Last year’s weakest apparel subsectors will be this year’s top performers, according to Moody’s Investor Service credit analysts, who pointed to online sellers and department stores as doing the best job right now to realign their inventories according to consumer purchasing trends.
In a report led by retail credit analyst Christina Boni, the ratings firm issued a stable outlook for global retail and apparel for the next 12 to 18 months with global revenue growth forecast at 3.4 percent, led by gains in North America.
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Getting inventory in order will improve merchandise margins by limiting deep promotions. That’s particularly true for North American retailers such as Walmart that overshot on demand last year and ended up paying a steep price. The good news for retailers this year is that sourcing, product and freight costs are coming down. A less chaotic supply chain means retailers don’t need to fly in quite so many orders.
“And while still early, the pressure on consumer purchasing power should subside as runaway inflation starts to ease,” the report said. For now, inflation is less of a problem in North America than it is in Europe, where real income lags the cost of living and retailers still need to clear an inventory glut.
Big retailers such as Walmart and Target with the scale to negotiate better pricing with suppliers as costs fall stand to benefit the most. Retailers will eventually pass along these cost savings to consumers to “stimulate demand,” the credit analysts said.
In addition, retailers importing from Asia benefit from freight cost declines as container costs from Asia have dropped as a result of lower cargo volumes inked to consumers buying less stuff. “Spot rates have been pushed lower and retailers have been able to renegotiate costly annual container contracts, which are typically readdressed each spring,” the Moody’s report noted.
Still, shipping-cost benefits are expected to be offset in part by higher transportation costs in the U.S. and in most parts of Europe, Middle East and Africa (EMEA). The benefits from lower costs will probably come later this year, particularly as “companies first sell inventories that were purchased earlier at much higher freight levels,” analysts said.
Retailers expected to benefit the most from realigning their inventories this year will be department stores and online retailers, the two worst-performing retail subsectors in 2022.
Global online retailers last year saw their adjusted earnings before interest and taxes (EBIT) plummet by 45.2 percent in 2022, but EBIT is expected to rise by 47.0 percent in 2023. Most of that turnaround is expected to come from Amazon, as it readjusts overcapacity following a Covid-era ramp up. Adjusted EBIT at department stores, down 41.4 percent last year, is projected to grow by 14 percent this year.
In other industry subsectors, global adjusted EBIT for off-price retail is expected to rise 11.7 percent this year, after falling 6.5 percent in 2022. And apparel and footwear is forecasted to be up 1.8 percent, following a decline in adjusted EBIT of 20.7 percent last year.
Moody’s said that the North American apparel and footwear subsector won’t see much growth, thanks to a lack in pricing power and weak unit demand. Adjusted EBIT is still expected to rise 9.1 percent, as a result of year-ago comparisons when U.S. retailers aggressively promoted to clear excess product. Despite the projected growth in North America, overall global adjusted EBIT for the subsector will be dragged down by business conditions in EMEA. That’s because of weak consumer sentiment and persistent inflation, which has forced consumers to cut back or trade down.
“Promotions will remain intense in EMEA during the first half of 2023, as many companies contend with inventory clearance, such as Adidas,” the report said.
And while the Moody’s outlook is stable for the next 12 to 18 months, the credit analysts warned that significant risks remain.
“The global economic and political environment still remains fraught with risks, which could delay the recovery,” the credit analysts said, citing risks that include more aggressive monetary tightening, further stress to banking systems, sustained inflation and the geopolitical environment, among others.
“Our outlook could change to negative should these risks result in negative adjusted EBIT growth. Our outlook could change to positive should the aforementioned risks abate,” the analysts said, noting that improving conditions would result in better consumer unit demand and people being able to afford products that cost more. Their outlook could also change to positive if adjusted EBIT growth is projected to exceed 4 percent.
