Moody’s Upgrades U.S. Retail Outlook, For Now

Better days might lie ahead for retail as COVID-19 vaccines help open up the economy — but how long will the good times last? 

Moody’s Investors Service raised its outlook on the U.S. retail and apparel sector to positive for the next 12 to 18 months while leaving the door open for a downgrade back to stable as the bounceback subsides. 

Mickey Chadha, a vice president and senior credit officer at the debt watchdog, said: “As pandemic pressures ease and the cadence of vaccinations accelerates, we expect the retail sector to experience broad-based improvement. Operating profit will grow a robust 10 percent to 12 percent in 2021, and hard-hit sectors such as apparel, department stores, and off-price will see the most pronounced operating profit growth over the next 12 to 18 months. 

“That said, our positive outlook could be short-lived given the lapping of weak performance in the first half of last year,” Chadha said. “As conditions continue to normalize, spending will shift to nonretail categories. Therefore, there remains a likelihood that our outlook could revert to stable as we head into 2022.”

Last year turned out better than Moody’s expected. Operating margins were flat for the year where the rating agency had predicted a 15 percent decline. Sales also grew 8 percent instead of the 3 percent to 5 percent predicted. 

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Moody’s said: “The consumer has proven to be resilient throughout the pandemic, with spending shifting from travel, restaurants and entertainment to retail categories like home improvement, electronics, sporting goods and food at home. Government stimulus programs also played a significant role, and the higher-income demographic responsible for a large portion of consumer spending was less affected by pandemic-related job losses.”

Now, the rating agency foresees operating profits this year to jump back 200 percent for department stores and 350 percent for off-pricers. 

And that is expected to accompany the continuing rise of e-commerce. 

“In the U.S. we expect online sales as a percent of total retail sales to be about 30 percent in the next five years, compared to about 20 percent today,” Moody’s said. “Retailers will be forced to find efficiencies and cost reductions to offset the incremental infrastructure needed to support the expanding demand online. However increased costs associated with fulfillment, particularly at Amazon, will dampen operating profits for our pure online sector, resulting in 0 percent to 2  percent operating profit growth for the sector. Online sales have surged across the board in every retail sector, including those that had low online penetration before the pandemic.”

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