Oct 11 (IFR) - The CDS of big box retailers Home Depot and
Target have tightened significantly in recent months, but have
the potential to widen in the months ahead as consumer spending
is expected to increase only moderately.
The US Fed's Beige Book on Wednesday cited flat consumer
spending growth in September, and with a weak holiday shopping
season expected, the two retail giants could see their credit
default swaps reverse course.
Home Depot (A3/A-/A-) and Target Corp
(A2/A+/A-) are both quality names from a credit perspective,
with solid balance sheets, stable earnings growth and good
Market sentiment has helped tighten the credit default swaps
of Home Depot to 42bp from 52bp in July, while Target's CDS has
tightened to 38bp from 41bp over the same period. Their CDS
trade at tight levels relative to other investment-grade names,
and are usually resistant to outside factors that provoke spread
widening in lesser-rated entities.
But despite the solid fundamentals, that outperformance is
likely to fade. Moderate CDS widening can be expected if
consumer spending continues to advance at a lackluster pace.
TROUBLE AHEAD, TROUBLE BEHIND
There are plenty of other problems, too, including the
looming fiscal cliff, elevated unemployment, stagnant wages and
rising food and gasoline prices.
With that as a backdrop, retailers such as Home Depot and
Target have adopted a more guarded outlook in the near term -
and September same store sales data back up those concerns.
If we extrapolate from the self-published figures of a mix
of big box, specialty and other retailers, we can get insight
into how consumers feel about spending - and sense what to
expect in the months ahead.
Target's September store sales came in at 2.1%, as expected,
but compare to 5.3% last year. It does, however, place them on
track to meet conservative goals. For October, Target forecasts
low to mid single digit same store revenue growth.
But the retailer had already planned for a stronger first
half of 2012 versus the second half, and its CFO John Mulligan
said at an analyst presentation last month that he expects
"uncertainty" due to the fiscal cliff and presidential election,
which is causing consumers to be cautious.
At the same presentation, Home Depot CEO Frank Blake noted
the tentative nature of consumers who are strapped for cash and
less likely to invest in larger home remodeling projects.
Even as the nascent housing recovery looks to gain traction,
Blake said that many people were still "underwater on their
homes," and less likely to "put money into it and think you'll
get a return."
With expectations for comparable store sales growth in the
low single digits, Home Depot has remained conservative in its
opinion of the slow economic and housing recovery - and is
linking its future growth to the GDP instead.
HO HO HUM
With shoppers already cash-constrained, forecasts for the
upcoming holiday season are less than enthusiastic.
The National Retail Federation said last week that 2012
holiday sales will rise by an anemic 4.1% year on year, while
the International Council of Shopping Centers has put it even
lower at 3.0%.
Ratings agency Moody's also anticipates a lackluster holiday
season, and expects Q4 sales will grow at their slowest pace
since 2009 when, according to their data, the figure was a
paltry 0.815%. The agency cites the slow increase of non-wage
income as rising prices outpace wages - and as consumers become
more reluctant to take on debt.
That reluctance to take on debt will curb spending habits,
whether holiday or home project-related, and warrants the
cautionary outlook from retailers.
This will eventually be reflected in the CDS of Home Depot
and Target, in the form of widening spreads. And that widening
could be spurred on further if consumer spending continues to be
restrained. But the companies' solid fundamentals should limit
any moves in that direction.