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Outlook for US retail, apparel, restaurant sectors stable in 2020, Moody's says

Moody's said Dec. 16 that it expects the U.S. retail, apparel and restaurant industries to be stable in 2020, noting that the sectors will continue to experience some growth amid pressures brought about by global trade tensions, rising labor costs and the growing fight for market share.

For U.S. retail, the rating agency expects operating income to climb 3% to 4% in 2020 and sales to increase by 3.5% to 4.5%. It said the sector will continue to grapple with intense market competition and changing consumer behavior, but noted that it will also continue to benefit from solid gains in household wealth, strategic investments in e-commerce and improved operating efficiencies.

Moody's forecasts seven out of 13 retail sectors to see operating income growth of more than 4%. It said dollar stores and off-price retailers will be the best-performing retailers in 2020, with operating income growth of more than 9% and more than 7%, respectively.

Meanwhile, the agency expects the department store and drugstore segments to underperform in 2020. It said department stores' operating income will likely decline to about 1% while drug stores' operating profit will inch up by only around 1% to 2%.

Online sales are expected to contribute 25% of total retail sales in the next four to five years, the agency said. Total retail sales growth is projected at 3% annually through 2026, with e-commerce sales increasing at 14% to 15% annually through 2022.

For the apparel industry, Moody's expects operating income to grow 4% to 5% in 2020 and sales to improve between 4% and 5%. Growth in the sector will likely be driven by international markets and direct-to-consumer channels, the agency said, but new product introductions and strengthened marketing efforts will also contribute to sales.

The agency also expects industry consolidation to continue as companies look for more ways to boost profit.

Moody's added that tariff uncertainties could pressure some apparel companies' earnings next year, particularly those that sell a greater percentage of imported Chinese goods in the U.S., such as G-III Apparel Group Ltd. Meanwhile, it noted that retailers like Levi Strauss & Co. and Hanesbrands Inc. are well-diversified and will not be significantly impacted by the tariffs.

For the restaurant sector, operating profit growth is expected to range from 2% to 4%. Moody's said growth will mostly come from higher average check and new unit additions, but it noted that increasing labor costs and a shrinking pool of workers will likely limit margin expansion.

In addition, the agency said traffic will remain a challenge for the industry as consumers wrestle with higher nondiscretionary spending and continue to search for value. It also said delivery will remain a key focus among restaurant operators but that it will take time before it makes a meaningful contribution to earnings.