TEXT-Fitch: Sept. retail sales subdued, holiday seen up 3 pct-4 pct

Oct 4 - Fitch Ratings notes U.S. retail sales for September were positive overall, as they captured the last portion of back-to-school season shopping, but results were subdued following a strong August (for most retailers), reflecting the cautious consumer spending seen over the last 18 months.

Given back-to-school results, we expect holiday retail sales to grow at 3.0%-4.0%, versus 4.1% in 2011. The sluggish economic and employment environment coupled with high gas prices leads us to expect promotional activity will remain the key driver for consumer traffic. As a result, we expect gross margins to be flat to slightly down for most retailers.

While apparel related retailers will benefit from lower cotton prices, we expect these retailers to take a significant portion of these savings and reinvest them into sharper pricing, both in their brick-and-mortar and online channels. In addition, right fashion trends and inventory control will play key roles in comps and margin performance. Among our rated apparel retailers, Gap and Limited Brands, are expected to continue the positive momentum through the holiday season, on top of their reported comps growth at 6% and 5%, respectively, following 9% and 8% comps growth in August.

Discount retailers remain the brightest spot, as consumers remain focused on value to stretch their dollar, given average household real income has remained flat to slightly negative for almost two years. Costco reported a 5% growth in comps excluding gasoline, in line with consensus estimates.

Four U.S. department stores reported monthly comps for September 2012. Kohl's negative 2.7% comps (vs. 3.4% in August and negative 1.3% in 1H12) was weaker than expected. We expect comps and gross margin to remain under pressure through third-quarter 2012, given the challenge with its budget-tight core customer. In the longer term, Kohl's market position is expected to remain relatively stable, with comps improving gradually in 2013, as the company continues to invest in pricing and adjust inventory levels to regain customer traffic.

Bon-Ton showed continued modest improvement in comps, reporting comps growth at 0.6% in September (vs. +2.2% in August), likely benefitting from J.C. Penney's sales loss and its own adjustment to merchandising strategy. However, we think operating performance will remain sluggish for the company.

Nordstrom and Macy's continued to deliver positive comps at 4.4% and 2.5% in September, while coming off a strong 9.0% growth in July/August combined for Nordstrom and 5.1% in August for Macy's. We expect both companies to maintain solid competitive position ahead of the holiday season. We also have concerns about high inventory levels among the luxury retailers relative to expected sales growth, which could place margin pressures for the remainder of 2012 if sales momentum slows down.

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. All opinions expressed are those of Fitch Ratings. (New York Ratings Team)

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