FED RATE CUTS SEEN BENEFITING RETAILERS WITH STRONG CREDIT.
"Given the significant change in interest rates in 2001, we believe the interest expense line will have a more dramatic impact on profitability than usual," Exstein said.
The analyst said retailers could realize interest expense savings in two forms. The first is lower interest on floating debt. Second, there could be significant savings for retailers who refinance their public debt.
"Our analysis shows that Target could realize the largest savings in its annual interest expense if it refinanced its debt under our assumptions," Exstein explained, adding that the retailer could see savings of $17.4 million.
Meanwhile, retailers with weak credit quality could see rising interest expenses. For example, Exstein's analysis shows that Dillard's would have the largest jump in annual interest expense if it refinanced its debt.
Exstein's analysis reveals that retailers are affected differently from the Fed's rate cuts. Retailers with strong balance sheets tend to be in a better position to benefit from the rate cuts.
Moreover, the savings in interest rate expense are "most quickly realized" within the area of floating debt. These are shorter-term financing arrangements that many retailers use for working capital requirements. On Exstein's radar of mall anchor stores, Federated, May and Sears use the most of this type of financing, while J.C. Penney uses the least. Exstein maintains that Federated would benefit the most from refinancing its debt.
On the discount retail side, Exstein said Wal-Mart uses the most short-term financing. His analysis suggests that Wal-Mart's short-term interest rate expense could decline $90 million for 2001, which would end up reducing the retailer's total interest expense by 18 percent compared with 2000.
Regarding Target, Exstein calculated that the retailer could save 24 percent in short-term interest costs for 2001 compared with 2000. Kmart, on the other hand, would see the greatest increase in annual borrowing costs on public debt, under Exstein's assumptions.
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|Comment:||FED RATE CUTS SEEN BENEFITING RETAILERS WITH STRONG CREDIT.|
|Publication:||HFN The Weekly Newspaper for the Home Furnishing Network|
|Article Type:||Brief Article|
|Date:||Jan 7, 2002|
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