Macy's

The pain keeps coming for department stores. 

Debt watchdog Moody’s Investors Service cut its forecast for the sector — again — after the last round of quarterly results came up short. 

Moody’s now expects operating income across the sector to drop 20 percent on average this year, down from the 15 percent decline projected just two months ago. The trend is then supposed to moderate next year to a 1 percent decrease on top of that.

The Grinch-y trend comes, in part, from familiar foes for department stores — the off-pricers and the value players

Off-price retailers and discounters once again posted robust sales as customers continued to flock to value,” Moody’s said of the third quarter. “The sector also has an important inventory edge because its turnover time is almost twice as fast as department stores, on average.”

Department stores have gotten into the off-price game themselves — Nordstorm Inc. with the Rack and Macy’s Inc. with Backstage — and while it’s been a bright spot, those off-price efforts aren’t big enough to drive the overall businesses. 

“The competitive landscape remains extremely promotional, with no letup as we wade further into the all-important holiday season,” Moody’s said of the plight of the department stores. “Fewer days between Thanksgiving and Christmas relative to last year could exacerbate the promotional environment.”

To win, department stores have had to look past the top line and are planning the flow of goods through their businesses carefully. 

“Inventory management is critical to success,” Moody’s said. “Most major players have limited [selling, general and administrative] expenses left to cut because keen expense management has been the focus for years. That will make gross margin improvement all the more crucial for performance.”

The rating agency said Nordstrom is “most successful in aligning inventories with customer demand,” driving operating margin improvement last quarter, and that the still-turning-around J.C. Penney Co. Inc. made progress in the area. 

While department stores work on figuring out where sales are going to come from and how they can most effectively serve shoppers, they’re also trying to shore up the overall financial position.

“Rightsizing the balance sheet must continue, but it may not be enough,” Moody’s said. “Many department stores have recognized the need to assure financial flexibility, as evidenced by Macy’s Inc.’s recent announcement to tender up to $450 million of its debt. Although we view further debt reduction as critical, companies face significant challenges in stabilizing earnings growth, which will be integral to maintaining their [debt] ratings profiles.”

Additionally, J.C. Penney is looking at alternatives to address its debt load, which begins coming due in earnest in 2023 and Belk Inc. extended its $1 billion first lien term loan to July 2025 from December 2022.

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