Moody's Investors Service on Aug. 24 said the U.S. and European retailers are "at least two years away" from recovering to 2019 profitability levels due to the impact of the pandemic, warning that U.S. mall store footprint is expected to shrink by over 20% and online sales growth is likely to approach 30% in five years.
COVID-19 created "a radically changing landscape" wiping out months of revenues for nonessential retailers due to lockdowns and accelerating the digital transformation of the retail sector, Moody's said.
Moody's expects the industry's total operating income to likely plunge 25% to 30% in 2020 due to the impact of the pandemic versus a decline of 2% to 5% it projected before the outbreak.
Increasing online shopping resulted in "record online spending and delivery costs," the rating agency said, adding that companies will be "forced to find efficiencies and cost reductions to offset the incremental infrastructure to support the expanding demand online."
"Overnight, legions of consumers have been converting to shopping online – sending shipping costs off the charts. Even the most successful such as Amazon.com Inc. (A2 positive) have absorbed earning hits as they ramp up capacity," the rating agency said.
According to the U.S. Bureau of Economic Analysis, online sales jumped 25.2% during the second quarter.
Moody's expects the percentage of online sales to make up over 25% of all retail sales in the U.S. and the U.K. within five years.
"Many weaker malls across the U.S. will experience full closures and repurposing to alternative uses for many of these properties," the rating agency said.
In Western Europe, online penetration is expected to grow 15% over the next three years versus an expectation of 10% before the crisis.
Companies with "scale, original product and financial flexibility" are best suited to recover from the pandemic, while smaller retailers with high leverage will likely succumb to pressures during the pandemic, Moody's said.
Downgrades prompted by the pandemic are most concentrated in the off-price, apparel, specialty and department stores sectors, which have the weakest EBIT recovery prospects. The supermarket and home improvement sectors must also prepare to accelerate online spending to increase their capacity and avoid downgrades during the period, Moody's said.
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