Department stores' probability of default has declined since the height of coronavirus-prompted store closures in April and after multiple bankruptcy filings in the industry.

The one-year median probability of default for department stores fell to 15.96% as of June 16. This was down from 43.85% on April 20 — the highest point for the sector since the start of the coronavirus pandemic. Yet the probability of default for department stores remains higher than the probability for the consumer discretionary sector writ large.

The short-term outlook for the sector does appear brighter, with store reopenings, rising comparable sales rates creeping out of negative territory and market share up for grabs as some chains close stores or declare bankruptcy or both. May retail sales, which beat expectations June 16 and marked a departure from the previous two months, were also cause for optimism. Seasonally and calendar-adjusted U.S. retail and food services sales in May jumped a bigger-than-anticipated 17.7% month over month to $485.55 billion, following a 14.7% plunge in April and an 8.2% drop in March.

Still, department stores specifically were facing declining sales and profits before the pandemic thanks to discount retailers and the rise of e-commerce. Analysts predict many retailers will continue to struggle now as foot traffic at stores and malls remains below year-ago levels and as customers rely even more heavily on online purchases.

Macy's Inc.'s one-year probability of default declined to 17.44% on June 16 from 44.31% on April 20, according to S&P Global Market Intelligence's analysis. Nordstrom Inc.'s rate fell to 15.04% from 26.07%, Kohl's Corp. sat at 12.29% instead of 43.40% and regional chain Dillard's Inc.'s 16.87% is much lower than its April 20 score of 56.52%.

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In the wake of bankruptcy filings from Neiman Marcus Group Inc. and J. C. Penney Co. Inc., Macy's Chairman and CEO Jeff Gennette told analysts in May that about $10 billion in sales were up for grabs as the bankrupt retailers reduce the number of stores that they operate.

Executives at Macy's said in May and June that comparable sales have been down about 50% at stores that have reopened — better than internal projections for a decline between 80% and 85%. Macy's had reopened about 450 stores as of June 1.

But Macy's comp sales decline is still bigger than what is happening at some other apparel retailers, said Lee Peterson, executive vice president at WD Partners. In May, sales at The Gap Inc.'s reopened North American stores were generating about 70% of the sales they did in the same period one year ago, while some chains, such as The TJX Companies Inc., reported that comparable sales were positive.

As shopping centers reopen, customers "are going to brands that are significant to them ... but not as much Macy's," Peterson said. Store closures during the pandemic exposed more customers to shopping for clothes, housewares and other department-store goods online. That represents a potential blow to their business since many businesses have been late to invest in digital options such as buy online, pickup in store, he added.

"They're going to be on that slide for a long time," he said.

Overall, the odds of default also declined for smaller apparel retailers, including Chico's FAS Inc., Guess? Inc. and J.Jill Inc., as stores reopened in May and early June. Collectively, apparel retailers saw their one-year probability of default descend to 13.60%, down from 32.59% on April 1, the peak for that subsector.

UBS analysts led by Jay Sole said June 14 that sales over that period have generally been above retailers' expectations. However, they cautioned that pent-up demand from earlier in the spring, stimulus spending and traditionally low expectations for apparel and home goods sales in June could be distorting results. "The best read ... will be back-to-school selling starting at the end of July," they wrote.

While the store reopenings are giving stores like Macy's and Kohl's a chance to advance those digital operations, the pandemic will likely ding mall foot traffic in the near term, and an abundance of seasonal apparel will keep selling prices low, Jefferies' analysts wrote in May. "We believe the [department] store space is likely to remain tough," Randal Konik, Janine Stichter and Jonathan Matuszewski wrote.

Shopping center-based tenants have asked their creditors for relief or delays on paying back loans, according to disclosures from banks including Amerant Bancorp Inc.