Dive Brief:

• Moody's reduced its forecast for the retail industry as "performance takes a dive," according to an emailed report issued Thursday by the ratings agency.
• Companies in the industry remain under "extreme stress" related to COVID-19 and the ensuing closures, increased costs and other pressures, Moody's analysts said.
• The analysts now expect operating income for the industry to decline by 25% to 30% for 2020, a significant downward revision from Moody's past estimates of a decline of up to 5%. And the analysts don't anticipate operating profit to return to pre-pandemic levels until at least 2022. 

Dive Insight:

As the Moody's team pointed out, even before COVID-19 began its spread in the U.S., "retailers were already fighting hard to shore up market share and margins." The pandemic has exacerbated numerous weaknesses among retail players and accelerated trends in place well before. 

For those already in distress, the closures were a major strain on cash supply, forcing retailers to draw down what they could from their revolvers or issue new debt. That wasn't enough for some. Companies including RTW Retailwinds, Tailored Brands, Stage Stores and an ever-growing number of others haven't been able to shore up their liquidity, even after re-opening stores, and have fallen into bankruptcy.

The pandemic and closures also rattled markets, making refinancing debt more difficult for some and derailing efforts that could have kept some retailers out of bankruptcy. J. Crew, which had ironed out a deal that would have allowed it to IPO its successful Madewell business and reduce debt, turned to bankruptcy after the post-COVID-19 market upheaval thwarted its deal. The COVID-19 fallout also led to the end of acquisition deals for Stein Mart and L Brands (for its Victoria's Secret banner), adding pressure to those retailers' turnaround efforts.

The reopening of stores has provided a boost to some, but uncertainty hangs over the industry as COVID-19 continues a rapid spread through the U.S. As Moody's analysts note, store traffic "will remain weak as coronavirus outbreaks continue and some states roll back store openings."

All of COVID-19's travails are felt even more deeply in department store, apparel and footwear retail, which were already challenged by mass discounting, consumer changes and competition from off-price and online players. Moody's analysts estimate the department store sector's total operating income to fall 200% and apparel and footwear to fall 150%. 

Off-price retail, which has seen significant growth over the past decade but as a sector is without a significant e-commerce channel and so has few answers to closures and traffic declines, also faces an outsized decline in profit. Moody's is now forecasting a drop of up to 130% in operating income for off-price players for 2020.