Things always have to get worse before they get better.
Earnings pressure in apparel and footwear prompted Moody’s Investor Service to downgrade its 2016 forecast for U.S. retail from positive to stable. The New York-based agency on Thursday said it expects sales growth of 2-3 percent this year, lowered from 4-5 percent. The 2016 holiday season expected to be in the mid-range of the forecast.
Moody’s also cut its outlook for retail operating income growth to 3-4 percent in 2016. This number is down from 5-6 percent.
“We have scaled back our growth and outlook expectations for the U.S. retail industry primarily due to weakness in four subsectors: apparel and footwear, discounters and warehouse clubs, department stores and office supplies,” Moody’s vice president Mickey Chadha, said. “In these subsectors some key contributors, including Gap, Walmart, Footlocker, Macy’s, Nordstrom, Kohl’s, Office Depot and Staples, remain under earnings pressure.”
While Moody’s said it doesn’t anticipate any material impact from the U.K.’s decision to leave the European Union, the “ensuing uncertainty” could ultimately affect consumer spending in the U.S. In addition, the agency pointed out that a strengthening U.S. dollar against the pound and euro could further squeeze global retailers, such as Gap, Coach and Abercrombie and Fitch.
Popular tourist destinations could feel the pinch, too. Moody’s said lower tourist spending in the U.S. could negatively impact retailers that have flagships in those locales.
However, the situation is expected to pick up. The agency said it anticipates a “modest improvement” in sales and operating income in 2017, driven by better operating performance in the department store subsector as inventory levels improve and unprofitable stores are closed. In particular, Walmart should see an upturn, but dollar stores and specialty chains are bright spots, too.