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June retail market: Retail sales grow, pace of bankruptcies slows

With sales rising and just two bankruptcies, the overall picture for the retail industry looks relatively brighter in May compared to past months, according to an analysis by S&P Global Market Intelligence.

Retail sales

Retail sales rose 0.8% to $501.97 billion in May from April, according to a monthly report released June 14 by the U.S. Census Bureau. Sales increased 5.9% year over year.

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The sales increase in May, like that in April, is an overall positive sign for the retail industry. It marks an improvement from the first quarter of the year when retail sales rose just 0.2% from the previous quarter, Satyam Panday, a U.S. economist for S&P Global, said in an interview.

"It's hard to fault anything in this report or in the industry numbers this month," he said. "Wage gains have started to show up, and you can see your additional spending from the tax cuts and a solid job market."

Sales at miscellaneous store retailers grew 2.7% month over month in May to an adjusted $11.12 billion. Building material and garden and supplies dealers grew at a slightly slower pace at 2.4% to sales of $32.53 billion over the same period.

Only two retailer categories saw sales fall month over month in May. Sales at furniture and home furnishings retailers fell 2.4% to $10.10 billion during the month. Sales at sporting goods, hobby, musical instrument and book retailers declined 1.1% to $6.90 billion.

Department stores, meanwhile, had their best month since June 2016 with a month-over-month 1.5% increase in sales to $12.71 billion.

Analysts were more optimistic about some department stores' performance in the fiscal first quarter than others. Macy's Inc. and Kohl's Corp. posted results that greatly exceeded analyst expectations for their fiscal first quarter ended May 5, while companies including Sears Holdings Corp. and J.C. Penney Co. Inc. fared more poorly against analyst expectations in the same period.

Similar to retail sales, consumer prices increased 0.2% in May from April, according to a monthly report released June 12 by the U.S. Bureau of Labor Statistics. Prices jumped 2.8% year over year.

Gasoline prices led the month-over-month increase at a 1.7% jump. Prices for medical care commodities followed at a 1.3% rise during the month.

Core prices for all items excluding food and energy also rose 0.2% in May from April.

Bankruptcy

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

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A group of vineyards, including Vineyard Brands Inc., Paragon Vineyard Co. Inc. and Cannon Wines Ltd.dba AdVini USA filed an involuntary petition for Chapter 7 bankruptcy against A&B Imports Inc., a Washington-based wine distributor, on May 25. The petition claimed about $745,000 in unpaid trade debts.

Way To Grow Inc., a home improvement retailer, voluntarily filed for Chapter 11 bankruptcy on May 18.

Those two cases bring the total number of retail bankruptcies so far in 2018 to 14. Earlier in the year, a wave of private equity-held, mall-based retailers, including Nine West Holdings Inc. and Claire's Inc., declared bankruptcy as they failed to make interest payments on a heavy debt load.

Vulnerability

A June analysis of one-year probability-of-default scores identified 15 U.S. department stores and apparel companies with scores ranging from 25.93% to 2.08% and corresponding implied credit scores of "ccc-" to "b+."

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Sears continued to top the list, with the department store operator's one-year probability of default inching up to 25.93% from 25.88% in May. Its implied corresponding credit score fell to "ccc-" from "ccc."

Sears on May 31 reported another net loss and a sharp drop in revenue in its first quarter ended May 5. The company also said it will shutter 63 stores by early September.

The department store operator has taken out loans from its CEO Edward Lampert's hedge fund and is considering selling off assets to stay afloat. Sears recently amended a loan agreement to borrow another $186 million under a term loan facility with the hedge fund.

A few companies shifted near the bottom of the list. Burlington Stores Inc.'s one-year probability of default score dropped to 2.08% from 2.31% in May. That pushed both J.C. Penney and Ascena Retail Group Inc. one spot higher on the list.

Employment

The retail sector added 31,100 jobs in May, reaching 15.97 million. That is an increase of 0.2% from April, according to a monthly report released June 1 from the U.S. Bureau of Labor Statistics.

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Clothing and clothing accessories stores, along with building material and garden supply stores, saw the sharpest increase in jobs during May.

Employment in clothing and clothing accessories stores rose by 6,500 jobs, or 0.5%, to 1.4 million during the month from April. Employment at building material and garden supply retailers also jumped by 0.5%, or 6,000 jobs, to 1.3 million over the same period.

General merchandise stores led the overall jump, adding 13,400 jobs, or 0.4%, in May to 3.1 million. Within general merchandise stores, department stores added 7,600 jobs, while warehouse clubs and supercenters added 5,900 jobs.

Only health and personal care and nonstore retailers saw employment declines during May. Employment at health and personal care companies declined 0.1% to 1.1 million. Employment at nonstore retailers, which includes e-commerce companies, fell 0.2% to 594,100.

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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.