Dive Brief:
- Moody’s analysts see “broad-based improvement” ahead for the retail industry in 2021 as vaccinations grow and pressure from the COVID-19 pandemic eases, according to a recent report.
- The ratings agency lifted its industry outlook for retail to positive from stable based on a strong economic environment. Analysts now estimate operating profit to grow a “robust” 10% to 12% during the year.
- Those sectors hit hardest last year have some of the most room for growth, including apparel, department stores and off-price, the analysts said.
Dive Insight:
The Moody’s report comes on the heels of good general economic news. During the first quarter of 2021, the economy grew at an annualized rate of 6.4%, driven by consumer spending, government stimulus, residential investments and other factors, according to the Bureau of Economic Analysis.
Meanwhile, the latest four-week average for jobless claims hit their lowest point since March 14, 2020, a sign that the general business environment is finally normalizing as inoculations against COVID-19 increase.
Vaccinations not only hold the promise for returning shoppers back to malls and other centers, but they can also open up the world more broadly. Office work, conferences, parties, weddings, travel, in-person school — are all poised for a comeback as COVID-19 cases decrease. And all of those things might help drive apparel and other retail spending.
It’s great news for the hardest hit retailers from the pandemic. S&P Global Ratings, for instance, raised its outlook for department store giant Macy’s this week. Analysts with S&P also cited a fast-improving economy and an expected apparel comeback in lifting the outlook for Macy’s, which was downgraded multiple times last year and posted a nearly $4 billion net loss for 2020.
Along with department stores and apparel, Moody’s also highlighted off-price, which the analysts said would “lead the comeback” in 2021. Off-price, while much stronger financially and structurally than department stores and many mall-based retailers, was uniquely hurt by the pandemic given the sector’s near-total reliance on physical stores as a channel. Moody’s predicts operating profit in off-price to grow a whopping 350% this year as shoppers return to stores.
However, a return to some kind of normal is a double-edged sword for retail.
The Moody’s team noted that 2020 ended “surprisingly strong” for retail, with operating profits remaining flat for the year compared to the agency’s estimate of a 15% drop. Along with government stimulus, retailers also benefited from the pandemic as consumers pared back spending on restaurants, travel and entertainment and shifted it to purchasing electronics, sporting goods and home goods. But the Moody’s analysts noted those patterns could change as vaccines shift behavior.
“As conditions continue to normalize, spending will shift to nonretail categories. Therefore, there remains a likelihood that our outlook could revert to stable as we head into 2022,” Mickey Chadha, a Moody’s vice president and senior credit officer, said in a press release.
Moreover, those retailers that saw exceptionally high sales during the pandemic, including big-box players, dollar stores, warehouse clubs and home improvement stores, will likely experience profit declines in 2021 as they lap unsustainable periods of growth from 2020, according to Moody’s.
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