Feb 7 - Comparable (comp) store sales trends for 4Q12 were largely in line
with Fitch's expectation for holiday sales growth of 3%. Improved sales trends
in late December and strong post-holiday sales in January 2013 helped offset the
weakness many retailers saw in November 2012 due to the impact from Superstorm
Sandy and concerns around fiscal policy. As companies report 4Q12 earnings, we
expect gross margins will be flat to down, reflecting significant promotions to
drive consumer traffic. We expect intense promotional activity will be a key
driver for increasing consumer traffic given a continued weak recovery in
consumer spending and an ongoing focus on value going into 2013.
While apparel-related retailers will benefit from lower cotton prices and
improved inventory control, we expect these retailers will have taken a
significant portion of these savings and reinvested into sharper pricing and
online channel to drive traffic. Among Fitch rated/monitored apparel retailers
Gap, Limited Brands, and Burlington Coat Factory are expected to continue the
positive momentum in 2013, on top of their reported comps growth at 5.0%, 6.0%,
and 1.2%, respectively in 2012.
Among the department stores that reported fiscal 2012 sales, Kohl's posted
better than expected January comps and therefore 4Q12 comps at 1.9% came in
better than our flat expectation. However, gross margins are expected to decline
materially as January 2013 was driven by heavy promotions to clear excess
inventory. We expect comps and gross margin could remain under pressure through
the 2H13 as the company continues to invest in pricing to regain traffic, while
the difficult consumer environment and intensified pricing competition in the
mid-tier space will continue to add pressure.
Even though January comps were weak at negative 0.4%, Bon-Ton (rated 'B-' with a
Negative Rating Outlook by Fitch) showed modest improvement with 1.0% comps in
4Q12, most likely a reflection of new merchandising and store presentation
initiatives, and the benefit from J.C. Penney's significant sales decline. We
would need evidence of Bon-Ton sustaining these trends over the next few
quarters and annual EBITDA approaching $200 million to change the Rating Outlook
to Stable from Negative.
J.C. Penney (with comps expected to be in the negative 20%-30% range and gross
margin in the mid-20s for 4Q12) and Sears remain the notable laggards (with flat
comps at Sears Domestic and negative 4% for Kmart in 4Q12) and are expected to
remain under pressure in 2013.
Nordstrom, Macy's, and Neiman continued to deliver positive comps at 6.3%, 3.9%
and 5.3%, respectively, in 4Q12. We expect these companies to maintain their
solid competitive position in 2013, although the impact from tax increases and
fiscal concerns on aspirational luxury spending could potentially dampen
top-line growth to the low single-digit range over the next two years. We also
believe high inventory levels among the luxury retailers relative to expected
sales growth could imply margin pressure in 2013 if sales momentum slows down.
Discount retailers should continue to gain traffic as consumers remain focused
on value to stretch their dollar, particularly with the recent increase in
payroll taxes. Costco and Target reported 5.0% (excluding gasoline) and 0.4%
growth in 4Q12 comps, respectively. Target's 4Q12 sales were relatively soft,
although it reported better-than-expected January comps aided by holiday
clearance sales. We expect further margin pressure for dollar stores given their
aggressive expansion and increasing exposure to discretionary categories as well
as a step-up in pricing competition from Wal-Mart.
Additional information is available on www.fitchratings.com.
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expressed are those of Fitch Ratings.