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The conventional wisdom is that in times of economic hardship, discounters reign - consumers react to tighter credit conditions and job insecurity by hunting for bargains and cutting back on discretionary spending.

Markit’s vice president of credit research, Gavan Nolan, discusses the “mounting body of evidence” supporting this theory - which, handily, is in tune with economists’ beloved “rational agent” assumption.

[Last Thursday’s] US retail same-store sales figures showed Wal-Mart, Costco and TJX all posting robust results, while high-end retailer Nordstrom and apparel firms such as Gap and Limited Brands disappointed. Department stores such as JC Penney reported better than expected sales, but only through cutting prices and clearing inventories. McDonald’s US sales bounced back, citing the tendency of consumers to “trade down” from more expensive eateries. The chart to the left demonstrates that Wal-Mart and Costco are viewed as solid investment grade credits, unlike their high-end counterparts Nordstrom and Neiman Marcus (the latter was acquired in a LBO, hence the high-yield spreads).

However, the chart below paints a more mixed picture. If the four firms’ spreads are indexed to 100 this time last year, Nordstrom’s spreads have indeed performed poorly and Costco’s have held up well. But the worst performer over the period is the bellwether of the sector - Wal-Mart.

Its spreads have widened six-fold since last May, indicating that the behemoth is not immune to an economic slowdown. Although its 3.2 per cent increase in sales in April was better than expected, Wal-Mart gave a weak forecast for May, predicting sales sales would be flat to up 2 per cent. The retailer warned that shoppers were gravitating towards cheaper products such as pasta and relinquishing their allegiances to brands in favour of “own label” products. The $152bn tax rebates currently making their way out to eligible consumers are an irrelevance to luxury retailers such as Neiman Marcus. Wal-Mart and its competitors, however, will be hoping that the checks are spent in their stores rather than used to pay down debt. Falling house prices and a seemingly interminable rise in the price of oil make the latter outcome all too likely, to the dismay of policymakers as well as retail executives.

Related links:
Cost-conscious shoppers steer to discount stores - FT