Thu Jul 8, 2004
By Eric Burroughs

NEW YORK, July 8 (Reuters) - Soggy retail and auto sales in June have many investors wondering whether the usually free-spending consumer is beginning to hide under the pillow.

But even with Thursday's disappointing news on June chain store sales, analysts and traders said the stronger balance sheets and better inventory management at most major retailers should buttress the improvement in their credit spreads over the past year.

"What you have is a recovery morphing into an expansion," said Tom Lofton, a retail credit analyst at Wachovia Securities. "Things are good but slowing down, and it doesn't necessarily mean a whole lot. For the vast majority of retail credits, they've gotten their house in order."

For that reason some major retail credit spreads weakened a tad but hardly flinched at the softness in sales last month, which had been forewarned by the likes of Wal-Mart Stores Inc. (WMT.T: Quote, Profile, Research) and Target Corp. (TGT.N: Quote, Profile, Research) even before the final results were released Thursday.

According to Thomson First Call, same-store retail sales rose just 2.8 percent compared to expectations for a 4.2 percent gain. Wal-Mart reported its weakest monthly sales gain in more than a year. Most retailers blamed unusually wet and cool weather during the month for the poor performance.

To Wachovia's Lofton, the bigger issues for retail credit spreads are more bondholder-negative mergers and acquisitions, like May's purchase of stores from Target, and the threat of terrorism. Homeland Security Secretary Tom Ridge warned of a potentially large-scale al Qaeda attack on Thursday.

To credit strategists at Morgan Stanley. investors should opt for industrial companies, like Raytheon (RTN.N: Quote, Profile, Research) , whose business mostly comes from other corporations rather than consumer-oriented companies.

The thinking is that many corporations have used the painful past few years to clean up their balance sheets, while consumers still have a long way to go. Thus consumer companies may not fare as well over the next year.

Indeed, the Federal Reserve reported Wednesday that consumers have loaded up on more debt during the first part of the year to fuel spending, but that the debt binge may be ending.

The Fed data showed that during the first five months of the year consumer credit rose by an average of $8.9 billion, compared with an average of $6.8 billion for all of 2003.

Yet the signs of a debt satiation are emerging. Revolving credit, like credit cards, has risen in just one of the past four months. Over the past year the average 1.7 percent increase in revolving credit is "among the slowest growth rates during the 36 years of record keeping," Insight Economics chief economist Steven Wood wrote in a research note.

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