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June 6 (Reuters) - (The following statement was released by the rating agency)
U.S. department stores would need to generate top-line growth of 2% or more to protect their market shares as online shopping and other factors threaten industry revenues, according to Fitch Ratings in a new report. Fitch notes that as department store sales decline, sales of traditional department store merchandise - specifically apparel, accessories and home goods - are still growing in the low-single digit category. However, online shopping is becoming an increasing threat for department stores and other brick-and-mortar specialty clothing, accessory and home furnishing retailers and is accounting for much of the sales growth in these categories.
Fitch also notes that sales productivity within department stores has meaningfully declined. Sales for the top-10 U.S. department stores in aggregate have remained essentially flat since 2001 despite square footage growth of approximately 18%. Fitch expects that secular and competitive pressure could lead to more store closings or potential restructurings over the next 24-to-36 months.
Such a decline would have negative implications for retail traffic patterns and competitive dynamics within malls, especially where department stores are anchor tenants.
'Department stores are the most pressured category in domestic retail,' said Monica Aggarwal, Senior Director, Fitch Ratings. 'Department stores that actively invest in and manage both physical store space networks and online platforms are strongly positioned to generate incremental sales and gain market share,'
Fitch estimates that an industry growth rate of 2% could be achieved by relatively flat to modest comps growth at the store level and mid- to high-teens growth from online sales for retailers that currently generate 10% of their revenue from online. Online growth of 15%-20% would translate into a 150 bps-200 bps contribution to overall comps.
Fitch does not expect promotional activity to abate given the fight for share among the traditional brick-and-mortar retailers and strong growth in online sales. As a result, gross margin for the sector could remain under modest pressure in 2014.
Additional information is available in Fitch's new report, 'Department Stores: A Shrinking Slice of the Pie', which is available at 'www.fitchratings.com' or by clicking on the above link The report also provides specific commentary for each of the department stores in Fitch's ratings portfolio.
Link to Fitch Ratings' Report: Department Stores: A Shrinking Slice of the Pie