December U.S.

Retail Sales Update: Positive Momentum Continues At A Wary Pace

Primary Credit Analysts: Kristina Koltunicki, New York (1) 212-438-7242; kristina.koltunicki@standardandpoors.com Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@standardandpoors.com Secondary Contacts: Ana Lai, CFA, New York (1) 212-438-6895; ana.lai@standardandpoors.com David M Kuntz, New York (1) 212-438-5022; david.m.kuntz@standardandpoors.com

Table Of Contents
The sales outlook for the holiday season: No signs of acceleration from low, slow growth The bigger economic picture: Ongoing slow recovery Summary Related Criteria And Research

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace
U.S. retailers reported higher than expected sales again in November. This continues to support our view of positive, albeit less than robust, demand for the remainder of 2013. Nearing the end of the holiday shopping season, we believe the consumer remains guarded; in response, retailers continue to heavily discount merchandise. Competition from online merchants is more pronounced compared with prior years as online sales gain share. Overall, U.S. retail sales rose 0.7% in November after rising a revised 0.6% in October. Excluding motor vehicles, retail sales rose 0.4% from October. Sales rose in November across many of the types of merchandise sellers we rate--electronics, food and beverage, and sporting goods all reported increases. Clothing and department stores remain under pressure as we enter the crux of the shopping season. Overview As the 2013 holiday season winds down, retailers will continue to promote heavily. Holiday sales should rise year over year--but only by a low-single-digit percentage. The slow economic recovery remains intact, but the consumer is still cautious on small ticket discretionary purchases even with gas prices down, unemployment slowly declining, and the equity markets at high levels. We do not anticipate any widespread rating changes resulting from the soft holiday sales season.

Meanwhile, the latest available First Data SpendTrend retail dollar volume growth--an indicator of consumer spending using credit, debit, and check--was up 1.3% in November, compared with a robust 5.6% increase in October. Even though it was up a smaller percentage, it corroborates our view that early and frequent promotions could lead to softer sales in the whole of December. An unexpected positive development occurred recently as Congressional negotiators announced a bipartisan budget agreement restoring some sequestration cuts in exchange for others. Our economist thinks this could translate into a growth rate that is higher than previously expected for the U.S. in 2014. However, we continue to believe the consumer's confidence will most likely remain tepid for the remainder of the holiday season. Economic uncertainty has continued globally. The Organization for Economic Cooperation and Development (OECD) recently decelerated its global growth forecasts for 2013 (2.7%) and 2014 (3.6%). The OECD cited a weaker outlook for growth in emerging economies as a main reason for the downward forecast revision.

The sales outlook for the holiday season: No signs of acceleration from low, slow growth
Heading into December, most third party forecasts for the holiday selling season called for low-single-digit increases year over year (the range is roughly from less than 2% to almost 5%). Our own expectations are for low-single-digit

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace

sales increases (around 2%) with variations among issuers. Several large retailers were open on Thanksgiving, yet that weekend's sales are reported to have declined year over year. This could partially be the result of Cyber Monday falling into December and the possibility that many retailers promoted early and may have pulled sales forward from the remainder of the month. Online sales were particularly strong as consumers continue to embrace its convenience--and perceived price. Overall, we continue to see evidence that the holiday season is highly promotionalthis is often planned but sometimes not. Big retailers that have commented on a cautious outlook heading into the holiday season include Wal-Mart, Kohls, and Best Buy. The majority of our rating outlooks are stable and we do not foresee a rash of negative rating actions stemming from the holiday season given the modest growth expectations we have already incorporated.

The bigger economic picture: Ongoing slow recovery

Federal and company data released through mid-December generally aligned with Standard & Poor's current full-year 2013 assumptions for consumer sentiment and consumer spending (see table 1). As such, we expect continued monthly sales volatility to result in limited profit growth in 2013 for many retailers and restaurants.
Table 1

Recent Data Versus Standard & Poor's Economic Outlook

2013 (% change) Real GDP (1) Consumer sentiment (2) Consumer spending Core CPI (Levels) Unemployment rate S&P 500 Index Crude oil ($/bbl, WTI) Housing starts (mil.) Unit sales of light vehicles (mil.) 7.8 1,418 88.17 0.9 14.9 7.7 1,515 94.35 0.96 15.3 7.6 1,610 94.22 0.87 15.5 7.3 1,675 105.8 0.89 15.7 7.2 1,752 98.85 0.93 15.7 7.4 1,638 98.31 0.91 15.5 6.9 1,836 99.26 1.14 16 6.3 1,910 96.09 1.47 16.3 1.7 1.7 2.3 2.1 1.8 1.4 1.5 1.8 2.5 1.4 Q4 2012 0.1 Q1 1.2 Q2 2.5 Q3 2.9 Q4e 2013e 2014e 2015e 2.1 1.7 78.6 1.9 1.8 2.6 82.7 2.5 1.9 3.1 N/A 2.7 2

e--Estimate. N/A--Not applicable. (1)-Figures released quarterly (2)- Annual forecasts only.

In our base-case scenario, soft economic growth and difficult political conditions in both the U.S. and abroad support low but still positive same-store sales increases for most rated issuers. There are exceptions however, including some casual dining operators, for which sales and traffic are under pressure from value-seeking customers. While gas prices continue to decline (see chart 1), consumer sentiment remains volatile, with the November number upticking slightly from October and since January 2013 amid weak economic growth forecasts and the eventual specter of higher interest rates.

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace

Chart 1

Retail demand remains fairly weak, according to the U.S. Census Bureau's advance monthly sales data (see chart 2). Advance monthly sales generally haven't grown more than about 1% month-over-month since 2009.

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace

Chart 2

Big ticket purchases--autos in particular--remain robust and so we see no changes to competition for the rest of the consumer dollar across discretionary goods, supermarkets, casual dining, and transportation. Many discounters continue to focus on and expand their grocery segment to drive traffic. The consumer's sharper focus on value, which developed during the Great Recession, does not seem to be abating. Meanwhile, shopper traffic remains weak and has been trending negative in recent months.

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace

Chart 3

Summary
We think the holiday season will be disappointing for some retailers this year (a few companies have managed public expectations downward). We think it's possible that retailers will be discounting steeper than they previously planned. Online shopping continues to be an opportunity for growth for many retailers, as consumer preferences shift to more convenient channels to buy goods. However, some retail segments, including niche non-apparel, restaurants, and certain mid-tier department stores, still face greater challenges than others in their ability to draw in the consumer. The majority of our ratings are in the 'BB' or 'B' category as of mid-December 2013 and 84% of all outlooks are stable, so a low growth holiday season should not trigger widespread rating actions. Some companies in the 'CCC' category remain the most vulnerable to significant shortfalls in the holiday selling season.

Related Criteria And Research

Economic Research: U.S. Economic Forecast: Two Economies Diverged In A Wood, Dec. 5, 2013 U.S. Auto Sales SAAR In November Rises Well Above Standard & Poor's 2013 Estimate; Positive Sales Momentum

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December U.S. Retail Sales Update: Positive Momentum Continues At A Wary Pace

Likely To Slow Somewhat In 2014; Dec. 5, 2013 Key Credit Factors For The Retail And Restaurants Industry, Nov. 19, 2013

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