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Standard & Poor’s Ratings Services has put six department store companies on CreditWatch with negative implications and has changed the outlook on three department store companies to negative from stable.  Moody’s & Fitch either downgraded or warned of possible downgrades.  Dillard’s Inc. (NYSE: DDS), Macy’s Inc. (NYSE: M), Nordstrom Inc. (NYSE: JWN), J.C. Penney Co. Inc. (NYSE: JCP), Sears Holdings Corp. (NASDAQ: SHLD), Bon-Ton Stores Inc. (NASDAQ: BONT), Kohl’s Corp. (NYSE: KSS), and Saks Inc. (NYSE: SKS) were all part of the S&P call late today.

This is over a deepening concern about the impact of the recession on department stores.  More importantly,it expects that the downturn to get worse in first half of2009.  This is based upon weakening employment, a declining housingmarket and continuing financial market turmoil.  The ratingsagency expects cost cutting and inventory management to protect marginsbut expects that margins will continue to erode based on weak consumerdemand, little sales leverage, and over discounted sales expectations.

Further, the declining profitability is expected to hurt enough toresult in downgrades in some cases.  This is not written in sand andthe CreditWatch listings should be resolved within 90 days.

S&P also noted that companies which forgo discretionary capitalspending and which reduce costs to preserve balance-sheet strengthshould be viewed favorably in this ongoing review.

Here are the ratings under review:

Ratings Placed On CreditWatch              To                 From
Dillard’s Inc.
Corporate Credit Rating                B+/Watch Neg/–    B+/Stable/–
Macy’s Inc.
Corporate Credit Rating                BBB-/Watch Neg/A-3 BBB-/Negative/A-3
Neiman Marcus Group Inc. (The)
Corporate Credit Rating                B+/Watch Neg/–    B+/Negative/–
Nordstrom Inc.
Corporate Credit Rating                A-/Watch Neg/A-2   A-/Negative/A-2
Penney (J.C.) Co. Inc.
Corporate Credit Rating                BBB-/Watch Neg/–  BBB-/Negative/–
Sears Holdings Corp.
Corporate Credit Rating                BB-/Watch Neg/–   BB-/Negative/–
Ratings Affirmed; Outlook Action             To                 From
Bon-Ton Stores Inc.
Corporate Credit Rating                B-/Negative/–     B-/Stable/–
Kohl’s Corp.
Corporate Credit Rating                BBB+/Negative/–   BBB+/Stable/–
Saks Inc.
Corporate Credit Rating                B/Negative/–      B/Stable/–

Our only problem with the S&P warning here is that there is justabout no way that things will get better at ANY of these stores.  We do not disagree with any of the reviewed issues, but we doubt these and most other retailers can or will take the necessary steps to pinch costs and to operate better.  Evenif the Obama stimulus package handed out checks of a hypothetical$3,000.00 to families, this might go under the mattress or go towardpaying off debt and creditors.  It feels like a no-win scenario. 

Hoping is always a poor investment and business strategy.

Jon C. Ogg
February 5, 2009