Department store outlook further downgraded by Moody's

In 2018, department stores saw an improvement in inventory levels, but calibrating with demand in 2019 has proven challenging. This is evident in the financial performance of major retailers such as Nordstrom and Macy's.

Nordstrom, for instance, reported a 1.2% sales increase in its Rack stores during the third quarter of 2019, while sales in its full-price stores declined by 4.1%. The company was able to capitalise on this trend through its Rack stores, where sales rose significantly.

However, the overall picture for department stores remains bleak. High inventory levels are forcing markdowns, which are eating into profits. If viewed on a two-year basis, the 2020 department store forecast would still be down roughly 21%.

Moody's Investors Service has revised its forecast for department stores twice since September, now expecting a 20% operating income decline this year. The credit rating agency sees some department store issues stabilising in 2020, projecting a 1% decline from the lower base.

Macy's recent announcement to tender up to $450 million of its debt is a recognition of the need for financial flexibility. The holidays threaten to foment the promotional environment further, with the six fewer selling days between Thanksgiving and Christmas this year potentially exacerbating the situation.

Off-price and discount retailers are gaining share, in part due to their popularity among millennials. Their inventory turnover time is almost twice as fast as department stores, on average. Kohl's surrendered significant profitability by investing in pricing during its third quarter.

Moody's notes that deft inventory control is all the more important for department stores due to limited room to manoeuvre further. Nordstrom and Dillard's led the way in inventory control in the third quarter, according to Moody's.

Despite these challenges, right sizing the balance sheet may not be enough for department stores to stabilise earnings growth. Moody's views department stores as among the worst performers of retail even with the 2020 forecast. The competition from off-price retailers continues to be a significant factor in this struggle.