Dive Brief:

• Moody's Investors Service on Monday cut its forecast for department stores, saying now it expects the sector to record a 20% operating income decline this year. That is worse than their previous expectations of a 15% decline and the second time analysts have slashed their forecasts since September. 

• Off-price and discount retailers continue to take share, thanks in part to their popularity among millennials, according to a report emailed to Retail Dive​. The trend helped Nordstrom, which was able to take advantage through its Rack stores, where sales rose 1.2%, while full-line store sales fell 4.1%, Moody's noted.

• Inventory is proving to be a problem for retailers in the segment, where mismatched levels versus sales have forced markdowns. Levels had improved in 2018, but this year department stores struggled to calibrate with demand. Nordstrom and Dillard's led the way in inventory control in the third quarter, Moody's said.

Dive Insight:

Department stores may be in a hurry for the new year, considering how rough 2019 has been for them.

"Despite a very healthy consumer and heavy spending to improve inventory efficiency and online capabilities, department stores rang up a disappointing third quarter close on the heels of a very bleak first half," Moody's analysts led by Christina Boni, VP senior credit officer, said in the report.

Off-price retailers remain stiff competition as they continue to attract consumers who still seek out deals despite shopping in a healthier economy since the Great Recession. Along with more modest prices, their inventory "turnover time is almost twice as fast as Department Stores, on average," Moody's said.

Many department stores have already addressed costs, leaving them little room to maneuver further. That makes deft inventory control all the more important, Moody's said. And debt management could prove a distraction for some.

"Although we view further debt reduction as critical, companies face significant challenges in stabilizing earnings growth, which will be integral to maintaining their ratings profiles," Moody's said, noting that Macy's recent announcement to tender up to $450 million of its debt is a recognition of the need for financial flexibility. "Right sizing the balance sheet must continue, but it may not be enough."

Moody's sees some of the department store issues stabilizing in 2020, projecting a 1% decline from the lower base analysts reported Monday. But retailers in the sector have their work cut out for them. High inventory levels are forcing markdowns, and those are eating profits. The holidays threaten to foment that further.

"The competitive landscape remains extremely promotional, with no let up as we wade further into the all-important holiday season," according to the report. 

The six fewer selling days between Thanksgiving and Christmas this year could "exacerbate the promotional environment," they warned, noting that Kohl's in its third quarter already demonstrated that problem. While the retailer "posted the best sales performance of the group for the quarter, with a 0.4% increase in comparable store sales ... it surrendered significant profitability by investing in pricing."

The report is the latest in a series of downbeat reports from Moody's on the sector, and even the future lift isn't viewed by the analysts as all that restorative. "[D]epartment stores will remain among the worst performers of retail," they said. "If we view our 2020 forecast on a two-year basis, it will still be down roughly 21%."