Fitch: Retailers Can Secure Their Positions with Omnichannel Investment
Stores with multiple ways to engage with customers have a solid, defensible position in the retail landscape given consumer preference for some level of in-person shopping, reported Fitch Ratings, New York.
“The pandemic affirmed the value proposition of well-established department stores and other physical retail through the clear consumer preference for omnichannel flexibility (such as in-store pickup of online orders), as well as the strong rebound in store foot traffic following the relaxation of social distancing restrictions,” Fitch said in U.S. Department Stores are Securing Positions With Omnichannel Investments. “Still, secular headwinds and execution missteps are key risks that are pressuring ratings for some sector issuers, which generally straddle the cusp between investment and speculative grade.”
Fitch noted the evolution toward omnichannel contact with customers through physical stores, websites and mobile apps benefits large retailers with good cash flow and customer connections, given the importance of efficient and reliable supply chain and well-located stores as well as the sector’s high capital barriers to entry.
“The competitive landscape eased during the pandemic due to the accelerated exits or retrenchment of weaker players,” the report said. “Leaders like Kohl’s Corp., Macy’s and Nordstrom have capitalized on their relatively strong competitive and financial positions by investing in omnichannel and other initiatives that should support market share defensibility. The direct-to-consumer disruptor segment has also produced significant fallout; several direct-to-consumer brands have partnered with department stores to support growth.”
Fitch said it views Nordstrom as having the strongest operating profile within the department store sector, given its pricing niche between mid-tier and true luxury, limited exposure to weaker or declining malls and robust omnichannel offering.
“Kohl’s has benefited historically from its off-mall real estate portfolio, younger store fleet and value price orientation, but Fitch recently revised the Rating Outlook of Kohl’s to Negative given ongoing execution challenges and elevated leverage,” the report said. “Although Macy’s has made good strides with its Polaris initiatives, including pruning its store portfolio and investing in targeted marketing initiatives, the company is somewhat structurally challenged by its regional mall fleet.”
Department stores occupy “defensible positions” in the retail landscape, but they will continue to face long-term secular headwinds, the report said. These challenges include less time spent in shopping malls, changes in apparel buying behavior including ongoing trends toward casualization and competition from newer channels including value-oriented and online players.
“Difficult comparisons, shifts in spending to services and softening tailwinds in savings and employment will likely lead to modest, low- to mid-single digit retail volume declines for many goods categories, although operating profits could expand for some companies due to better inventory management and easing inflationary pressures,” Fitch noted.
