Moody’s is feeling more positive about retailers’ operating income, but not necessarily their sales. Moody’s believes big mergers are leading to more operating efficiencies, resulting in higher income. However, when it comes to consumer spending, the shoppers remain cautious.

Operating income is now expected to grow between 5 and 6 percent, up from the previous range of 4 and 5 percent. Moody’s gave examples like the Dollar Tree/Family Dollar merger, which is expected to generate $300 million in synergies and the Walgreens Boots Alliance deal that is expected to deliver $650 million in synergies for 2015. The biggest beneficiaries of the improving operating trends are home improvement stores, drugstores, dollar stores, auto stores, supermarkets and department stores.

Retail sales will only grow at a measured pace, in the range of 4 and 5 percent, with e-commerce sales outpacing overall retail sales. E-commerce may only account for 7 percent of total sales right now, but it is the fastest growing segment in the retail industry. E-commerce is also leading to dramatic changes in brick-and-mortar strategies for retailers. Moody’s specifically mentioned Nordstrom as a leader in the transition to becoming a true multichannel retailer.

Bill McComb, the former chief executive officer at Fifth & Pacific Inc., agreed that Nordstrom has been very good at adapting e-commerce in its physical stores. “They may only stock one color in an item in the store, but then offer the customer the choice of many color options available online,” McComb told WWD.

For apparel and footwear, Moody’s highlighted the growth of the off-price sector and mentioned Macy’s Inc. as an example. Macy’s will be opening six new Macy’s Backstage stores in the New York area this fall. Moody’s also pointed out that while major brands like Macy’s may be chasing this customer, the original discounters like TJ Maxx, Ross Stores Inc. and Burlington Coat Factory Warehouse Corp. will continue to be leaders in the group.

Moody’s took a deeper look at the consumer picture and found that even though home prices have appreciated and the stock market has moved higher, people still don’t feel comfortable spending a lot. This explains the growth of the off-price sector. They cited persistent underemployment and weak wage growth. Lower gas prices have helped, but haven’t translated into the kind of spending many retailers had hoped for. On a positive note, Moody’s doesn’t expect any downside risk and thinks the consumer still has some pent-up demand.











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