverage of around 6.0x.

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Leveraged Finance Segment Data — Tailored Brands, Inc. 2007

2008

2009

2010

2011

2012

2013

2014

2015

LTM

Sales by Store ($ Mil.) c Men’s Wearhouse Moore’s K&G MW Cleaners Jos. A. Bank Total Retail Sales Twin Hill Dimensions and Alexandra (U.K.) Total Corporate Apparel Total Net Sales

1,413 250 408 22 604 2,696 20 — 20 2,113

1,322 230 376 23 696 2,647 21 — 21 1,972

1,282 222 370 22 770 2,666 13 — 13 1,910

1,346 247 360 23 858 2,834 21 105 126 2,103

1,472 268 375 25 980 3,119 25 218 244 2,383

1,581 274 366 28 1,049 3,298 30 210 239 2,488

1,606 254 336 30 1,032 3,258 38 209 247 2,473

1,687 258 334 32 1,028 3,339 41 217 257 3,253

1,791 223 338 33 867 3,252 39 205 244 3,496

1,786 216 333 32 761 3,128 — — 283 3,411

YoY Growth (%) b Men’s Wearhouse Moore’s K&G MW Cleaners Jos. A. Bank Total Retail Sales Twin Hill Dimensions and Alexandra (U.K.) Total Corporate Apparel Total Net Sales

17.0 9.2 (2.5) 13.4 10.6 11.4 188.4 — 1,884.4 12.3

(6.5) (7.8) (7.8) 5.1 15.2 (1.8) 6.3 — 6.3 (6.6)

(3.0) (3.6) (1.6) (2.6) 10.6 0.7 (37.3) — (37.3) (3.2)

5.0 11.1 (2.7) 6.2 11.4 6.3 59.3 — 837.4 10.1

9.3 8.5 4.1 5.4 14.2 10.0 18.3 108.3 93.0 13.3

7.4 2.3 (2.4) 12.6 7.0 5.7 16.2 (3.9) (1.8) 4.4

1.6 (7.2) (8.1) 6.5 (1.6) (1.2) 27.7 (0.4) 3.1 (0.6)

5.0 1.6 (0.6) 7.8 (0.4) 2.5 7.6 3.7 4.3 31.5

6.2 (13.6) 1.3 4.7 (15.6) (2.6) (5.5) (5.4) (5.1) 7.4

(0.3) (3.1) (1.5) (3.0) (12.2) (3.8) — — 16.0 (2.4)

Contribution of Sales by Store (%) Men’s Wearhouseb Moore’s K&G MW Cleaners Jos. A. Bank Total Retail Sales Twin Hill Dimensions and Alexandra (U.K.) Total Corporate Apparel Total Net Sales

66.9 11.8 19.3 1.0 0.0 99.0 1.0 0.0 1.0 100.0

67.0 11.7 19.1 1.1 0.0 98.9 1.1 0.0 1.1 100.0

67.1 11.6 19.4 1.2 0.0 99.3 0.7 0.0 0.7 100.0

64.0 11.7 17.1 1.1 0.0 94.0 1.0 5.0 6.0 100.0

61.8 11.2 15.7 1.0 0.0 89.8 1.1 9.2 10.2 100.0

63.5 11.0 14.7 1.1 0.0 90.4 1.2 8.4 9.6 100.0

64.9 10.3 13.6 1.2 0.0 90.0 1.5 8.5 10.0 100.0

51.9 7.9 10.3 1.0 21.0 92.1 1.2 6.7 7.9 100.0

51.2 6.4 9.7 0.9 24.8 93.0 1.1 5.8 7.0 100.0

52.4 6.3 9.8 0.9 22.3 91.7 — — 8.3 100.0

Comps (%) Men’s Wearhouse Moore’s K&G Jos. A. Bank

(0.4) (10.9) 1.5 3.8

(9.0) (11.7) (5.6) 8.9

(4.0) (0.9) (1.9) 6.3

4.7 2.2 (1.5) 7.0

9.3 4.5 3.6 7.6

4.8 1.5 (4.3) (0.5)

0.8 (4.1) (5.5) (5.8)

3.9 8.6 3.7 (2.5)

4.9 (1.7) 5.0 (16.4)

(0.1) (1.8) (1.5) (14.2)

40.1 34.1 3.2 — 77.4 15.4

39.5 32.9 3.3 — 75.8 16.7

39.9 31.3 3.9 — 75.1 17.5

37.6 29.1 3.7 — 70.4 17.3

37.1 27.6 3.3 — 68.0 15.8

37.0 27.8 3.3 — 68.0 16.3

36.6 27.8 3.0 0.1 67.4 16.7

38.6 31.5 2.3 0.3 72.7 13.6

41.1 30.8 2.1 0.3 74.4 12.7

39.7 30.5 2.2 0.3 72.5 13.3

5.2 1.0 6.2 1.0 100.0

5.3 1.1 6.4 1.1 100.0

5.6 1.2 6.7 0.7 100.0

5.1 1.1 6.3 6.0 100.0

5.0 1.0 6.0 10.2 100.0

5.0 1.1 6.1 9.6 100.0

4.7 1.2 5.9 10.0 100.0

4.8 1.0 5.7 7.9 100.0

5.0 1.0 6.0 7.0 100.0

4.9 1.0 5.8 8.3 100.0

Segment Sales Mix (%) Retail Men’s Tailored Clothing Product Men’s Nontailored Clothing Product Ladies Clothing Product Other Total Retail Tuxedo Rental Services Alteration and Other Alteration Services Retail Dry Cleaning Services Total Alteration and Other Corporate Apparel Clothing Product Total Net Sales

Includes Jos. A. Bank beginning mid-second quarter. bLTM comps are nine-month figures as of Oct. 29, 2016. Corporate apparel segments are consolidated on quarterly reporting basis. cIncludes Men’s Wearhouse, Men’s Wearhouse and Tux Stores, and JA Holding. YoY – Year-over-year. Comps – Comparable store sales. N.A. – Not available. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Segment Data (Continued) 2007

2008

2009

2010

2011

2012

2013

2014

2015

Geographic Sales U.S. Canada U.K. (Corp. Apparel — Alexandra & Yaffy) Total

— — — —

1,742 230 — 1,972

1,688 222 — 1,910

1,751 247 105 2,103

1,897 268 218 2,383

2,004 274 210 2,488

2,010 254 209 2,473

2,777 258 217 3,253

3,069 223 205 3,497

N.A. N.A. N.A. N.A.

Geographic Sales Growth YoY (%) U.S. Canada U.K. (Corp. Apparel — Alexandra & Yaffy) Total

— — — —

(3.1) (3.6) — (3.2)

3.8 11.1 — 10.1

8.3 8.5 108.0 13.3

5.7 2.3 (3.8) 4.4

0.3 (7.2) (0.4) (0.6)

38.2 1.6 3.7 31.5

10.5 (13.6) (5.5) 7.5

N.A. N.A. N.A. N.A.

Geographic Sales Contribution (%) U.S. Canada U.K. (Corp. Apparel — Alexandra & Yaffy) Total

— — — —

88.3 11.7 0.0 100.0

88.4 11.6 0.0 100.0

83.3 11.7 5.0 100.0

79.6 11.2 9.2 100.0

80.6 11.0 8.4 100.0

81.3 10.3 8.5 100.0

85.4 7.9 6.7 100.0

87.7 6.4 5.9 100.0

N.A. N.A. N.A. N.A.

LTM

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Leveraged Finance Liquidity and Debt Structure Tailored Brands had $35 million of cash on hand as of Oct. 29, 2016, and $427 million available under its revolving credit facility. The company entered into a term loan agreement in June 2014, which provided for a $1.1 billion senior secured term loan and a $500 million assetbacked revolving credit agreement that may increase to $650 million. The term loan matures in 2021 and the revolver matures in 2019. The company also issued $600 million of 7.00% senior unsecured notes due 2022, $25 million of which was retired in third-quarter 2016. The ABL facility and term loan are secured on a senior basis by a first-priority lien on substantially all the assets of the company, certain of its U.S. subsidiaries, and in the case of the ABL facility, Moore’s (the Canadian operations). Moore’s is a co-borrower on the ABL facility, and the ABL facility has priority payment over the term loan. The ABL requires the fixed-charge coverage ratio to be at least 1.0x, which the company was in compliance with as of Jan. 31, 2015. The term loan contains a restrictive covenant restricting the company from incurring additional indebtedness if the total leverage ratio (total debt/EBITDA) exceeds 3.75x, and the amount issued cannot exceed $50 million.

Capital Structure ($ Mil., At Oct. 29, 2016) Description

Amount

(%)

Secured Debt $500 Mil. ABL Revolver due 6/18/19 $1.1 Bil. Term Loan due 6/18/21 Total Secured Debt

0.0 1,049.0 1,049.0

0.0 64.6 64.6

Unsecured Debt 7.00% Senior Unsecured Notes due 6/18/22 Total Unsecured Debt Total Debt

575.0 575.0 1,624.0

35.4 35.4 100.0

ABL – Asset-based loan. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter

($ Mil., At Oct. 29, 2016) 10.9 10.9 10.9 10.9 10.9 1,569.5

Cash Revolver Availability Total

34.9 427.2 462.1

Note: Revolver availability is net of borrowings and letters of credit outstanding. Source: Company filings, Fitch Ratings.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis Fitch estimates the recovery prospects to Tailored Brands creditors based on a distressed enterprise value of $1.6 billion. Enterprise value is based on a going concern EBITDA value of approximately $290 million, which assumes a 20% decline in revenue from the LTM level and a sustainable 10%–11% EBITDA margin. Deducting 10% for administrative claims leaves $1.4 billion of value to its creditors. Fitch consequently expects the lenders in the credit facility and the term loan to have outstanding recovery prospects (91%–100%), while the unsecured creditors, comprising senior unsecured noteholders and operating lease claims, would have below average recovery prospects (0%–10%).

Recovery Analysis — Tailored Brands, Inc. ($ Mil., Except Where Noted; Credit Opinion: b*) Distressed Enterprise Value (EV) as a Going Concern (GC)

Liquidation Value (LV)

GC EBITDA GC EV Multiple (x) EV on GC Basis

290 5.5 1,595

Cash A/R Inventory Net PPE Total LV

Book Value

Advance Rate (%)

Avail. to Creditors

34.9 71.9 1,047.9 501.4 1,656.1

0 80 70 20 —

— 57.5 733.5 100.3 891.3

Value Available for Claims Distribution Greater of GC or LV Less: Administrative Claims (10%) Adjusted EV Available for Claims

1,595.0 159.5 1,435.5

Distribution of Value Secured Priority Sr. Secured Facility Sr. Secured Term Loan

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

350.0 1,049.0

100 100

rr1* rr1*

+3 +3

bb* bb*

Concession Payment Availability Table Adjusted EV Available for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority Sr. Unsecureda

1,435.5 1,399.0 36.5

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Credit Opinion

664.0

36.5

rr6*

–2

ccc+*

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Leveraged Finance Appendix A Organizational Structure — Tailored Brands, Inc. ($ Mil., As of Oct. 29, 2016) Tailored Brands, Inc. (Guarantor) (CO — b*/positive) The Men’s Wearhouse, Inc. (CO — b*/positive) Debt Issue $500 Million ABL Credit Facility due June 2019 $1.1 Billion Senior Secured Term Loan due June 2021 7.000% Senior Unsecured Notes due June 2022 Total

Amount — 1,049 575 1,624

CO bb*/rr1* bb*/rr1* ccc+*/rr6* —

100% Domestic Subsidiaries

Foreign Subsidiaries 100%

K&G Men’s Company Inc.

Twin Hill Acquisitions

JAVA CORP.

JA Holding Inc.

Jos A. Bank

JA Apparel Corp.

Moores Retail Group Inc.

100% Moores The Suit People Inc. (Guarantor and Co-Borrower of Credit Facility) 86% • •

MWUK Holding Company Limited Incorporated in the U.K. Operates under brand names: Dimensions, Alexandra and Yiffy

CO – Credit Opinion. ABL – Asset-based loan. Note: Please refer to the first page of the issuer report for disclaimers regarding Credit Opinions. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — The Men’s Wearhouse, Inc. Overview Borrower Document Date and Location Description of Debt Maturity Date Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Men’s Wearhouse, Inc. (Parent), and Moore’s The Suit People Inc. (Canadian Borrower) Credit agreement dated 6/18/14 (exhibit 10.1 to 8-K filed 6/20/14) Senior secured credit facility. 6/18/19 $500 Mil. in total commitment for the revolver (sublimit of $100 Mil. for the Canadian commitment). For LOC, the U.S. obligations are limited to $120 Mil. and the Canadian obligations are limited to $30 Mil. Senior secured. Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of foreign subsidiaries). Men’s Wearhouse Inc. and direct and indirect wholly owned domestic subsidiaries.

Leverage Ratio Debt: Allowed if total leverage ratio is less than 4.0x. Restricted U.S. subsidiaries that are not borrowers are limited to incur no more than 50 Mil. in debt. Notable Permitted Debt: 1) Debt incurred to acquire, construct or improve capital assets allowed up to $50 Mil. in total; 2) total term loan allowed up to 1.5 Bil.; 3) indebtedness of foreign subsidiaries not to exceed $25 Mil.; 4) additional all-purpose debt up to $50 Mil. Generally not allowed other than existing liens and additional secured debt up to $50 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Event of Default. Defined as transactions that result in change of ownership with respect to 50% of voting power. No restriction if either (a) availability is greater than the greater of 50 Mil. and 15% of line cap and fixed-charge coverage ratio is more than 1.0x; or (b) availability is greater than the greater of 65 Mil. and 20% of line cap. Other than routine sales of inventory and other dispositions in the ordinary course of business, asset sales are limited to 10% of total assets each fiscal year, and the total asset sales allowed throughout the life the agreement are limited to 25% of total assets.

RP Basket: None. Notable Permitted Restricted Payments: 1) Parent can pay $10 Mil. in cash dividend. Special Condition: No restriction if (a) availability is greater than the greater of 65 Mil. and 17.5% of line cap and fixed-charge coverage ratio is more than 1.1x; or (b) availability is greater than the greater of 85 Mil. and 25% of line cap.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension

Yes, exceeding $50 Mil. N.A. None. None. None.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

— Fixed-charge coverage ratio is no less than 1.0x if availability is less than the greater of 10% of the line cap and $40 Mil.  

