Fitch: 4Q11 Department Store Sales Show Continued Bifurcation

CHICAGO--(BUSINESS WIRE)--Comparable store sales (comps) for the nine rated U.S. department stores have increased by an estimated 0.6% in the fourth quarter. While this is essentially in line with Fitch Ratings' expectations, fourth-quarter comps continue to distinguish clear winners from losers.

Stronger-than-expected performance from Macy's, Dillard's, and all of the luxury retailers was offset by weaker performance from Sears, Bon-Ton, and Kohl's. As expected, high-end retailers remained resilient through the holiday season, while mid- to low-tier department stores continue to see top-line weakness as the low-end consumer remains stressed.

For 2011, we estimate that sales weighted department store comps were up 2.0%, versus 2.6% in 2010. For 2012, we expect department store comps to grow by less than 1%, in line with total industry sales growth expectation of +/-1%.

Kohl's comps are under increasing pressure given its stressed customer and maturing store base. Fourth-quarter comps came in at negative 2.1% compared with 1.7% for the first three quarters of 2011. We expect the increased investments in pricing and markdowns will likely place pressure on the top line and margins in the near term. As a result, 2012 EBITDA is expected to be flat to lower than 2011 with flat to slightly positive comps. However, we remain comfortable that leverage will be maintained well within the 2.0x-2.5x range in the next 12-36 months.

Bon-Ton and J.C. Penney continue to disappoint and are likely to face significant earnings pressure with fourth-quarter comps of negative 2.6% and an estimated negative 1.0% to 1.5%, respectively. For 2011, leverage could increase to more than 6.0x for Bon-Ton and more than 3.5x for J.C. Penney. Bon-Ton could continue to face earnings pressure next year and J.C. Penney's leverage is likely to remain in the mid 3.0x range as it goes through a major transformation before potentially trending to the lower 3.0x range in 2013.

Sears continues to be the weakest performer in the group with EBITDA likely to turn negative in 2012 after a dismal performance in 2011. The weakening operating outlook and the heightened risk of a restructuring over the next 12 to 24 months drove our recent downgrade to 'CCC' with a Negative Outlook.

Despite the increasing pressure in the moderately priced department store space, Macy's and Dillard's continue to deliver outstanding performance, reporting comps at 5.2% and 3.0%, respectively in 4Q11, indicating both companies are accelerating their market share gains. Macy's comps trend provide strong signs that its localized merchandising initiatives are resulting in positive comps at core retail Macy's stores. The company is also benefiting from above-average sales growth at Bloomingdale's and its Internet businesses. We expect the positive momentum for Dillard's to continue, driven by improved execution of inventory management and merchandise assortment, with 2011 EBITDA and margin expected to beat the best performance in more than 10 years.

Luxury retailers continue to outperform with fourth-quarter sales weighted comps up 7.7% for Neiman, Nordstrom, and Saks. This bodes well for profitability, given well-controlled inventories. Fitch expects the luxury retailers to continue to outperform in 2012, driving comp store sales growth in the 3% to 5% range.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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