Operating profits for sector aren’t expected to return to pre-COVID-19 levels until 2022 at the earliest, according to credit analysts at ratings firm Moody’s Investors Service.
“Our industry outlook remains negative because we still face two quarters of severe declines, before the recovery begins in 2021 amid an operating environment fraught with uncertainty. We now expect operating income to plunge 25% to 30% in 2020 versus its previous sector call for a milder decline of 2% to 5%,” said Mickey Chadha, vice president and senior credit officer, calling the road to recovery protracted and challenging.
Flagging store traffic isn’t helping the rebound. Meanwhile, the coronavirus outbreaks continue, forcing some states to roll back store openings, while rising infections and government stimulus measures that are set to expire could weaken the pace of any early recovery. While growth will improve in 2021, the analysts’ downgrade to “negative” for U.S. retailers reflects the ongoing risks and the scenario for a drawn-out recovery.
Most sectors will see falling profits, but department stores will take the deepest dive as the sector faces over 200 percent operating income declines this year, followed by apparel and footwear at 150 percent for the same period. The only bright spots will be supermarkets, discounters and warehouse clubs and dollar stores, the essential retailers that have remained open and operating throughout the coronavirus crisis.
“Crucially, accelerating online growth will only absorb a fraction of lost sales from store closures. While online sales have surged across the board in every retail sector, most brick-and-mortar operations will not be able to offset the steep loss from store sales with their online platform,” Chadha said, concluding that as the trend accelerates, profit will be pressured because “online sales typically have lower margins due to higher costs associated with customer acquisition, fulfillment and delivery.”
Currently, the retail credit team at Moody’s expect most of the decline to be in the first half of 2020, with operating profit down 40 percent and 20 percent in the first and second quarter, respectively. A decline of between 10 percent to 15 percent is expected in the second half. That could be “followed by growth in the first half of next year of about 40 percent to 45 percent, making the overall next twelve month growth to be 10 percent to 15 percent with revenue growing 3 percent to 5 percent,” they concluded.
But whatever profits they do see will still be lower than 2019 levels. Departments stores set to be impacted by losses include Macy’s, Kohl’s and Nordstrom, while specialty retailers in apparel and footwear that will face pressures include Gap Inc, Capri-owned Michael Kors, Limited Brands, Abercrombie & Fitch and Tapestry, the analysts concluded.
Another sector that could underperform is the off-price retailers, such as TJX Cos. Inc., Ross Stores Inc. and Burlington Coat Factory Warehouse Corp, which have a minimal e-commerce presence, if any at all. That’s because the roll back on store openings and lower traffic will pressure operating income will hobble these store-dependent brands, leading to a possible decline of 120 percent to 130 percent in 2020.