Pricing Coupon Type/Index

Quarterly Average Availability ≥ 66.67% ≥ 33.33% but < 66.67% < 33.33%

Applicable Rate LIBOR + 150 bps or BR + 50 bps LIBOR + 175 bps or BR + 75 bps LIBOR + 200 bps or BR + 100 bps

MAC − Material adverse change. N.A. − Not applicable. BR – Base rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Term Loan Covenant Summary — The Men’s Wearhouse, Inc. Overview Borrower Men’s Wearhouse, Inc. (Parent), and Moore’s The Suit People Inc. (Canadian Borrower) Document Date and Location Term loan agreement dated 6/18/14 (exhibit 10.2 to 8-K filed 6/20/14) Incremental supplement to term loan agreement dated 4/7/15 (exhibit 10.1 to 8-K filed 4/8/15) Description of Debt Term loan. Maturity Date 6/18/21 Amount $700 Mil. for the Term Loan Tranche B-1 and $400 Mil. for the fixed-rate term loans. Ranking Senior secured. Security Secured by first-priority perfected liens on all material owned assets of subsidiaries and all capital stock (65% of voting capital stock of foreign subsidiaries). Guarantee Men’s Wearhouse Inc. and direct and indirect wholly owned domestic subsidiaries. Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees

Leverage Ratio Debt: Allowed if total leverage ratio is less than 3.75x. Restricted U.S. subsidiaries that are not borrowers are limited to incur no more than $50 Mil. in debt. Notable Permitted Debt: 1) Debt incurred to acquire, construct or improve capital assets allowed up to $50 Mil. in total; 2) total term loan allowed up to 1.5 Bil.; 3) indebtedness of foreign subsidiaries not to exceed $25 Mil.; 4) indebtedness under the ABL credit agreement not to exceed $650 Mil.; 5) additional all-purpose debt up to $50 Mil. Generally not allowed other than existing liens and additional secured debt up to $50 Mil. Guarantees are included under the definition of both indebtedness and investments and hence are governed by both related covenants.

Acquisitions/Divestitures Event of Default: Defined as transactions that result in change of ownership with respect to 50% of voting power. Change of Control (CoC) M&A, Investments Restriction Permitted as long as the total leverage ratio does not exceed 3.75x and total amount in consideration does not exceed $50 Mil. Sale of Assets Restriction Other than routine sales of inventory and other dispositions in the ordinary course of business, asset sales are limited to 10% of total assets each fiscal year. Restricted Payments Restricted Payments (RP)

RP Basket: None. Notable Permitted Restricted Payments: 1) Parent can pay $10 Mil. in cash dividend. If the senior secured leverage ratio is less than 2.0x, payment for dividends increases to $15 Mil.; 2) RP not to exceed $5 Mil. in any fiscal year pursuant to and in accordance with stock option plans or other benefit plans for management or employees; 3) general payments not to exceed $50 Mil.

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Covenant Suspension

Yes, exceeding $50 Mil. N.A. None. None. None.

Financial Covenants Leverage (Maximum) Coverage (Minimum) Current Ratio (Minimum) Net Worth (Minimum)

   

Pricing Coupon Type/Index

1) Fixed-rate term loans of $400 Mil. at a fixed rate of 5.0%. 2) Term Loan B-1 of $700 Mil. at (i) 3.50% in the case eurodollar Tranche B Term Loans and (ii) 2.50% in the case of ABR Tranche B Term Loans; subject to a LIBOR floor of 1.0%.

ABL – Asset-based loan. MAC − Material adverse change. N.A. − Not applicable. ABR – Alternate Base Rate. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Senior Unsecured Notes Covenant Summary — The Men’s Wearhouse, Inc. Overview Issuer Document Date and Location Maturity Date Description of Debt Amount Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback Covenant Suspension

Men’s Wearhouse, Inc. Indenture dated 6/18/14 (exhibit 4.1 to 8-K filed 6/20/14) 6/18/22 7.000% senior notes. $600 Mil. Senior unsecured. None. Each of the issuer’s direct or indirect wholly owned restricted domestic subsidiaries.

Coverage Ratio Debt: Fixed-charge coverage ratio ≥ 2.0x. Nonguarantor restricted subsidiaries are only allowed $75 Mil. Notable Permitted Debt Incurrence: 1) Borrowings under the credit facility not to exceed $1.35 Bil.; 2) acquisition debt of new restricted subsidiaries if fixed-charge coverage ratio is larger than 2.0x and does not increase; 3) capital lease obligations up to $85 Mil.; 4) foreign subsidiaries debt up to $45 Mil.; 5) additional all-purpose debt up to $85 Mil. Other than liens on the credit facility and other customary liens incurred during the ordinary course of business, additional liens are allowed if the consolidated secured leverage ratio is less than 2.0x. Governed by debt incurrence.

Put Option at 101: 50% or more of voting power changes ownership, sale of substantially all assets and liquidation of the company. Governed by restricted payments. Proceeds can be used to repay secured debt, reinvest and prepay other debt (as long as it is not subordinated). After 360 days, the remaining proceeds must be used to repay the notes.

RP Basket: Equals i) 50% of consolidated net income commencing 6/18/14, plus ii) 100% of net proceeds from equity and debt issuances, plus iii) other customary items. Subject to fixed-charge coverage ratio > 2.0x. Notable Permitted Restricted Payments: 1) Pay dividend on company’s stock up to $15 Mil. per year; 2) additional all-purpose payments up to $75 Mil.

No. Yes, exceeding $50 Mil. Redeemable, at the company’s option, in whole or in part, on and after July 1, 2017, at the applicable redemption price below. 2017: 105.250% 2018: 103.500% 2019: 101.750% 2020: 100.000% None. Covenants related to debt incurrence, restricted payments, asset sales and limitation on guarantees of debt by restricted subsidiaries will be suspended if the notes have investment-grade ratings by two rating agencies and there is no event of default. If any of these conditions fails to be met and/or in conjunction with a change of control event leading to ratings to be withdrawn or downgraded at a subsequent date, the covenants shall be reinstated on that later date.

Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Financial Summary — Tailored Brands, Inc. 12 Months ($ Mil.) Profitability (%) Operating EBITDAR Margin Operating EBITDA Margin Operating EBIT Margin FFO Margin FCF Margin Return on Capital Employed Gross Leverage (x) a Total Adjusted Debt/Operating EBITDAR FFO-Adjusted Leverage FCF/Total Adjusted Debt (%) Total Debt with Equity Credit/ Operating EBITDAa Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex) Net Leverage (x) Total Adjusted Net Debt/ Operating EBITDARa FFO-Adjusted Net Leverage Total Net Debt/(CFFO – Capex) Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a Operating EBITDA/Interest Paida FFO Fixed-Charge Coverage FFO Interest Coverage CFFO/Capex Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%) Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents Liquidity Readily Available Cash and Equivalents Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital Net Working Capital (Fitch Defined) Trade Accounts Receivable (Days) Inventory Turnover (Days) Trade Accounts Payable (Days) Capital Intensity (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

18.7 11.8 8.6 10.1 1.9 18.8

18.9 12.1 8.7 8.3 2.7 18.5

18.2 11.1 7.5 7.2 1.8 15.3

19.1 11.9 8.4 3.8 (1.1) 12.8

19.4 11.8 8.2 6.0 1.1 10.4

22.8 15.5 11.9 8.8 1.2 9.1

19.1 11.3 7.5 7.5 (2.4) 9.1

13.0 4.9 0.7 (0.4) (2.2) 10.6

18.7 11.0 7.2 5.6 (0.5) 10.6

18.0 9.9 6.2 11.2 0.9 9.7

22.0 14.6 11.3 6.7 2.1 9.5

20.5 12.5 9.3 8.7 5.1 10.2

18.5 10.6 7.0 6.6 1.5 10.2

3.0 3.3 3.5

2.9 3.6 5.0

3.3 4.2 3.0

5.7 8.8 (1.0)

6.5 8.8 (1.7)

5.8 7.5 0.7

5.7 7.2 0.1

5.8 6.8 (0.5)

6.1 6.5 (0.6)

6.1 6.5 (0.3)

6.0 6.4 1.4

— —

0.4 —

4.4 2.8

4.9 3.1

4.1 2.6

4.3 2.7

4.6 3.0

4.7 3.0

4.5 2.9

5.6

5.0

5.9

15.3

18.0

12.2

12.8

13.4

13.6

13.0

10.6

2.7 2.9 —

2.6 3.2 —

3.2 4.0 0.5

5.6 8.7 (981.3)

6.4 8.6 (53.6)

5.7 7.4 25.4

5.6 7.1 42.7

5.8 6.7 100.4

6.0 6.5 120.4

6.1 6.5 72.7

5.9 6.3 18.3

2.7 268.4 2.4 230.4 1.8

2.8 260.4 2.2 179.9 1.9

2.5 117.5 2.0 77.5 1.7

2.2 8.6 1.4 3.8 1.0

1.9 5.0 1.4 2.8 0.7

2.0 4.9 1.5 3.1 1.6

1.9 4.1 1.5 2.7 1.3

1.8 4.0 1.5 3.0 1.1

1.8 4.3 1.7 3.8 1.1

1.7 3.6 1.6 3.2 1.2

1.7 3.7 1.6 3.3 1.8

— 1,321 1,321 — (1) —

— 1,355 1,355 — (1) —

98 1,505 1,407 — (2) —

1,687 3,568 1,881 — (45) 5.0

1,687 3,838 2,151 — (70) 7.8

1,687 3,838 2,151 — (84) 5.0

1,656 3,807 2,151 — (98) 5.9

1,656 3,807 2,151 — (97) 5.8

1,687 3,839 2,151 — (85) 5.0

1,644 3,795 2,151 — (98) 5.9

1,624 3,775 2,151 — (98) 5.9

241 (78) 163 — (92) (25) 46 — — (56)

207 19 226 — (121) (37) 67 — — (33)

179 10 189 — (108) (36) 45 (95) 98 (141)

124 (29) 95 — (96) (35) (36) (1,491) 1,589 8

53 (4) 49 — (30) (9) 10 — (5) 1

81 (35) 46 — (26) (9) 11 — 0 1

65 (47) 17 — (30) (9) (21) 3 (2) 0

(3) 23 19 — (29) (9) (18) 0 (2) 1

195 (64) 132 — (115) (35) (19) 3 (8) 3

93 (47) 46 — (30) (9) 7 1 (2) 0

61 (7) 54 — (26) (9) 20 0 (44) 0

74 3 77 — (25) (9) 43 0 (20) 1

224 (28) 196 — (110) (35) 52 1 (67) 2

(1) (11)

(4) 31

(3) (97)

(66) 3

(6) (0)

(0) 12

(0) (20)

(4) (24)

(11) (32)

0 6

(1) (25)

0 24

(5) (19)

125 173

156 178

59 281

62 433

62 441

73 424

54 437

30 421

36 479

11 470

35 427

—

351 8.7 156.7 33.8 3.9

331 9.2 147.2 32.8 4.9

338 9.3 158.1 39.2 4.4

533 8.2 185.0 41.4 3.0

547 8.5 176.7 41.7 3.4

582 6.9 172.2 31.8 2.9

629 7.0 193.7 42.7 3.4

594 7.0 183.3 42.5 3.5

594 6.7 186.9 43.3 3.3

646 9.0 203.2 38.4 3.7

641 8.3 184.2 30.6 2.8

784 7.6 200.4 38.3 2.9

784 7.7 196.2 37.5 3.2

a EBITDA/R after dividends to associates and minorities. bFigure for the LTM reflects the performance for the nine months ended Sept. 30, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Tailored Brands, Inc. (Continued) 12 Months ($ Mil.) Income Statement Revenue Revenue Growth (%) Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities Operating EBIT Sector-Specific Data b Comparable Sales Growth (%) No. of Stores Gross Margin SG&A/Revenues Inventory Turnover Accounts Payable Turnover Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%)

12 Three Months Months LTM 8/1/15 10/31/15 1/30/16 1/30/16 4/30/16 7/30/16 10/29/16 10/29/16

Three Months

1/28/12

2/2/13

2/1/14 1/31/15

5/2/15

2,383 13.3 446

2,488 4.4 470

2,473 (0.6) 451

3,253 31.5 621

885 40.4 172

920 14.6 210

865 (2.8) 165

826 (11.1) 108

3,496 7.5 655

829 (6.4) 149

910 (1.1) 200

847 (2.1) 173

3,411 (5.2) 630

446 281

470 301

451 275

621 386

172 104

210 143

165 98

108 40

655 386

149 82

200 133

173 106

630 361

281 205

301 216

275 186

386 274

104 72

143 110

98 65

40 6

386 253

82 52

133 103

106 79

361 239

9.3 1,166 44.0 (20.5) 2.3 10.8 36.3 8.6 120.9

4.8 1,143 44.5 (20.2) 2.5 11.1 35.1 8.8 142.9

0.8 1,124 44.0 (20.0) 2.3 9.3 32.7 5.4 121.9

3.9 1,758 43.1 (17.3) 2.0 8.8 19.1 0.0 85.6

6.8 1,758 43.2 28.2 2.0 8.6 17.5 (0.2) 95.2

3.1 1,754 45.6 26.3 2.2 11.7 19.9 0.8 79.2

5.3 1,748 43.1 27.8 1.9 8.8 20.3 (0.1) 90.0

4.3 1,724 39.2 24.7 2.0 8.4 33.6 (45.7) 85.1

4.9 1,724 42.9 (20.7) 2.0 8.4 33.6 (45.7) 87.3

(3.5) 1,698 42.5 26.6 1.8 9.7 31.4 (45.5) 100.1

2.9 1,617 45.0 22.4 1.9 11.6 31.8 (48.4) 85.4

0.1 1,710 44.4 24.1 1.9 9.7 32.9 (46.1) 89.4

(0.1) 1,710 44.4 24.1 1.9 9.7 32.9 (46.1) 89.4

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Leveraged Finance Retailing / U.S.A.

