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After Tough 2020, Apparel Retail Faces ‘Positive’ Outlook

Fashion retail has some good news as the nation lurches toward reopening.

Moody’s Investors Service on Thursday changed its outlook for the retail and apparel sectors to “positive” from “stable,” noting that it expects fundamental business conditions to improve over the next 12 to 18 months.

“As pandemic pressures ease and the cadence of vaccinations accelerates, we expect the retail sector to experience broad-based improvement,” said Mickey Chadha, vice-president and senior credit officer at the credit ratings firm. He added that Moody’s expects operating profit will expand by a “robust” 10 percent to 12 percent this year, and hard-hit sectors including apparel, department stores, and off-price channels will experience the “most pronounced operating profit growth” in the next year and a half.

Chadha cautioned that the positive outlook eventually could revert heading into 2022 as conditions normalize and consumer spending pivots toward to nonretail categories.

For the immediate future, pent-up demand is expected to provide some fuel for future growth. Covid-19 stimulus packages propped up consumer spending last year and supported the nation’s retail sales.

This year, department store operating profits are expected to climb by 200 percent, with off-price retailers leading the charge as Moody’s forecasts operating profit growth by over 350 percent versus 2020. And apparel brands could see operating profit grow 50 percent as they lap weak comparison figures from the prior year.

Moody’s noted in a report that the exceptional profit growth in retail last year was led by companies in the home improvement, discount, dollar store, warehouse club, supermarket and big-box sector, which are less discretionary than pure-play fashion.

The credit ratings firm also said the profit growth last year won’t be sustainable in 2021 as the economy reopens and consumers at some point resume spending back on travel, entertainment and dining out. In fact, Moody’s said on Thursday that supermarkets and convenience stores will like see operating profit decline by 10 to 12 percent after very strong growth in 2020. It also expects that home improvement retailers could face some downward pressure in the back half of 2021. Operating profits for discounters, warehouse clubs and dollar stores could end up flat in 2021.

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Online shopping is expected to maintain its strong momentum. But the credit analysts at Moody’s—who expect online to become 30 percent of total retail sales in the next five years, up from 20 percent now—noted that retailers will be forced to find efficiencies and cost reductions to offset the incremental infrastructure needed to support the expanding digital demand. Those increased fulfillment costs could dampen operating profits for pure players like Amazon, giving them just 0 to 2 percent operating profit growth.

The ratings firm’s base scenario expects U.S. real GDP this year growing 4.7 percent after a 3.5 percent decline in 2020. Economic growth last year came in above initial expectations—forecast at down 15 percent, but operating profit turned out to be flat as sales rose 8 percent—due to a stronger-than-expected rebound in the second half as businesses figured out how to operate through Covid. Moody’s now expects the real GDP level to converge with its pre-pandemic trajectory in 2022. Retail sales this year are forecasted to rise 6 to 8 percent, in-line with the National Retail Federation‘s estimate of 6.5 to 8.2 percent.