Mortgage woes: More trouble for retailers

Credit crunch could crimp spending by shoppers at Wal-Mart, Target, other chains. Will the high end get hit too?

By Parija B. Kavilanz, senior writer

NEW YORK ( -- Wal-Mart, Kmart, Target and big chains that cater to low-income consumers could take a direct hit from the turmoil in the mortgage market, industry experts warned.

And even though most analysts expect the hit to spending from subprime delinquencies to be modest, they say the retail industry may be in real danger of a sales slowdown if credit problems migrate up the ladder from low net-worth consumers to moderate income households.

"Discounters and dollar stores, to a lesser extent, could face modest headwinds in the near-term as (some customers) may forgo some discretionary spending to meet rising debt repayments," Citigroup analyst Deborah Weinswig wrote in a research note Wednesday.

But not everyone's convinced. Some experts said rising mortgage defaults would cause little more than a ripple in consumer spending. Former Federal Reserve Chairman Alan Greenspan reinforced that idea Thursday when he told an industry gathering that he was more worried about the housing downturn slowing down the economy than the problems in the subprime mortgage market.

The retailer with arguably the most exposure to the knock-on effect of mortgage defaults: Wal-Mart.

Subprime loans by definitions are given to the riskiest borrowers, or typically low-income consumers with poor credit. These borrowers also represents the core shoppers at big discounters like Wal-Mart (Charts) and Target (Charts).

Wal-Mart, (Charts) the world's biggest retailer, claims that more than 100 million shoppers cruise the aisles of its discount stores every week looking for bargains.

"It's clear that when (investors) think of the discount sector, they have to build in this downside," said Stephen Hoch, director of Wharton Business School's Jay H. Baker division of retailing. "But if delinquencies spread, that puts banks under pressure and the entire financial system gets tighter," he said.

Lenders are already tightening standards, something that could affect higher-quality borrowers, making it more difficult for average consumers to get credit or borrow against their homes - something that helped buoy consumer spending during the housing boom.

"If the credit crunch spreads, then its impact on consumer spending will be reasonably distributed across the industry," Hoch said.

Robert Gay, a former Federal Reserve economist who's now managing partner with Fenwick Advisers, a financial consulting firm, said the subprime problems could start to affect spending even by wealthier consumers.

"You and I don't have subprime loans but the situation does make us cautious about the mortgages that we do have," Gray said. "We wouldn't want to go into more debt in order to make big-ticket purchases."

As a result, he said retailers could see sales of big-ticket items slow. Auto sales, already weak, could slump further. Appliance and furniture will also be vulnerable. "Consumers will want to postpone these purchases that they would typically make on credit," he said.

That's bad news for furniture sellers like Pier 1 Imports (Charts) which has suffered declining sales at its stores open at least a year - a key measure of retail performance known as same-store sales - for more than a year.

It's also potentially troublesome for department store chain Sears (Charts), one of the nation's leading sellers of home appliances.

The impact on home improvement chains Home Depot (Charts) and Lowe's (Charts) is harder to predict. While a housing slowdown could hurt them, if people spruce up their existing properties, these chains could benefit.

For its part, the National Retail Federation (NRF), the retail industry's largest trade group, isn't too worried about any long-term pressure on industry sales from mortgage delinquencies.

"The retail industry has proved its resilience repeatedly, whether it was after the Sept. 11 attacks or even when consumers were confronted by higher gas and energy costs two years ago," said NRF spokesman Scott Krugman. "You can't ignore past performances."

As a result, Krugman said it's premature to talk about the subprime issue as an industrywide problem for retailers. Still, the NRF is forecasting that sales growth will slow to about 4.8 percent this year, down from 6.3 percent last year and 5.8 percent in 2005.

Wal-Mart declined to comment on the story. Target, Sears and Family Dollar could not immediately be reached for comment.

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