US retailer CDS pressured by headwinds
NEW YORK, Aug 15 (IFR) - US retailers could see the cost of insuring their debt against default rise in coming months if recent results are anything to go by, as a slowdown in consumer spending starts to bite.
Both Macy's and Wal-Mart reported lower-than-expected sales this week.
The latter said on Thursday that second quarter same-store sales were impacted by the higher payroll tax, among other factors, while Macy's reported an unexpected decline in sales a day earlier, blaming hesitation by consumers to spend on non-essential items.
Credit default swaps on both companies widened only marginally Thursday by 1.5-2 basis points, but analysts predict a more bearish positioning to develop with a number of headwinds on the horizon.
Barclays analysts, for example, lowered their opinion on Macy's to market weight from overweight, saying the miss was perceived as a "harbinger for near-term results" from others in the industry.
With retailers remaining constricted by payroll tax increases, lower discretionary spending, weather factors and, for Wal-Mart, lower-than-expected grocery inflation, there will now likely be an even stronger focus on back-to-school and the holiday seasons - the two most pivotal periods of the year.
Wal-Mart cut its full-year earnings per share outlook by ten cents to $5.10-$5.30 to further incorporate the challenging consumer environment, while Macy's CEO Terry Lundgren voiced concerns about the performance, citing "continuing uncertainty" in consumer discretionary spending.
Kohl's bucked the trend Thursday with its quarterly comparable sales rising, which sent its shares 6% higher and CDS 12bp tighter to 140bp.
However, it did trim its full-year EPS to $4.15-$4.35 from a prior $4.15-$4.45. Although results were better received than those of contemporaries, the rise in Q2 same store sales was shy of estimates of 1.1%, coming in at 0.9% instead.
In the first quarter, Kohl's saw same-store sales fall 1.9%, dragged down by an inability to offload seasonal merchandise.
Analysts now see the potential for CDS of these names to revert to the mean versus the CDX.NA.IG and, in some cases, even see meaningful widening.
The CDX.IG.20 has been cited recently at 75 basis points. A reversion to the mean would likely see the relationship of Kohl's at 140bp, and Macy's at 94bp, move further behind or away from the index.
Kohl's, for example, has the potential to widen by 15-20bp, although pressure on Macy's CDS is likely to be more muted, Barclays said.
Wal-Mart is regarded as a more resilient name, and at 29bp is more likely to retrace to wider levels of the mid-to high 30s, according to a source.
Another important indicator is traffic.
Research firm ShopperTrak's Retail Traffic Index, which showed a 1% uptick in mall traffic in Q2, saw the increase dissipate as the weather warmed and the quarter came to an end.
Additionally, Bank of America Merrill Lynch analysts, in a preview of second-quarter results, found by tracking spending data linked to Bank of America credit and debit cards, that customers spent less in department stores in Q2 versus the year-ago period.
Whether this is a broader trend in the industry remains to be seen. But the foundation for widening in these names is set to gain traction if these headwinds continue to build.
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