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Retail Debt Headed for More Downgrades

Stocks rise despite sour outlook.

As if the recession, rock-bottom stock prices and a still-skittish banking sector weren’t enough, retailers with publicly held debt could find refinancing even harder next year as credit ratings continue to fall.

Standard & Poor’s said changes to the industry’s debt ratings would be “decidedly negative” again next year. Lower credit scores can make it harder and more expensive for companies to secure additional debt. Especially cash-strapped firms might find lenders entirely unwilling to extend them a financial lifeline if their credit ratings fall.


“Thirty-seven percent of retail ratings are in jeopardy, while only 7 percent have upgrade prospects,” said S&P in an outlook Tuesday. The debt watchdog lowered 70 retail credit ratings this year and raised just 18.

“With the economy in a recession and consumers in turmoil due to sharp declines in discretionary incomes and rising unemployment, we see ‘stay-away-from-stores’ behavior continuing well into 2009,” said the report, entitled “Industry Report Card: Weak Economy Portends More Pressure On U.S. Retail Ratings In 2009.” Gerald Hirschberg was the report’s primary credit analyst.

Investors are feeling similarly negative, though the Standard & Poor’s Retail Index did manage to rise 2.3 percent, or 6.2 points, Tuesday, to 274.96 despite a record-low reading on consumer confidence from The Conference Board (see related story). The Dow Jones Industrial Average increased 2.2 percent, or 184.46 points, to close at 8,668.39 on a day of light trading. The market was buoyed by news of a $6 billion government aid package for auto financing company GMAC.

Still, retail shares have lost 24.1 percent of their value over the last three months as the Dow fell by 20.1 percent.

The downturn has been widespread, but its impacts have not been equally felt. Specialty and department stores have been hurt worse than their mass merchant brethren.

“The department store sector is feeling the full brunt of the soft U.S. economy and weakening consumer confidence,” S&P said. “Same-store sales have been mostly negative for the group thus far in 2008. We have changed outlooks and ratings on all the rated department stores, except for Kohl’s Corp. [rated ‘BBB-plus’ with a stable outlook], as they have been suffering sharp declines in profits because of sales deleveraging and increased promotional activity to stimulate sales and clear inventory.”

Luxe department stores such as Neiman Marcus Inc., Nordstrom Inc. and Saks Inc. have been harder hit than their moderate counterparts, as aspirational customers pull back and high-end consumers are more selective.

Business at apparel specialty stores has been deteriorating, and the environment is expected to remain “significantly challenged,” S&P said.

And even though discounters are expected to outperform their competitors, S&P noted both Wal-Mart Stores Inc. and Target Corp. have slowed store growth, reduced capital expenditures and suspended share repurchase programs.

Despite scant evidence of any manner of consumer rebound in the near future, most retailers joined in Wall Street’s mini-rally Tuesday.

The gainers among department stores included Dillard’s Inc., up 9.5 percent to $3.79; Saks, 8.4 percent to $4; Nordstrom, 6.9 percent to $12.29, and Macy’s Inc., 5.9 percent to $9.41.

On the rise in the specialty store sector were Destination Maternity Corp., previously Mothers Work, ahead 12.5 percent to $7.66; The Talbots Inc., 11.9 percent to $2.35; New York & Company Inc., 10.3 percent to $2.15; Caché Inc., 7.2 percent to $1.94; Cato Corp., 6.3 percent to $14.67; Hot Topic Inc., 6.1 percent to $9.01, and AnnTaylor Stores Corp., 6 percent to $5.30.

Shares of vendors, which have gotten beaten up along with retail stocks, also advanced. Among the gainers were Jones Apparel Group, up 18.7 percent to $5.40; Oxford Industries Inc., 13.6 percent to $8.85; Kenneth Cole Productions Inc., 15 percent to $6.76; Perry Ellis International Inc., 9 percent to $5.71; Liz Claiborne Inc., 6.8 percent to $2.35; Polo Ralph Lauren Corp., 5.7 percent to $44.61, and G-III Apparel Group, 5.2 percent to $6.25.