Just a few months ago, the off-price sector looked like it might be less resilient than in the past. In the second quarter, TJX Cos., Ross and Burlington — which dominate the off-price space and often benefit from both economic upturns and downturns — all demonstrated to varying extents that they weren’t immune to inventory struggles, inflation’s drag on discretionary spending, or fresh competition from highly promotional specialty retailers and department stores.
In the third quarter, though, those retailers bounced back. Their promise of good deals on apparel and home goods fits the moment, especially as the holidays grow closer, and they seem to be better controlling their inventories. In October, their combined sales were 20% above October 2019, according to research from Bloomberg Second Measure. Though not addressed in that report, Nordstrom’s off-price Rack business isn’t keeping up with its three main competitors, according to other analysts.
These major players are not one unit, however. Current macroeconomic pressures, and each of their strengths and weaknesses, translated to noticeable differences among them. TJX far outpaced its rivals, earning 68% of their combined sales in October, compared to Ross’ 22% and Burlington’s 10%, per the Bloomberg Second Measure report.
Here’s how each progressed in the third quarter.
TJX Cos.
TJX Cos. total net sales fell 2.9% to $12.2 billion, with particular weakness internationally. Net income rose 3.9% to $1.06 billion. Total U.S. comparable store sales, which include the HomeGoods and Marmaxx businesses, fell 2%. But at Marmaxx, which encompasses the company’s T.J. Maxx, Marshalls and Sierra retailers, comps jumped 3%, per a company press release.
Those latter banners are getting attention and dollars from higher-income consumers, thanks to their name-brand assortments, according to CEO Ernie Herrman, speaking on a conference call with analysts.
“As I've been saying all year long, the marketplace is absolutely loaded with quality branded merchandise across good, better and best brands,” he said. “Importantly, this has set us up very well to offer an excellent assortment of branded gifts this holiday season that we believe will excite and inspire our shoppers.”
But the retailer is set up nicely for the long term as well, he said. “I really want to emphasize that we are extremely confident that we can manage through any type of promotional environment that we may see from other retailers in the fourth quarter and beyond.”
Several analysts see it that way, too. TJX could see its access to stellar inventory diminish as retailers work through an unusual inventory buildup, and that in turn could ding its gross margin, UBS analysts led by Jay Sole said in emailed comments. A greater shift toward apparel e-commerce could also hurt its sales, those analysts warned. But the company is poised to continue to take market share from department stores, they also said.
The off-price segment is besting full-price retail right now, and TJX is leading the way, according to Wells Fargo analysts led by Ike Boruchow.
“Alongside the comp beat, TJX's confidence of the go-forward business is in sharp contrast to other retailers reporting this week, and the company's confidence leaves us comfortable with our bullish stance on the off-price industry through the end of [fiscal year 2022] and into [fiscal year 2023],” Boruchow said.
Ross
Sales at Ross (which includes the namesake banner and DD’s Discount stores) in the third quarter reached $4.6 billion, about flat compared to last year, as comps fell 3%. Net income fell 11.2% to $342 million, according to a company press release. Quarter-end inventories were up 12% year over year, executives said during a conference call with analysts.
Inflation is squeezing the low- to moderate-income households that frequent Ross stores, and that’s especially true for DD’s less wealthy customer base, they also said.
That’s led more Ross shoppers to retreat over the past month, in contrast to TJX and its wealthier customer, and the macroeconomics behind that could make things even worse for Ross, according to GlobalData research. But another reason more higher-end shoppers flock to TJX is that “Ross has a more everyday, casual offer which is solid but far less compelling,” GlobalData Managing Director Neil Saunders said in emailed comments.
Still, like TJX, Ross is benefiting from a robust pipeline of goods and consumers’ general appreciation of off-price shopping, according to analysts.
“While the model is certainly being tested by the significant inflation that is squeezing the company’s core customer, we are confident that the business will continue to benefit from an abundant supply of quality merchandise across both the apparel and home categories,” William Blair analysts said.
Burlington
Burlington is working to address the unique needs of its customers, though CEO Michael O'Sullivan said the company has had to pick up the pace. In the third quarter, total sales fell 11.5% year over year to $2 billion, as store comps tumbled 17%. Tightening its grip on costs helped push net income up 23.2% to $16.8 million, however, GlobalData’s Saunders said.
The retailer’s comp decline came after a 16% increase last year; compared to 2019, comps fell 3%, a result that was within its expected range, but still disappointing, O'Sullivan said during a conference call with analysts.
He noted the macroeconomic headwinds that are in part driving that disappointment, but said the company has been falling behind its peers.
“As an off-price retailer, we should be able to drive stronger performance than this,” he said. “If you look at the results reported this past week, clearly, we are an outlier within off-price.”
Burlington is addressing this by getting more aggressive about clearing out inventory, which has necessitated some deeper markdowns, and using its liquidity to bring in more brand-name goods. And the company has expanded its availability of items at lower price points to meet the needs of its cash-strapped customers, he also said.
“Since early September, we have done a lot to sharpen our values, but as I acknowledged back in August, we should have done all of this sooner,” he said. “In 2022, the consumers' frame of reference for value shifted significantly versus last year. We should have responded more aggressively and more rapidly.”
Checks by GlobalData researchers found improvements at many stores by the end of the period. “The assortments in a lot of Burlington stores lacked oomph and excitement,” GlobalData’s Saunders said in emailed comments. “This appears to have been caused by some supply chain issues and difficulties in acquiring the right inventory mix. Fortunately, the problems seem to have been remedied later in the quarter and business picked up accordingly, but this wasn’t nearly enough to offset earlier weaker trading.”
Starting in mid-October and into November, sales have picked up as a result of Burlington’s improvements, allowing for “some optimism going into Q4,” according to O'Sullivan.
