Despite a healthy consumer, improved inventory control and investments to enhance their customer experience, department stores will continue to face margin pressure following the sales drop-off seen in December, according to a report on the sector by Moody's Investors Service emailed to Retail Dive.
Many of the players are relying on their store credit cards to contribute to operating income, and that carries some risk, according to the report. "Credit card income continues to grow faster than net sales for many department stores, as more loyal customers increase their engagement and companies reward loyalty, which we view positively," wrote the team, led by Moody's VP and Senior Credit Officer Christina Boni.
Moody's expects square footage within the sector to fall some 4% after a 13% or so decline last year, driven mostly by Sears' bankruptcy, according to the report. So far this year, Kohl's has already announced four closures and J.C. Penney 18, and that should help them add share in remaining stores, Moody's said.
Department stores will continue to face major challenges in 2019, at a time when the economy seems to be slipping somewhat and threatening to undermine relatively healthy consumer confidence.
Moody's noted that inventory declines will help these players. But Instinet analysts led by Simeon Siegel continue to push against the notion that inventory levels are healthy enough to help department stores demand full price.
"After several quarters of expressing our fear that inventory levels across the dept. store channel were not as healthy as they seemed amid a growing diversion of excess product to off-price channels, 4Q represented the fifth consecutive quarter of net off-price inventory growth," Instinet wrote in comments emailed to Retail Dive. "With positive sales inflections across the channel last year driven by [average unit retail] hikes, this building inventory keeps us extremely wary of go-forward pricing power."
That, along with the higher costs that come with growing e-commerce, means further pressure on department store margins, Moody's noted. "Macy's and Nordstrom, in particular, remained disciplined on clearing inventory quickly in the face of weaker demand and efforts in digital and loyalty program also added costs," Moody's said.
Macy's fourth-quarter gross margins declined 110 basis points, more than expected, while Nordstrom's gross margins declined about 33 basis points, driven by markdowns at its full-price stores. And "J.C. Penney continued to see considerable degradation to gross margin (down approximately 220 basis points) as it continues to liquidate slow-moving and aged inventory," according to the Moody's report.