"The rating actions reflect Standard & Poor's deepening concern about the impact of the U.S. recession on the increasingly troubled department store sector," Standard & Poor's credit analyst Diane Shand writes in her reports, "which has felt the full brunt of the declining U.S. economy and weakening consumer confidence in 2008. We believe lower consumer spending and declining mall traffic will affect the sales and profits of the department store operators this year," Shand writes, "and that recovery will be slow."
In fact, in a separate report, the credit agency takes its gloomy view one step further, and says it doesn't believe there are any bright spots in the retail sector: "We believe all the rated department stores will be challenged by weak consumer demand this year and that their operating margins will remain at historically low levels."
Both Macy's and Penney -- arguably two of the most enduring brands in the struggling sector -- are well-positioned, with Macy's market standing somewhat stronger than JC Penney. But while Shand writes that Macy's "solid position in the moderate-to-better department store sector and good geographic diversification partially mitigate these risks," it also says it expects that the retail environment "will remain challenging and that Macy's may have difficulty with sales and margins in 2009."
But Macy's has also been especially weakened by "the debt-financed acquisition of May Department Stores Co. in 2005 and large share repurchases in 2007, as well as declines in profitability, its participation in the intensely competitive retail industry, and its vulnerability to the U.S. economy."
Among the moderately priced chains -- Macy's, Penney, and Dillard's -- S&P is predicting high single-digit declines in comparable-store sales for the remainder of this year. And among the higher-end stores -- Neiman Marcus and Nordstrom -- it anticipates declines in the low double digits. "We expect declining profitability to hurt their credit profiles," it says.
S&P also reaffirmed its rating of the troubled Sears Holding Corp., parent of both Sears and Kmart. The company continues to be weaker than its competitors: "Sales trends remain poor, with steep declines in comparable-store sales at both Sears and Kmart. Our concern also includes the company's historical use of cash flow to fund share repurchases and dwindling cash flow protection measures."
Still S&P says, the company's cash flow generation remains "fairly healthy given the modest levels of capital spending from a relatively mature store base. We expect Sears to generate solid positive free cash flow in 2009."