Moody's says department store closures to slow significantly

Dive Brief:

Department stores had a weak first quarter, "thanks largely to a slowdown during the all-important holiday season," according to a Moody's report emailed to Retail Dive.
The generally poor performance in the sector led the service to lower its forecast for operating income. Moody's now expects operating income to decline by 10% in 2019, "twice the decline we had previously called for and worse than the 6% decline in 2018," the report said.
Moody's acknowledged challenges in the form of "cool temperatures," which burned many in the apparel sector, and noted the efforts of many to reduce debt, including Macy's, Kohl's and Hudson's Bay.

Dive Insight:

Moody's honed in on operating income as a low point for department stores in the first quarter, noting that it fell 35% for the sector, as department stores "stalled in their efforts to make significant progress in stabilizing operating income."

Even previously strong performers in the sector, like Kohl's and Nordstrom, started the year with disappointment. Retailers toned down full-year guidance and reported negative comparable sales for the first time in a long time.

Kohl's same-store sales declined by 3.4%, the first time they've been in the red since Q2 2017, while Nordstrom's declined 3.5% after five consecutive quarters of positive comp sales.

Moody's named the usual suspects that plague department stores, namely off-price retailers and big discounters, as well as their own debt levels. Macy's, Kohl's and Hudson's Bay have notably paid off $2.1 billion, $943 million and 1 billion Canadian dollars respectively over the past two years, though Nordstrom was called out for, "in part the lack of debt paydown," which led the service to change the retailer's outlook to negative in May.

"Department stores, in contrast, have been saddled with weak performance in ladies apparel, which continues to drag down sales," the report reads, in comparing department stores to their competitors.

There are still opportunities for retailers to pick up market share from the mass closures of 2018, including Sears and Bon-Ton, and Moody's expects "significant slowing" in store closures for department stores this year, with a projected 4% decline, compared to 13% last year.

However, healthy retailers like Macy's and Kohl's are more likely to gain that share than weaker players like J.C. Penney, which continues to struggle.

"It will take time for the company's new management team to enact critical change and we do not expect a recovery in sales this year," the report reads.