Department Stores Can’t ‘Catch a Break’ Despite Strong Economy

(Bloomberg) -- Departments stores’ dubious distinction as one of the weakest parts of the consumer economy is likely to persist this holiday season, according to Moody’s Investor Service.

For the third time this year, Moody’s cut its 2019 forecast for department stores’ operating income. The credit-rating company now sees the measure falling by 20% -- deeper than the 15% drop it projected about two months ago and an earlier projection for a 10% decline. Moody’s said sales have been disappointing and cited “no improvement in financial performance despite an already challenged first half of the year.”

Department stores haven’t been able to take advantage of buoyant consumer spending, despite heavy investments to improve inventories and e-commerce capabilities. For example, both Kohl’s Corp. and Macy’s Inc. cut their full-year profit outlooks in November. Kohl’s also reported quarterly sales that disappointed Wall Street, causing shares to plummet the most on record.

Department Stores Can’t ‘Catch a Break’ Despite Strong Economy

“The competitive landscape remains extremely promotional, with no let up as we wade further into the all-important holiday season,” Moody’s said in the report, referring to the discounts that have contributed to the erosion of retailers’ profit margins. “Despite a very favorable consumer spending environment, department stores have yet to catch a break.”

Off-price retailers like Ross Stores Inc. and TJX Cos., which owns the Marshalls and T.J. Maxx chains, have been winners in the sector. Foot traffic is increasing and those retailers continue to post “robust sales.” And while department-store weakness has hurt Nordstrom Inc.’s results, the company is getting some benefit from its discount arm, Nordstroom Rack, Moody’s said.

Moody’s said it expects department stores’ plunge in operating income to lessen in 2020 to a decrease of 1% -- but that’s due to the weak comparison period.

©2019 Bloomberg L.P.

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