OFF-PRICE: A CHANGE IN STORE
Byline: Mark Tosh
NEW YORK — After an industrywide downturn in profits last year, off-price retailers are shifting inventories, in many cases deemphasizing apparel, and preparing to prune unprofitable locations.
It could be a year of consolidation for off-price operators, who continue to feel pressure from department stores promoting heavily and discounters and national chains beefing up apparel offerings.
That’s the view of many off-price executives and industry analysts, who see little hope for a turnaround in the off-price sector soon.
Last year’s fourth quarter flagged the weakness in the off-price sector. Seven of the nation’s eight leading publicly traded off-pricers showed an earnings decline or a loss for the November-January period and all eight reported flat or negative same-store sales. (See chart.) Only The Dress Barn Inc. reported improved earnings, a 13.8 percent increase that even the company called “disappointing.” Dress Barn added 81 stores last year, increasing its store base 12 percent to 738 units. Its same-store sales, however, fell 2 percent in the period.
“The industry in a lot of ways has lost some of its competitive advantage, particularly with respect to price,” said Carl Steidtmann, director of research at Management Horizons.
Off-pricers have moved away from their original “second merchandise kind of concept” to some extent by ordering directly from suppliers, as traditional stores do, and building stores in less remote locations. That has put pressure on their cost structure, he added.
Steidtmann said he believes off-pricers have clearly overexpanded in the last few years and are “rapidly approaching the maturity stage.” “There is way too much capacity relative to supply,” he said. “That always leads to some kind of restructuring or some kind of consolidation, and I would expect that to be the case with off-pricers as well.”
The eight leading off-pricers added more than 250 locations in 1994, according to company reports.
Arnold Aronson of Levy, Kerson, Aronson & Associates, said off-pricers are feeling pressure from department stores that have lowered prices and “rearranged their mix” to capture the moderate customer.
Aronson said he expects off-pricers, as they try to get back on track, to look more closely at their expense structure and the productivity of each store.
A few off-pricers already have begun to restructure and consolidate.
Clothestime Inc., which opened 63 units last year and operates 565 off-price stores, said it will open eight stores in 1995 as it focuses on boosting same-store sales. Clothestime, based in Anaheim, Calif., reported an 18 percent same-store sales decline in the fourth quarter.
Marshalls, a division of Melville Corp., has begun “a major strategic reassessment” of its operating plans and expects to “take significant action” to get its earnings back on a positive growth track, the parent company said in the annual report issued to shareholders this week. Operating profit for the company’s apparel group, which includes Marshalls and Wilsons leather goods, fell 11.5 percent to $161.1 million last year.
Analysts see a slowdown in the number of Marshalls units opened this year and a broadening of the merchandise mix. Marshalls showed a 6.4 percent increase in total sales last year to $2.8 billion while adding 8 percent to its store base and ending the year with 484 stores.
50-Off Stores of San Antonio, Tex., plans to close 12 stores this year, bringing to 28 the number of units shut in the last three years. As reported, 50-Off also plans to lay off about 25 percent of its work force and trim wages and benefits by 19 percent.
Charles M. Siegel, chairman, president and ceo, said 50-Off was hit by the slowdown in women’s apparel sales last year and the devaluation of the Mexican peso, which hurt sales at its 10 stores along the Mexican border.
After the current round of closings, 50-Off will operate 102 units, which Siegel said will primarily be in urban markets.
“We have found that we do better in more urban markets than in suburban or rural markets,” he said. “We believe this is where we belong.”
Siegel said 50-Off also will continue shifting its mix toward home goods. Nonapparel merchandise accounts for about 38 to 39 percent of volume, compared with about 25 percent two years ago, and is on the rise as a percentage of total volume.
And in another sign of trouble, Chadwick’s of Boston, the off-price catalog division of TJX Cos., said its president, Rebecca Jewett, resigned last month. TJX previously said Chadwick’s had a “disappointing year” of sales and higher-than-expected markdowns and expenses. Jewett’s position has not yet been filled.
While off-pricers continue to open stores and achieve record sales levels, their market share may have peaked.
Off-pricers’ market share hit an historic high of 12 percent of all women’s apparel sales in 1994, compared with an estimated 11.4 percent in 1993, according to Isaac Lagnado, publisher of Tactical Retail Monitor.
“In 1995, we see off-pricers going back to about 11.25 percent of women’s apparel sales, and in 1996 the share will drop to as low as 10.8 percent,” he said.
Lagnado said off-pricers tend to do well in a recession, but as the economy improves and shoppers have more disposable income, they turn to department stores. Steven Siegel, chief financial officer of Filene’s Basement Corp., conceded that business is “very difficult” but said Filene’s is hoping its strategy to expand certain existing units and open larger stores will boost sales. Filene’s has 52 stores.
“In the Northeast, with Jordan Marsh and Filene’s at war with each other, off-pricers have been under a lot of pressure,” he said.
Filene’s Basement, based in Wellesley, Mass., plans to open only two units this year, including a 42,000-square-foot store on Sixth Avenue at 18th Street in Manhattan on April 13. Units on State Street in Chicago and Corbin’s Corner, Conn., are slated for expansion.
“We are heading toward larger stores so we can have a more complete offering,” Siegel said. He declined to disclose any planned changes in the merchandising mix.
T.J. Maxx, a division of TJX Cos., also plans to put more emphasis on home and gift items, which accounted for about 25 percent of sales last year. The percentage should go “slightly higher” this year, according to a spokeswoman.
TJX management has taken a “conservative view” of the retail environment and does not expect a rebound for women’s apparel in the immediate future, she said. Despite the slowdown, TJX still expects to open 40 to 45 stores this year after opening 44 units in 1994.
Katie Loughnot, assistant corporate secretary, Ross Stores, said competitive pressures on off-pricers will not go away. “I don’t think you’re going to see people raising prices,” she said. “So it’s up to us to step back and find ways to deliver even stronger values and to reestablish that differential between our pricing and the pricing of department and specialty stores on name brand merchandise.”
One step that Ross Stores has taken is to increase its merchandising staff, from management to assistant buyer levels, she said.
Loughnot said she was encouraged by research from the NPD Consumer Purchase
Panel showing the off-price segment gained market share last year at a faster rate than other distribution channels. “I think that attests to the fact that off-price is still an attractive option to the consumer,” she said.
Jeffrey Edelman, an analyst at C.J. Lawrence Deutsche Bank, said off-pricers were hurt in the fourth quarter, primarily because of department stores liquidating excess inventory.
“They pushed the panic button and cut prices significantly, which generated a lot of traffic,” he said. “Those inventories appear to be much leaner today and, as a result, I would expect to see the pricing differential widening again.”