Off-pricers face slow recovery after a rough year

Despite pressures that will remain this year, these retailers hold key advantages compared to department stores and other apparel sellers.

Flickr; Mike Kalasnik

AUTHOR Daphne Howland@daphnehowland PUBLISHED March 5, 2021 retail dive

Off-price retailers, which tend to be insulated from macro disruptions and fare well in economies weak and strong, have not escaped the trouble that the pandemic has brought to retail. The retailers sell mostly clothes, a category all but ignored by consumers stuck at home for work and play. Month after month last year, apparel sales plunged, leaving even off-pricers to grapple with rising inventory. Their lack of e-commerce, usually a selling point for consumers eager for a store-based treasure hunt, was a liability in a period when stores were forced to close for varying amounts of time, with many consumers continuing to shy away from them when they're open. And in recent weeks all off-price retailers noted higher freight, wage, supply chain and pandemic-related costs. Still, they also have key advantages compared to their full-price rivals. One is that department stores and specialty stores are shrinking their store fleets and, in some cases, their operations, expanding the potential share that off-price retailers have already been siphoning for years. Their inventory pipeline is poised to benefit from brands that see it as a key channel, according to MKM Managing Director Roxanne Meyer. "Off-price (and in particular TJX) will become the premiere one-stop shop for brands as traditional players consolidate as well as focus on growing private label," she said in emailed comments. "We continue to believe in part the 'secret sauce' to brand acquisition is the inventory imbalance (and overage) in direct-to-consumer models, which is only going to expand." Another is that consumers remain attracted to their value proposition. "[W]hile consumers are faring reasonably, they remain very sensitive to both value and price which will provide a helpful fillip to the whole off-price segment over the next couple of years," GlobalData Managing Director Neil Saunders said in emailed comments. Here's how the major chains did recently.

TJX Companies In the fourth quarter, TJX was hampered by temporary store closures due to the pandemic, especially abroad. At certain points in the period, all stores in Europe and most stores in Canada were shut, CEO Ernie Herrman told analysts last month, according to a Seeking Alpha transcript. Sales in the quarter fell 10.3% to $10.9 billion, and for the full year fell 23% to $32.1 billion, according to a company press release. Net income in the quarter fell 67%, and for the year, plunged 97.2%. The retailer has the benefit of having the strongest home offer in the space, and its home sales grew to nearly 40% of its sales last year, from 33% in 2019, Herrman said during the call. That's evident in the company's same-store sales measures (reported for "open-only" stores). For the quarter, U.S. comps at its T.J. Maxx and Marshalls stores fell 7% but rose 12% at U.S. HomeGoods stores — the one area of the business where TJX plans a robust e-commerce site. In all, company comps fell 3% during the quarter and 4% for the year. The company has some work to do to right its assortment, given its emphasis on work and formal wear, according to GlobalData's Saunders. "Despite being battered by the pandemic, the company is in a strong position and its businesses are aligned with various consumer trends," he said. "The experimentation with digital is interesting and while we do not see this becoming a major part of the business, it allows TJX to access a high growth channel with the option of accelerating its digital presence if it decides it is in its interest to do so." Ross The company has had an advantage over rivals in and outside the apparel sector during the pandemic because it offers home merchandise and more casual clothing. Still, like TJX, Ross' results suffered from store closures or weak traffic in certain geographies, though at Ross, they were all in the U.S., including California, Florida and Texas (which together account for about 50% of its stores, as noted by MKM Partners analysts). "Similar to TJX, the extent of a snap-back will be dependent on a sales rebound, which for [Ross] will be tied to recovery in [California] and other key tourist/border markets," Meyer said in emailed comments. In the fourth quarter, sales fell 3.7% to $4.2 billion, as store comps fell 6%, according to a company press release. For the year, sales fell 22% to $12.5 billion. Net earnings in the quarter fell 47.8% to $238 million, and for the year fell 95% to $85.4 million.

Ross has previously been on a tear when it comes to its physical expansion. The retailer still plans to add about 60 new locations, including 40 Ross Dress for Less stores and 20 dd's DISCOUNTS stores, per the release. They'll likely find a favorable real estate market as they do, Saunders said. "Over the course of 2021, Ross will recover and will recover well," he said. "The bottom line may take some time to catch up with sales growth, if only because higher operating and supply chain costs will take some time to work their way out. But overall, the year ahead should be a good one that sees Ross get back on track after a period of pandemic disruption."

Burlington Burlington is another off-price retailer set on expansion after a challenging pandemic year in which the retailer actually saw sales rise in the fourth quarter. In fact, the company said Wednesday that it's aiming for a fleet of 2,000 stores, double the size of its previous target. In the fourth quarter, total sales increased 3.5% to $2.3 billion, with flat comps (a 10% comp decline in November gave way to flat comps in December and a 17% rise in January, "as weather normalized and federal stimulus payments were disbursed," the company said in a press release). Net income in the quarter fell 24.4% to $156 million. For the year, total sales fell 21% to $5.8 billion, and the company swung to a loss of $216 million from $465 million in net income the previous year. Burlington ended the year with the strongest results of the bunch and may face the sunniest prospects as the pandemic wanes. Its long-term drivers remain its lean inventory management, which protects margins; supply chain investments; the contributions of new and relocated stores; and category growth including women's, home and kids, according to MKM's Meyer. "[A] doubling of the long-term store target to 2,000 stores re-emphasizes that [Burlington] continues to be the highest growth name in off-price and is not surprising given its relative sizes vs. peers as well as the opportunities that will present themselves in what will be a changing competitive landscape," she said in a client note.

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