Toys ‘R’ Us, Inc. Full Rating Report Key Rating Drivers

Ratings Toys ‘R’ Us, Inc. IDR Senior Unsecured Notes

CCC CC/RR6

Toys ‘R’ Us - Delaware IDR Sr. Secured Bank Facility Sr. Secured Term B-4 Loan Sr. Secured Term B-2/B-3 Loan Sr. Unsecured Notes

CCC B/RR1 CCC+/RR3 CCC/RR4 CC/RR6

Toys ‘R’ Us Property Co. I, LLC IDR Sr. Unsecured Term Loan

CCC B/RR1

Toys ‘R’ Us Property Co. II, LLC IDR

CCC

TRU Taj LLC IDR Senior Secured Notes

CCC CCC/RR4

Long-Term Headwinds: Long term, we believe Toys faces both competitive and secular headwinds, and the company will continue to be a share donor. Toys has faced a multidecade onslaught of competition from discounters such as Wal-Mart Stores, Inc., and more recently, online-only players such as Amazon.com, Inc., leading to market share losses. Refinancing Largely Complete: Toys issued $583 million of senior secured notes due August 2021 at a new entity, TRU Taj LLC, an indirectly owned subsidiary of Toys, which, along with cash, were used to repay HoldCo’s $450 million senior unsecured notes due 2017 and $192 million of its $400 million senior unsecured notes due 2018. Post this transaction, $208.3 million of 2018 notes remain outstanding, which we expect to be addressed through future exchanges or paid down with cash. Toys also refinanced its Toys ‘R’ Us Property Co. II, LLC (PropCo II) $725 million senior secured notes due in 2017 with CMBS and mezzanine debt, as well as cash.

IDR – Issuer Default Rating.

Rating Outlook —

Financial Data Toys ‘R’ Us, Inc. ($ Mil.) Total Revenue EBITDA EBITDA Margin (%) FCF Total Adjusted Debt Total Adjusted Debt/EBITDAR (x) EBITDAR/(Interest + Rent) (x) Domestic/ International SameStore Sales (%)a Real Estate Owned (%) No. of Storesb

Mid-$600 Million EBITDA Expected in 2017: EBITDA (Fitch Ratings calculated) improved to $753 million in 2015 from $597 million in 2014 given modestly positive same- store sales of 0.9% and cost reduction. However, Fitch expects EBITDA to be around $700 million in 2016 and $650 million in 2017 given annual consolidated same-store sales declines of 1.5%–2.0% and some gross margin pressure. Fitch believes Toys ‘R’ Us, Inc. (Toys or HoldCo) needs to invest further to improve its price perception and build out its omnichannel infrastructure.

Adequate Liquidity: Toys held $420 million of cash — $189 million held at the Toys ‘R’ Us Delaware, Inc. (Toys-Delaware) level — and $841 million of availability under its various revolvers as of Oct. 29, 2016, including $610 million available under its domestic $1.85 billion facility. Availability under the domestic revolver should be approximately the same in 2017 based on Fitch’s expectation of modest but positive FCF (assuming no negative swings in working capital) offset by a midsingle-digit decline in EBITDA.

FYE 1/30/16 11,802.0 753.0 6.4 19.0 9,273.0

LTM 10/29/16 11,732.0 758.0 6.5 (91.0) 10,129.0

7.0

7.7

Rating Sensitivities

1.4

1.3

(0.6)/3.2

(0.6)/0.3

Positive Rating Action: A positive rating action could result from sustainable improvement in Toys’ same-store sales trends — which would indicate stable and/or improved market share, while continuing to generate EBITDA at a level where the company is generating FCF.

36 1,874

36 1,910

Same-store sales for the LTM reflects the performance for the nine months ended Oct. 29, 2016. bNumber of stores includes Toys’ international licensed stores.

Negative Rating Action: A negative rating action could result if same-store sales in the U.S. and international businesses revert to midsingle-digit declines and/or gross margins decline meaningfully without any offset from cost reductions. This would indicate more severe market share losses and lead to tighter liquidity than Fitch’s current expectation over the next 24 months. The inability to refinance ongoing debt maturities starting 2018 would also be a rating concern.

Analysts Monica Aggarwal, CFA +1 212 908-0282 monica.aggarwal@fitchratings.com David Silverman, CFA +1 212 908-0840 david.silverman@fitchratings.com

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Leveraged Finance Fitch Base Case Assumptions — Toys ‘R’ Us, Inc. ($ Mil.) Revenue Revenue Growth (%) Same-Store Sales — Domestic (%) Same-Store Sales — International (%) EBITDA EBITDA Margin (%) Working Capital Change

Cash Flow From Operations Capex Capex/Revenue (%) Dividends FCF Share Repurchases Total Debt Total Adjusted Debta Total Adjusted Debt/EBITDAR (x)

2015A 11,802 (4.5) (0.6) 3.2 753 6.4 (68)

2016F 11,537 (2.2) (1.4) (1.8) 704 6.1 (1)

2017F 11,342 (1.7) (1.5) (2.0) 661 5.8 (1)

2018F 11,172 (1.5) (1.5) (1.5) 640 5.7 (1)

238 (219) 1.9 — 19 — 4,769 9,273 7.0

238 (200) 1.7 — 38 — 4,540 9,100 7.1

209 (200) 1.8 — 9 — 4,516 9,076 7.4

184 (200) 1.8 — (15) — 4,358 8,926 7.4

Comments —

— — Timing on payables/accruals led to meaningful positive FCF in 2014. Given volatility, changes assumed to be neutral. — — — — — — — . —

Total Adjusted Debt includes rent expense capitalized at 8.0x. A – Actual. F – Forecast. SG&A – Selling, general and administrative. Source: Fitch Ratings.

Business Profile Assessment Fitch views Toys’ recent refinancing activity, which largely addressed 2017 and 2018 debt maturities, as a credit positive. Long term, we believe Toys faces both competitive and secular headwinds, and the company will continue to be a share donor. Toys has faced an onslaught of competition for many years from discounters like Wal-Mart, and more recently, online-only players such as Amazon, leading to market share losses. Fitch views Toys as disadvantaged for the following reasons: The toy industry is extremely seasonal, with discounters using toys to drive traffic — at low margin or even as loss leaders — into their stores during the holiday period. This challenge is made more acute because Toys essentially drives 75% of its EBITDA and virtually all its cash flow in the fourth quarter and is limited in its ability to drive sales productivity to cover fixed costs during nonholiday periods. • The industry is hit-driven, with a small number of SKUs or popular toys driving a high percentage of sales, particularly during the holiday season. Toys consequently generates only a marginal benefit from having the breadth of product it offers relative to other categories, such as auto parts, crafts and vitamins. • Sales assistance has not emerged as a competitive advantage for Toys, given relatively easy purchase decisions and online information availability. • As toys are typically a gift purchase, an inviting in-store experience — compared with a discount or online shopping experience — has not benefited Toys. Moreover, the company’s limited FCF generation would preclude significant store-level investment even if an improved experience could drive positive same-store sales.

•

Fitch believes Toys needs to invest further to improve its price perception and build out its omnichannel infrastructure. Its current online penetration, at approximately 14.5% and 11.3% of domestic and total revenue in 2015, respectively, lags the overall industry, especially in its core categories. Fitch estimates online penetration is in the low- to mid-20% range domestically in Baby and Core Toys. High-Yield Retail Checkout January 31, 2017

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Leveraged Finance The traditional toy industry has also been negatively affected by low birth rates in developed markets (more than 80% of sales are in the U.S., Europe and Japan) and the increased penetration of screen-based play. Purchases of board games and dolls have evolved into purchases of software and apps, which can occur online and not in a physical store. Fitch expects play habits to continue this evolution, with traditional toy category growth challenged. Fitch consequently expects EBITDA to be around $700 million in 2016 and $650 million in 2017, given consolidated same-store sales decline of 1.5%–2.0% annually and some gross margin pressure. At these levels, Toys will not be able to grow out of its capital structure and will largely remain dependent on favorable credit markets to refinance debt on an ongoing basis.

Secular/Competitive Pressures Dampen Revenue Growth Toys is the only large national brick-and-mortar specialty toy retailer left in the U.S. following a significant sector restructuring in the early- to mid-2000s. It faces increasing competition from online retailers and discounters, as consumers seek value and convenience versus broad product selection and customer service. Toys’ sales hovered around $13.5 billion–$14.0 billion and EBITDA held up at around $1.0 billion for six years through 2012. However, sales and EBITDA took a material step down in 2013 as pricing competition and promotional pressures intensified in a sluggish economic and consumer environment. Toys’ response was historically lackluster, with weak execution both on top line and inventory buys, and an unwieldy cost structure given a large physical store footprint. Ongoing channel shift of toy sales to the discount and online channels — and secular issues in the Baby (newborns and children up to four years old) and Entertainment product categories (video game software, systems and accessories), which compose roughly 50% of Toys’ revenues — underpin Fitch’s expectations for negative low single-digit consolidated same-store sales growth through the medium term. These categories are less than 30% of revenues internationally. International constant-currency same-store sales were positive in the 1%–4% range for 10 quarters through mid-2016, benefiting from exposure to growth in action figures and construction toys within the Core Toys and Learning categories, and net sales from new locations. These two categories compose more than 50% of international revenues. However, trends turned negative in third-quarter 2016, with same store sales at negative 2.5%, and decelerated further to negative 5% for the first nine weeks of fourth-quarter 2016. The ongoing encroachment by discount formats and the rise of e-commerce, particularly in the U.S., has contributed to a channel shift away from traditional specialty brick-and-mortar toy retailers. Online retailers such as Amazon are making inroads, particularly with consumables such as diapers via subscription and other programs. Toys has also been disadvantaged by having to maintain a large physical footprint year-round and bearing high levels of inventory risk compared with most competitors. Toys needs to invest aggressively in its omnichannel capabilities to help protect its market share given the rapid growth in online sales led by Amazon. Even if domestic online sales grow 10%–15% annually, it may not be adequate to offset negative store-level same-store sales trends, which are expected to trend in the negative 2%–negative 4% range.

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Leveraged Finance Toys E-Commerce Contribution ($ Mil.) Total E-Commerce YoY Growth (%) % of Total Sales Contribution to SSS (%) Domestic (U.S. Only) Total Sales YoY Growth (%) Total Domestic SSS (%) a

Domestic E-Commerce YoY Growth (%) % of Domestic Sales Contribution to SSS (%)

Domestic Store-Level Sales YoY Growth (%) Store-Level Contribution to Total Domestic SSS (%) Implied Domestic Store-Level SSS (%)

2009

2010

2011

2012

2013

2014

2015

602 4.2 4.4 0.1

782 29.9 5.6 1.3

1,005 28.5 7.2 1.6

1,135 12.9 8.4 0.9

1,151 1.4 9.2 0.1

1,229 6.8 9.9 0.6

1,331 8.3 11.3 0.8

8,317 (1.9) (3.0)

8,621 3.7 1.7

8,393 (2.6) (1.7)

8,149 (2.9) (3.5)

7,638 (6.3) (5.0)

7,524 (1.5) (1.0)

7,356 (2.2) (0.6)

496 (1.6) 6.0 (0.1)

645 30.0 7.5 1.8

834 29.3 9.9 2.2

939 12.6 11.5 1.3

936 (0.3) 12.3 0.0

988 5.6 13.1 0.7

1,065 7.8 14.5 1.0

7,821 (1.9)

7,976 2.0

7,559 (5.2)

7,210 (4.6)

6,702 (7.0)

6,536 (2.5)

6,291 (3.7)

(2.9) (3.1)

(0.1) (0.1)

(3.9) (4.2)

(4.8) (5.3)

(5.0) (5.6)

(1.7) (1.9)

(1.6) (1.9)

Domestic e-commerce sales excludes Canada and 2015 sales are estimated. YoY – Year-over-year. SSS – Same-store sales. Source: Company filings, Fitch Ratings.

Category Mix Poses Additional Headwind Baby Category Hurt by Low Birth Rates The Baby category (46% of domestic revenue) has been declining in low to midsingle digits in Toys’ domestic business since 2011. For the most part, Toys is a slow-growth, developed market story with more than 80% of sales in the U.S., Europe and Japan. The population is shrinking in continental Europe and Japan, which composed 20% of 2015 revenues, with fertility rates under the 2.1x needed to maintain a stable population. The U.S. growth rate is also shrinking, limiting the market for categories dependent on this population, such as Toys’ Baby category (baby clothes, joggers, diapers, etc.).

Entertainment Affected by Digitalization Entertainment, which represents around 8% of total revenue, presents another difficult spot for Toys. While U.S. computer and video game dollar sales increased to $15.6 billion in 2015 from $15.2 billion in 2012 per The NPD Group (NPD), there has been a decline in physical product sales at brick-and-mortar retailers, and an increase in subscription and digital downloads. U.S. computer and video games purchased at retail stores declined to 44% of total dollar sales in 2015 from 59% in 2012.

Market Share Losses in Traditional Toy Category The U.S. traditional toy industry grew approximately 7% to $24.5 billion in 2015, after flat sales of around $22 billion–$23 billion annually between 2009 and 2014, according to NPD. Industry sales grew 6.0% during the first nine months of 2016. Dolls, games/puzzles, and action figures and accessories saw double-digit growth while arts and crafts, building sets and youth electronics saw declines. Toys’ domestic traditional toy sales (excluding entertainment) were up 1.3% for the first three quarters of 2016.

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Leveraged Finance The global toy market grew 4% to $87 billion in 2015 according to NPD after remaining flat for several years. The U.S. represents the largest market, with sales of approximately $26 billion, followed by Japan, China, the U.K. and France. These countries combined account for slightly more than 50% of global toy sales. Strong performance in emerging markets has driven most of the global market growth, while sales in developed markets remain relatively stagnant. Toys is skewed toward developed markets, with over 90% of its stores located in these mature markets.

