A bump in retail sales in April signaled a potential rebound in consumer spending, but bankruptcies continued at an even pace in late April and early May, underscoring the challenges retailers face as consumers slowly shift from brick-and-mortar stores to online purchases, an analysis by S&P Global Market Intelligence showed.

Retail sales

Retail sales increased 0.3% in April to $497.56 billion, according to a monthly report released by the U.S. Census Bureau on May 15.

The increase in sales in April, following a revised 0.8% jump in March, points to a rebound in consumer spending for the second quarter, Satyam Panday, a U.S. economist for S&P Global, said in an interview.

"If you remember, in the first quarter, personal expenditure sort of slowed down," he said. "Now, [with] the number that we saw for April and the revised March numbers, it looks like consumers are sort of still active and that they will carry economic growth going forward. It looks like it's going to be a nice rebound."

At IHS Markit, however, the overall retail sales number came in below expectations. But there were "more winners than losers" in the April sales report, said Kathleen Navin, director of macroeconomic advisers at IHS Markit, in a note.

She said that nonstore retailers, which includes e-commerce companies, continued to capture spending. Sales at nonstore retailers increased 0.6% to $55.91 billion month over month.

Clothing and clothing accessories stores in April saw the sharpest increase in sales at 1.4% to $22.48 billion, followed by miscellaneous store retailers at 0.9% to $11.27 billion.

Health and personal care stores were one of the few categories to report a decline in sales at 0.4% to $27.51 billion.

Similar to retail sales, consumer prices rose a seasonally adjusted 0.2% in April, according to a monthly report released May 10 by the U.S. Bureau of Labor Statistics.

Energy commodity and gas prices led the increase with a 3% jump in both categories, outweighing a 1.6% decrease in used cars and trucks.

Core prices for all items, excluding food and energy, rose 0.1% in April. A 0.3% rise in prices for shelter led the increase, along with a 0.3% increase in the price of apparel.

Going forward, lower income taxes for consumers could lessen any impact from rising gas prices on retail sales, said Naveen Jaggi, president of JLL Retail, in a note.

"This increase is despite gasoline prices rising significantly over the first four months of the year," he said. "However, gas prices will be increasingly important to monitor for retailers as we progress throughout the year, as paying more at the pump will likely cut into consumers' discretionary spending capability."

Panday also said that higher gas prices are slightly offsetting some of the gains from tax reform, and will likely continue to do so. Another key issue to watch going forward — rising interest rates — is not yet presenting a problem for retail spending, he said.

"We don't see it as a huge problem, at least right now," he said. "The fear is that you might take off consumer spending ability if you have a higher month-over-month interest to pay; that might divert the consumption from somewhere else."

Bankruptcy

Three S&P Capital IQ-covered U.S. retail companies filed for bankruptcy in late April and early May. S&P Global Market Intelligence’s tally includes companies with a primary industry classification of retailing, household and personal products, or consumer durables and apparel, and a secondary industry classification of retailing.

The Rockport Co. LLC, a footwear e-commerce company, filed the most recently on May 14. AcuSport Corp., a distributor of outdoor and shooting sports products, and Gibson Brands, a manufacturer of guitars and other musical instruments, both filed on May 1.

This brings the total number of bankruptcies so far in 2018 to 12, compared to a six-year high of 40 retail bankruptcies in all of 2017.

Retailer vulnerability

A May analysis of one-year probability-of-default scores identified 15 U.S. department stores and apparel companies with scores ranging from 25.88% to 2.09% and corresponding implied credit scores of "ccc" to "bb-."

Sears Holdings Corp. continued to hold the top spot on the list, with the department store operator’s probability of default holding steady at 25.88% and an implied credit score of "ccc." The company is considering the sale of its Kenmore brand and related assets to CEO Edward Lampert's hedge fund. Sears has begun the formal process to explore the sale, the company said May 14.

Although the companies on the list did not change from the April iteration, several did shift position.

Vince Holding Corp., which has previously held the No. 2 spot on the list with a probability of default of 13.04%, fell to the No. 6 spot with a probability of default of 7.91%.

Destination Maternity Corp., meanwhile, saw its probability-of-default score rise to 10.23% from 9.78% as it claimed Vince Holding’s former spot on the list. Other retailers previously below Vince Holding Corp., including Destination XL Group Inc., Stein Mart Inc. and Christopher & Banks Corp., moved up on the list.

Employment

Retail employment remained about even during April, according to a monthly report released May 4 by the U.S. Bureau of Labor Statistics. The sector added 1,800 jobs during the month, according to the report.

Sporting goods, hobby, books and music stores helped lead job growth in the sector by gaining 1,700 jobs, or a month-over-month increase of 0.3%.

Non-store retailers, a category that includes e-commerce, added 1,800 jobs, which also represents 0.3% month-over-month growth.

Clothing and clothing accessories stores, meanwhile, lost the most jobs at 5,300 jobs, a 0.4% decline.

Building material and garden supply stores, which ramped up seasonal hiring earlier in the year for the busy spring remodeling season, also saw a 0.4% drop, equaling about 4,800 jobs.

S&P Global Market Intelligence is owned by S&P Global Inc.

S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, refer to the PD Model Fundamentals - Public Corporates whitepaper.