Home Depot, Target could see CDS reverse course


By Melissa Mott

Oct 11 (IFR) - The CDS of big box retailers Home Depot andTarget have tightened significantly in recent months, but havethe potential to widen in the months ahead as consumer spendingis expected to increase only moderately.

The US Fed's Beige Book on Wednesday cited flat consumerspending growth in September, and with a weak holiday shoppingseason expected, the two retail giants could see their creditdefault swaps reverse course.

Home Depot (A3/A-/A-) and Target Corp(A2/A+/A-) are both quality names from a credit perspective,with solid balance sheets, stable earnings growth and goodcustomer loyalty.

Market sentiment has helped tighten the credit default swapsof Home Depot to 42bp from 52bp in July, while Target's CDS hastightened to 38bp from 41bp over the same period. Their CDStrade at tight levels relative to other investment-grade names,and are usually resistant to outside factors that provoke spreadwidening in lesser-rated entities.

But despite the solid fundamentals, that outperformance islikely to fade. Moderate CDS widening can be expected ifconsumer spending continues to advance at a lackluster pace.


There are plenty of other problems, too, including thelooming fiscal cliff, elevated unemployment, stagnant wages andrising food and gasoline prices.

With that as a backdrop, retailers such as Home Depot andTarget have adopted a more guarded outlook in the near term -and September same store sales data back up those concerns.

If we extrapolate from the self-published figures of a mixof big box, specialty and other retailers, we can get insightinto how consumers feel about spending - and sense what toexpect in the months ahead.

Target's September store sales came in at 2.1%, as expected,but compare to 5.3% last year. It does, however, place them ontrack to meet conservative goals. For October, Target forecastslow to mid single digit same store revenue growth.

But the retailer had already planned for a stronger firsthalf of 2012 versus the second half, and its CFO John Mulligansaid at an analyst presentation last month that he expects"uncertainty" due to the fiscal cliff and presidential election,which is causing consumers to be cautious.

At the same presentation, Home Depot CEO Frank Blake notedthe tentative nature of consumers who are strapped for cash andless likely to invest in larger home remodeling projects.

Even as the nascent housing recovery looks to gain traction,Blake said that many people were still "underwater on theirhomes," and less likely to "put money into it and think you'llget a return."

With expectations for comparable store sales growth in thelow single digits, Home Depot has remained conservative in itsopinion of the slow economic and housing recovery - and islinking its future growth to the GDP instead.


With shoppers already cash-constrained, forecasts for theupcoming holiday season are less than enthusiastic.

The National Retail Federation said last week that 2012holiday sales will rise by an anemic 4.1% year on year, whilethe International Council of Shopping Centers has put it evenlower at 3.0%.

Ratings agency Moody's also anticipates a lackluster holidayseason, and expects Q4 sales will grow at their slowest pacesince 2009 when, according to their data, the figure was apaltry 0.815%. The agency cites the slow increase of non-wageincome as rising prices outpace wages - and as consumers becomemore reluctant to take on debt.

That reluctance to take on debt will curb spending habits,whether holiday or home project-related, and warrants thecautionary outlook from retailers.

This will eventually be reflected in the CDS of Home Depotand Target, in the form of widening spreads. And that wideningcould be spurred on further if consumer spending continues to berestrained. But the companies' solid fundamentals should limitany moves in that direction.

(Melissa Mott is a senior IFR analyst; Editing by MarcCarnegie)

((melissa.mott@thomsonreuters.com; Reuters messaging:melissa.mott.thomsonreuters.com@reuters.net))

Keywords: US RETAIL CDS/