Sales Mix by Category Domestic

(%) Baby Learning Core Toy Entertainment Seasonal YoY Change Baby Learning Core Toy Entertainment Seasonal

International YTD YTD 2010 2011 2012 2013 2014 2015 10/29/16 2010 2011 2012 2013 2014 2015 10/29/16 37.2 20.9 15.5 13.7 11.4

37.5 21.5 15.9 13.0 11.3

37.9 22.4 16.0 11.7 11.3

37.7 22.8 16.2 11.3 11.3

38.0 22.7 17.4 10.2 11.2

36.9 23.5 18.4 9.0 11.4

3.7 10.5 8.6 (8.4) 1.0

(1.9) (2.1) (6.8) (0.4) (5.1) 0.2 1.2 (4.6) (1.9) 1.2 (0.1) (2.3) (4.5) 5.2 3.4 (7.6) (12.6) (10.3) (10.3) (13.7) (3.5) (2.1) (6.3) (3.2) (0.5)

46.2 19.0 14.8 5.1 13.9

21.7 26.9 21.3 13.4 15.9

21.6 27.8 22.0 11.9 15.9

21.6 29.2 21.9 11.4 15.2

20.4 30.8 22.7 10.0 15.3

20.2 31.1 23.5 8.5 15.9

20.5 32.8 23.2 7.1 15.7

26.5 29.1 21.0 5.0 17.5

(4.0) 4.7 (0.7) (0.5) 2.1 4.8 (23.7) (14.2) 3.2 1.1

4.7 8.7 8.7 (6.6) 5.2

(2.2) (14.1) (2.4) (6.7) 2.7 (4.1) (0.4) (3.1) (2.7) (5.7) 2.1 (9.3) (6.3) (20.2) (16.2) (23.2) (6.5) (8.5) (2.5) (9.2)

5.4 3.2 1.8 (16.5) 0.7

YoY â&#x20AC;&#x201C; Year-over-year. Source: Company filings, Fitch Ratings.

Sales Trends by Major International Markets ($ Mil.)

2007

2008

2009

2010

2011

2012

2013

2014

2015

Japan Continental Europe U.K. Other (Canada, Australia and Asia) Total

1,643 1,630 1,146

1,786 1,611 902

1,791 1,587 891

1,866 1,493 792

1,988 1,574 758

1,795 1,439 735

1,374 1,447 680

1,308 1,405 710

1,182 1,211 666

925 5,344

945 5,244

982 5,251

1,092 5,243

1,196 5,516

1,425 5,394

1,404 4,905

1,414 4,837

1,387 4,446

11.9 11.8 8.3

13.0 11.7 6.6

13.2 11.7 6.6

13.5 10.8 5.7

14.3 11.3 5.4

13.3 10.6 5.4

11.0 11.5 5.4

10.6 11.4 5.7

10.0 10.3 5.6

6.7

6.9

7.2

7.9

8.6

10.5

11.2

11.4

11.8

(0.4) 17.4 14.7

8.7 (1.2) (21.3)

0.3 (1.5) (1.2)

4.2 (5.9) (11.1)

6.5 5.4 (4.3)

(9.7) (8.6) (3.0)

(23.5) 0.6 (7.5)

(4.8) (2.9) 4.4

(9.6) (13.8) (6.2)

24.5 11.8

2.2 (1.9)

3.9 0.1

11.2 (0.2)

9.5 5.2

19.1 (2.2)

(1.5) (9.1)

0.7 (1.4)

(1.9) (8.1)

% of Total Net Sales Japan Continental Europe U.K. Other (Canada, Australia and Asia) YoY % Change Japan Continental Europe U.K. Other (Canada, Australia and Asia) Total

YoY â&#x20AC;&#x201C; Year-over-year. Source: Company filings, Fitch Ratings.

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Leveraged Finance Impact on Gross Margin/SG&A Gross margins have been reasonably steady, except for poor inventory management in 2013, which caused a 160-bps contraction to 35%. Gross margins grew to 35.8% in 2014 due to better inventory management, were flat in 2015 and could be down 10 bps–30 bps in 2016, depending on fourth-quarter 2016 results, given a disappointing holiday season. Fitch has assumed gross margin to be flat to down 50 bps year over year in the fourth quarter. Ongoing pricing investment could put further pressure on margins, and Fitch assumes modest gross margin decline of 10 bps annually in 2017 and 2018.

Gross Margins — Toys 'R' Us, Inc. Fourth Quarter

(%)

Full Year

38 36 34 32 30 28 2007

2008

2009

2010

2011

2012

2013

2014

2015

9M15

9M16

Source: Company filings, Fitch Ratings.

Toys is addressing its cost structure by implementing a cost-savings program that started in 2014, which is slated to take $325 million out of its expense structure by the end of 2016. This generated $100 million in domestic cost savings during 2014. Selling, general and administrative (SG&A) expense excluding depreciation and amortization was $325 million lower in 2015 — $182 million came from cost savings, while the rest primarily reflects foreign exchange movement. Fitch anticipates overall SG&A expense to be flat to down modestly given ongoing investments required to drive top line in 2016–2018.

SG&A Performance ($ Mil.) Net Sales SG&A (Incl. D&A) SG&A Growth SG&A Growth (%) SG&A/Sales (%)

2007

2008

2009

2010

2011

2012

2013

2014

2015

9M15

9M16

13,794 4,142 283 7.3 30.0

13,724 4,247 105 2.5 30.9

13,568 4,101 (146) (3.4) 30.2

13,864 4,280 179 4.4 30.9

13,909 4,388 108 2.5 31.5

13,543 4,428 40 0.9 32.7

12,543 4,297 (131) (3.0) 34.3

12,361 4,263 (34) (0.8) 34.5

11,802 3,904 (359) (8.4) 33.1

6,949 2,694 (300) — 48.8

6,879 2,685 (9) (0.3) 39.0

SG&A – Selling, general and administrative. D&A – Depreciation and amortization. Source: Company filings, Fitch Ratings.

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Leveraged Finance Operating Trends — Domestic and International Segments Sales ($ Mil.) U.S. International Total % of Total Sales U.S. International a Same-Store Sales (%) U.S. International Consolidated (Fitch estimate from 2007–2011) Store Units U.S. International (Incl. Licensed Stores) Gross Margin (%) U.S. International EBITDA (Before Corporate Expenses) ($ Mil.) U.S. International Total EBITDA Margin (Before Corporate Expenses) (%) U.S. International % of Total EBITDA (Before Corporate Expenses) U.S. International

LTM 2015 10/29/16

2006

2007

2008

2009

2010

2011

2012

2013

2014

8,270 4,780 13,050

8,450 5,344 13,794

8,480 5,244 13,724

8,317 5,251 13,568

8,621 5,243 13,864

8,393 5,516 13,909

8,149 5,394 13,543

7,638 4,905 12,543

7,524 4,837 12,361

7,356 4,446 11,802

7,238 4,494 11,732

63.4 36.6

61.3 38.7

61.8 38.2

61.3 38.7

62.2 37.8

60.3 39.7

60.2 39.8

60.9 39.1

62.3 37.7

61.7 38.3

0.2 3.1 —

2.7 2.9 1.5

(0.1) (3.4) (0.1)

(3.0) (2.8) (2.2)

1.7 (3.1) 1.0

(1.7) (2.7) (2.3)

(3.5) (5.0) (4.1)

(5.0) (3.3) (4.4)

(1.0) 1.8 0.0

(0.6) 3.2 0.9

(0.6) 0.3 (0.3)

837.0 678.0

845.0 715.0

846.0 713.0

849.0 717.0

868.0 744.0

876.0 777.0

875.0 828.0

873.0 889.0

872.0 942.0

866.0 1,008.0

880.0 1,039.0

33.5 34.4

34.3 35.6

34.3 35.0

34.8 35.9

34.8 36.6

34.3 38.0

35.4 38.3

32.6 38.7

34.1 38.6

34.3 38.4

34.0 38.4

913 381 1,294

877 473 1,350

818 331 1,149

879 463 1,342

829 482 1,311

774 504 1,278

796 445 1,241

450 343 345

542 345 887

664 378 1,042

618 398 1,017

11.0 8.0

10.4 8.9

9.6 6.3

10.6 8.8

9.6 9.2

9.2 9.1

9.8 8.2

5.9 7.0

7.2 7.1

9.0 8.5

8.5 8.9

70.6 29.4

65.0 35.0

71.2 28.8

65.5 34.5

63.2 36.8

60.6 39.4

64.1 35.9

5.5 94.5

61.1 38.9

63.7 36.3

60.8 39.2

Same-store sales for the LTM reflects the performance for the nine months ended Oct. 29, 2016. Source: Company filings, Fitch Ratings.

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Leveraged Finance Liquidity and Debt Structure Toys held $420 million of cash — $189 million held at the Toys-Delaware level — and $841 million of availability under its various revolvers as of Oct. 29, 2016, including $610 million available under its domestic $1.85 billion facility. Availability under the domestic ABL should be approximately the same in 2017 given Fitch’s expectation of modest but positive FCF.

Refinancing Largely Complete In August 2016, Toys issued $583 million of 12% senior secured notes due Aug. 15, 2021 at a newly formed entity TRU Taj LLC, an indirectly owned subsidiary of Toys. The notes were issued through exchange offers and private placements, which along with cash, were used to fully address HoldCo’s $450 million 10.375% senior unsecured notes due 2017 and $192 million of its $400 million 7.375% senior unsecured notes due 2018. The 2017 notes were exchanged at par while the 2018 notes were exchanged at 90% of par. The new notes offer improved terms relative to the existing notes, with a higher coupon rate and secured status in the capital structure. The notes are secured by a stock pledge in certain international subsidiaries, including guarantors of the European asset-backed loan (ABL). Post this transaction, $208.3 million of 2018 notes remains outstanding, which we expect to be addressed through future exchanges or paid down with cash. Toys ‘R’ Us - Japan, Ltd. entered into an agreement on June 30, 2016 to refinance and combine two of its existing unsecured loan commitment lines of credit (Tranche 1B due fiscal 2016 and Tranche 2 due fiscal 2016) into a new Tranche 2 committed credit line, expiring on June 29, 2018. In November 2016, Toys refinanced the $725 million of 8.5% senior secured notes due December 2017 that were issued by its subsidiary Propco II. The company redeemed the notes via a $512 million CMBS loan at Propco II; $88 million of mezzanine financing at Giraffe Junior Holdings, LLC, Toys’ indirect wholly-owned subsidiary and the owner of 100% of the equity interest in TRU Propco II; a $51 million rent prepayment from Toys-Delaware; and with cash on hand. The CMBS loan is secured by a first-mortgage lien on Propco II’s fee simple or leasehold interests in its retail properties, which will provide approximately $67 million of master lease rent per year. The mezzanine loan is secured by a first-priority pledge of all of Giraffe’s Junior’s ownership interests in Propco II, together with certain other collateral of Giraffe Junior. The aggregate of the individual values of the properties securing this debt under the Leased at Market Rent and Dark Value scenarios as of the end of April 2016 was estimated at $878.8 million and $617.9 million, respectively, by Cushman & Wakefield’s appraisal filed on Aug. 18, 2016. Both loans are due Nov. 9, 2019, and may be extended for two one-year terms at the option of the borrowing entities.

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Leveraged Finance Capital Structurea (USD Mil., Pro Forma at Oct. 29, 2016)b

1/30/16

10/29/16

(%)

80 280 375 130 65 1,015 0 0 50 49 0 0 — 2,044

1,018 280 312 127 64 1,008 8 — 49 48 92 512 88 3,606

18.5 5.1 5.7 2.3 1.2 18.3 0.1

725 0 725

— 583 583

— 10.6 10.6

Senior Unsecured Debt 10.375% Notes Due 8/15/17 7.375% Notes Due 10/15/18 Senior Unsecured Term Loan Due 8/21/19 (PropCo I) 8.750% Notes Due 9/1/21 Total Senior Unsecured Debt

450 400 929 22 1,801

— 208 888 22 1,118

— 3.8 16.1 0.4 20.3

Subtotal Finance Obligations Associated with Capital Projects Capital Lease Obligations Asia JV Short-Term Borrowings Total Debt

4,570 183 19 0 4,772

5,307 180 13 7 5,507

96.4 3.3 0.2 0.1 100.0

Bank Debt, Term Loan and International Real Estate-Backed Facilities USD1.85 Bil. Secured Revolver Due 3/21/19 USD280 Mil. FILO Tranche A-1 Loan Facility Due 10/24/19 GBP263 Mil. U.K. Term Loan Facility Due 7/7/20 USD400 Mil. Secured Term Loan Facility (Term B-2) Due 5/25/18 USD225 Mil. Secured Term Loan Facility (Term B-3) Due 5/25/18 USD1,025 Mil. Secured Term Loan Facility (Term B-4) Due 4/24/20 YEN18.9 Bil. Toys-Japan Unsecured Credit Lines Due 2017–2018 EUR75 Mil. Spanish Term Loan Facility Due 1/29/16 EUR48 Mil. French Term Loan Facility Due 2/27/18 Toys−Japan 1.850%−2.850% Loans Due 2019–2021 GBP138 Mil. European and Australian Asset-Backed Revolver Due 12/18/20 b USD512 Mil. Mortgage Loan Due 11/9/19 (PropCo II) b USD88 Mil. Mezzanine Financing due 11/9/19 (Giraffe Junior) Total Bank Debt, Term Loan and Real Estate Facilities Senior Secured Notes 8.500% Senior Secured Notes Due 12/1/17 (PropCo II)b 12.000% Senior Secured Notes due 8/15/21 (TRU Taj) Total Senior Secured Notes

— 0.9 0.9 1.7 9.3 1.6 65.5

a See org chart in Appendix A for reference of where each debt class resides. bToys entered into a new mortgage loan on Nov. 3, 2016 and used the proceeds, along with $88 Mil. of mezzanine financing, a $51 Mil. rent prepayment from ToysDelaware and cash on hand to redeem the 8.500% senior secured notes due 2017. FILO – First in, last out. JV – Joint venture. Source: Company filings, Fitch Ratings.

Scheduled Debt Maturities

Liquidity

($ Mil., At Oct. 29, 2016) 2017 2018 2019 2020 2021 Thereafter Note: Excludes credit facility borrowings, finance obligations and capital leases. Source: Company filings, Fitch Ratings.

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($ Mil., At Oct. 29, 2016) 26 456 1,754 1,284 605 —

Cash Unused U.S./Canada Revolvera Unused International Revolvers Total

420 610 231 1,261

The U.S./Canada revolver availability is net of a minimum excess availability that Toys must maintain, which was $125 Mil. at Oct. 29, 2016. Source: Company filings, Fitch Ratings.

410

Leveraged Finance Intercompany Obligations Toys has incurred significant intercompany borrowings, particularly between HoldCo and ToysDelaware. HoldCo issued notes due to Toys-Delaware between 2005 and 2012, and all of the notes are documented, unsecured and include a market rate interest. Fitch estimates the total amount will increase to just over $1 billion in 2016, reflecting accrued interest on three notes. One of the notes issued in fiscal 2012 that is expected to be $282 million in 2016, is expressly subordinated in right of payment to the senior obligations of HoldCo, which implies the remaining $733 million is pari passu with the $208.3 million HoldCo notes.

