Brandishing their potent “brands for less” business models, the leading off-price retailers in the U.S. are continuing to steal market share from the full-price ones — and, so far, without the benefit of significant e-commerce businesses.
A study by Moody’s Investors Service projects that off-pricers’ share of apparel and footwear sales in the U.S. will rise to 9.4 percent by 2017 from about 8.1 percent last year ($27.8 billion of $343.3 billion) and 5.5 percent in 2008 ($17.7 billion of $322.3 billion). The numbers include data for the three largest off-price retailers — The TJX Cos. Inc., Ross Stores Inc. and Burlington Stores Inc. — and the Rack division of Nordstrom Inc.
Moody’s expects off-price retail, including apparel and home goods, to grow by between 6 percent and 8 percent a year in the next five years. Driven by store openings and “modest comparable-store sales growth,” the category will outperform the broader apparel sector by about 4 percentage points. In a recent Securities and Exchange Commission filing, Burlington cited NPD Group data stating that the off-price channel enjoyed a compound annual growth rate of 5 percent during the four years leading up to 2014, about 10 times greater than department stores and national chains.
Scott Tuhy, vice president and senior credit officer at Moody’s and author of the study, believes the recent strength of off-price chains, even in the face of the slow economic recovery, proves the channel has become an enduring part of the retail landscape, rather than an anomaly that grew as consumers suffered through the economic downturn and its immediate aftermath.
Except in 2005, the growth rate of off-price apparel and footwear has exceeded that of the two categories overall, according to statistics from the Bureau of Economic Analysis. In 2009, when apparel and footwear sales fell 4.9 percent, they grew at a 7 percent clip in the off-price channel. Last year, overall growth in the categories was 1.3 percent, but off-price enjoyed a 6 percent improvement.
“This year got off to a tough start, and there were a lot of promotions,” Tuhy told WWD. “But when department stores get really promotional, that means there’s too much merchandise, and the off-pricers can buy and sell even more cheaply. That’s true in real estate as well as merchandising: If the department store and mall stores are suffering, there are better opportunities for the off-pricers.”
Over the past decade, 2005 is the only year in which, overall, off-price growth in apparel lagged that of apparel.
The Moody’s team expects consolidation in the retail market to persist, with classifications, such as office supply, continuing to reduce their store counts and a growing number of retailers looking to vacate properties once their leases have expired.
“If you look at the office channel, the stores are just about the same size as a TJ Maxx or a Ross,” Tuhy said. “It’s pretty obvious that real estate is not going to be a constraint on growth.”
Dramatizing this point, the report noted that TJX, Ross and Burlington this year plan to open about 230 stores, covering about 7 million square feet. That’s more than the entire U.S. footprint of L Brands Inc.’s Victoria’s Secret division.
The combined store count of TJX’s Marmaxx unit (TJ Maxx and Marshalls), Ross, Burlington and Nordstrom Rack has more than doubled in the past 14 years. “This means a meaningfully larger portion of the population has at least one, if not more, of these stores in a convenient location,” the report said.
Tuhy added that, with the off-pricers themselves less resistant to the idea of sharing nearby real estate with their competitors, the likelihood that a consumer will have two or more of the nameplates nearby has ticked upward, too.
The report notes the growth of the Saks Off 5th concept, but, because Hudson’s Bay Co. doesn’t separately disclose its results, they aren’t included in Moody’s tabulations. Before its November acquisition by Hudson’s Bay, Saks Inc. didn’t disclose those figures, either.
But a look at the past two years of Nordstrom’s results, which have included specific breakouts for Rack’s stores but not its Web site since 2008, makes it clear where the growth has been. Last year, revenues at Nordstrom’s full-line stores declined 3.3 percent, to $7.71 billion, on a net basis and were off 2.1 percent on a same-store basis. At the same time, Rack sales rose 12 percent, to $2.74 billion, while comps expanded 2.7 percent. The number of full-line stores held steady at 117, while Rack’s unit count grew by 20, to 143. In this year’s second quarter, Rack’s comps were up 4 percent, while the full-line stores were down 1.2 percent.
While the off-price footprint is growing, the channel’s online progress has lagged. “At this point, no off-price company generates a meaningful portion of their sales online,” the report notes, adding that the share of apparel bought online outside the off-price channel has enjoyed sustained growth that is expected to continue.
Tuhy cites a number of reasons for the relatively slow development of off-price e-commerce, including the limited availability of goods that can be bought opportunistically, as supply allows. “They’re buying small quantities from lots of brands,” he said of the off-pricers, “and those brands aren’t inclined to publicize their presence.” The report puts online sales at about 1 percent of TJX’s revenues and postulates that “vendor relations, not technology, are the barrier to entry” for off-price e-commerce.
Last month, Tuhy raised TJX’s rating outlook to “positive” from “stable” and affirmed the “A3” rating on its $1.6 billion in senior unsecured debt. Ross’s proposed offering of $250 million in senior unsecured notes also received an “A3” rating. Debt in Moody’s “A” group is investment grade and considered subject to low credit risk.
The equity markets have also looked on the off-pricers favorably in recent months. Since June 30, TJX shares have risen 14.2 percent to $60.49, Ross’ 15.5 percent to $76.17 and Burlington’s 18.8 percent to $37.85. During the same time frame, the S&P 500 has fallen 1.7 percent and its S&P 500 Retailing Industry Group subset risen 3.6 percent.