June 16, 2008, 12:00 AM

Moody’s gives greater weight to online sales in rating retailer debt

The ratings service says a retailer’s online strategy is becoming a more important factor as the web represents a larger part of retail sales. More retailers are breaking out their online or direct-to-consumer sales, Moody’s notes.


Moody’s Investors Service Inc., a major Wall Street credit-rating agency, announced today that it is giving greater weight to online sales in rating the debt of retailers.

“As online sales become a larger percentage of total sales for individual issuers, and as online spending gains a bigger share of overall retail spending, a retailer’s Internet strategy is becoming a more important factor in Moody’s credit analysis,” says vice president and senior credit officer Margaret Taylor. “A strong online presence is considered a ratings positive more frequently than in the past, because it represents such an important channel of distribution and can mitigate declining comparable-store sales trends.”

Taylor cites government statistics showing online sales grew by 19% last year to $136 billion, a dramatic increase from $4.6 billion in 1999. And she notes that Forrester Research projects U.S. web sales will approach $200 billion this year and could exceed $300 billion in five years. “Moody’s believes that this milestone is not unreasonable,” Taylor writes.

The growing importance of the web is also reflected in more retailers breaking out web or direct-to-consumer sales, Taylor notes in a report released today entitled “Internet Sales Finally Gain Bandwidth.” More than half the specialty apparel retailers and department store chains Moody’s tracks now report those sales separately, Moody’s says.

Taylor gives several examples of how online sales have significantly impacted the results, and thus the credit ratings, of major retailers. For instance, she notes apparel retailer Gap Inc. softened the impact of a 4% decline in same-store sales in fiscal 2007 with 23.7% growth in online sales to $903 million, and chain J.C. Penney Co. Inc. partly offset flat comp-store sales with 15% growth in online sales to $1.5 billion.

She says J. Crew’s strong online presence gives it a national profile beyond its 206 stores that helps boost its rating and that “Amazon.com’s strong fulfillment capabilities and industry-leading web site were two key factors” in a recent upgrade by Moody’s. On the flip side, she points to the dangers of poor execution, such as Limited Brands cutting back last holiday season on online sales of Victoria’s Secret lingerie because of distribution center problems that slowed order fulfillment.

Taylor also notes that Moody’s will be monitoring the extent to which weak same-store sales are a result of shoppers moving their purchases to the Internet.

Amazon.com is No. 1 in the Internet Retailer Top 500 Guide, J.C. Penney No. 15, Victoria’s Secret/Limited Brands No. 20, Gap No. 24 and J. Crew No. 50.


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