Economic Update – Consumers Credit Shrinks, Puts Further Squeeze on Retailers

The deleveraging of the American consumer continued apace in February, according to the Federal Reserve. In the report published on Tuesday, the Fed said that consumer credit outstanding decreased $7.5 billion during the month to $2.564 trillion. That’s the sharpest monthly drop since the Fed started tracking consumer credit more than 40 years ago, and represents a seasonally adjusted annual decline of 3.5 percent. The inability to borrow may be a factor in the decline, but just as likely is the reluctance to borrow in the face of job fears and income loss–an entirely rational reaction. In any case, the slump in consumer credit is likely to continue to put pressure on retailers and retail real estate owners, some of which posted their most recent quarterly returns on Tuesday. A good example of putting the best face on disappointing returns came during the fiscal 4Q09 Pier 1 Imports Inc. conference call when president & CEO Alexander Smith said: “In terms of comparable store sales, we are no longer seeing those large double-digit declines that we experienced in some months of the third and fourth quarters. March comp-store sales were minus 9.7 percent, which is by no means good, but they were in line with our budget.” But there were some genuine positives for the home decor retailer, which is part of a retail sector than has been hit especially hard by the recession. Smith noted that the company has reduced outstanding debt by $79 million, and that it has negotiated to receive about $6 million in rent relief from its landlords, meaning that the company will probably close fewer stores this year than it previously expected: 80, instead of 125. All together during the company’s most recent quarter, which ended Feb. 28, Fort Worth-based Pier 1 Imports’ comp-store sales, an important metric in retailing, were down 9.7 percent, and it experienced a quarterly net loss of about $29 million, or 33 cents a share. “It’s a battle,” said Smith. “There’s no doubt about it.” Bed, Bath & Beyond Inc. also reported quarterly numbers on Tuesday: same-store sales fell 4.3 percent, and net income was down 18 percent for the quarter ended February 28, compared with the same period a year ago, though the company did post a profit of $141.4 million, or 55 cents a share. The company chalked some of the drop to competition from its bankrupt rival Linens ‘N Things Inc., which has been holding liquidation sales. NASCAR tracks represent a specialized kind of entertainment real estate niche, and it too is not immune from the recession. As NASCAR dads (and moms) stay home, International Speedway Corp. (ISC) has seen a decline in revenues at its 13 tracks nationwide. According to ISC, for the quarter ended February 28, net income dropped to $25.1 million, or 52 cents a share, down from $36.2 million for the same period a year ago. Wall Street lost ground for the second day in a row on Tuesday, perhaps on worries that as earnings season gets under way once again, other quarterly reports would be worse than expected. The Dow Jones Industrial Average lost 186.29 points, or 2.34 percent, while the S&P 500 was down 2.39 percent, and the Nasdaq lost 2.81 percent.