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Moody’s: Retail Income to Improve in Next 18 Months

Moody’s forecasts improvement in U.S. apparel and footwear sector—but it’s still about 18 months away.

The investors service has lowered its forecast for operating profits from 5 percent to 7 percent growth to 4 percent to 6 percent for the next year to year and a half. Many of the ills that plagued retail last year will continue into the first half of 2017, chiefly sluggish store traffic, which lead to markdowns and bankruptcies.

As a result of these conditions, Moody’s estimates operating profits declined by 4 percent in 2016.

Barring a recession, spikes in raw materials pricing and huge trade policy changes, the industry should pick up during the second half of 2018 with operating income increasing by 6 percent to 8 percent.

Moody’s predicts that growth will come from investments in three areas: e-commerce, international sales and consolidation.

Companies continue to invest in direct to consumer, including corporate stores, e-commerce channels and mobile, to catch up with the consumer shift away from malls. And, Moody’s reports, they’re already seeing results. For instance, Nike experienced a 49-percent growth in online sales in the second quarter.

Similarly, companies are expected to find more success abroad for growth, as opportunities dry up domestically. Sales outside the U.S. made up 41 percent of total sales in Moody’s rated apparel companies in the last fiscal year. The company points to the 16 percent growth in international revenue for both Calvin Klein and Tommy Hilfiger, driven by both Europe and China.

“Emerging markets, and China in particular, will continue to be a source of strong growth because their faster GDP growth helps fuel branded apparel purchases,” the report states.

This focus on China coincides with an increased interest in sports in the country, which Moody’s expects to fuel active wear sales there.

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While international brands are well positioned, those with the lion’s share of their sales tied to the American market are expected to continue to struggle. Department stores, in particular, are at risk. For these stores, 2017 profits are not expected to improve much over 2016’s 18 percent operating income decline.

“The sector continued to see negative comparable sales as traditional consumers continue to defect to e-commerce, fast fashion and off-price alternative channels. While we believe the department stores are taking the right steps to address this, we believe they must move faster or risk falling further behind their competitors,” according to the report.

Moody’s expects more consolidation as companies look for ways to grow. Prominent deals will continue, like G-III Apparel’s acquisition of Donna Karan last year. PVH is another example, having announced that it will be streamlining its men’s tailored business by producing all goods with Peerless Clothing, which already produces its Van Heusen, IZOD and Calvin Klein labels.

Moody’s forecast could prove conservative if a variety of factors take place, including companies are able to increase prices, both online and international market investments produce sales spikes, and inventory levels are well managed.

On the other hand, the outlook could be considerably worse if a recession sets in, the U.S. dollar or cotton prices spike or profits sink as a result of tax and trade policy adjustments.