Moody's says rating outlook for leveraged retailers remains negative

Nashville, Tenn., Dec.17 - It is becoming increasingly unlikely that the fourth quarter performance of retailers this year will show much if any improvement over the poor fourth quarter performance of last year, leading to less cash generation and higher debt levels for many retailers, said Moody's Investors Service in a report Monday. Thus, Moody's said its rating outlook for leveraged retailers remains negative.

"Retail sales have held few surprises since Sept. 11," said Marie Menendez, a Moody's vice president and senior credit officer in a report updating the outlook for leveraged retailers.

"Heightened concerns about the economy and job prospects have caused consumers to pull back spending or cross over to lower priced venues. If operating profits for the important holiday quarter come in below already diminished expectations, that could stress ratings for those retailers already positioned weakly in their rating categories."

The more stable segments of retailing continue to include supermarkets, drug stores and craft stores, while certain electronics and entertainment sectors are also performing well "as consumers purchase new technology and home entertainment centers to make up for those lost vacations," Menendez said. One unfortunate development for retailers was the unseasonably warm weather throughout most of the U.S. this fall, particularly in the Northeast, where Sept.11 had already disrupted buying patterns. Shoppers have been slow to buy winter apparel and seasonal hard goods because of the irregular weather, she added.

"Retailers invariably seem to count on 90 days of perfectly seasonal weather in each quarter when they plan their buying," Menendez said. "Any variances to expectations along either the east or west coast, because of their concentrations of wealth and population, are particularly disruptive."

She also noted that Wal-Mart's year-to-year comparable store sales growth in November of 4.3%, which contrasts favorably with the flat to double-digit negative growth of many specialty retailers, may yet be a troubling sign.

"To the extent that overall retail sales experience stagnant or minimal rates of growth, Wal-Mart's gains represent a large amount of spending transferred from other retailers," Menendez explained. "The discrepancy in growth rates between Wal-Mart and other merchandize and apparel retailers indicates that consumers may collectively be buying more than we think, but concentrating their spending at fewer venues."

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