Fitch Sees Weaker 2008 Retail Sales

New York, NY, November 15, 2007--Fitch Ratings expects a moderately weaker 2007 holiday season compared to last year when comparable store sales were up 2.8% and total sales increased 4.6%.

Promotional activity is earlier and broader than last year as retailers seek to drive store traffic and clear excess apparel inventory. While recent headlines about toy recalls could divert demand to U.S. and European made products, overall toy demand should remain strong. In addition, sales in some categories, such as consumer electronics, should fare better than others given the price accessibility and continued demand for popular products.

Fitch also anticipates that comparable store sales growth in 2008 will be weaker than 2007 due to slow U.S. growth in Gross Domestic Product, which Fitch forecasts to be about 1.7% in 2008, versus an expected 1.8% in 2007.

Expected high energy costs, weak housing and credit markets, and increased unemployment rates will weigh on consumer confidence and spending. Consumers at all but the highest income levels are expected to moderate discretionary spending with fewer elective purchases and more trading down among retail channels. As a result, competition among retailers is anticipated to remain intense, particularly in those geographic markets that are most acutely impacted by housing and job related weakness.

The combination of pressured revenues, promotional activity, and high costs related to energy and commodities are expected to stress operating profit margins.

Fitch expects retailers will be primarily focused on perfecting their operating strategies to preserve sales and gain market share as well as manage profitability and cash flow generation, with industry consolidation.

Liquidity for U.S. retail companies is expected to remain strong and be primarily internally generated.

Fitch expects companies will need to be focused on managing their business to drive traffic into stores, contain costs, and appropriately allocate cash flow.

Controlling costs will be a key area of focus to offset margin compression from top line pressures and promotional activity as well as high energy and commodity costs.

Home improvement retailers are anticipated to focus on strengthening their store bases and service levels to capture market share in the face of a challenging housing market. This segment remains highly fragmented, with Home Depot and Lowe's accounting for less than 20% of the market.

While Home Depot is slowing its store growth to focus on strengthening its existing operations, Lowe's is expected to continue expanding its store base aggressively. Debt-financed share repurchases will continue to be a focus for Home Depot as it has yet to complete $11.8 billion of the $22.5 billion share repurchase program that was announced in June 2007.