Moody’s is bullish on retail, upping both its operating income and sales growth forecasts.
Moody’s Investor Services said Thursday that its outlook for the U.S. retail industry has turned positive for the first time since mid-2015. In a new report, Moody’s said retailers are finally starting to reap the benefits of investments aimed at cost efficiencies, enhancing their e-commerce capabilities and customers' in-store experience. This, coupled with a strong economy, will result in higher profits, according to the report.
Moody's upped its 2018 forecast for the industry's operating income growth to 4.0% - 5.0% from 3.5% - 4.5% and its sales growth forecast for the year to 4.5%-5.5% from 3.5%-4.5%. Moody's also forecasts holiday sales growth to be a healthy 5%-6% this year.
Discounters and warehouse clubs, dollar stores, auto parts, online and off-price stores are all expected to perform well this year. The improvement will accelerate next year when department store declines begin to taper and higher growth at specialty retailers, supermarkets, apparel and footwear and drug stores provides a lift to overall operating profit.
“The positive outlook for the U.S. retail industry reflects increasing topline growth and operating profits as companies' investments to improve both the online and in-store shopping experience continue to gain traction," said Mickey Chadha, Moody's VP and senior credit officer. "The improvement has been spurred by a very strong macro-economic environment, with improving consumer confidence and low unemployment."
Growth in online sales will continue to outpace overall retail growth, according to the report, which forecasts that online sales will grow to about 20% of total sales during the next five years. Amazon will continue to dominate in e-commerce, but brick and mortar companies will gain more of the online market share as they set up their own platforms.
The report, titled “US Retail: Going positive as investments start bearing fruit and economy boosts growth,” also pointed out the downside risks for the retail industry, which include a tighter labor market and increasing freight costs. In addition, a significant and prolonged escalation of the ongoing trade dispute between the U.S. and China would negatively affect U.S. retailers that import a meaningful portion of their products from China.
Moody's industry sector outlooks represent the agency's expectations for the fundamental business conditions in a given industry over the next 12-18 months.