This year is expected to be a breakout one for online sales while shifts in consumer behavior will crimp results for many companies, according to Fitch Ratings retail analysis.
Amid a challenging consumer spending environment, analysts at Fitch Ratings see clear winners emerging in the retail market this year with companies such as Burlington Stores Inc., Levi Strauss & Co., Kate Spade & Co. and J.C. Penney Co. Inc. all on a “positive trajectory” in regard to delivering top-line and bottom-line growth as well as showing improved credit metrics.
Fitch analysts said they expect overall U.S. retail sales, excluding automobiles, to grow between 3 and 4 percent this year, which is “in line with or modestly better than the 3 percent growth projected for 2015.” The analysts said overall economic conditions are expected to remain stable, but the firm sees in-store sales remaining “muted” with a 1.5 to 2 percent growth rate as traffic declines and online sales surge.
In Fitch’s annual “High-Yield Retail Checkout” report, lead analyst Monica Aggarwal said the firm classifies retailers “based on how effectively they are defending their market share positioning and maintaining their profitability.”
Through that lens, Aggarwal said the “best-in-class,” high-yield retailers include Neiman Marcus Group Ltd., L Brands Inc., Hanesbrands Inc., Sally Beauty Holdings Inc. and PVH Corp., among others.
Aggarwal noted that “best-in-class” companies can more easily generate free cash flow, and deleverage as needed. “These companies are likely to accelerate market share gains in a strong economy and demonstrate resilience in a weak economy,” the researchers said.
The laggards class includes Claire’s Stores Inc., Sears Holdings Corp. and The Bon-Ton Stores Inc., among others. The analysts said these retailers “exhibit weak business profiles in the face of operationally and financially stronger competitors.” There are also retailers who are experiencing “negative” earnings, sales and credit/cash flow trajectory. These include Sears and Claire’s Stores as well as Toys ‘R’ Us Inc. and 99 Cents Only Stores LLC.
With Sears, Fitch said it expects pre-tax income to “be in the negative $600 million to negative $650 million range in 2015 and potentially worse in 2016.” The analysts are expecting comparable-store sales to drop “in the high single-digit range as Sears continues to close stores.”
There are also retailers who have struggled with quarterly results, but have cash on the balance sheet. The analysts noted that J. Crew Group Inc. and The Men’s Wearhouse “have seen declines in sales and [pretax earnings], but liquidity is comfortable in the near term.”
Among the market forces at play this year is robust growth of online retail sales, which the analysts said will see “low teens” growth, and is expected to grow to $300 billion this year — which represents a 15 percent share of total retail revenue. That’s about 5 percent more share than what the industry experienced this past year.
Regarding key categories, general merchandise, apparel and consumer electronics are expected to experience the strongest sales online.
The analysts also noted that household spending on services has increased, especially with subscriptions for cable/broadband, cell phones and streaming media (audio and video). “Once-physical media purchases are increasingly becoming digital assets, accelerating market share shift to online vendors,” the Fitch analysts wrote, adding that spending on restaurants and travel has also grown.