By managing inventory positions well, many retailers have stabilized their gross margins even in a continued challenging sales environment, according to Fitch Ratings. In a recently-released special edition of its Retail Register [registration and/or subscription may be required], a report on companies Fitch covers in the retail sector, the ratings agency stated that it continues to believe that financial metrics for many retailers in the near term will remain weak. However, the “key to ratings will be what credit profiles will look like upon exit from the recession and whether a company’s business or financial profile has been fundamentally weakened by the recession.”
Lower inventory, combined with strong cash flow management and the resolution of liquidity issues for several companies, has resulted in an improved overall credit outlook as evidenced by the lower level of negative rating movement in recent months.
Holiday sales are expected to be challenging, according to the report, but, lest any investor become too bearish on the sector, keep in mind that easier sales comparisons in the coming months may help same-store sales performance. Also, with greatly reduced inventories this year, one should not expect many price discounts or other promotional activity.
In sum, from an investor’s perspective, with expectations for consumer spending reasonably low, there is low probability of a negative surprise. By focusing on retailers that have low or no debt and have adequately managed their profitability through the recession, one may find reasonable opportunities for upside surprises.
Gregg D. Killoren
victoria1014
