Off-price retailers continue to take market share from department stores and Moody’s Investors Services analysts believe the trend is only going to continue.
“We expect off-price sector revenue to grow by 6 to 8 percent for the next five years, outperforming the broader apparel sector by a collective 4 percent,” said Moody’s analyst Christina Boni.
The off-price category is dominated by The TJX Cos. Inc., Ross Stores Inc., Burlington Coat Factory Warehouse Corp. and Nordstrom Rack, owned by Nordstrom Inc. Moody’s expects the group’s market share in sales to grow to roughly 10 percent of apparel sales by 2018 from the 8.8 percent.
“The robustness of off-price store traffic patterns suggests that consumers see value in the presentation and product selection within these stores,” Boni said. The traffic numbers don’t lie. TJX said its sales increased 7 percent in the first quarter of 2016 and attributed that to higher traffic. Macy’s on the other hand said its sales declined 7 percent.
As evidence of this growth, off-price retailers are expanding and adding stores, while traditional department stores are closing locations and shrinking their footprint even as they, too, expand their off-price formats. Altogether, Moody’s said the group will add domestic square footage in excess of 4 percent in 2016.
TJX is the biggest of the four based on sales and square footage and it plans to grow from last year’s store count of 2,163 to 2,223. Ross plans to open another 90 stores this year, bringing the total to 1,530. Burlington is set to open 25 net new stores during fiscal 2016. Nordstrom opened six Rack stores in the first quarter with plans for 15 more Rack stores this fall. By contrast, Macy’s has closed 36 full-line stores this year.
Macy’s is clearly trying to fight for market share as it increases distinct product for its physical stores. It has also created Macy’s Backstage to enter the off-price sector and invested millions into e-commerce to offset the loss of revenues. E-commerce remains a weak spot for off-price retailers.
Traffic is strong at off-price because shoppers are willing to make a trip to a physical store as they pursue bargains. The thrill of the hunt drives shoppers to stores where inventory changes often and the supply is limited keeping the traffic numbers high. This model doesn’t translate to online shopping as well.
A handful of flash sale sites like Zulily, Gilt and Nordstrom’s HauteLook have managed to develop a strong online presence, but Moody’s believes that if TJX customer wants to go online for bargain shopping, they’ll just stick with TJX.
Moody’s believes that the off-price group will have a minimal online presence as they focus on store expansion. “We expect that the department stores will remain more focused on enhancing their omnichannel capabilities as they fight to offset reduced sales at their physical locations,” Boni said.