Dive Brief:

• Retail, despite a severe rash of store closures and bankruptcies, is doing OK at a fundamental level. At the same time, the industry is rapidly evolving and while apparel and department store retailers are closing the most stores, few retailers are immune from the changing winds. That’s the takeaway from a new report by bond rating firm Moody’s Investor Service emailed to Retail Dive.
• Thousands of stores are slated to close this year, on-pace with recession-era levels, and the industry’s default rate, at 4.6%, is second only to media. But Moody’s analysts said they expect the distressed portion of the industry to stay "contained," with distressed retail debt making up only 6% of all retail debt they cover.
• Nevertheless, the industry is in flux and "experiencing major growing pains, brought on by an increasingly demanding, less predictable consumer base," the analysts note. "Competitive pressures are forcing retailers to adjust infrastructures and converge brick-and-mortar and e-commerce platforms, with emphasis on developing scale, distribution and technology."

Dive Insight:

Somewhere between "apocalypse" and "correction" is where you'll likely find the reality retailers face today. While the majority of bankruptcies and store closures might be contained to a few sectors — and most analysts think the U.S. was overstored to start with — we are likely seeing permanent changes in how the industry operates and what it looks like.

The Moody’s report points out that "once-loyal shoppers are morphing into value-hungry, internet savvy consumers." Those shoppers can check prices on their phones in the store and, if they want, order the exact same item right there and then — from somebody else.

To accommodate savvier, more demanding customers, retailers are having to revamp their infrastructure and distribution and invest in technology, Moody’s analysts note. Retailers who can’t keep up with those pressures to invest because they are paying down debt are falling by the wayside. We’ve seen that happen several times this year, including with Gymboree, rue21, Gordman’s Stores and others.

But Moody’s analysts say there are more "leaders than laggards" — that is, more sectors within the industry forecasted to enjoy positive rather than negative growth in operating income. At the front of the pack are dollar stores, whose operating income Moody’s expects to expand by more than 12%, with home improvement (7.6%) and off-price retailers (4.8%) also expected to have strong income growth.

Off-price retailers, in particular, show why physical stores still matter, in Moody's view. "The three main incumbents" — TJX, Ross Stores and Burlington — "offer quick product turnaround, lower prices and physical store presence that provides the customer a catalyst to shop its stores. And this group has achieved its success almost entirely without an e-commerce platform."

Editor's note: Read The running list of 2017 retail apocalypse victims and 10 major retailers that could go bankrupt in 2017 for more in depth coverage of distressed retailers.