The agency said in a credit report that it expects operating profit to grow in both sectors, up 4 to 5 percent in retail and up 5 to 7 percent in apparel. Sales growth is also expected in both sectors, with retail up 3 to 4 percent and apparel up 6 to 8 percent, supported by international and direct-to-consumer sales. And while specialty and dollar stores are expected to lead the way, apparel and footwear retailers and department stores are will see growth tempered as consumers spend more on health care and rent. Weak traffic trends and competitive pressure are expected to continue to impact the operating performance of department stores.
Mickey Chadha, senior credit officer at Moody’s, said, “Dollar stores will be among the top-performers in 2017, as cash-strapped consumers look to save money on multiple fronts.”
Wal-Mart, which accounts for 75 percent of the discounter/warehouse subsector, is expected to continue to see weak performance as wage hikes and investment for future growth “squeeze its profits.”
Despite the headwinds such as choppy retail traffic and consolidation in the space, Moody’s said the outlook for apparel firms is stable. It said the larger apparel sellers will continue to emphasize top-line, organic growth through direct-to-consumer channels.
In a separate in-depth report — headed by Michael M. Zuccaro, assistant vice president and analyst — on the apparel sector, Moody’s said the apparel and footwear firms are recovering from a “stronger dollar, weak retail traffic and inventory overload. “Recent profit declines among players such as Ralph Lauren, Fossil, G-III Apparel and Nike cast a shadow over the sector’s calendar 2016 operating income performance. We expect prospects to brighten next year, when constant currency operating profit growth resumes on the back of easier comparisons to this year,” Moody’s said.
Nike, PVH Corp., Levi Strauss and Under Armour were cited as firms that will benefit from international growth opportunities, particularly in emerging markets where stronger GDP growth is fueling branded apparel purchases. And even though GDP growth in China is slowing, the country is still one of the largest and fastest-growing international markets for apparel and footwear, Moody’s said.
Further, Nike, Ralph Lauren, VF Corp. and PVH were cited as firm focusing more on direct-to-consumer channels, whether through new stores, websites or mobile apps. “This not only positions them where the shoppers are, it helps them better control the brand,” the report said. Nike was used as an example where its Nike brand direct-to-consumer revenue grew 22 percent on a constant currency basis in the first quarter ended August 2016, driven by 8 percent comparable store growth and 49 percent growth in online sales and new stores. Nike’s direct-to-consumer revenues now accounts for 27 percent of Nike brand revenue, Moody’s said.
Mergers and acquisitions are expected to continue as it’s the way many firms fuel growth. Hanesbrands, VF and G-III were cited as particularly active in the space.
Separately, Fitch Ratings published a U.S. high-yield default report. Among the retail issuers with bonds outstanding at greater than $100 million of most concern to the ratings agency are Claire’s Stores, $1.8 billion; Sears Holdings, $1.14 billion; Nine West Holdings, $705.2 million; 99 Cents Only Stores LLC, $150 million; Rue21 Inc., $250 million, and Gymboree Corp., $171 million.