NEW YORK - Department stores will likely face a smaller sales decline in the second half of 2009 than in the first half as lower inventories make discounting less necessary to clear out merchandise, Moody's Investors Service said on Friday.

However, prices will still drop as consumers delay holiday purchases while waiting for bargains, the rating agency said.

For 10 department stores -- including Macy's Inc, J.C. Penney Co Inc, Saks Inc and Kohl's Corp -- Moody's forecast a sales drop of nearly 4 percent in the second half of 2009, which includes the key holiday season.

That compares with a nearly 9 percent decline in the first half of the year, Moody's said in a research note.

Last year's holiday sales season was one of the worst in four decades, with shoppers searching for deep discounts on merchandise as they tried to save money.

This time, consumers will likely delay holiday purchases as they still hunt for discounts, forcing department stores to cut prices like last year to clear out inventory, said Margaret Taylor, lead analyst for the retail team at Moody's.

Given the likelihood of discounts, which pressures margins, and consumers' penchant for discount retailers, we have become more cautious on department store third-and fourth-quarter earnings expectations, Taylor said in the note.

(Reporting by Aarthi Sivaraman in Seattle; Editing by Richard Chang)

Retail