The US retail sector’s stable outlook is reflective of modestly higher operating income and sales growth, credit rating agency Moody’s Investors Service says in its 2018 outlook for U.S. retail, apparel, and restaurants.
Moody’s expects operating income to grow 3.5 percent to 4.5 percent in 2018, with sales growth also expected to grow 3.5 percent to 4.5 percent.
Five out of 14 retail sub-sectors will see operating income growth that exceeds 5 percent in 2018, with online, home improvement and dollar store retailers leading the way.
Weaker performing sub-sectors include discounters/warehouse clubs, department stores, office supply, auto retailers, apparel and footwear, and drug stores the report says.
“Large discounters like Walmart will improve as growth investments start to pay off, and drug stores like CVS and Walgreens will improve through cost efficiencies and improved front end sales,” said Moody’s vice president, Mickey Chadha, in a statement. “We also expect losses to begin to taper for department stores, including Macy’s, Kohl’s and Nordstrom.”
Despite select weakness, gains in consumer confidence and the overall improved economic environment should support the broader industry, and Moody’s expects retail defaults to begin to ease.
“Consumers are wrestling with higher non-discretionary spending needs while restaurant companies face higher operating costs — predominantly labor — and challenging traffic trends”
The speculative grade retail default rate is expected to peak at 10.5 percent in March, and then ease to 4.9 percent in October, down from 8.9 percent today. Around $21 billion (5 percent) of the total $388 billion of retail debt rated by Moody’s carries a grade of Caa or lower.
Meanwhile, the firm expects U.S. restaurants will see operating profits grow 2 percent to 4 percent over the next 12 to 18 months, driven by a higher average check. Delivery options will be a key focus for the overall industry, and promotions and discounts will remain high.
“Consumers are wrestling with higher non-discretionary spending needs while restaurant companies face higher operating costs — predominantly labor — and challenging traffic trends,” said Moody’s vice president Bill Fahy, in a prepared statement.
By Brannon Boswell