More bad news for department store sector — from Moody’s

A less than stellar holiday season for U.S. department stores has led Moody's Investors Service to revise its forecasts downward for the sector's operating income.



In its new report, the rating agency said it now expects 2016 aggregate operating income to decline 18%, rather than 11%, and for sales to also decline in the year ahead.



"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, "Department Stores - US: Sector Must Accelerate Revamp in 2017 Following Grim Holiday,” noted that most major chains, including Macy's, Kohl's and J.C. Penney, rang up negative comparable sales in the final three months of last year. Moody's previous earnings expectations reflected companies' efforts to better manage inventory and grow online sales. Shoppers, however, have continued to leave department stores for fast fashion, off-price and e-commerce options as they prioritize value and convenience.



"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 added. "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 when it comes to value for money and convenience, despite their limited online presence. Among department stores, Kohl's fares consistently better on these attributes, while regional stores such as Bon-Ton and Dillard's were laggards.



Internet purchases currently account for about 20% of department stores' sales, and to increase that number companies must further shrink their brick-and-mortar presence, Moody's said. Department stores will also need to redeploy investments in technology to keep pace both with their competitors and fast-changing customer expectations.