3 January 2018 HY Corporate Credit HY Multi Sector.Media, Cable & Satellite Retail, Consumer and Food Outlook McKinney, Geoffrey, (+1) 212 250-4914, [email protected] Retail: Challenges persist despite positive holiday outlook Key themes: ho€€day kick start; e-commerce and margin risk We expect retail will remain the most topical sector within the consumer suite in 2018, as the recent kick start from the 2017 holiday season is balanced against secular headwinds. While our best idea for the start of 2018 was pulled forward into 2017 - PetSmart (PETM) - we expect episodic opportunities to remain present over the course of next year. Below we list some of the key themes to monitor as we turn the calendar. • Strong start to holiday season buoyed retail performance in November and December. Department store sales inflected positive in November (+1.7% YoY seasonally adjusted; +4.0% unadjusted) according to the latest U.S. Census Bureau's Advance Retail Sales report. • E-commerce growth continues to far outpace overall growth in retail spending. First Data indicated Black Friday/Thanksgiving retail sales grew 9.3% YoY, compared to online sales growth of 17.4% YoY over the same period. In this context, Neiman Marcus (NMG) has outsized digital penetration, with online representing 32% of sales. While we are increasingly constructive on the F2018 outlook for NMG, we believe a restructuring of some form is necessary at some point. • Retailers, across all categories, are likely to face increased pressure to compete on price or risk declining foot traffic and sales dollars. The Fresh Market (TFM), PetSmart (PETM) end Petoo (PETC) were the 2017 case studies for such pressure. Driven by either competitors investing in gross margin or online undercutting brick-and-mortar pricing and capturing market share, each saw decelerating SSS driven by foot traffic headwinds throughout 2017. Looking ahead to 2018, Sally Beauty (SBH) potentially fits