Fitch Ratings offers cautious 2010 retail outlook

NEW YORK - Fitch Ratings expects sales at stores open at least a year to rise slightly this holiday season after last year's sharp falloff, the credit rating agency said Monday.

Sales for 2010 are expected to continue at the same sluggish pace, because shoppers likely still will be grappling with high unemployment and tight credit, Fitch said in an industry report. Sales at stores open at least a year are a key indicator of a retailer's health.

The good news is that liquidity has improved dramatically for many U.S. merchants from a year ago. That means the industry won't see the wave of bankruptcy filings seen in 2008 and early 2009 as stores have been able to refinance their debt.

Low-price retailers like Wal-Mart Stores Inc. are expected to remain the bright spots, as shoppers scour for deals and focus on necessities like food.

Department stores' sales at stores open at least a year are expected to fall 4 percent in the fourth quarter and 6 percent to 7 percent for all of 2009. In 2010, that measure is expected to decline by 2 percent to 3 percent compared with 2009 amid economic pressures and stiff competition from discounters.

Fitch noted that retailers like Kohl's Inc., J.C. Penney Co. and more recently Nordstrom Inc. have fared better than expected. Fitch noted that inventory appears in line with consumer demand, which will help limit discounting. Last Christmas, stores were stuck with mounds of inventory that they had to aggressively discount after shoppers dramatically cut back their spending, a move that depressed their profit margins.

Fitch expects well-capitalized companies such as Kohl's, Macy's and J.C. Penney to increasingly grab more market share and post sales at stores opened at least a year about even for 2010.

The picture for specialty stores is a mixed bag. For consumer electronics merchant Best Buy Co., sales at stores open at least a year are expected to flatten or be up slightly in 2010 as demand for products such as netbooks, smart phones and lower-price store-label products offsets price deflation.

However, Fitch noted that consolidation in the industry will continue to benefit Best Buy, which it says controls 20 percent of the consumer electronics market. Best Buy has sought to gain market share following the closing last spring of the Circuit City chain.

Sales at home improvement merchants are expected to rise in the low single digits next year, compared with weak sales in 2009. Demand for big-ticket items such as cabinets, are expected to remain soft amid a still weak housing market and tight credit. However, sales of small-ticket items such as paint, flooring and fixtures are expected to remain solid.

Sales at office products merchants should continue to be tough as small business spending remain low. Staples Inc., however, is expected to perform better than its peers.

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