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Department Stores Must Solve ‘Chronic’ Inventory Problem This Year, Moody’s Warns

Weak holiday sales last month in the department store channel indicate that retailers over-anticipated demand, thrusting inventory control to the fore as they’re pressed to counter margin pressures.

Inventory management–a chronic problem for the industry–will once again be a performance hot spot in 2020. Department stores struggled with aligning inventory in 2019 as they over-anticipated demand. Companies need to provide availability and speed of delivery while at the same time reducing inventory investments,” Moody’s Investors Service said in a sector-in-depth report led by vice president and senior credit officer Christina Boni.

Department stores have few options. Operating margins will remain under pressure, due in part by an intensely promotional environment that’s been fueled by a glut of inventory as demand falls short. And while the retailers have done an “outstanding job” managing their selling, general and administrative costs, that also means there’s little wiggle room for additional improvement in SG&A going forward.

“Additional savings will need to be driven by efficiencies in workflow to make employees more productive and optimization of its flow of inventory throughout its supply chain,” Moody’s said, citing Nordstrom Inc. and Macy’s Inc. as two retailers that have been “keenly focused on improving the flow of inventory.”

While Macy’s and Kohl’s have been disciplined in reducing debt, even that might not be enough to bolster credit ratings unless they can quickly stabilize their business model, Moody’s noted. “Margin compression must be mitigated and companies must show that sales growth can outpace SG&A increases. That is proving difficult as the sector continues to lose market share to alternative channels,” the report said.

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Another problem for the sector is that credit income has become a significant portion of operating income, with credit now representing around 58 percent for Macy’s and 48 percent for Nordstrom.

“Although it is difficult to fully separate credit from retail sales because they are so highly interdependent, this trend highlights how much worse performance would look like without this income stream,” Moody’s noted. Macy’s sold most of its credit accounts and related receivables to Citibank and now receives a share in the economic performance of the program.

“Any change in economic conditions could result in receiving lower payments under the credit card program,” Moody’s said.

With few options to offset chronic sales weaknesses and market share losses to other retail channels, department stores in 2020 will need to move aggressively to stabilize operations–and, in turn, operating margins–to show that their business models are still viable in the face of seismic changes roiling the retail landscape.