NEW YORK - The outlook for the U.S. retail sector is stable, and Moody's expects a modest 3.5% to 4.5% operating-income growth in 2012, driven partly by inflation, says Moody's Investors Service in its new industry outlook "2012 Is Off to a Strong Start But Retailers Face Late-Year Headwinds." Inflation will be 1.9% in 2012 and 2.1% in 2013, according to Moody's Analytics.

Moody's industry outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.

"Retail industry operating-profit growth will outperform growth in the overall economy, as consumers release pent-up demand and some commodity costs ease. Although the slow economy will temper any improvement," said Margaret Taylor, a Moody's Vice President -- Senior Credit Officer and author of the report.

"Still, the upcoming expiration of Bush-era tax cuts and the temporary reduction in social security taxes in 2012, coupled with a debt ceiling peak in early 2013 and election-year political stagnation are significant risks to consumer spending," added Taylor.

Luxury retailers, dollar store and auto-parts retailers to outperform other segments of the US retail industry, with operating earnings of Neiman Marcus Group (B2 stable) and Saks Inc. (Ba3 stable) to perform well. The luxury retailers benefit from customers less sensitive to high gas prices, says Moody's.

The other end of the retail spectrum will benefit too, says Moody's. Dollar General Corp. (Ba1 positive) and Family Dollar Stores Inc. (Baa3 stable), which combine very low prices with convenient locations will continue to appeal to low and middle-income consumers hard-hit by high gas prices.

The outlook update notes that discounters and warehouse clubs Wal-Mart Stores Inc. (Aa2 stable), Target Corp. (A2 stable) and Costco Wholesale Corp. (A1 stable) will also benefit from growing food businesses that take share from grocers. Investment grade auto-parts retailers AutoZone Inc. (Baa2, Prime-2, stable), O'Reilly Automotive Inc. (Baa3 stable), and Advance Auto Parts Inc. (Baa3 stable) will also perform well, says Moody's.

But supermarkets and drugstores will be challenged by environmental pressures that include increased competition and reimbursement pressures, says Moody's, while high unemployment continues to weight on office supply stores.

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