Fitch: U.S. Retail Faces Gross Margin Pressure

New York—In its second quarter report on U.S. retail released today, Fitch Ratings predicted that retailers would face increasing gross margin pressure as merchandise prices increase and consumers pull back on spending.

The ratings agency, which made news over the weekend for its downgrades of Spain and Italy’s debt ratings, said that sales of discretionary and “big-ticket” items will come under increasing pressure especially as consumers in lower income households “remain challenged” in final months of the year.

‘Double-Digit Apparel Cost Increases’

“Moreover, higher inflation in gas, food, and apparel will flow through second-half results, with significant gross margin compression expected for department stores and specialty apparel retailers as higher cotton costs drive low double-digit apparel cost increases,” Fitch reported.

Noting that the luxury segment has been in a strong rebound, Fitch added, “recent stock market volatility could begin to affect attitudes of luxury consumers, potentially dampening growth rates.” On the positive side, however, “Fitch does not expect to see the material gross margin declines witnessed in late 2008 given inventories are up in the low- to mid-single-digit range.”

Other comments on the state of U.S. retail health included:

Credit Trends: Operating and credit trends in the retail sector are generally steady. “Free cash flow is healthy across the sector as capital expenditures are tracking below the levels of 2006 to 2007, even as dividends move gradually higher. However, share repurchases are projected to remain elevated in 2011-2012, at near 2010 levels, eating into industry cash balances.”

Liquidity Solid: “Liquidity nonetheless remains solid, with healthy levels of cash and unused bank lines, most of which do not expire until 2013 and beyond.

Fitch’s report provides an overview of key economic data, operating and credit trends in the U.S. retail industry and a summary of individual companies’ operating and credit metrics for retailers under Fitch’s coverage and 17 additional non-rated companies. In addition, the report highlights key credit strengths and concerns and provides a summary of company liquidity positions for the latest reported period.

The report, “U.S. Retail Stats Quarterly – Second-Quarter 2011,” is available at www.fitchratings.com.

 

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