Moody’s Cuts Department Store Outlook Again, Projects 20% Operating Profit Decline In 2019

  • December 10, 2019 at 5:59 PM EST
  • By Glenn Taylor
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Despite a variety of efforts to revitalize their store footprints through new partnerships and experiential offerings, department stores continue to struggle — and according to one report, the financial hit has been worse than expected. Moody’s Investors Service is now calling for department stores’ operating profits to be down 20% in 2019, compared with prior expectations for a 15% drop.

What’s perhaps more alarming is that this is not the first downward adjustment. Moody’s cut its forecast from an initial expected 10% operating profit decline to 15% in October. If there is one piece of somewhat good news, Moody’s expects the overall profit declines to subside significantly in 2020, to roughly a 1% decline as department stores cycle the weak results of 2019. But even then, Moody’s describes them as remaining “among the worst performers in retail.”

During Q3, only Kohl’s saw positive same-store sales (0.4%) among its contemporaries. Dillard’s saw flat growth, while Nordstrom (down 2.2%), JCPenney (down 9.3%) and Macy’s (down 3.5%) all saw significant losses in the quarter.

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Off-price retailers and discounters remain a major thorn in the side of department stores, with TJX and Ross Stores posting 4% and 5% same-store sales increases, respectively, in Q3 2019. The report indicates that the off-price sector turns inventory roughly twice as fast as department store chains.

Many department store retailers had planned for a more robust 2019 after improving inventory levels in 2018, but sales have lagged, forcing these companies to recalibrate to lower demand. Nordstrom has done the best job maneuvering through its inventory churn — although the company saw the 2.2% sales decline in Q3, it cut inventory by 2.7%, leading to a 9% increase in operating income. In contrast, sales declines at Macy’s outpaced inventory declines (comparable inventory was flat relative to a 3.5% comp decline), with operating income declining 56.7%.

With the holiday season in full swing, department stores aren’t helping themselves from an income standpoint, due to continued reliance on promotions to generate traffic and sales, and offload excess inventory.

“The competitive landscape remains extremely promotional, with no let up as we wade further into the all-important holiday season,” said Christina Boni, VP and Senior Credit Officer of Moody’s, in the report. “Fewer days between Thanksgiving and Christmas relative to last year could exacerbate the promotional environment.”

The report estimates that the department store sector’s store count will decline 2.2% in 2018, more than any other sector except apparel and footwear retailers (7.3% decline). But the 2019 department store dip is tempered compared to the 13% decline in 2018, which was largely fueled by the Sears bankruptcy filing.

Moody’s anticipates these retailers will continue to reduce their store sizes through smaller replacement stores, subleasing of excess space or redeployment into other categories or business lines.

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