S&P; Paints Dark Picture for Retailers

U.S. retailers face grim prospects in the second half of the year amid lackluster consumer spending, a slow economy and heavy company debt loads, a report Thursday warned.

Bond-rating agency Standard & Poor’s Corp. said it downgraded the credit-worthiness of 25 retailers in the first half of the year, and said the outlook for the rest of the year was “bleak.”

Two major retailers Thursday underscored fears of sluggish sales across the industry, as Federated Department Stores Inc. slashed earnings estimates and Guess Inc. also said results will be below expectations.

Federated, which owns Macy’s, Bloomingdale’s and other chains, cited a “sales shortfall” in cutting its estimate for the second quarter by more than one-third, saying it expects earnings of 40 cents to 50 cents a share instead of the previously forecasted 70 to 75 cents.

S&P; analyst Gerald A. Hirschberg said many retailers borrowed too much in previous years to fund expansions and have been blindsided by slower sales. Also, a tighter credit market has lenders and bond investors more cautious about financing retailers, he said.

Retail sales had been on a steady if not spectacular pace this year, with sales surging 1.4% in April before slowing in May, according to the Commerce Department.

But spending hasn’t been enough to match “overly ambitious performance expectations” by retailers, Hirschberg said. Many companies that borrowed to expand during boom times have failed to live up to earnings projections, he said.

Now, with less financial flexibility because of the tighter credit market, these retailers are more vulnerable to credit downgrades in coming months unless the economy and consumer spending improve significantly, Hirschberg said.

Federated suggested Thursday that it doesn’t see much near-term improvement. The firm cut its estimate of fall sales and lowered its full-year earnings estimate to $3.60 to $3.90 a share, compared with earlier predictions of $4 to $4.25.

Federated shares tumbled $2.37 to close at $38.01 on the New York Stock Exchange.

Guess also blamed the economy for slower sales, saying customers bought fewer jeans and other clothing items. Guess estimated its second-quarter profit will be 2 cents to 4 cents a share, compared with analysts’ expectations of 7 cents. It expects total sales to be down slightly from a year earlier.

Guess fell 13 cents to $7.50 on the NYSE.

Meanwhile, initially optimistic figures about overall consumer spending in May had to be revised Thursday. The Commerce Department said earlier this week that consumer spending rose a better-than-expected 0.5% in May. But Thursday the department revised its figure to 0.3%, saying a data glitch caused the higher figure.

More cautious consumers aren’t retailers’ only problem, economists said. The industry has been hurt by a strong dollar and weak overseas economies, which have led to a flood of cheap imports with low profit margins, said Wells Fargo Bank economist Sung Won Sohn.

By contrast, high-profit luxury items and brand-name merchandise have been slower to sell, Sohn said. “Consumers are in no mood to pay high prices for branded items,” he said.

Still, the bargain mentality is helping some retailers. 99 Cents Only Stores said Thursday that second-quarter sales rose 26.3% from a year earlier, and sales at stores open at least one year rose 5.5%. The Commerce-based company’s shares jumped $2.50 to close at $31.90 on the NYSE.

Economists are divided about how much retailers will benefit from the approximately $300-per-taxpayer federal tax rebates expected this summer. Sohn said rebates could fuel a $56-billion infusion that could boost economic growth 1% this year.

But Scott Grannis of Western Asset Management in Pasadena said he doubted the rebates will have much lasting effect.