Long-Term Notes Payable due to Toys-Delaware from HoldCo ($ Mil.)

Imputed PIK Rate (%)

1/31/15

1/30/16

1/27/17 Projected

9.0 14.0 11.0 — —

299 222 229 90 840

326 253 254 90 923

355 288 282 90 1,016

Note Issued by Parent in Fiscal 2005 Note Issued by Parent in Fiscal 2009 Note Issued by Parent in Fiscal 2012 Note Issued by Parent in Fiscal 2012 Long-Term Notes Receivable from Parenta a

Includes accrued and unpaid interest. PIK – Payment-in-kind. Source: Company reports, Fitch Ratings.

While Toys-Delaware had $364 million in short-term loans at the end of 2015 — and $267 million as of Oct. 29, 2016 — due to HoldCo, Fitch does not assume HoldCo can effectuate a set-off against its long-term obligation to Toys-Delaware. The short-term unsecured loans at ToysDelaware are used to fund seasonal working capital needs and are therefore considered unsecured claims that rank below all the secured debt at Toys-Delaware. Fitch does not believe HoldCo can net these current assets against their debt due to Toys-Delaware because any liquidation proceeds from the HoldCo assets would need to pay down both the $208.3 million HoldCo notes and the $733 million notes due to Toys-Delaware on a pro rata basis to avoid giving preferential treatment to the Toys-Delaware debt.

Highly Leveraged Capital Structure Toys was acquired by Bain Capital, LLC; KKR & Co., LP and Vornado Realty Trust on July 21, 2005, for $7.6 billion, implying an 11.8x EBITDA multiple based on an LTM EBITDA of $642 million for the period ended April 30, 2005. Fitch did not adjust for the approximately $160 million in inventory markdowns that were taken in 2004, primarily to liquidate selected older toy store inventory. This resulted in approximately $6.3 billion of debt on the company’s balance sheet at closing and an operating company-property company (OpCo-PropCo) structure to access the CMBS market as part of the LBO financing.

Debt and Leverage Trend — Toys ‘R’ Us, Inc. Adjusted Debt (LHS)

EBITDAR (LHS)

Adjusted Leverage (RHS)

($ Bil.)

(x)

6 4

2 0

0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Company filings, Fitch Ratings.

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Leveraged Finance Toys’ leverage (adjusted debt/EBITDAR) was 7.0x in 2015, and Fitch expects it to increase modestly to the mid-7x range over the next 24 months on our EBITDA projections. This compares with a relatively stable leverage profile in the high-5x to low-6x range through 2012, when sales held up at more than $13.5 billion and EBITDA hovered around $1 billion. No dividend has been paid to the private equity sponsors since the LBO.

Recovery Analysis and Considerations For issuers with Issuer Default Ratings (IDRs) at ‘B+’ and below, Fitch performs a recovery analysis for each class of obligations. Issue ratings are derived from the IDR and the relevant Recovery Rating (RR) and notching based on expected recoveries in a distressed scenario for each of the company’s debt issues and loans. Toys’ debt is at three types of entities: operating companies (OpCo); property companies (PropCos); and HoldCos, with a structure summary as follows: Toys ‘R’ Us, Inc. (HoldCo) (I) Toys ‘R’ Us-Delaware, Inc. (Toys-Delaware) is a subsidiary of HoldCo. (a) Toys ‘R’ Us Canada (Toys-Canada) is a subsidiary of Toys-Delaware. (II) Toys ‘R’ Us Property Co. I, LLC (PropCo I) is a subsidiary of HoldCo. (III) TRU Taj LLC, an indirectly owned subsidiary of Holdco.

OpCo Debt Fitch takes the higher of liquidation value or enterprise value (EV, based on 5.0x multiple applied to the stressed EBITDA) at the OpCo levels — Toys-Delaware and Toys-Canada and the international entities that provide a stock pledge to the debt at TRU Taj. The 5.0x is consistent with the low end of the 10-year valuation for the public retail space and Fitch’s average distressed multiple across the retail portfolio. The stressed EV is adjusted for 10% administrative claims.

Toys-Canada Toys has a $1.85 billion ABL revolver with Toys-Delaware as the lead borrower, and this contains a $200 million subfacility in favor of Canadian borrowers. Any assets of the Canadian borrower and its subsidiaries secure only the Canadian liabilities (including the Canadian portion of the first in, last out [FILO] term loan). The $200 million subfacility is more than adequately covered by the EV calculated based on stressed EBITDA at the Canadian subsidiary. Therefore, the fully recovered subfacility is reflected in the recovery of the consolidated $1.85 billion revolver discussed below. The residual value of approximately $150 million is applied toward the ABL revolving facility and term loan.

Toys-Delaware At the Toys-Delaware level, recovery on the various debt tranches is based on: the liquidation value of the domestic assets at the Toys-Delaware level, estimated at over $1.5 billion; estimated value for Toys’ trademarks and IP assets, which are held at Geoffrey, LLC as a wholly owned subsidiary of Toys-Delaware; equity residual from Toys-Canada; and the benefit to the B-4 term loan from an unsecured guarantee from the indirect parent of PropCo I.

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Leveraged Finance The $1.85 billion revolver is secured by a first lien on inventory and receivables of ToysDelaware. In allocating an appropriate recovery, Fitch considered the liquidation value of domestic inventory and receivables assumed at seasonal peak, at the end of the third quarter, and applied advance rates of 75% and 80%, respectively. Fitch assumes $1.3 billion, or approximately 70%, of the facility commitment is drawn under the revolver. The facility is fully recovered and is therefore rated ‘B/RR1’. The FILO term loan is secured by the same collateral as the $1.85 billion ABL facility and ranks second in repayment priority relative to the ABL. The FILO tranche is governed by the residual borrowing base within the ABL facility and benefits from a lien against 15% of the estimated value of real estate at Toys-Canada. The facility is rated ‘B/RR1’ based on outstanding recovery prospects (91%–100%), as it benefits from the excess liquidation value of domestic inventory and A/R and the recovery on the Canadian real estate. The $983 billion B-4 term loan benefits from the same credit support as the existing B-2 and B3 term loans, which includes a first lien on all present and future IP, trademarks, copyrights, patents, websites and other intangible assets, and a second lien on the ABL collateral. It also benefits from an unsecured guaranty by the indirect parent of PropCo I and is secured by a first-priority pledge on two-thirds of the Canadian subsidiary stock. After prorating the value of the IP assets (estimated at $350 million), the residual equity in ToysCanada and applying the benefit from the guaranty by the indirect parent of PropCo I, the B-4 term loan is expected to have good recovery prospects (51%–70%), and is therefore rated ‘CCC+/RR3’. The $191 million in remaining B-2 and B-3 term loans are rated ‘CCC/RR4’, as they are expected to have average recovery prospects (31%–50%), mainly from their prorated claim against the IP assets. The $22 million 8.75% debentures due Sept. 1, 2021 have poor recovery prospects (0%–10%) and are therefore rated ‘CC/RR6’.

Valuation of Trademarks and IP Toys’ trademarks and IP assets held at Geoffrey, LLC are the first-lien collateral backing the senior secured term loans issued at Toys-Delaware. The annual license fees paid by HoldCo’s international subsidiaries were $67 million as of Oct. 29, 2016, a decline from $102 million in 2012. In addition, Toys generated $17 million in license fees from third parties in 2015. In terms of valuing the trademarks, Fitch applied a 4.0x–5.0x multiple to these royalty streams from Toys’ international subsidiaries (excluding Canada) to arrive at a value of $350 million. While the multiple paid could potentially be better, resulting in a higher IP valuation, there could be further downward pressure on the royalty stream itself given weakness in its international businesses.

International Licensing Fees Licensing Fees from Foreign Affiliates (LHS)

($ Mil.)

Royalty Rate (RHS)

(%)

125

3.0

100

2.4

1.8

1.2

0.6

0.0 2007

2008

2009

2010

2011

2012

2013

2014

2015

LTM 3Q16

Note: Royalty Rate is calculated based on the annual license fees paid by HoldCo's international subsidiaries over the revenues generated by the international subsidiaries excluding Canada. Source: Company filings, Fitch Ratings.

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Leveraged Finance Sensitivity of Trademarks and IP Valuation Multiple on Royalty Stream (x) ($ Mil.)

4.0

5.0

6.0

7.0

8.0

336 319 302 286 269

420 399 378 357 336

504 479 454 428 403

588 559 529 500 470

672 638 605 571 538

Discount Rate on LTM Royalty Stream (%) 0 (5) (10) (15) (20) a

LTM royalty stream was approximately $84 Mil. as of Oct. 29, 2016. Source: Fitch Ratings.

PropCo Debt At the PropCo levels — PropCo I and other international PropCos — LTM net operating income (NOI) is stressed at 20%. PropCo I is set up as bankruptcy-remote entity with a 20-year master lease through 2029 covering all the properties within the entities, which requires Toys-Delaware to pay all costs and expenses related to leasing these properties from these two entities. The ratings on the PropCo debt reflect a distressed capitalization rate of 12% applied to the stressed NOI of the properties to determine a going-concern valuation. The stressed rates reflect downtime and capital costs that would need to be incurred to re-tenant the space. Applying these assumptions to the $888 million senior unsecured term loan facility at PropCo I results in outstanding recovery prospects (91%–100%) and the facility is therefore rated ‘B/RR1’. The PropCo I unsecured term loan facility benefits from a negative pledge on all PropCo I real estate assets, which includes around 320 properties. As described above, the residual value of approximately $315 million after fully recovering the $888 million term loan at PropCo I is applied toward the Delaware B-4 term loan via an unsecured guaranty by the indirect parent of PropCo I.

TRU Taj LLC Debt The notes are secured by a stock pledge in certain international subsidiaries, including guarantors of the European ABL, and the EBITDA attributed to TRU Taj was $152 million in 2015, calculated on a covenant basis. Fitch applied a 5.0x multiple to each entity’s EBITDA (stressed at 15%–20% from current levels), subtracted out any entity-level debt, and then applied the remaining value against the $583 million new notes. This resulted in average recovery (31%–50%), and the notes are therefore rated ‘CCC/RR4’.

Toys ‘R’ Us, Inc. — HoldCo Debt The $208.3 million 7.375% unsecured notes due Oct. 15, 2018 (and the $734 million senior notes due to Toys-Delaware that are considered pari passu with the publicly traded HoldCo notes) have poor recovery prospects (0%–10%) because there is no residual value flowing in from the wholly owned subsidiaries. Therefore, they are rated ‘CC/RR6’.

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Leveraged Finance Recovery Analysis — Toys ‘R’ Us — Delaware, Inc. (U.S. OpCo) ($ Mil., IDR: CCC) a

Going Concern (GC) Enterprise Value (EV)

Liquidation Value

GC EBITDA (Excluding Propco II and Canada) GC EV Multiple (x) GC EV Less Administrative Claims (10%) Adjusted Enterprise Value for Claims Canadian Revolver Recovery Equity Residual from Toys ‘R’ Us Canada

300 5.0 1,500 150 1,350 140 153

Equity Residual from Toys ‘R’ Us PropCo I Applied Toward Term B-4 Loan Total Adjusted EV for Claims

312 1,955

Book Value Advance Rate (%)

Cash 189 A/R 60 Inventory 2,000 Trademarks and IP 350 Total 2,559 Less Administrative Claims (10%) Liquidation Value Canadian Revolver Recovery Equity Residual from Toys ‘R’ Us Canada

0 80 75 100 —

Equity Residual from Toys ‘R’ Us PropCo I Applied Toward Term B-4 Loan Total Adjusted Liquidation Value for Claims

Available to Creditors  48 1,500 350 1,898 190 1,708 140 153 312 2,313

Distribution of Value First and Secured Priority $1.85 Bil. Revolver $280 Mil. FILO Term Loan $1.025 Bil. Term B-4 Loans $205 Mil. B-2/B-3 Term Loan

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

1,295.0 280.0 1.008.0 191.0

1,295.0 280.0 672.3 65.3

100 100 67 34

RR1 RR1 RR3 RR4

+3 +3 +1 0

B B CCC+ CCC

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

22.0 750.0

0.0 0.0

0 0

RR6 

–2 

CC 

Allocation of Total Adjusted Enterprise Value for Claims Adjusted Enterprise Value for Claims Less Secured Debt Recovery Remaining Recovery for Unsecured Claims

Unsecured Priority

2,000.7 2,312.6 —

8.750% Debentures Due 9/1/21 Operating lease claims

a Toys ‘R’ Us-Delaware assets excluding Canada are estimated at normalized peak seasonal levels, which is typically in the third quarter. Fitch notes actual domestic inventory (excluding Canada) at the end of third-quarter 2016 was higher than $2.0 Bil. IDR – Issuer Default Rating. A/R – Accounts receivable. FILO – First in, last out. Source: Company filings, Fitch Ratings.

Recovery Analysis — Toys ‘R’ Us Canada ($ Mil., IDR: CCC) Going Concern (GC) Enterprise Value (EV) GC EBITDA GC EV Multiple (x) GC EV Less Administrative Claims (10%) Adjusted EV for Claims First and Secured Priority $200 Mil. Canadian Subfacility

65 5.0 325 33 293 Amount Value Recovered 140.0

140.0

Recovery (%) Recovery Rating  100

Notching 

Rating 

Allocation of Adjusted Enterprise Value for Claims Adjusted Enterprise Value for Claims Less Secured Debt Recovery Value Distributed to Toys-Delaware

293 140 153

Source: Company filings, Fitch Ratings.

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Leveraged Finance Recovery Analysis — Toys ‘R’ Us Property Co. I, LLC ($ Mil., IDR: CCC) Going Concern (GC) Enterprise Value (EV) LTM Estimated Net Operating Income Discount (%) Projected Post-Default NOI Cap Rate (%) Adjusted EV for Claims Unsecured Priority Senior Unsecured

180 20 144 12 1,200 Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

888.0

100

RR1

Value to be Distributed to Term B-4 Loan

312.0

NOI – Net operating income. Source: Company reports, Fitch Ratings.

