Another dismal year for US department stores will accelerate change in 2020, Moody’s Investors Service says in a new report. As a result, US department stores must radically improve their format and product offerings in 2020.

The rating agency projected the operating income of US department stores to be down about 20% in 2019 and about 5% in 2020.

The sector heavily underperformed the broader retail industry last year, despite continued investments and offering updates, the still-solid growth of the US economy and strong consumer spending.

„Despite strength in most other sectors of the retail industry, department stores lost momentum in 2019, with operating income for the year projected to be down about 20%,” said Christina Boni, a Moody’s VP-Senior Credit Officer. „We forecast that the sector will stem its decline in 2020, but with operating income still expected to fall by about 5%, department stores must radically improve their format and product offerings in the year ahead.”

Last year department stores struggled to align inventory with demand, which despite aggressive promotional activity wasn’t as high as expected, Boni says. Inventory control remains critical in an environment in which the stores must ensure the availability of product offerings, as well as speed of delivery. Faced with weaker merchandise margins, in 2020 operators must also continue to actively manage selling, and general and administrative costs.

Meanwhile, although many department stores, including Macy’s, Inc. and Kohl’s Corp., have been disciplined in reducing their debt levels, that won’t be sufficient to boost their credit ratings unless they can quickly stabilize their business model, Moody’s says.