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Moody's Investors Service on Tuesday lowered its outlook to negative from stable for the U.S. retail and apparel industry.
The risk assessment firm found plenty of risks for retailers. Inflation, geopolitical developments, supply chain disruptions and falling demand are expected to erode margins and profits. Moody’s sees this scenario playing out across every subsector of retail and apparel.
"Retailers face deteriorating business conditions as they grapple with shipping delays, product shortages and inflation,” Christina Boni, senior vice president, Moody's Investors Service, said in a statement. “We expect sales to increase two-four percent, while operating profit is set to decline one-three percent over the next 12-18 months."
First-quarter results released this week by Target and Walmart suggest that Moody’s forecast may have merit. The two retailing giants posted modest sales gains while reporting that operating margins had fallen well below their own expectations.
Moody’s sees higher prices for food, fuel and other necessities weighing on consumer spending in the months ahead. It said that retailers that have been dealing with high demand, product shortages and increased shipping costs will now find themselves having to also plan lower demand.
The pain will be spread across players both large and small.
Moody’s said that online will be the largest underperforming category with Amazon.com and others facing rising costs and excessive capacity as product demand comes back to earth. Big box retailers, department stores, food and gas are going to feel the pain, as well.
Retailers landing on Moody’s exception list include auto and auto parts, home improvement, off-price and value stores. All four segments “have growth potential in coming months,” according to the firm.
One of the biggest challenges facing retailers, according to Moody’s, will be their ability to continue passing on price increases to their customers. The firm sees Russia’s ongoing attack on Ukraine creating economic realities that may undermine the American economy, which currently boasts low unemployment and high savings rates.
Supply chain factors remain an area of concern for Moody’s. It points to potential constraints, specifically the negotiations taking place between West Coast ports and dock workers on a new labor contract. The current one expires on July 1.
- Moody's Outlook for US retail and apparel industry cut to negative as business conditions deteriorate – Moody’s Investors Service
- Walmart and Target report higher sales and lower margins – RetailWire
- April Retail Sales Grew With Consumers ‘Taking Higher Prices in Stride’ – National Retail Federation