Recovery Analysis — Toys ‘R’ Us, Inc. (HoldCo) ($ Mil., IDR: CCC) Going Concern (GC) Enterprise Value (EV)  

GC EBITDA Residual Value from Toys ‘R’ Us Property Co. I, LLC Unsecured Priority

Amount

Value Recovered

Recovery (%)

Recovery Rating

Notching

Rating

Senior Unsecureda Subordinated Notes

943.0 282.0

0.0 0.0

0 0

RR6 —

–2 —

CC —

Includes senior unsecured notes due to Toys-Delaware. See section on Intercompany Obligations. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix A Organizational Structure Prior to 2016 Refinancings — Toys ‘R’ Us, Inc. (USD Mil., As of April 30, 2016) Bain Capital Partners LLC KKR & CO., L.P. Vornado Realty Trust Management and Directors

32.5% 32.5% 32.5% 2.5%

100%

100% USD334 Mil. short-term loans payable to HoldCo

Toys ‘R’ Us-Delaware, Inc. (Toys-Delaware) (IDR — CCC)

Toys ‘R’ Us, Inc. (HoldCo) (IDR — CCC) Amount 10.375% Sr. Unsec. Notes due 8/15/17 450 7.375% Sr. Unsec. Notes due 10/15/18 400 Sr. Unsec. Notes due to Toys-Delaware 650 Subordinated Notes due to Toys-Delaware 255

Rating CC/RR6 CC/RR6 — —

Revenue EBITDA (Fitch Defined)a Consolidated Debt Total Adjusted Debt/EBITDAR (x)

— — — —

11,796 772 5,321 7.4

100%

Amount Rating

Toys ‘R’ Us-Japan, Ltd. (Japan Sub.)

Wayne Real Estate Parent Company, LLC

USD1.85 Bil. Secured ABL due 3/21/19c USD280 Mil. FILO Term Loan due 10/24/19 USD1,025 Mil. Secured Term Loan Facility (Term B-4) due 4/4/20 USD400 Mil. Secured Term Loan Facility (Term B-2) due 5/25/18 USD225 Mil. Secured Term Loan Facility (Term B-3) due 5/25/18 8.750% Debentures due 9/1/21 Finance Obligations Associated with Capital Projects

586 B/RR1

Amount

Unsecured guarantee of B-4 Term Loan

280 B/RR1 1,013 CCC+/RR3

International (Excluding Canada) International Revenue 3,674 % of Consolidated Revenue 31.0 International EBITDAb 175 % of Consolidated EBITDA 23.0

Toys ‘R’ Us Property Co. I, LLC (TRU PropCo I) (IDR — CCC)

Unsecured Revolver due 2016–2017 1.850%–2.180% Loans due 2016–2021

6 52

Amount Rating 129 CCC/RR4 65 CCC/RR4 22 CC/RR6

923 B/RR1 180 —

Negative Pledge on 318 stores — three DCs — HQ

183 —

Revenued EBITDA (Fitch Defined)e,f Consolidated Debt (Including PropCo II and Canada)

Senior Unsecured Term Loan Facility due 8/21/19 Net Operating Incomee

100% Toys ‘R’ Us Europe, LLC (European OpCo) TRU Australia Holdings, LLC (Toys Australia)

8,122 — 408 —

Downstream guarantee of European ABL

3,003 — European Borrowers

Toys ‘R’ Us Property Co. II, LLC (TRU PropCo II) (IDR — CCC)

GBP138 Mil. Multicurrency ABL due 12/18/20

Amount Rating

100% 8.500% Senior Secured Notes due 12/1/17 Net Operating Incomee

Toys ‘R’ Us Properties (U.K.) Limited (U.K. PropCo) 725 B/RR1 98 —

Secured by 123 properties

Amount 100% USD200 Mil. Secured Revolver due 3/21/19c Revenue EBITDAf

N.A. 813 86

Geoffrey, LLC (IPCo) License fees from Foreign Affiliates License fees from Third Partiesg

GBP263 Mil. Term Loan Facility due 7/7/20 Upstream guarantee of U.S. term loans

Toys ‘R’ Us Canada (Canadian OpCo)

100%

Amount 54

Amount 68 17

Amount 374

Secured by 31 properties Toys ‘R’ Us France Real Estate SAS (France PropCo) Amount EUR48 Mil. Term Loan Facility due 2/27/18 51 Secured by nine properties Toys ‘R’ Us Iberia Real Estate SL (Spain PropCo) Amount EUR75 Mil. Term Loan Facility due 1/29/16 — Secured by 26 properties

aFitch-adjusted EBITDA only adds back impairment of long-lived assets, compensation expense and net gain on sales of properties compared with reported adjusted EBITDA. bInternational EBITDA is calculated as the balance of company’s consolidated EBITDA minus consolidated Toys-Delaware's EBITDA and TRU PropCo I’s net operating income (NOI). cUSD1.85 Bil. ABL revolver including a USD200 Mil. subfacility in favor of Canadian borrowers. dToys ‘R’ Us-Delaware’s consolidated revenue includes licensing fees from unaffiliated third parties, but excludes other revenues related to transactions with related parties. eNOI at PropCos is calculated as operating earnings plus depreciation. fAdjusted EBITDA at Toys-Delaware is based on Fitch’s estimates. gLicense fees from third parties as of Jan. 30, 2016. IDR – Issuer Default Rating. RR – Recovery Rating. ABL – Asset-backed loan. FILO – First in, last out. N.A. – Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance New Organizational Structure: Part I — Toys ‘R’ Us, Inc. (USD Mil., Pro Forma As of Oct. 29, 2016) Bain Capital Partners LLC KKR & CO., L.P. Vornado Realty Trust Management and Directors

32.5% 32.5% 32.5% 2.5%

100%

100% USD255 Mil. short-term loans payable to HoldCo

Toys ‘R’ Us-Delaware, Inc. (Toys-Delaware) (IDR — CCC)

Toys ‘R’ Us, Inc. (HoldCo) (IDR — CCC) Amount 10.375% Sr. Unsec. Notes due 8/15/17 — 7.375% Sr. Unsec. Notes due 10/15/18 208 Sr. Unsec. Notes due to Toys-Delaware 734 Subordinated Notes due to Toys-Delaware 282

Rating — CC/RR6 — —

Revenue EBITDA (Fitch Defined)a Consolidated Debt Total Adjusted Debt/EBITDAR (x)

— — — —

11,732 758 5,625 7.7

Amount Rating Wayne Real Estate Parent Company, LLC

USD1.85 Bil. Secured ABL due 3/21/19b USD280 Mil. FILO Term Loan due 10/24/19 USD1,025 Mil. Secured Term Loan Facility (Term B-4) due 4/4/20 USD400 Mil. Secured Term Loan Facility (Term B-2) due 5/25/18 USD225 Mil. Secured Term Loan Facility (Term B-3) due 5/25/18 8.750% Debentures due 9/1/21 Finance Obligations Associated with Capital Projects

1,018 B/RR1 Unsecured guarantee of B-4 Term Loan

280 B/RR1 1,008 CCC+/RR3

100%

Toys ‘R’ Us Europe, LLC (European OpCo)

127 CCC/RR4 64 CCC/RR4 22 CC/RR6

TRU Taj Holdings 1, LLC (Delaware)

180 — TRU Taj Holdings 2 Limited (U.K.)

Revenuec EBITDA (Fitch Defined) Consolidated Debt (Including PropCo II and Canada) 100%

8,076 — 386 — TRU Taj Holdings 3, LLC (Delaware) 3,299 — TRU Taj LLC (Delaware)

Giraffe Junior Holdings, LLC

12.000% Senior Secured Notes due 2021

USD88 Mil. Mezzanine Loan due 11/9/19 100% Toys ‘R’ Us Property Co. II, LLC (TRU PropCo II) (IDR — CCC) Amount Rating USD512 Mil. Mortgage Loan due 11/9/19 Net Operating Income

Upstream guarantee of U.S. term loans

512 — 67 —

Secured by 123 properties Toys ‘R’ Us Canada (Canadian OpCo) 100%

100%

Amount USD200 Mil. Secured Revolver due 3/21/19b Revenue EBITDAd

N.A. 822 92

Geoffrey, LLC (IPCo) License fees from Foreign Affiliates License fees from Third Partiesd

Amount 67 17

aFitch-adjusted EBITDA only adds back impairment of long-lived assets, compensation expense and net gain on sales of properties compared with reported adjusted EBITDA. bUSD1.85 Bil. ABL revolver including a USD200 Mil. subfacility in favor of Canadian borrowers. cToys ‘R’ Us-Delaware’s consolidated revenue includes licensing fees from unaffiliated third parties, but excludes other revenues related to transactions with related parties. dLicense fees from third parties as of Jan. 30, 2016. IDR – Issuer Default Rating. RR – Recovery Rating. ABL – Asset-backed loan. FILO – First in, last out. N.A. – Not available. Source: Company filings, Fitch Ratings.

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Leveraged Finance New Organizational Structure: Part II — Toys ‘R’ Us, Inc. (USD Mil., As of Oct. 29, 2016) Bain Capital Partners LLC KKR & CO., L.P. Vornado Realty Trust Management and Directors

100%

32.5% 32.5% 32.5% 2.5%

TRU Taj LLC (Delaware) (IDR — CCC) Amount Rating 12.000% Sr. Secured Notes due 2021 583 CCC/RR4 100%

TRU Asia, LLC

Wayne Real Estate Parent Company LLC (Delaware)

70% Asia JV

Toys ‘R’ Us Property Co. I, LLC (TRU PropCo I) (IDR — CCC)

TRU (Japan) Holdings Parent Ltd. (BVI)

Amount Rating Senior Unsecured Term Loan Facility due 8/21/19 Net Operating Income

100%

888 B/RR1 180 —

Negative Pledge on 318 stores — three DCs — HQ

Toys 'R' Us-Japan, Ltd. (Japan) Unsecured Revolver due 2017–2018 1.850%–2.180% Loans due 2019–2021

Amount 8 48

100% TRU Australia Holdings, LLC (Delaware)

European Borrowers GBP138 Mil. Multicurrency ABL due 12/18/20

Amount 92

Toys ‘R’ Us Properties (U.K.) Limited (U.K. PropCo) GBP263 Mil. Term Loan Facility due 7/7/20

Amount 312

Secured by 31 properties Toys ‘R’ Us France Real Estate SAS (France PropCo) EUR48 Mil. Term Loan Facility due 2/27/18

Amount 49

Secured by nine properties Toys ‘R’ Us Iberia Real Estate SL (Spain PropCo) 26 unencumbered properties

NR – Not rated. IDR – Issuer Default Rating. RR – Recovery Rating. ABL – Asset-backed loan. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix B Bank Agreement Covenant Summary — Toys ‘R’ Us – Delaware, Inc. Overview Borrower Description of Debt Document Date

Amount

Maturity Date

Ranking Security

Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration MAC Clause Equity Cure Cash Dominion Events Required Lenders/Voting Rights

Toys ‘R’ Us  Delaware, Inc. (lead borrower), Toys ‘R’ Us (Canada) Ltd. (Canadian borrower). $1.85 Bil. secured asset-based revolving credit facility, including a $200 Mil. subfacility in favor of Canadian borrowers $280 Mil. FILO term loan (Tranche A-1 loan facility) First amendment to third amended and restated credit agreement and to security agreement dated 10/24/14 (Exhibit 10.1 to 10-Q filed 12/11/14) Third amended and restated credit agreement dated 3/21/14 (Exhibit 10.1 to 10-Q filed 6/12/14), originally dated 7/21/05, as amended as of 12/21/05; 7/19/06; and 6/24/09 Amendment No. 1 to amended and restated intercreditor agreement dated 10/2414 (Exhibit 10.3 to 10-Q filed 12/11/14) Amended and Restated Intercreditor Agreement, dated as of 8/24/10 (Exhibit 4.5 to 10-Q filed 9/10/10) $1.85 Bil. full commitment split between a $1.65 Bil. U.S. facility and a $200 Mil. Canadian facility subject to a borrowing base consisting of specified percentage of eligible inventory and eligible credit card receivables and certain real estate less any applicable availability reserves. Accordion feature of $1,150 Mil. under the revolving facility subject to no default. $280 Mil. FILO term loan (Tranche A-1 loan facility). ABL Facility: 3/21/19 (with a springing maturity date if the Toys-Delaware term loans due fiscal 2018 are not repaid 30 days prior to maturity). $280 Mil. FILO Term Loan (Tranche A-1 Loan Facility): 10/24/19 subject to a springing maturity to 2018 if the remaining secured Term B-2 and Term B-3 loans have not been refinanced, extended or otherwise replaced or repaid prior to such time. Senior secured. Secured by a first lien on inventory and receivables of Toys-Delaware and its domestic subsidiaries. Any assets of the Canadian borrower and its subsidiaries secure only the Canadian liabilities, besides 65% of Canadian real estate, which secures the whole facility (with 50% toward the Canadian subfacility and 15% applied toward the domestic ABL and FILO term loan). Second lien on 65% of Toys-Canada equity. Guaranteed by Toys-Delaware and material wholly owned U.S. subsidiaries, including TRU Puerto Rico (but excluding TRU PropCo II, Geoffrey, LLC [IPCo], and its subsidiaries and foreign subsidiaries); Canadian subsidiaries only guarantee the obligations under the Canadian revolver.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) $2.75 Bil. aggregate debt basket composed of (i) term loan, (ii) permanent financing facility maturing on or after the revolver with amortization capped at $200 Mil. per year or $500 Mil. prior to maturity; (iii) debt of special-purpose entities of the lead borrower, including supplemental real estate facilities; and (iv) any other unsubordinated debt, provided it is either capped at $750 Mil. or the consolidated interest coverage ratio of more than or equal to 2.0x; 2) no restriction on subordinated debt; 3) additional all-purpose unsecured debt up to $100 Mil. Generally not permitted for debt except existing liens on debt and refinancings thereof; general carveout of $100 Mil. Guarantees are defined as debt and, hence, governed by debt restriction. Also see Investments Restriction section below.

