Moody’s Sets Outlook to Negative for Retail, Apparel
● The debt watchdog said inflation, war, supply chain backups and slipping demand would lead to lower margins in fashion.
Moody’s Investors Service has gone negative on U.S. apparel and retail.
“Retailers face deteriorating business conditions as they grapple with shipping delays, product shortages and inflation,” said Christina Boni, a senior vice president at Moody’s. “We expect sales to increase 2 to 4 percent, while operating profit is set to decline 1 to 3 percent over the next 12 to 18 months.”
The debt watchdog also lowered its outlook on retail and apparel to negative from stable and, in a report detailing the change of heart, listed a laundry list of woes with inflation, geopolitical risks and falling demand, all leading to profit declines.
“Margins for retail and apparel will fall sharply in 2022 as supply chain disruptions and higher costs take a toll,” Moody’s noted. “The industry is still adjusting inventory levels while coping with supply chain bottlenecks amid inflationary pressures. Not only are retailers facing shipping delays, product shortages and sharply higher container costs, they now also must contend with cooling outsized demand.”
Fashion came into the year with a full head of steam and many companies saying they had their best year ever in 2021 and were prepared to keep going higher.
But while the pandemic and the attendant supply chain backups did force a new kind of inventory discipline in apparel and consumers were ready to pay up to refresh their wardrobe, the world changed quickly.
Russia’s invasion of Ukraine has spurred not just a frightening reordering in geopolitics but pushed fuel and food prices sky high and made clear that inflation — now at 40-year highs — is not just a passing phenomenon. And as the Federal Reserve continues to ratchet up interest rates to keep the U.S. economy from overheating any more, life will get harder for retailers.
“Higher prices for energy, food and other necessities, as well as heightened financial market volatility, will weigh on consumer spending and sentiment in coming months as retailers lap strong
2021 performance,” Moody’s said. “The ability to pass further price increases to consumers to mitigate rising costs will also be tested.
“And while the consumer remains healthy on the back of low unemployment and robust savings, the length and severity of the Russia-Ukraine military conflict could yet undermine demand,” the rating agency said.
That could have consumers sitting out just as retailers bring in long-lead inventory, ordered as a supply chain work around.
“Retailers risk getting stuck with too much inventory if consumer demand cools,” Moody’s said. “This could fuel a more promotional environment and hurt their ability to raise prices at a time when inflation pressures are high.”
It’s an environment expected to hit online giants like Amazon and department stores alike but there are expected to be some winners — particularly the off-pricers.
“Although the operating margins for off-price will shrink due to increased costs, the top-line growth for off-price retailers like TJX Companies, Ross Stores and Burlington Stores will leverage the higher costs and result in a 2 percent increase in operating profits for 2022,” Moody’s said. “Demand will benefit from the consumer’s focus on value, which becomes greater during periods of stress. The customer has and will continue to prioritize value evidenced by the continued increase in comparable store sales for off-price retailers in 2021. Flexible supply chains help these companies better manage operating margins and to maintain positive comparable store sales performance during negative economic cycles.”