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 --
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