Stable can be good.
Despite the shift in consumer shopping behavior patterns and the ongoing impact on retail and apparel firms, credit ratings agency Moody’s Investors Service has a “stable” outlook for the two sectors for 2018.
Five out of 14 retail subsectors will see operating income growth above 5 percent next year, led primarily by the e-tailers with a 36 percent growth rate, dollar stores up 7.9 percent and home improvement up 6.6 percent. Dragging the broader sector performance will continue to be discounters and warehouses, department stores — the only subsector to see a decline in the growth rate at down 2.7 percent — and apparel and footwear, as well as drug stores.
Moody’s predicted that growth investments by Wal-Mart Inc., CVS Health Corp. and The Walgreen Co. should begin to pay off, and firms such as Macy’s Inc., Kohl’s Department Stores and Nordstrom Inc. should begin to see their losses taper off. The ratings agency is predicting sales growth between 3.5 to 4.5 percent, while solid gains in household wealth becomes a “clear positive” for the broader sector.
Credit-wise, distressed debt in retail comprises 5 percent of total rated retail debt concentrated in Neiman Marcus, Sears Holdings Corp. and Claire’s. Also, retailers have been rightsizing their real estate, with Moody’s predicting that the number of mall stores will decline by more than 2.5 percent in 2018, and off mall growth decelerating.
One factor could shift the outlook to negative is a “material industry-wide supply chain disruption. Another is any sign that revenues will flatten or decline. Moody’s also said the outlook could change to positive should operating income accelerate above 5 percent. Another plus would be growth driven by higher consumer spend not attributable primarily to cost cuts.
In apparel, profit growth will be more widespread among firms that can benefit from product innovation, cost savings and synergy initiatives. Weak traffic trends and high promotional activity will remain as the top challenges for the sector.
Moody’s expects 2018 operating earnings to grow 4 to 6 percent for apparel firms, noting that foreign exchange rate pressures should also abate next year. What could shift the outlook to negative include a tax or trade policy that hurts sales or profits, while top line growth gains, price increases that take hold and steady inventory levels could change the outlook to positive.
On the credit side, lingering challenges in the U.S. included weak traffic trends and high promotional activity.
Among the firms in the vendor group, Moody’s said key initiatives at Nike Inc. is expected to drive continued global growth, while the Way Forward Plan at Ralph Lauren Corp. is showing good results so far. Further VF Corp.’s active reshaping of the brand portfolio has Moody’s predicting a “rapid debt reduction following recent acquisitions.” The ratings agency also said cost-savings initiatives should begin to yield improvement in 2018 for Under Armour Inc.