Thanks to vaccine rollout and accumulated savings, consumption isn’t expected to slow down. The credit analysts from Moody’s Investors Service said that supply chain disruptions—even though they pose some risks—are expected to be manageable for most retailers. And because global shipping delays are hampering the flow of goods, as well as increase raw materials and transportation costs, apparel and home furnishing retailers are at most likely to see their margins suffer.
More important, the analysts are starting to see signs of retail sales softening, following the sharp rebound over the spring and summer. The month of April seems to be when retail sales peaked, with the Euro area rising to 25 percent versus a year ago, although the sales increase has since moderated to up just 5 percent in September. That softening isn’t viewed as bad, but more as a return to normal sales activity.
Across Europe, Spain and France each saw sales in April up 43 percent from year-ago figures, but in September had slowed to growth of 6 percent and 7 percent, respectively. Italy saw sales rise 39 percent in April, while U.K. sales rose 38 percent. By September, sales moderated to up 7 percent and 1 percent, respectively. The Netherlands posted an 11 percent sales growth in April, but just 5 percent in September, and Germany’s sales rose 9 percent in April from 2020 levels, although in September, retail sales rose just 1 percent.
Apparel retailers are expected to see retail sales grow 18.3 percent for all of 2021, and 11.5 percent in 2022. On the earnings front, Moody’s expects online e-tailers, luxury and sportswear firms to outperform their fashion counterparts. Financial year 2022 begins July 1, 2022 and ends June 30, 2023.
The Moody’s analysts have forecasted 0 percent to 5 percent adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) growth in 2022 from 2021 levels for German footwear brand Birkenstock, Next plc, Matalan, and luxury fashion house Burberry. Adjusted EBITDA growth was projected at between 5 percent to 10 percent for German value chain CBR Fashion. Italian luxury firm Golden Goose, German sportswear brand Adidas, Spanish premium mass chain Tendam and German off-price e-tailer Schustermann have a projected 10 percent to 20 percent adjusted EBITDA growth rate, while German value chain Takko and French design house Isabel Marant were forecasted to grow more than 20 percent.
Despite the hit to margins, the Moody’s analysts said retailers focused on luxury, discount or casual apparel will generally continue to outperform the sector. But even if these categories do well, earnings and margins will still lag pre-pandemic levels. The analysts also believe that retailers will continue their digital transformation. That’s because retailers are reducing their store networks as they accelerate investments in artificial intelligence and customer analytics to improve the performance of their online platforms.
However, the outlook could turn negative if the Euro area dips into a recession or companies’ annual sales deteriorate. The potential for new shopping restrictions, sustained supply chain disruptions or prolonged inflationary pressures poses the biggest risk to sales.
And as for what could change the outlook to positive, accelerating economic growth is one key factor. Easing of supply chain disruptions and a softening in inflationary pressures are additional factors.
Looking at the credit landscape for 2022, the analysts said debt levels have climbed, which creates repayment risks where growth and earnings prospects have weakened. But the global economic recovery is expected to solidify as pandemic effects lessen and businesses and consumers adapt. However, prospects will diverge across regions and sectors. For the European retail and apparel sector, the share of company ratings with stable outlooks has grown from 54 percent in December 2020 to 82 percent in December 2021. The rating distribution for firms rated either negative or for review for downgrade narrowed from 42 percent to just 12 percent over the same time period. The number of firms with credit ratings of positive grew from 4 percent to 6 percent, also over the same time period.