As US retail and apparel companies emerge from their worst year since the Great Recession, many will be happy to put 2017 behind as 2018 will be brighter overall, even for department stores, says a new report by Moody's Investors Service. However, more defaults and rating downgrades are expected in the next few months as the number of distressed firms rises.

"After a particularly difficult year, the US retail and apparel industry is bracing for more defaults and rating downgrades in the next few months," said Moody's Vice President, Christina Boni. "That said, we expect defaults among speculative-grade retailers to drop sharply to 5% in October from 9% today, but only after peaking at 11% in March."

The US retail and apparel industry chalked up 11 defaults last year, compared with seven in 2009, at the height of the recession. Rating downgrades shot up by 87 per cent last year, while upgrades declined by 43 per cent.

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Moody's Liquidity Stress Indicator for retailers was up by more than 3 per cent last November from a year earlier, with the rise in the number of distressed companies signalling more defaults ahead.

The operating profit margins of companies that have invested heavily in online channels have come under pressure in the past few years. As retailers will continue to be under intense pressure to meet the needs of customers, the critical next step for companies will be to improve the customer-facing aspects of their trade while also reducing costs, the Moody’s report said.