U.S. Retailers Face Multiple Challenges During Recession
Liquidity, pricing, inventory and cost management as well as management of pensions and real estate are key factors in determining U.S. retailers’ financial health through the recession, according to Fitch Ratings.
The ongoing downside rating risk is represented by the 44% of Fitch’s retail coverage with Negative Rating Outlooks up from 15% at the end of 2007.
However, Fitch says that ‘Even with weaker credit metrics, we do not foresee significant rating movement for companies that effectively manage through the difficult environment and return to strong credit profiles.’
Retail sales growth is expected to continue to be pressured in 2009 and 2010 given the ongoing economic challenges, changes in consumer behavior and pressure from promotional activity, re-pricing and deflation. Consumers have become more price-sensitive and are purchasing more on promotion, trading down to lower-priced substitutes, and shifting to lower-priced store brands. Fitch expects that some of these behavioral changes will become permanent shifts for consumers given the length and severity of the recession.
Key areas of focus to assess how companies are managing through the current environment include:
–Liquidity, with preserving cash flow important given that obtaining liquidity from external sources, such as the debt capital markets and banks, has been more challenging with the cost and terms more onerous.
–Prices, which are being reset in response to the changes in buying behavior.
–Inventory and cost management, as these are critical to operating margins.
–Real estate, with risks from capital-constrained property owners and benefits from lower rents and new site opportunities.
–Pension, as the funded status has deteriorated.
The full report The Retail Register, Spring 2009 includes liquidity profiles for all companies within Fitch’s U.S. retail coverage and sector outlooks.
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