Byline: Mark Tosh

NEW YORK — With a move toward consolidation and some tightening of apparel inventories, the off-price retail sector could be ready for a comeback in 1996, according to some analysts.
Off-pricers such as TJX Cos., Filene’s Basement, Ross Stores and Burlington Coat Factory have been mired in a slump since mid-1993. Too many stores, lackluster demand for apparel and the highly promotional stance taken by department stores have combined to take their toll on the sector.
Two chains — Clothestime Inc. of Anaheim, Calif., and Weiner’s Stores Inc. of Houston — were forced to file for Chapter 11 bankruptcy protection this year, and many of the other off-pricers reported depressed same-store sales and lower earnings.
Some retail analysts, however, believe off-pricers are in position to make a turnaround next year as a result of better inventory controls and consolidation efforts aimed at reducing some of the sector’s over-capacity.
Last week, Loehmann’s Holdings, a 69-unit privately held off-price chain, reported a 40 percent increase in third-quarter earnings, attributing it to improved gross margins and lower markdowns. Loehmann’s closed 11 underperforming units this year.
In October, TJX, which operates the 570-unit T.J. Maxx chain, acquired Marshalls, its chief competitor in the Northeast, from Melville Corp. for $550 million. The deal is seen as a possible first step in an industrywide consolidation effort.
Marshalls, with 495 stores, is the nation’s second-largest off-price chain, but reportedly was struggling to break even in 1995.
“The faster the consolidation in that industry, the better it will be,” said Todd Slater, an analyst at UBS Securities. “And I think we’re hitting an acceleration in the consolidation due to TJX’s purchase of Marshalls.”
When TJX folds Marshalls into its operations, Slater said, he expects as many as 200 stores will be closed. This should help reduce over-capacity among off-price outlets and be “a big positive for the entire industry,” he said.
“I think people are anticipating the fallout of the consolidation to benefit the remaining strong players,” Slater added.
Barry Bryant, an analyst at Rodman & Renshaw Inc., said in a recent report on off-price retailing that he believes the sector is “in the latter stage of an industrywide downturn,” which he attributed to an oversupply of apparel and widespread discounting by department stores.
“Essentially, manufacturers have put department stores into the off-price business by guaranteeing their margins with markdown money to drive excess inventory through the stores,” he said in the report. “This has eroded the pricing advantage of off-price chains beyond what would have occurred from increasing competitiveness alone.”
However, Bryant said the problems for off-pricers are cyclical “rather than secular changes that are permanent,” and that consolidation could transform the off-price industry in the same way it has helped revive the department store sector from its mid-Eighties doldrums.
Other trends that should help the off-price sector, Bryant said, are tighter inventory controls among all retailers and some pickup in the women’s apparel business next year.
“The off-pricers as a sector have systematically reduced their inventories in the last year,” Bryant said in a telephone interview last week. “It’s the only group of companies, or sector, that has lowered inventory levels. Because of that, bad Christmas sales will not be a disaster for them. They won’t have to take the level of markdowns other retailers will take.”
Among off-pricers, Bryant rates TJX and Stein Mart, a 100-unit chain based in Jacksonville, Fla., as “buys.” His ratings of Ross Stores, Filene’s Basement and Burlington Coat Factory are neutral.
T.J. Maxx, Bryant said, is the “best-run company in the business” with 18 consecutive years of profit increases until 1994. The acquisition of Marshalls should increase TJX’s buying power and help leverage expenses. The deal also “knocks out TJX’s only significant competitor in the Northeast,” Bryant said.
Bryant said he expects Marshalls to add more than 20 to 25 percent to TJX’s earnings next year. He estimated TJX will earn 90 cents this year and $1.35 in 1996.
Stein Mart, according to Bryant, has the potential to increase sales between 20 and 25 percent a year over the next three years. He estimates earnings per share of 54 cents in the fourth quarter, a 13 percent increase from last year.
“Stein Mart is the only major off-price retailer that has come up with a successful variation on the theme by focusing on better merchandise and locating stores only in affluent parts of town,” Bryant said in the report. “It has never strayed significantly into private label or inferior brands.”
Additionally, he said, Stein Mart has managed to keep its buying staff intact, “a key to success in this business.”
Ross Stores is “a well-run business that adheres to the same principles as TJX,” but recent increases in the company’s stock leave little up-side potential, Bryant also noted in the report. Burlington Coat Factory, which is involved in many unrelated businesses, and Filene’s Basement, which has a relatively high cost structure and less-experienced buyers, are stocks that should be avoided, he said.

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