CoC is defined as occupancy of majority of board seats or acquisition of more than 25% voting stock after an IPO and constitutes an event of default. Ratio test permitted provided the following payment conditions are satisfied: (i) no event of default; (ii) excess availability of more than $225 Mil. during any projected 12 fiscal months; and (iii) pro forma fixed-charge coverage of more than 1.0x. Carveouts: General carveout of $100 Mil.; $100 Mil. carveout for guarantees provided to nonloan parties (such guarantee can only exceed $25 Mil. at any time if projected monthly excess availability is more than $225 Mil. during any projected 12 fiscal months); $25 Mil. for investments in foreign subsidiaries; $250 Mil. for investments to secure obligations of TRU (Vermont), Inc. as an insurance captive. General carveout of $100 Mil. provided no event of default and the proceeds are used to repay the loans; real estate asset sales are permitted provided such sale is made at FMV, such leases on market terms and consideration shall be at least 50% in cash if assets are sold to non-affiliated entity or 100% in cash if sold to affiliated entity; store closures and related inventory dispositions are permitted provided that the number of stores closed shall not exceed 15% of the total loan parties’ stores as of the beginning of any fiscal year or 30% cumulatively (net of new store openings) and net proceeds from the sales shall be used to prepay the loans.

RP Basket: None. Notable Permitted Payments: Repayment of the HoldCo 7.625% 2011 notes and the 7.875% 2013 notes provided pro forma excess availability for the one-month prior and six months’ projected pro forma for such payment is at least $250 Mil. Special Situation: no restriction if excess availability of more than $225 Mil. and pro forma fixed-charge coverage ratio of more than 1.1x.

Yes, exceeding $190 Mil. note that a master lease liquidation event (acceleration of any CMBS/real estate debt incurred by special purpose entities) does not constitute an event of default. N.A. None. None. Sweep cash toward prepayment of the loans if (a) either excess availability falls below $150 Mil. for any three days in a 30-day period; (b) excess availability at any time is less than $130 Mil.; or (c) specified event of default occurs. 50% of total commitments.

FILO – First in, last out. ABL – Asset-based loan. FMV − Fair market value. CMBS − Commercial mortgage-backed securities. N.A. – Not applicable. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Term Loan Agreement Covenant Summary — Toys ‘R’ Us – Delaware, Inc. Overview Borrower Description of Debt Document Date

Original Size/Outstanding

Maturity Date Ranking Security

Guarantee

Toys ‘R’ Us - Delaware, Inc. Senior secured term loan credit facility. Third amendment to amended and restated credit agreement dated 10/24/14 (Exhibit 10.2 to 10-Q filed 12/11/14). Intermediate company unsecured guarantee dated 10/24/14 (Exhibit 10.4 to 10-Q filed 12/11/14) between Toys ‘R’ Us - Delaware, Inc. and Wayne Real Estate Parent Company, LLC Incremental Joinder Agreement No. 2, dated 4/10/12, filed as Exhibit 10.4 to 10-Q dated 6/8/12 Incremental Joinder Agreement, dated 5/25/11, filed as Exhibit 10.1 to 10-Q dated 6/10/11 Security agreement dated 8/24/10, filed as Exhibit 4.3 to 10-Q dated 9/10/10 First-lien intercreditor agreement dated 8/24/10, filed as Exhibit 4.4 to 10-Q dated 9/10/10 Amended and restated intercreditor agreement dated8/24/10, filed as Exhibit 4.5 to 10-Q dated 9/10/10 Amended and restated credit agreement dated 8/24/10, filed as Exhibit 10.2 to 10-Q dated 9/10/10 Term B-2: $400 Mil./$126 Mil. Term B-3: $225 Mil./$63 Mil. Term B-4: $1.025 Mil./$983 Mil. Term B-2 and B-3: 5/25/18 Term B-4: 4/4/20 Senior secured. Secured by first lien on trademarks and intellectual property rights and second lien on accounts receivable and inventory of ToysDelaware and its domestic subsidiaries. The B-4 term loan is also secured by a first lien on 65% of Canada Toys-Canada equity; a first lien on certain unencumbered real property when liens limitation in 2018 HoldCo notes are no longer in effect. Term-B-2 and Term B-3 are pari passu with Term B-4 in terms of payment on the common liens. Guaranteed by Toys-Delaware and its existing and future direct and indirect subsidiaries, including Geoffrey, LLC (IPCo) but excluding TRU PropCo II or any other special-purpose real estate entities. Term B-4 has, in addition, unsecured guarantee by indirect parent holding company of PropCo I, Wayne Real Estate Parent Company, LLC.

Financial Covenants None. Debt Restrictions Debt Incurrence

Limitation on Liens

Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction

Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Required Lenders/Voting Rights

Coverage Ratio Debt: None. Notable Permitted Debt: 1) ABL borrowing up to the greater of $2.5 Bil. and the combined borrowing base; 2) additional incremental term loans up to $175 Mil.; 3) capital lease obligations up to $250 Mil.; 4) debt to refinance the 2021 debentures ($22 Mil. outstanding); other secured debt provided no event of default and senior secured leverage ratio is less than or equal to 1.75x; 4) $150 Mil. debt secured by PPE provided proceeds applied fully for loan repayment; 5) unsecured, later-maturing debt provided pro forma fixed-charge coverage ratio is more than or equal to 2.0x, no event of default and no scheduled repayment, mandatory redemption or sinking fund obligation; 6) additional all-purpose debt up to $100 Mil. Carveouts: Liens on PPE securing indebtedness up to $150 Mil. provided senior secured leverage is less than or equal to 1.75x; general carveout of $100 Mil.

A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the borrower or HoldCo and constitutes an event of default. General carveout of $100 Mil. for permitted acquisition without notifying administrative agent. Carveout for permitted investments: overall subject to fixed-charge coverage test of 2.0x; investments in connection with permitted acquisition with purchase price subject to a limit (determined by cumulative 50% consolidated net income commencing 8/2/09, plus equity issuance proceeds plus upstream dividend and distribution); investments consisting of posting letter of credit, $250 Mil. for guarantees or cash collateral to secure obligations of TRU (Vermont), Inc. in respect of insurance policies issued in favor of Holdings and its domestic subsidiaries; $100 Mil. for unsubordinated intercompany loans to nonloan parties; and general carveout of $100 Mil. No notable carveout; for permitted asset sales, there shall be no event of default and provided that 75% of the cash proceeds from real property sales or 100% from other asset sales to be applied for loan repayment; sale-leaseback permitted provided 100% of sales proceeds applied for loan repayment.

RP Basket: 50% of cumulative consolidated net income of Toys ‘R’ Us-Delaware, Inc. commencing Aug. 2, 2009, plus 100% equity issuance proceeds plus 100% upstream dividend and distribution. Subject to fixed-charge coverage ratio < 2.0x. Notable Permitted Payments: 1) Prepayment or repayment of 7.625% notes due 2011 and 7.875% notes due 2013 are permitted provided U.S. OpCo’s total net leverage is less than 4.75x; 2) distributions to HoldCo for the purpose of HoldCo operating expense and interest expense of HoldCo notes; and 3) additional all-purpose payments up to $50 Mil.

Yes, exceeding $100 Mil. of debt at any loan party (excluding HoldCo and any direct or indirect subsidiary of HoldCo). N.A. 50% of total commitments.

ABL – Asset-based loan. PPE − Property, plant and equipment. OpCo – Operating company. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Bank Agreement and Term Loan Covenant Summary — Toys ‘R’ Us — Delaware, Inc. Financial Covenants (Maintenance) Excess Availability (Minimum)

Other

Principal Repayments Mandatory/Tax Prepayment

Amortization Schedule Callability/Optional Prepayment Pricing Coupon Type/Index

ABL Revolver: Excess availability (line cap minus outstanding balance) at all times of at least $125 Mil. (of which no more than $50 Mil. may be attributable to Canadian excess availability). Line cap is defined as the lower of total commitments and combined borrowing base. Term Loan: No financial covenants; only incurrence tests, such as senior secured leverage test, fixed-charge coverage test, or U.S. OpCo total net leverage test to constrain debt incurrence, investments and restricted payments.

ABL Revolver: Sweep cash toward prepayment of the loans if (a) either excess availability falls below $150 Mil. for any three days in a 30-day period; (b) excess availability at any time is less than $130 Mil.; or (c) specified event of default occurs. Term Loan Facility: Excess Cash: 50% of excess cash flow, with stepdown to 25% if total net leverage is less than 1.75x, then 0% if total net leverage is less than 1.4x. Asset Sale: 100% of net proceeds subject to company’s reinvestment rights. New Debt: 100% of net proceeds from debt issuance other than permitted under the credit facilities. Term loans amortize at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. None.

ABL Revolver: LIBOR plus 150 bps−175 bps or prime rate plus 50 bps−75 bps depending on utilization of the facility; commitment fee equals 0.25%. Term Loan B-2 and B-3: LIBOR plus 3.75% or base rate plus 2.75% with stepdown to LIBOR plus 3.50% or base rate plus 2.50% if total leverage less than or equal to 1.75x; LIBOR floor of 1.50% or base rate floor of 2.50%. Term Loan B-4: LIBOR plus 8.75% with LIBOR floor of 1% or base rate plus 7.75% with base rate floor of 2%.

ABL – Asset-based loan. OpCo – Operating company. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix C Term Loan Agreement Covenant Summary — Toys ‘R’ Us Property Co. I, LLC Overview Borrower Description of Debt Document Date and Location Original Issue/Outstanding Maturity Date Ranking Security Guarantee Debt Restrictions Debt Incurrence

Limitation on Liens Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default

Cross-Acceleration Mandatory Prepayments

Voluntary Prepayments Amortization Schedule Coupon

Toys ‘R’ Us Property Co. I, LLC (PropCo I) Senior unsecured term loan facility. Term Loan Credit Agreement dated 8/21/13, filed as Exhibit 10.4 to 10-Q dated 9/1713. $985 Mil./$985 Mil. 8/21/19 Senior unsecured. Negative pledge on 342 properties (338 stores, three DCs and headquarter building) held in a bankruptcy-remote entity with a 20-year master lease covering all the properties. Guaranteed on a senior unsecured basis by all of PropCo I’s subsidiaries, but not by HoldCo or U.S. OpCo.

Coverage Ratio Debt: None. Notable Permitted Debt: 1) Incremental term loan facility plus then outstanding principal amount up to the difference between 65% of the appraised value of then owned and leased properties; and 2) additional all-purpose debt up to $50 Mil. Negative pledge on 342 properties. Not permitted to guarantee obligations outside of PropCo I and its subsidiaries.

A CoC is defined as less than 100% of equity interest in the borrower or acquisition of more than 50% voting stock of the borrower and constitutes an event of default (EoD). None. Asset sales permitted provided at least 75% of proceeds in cash or equivalent; if cumulative appraised value of all asset sales exceeds $200 Mil. and pro forma loan to value ratio exceeds 75%, or if an EoD has incurred, 100% of the greater of (i) net cash proceeds of such asset sales (including the amount of any related termination payments made pursuant to the master lease agreement) and (ii) 65% of appraised value of properties disposed of in such sale, shall be used to repay the term loan.

RP Basket: 50% of retained cash flow, with retained cash flow defined as 75% of cumulative excess cash flow (ECF) and 100% of asset sale proceeds (including amount of any related termination payments made pursuant to the master lease agreement) in excess of the amount required for mandatory prepayment of term loan, plus 50% of declined ECF sweep by PropCo I term loan lenders, plus 100% of equity proceeds, plus certain permitted tax distributions. So long as pro forma fixedcharge coverage ratio is not less than 2.0x, RP basket can include additional 50% of retained cash flow and 50% of declined ECF sweep. Notable Permitted Payments: None.

PropCo I or its subsidiaries’ default on material debt of more than $20 Mil. is defined as an event of default. Any payment default in excess of $15 Mil. by U.S. OpCo under its master lease with PropCo I beyond the stated grace period shall cause the master lease to terminate, which in turn would be an event of default. N.A. 25% of ECF sweep commencing fiscal year ending 1/31/15; 100% of net cash proceeds from incurrence of indebtedness other than permitted indebtedness by the Borrower and its subsidiaries; In terms of repayment with proceeds from asset sales, see Sales of Assets Restriction. 102 and 101 soft call protection in year one and year two for term loan repricing. Amortize at a 0.25% quarterly installment (1.0% annually) with the balance due upon maturities. L + 500 with LIBOR floor of 1.00%.

DC – Distribution center. OpCo – Operating company. N.A. – Not applicable. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix D Bond Covenant Summary — TRU Taj LLC Overview Description of Debt Document Date and Location Maturity Date Original Issue/Outstanding Ranking Security Guarantee

Debt Restrictions Debt Incurrence

Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Restricted Payments Restricted Payments (RP)

Other Cross-Default Cross-Acceleration Callability

Equity Clawback MAC Clause Covenant Suspension

12% Senior Secured Notes due 2021 Indenture dated 8/16/16 (exhibit 4.1 to 8-K filed 8/18/16) 8/15/21 $583 Mil./$583 Mil. First lien. Pledge of capital stock of certain Foreign Subsidiaries Guaranteed by Toys “R” Us (the parent), certain parent companies of TRU Taj LLC (the issuer), and certain direct and indirect subsidiaries of the Issuer.

Restrictions at Parent or a Restricted Subsidiary: None if pro forma FCCR greater than 2.0x. Bank debt up to the greater of $3.2 Bil. and the borrowing base (87.5% of BV of inventory plus 90% of all credit card receivables of parent and restricted subsidiaries) at the time of incurrence, plus $1.5 Bil., net of mandatory principal payments or repurchases with proceeds from asset sales. General basket of $150 Mil. plus up to $100 Mil. equal to the amount outstanding on any debt facility at issue date less the amount incurred to refinance such debt facility after the issue date. Indebtedness to finance purchase, lease, construction or improvement of PPE in a permitted business not to exceed greater of $400 Mil. and 5% of Total Assets of the Parent. Indebtedness for acquisitions if consolidated FCCR is equal to or greater than 2.0x immediately prior or there is room to incur at least $1 of additional Indebtedness. Acquired indebtedness if either pro forma Leverage ratio does not exceed 4.0x or the pro forma leverage ratio does not exceed its pre-transaction level. Restrictions at Issuer and its Restricted Subsidiaries: Indebtedness of Spain Propco up to $75 Mil., or up to $100 Mil. if Leverage Ratio is less than 4.0x. Prior to a distribution event incur parity lien debt, unsecured indebtedness, subordinated indebtedness or disqualified stock up to $141.5 Mil. (issuer basket debt). On or after a distribution event incur parity lien debt, unsecured indebtedness, subordinated indebtedness or disqualified stock as long as pro forma issuer leverage ratio does not exceed 4.0x (issuer basket debt). Indebtedness to finance purchase, lease, construction or improvement of PPE in a permitted business not to exceed $25 Mil. General basket of $25 Mil. revolving credit indebtedness up to $20 Mil. Indebtedness up to 100% of net cash proceeds received by issuer on sale of equity interests or capital contribution. On or after the consummation of a qualified excluded business IPO, indebtedness of the excluded public company not to exceed 100% its consolidated adjusted EBITDA. Acquired indebtedness if either pro forma leverage ratio does not exceed 4.0x or the pro forma leverage ratio does not exceed its pre-transaction level. No limitations on subordinated indebtedness Exceptions for liens securing the European ABL facility. General basket of $100 Mil. for the parent, including up to $10 Mil. for the issuer and its restricted subsidiaries. Liens securing FF&E up to $150 Mil. for the parent, including up to $50 Mil. for the issuer and its restricted subsidiaries. Concept of guarantee of indebtedness incorporated in limitations on indebtedness and bound by them.

