Moody's said it expects more retail bankruptcies as the sector's largest companies focus on infrastructure and converging e-commerce operations with brick-and-mortar stores in an effort to stay competitive with new online rivals, according to a report published on Aug. 4.
"The U.S. retail sector is experiencing major growing pains, brought on by an increasingly demanding, less predictable consumer base," the analysts said. "Strapped department store retailers and others are finding that once-loyal customers are morphing into value-hungry, Internet savvy consumers."
Moody's said the number of distressed retail and apparel issuers is "back to recession levels." Among Moody's rated retail and apparel companies, 22 were given ratings of "Caa/Ca" in June, which Moody's defines as being considered in either "poor standing and subject to very high credit risk" or "likely in, or very near, default with some prospect of recovery of principal and interest." In 2016, 17 companies held that rating, while 13 were given the rating in 2015.
Smaller companies with high levels of debt are especially struggling to keep up, the analysts wrote. As of June 30, the U.S. retail industry had the second-highest 12-month default rate, coming in at 4.56%. The retail industry was second only to the media group in Moody's 18 covered industries, according to the note.
"A higher default rate suggests that any let-up in the strong refinancing pace that has driven new high-yield issuance across industries would pose problems for those with more challenging credit profiles and impending maturities, in particular those with weaker credit profiles," the analysts said.
Despite defaults in the retail sector, the broader industry remains healthy, Moody's said. The distressed group represents only about 6% of the group covered by Moody. Some 57% of retail and apparel rated debt is issued by investment grade companies.
There are some exceptions to the rapid shift to online, Moody's said. Low-price retailers — including TJX Cos. Inc. and Ross Stores Inc., which offer quick turnaround, lower prices and a physical store presence — have been successful with minimal e-commerce operations.
But most segments of retail are not immune from challenges from online retailers such as Amazon.com Inc. Even supermarkets, which Moody's said have been one of the highest-performing retail sectors, are vulnerable. Moody's lowered its 2017 operating profit growth for the group July 10 to a range of 4% to 5% from the previous expectation of 7% to 8%.
"Even strong industry performers are looking over their shoulders," the analysts said.