Moody’s Investors Service lowered its 2016 forecast for retail sales and said apparel and department stores would take the biggest hit.
The debt rating agency cut its retail sales growth projection for this year to a range of 2 percent to 3 percent from the previous range of 4 percent to 5 percent. The analysts also lowered their outlook to stable from positive.
Moody’s expects apparel and footwear to decline 5 percent to 6 percent this year, which is a huge switch from their original call for growth to rebound by 2 percent to 3 percent. Most of the decline is attributed to problems at The Gap Inc., which has experienced revenue and operating profit declines. Gap makes up about 18 percent to the sector, by Moody’s reckoning. Excluding Gap, Moody’s said 2016 operating profits for the group could grow in the low-single digits. Companies such as Coach Inc. and L Brands Inc. are seen supporting this positive number.
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The rating agency noted Gap has been heavily promotional and that a poor 2016 spring selling season has kept inventory levels elevated. Many retailers are also getting squeezed by fast fashion and direct channel selling by apparel manufacturers. Moody’s said that consumers just aren’t buying fashion and are instead directing their spending to home-related products, electronics, car payments, rent and health care.
Department stores aren’t faring any better.
Moody’s said 2016 operating profits would decline between 14 percent and 15 percent as sales are expected to drop between 8 percent and 9 percent. The department stores are facing a one-two punch of weaker mall traffic and fewer apparel purchases by consumers.
On a positive note, Moody’s expects performance to stabilize in 2017.
In other groups, operating earnings at discounters and warehouse clubs like Costco and Target are expected to decline 1.5 percent to 2.5 percent for the year. Office supply stores’ operating earnings are forecast to decline by 6 to 7 percent versus the original estimate for a decline of 3 to 4 percent.
There are bright spots in retail for home improvement stores, dollar stores, auto parts and supermarkets. Profit growth for these sectors is expected to range between 12 percent and 15 percent.
While the U.K.’s vote to leave the European Union has dominated the news this week, Moody’s doesn’t believe it will have a direct impact on U.S. retailers. The ongoing uncertainty could potentially hurt consumer confidence and then that could affect consumer spending. The stronger dollar versus the other currencies could affect tourist centers negatively and that could hurt retailers like Gap, Coach and Abercrombie & Fitch Co. It could also impacted retailers like Macy’s Inc., which have flagship stores in tourist areas.
Moody’s could change its outlook to positive if operating income growth can be sustained over 5 percent by a majority of the retailers it rates and if that growth is driven by higher consumer spending. The analysts tempered that by saying they could also switch to a negative outlook if revenue declines further.