The scene on Black Friday 2018.

The great hope of the holiday season has devolved into a grim reality for department stores, which Moody’s Investors Service said have a lot to prove this year.

“A dismal year will force department stores to accelerate change,” said debt watchdog Moody’s Investors Service in a dour new analysis that picks up a thread that’s existed in the equity markets for some time.

“Following a weak 2019, department stores must radically accelerate changes to their format and product offering in 2020,” the rating agency said. “The sector heavily underperformed the broader retail industry in 2019, despite continued investments and offering updates. Early holiday 2019 sales reports suggest that demand was weak for department stores despite holiday strength for most others. This is notable given the still-solid growth of the U.S. economy and the strength of consumer spending.”

Moody said some players — particularly Macy’s Inc. and Kohl’s Corp. — have been reducing their debt loads, but warned that the companies’ credit ratings won’t improve “unless they can quickly stabilize their business model.” 

“Major investments in delivering value need to result in maintaining market share,” the analysis said. 

Department store operators have been struggling to reinvent, but are still not trying to find enough traction to put the investment set at ease. Macy’s has been focusing on its best stores and is expected to roll out significant changes to its business next month and Kohl’s has been forging new partnerships, including with web giant Amazon.

But Moody’s said department stores still need to figure out how to control inventories and make their underlying business work better (both Macy’s and Nordstrom Inc. have been getting a significant amount of their operation income from their credit businesses). 

All this leads to even more changes ahead.

“While store closures slowed significantly in 2019, department stores may feel compelled to take another hard look at their footprint, especially among lower-quality locations,” Moody’s said. “The sector will also remain one of the biggest spenders in retail as they race to keep pace with the rapid transformation in the retail industry.”

The Operating Margin Disconnect

Department stores continue to fall further behind their retail peers.

2007 2016 2017 2018 2019 (estimate) 2020 (estimate) Basis Point Change (’07-20E)
Off-Price Retailers 6.8% 12.5% 12.3% 11.9% 11.7% 11.9% 510
Dollar Stores 5.3% 8.4% 8.4% 7.8% 7.7% 8.0% 270
Home Improvement 9.6% 12.5% 12.6% 12.3% 12.2% 12.1% 250
Auto-Parts Retailers 13.1% 16.1% 14.4% 14.9% 15.4% 15.4% 230
Convenience Stores 1.6% 3.8% 3.6% 3.3% 3.3% 3.3% 170
Drugstores 5.5% 6.4% 6.1% 6.3% 6.6% 5.9% 40
Auto Retailers 2.9% 3.4% 3.3% 3.2% 3.3% 3.3% 40
Specialty Retailers 6.8% 7.4% 6.6% 5.8% 5.9% 6.2% -60
Supermarkets 3.2% 2.6% 2.3% 1.9% 2.0% 2.2% -100
Discounters/Warehouses 5.8% 4.6% 4.2% 4.2% 4.3% 4.4% -140
Apparel & Footwear 10.1% 10.3% 9.0% 8.3% 7.8% 8.1% -200
Department Stores  8.3% 5.2% 4.9% 4.7% 4.4% 4.3% -400
Source: Moody’s Financial Metrics

 

 

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