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Off-price retailers best Q3 expectations but brace for the holidays

Off-price retailers best Q3 expectations but brace for the holidays The segment is mostly overcoming supply challenges while benefiting from full-price sales at other retailers, as consumers grapple with inflation. Retail

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"Burlington Coat Factory" by Mike Mozart is licensed under CC BY 2.0

Macro headwinds are often actually tailwinds for off-price retailers — consumers flock to them for deals during economic downturns, for example. These days, inflation and lean supply at other retailers, which are leading to fewer markdowns, are sending shoppers to off-pricers' below-retail price tags. Still, these retailers are not immune to the pressures plaguing the industry, including high freight costs and a choked supply chain. "While demand appears to be solid, the bigger concern for off-price retailers comes in terms of supply," GlobalData Managing Director Neil Saunders said in emailed comments last week. "Here a lack of apparel inventory at other retailers, reduced manufacturing volumes by brands, and a pull back from off-price by some fashion labels are all combining to potentially create a perfect storm of crimping available product." Nevertheless, TJX Companies, Ross and Burlington all beat analyst estimates in the third quarter, positioning them well for the holidays in a climate where consumers are willing to spend, buying clothes again and continuing to accumulate goods for their homes.

TJX Cos. All the major off-price retailers employ nimble buying teams, which has helped them weather the current snafus in the supply chain, but TJX stands out. The company runs 4,684 stores in nine countries: the U.S., Canada, the U.K., Ireland, Germany, Poland, Austria, the Netherlands and Australia. Its banners include T.J. Maxx, Marshalls, HomeGoods, Sierra and Homesense. "[W]e believe that TJX's superior buying expertise and the very strong industry connections of its buyers will help it mitigate some of these challenges compared to rivals," Saunders said. "We also think that supply chain disruptions – which mean clothing product is often arriving after key selling seasons at some retailers – creates opportunities for opportunistic purchasing which TJX can, and will, take advantage of." The company has been "surgically" instituting price hikes while being mindful about beating full-price stores, TJX CEO Ernie Herrman told analysts last week, according to a transcript from Seeking Alpha. Net sales for the third quarter rose 24% year over year and 20% versus 2019 to $12.5 billion, per a company press release. Comps rose 14% versus the 4% increase last year. Net income rose 18% year over year and 23.5% from 2019 to $1 billion. The retailer's focus on home has positioned it well during the pandemic, as consumers continue to lavish spending on their homes. Its agility means it's well prepared for the fourth quarter, Herrman said. "Our store shelves are full with great gifting selections today, and we expect them to continue to be that way throughout the holiday shopping season," he said. "We expect to have something for everyone on consumer shopping list and to offer an exciting and inspiring treasure hunt shopping experience."

Ross Stores Despite the rise of e-commerce, fueled all the more by the pandemic in the past 18 months, Ross has hewed closely to its pre-pandemic plans to expand its brick-and-mortar footprint. CEO Barbara Rentler last week reiterated that the company has polished off its expansion plans for the year, having opened 18 new Ross and 10 DD's Discounts stores in the third quarter, a total of 65 locations this year, with one closure by the end of the year. "[W]e expect to return to our normal annual opening program of approximately 100 stores in 2022," she said, according to a transcript from The Motley Fool. Ross has joined retailers like Walmart and Target in chartering its own ocean vessel to ensure it has enough inventory, which took a bite out of its results, Chief Operating Officer Mich