U.S. Retail Set To Bounce Back, Moody's Estimates

What comes after a retail apocalypse? Maybe a renaissance, if Moody's Investors Service is correct in revising its outlook for the industry from stable to positive.

This is the first time Moody's has had a positive outlook on the industry since mid-2015.

The rating agency also revised its 2018 forecast for the industry's operating income growth to a range of 4% to 5%, up from 3.5% to 4.5%. The industry's sales growth for the year will be 4.5% to 5.5%, an upward revision from 3.5% to 4.5%, the company reports. 

Moody's outlooks represent the agency's expectations for the fundamental business conditions in a given industry over a 12- to 18-month period. The move is not a credit rating action by the company, but an industry forecast, and Moody's is not alone in its new optimism.

Late last year retailers began to reap the benefits of investments aimed at cost efficiencies, enhancing their e-commerce capabilities and in-store experiences, according to the rating agency. In short, retailers are adapting with the times.

Those changes are occurring when the U.S. economy is particularly strong. The convergence of positive trends will result in higher profits for retailers, Moody's says.

"The positive outlook for the U.S. retail industry reflects increasing top-line growth and operating profits as companies' investments to improve both the online and in-store shopping experience continue to gain traction," Moody's Vice President and Senior Credit Officer Mickey Chadha said in a statement. 

"The improvement has been spurred by a very strong macro-economic environment, with improving consumer confidence and low unemployment," Chadha said.

Moody's also forecasts that 2018 holiday sales growth will be up a healthy 5% to 6% year over year. That forecast makes Moody's more optimistic than the National Retail Federation and Prosper Insights & Analytics, which predict that holiday season spending will be up 4.1% this year compared with 2017.

Moody's expects that discounters and warehouse clubs, dollar stores, auto parts, online and off-price stores will all perform well during the holidays this year.

Moreover, the overall retail improvement will accelerate next year when department store declines begin to taper (such as after the demise of Sears) and higher growth at specialty retailers, supermarkets, apparel/footwear and drugstores provides a lift to overall profits.

Online sales growth will continue to outpace overall retail growth, Moody's estimates. Although it will still only account for around 15% of total U.S. retail sales, online sales will grow to about 20% of total sales in the next five years.

Amazon will continue to dominate e-commerce, but brick-and-mortar companies will gain more online market share as they set up their own platforms.