New competition is coming and early signs of maturity are showing, but it hasn’t slowed the pace of market share growth among the off-price “incumbents” — The TJX Cos. Inc., Ross Stores Inc. and Burlington Stores Inc.
Both TJX and Ross Stores exceeded second-quarter profit estimates last week, and if that trend holds true, Burlington is likely to follow suit when it reports its results for the three months when it shares its numbers with Wall Street on Thursday.
“TJX is running on all eight cylinders and Ross and Burlington nearly as good,” said Craig Johnson, president of Customer Growth Partners. “The sector is at an advantage in that incomes and spending power are weaker.”
Matching its forecast numbers, CGP has found back-to-school results running up about 2.7 percent overall and up just about 1.5 percent in apparel.
“But all the growth in apparel is coming from off-price and performance wear,” Johnson noted. “You subtract them, and the number is down, and I think the year-end numbers, particularly if the volatility in the equity markets goes on and the top spenders were to pull back, will follow along those same lines.”
The company believes off-price outlets account for about 16 percent of apparel sales in the U.S. overall and continue to gain about 0.5 percent share points a year.
“Some of the specialty and department stores are only getting to flat comps by promoting,” he said.
Johnson has concerns about the sector, although they don’t involve the aggressive push into off-price by companies like Nordstrom, through Rack, or the entry of Macy’s into the sector through Backstage.
“The strongest department and areas within the off-price world right now are coming from the other sector that’s generating gains — home and home decor,” he noted.
This was clearly demonstrated in the second-quarter comparable-store results of TJX, where overall comps rose 6 percent, those for Marmaxx, incorporating T.J. Maxx and Marshalls in the U.S., rose 4 percent and the hot HomeGoods brand was up 9 percent. “The strongest parts are the nonapparel parts,” Johnson said, noting he was hearing similar reports about Ross and Burlington, which incorporate home into overall sales and comp results and do not operate separate home nameplates.
Ross generated comps of 4 percent in the most recent quarter, above the 2 to 3 percent increase projected in May.
With attention focused on the equity erosion emanating from China, the ability of the “incumbents” to perform well during a more widespread downturn is very much on people’s minds.
“I think these companies would do well in a downturn,” said Scott Tuhy, vice president and senior credit officer at Moody’s Investors Service Inc., who has tracked the sector for years.
Analyzing data from the Bureau of Economic Analysis, Moody’s found that off-pricers had steadily maintained a higher growth rate in apparel and footwear than the overall market. In 2009, when apparel and footwear sales slumped 4.9 percent, off-price growth in those categories hit 7 percent. That gap closed a bit in 2010, as retailing in general recovered from the economic collapse, but widened again in 2012, when it was up 11 percent versus just a 1.2 percent gain in overall apparel and footwear sales.
Tuhy doesn’t doubt that off-pricers could face a maturing business in apparel in the years to come, but he believes the stores have a handle on the possibility and, as they did with home goods, will continue to add categories that will allow them to expand their assortments as well as their consumer following.
“These stores generally have the Millennials and they will up their marketing and their loyalty programs to bring in even younger customers and strengthen their ties with existing ones,” Tuhy said.
Many see the stores with a distinct advantage in their pursuit of new customers in the manner in which the economy has evolved.
Antony Karabus, chief executive officer of Hilco Global’s HRC Advisory unit, believes consumers — with the exception of much but not all of the affluent — have been engaged in the “flight to value” since before the 2008 downturn. That event added to the velocity of the changeover, which continues in somewhat different form now.
“Despite the drop in unemployment we’ve seen, people are feeling stretched,” he said. “The new jobs are lower-end jobs and a lot of the consumers who are feeling pressured are running to the off-price stores looking for whatever values can be found, and know there is fashion to be had among the racks and shelves.”
Much of the financial insecurity that has driven them to seek value wherever it’s available is a result of student loan debt. The Federal Reserve put student loan payments in 2013 at $20.93 billion, 10.6 percent higher than in 2010 and 31.5 percent above the 2007 level.
“And a lot of these kids and young adults aren’t looking at these amounts with any great expectation of getting high-paying jobs later,” Karabus said. “People are always going to spend their money on great brands, like you’re seeing with Under Armour, and stores with these brands will also do well, assuming they take the right steps to protect their brands.”
Cowen & Co. analyst Oliver Chen is no more surprised by the desire of so many retailers to test the waters of off-price retailing than he was about the market’s noticeable embrace of the sector following the economic challenges of 2008.
“Everyone had to do a reset after 2008,” he said. “The vendors needed new places to place goods and the department stores pretty much had to go into fire-sale mode. TJX does a great job of casting their net widely. Nordstrom, as with all things, is highly customer-centric.
“Ross, at both Ross and dd’s [Discount], functions at slightly lower prices,” Chen said, “and, because their stores are predominantly in the west, they’re more suited to physical shopping and less so to the online direction TJX has started to take. But Ross has got a great supply chain and a clear position in the market.”
Besides the constant treasure-hunt nature of off-price shopping, Chen believes that trends have moved in directions that make the off-pricers more attractive to young customers: “Kids today don’t care about logos the way they used to. Whether it’s an older customer or a younger one, it’s about personalization and finding a few key items that will work with the wardrobe.”
Michael Brown, partner in the retail practice of global consulting firm A.T. Kearney, pointed out that as disposable income became tighter, consumers’ loyalty to individual retailers faded. “Consumers for the past 15 or so years have been channel agnostic,” he said. “They want the best value for their purpose. They’ll sacrifice a little bit of currency for something less expensive. Shoppers in general are turned off by the department and specialty stores’ up-and-down pricing anyway.
“The sector has been growing for a long time at this point and, even if every trip to every store isn’t going to pay off, there’s a consistency of value that you probably wouldn’t find in a department or specialty store,” he concluded.