It looks like more bad news for the U.S. department store sector. After a subpar holiday shopping season, research firm Moody’s announced that it had revised down its forecast for the sector’s operating income.
In its new report, the rating agency said it now expects aggregate department store operating income to have declined 18 percent in 2016 as opposed to the originally estimated decline of 11 percent. The outlook isn’t stellar either, as Moody’s projects the sales decline for department stores to continue into continue in 2017.
“Prior to the 2016 holiday shopping season, it looked as if department stores could get back on track after a tough year,” said Moody’s analyst Christina Boni. “But leaner inventory levels and other efforts to boost earnings don’t appear to be sufficient, and as a result, we have lowered our 2016 forecast and become more cautious on 2017.”
The report noted that most major department store chains, including Macy’s, Kohl’s and J.C. Penney, saw negative comparable sales in the last three months of 2016. Shoppers have continued to prioritize value and convenience, leaving the department store space for off-price and eCommerce options, Moody’s said.
“Department stores are seeking to counter competition from off-price and online competitors by leveraging their store locations, for example, by allowing customers to pick up and return online purchases at stores,” Boni said. “And while we believe they are taking the right steps, their 2016 holiday results clarified that they must recalibrate much faster in 2017 or risk falling even further behind their more nimble competitors.”
Off-price retailers generally rank highest among shopping options, Moody’s said, when it comes to value for money and convenience — despite a limited online presence, such as in the case of Kohl’s.
According to Moody’s data, internet purchases currently account for about 20 percent of department stores’ sales. To increase that number, companies must downsize their brick-and-mortar presence, Moody’s said, as well as upping technology investments to keep pace with consumer expectations and their competitors.