Get ready for the Christmas come down.
This story first appeared in the November 8, 2011 issue of WWD. Subscribe Today.
Even though holiday revenues are expected to rise, Standard & Poor’s said the sales gains might not be enough to avert slowing business trends and weaker profits for the rest of this year and in early 2012.
Already, credit downgrades outpaced upgrades by a rate of 1.3 to 1 over the first nine months of this year, marking a dramatic flip from a year earlier.
“This trend indicates the extent to which the retail sector is softening following the recovery in 2010,” said S&P debt analyst Gerald Hirschberg in an analysis Monday.
“After the deep recession, many retail companies have tapped the debt markets, raising new capital to address debt maturities or tight covenants, or to finance [leveraged buyouts] or merger and acquisition activity, thereby weakening their overall credit profile,” Hirschberg said.
The credit markets have generally been open to retailers, which so far this year have taken on $53 billion in new debt rated by the credit watchdog.
“For most department stores, we believe same-store sales comparisons will become less favorable over the next few quarters and that performance growth is likely to slow, especially given the weak economy in the U.S. and Eurozone issues,” Hirschberg said.
S&P expects combined November and December sales of general merchandise, apparel, furniture and other goods will rise 2.5 percent to $249 billion — just shy of 2007 sales of $251 billion. The rating agency expects sales will continue to grow in the low-single digit percentage range early next year.
“Margins will at best remain the same, and could be squeezed if retailers can’t pass on higher costs or lower leverage through sales,” Hirschberg said in the report.
Hirschberg said S&P’s retail ratings could withstand some “moderate variances to our baseline outlook,” but that an unexpected twist could lead to a credit downgrade, especially if a company is carrying a lot of debt.