S&P publishes peer comparison on rated apparel retailers

Two Asia-Pacific apparel retailers that Standard & Poor's Ratings Services rates have the strongest and weakest credit profiles among their global peers. That's according to a report that Standard & Poor's released last week, titled "Asia-Pacific's Rated Specialty Apparel Retailers Top And Tail Their Global Peer Group".

In its peer comparison study, Standard & Poor's assessed the credit quality of four companies: China-based E-Land Fashion China Holdings Ltd. (BB-/Stable/--; cnBB+), Japan-based Fast Retailing Co. Ltd. (A/Stable/--), U.K.-based Next PLC (BBB/Stable/A-2), and U.S.-based Gap Inc. (BB+/Stable/--).

"We believe that Fast Retailing has the best credit quality of the group," said Standard & Poor's credit analyst Helena Song. "The company has a strong market position as Japan's largest apparel retailer by sales, efficient supply chain management, and sound financial standing."

Conversely, Standard & Poor's views E-Land China as having the weakest credit quality. Despite benefiting from stronger consumer spending in China, the company has a small scale on an international basis. The rating on E-Land China reflects the company's aggressive financial policy and the weaker credit profile of the wider E-Land Group.

The 'BBB' rating on Next, the U.K.'s second-largest clothing retailer by revenue, reflects the company's good cash flow generation and its meaningful mail-order and Web-based presence. The margins of Gap, the largest U.S. specialty apparel retailer by revenue, have weakened in recent quarters because of the hikes in cotton prices. Nevertheless, the company's good market position, satisfactory cash flow generation, and above-average credit metrics support the rating.

The report also examines the business and financial risks for each of the retailers.

"We believe a still-weak global economy and uncertainties regarding recovery will continue to dampen global consumer sentiment. This will limit the opportunities for specialty apparel retailers to expand in mature markets," said Ms. Song. "Specialty apparel retailers also face the risk of further margin erosion in the remainder of 2011 and into 2012, as commodity prices remain high. Consumer spending is likely to stay healthy in China, supporting the growth prospects of companies there. But increasing competition from large global competitors and risks associated with aggressive expansion could slow the pace of improvements in credit quality in that market."