Department stores may well be heading for a less than happy holiday season, according to the experts, and an uncertain New Year. Moody's Investors Service slashed its forecast for department stores this season — with expectations the sector will log as much as a 20 percent decline in operating income. A decline was expected prior to Monday's revision — but it was for 15 percent, which itself was a lowered estimation.
The market share department stores are losing is expected to accrue largely to off-price and discount stores, which are more popular among millennial and Generation Z shoppers during the active season. That trend will benefit some department store brands — Nordstrom and Macy's with their respective Rack and Backstage offerings, for example. And problems look in line to beget more problems, according to the report, as inventory has built up and necessitated big discounts and markdowns just to move it out of the stores. That problem had started to look as though it might be turning around last year, but roared back with a vengeance in 2019 as stores struggled to calibrate supply with demand.
“Despite a very healthy consumer and heavy spending to improve inventory efficiency and online capabilities, department stores rang up a disappointing third quarter close on the heels of a very bleak first half,” Moody's analysts led by Christina Boni, VP senior credit officer, said in the report.
The case is not hopeless — some department stores will stabilize in 2020 according to Moody's estimates, but the inventory and the resultant margin-killing markdowns will continue to plague the segment.
“The competitive landscape remains extremely promotional, with no let up as we wade further into the all-important holiday season,” according to the report.
And while there is a chance that some department stores will be able to break out of the overstock, markdown cycle this season, analysts aren't all that certain that an upswing will really mean that much improvement in their overall fortunes.
Department stores “will remain among the worst performers of retail,” they said. “If we view our 2020 forecast on a two-year basis, it will still be down roughly 21%.”