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High Inflation and Shifts in Consumer Spending to Pressure Discretionary Retailers' Credit Risk Profiles

Inflationary pressure has materially increased in the North American market in 2022 as the consumer price index rose to a four-decade high of 9.1% in the U.S. and 8.1% in Canada at the end of June 2022, further delaying the widely anticipated inflation rollover. With the winding down of government stimulus, soaring inflation, a decline in real wages, and rising interest rates, consumer purchasing power has significantly dampened. DBRS Morningstar now expects this to affect retailers' volumes and margins more severely than previously anticipated, especially for more discretionary retailers as well as leading online retailers.

We believe that this sustained inflationary pressure could materially weaken discretionary retailers' credit risk profiles and/or affect their ongoing recovery (even more so for retailers with comparatively higher leverage and weaker liquidity profiles) and could lead to negative credit rating actions or result in the delay/suspension of positive rating actions that were previously envisaged. While the overall impact is directionally negative even for big-box retailers, which offer a wide range of merchandise including staple, discounted, and discretionary products, we believe that these large retailers are relatively better positioned to withstand current inflationary pressure and earnings moderation within the context of their current rating categories.