Fitch Publishes U.S. Retail Stats Quarterly for Third Quarter 2012
by Business Wire
Fitch Ratings has published its U.S. Retail Stats Quarterly for the third quarter of 2012. 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 41 retailers on which Fitch maintains public ratings, private credit opinions, 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.
Industry Trends Uneven: The U.S. retail sector continues to benefit from a gradually improving economic backdrop, though the results of individual retailers remain uneven. Strong comparable store sales at Nordstrom, Inc.; Costco Wholesale Corp.; Macy's, Inc.; and other retailers that cater to higher income households contrast with continuing weaker results at J.C. Penney Company, Inc.; Sears Holdings Corp; and several other mid- to low-tier retailers.
Negative Tone to Rating Activity: Rating activity skewed negatively in 2012, with a total of 11 downgrades and three upgrades. Concerns around market share losses and margin compression have resulted in multi-notch downgrades on Best Buy, Inc., J.C. Penney, RadioShack, and SUPERVALU. In addition, the recent downgrade of Toys 'R' Us, Inc. reflected similar concerns as the top-line comes under increasing pressure. Fitch may take additional negative rating actions in 2013 as indicated by the Negative Outlooks on several retailers.
Economic Backdrop Muted: As shown on pages 3 - 5, the economic backdrop remains muted, though there has been some improvement from a year ago. Retail sales (excluding auto) are up 4.9% YTD (as of October), the unemployment rate decreased to 7.8% in December, while the consumer confidence index decreased to 65.1 in December. The inflation picture is mixed, as lower cotton costs should be a positive for department stores' and apparel retailers' gross margins through first-half 2013, to the extent they can hold onto pricing. On the other hand, food inflation, which has moderated to the low single-digit range, could start creeping up in 2013 as the effect of crop failures in 2012 works through the food chain. This could strain budgets and cut into discretionary spending, particularly for lower-income consumers, though gasoline prices are currently at the low end of their two-year range.
Operating and Credit Trends Broadly Stable: Operating and credit trends in the retail sector are generally steady, as shown on pages 6 - 7. Free cash flow (FCF) is healthy across the sector and capital expenditures inch higher but remain below the levels of 2005 - 2008, even as dividends move gradually higher. Adjusted debt levels are expected to increase modestly in 2013, but adjusted debt/EBITDAR is projected to be steady at an industry-weighted average of 2.7x - 2.8x. This figure masks operating pressures at certain credits, such as Best Buy, J.C. Penney, Sears Holdings, SUPERVALU, and RadioShack.
The report, 'U.S. Retail Stats Quarterly - Third-Quarter 2012,' is available on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Retail Stats Quarterly -- Third-Quarter 2012