Dive Brief:

• Competitive pressures and financial instability are thinning out the retail herd while larger, healthier companies are poised to grab market share. That's the premise of a new report from Moody's shared with Retail Dive. 
• Analysts, led by Moody's vice president and senior credit officer Manoj Chadha, described a "survival of the fittest" in retail that could ultimately lead to a healthier sector. They expect competitive pressures to increase, with stronger retailers that have healthy balance sheets able to chip away at their weaker rivals by lowering prices and ramping up their e-commerce operations.
• In the first quarter of the year, the ratings agency downgraded seven retailers. Of those, six of the retailers were rated B3 or lower and were "more susceptible to downgrades" due to poor liquidity, high debt levels, competitive disadvantages, operational problems or some combination of those, the analysts wrote.

Dive Insight:

Moody's analysts refer to the failure of companies throughout the retail world as a "shake out of chronic underperformers." But that does not mean the industry as a whole is in decline.

For now, credit downgrades (a measure of default risk) are outpacing upgrades. The ratio of upgrades to downgrades has fallen in early 2019 as compared to last year, according to Moody's. That said, the total number of downgrades, at seven, is the lowest since the third quarter of 2016.

Last year saw a total of 33 credit downgrades for retailers rated by Moody's, coming after downgrades hit a peak of 56 in 2017, also a record-setting year for retail bankruptcies. What the numbers amount to is a retail industry that "remains in the throes of major structural change," analysts wrote. Those retailers that aren't diversified, are heavily indebted or are more susceptible to online competition are the most vulnerable.

Over the next year, the analysts expect the ratio of upgrades to downgrades to improve as larger retailers with healthy balance sheets take more market share from their weaker competitors. For the weaker retailers, they might lack pricing power or the scale to deal with competitive pricing, or they may "offer products that do not resonate with customers" — or they might have poor inventory management, or "undesirable store locations," Chadha and his team wrote. And even relatively small financial shocks can disproportionately increase their default risk.

Several major retailers have already gone into bankruptcy in 2019, including Shopko, Gymboree, Payless and Charlotte Russe — all of which liquidated in bankruptcy. Many more are in financial distress, in need of a deal to reduce their debt burden or facing possible bankruptcy.

Yet there are slices of the industry that are performing well, bringing in strong income and expanding footprints and capabilities. Among them, Moody's analysts pointed to warehouse clubs, discounters, dollar stores, off-price retailers and e-tailers as "particularly strong."