Moody’s, in a new report, predicted that “another dismal year” for U.S. department stores will accelerate change in 2020. The sector heavily underperformed the broader retail industry last year, despite continued investments and offering updates, the still-solid growth of the U.S. economy and strong consumer spending.
“Despite strength in most other sectors of the retail industry, department stores lost momentum in 2019 with operating income for the year projected to be down about 20 percent,” said Christina Boni, a Moody’s VP and senior credit officer, in a statement. “We forecast that the sector will stem its decline in 2020, but with operating income still expected to fall by about 5 percent, department stores must radically improve their format and product offerings in the year ahead.”
Moody’s said operating income is projected to be down about 20 percent in 2019 and about 5 percent in 2020.
Last year department stores struggled to align inventory with demand which, despite aggressive promotional activity, wasn’t as high as expected, Boni said. Inventory control remains critical in an environment in which the stores must ensure the availability of product offerings as well as speed of delivery. Faced with weaker merchandise margins in 2020, operators must also continue to actively manage selling and general and administrative costs.
At the same time, earnings have become critically dependent on credit income which now accounts for a significant portion of operating income, around 50 percent for both Macy’s and Nordstrom. Without this income stream, department store performance would look much worse. More rationalization and investment may be necessary to keep up with the rapid changes in the retail industry, and in 2020 companies may need to take another look at their footprint.
Meanwhile, although many department stores including Macy’s, Inc. and Kohl’s Corp., have been disciplined in reducing their debt levels, that won’t be sufficient to boost their credit ratings unless they can quickly stabilize their business model, Moody’s added. Major investments in delivering value need to result in maintaining market share.