Barneys New York might have gotten caught up in its very own web of skyrocketing rent and a customer base and aesthetic that were too narrow, but the company’s bankruptcy is also part of a broader trend.
While U.S. consumers are strong, U.S. apparel and footwear retailers are hurting — and bad — and it’s the department stores getting hit hardest of all.
Moody’s Investors Service reduced its outlook for the U.S. retail industry to stable from positive and trimmed its financial projections. The debt watchdog is now looking for the industry to post operating profit growth of 2 to 3 percent, significantly lower than the 5 to 6 percent previously projected, while sales growth is forecast for 3.5 to 4.5 percent, instead of 4.5 to 5.5 percent.
“Over the past year, retailers have been locked in a battle of mounting competition for market share — waging pricing wars while plowing more cash into necessary investments for future growth,” Moody’s said. “In addition to competitive and promotional challenges, companies are facing rising costs as the labor market continues to tighten. These costs are generating pressure on company margins that could weigh on overall profitability.”
Retailers are also wrestling with higher tariffs on goods made in China — a factor that many better capitalized companies have been able to cancel out.
But there are plenty of other places where retailers need to invest — particularly in growing their online businesses.
Moody’s projected online sales would grow to 20 percent of the total retail market in the next four to five years, up from roughly 15 percent today.
But even if retailers know they have to build online, it’s easier said than done profitably and at scale. Barneys had a $240 million web business that accounted for 30 percent of its $800 million in sales, but that wasn’t enough to save it from filing for bankruptcy in August.
Other department stores — while not in such acute distress — are feeling the pain.
“Department stores have struggled in the first half of 2019, despite heavy investing to improve inventory efficiency and to build their online capabilities,” Moody’s said. “As challenges have grown, we have accelerated our call for operating income to fall over 15 percent in 2019. We expect declines to ease significantly in 2020, to roughly 1 percent.”
Retailers often look toward Christmas hoping for a lift, but the season might not be enough for department stores.
“It remains questionable whether the leading department store operators will be able to deliver this holiday, given their weak first-half operating performance,” Moody’s said. “We believe there is a real risk companies are not planning inventories conservatively enough for another weak round of sales, which could exacerbate the promotional environment.”
With this backdrop, Moody’s spotlighted the importance of being able to invest as needed for all retailers.
“Financial flexibility is a key weapon as they employ aggressive pricing tactics and plow hefty resources into e-commerce growth,” the rating agency said. “This is causing a deepening gulf between the larger, more successful issuers and those that are smaller, less diversified, highly leveraged and impeded in their ability to invest…the bifurcation between stronger and weaker issuers continues to grow. We expect these smaller, more leveraged issuers to feed defaults in the months ahead.”
There was something of a silver lining in the report — Moody’s expects next year to be better, helped along by a strong U.S. consumer.
“U.S. retail will continue to reap the rewards of strategic investments in e-commerce and improved operating efficiencies,” the report said. “Growth is getting a boost from a strong consumer as the U.S. economy continues to be a bright spot. We forecast improvement next year, with U.S. retail industry operating income growing 3 to 4 percent and sales growth staying steady, at 3.5 to 4.5 percent.”