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Get Four
|  | NOVEMBER 16, 2004
 MARKET VIEWS By Frank Benassi A Crimp on Holiday Cheer? [Page 2 of 2] SQUEEZE ON MARGINS. While a solid sales outlook is expected to translate into improved profits for many retailers this holiday season, promotions are expected to be heavy as usual, but not greater than last season. The Standard & Poor's market survey indicated that an overwhelming majority of retailers (71%) expect 2004 holiday promotions and sales to start at about the same time as last year. In addition, the majority of survey respondents (64%) expect promotional levels for the 2004 holiday season to be about the same as last year. Although prospects for sales growth for the upcoming holiday are favorable, and discounting is expected to remain stable (albeit at high levels), cost pressures continue to squeeze retailers' margins. Standard & Poor's market survey confirmed that an overwhelming majority (73%) of retail executives believe labor-cost increases -- such as workers compensation, employee benefits, and health-care costs -- are not leveling off. To reduce costs, a majority of the respondents indicated they would increase the amount their employees pay for health insurance and pressure for better lease terms. Apparently taking a cue from last year's good results, a majority of the survey respondents (64%) indicated their companies are positioning 2004 holiday season inventory about the same as last year's. Looking beyond the current holiday season, our market survey clearly indicates a positive retail outlook and business environment for 2005. Relative to 2004, most survey respondents (55%) expect 2005 to produce a stronger retail environment. In addition, the majority (76%) expect an increase in company profits in 2005. NEW YEAR'S CHALLENGE? Our early view of 2005 also is favorable for retailing, but we are a bit less enthusiastic than the survey results. This reflects our view that interest rates gradually will rise next year, and that consumers are spending at already high levels, given the low savings rate and high consumer household-debt-service obligations. Consumers likely will keep spending. But without the benefit of a strong stock market, further rapid home-price appreciation, or the stimulant of special tax refunds, 2005 is likely to be a somewhat more challenging year for retailers. What does that mean for the credit quality of U.S. retailers? The improved economic outlook and stronger sales performance to date generally should translate into improving underlying credit trends in the sector for 2004. Most S&P ratings outlooks in the department store sector have been revised to stable, from the strong negative bias of last year. However, M&A activity and other discretionary decisions, such as for special dividends and share repurchases, could continue to have a negative impact on credit quality for certain retailers. Ratings recently were lowered on CVS (CVS ) and May Department Stores (MAY ) because of large acquisitions. Similarly, several restaurant ratings have been downgraded or placed on CreditWatch with negative implications because of debt-financed dividends to shareholders, or the proposed issuance of income deposit securities.
 Benassi is a senior features editor for Standard & Poor's Securities Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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