Moody’s Investors Services predicts slower growth for retailers; revises outlook

Intense competition and digital investments are putting pressure on retailers’ profits. 

That’s according to a new report from Moody’s Investors Services which has revised its outlook for U.S. retail from positive to stable from positive. The change comes as the industry faces rising pressure due to intense competition in the fight for market share and costs associated with the integration of e-commerce and brick-and-mortar channels. 

Despite strong progress in 2018 with operating profit growing to 4.9%, pricing wars and intense competition have taken a toll on U.S. retail performance this year, according to Moody’s. The firm expects operating income to grow a slower 2% to 3% in 2019, with sales forecasted to grow 3.5% – 4.5%. Moody's previous forecast called for 2019 operating income and sales to grow 5%-6% and 4.5% – 5.5%, respectively. 

"Large retail contributors such as drug stores and home improvement stores have been negatively impacted this year by reimbursement pressures and softer housing markets," said Mickey Chadha, VP-senior credit officer  Credit at Moody's. "Meanwhile, retailers are facing intense pricing pressures in the fight for market share, as well as rising costs due to continued investments in e-commerce capabilities and rising labor costs, putting pressure on margins and weighing on overall profitability." 

The outlook for 2020 is brighter, according to Moody’s. Strategic investments in e-commerce capabilities, improved operating efficiencies, coupled with continued strong performance from larger well-capitalized retailers in select retail sectors alongside a strong economy, will lead to improvement in 2020, the firm said. 

For 2020,  Moody's forecasts U.S. retail industry operating income growing 3% – 4% and sales growth staying steady, at 3.5% – 4.5%. Discounters and warehouse clubs, off price, online retailers and dollar stores will continue to grow, and improvement in specialty retailers, home improvement, supermarkets and drug stores will also help.