Fitch: Large banks keep lid on retail sector exposure
The largest U.S. banks are keeping their exposure to the beleaguered retail sector in check, according to Fitch Ratings’ latest Banks Chart of the Month.
The retail sector is unlikely to threaten the banks’ ratings given their limited exposure, strong core earnings and healthy capital levels. However, disruption to retailers from e-commerce underscores the need for banks to stay abreast of technological change and adjust their exposures accordingly, advised Fitch.
Large banks are actively reducing exposure to the most challenged retail segments and using asset-based lending to limit their retail sector risk. Fitch estimates that balance sheet exposures to retailer commercial real estate and retail commercial loans represent 9% and 14%, respectively, of common equity tier 1 capital in aggregate across large Fitch-rated U.S. banks.
Retail exposure in banks’ securities portfolios is minimal. Only 2% of portfolios in aggregate are invested in CMBS that do not carry a government or government-sponsored entity guarantee.
U.S. retail loan default rates have risen sharply to about 7% this year (on a trailing 12-month basis) after several years below 1%.
“We forecast them to reach 10% next year as brick-and-mortar sales continue to decline in the face of online sales,” Fitch stated.
Not all retailers are equally challenged. Retailers of consumer staples are more susceptible to disruption from online competitors than convenience stores and grocery stores, for example, although Amazon’s recent acquisition of Whole Foods could signal that this is changing, according to Fitch.
Arts and crafts retailer makes two key digital moves
A.C. Moore Arts and Crafts is ramping up its digital offerings with an acquisition — and an investment.
The retailer’s parent company, Nicole Crafts, has acquired Blitsy, an online retailer of arts and crafts products that was founded in 2011. Blitsy will operate largely as an independent subsidiary of Nicole Crafts and remain based in Chicago, with access to A.C. Moore’s infrastructure and scale. A.C. Moore will leverage Blitsy’s e-commerce expertise and relaunch acmoore.com in 2018.
“We are joining the A.C. Moore family because there is a huge opportunity to utilize each other’s strengths and move faster toward our vision of delivering a truly rewarding and holistic experience to customers, teammates, and brand partners,” said Ross Petersen, co-founder and CEO of Blitsy.
In a second initiative, the A.C. Moore parent company secured an exclusive partnership as part of a major investment in handcraft marketplace Zibbet, a marketplace of some 50,000 independent artists, crafters and vintage collectors.
“A.C. Moore is entering a period of unprecedented growth,” said Anthony Piperno, owner and chief marketing & merchandising officer at A.C. Moore, which operates 135 stores across the East Coast. “These dynamic additions to our company can rapidly accelerate adoption of our proprietary product across a global audience of creative consumers and position our family as industry leaders among arts and crafts enthusiasts everywhere.”
A.C. Moore was advised on both transactions by EGL Holdings, an Atlanta-based boutique investment banking company.
Party City’s Q3 hit with hurricanes and Web performance issues
Party City reported third quarter profit in line with expectations even as its sales fell short due to Web problems and the impact of hurricanes.
Total revenues rose 0.6% to $560.1 million for the quarter ended Sept. 30. Its results included a $5 million hurricane-related headwind.
Retail sales increased 4.7%, driven primarily by increased store count through acquired franchise stores (36), one acquired independent store and new store growth (20 net new Party City stores) in the past 12 months. Same-store sales fell 1.2%.
Party City’s comp performance was impacted by problems on its Web platform that negatively affected traffic levels on its site. The company said it is “aggressively addressing these issues.”
Net income totaled $10.1 million or $0.08 on a per share basis, compared to $10.2 million, or $0.08 per share in the prior year period. Adjusted earnings per share increased to $0.13 from $0.12 in the year-ago period.
“Our bottom-line performance in the third quarter once again demonstrated the inherent benefits of our unique vertical model,” said CEO James M. Harrison. “Despite modest topline growth, and slightly softer than expected retail brand comps, in part driven by the hurricane disruptions, we delivered solid financial performance which was largely in-line with expectations, as we focused on the core fundamentals of gross margin expansion and disciplined cost control, resulting in adjusted EPS growth of over 8%.”
Based on its year-to-date performance, Party City is updating our full year guidance. It expects full-year earnings in the range of $1.21 to $1.25 per share, with revenue in the range of $2.36 billion to $2.39 billion.
“Looking ahead, we remain focused on executing our retail initiatives as well as elevating our e-commerce capabilities which, combined with the power of our vertical model, will drive sustainable top and bottom line improvement,” Harrison said.
The company’s retail operations include over 900 specialty retail party supply stores (including approximately 150 franchise stores) throughout North America operating under the names Party City and Halloween City, and e-commerce websites, principally through the domain name PartyCity.com.