Parent seizes to wholly own the issuer. Acquisition of 50% of voting stock in parent or its direct or indirect parents that hold 100% of the voting stock of the parent. 101% repurchase of principal upon CoC. Loans and advances to employees up to $20 Mil. Up to $250 Mil. for investment made by parent and its restricted subsidiaries. Up to $75 Mil. for investment made by issuer and its restricted subsidiaries. Permitted if for consideration of parent or restricted subsidiary (i) no less than 75% of proceeds in cash (unless it is an asset swap); (ii) noncash consideration not to exceed 5% of total assets. After 450 days for the parent or 365 days for the issuer, proceeds to (i) pay down indebtedness at the parent or restricted subsidiary (excluding subordinated and nonrecourse debt); (ii) capex and other noncurrent assets (iii) properties and other assets that would replace the sold assets.

Prohibited unless consolidated FCCR is at least 2.0:1, or, with respect to a restricted junior payment, the issuer leverage ratio is less than 3.0:1. Restrictions at Parent or a Restricted Subsidiary: Up to $15 Mil. of equity interests held by employees and directors, or up to $30 Mil. upon Qualified IPO. Obligations under the management agreement up to $6 Mil. for any 12-month period. Restrictions at Issuer and its Restricted Subsidiaries: Up to $5 Mil. of equity interests held by employees and directors, or up to $10 Mil. upon qualified IPO. Dividends/loans to the parent up to $12.5 Mil. annually to pay for operational costs (taxes, overhead, fees, management agreement, insurance policies, trade payables, etc.). Dividends/loans to parent from available proceeds from Spain Propco indebtedness as long as proceeds are used to pay down specified debt and the issuer leverage ratio is no less than 4.00:1.00 on pro forma basis. Restricted payment to parent from net proceeds of issuer basket debt (see Debt Incurrence), distribution of existing notes acquired by issuer in from the net proceeds of debt permitted to be incurred by the issuer, or offer by Issuer to exchange issuer basket debt for existing notes. General basket for issuer only up to $10 Mil.. None. $175 Mil. for indebtedness/final judgments at parent of any of its restricted subsidiaries. $50 Mil. for indebtedness/final judgments at issuer or any of its restricted subsidiaries. Prior to 2/15/18, issuer can redeem: (i) All or part of the notes at 100% of principal plus applicable premium and accrued and unpaid interest. (ii) Up to 10% of the notes at 103% of principal at 103% of principal for each 12-month period, with ability to carry over unused amounts, but not to exceed 15% per period. After 2/15/18 notes can be redeemed at 100% plus accrued and unpaid interest. None. None.

FCCR – Fixed-charge coverage ratio. BV – Book value. PPE – Property, plant and equipment. ABL – Asset-backed loan. FF&E – Furniture, fixtures and equipment. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix E Bond Covenant Summary — Toys ‘R’ Us, Inc. Overview Issuer Description of Debt Document Date Maturity Date Original Issue/Outstanding Ranking Security Guarantee Debt Restrictions Debt Incurrence Limitation on Liens

Limitation on Guarantees Acquisitions/Divestitures Change of Control (CoC) M&A, Investments Restriction Sale of Assets Restriction

Toys ‘R’ Us, Inc. 7.375% senior notes. Indenture dated 5/28/02, filed as Exhibit 4.3 to S-3 dated 5/29/02. 10/15/18 $400 Mil./$209 Mil. Senior but structurally subordinated to the OpCo debt. Unsecured. None.

None. Liens on principal property of domestic subsidiaries are limited to a maximum of 10% of consolidated net tangible assets or 15% of consolidated capitalization. There is no limit on the company’s ability to pledge working capital or the assets of international subsidiaries. None.

None. None. Carveout for sale-leaseback transactions: permitted if net proceeds are at least equal to the sum of all acquisition costs of principal property and a lien incurred thereon would be permitted.

Restricted Payments Restricted Payments (RP)

None.

Other Cross-Default Cross-Acceleration MAC Clause Equity Clawback Covenant Suspension Callability Applicability of Covenants

None. None. None. None. Upon an upgrade to investment-grade ratings and given no event of default. Call at make whole plus 50 bps. None.

OpCo – Operating company. MAC − Material adverse change. Source: Company filings, Fitch Ratings.

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Leveraged Finance Appendix F Financial Summary — Toys ‘R’ Us, Inc. 12 Months ($ Mil.)

12 Months

Three Months

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15 10/31/15

1/30/16

Three Months

LTM

4/30/16 7/30/16 10/29/16 10/29/16

Profitability (%) Operating EBITDAR Margin

11.8

12.0

9.2

9.8

8.7

10.7

7.2

14.4

11.2

9.5

11.0

6.5

11.3

Operating EBITDA Margin

7.4

7.2

4.2

4.8

2.6

4.6

1.2

11.5

6.4

3.5

4.8

0.4

6.5

Operating EBIT Margin

4.5

4.2

1.1

1.8

(1.1)

0.8

(2.3)

9.7

3.5

0.0

1.1

(3.0)

3.6

FFO Margin

4.3

(0.2)

1.7

(3.5)

0.2

(3.7)

9.7

2.6

(3.7)

0.4

(6.1)

2.2

FCF Margin

(0.4)

1.9

(0.7)

2.2

(28.9)

(3.7)

(16.3)

23.8

0.2

(34.8)

(4.1)

(15.2)

(0.8)

Return on Capital Employed

10.6

9.3

2.4

4.7

5.7

7.1

7.5

9.7

9.5

9.8

9.1

Total Adjusted Debt/Operating EBITDARa

6.1

6.5

8.7

8.0

7.8

7.7

7.9

7.0

7.4

7.7

FFO-Adjusted Leverage

6.2

6.4

9.6

8.0

7.5

7.3

7.5

7.2

7.4

7.6

7.5

8.1

(0.6)

2.4

(0.9)

2.8

0.8

2.0

1.5

0.2

(1.2)

(1.3)

(0.9)

Total Debt with Equity Credit/Operating EBITDAa

5.0

5.5

9.6

8.0

8.2

7.7

7.9

6.3

7.0

6.9

7.5

Total Secured Debt/Operating EBITDAa Total Adjusted Debt/(CFFO Before Lease Expense – Maintenance Capex)

0.9

3.3

7.3

6.2

6.4

5.9

6.3

5.1

4.6

5.9

18.3

11.7

18.8

11.0

14.3

12.5

14.0

15.9

21.8

22.4

21.4

Total Adjusted Net Debt/Operating EBITDARa

5.7

5.8

8.2

7.4

7.5

7.3

7.6

6.5

7.0

7.1

7.4

FFO-Adjusted Net Leverage

5.8

5.7

8.9

7.5

7.1

7.0

7.2

6.6

6.8

7.2

7.7

(73.3)

16.8

(46.5)

15.2

65.2

24.9

35.2

215.2

(42.7)

(39.5)

(56.6)

Coverage (x) Operating EBITDAR/ (Interest Paid + Lease Expense)a

1.6

1.5

1.1

1.2

1.3

1.4

1.3

Operating EBITDA/Interest Paida

2.4

2.3

1.1

1.6

1.4

1.5

1.6

1.8

1.9

1.7

1.8

1.7

FFO Fixed-Charge Coverage

1.6

1.5

1.0

1.2

1.3

1.2

FFO Interest Coverage

2.3

0.9

1.6

1.5

1.6

1.7

1.8

1.7

1.6

CFFO/Capex

0.8

1.9

0.6

2.3

1.3

2.0

1.7

1.1

0.5

0.6

Gross Leverage (x)

FCF/Total Adjusted Debt (%)

Net Leverage (x)

Total Net Debt/(CFFO – Capex)

Debt Summary Total Debt with Equity Credit Total Adjusted Debt with Equity Credit Lease-Equivalent Debt Other Off-Balance Sheet Debt Interest (Paid) Implied Cost of Debt (%)

5,170

5,343

5,019

4,788

5,215

5,282

5,640

4,769

5,321

5,313

5,625

10,050

10,519

10,043

9,740

9,719

9,786

10,144

9,273

9,825

9,817

10,129

4,880

5,176

5,024

4,952

4,504

—

(432)

(458)

(380)

(457)

(461)

(445)

(429)

(393)

(438)

(434)

(443)

8.3

8.2

8.8

7.8

8.7

8.6

7.8

9.0

8.2

8.3

8.2

7.9

Cash Flow Summary FFO Change in Working Capital (Fitch Defined) CFFO Non-Operating/Nonrecurring Cash Flow Capital (Expenditures) Common Dividends (Paid) FCF Acquisitions and Divestitures Net Debt Proceeds Net Equity Proceeds Other Investing and Financing Cash Flows Total Change in Cash and Equivalents

592

582

(28)

215

(82)

(87)

471

306

(86)

(140)

254

(273)

(45)

172

261

(548)

(49)

(235)

764

(68)

(670)

(58)

(127)

(91)

319

537

144

476

(630)

(45)

(322)

1,235

238

(756)

(49)

(267)

163

—

(380)

(286)

(238)

(207)

(43)

(39)

(57)

(80)

(219)

(50)

(45)

(79)

(254)

—

(61)

251

(94)

269

(673)

(84)

(379)

1,155

(806)

(94)

(346)

(91)

(70)

(15)

—

(1)

—

(2)

(171)

175

(334)

(156)

430

361

(854)

(21)

559

310

—

(10)

(46)

(58)

(2)

(3)

(30)

(27)

(7)

(9)

(23)

(312)

417

(474)

(245)

(36)

(21)

284

(18)

(222)

(38)

Liquidity Readily Available Cash and Equivalents

701

1,118

644

698

453

417

396

680

458

420

1,318

1,211

1,191

1,213

779

702

1,031

884

1,089

571

841

Net Working Capital (Fitch Defined)

132

219

(314)

269

319

563

506

513

570

716

Trade Accounts Receivable (Days)

6.7

6.9

7.2

6.6

8.7

9.5

10.3

4.2

7.0

9.7

11.0

11.9

9.4

Inventory Turnover (Days)

91.1

94.7

97.2

95.0

133.1

140.3

199.2

63.9

109.4

148.7

159.3

214.5

167.9

Trade Accounts Payable (Days)

59.1

58.6

66.6

72.3

78.6

79.1

125.4

47.8

81.9

82.6

86.1

130.2

101.9

2.7

2.1

1.9

1.7

1.8

1.7

2.4

1.6

1.9

2.2

2.0

3.5

2.2

Availability Under Committed Credit Lines Not Readily Available Cash and Equivalents Working Capital

Capital Intensity (%) a

EBITDA/R after dividends to associates and minorities. bSame-store sales for the LTM reflect the nine months ended Oct. 29, 2016. CFFO – Cash flow from operations. SG&A – Selling, general and administrative. Continued on next page. Source: Company filings, Fitch Ratings.

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Leveraged Finance Financial Summary — Toys ‘R’ Us, Inc. (Continued) 12 Months

12 Months

Three Months

LTM

1/28/12

2/2/13

2/1/14

1/31/15

5/2/15

8/1/15

10/31/15

1/30/16

13,909

13,543

12,543

12,361

2,325

2,293

2,331

4,853

11,802

2,319

2,282

2,278

0.3

(2.6)

(7.4)

(1.5)

(6.2)

(6.0)

(5.2)

(2.6)

(4.5)

(0.3)

(0.5)

(2.3)

(1.7)

Operating EBITDAR Operating EBITDAR After Dividends to Associates and Minorities

1,639

1,627

1,149

1,216

202

246

168

701

1,316

221

251

149

1,321

1,639

1,627

1,149

1,216

202

246

168

701

1,316

209

251

149

1,309

Operating EBITDA Operating EBITDA After Dividends to Associates and Minorities

1,029

980

521

597

105

560

753

110

758

1,029

980

521

597

105

560

753

110

746

626

573

133

220

(26)

(53)

470

410

(68)

428

($ Mil.)

4/30/16 7/30/16 10/29/16 10/29/16

Income Statement Revenue Revenue Growth (%)

Operating EBIT

11,732

Sector-Specific Data Domestic Same-Store Sales (%)b No. of Stores Gross Margin (%)

(1.7)

(3.5)

(5.0)

(1.0)

(2.3)

(2.5)

(0.9)

1.2

(0.6)

0.1

0.0

(1.9)

(0.6)

1,653

1,703

1,762

1,814

1,841

1,861

1,874

1,877

1,897

1,910

35.7

36.6

35.0

35.8

37.1

38.2

35.7

34.1

35.8

36.5

37.8

36.0

SG&A/Revenues (%)

0.5

(1.0)

(2.1)

(4.5)

105.1

106.0

102.1

40.6

(4.0)

102.0

102.1

96.7

Inventory Turnover

4.0

3.9

3.8

3.6

3.5

2.3

3.3

3.1

3.0

2.2

Accounts Payable Turnover

6.2

5.5

5.0

6.1

6.2

3.7

4.5

5.6

3.6

21.8

20.9

17.4

22.7

22.1

23.7

23.1

28.0

24.6

25.1

24.1

1.7

0.4

(13.8)

(4.1)

(3.4)

(2.7)

(1.8)

(1.9)

(1.7)

(1.6)

(1.3)

94.3

70.3

61.3

54.9

49.4

45.3

71.3

88.9

63.8

62.5

53.6

103.9

Return on Invested Capital (%) Return on Assets (%) Capex/Depreciation (%) a

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Leveraged Finance

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