Moody's: US retail outlook remains positive

31 Oct '15

2 min read

The US retail industry will see steady growth through 2016 amid improved operating efficiencies, despite still-cautious consumer spending, says Moody's Investors Service. The rating agency's outlook on the industry remains positive.

Moody's expects the industry's operating income to grow 5-6 per cent this year and in 2016.

"Operating income growth will be driven mainly by continued strong performance at key companies in the home improvement, auto parts retailers and supermarket sectors, as well as specialty retail, off price retailers and department store sectors," said Mickey Chadha, a Moody's Vice President - Senior Analyst.

Moody's lowered its US retail sales forecast to 3 per cent – 4 per cent growth in 2015 from 4 per cent-5 per cent, owing to much lower fuel prices in the first half, as well as severe weather that forced consumers to stay at home. However, retail sales growth will likely pick up again to 4 per cent-5 per cent in 2016 as gasoline prices stabilize, according to the report, "U.S. Retail Industry: Steady Growth Through 2016 As Companies Juggle Efficiencies with Mixed Fundamentals."

Yet economic conditions remain mixed. While the industry is benefiting from clear positives, such as solid gains in household wealth, spending by the lower-income demographic is still constrained. As long as disposable income remains weak, underemployment persists and wage growth stays sluggish, consumer spending is unlikely to rise meaningfully.

Furthermore, the discounters and warehouse clubs, the biggest subsector in US retail with a 30 per cent operating earnings contribution to Moody's rated retail universe, will see a 4 per cent-5 per cent drop in operating income in 2015, muting the momentum of the broader retail industry. Walmart, which makes up 75 per cent of this subsector's operating profits, will be the main source of pressure as it continues to show weak performance amid wage hikes and investments for future growth.

"Also, e-commerce sales will continue to gain momentum, aiding various sectors as more companies seek to meet customer demand for greater flexibility and choice," added Chadha. "Although still only a small part of the overall retail landscape, e-commerce is driving major change and will remain the industry's fastest-growing segment." (SH)

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