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financial

Credit: The Year Ahead

For much of 2009, the savings rate was up to between 4 percent and 5 percent, and many consumers have weaned themselves away from credit.

The shift to thrift ushered in by the recession continues to turn the spending and saving habits of Americans upside down, posing an ongoing challenge to retailers and their suppliers.

Consumers have learned a thing or two from the recession. The savings rate was up to between 4 percent and 5 percent for much of 2009, and many consumers have weaned themselves away from credit.

But with less credit comes the problem of less spending, which analysts say is sure to put a strain on retailers’ earnings in the year ahead.

“What the consumer wants depends on credit availability,” said Moody’s Investors Service senior analyst Charles O’Shea. “Consumer credit availability is going to be a key issue in 2010. We think the savings rate is an issue as well. It’s hard to envision the sales environment getting too much better considering the dearth of credit availability.”

According to the Federal Reserve, consumer credit decreased at an annual rate of 8.5 percent in November — dropping 3 percent for nonrevolving credit but 18.5 percent for revolving loans.

O’Shea, who said retail earnings are expected to be flat to up in the low-single digits in 2010, believes credit constraints will continue to impact high-ticket items the most this year. He has already seen “compressed sales” in appliances and electronics, and said retailers that carry “must-have items” like refrigerators have started stocking more lower-priced models than before.

On the apparel side, however, luxury retailers are bearing the brunt of the burden, even with measurable improvement in their holiday same-store sales.

With less credit available, the “aspirational shopper is evaporating,” he said, noting this consumer is unable to make those big-ticket purchases and in many cases has traded down to value-oriented chains. While many value retailers had modest decreases and even some gains after the credit meltdown of September 2008, upscale retailers weather a series of double-digit decreases.

“There’s a certain percentage of people who have been absolutely shell-shocked by this [recession],” he said, adding that they may conserve a sort of “post-depression” mentality, which could translate to a permanent trade-down.

At the same time, the core luxury consumer seems to be showing some signs of life, Needham & Co. retail analyst Christine Chen said, explaining that if high-end consumers “made it through two or three rounds of layoffs,” they are feeling “more confident” now as things appear to be stabilizing.

She contended that if the economy continues to improve, maybe the aspirational customer will begin “trading up” again as well.

Still, as it stands today, the American consumer continues to be “strapped,” said Michael Dean, managing director at Fitch Ratings, citing research by his firm indicating U.S. consumers defaulted on store-branded credit cards at near-record levels during the holiday season.

This year is “likely to bring more of the same trend,” he said, adding that considering delinquencies and the high level of unemployment, which he expects to remain above 10 percent this year, retail card chargeoffs are also anticipated to remain “elevated throughout he first half of 2010.”

“The unemployment rate directly impacts consumers’ cash flow,” said his colleague, Karen Ghaffari, a managing director who heads up the rating firm’s U.S. retail group.

According to Ghaffari, equity and real estate portfolios, in addition to consumer confidence and a potential inflationary environment, could also affect consumer spending.

In order to cope, most retailers have severely cut inventories and costs, she said, but added “if retailers don’t have the right product that the consumer wants to buy, then they are not going to sell it.”

Given the economy, she expects to see a continued focus on value and a host of planned promotions in 2010.

Ghaffari, who projected retail sales to be up “moderately” this year and same-store sales comparisons to be easy through the third quarter, said Fitch projects personal consumption, which is a large part of GDP, to rise 1.4 percent for the year. This “subdued recovery” is only expected to lead to a 1.8 percent improvement in 2011, she said. In 2007, personal consumption grew 2.6 percent, followed by a 0.2 percent decline in 2008. Fitch forecasted a 0.6 percent dip in 2009.

“Americans are remarkably resilient consumers,” said Erin Armendinger, managing director of the Jay H. Baker Retailing Initiative at University of Pennsylvania’s Wharton School of Business. “We’ve got a positive savings rate, but eventually we will find ways to get credit again. We’ll go back to find out how much credit is right for each person.”

In the end, though, most analysts expect credit to remain tight through the year, with some potential movement in 2011.

“I can’t see consumer credit availability getting better in 2010. There’s also the question of whether the consumer really wants it later,” said O’Shea of Moody’s. “It’s a behavioral issue that’s hard to dimension out now. We just don’t know.”

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