Daily News: January 16, 2012

Fitch Publishes U.S. Retail Stats Quarterly for Q3/11

Fitch Ratings has published its U.S. Retail Stats Quarterly for the third quarter of 2011. The report provides an overview of key economic data, operating and credit trends in the U.S. retail industry, and a summary of individual companies’ operating and credit metrics for 45 retailers that Fitch maintains public ratings or private credit opinions on, as well as some select non-rated names. In addition, the report highlights key credit strengths and concerns and provides a summary of company liquidity positions for the latest reported period.

Key Highlights:

  • Industry Trends: Third-quarter results for Fitch-rated retailers were generally in line with Fitch’s expectations. Strong comparable store sales at Costco Wholesale Corp., Macy’s, Inc., Nordstrom, Inc. and other retailers that cater to higher income households contrasted with weaker results at Bon-Ton Stores, Inc., JC Penney Company, Inc. and several other mid-to-low-tier retailers, which confirmed the diverging fortunes of high and low income consumers.
  • 2012 Expectations: In 2012, Fitch expects total retail sales growth in the 4%-5% range, similar to growth in 2011. Fitch expects lower income households to remain challenged in 2012, suggesting sales of discretionary and/or big-ticket items could come under additional pressure. Moreover, higher cotton costs during 2011 will continue to affect first-half 2012 results, leading to further gross margin compression for department stores and specialty apparel retailers, before margins begin to recover in the second half. Overall, operating margins for the sector are expected to hold steady in 2012 at around 5.6%.
  • Operating and Credit Trends: Operating and credit trends in the retail sector are generally steady. Free cash flow (FCF) is healthy across the sector as capital expenditures are tracking below the levels of 2006-2007, even as dividends move gradually higher. However, share repurchases are projected to remain elevated in 2011-2012, at near 2010 levels, eating into industry cash balances and potentially leading to additional downgrades. Adjusted debt levels are expected to move gradually higher in 2011-2012, but adjusted debt/EBITDAR is projected to be steady at an industry-weighted average of about 2.6 times (x). This figure masks operating pressures at certain credits, such as Bon-Ton, Sears Holdings and SUPERVALU.
  • Liquidity Strong: Liquidity is expected to remain strong for U.S. investment grade retailers with healthy levels of cash and unused bank lines, most of which do not expire until 2013 and beyond. Fitch believes near-term liquidity (cash and credit facility availability) remains adequate to address the key fixed obligations of the majority of the high-yield issuers. One notable exception is Sears, which is seeing its liquidity profile worsen as it continues to burn FCF.

    The report, U.S. Retail Stats Quarterly – Second-Quarter 2011, is available on Fitch’s website at www.fitchratings.com.