Fitch: Q4 Comp Store Sales Met 3 Percent Growth Expectations

— February 07, 2013

Comparable store sales trends for 4Q12 were largely in line with Fitch's expectation for holiday sales growth of 3 percent. 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, Fitch expects gross margins will be flat to down, reflecting significant promotions to drive consumer traffic. What's more, Fitch expects 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, Fitch expects 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 percent, 6.0 percent, and 1.2 percent, 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 percent 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. Fitch expects 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 percent, Bon-Ton (rated 'B-' with a Negative Rating Outlook by Fitch) showed modest improvement with 1.0 percent 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 percent-30 percent 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 percent 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 percent, 3.9 percent and 5.3 percent, respectively, in 4Q12. Fitch expects 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 percent (excluding gasoline) and 0.4 percent 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. Fitch expects 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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