The near future looks bright for off-price retailers, while department stores will continue to face challenges, according to a recent report from Moody’s Investors Service.
In the report, Moody’s expects operating income in the U.S. off-price retail sector to grow 6.9% in 2017 and 5.4% in 2018, while department stores will see operating income decline 9.3% this year and 2.7% in 2018.
“Off-price retailers continue to outperform other sectors of the U.S. retail industry largely because they offer the kind of lower-cost, higher-value products and shopping experience many consumers are looking for,” said Christina Boni, Moody’s analyst. “Off-price stores are far outstripping department stores, which in contrast are still struggling with outmoded formats and supply chains that can’t keep pace with customer demand.”
The report noted that while Moody’s feels department stores are mostly taking the right steps to rebound, it remains too early to gauge the long-term impacts of new initiatives.
In particular, department stores have been exploring new ways to drive traffic through e-commerce offerings and partnerships to spur growth. For example, while Kohl’s Corp. has its own online platform, it is now carrying Amazon products at 10 of its stores and accepts Amazon returns at 82 of its locations.
While apparel sales still make up the bulk of sales for off-price retailers, they have been increasing their product mix in the higher-growth and less competitive home products category. Moody’s estimates that home product sales at off-price stores grew 9.9% in 2016, compared with 7.8% for the off-price sector’s overall growth.