March U.S.

Retail Sales Update: Sales Advanced And Should Continue Improving Through 2014
Primary Credit Analysts: Diya G Iyer, New York (1) 212-438-4001; diya.iyer@standardandpoors.com Robert E Schulz, CFA, New York (1) 212-438-7808; robert.schulz@standardandpoors.com Secondary Contacts: Ana Lai, CFA, New York (1) 212-438-6895; ana.lai@standardandpoors.com David M Kuntz, New York (1) 212-438-5022; david.m.kuntz@standardandpoors.com

Table Of Contents
Retail Trends: Graphic Snapshot The Bigger Economic Picture: Slow But Steady Economic Recovery Summary Related Criteria And Research

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March U.S. Retail Sales Update: Sales Advanced And Should Continue Improving Through 2014
U.S. retail sales ticked up slightly in February, as cold weather began to dissipate and consumers warmed up to goods ranging from furniture to clothing. Many of the issuers we rate remained highly promotional beyond the typical markdowns that follow the holiday season. Others, such as Staples Inc. and RadioShack Corp. announced plans for significant store closures. Overall, we believe improved outlooks for the stock market, housing, and employment could mean continued sales gains as the year progresses, though low-end consumers will remain challenged as they benefit less from such trends. U.S. retail sales increased 0.3% in February after declining a revised 0.6% in January. Excluding spending on gas, autos, and building supplies, retail sales rose 0.3% following a 0.6% decrease in January. Among the biggest winners were health and personal care stores, which were up 5.5% from February 2013, and non-store retailers, which were up 6.3% from last year and include online sellers that benefited from the frosty winter (aka the polar vortex) as consumers shunned brick-and-mortar formats. Meanwhile, although department stores and sporting good vendors saw gains in February, the categories were down 4.8% and 5.2%, respectively, from February 2013 partly because of weakness at locations such as malls and outdoor shopping centers. Consumer sentiment was flat in February after a slight decline in January, and we expect continued improvement this year, resulting in a 2.9% increase in 2014 real consumer spending compared with 2.0% in 2013. The latest available First Data SpendTrend retail dollar volume growth--an indicator of consumer spending using credit, debit, and check--remained positive at 2.4%, down slightly from January's 2.5% growth, further confirming consumer willingness to resume shopping this quarter. Given receptive capital markets for refinancing and dividend recapitalization, debt issuance has remained strong, particularly among lower-rated companies. New issuers this year include Talbots Inc., Lands End Inc., and the parent company of 1-800-Contacts Inc. Notable rating actions this month included revising the outlook on J.C. Penney Co. Inc. to stable from negative on modest fourth quarter improvement and keeping our ratings on Safeway Inc., including the 'BBB' corporate credit rating, on CreditWatch with negative implications, given the agreement for a group led by Cerberus Capital Management LP to buy the company in a deal valued at more than $9 billion. We believe shoppers will continue to return to a variety of retail segments this spring selling season, from home furnishing vendors to discounters, given an improved U.S. economic outlook for 2014. Exceptions include some casual dining operators, for which sales and traffic are under pressure from value-seeking customers. Overall we are forecasting a low-single-digit same-store sales improvement across issuers this year, and will be watching closely as retailers continue to manage excess capacity and promotional activity.

Retail Trends: Graphic Snapshot

This month we are revising our format and plan to now present eight charts that we think tell a crisp graphic story about key macroeconomic and segment trends in the retail sector. For example, same-store sales seem to be settling

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March U.S. Retail Sales Update: Sales Advanced And Should Continue Improving Through 2014

in between 2% and 4% for now, while autos, eating and drinking, and furniture categories are showing some softness.

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March U.S. Retail Sales Update: Sales Advanced And Should Continue Improving Through 2014

The Bigger Economic Picture: Slow But Steady Economic Recovery

Federal and company data released through mid-March was slightly weaker than Standard & Poor's current full-year 2014 assumptions for figures including consumer sentiment (see table 1). However, we expect improved average transaction volumes for most retailers as the year unfolds, with 2014 resulting in slightly increased profit growth for the sector overall.

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March U.S. Retail Sales Update: Sales Advanced And Should Continue Improving Through 2014

Table 1

Recent Data Versus Standard & Poor's Economic Outlook

2013 (% change) Real GDP (1) Consumer sentiment (2) Consumer spending Core CPI (Levels) Unemployment rate S&P 500 Index Crude oil ($/bbl, WTI) Housing starts (mil.) Unit sales of light vehicles (mil.) 7.2 1,675 105.8 0.9 15.7 7.0 1,770 97.5 1.0 15.6 6.7 1,836 96.6 1.0 15.6 6.5 1,872 97.5 1.1 16.2 7.4 1,643 98.0 0.9 15.5 6.4 1,889 96.0 1.2 16.1 5.7 1,983 89.1 1.5 16.5 2.0 1.8 3.3 1.6 2.7 1.4 3.4 1.9 Q3 4.1 Q4 3.2 2014 Q1e 2.2 Q2e 2.9 2013 1.9 79.2 2.0 1.8 2014e 3.0 83.1 2.9 1.7 2015e 3.3 91.7 3.1 2.0

e--Estimate. (1)-Figures released quarterly (2)- Annual forecasts only

Summary
Many retailers continue to focus on online shopping for growth as we believe consumer preference for more convenient channels will continue. However, some retail segments, including electronics, niche non-apparel, restaurants, and certain mid-tier department stores, still face greater challenges than others in their ability to draw in the consumer. The majority of our ratings are in the 'BB' or 'B' category as of mid-March 2014 and the vast majority of our outlooks are stable, so slow growth should not trigger widespread rating actions, absent leveraging events. Some companies in the 'CCC' category remain the most vulnerable to significant shortfalls following the holiday selling season.

Related Criteria And Research

Related Criteria
Key Credit Factors For The Retail And Restaurants Industry, Nov. 19, 2013

Related Research
U.S. Auto Sales SAAR Remained Below Full-Year Estimate In February; Sales Growth Will Likely Moderate In 2014, March 6, 2014 U.S. Forecast Update: A Recovery Postponed Not Canceled, Feb. 10, 2014

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