The Supply Side: Off-price retailers thrive without e-commerce

The off-price retail sector has quickly recovered following the pandemic, which temporarily closed stores much of last year. Three major off-price retailers, Burlington, Ross Stores and TJ Maxx, which have little to no e-commerce, saw sales return in 2021.

These chains also sell home goods, and that part of their businesses took off amid the pandemic. They also continue to be popular with consumers wanting to refresh their wardrobes with new apparel and fashion accessories.

Burlington, the smallest of the three major off-price retailers with 792 stores, recently announced an aggressive growth strategy with the potential to expand to 2,000 stores in the next few years after closing the firm’s e-commerce business. The plan also calls for smaller stores, more in line with competitors Ross and TJ Maxx.

Laurie Hummel, Burlington senior vice president and general merchandise manager, said last month at the Texas A&M Retailing Summit in Dallas that the retailer’s decision to shutter the online business made sense given the model deals in closeouts and operates on lower margins. She said the cost of fulfillment and final-mile delivery was too dilutive to margins, not to mention the cost of returns. With money saved by shuttering the e-commerce business, Burlington plans to open 100 more over the next year.

Burlington reported robust sales in the first half of this year, rising 34% over the pre-pandemic period of 2019. Net income increased 69% to $274 million. Comparable sales rose 19% from the pre-pandemic period of 2019.

Despite robust sales and margin gains in the second quarter, Burlington CEO Michael O’Sullivan told analysts the retailer is being conservative about the near term due to uncertainty around the resurging pandemic and a supply chain situation that he said is “getting much worse.” Burlington and its competitors will report third-quarter earnings in late November.

Wells Fargo analysts believe Burlington “should thrive” in the long term, despite near-term worries regarding supply costs and the uncertainties in retail. Ike Boruchow, an analyst at Wells Fargo, said Burlington would ultimately benefit from other retailers’ woes, as it has in the past.

“The unexpected events of 2020 have driven many retailer bankruptcies and thus, severe inventory dislocations,” Boruchow noted. “The last time a similar dynamic occurred was back in 2008, which was followed by a decade of off-price share gains and stable [Burlington] performance. If history repeats itself, Burlington should be well-positioned to take advantage of the new, premium supply of brands entering the market given its off-price business model, which could drive further market share gains and push margins to all-time highs for the company.”

Hummel said the new look for Burlington will be a well-stocked, smaller store with a balance of home goods, apparel, shoes, other fashion accessories and beauty. She said less than 10% of the inventory would be in coats and outerwear, which used to be a more significant portion for the retailer formerly known as Burlington Coat Factory.

She said stores like the one in Rogers have already downsized, with roughly one-third of the former space now blocked off. She said the retailer would renegotiate tenant rents and use smaller formats between 25,000 and 32,000 square feet.

SUPPLY CHAIN WIN
When asked about how the discounter could ensure adequate inventory amid the supply chain disruption, Hummel said the best thing about off-price is that she is still buying for the holidays as late as October. She said not everything comes from China, and there are many ways the retailer can source its goods stateside.

Ross said having a lean inventory coming into 2021 meant it did not have to take many markdowns, which bolstered its margins. Ross reported inventories were down 5% at midyear, while average selling store inventory rose 3% compared to the same period in 2019, before the pandemic. Ross CEO Barbara Rentler said sales rose 21% in the second quarter of this year to $4.8 billion. Comparable store sales were up 15%, and net income increased to $494 million, up nearly 20% from the comparable period.

Rentler reiterated that Ross is back to its pre-pandemic plans to open about 100 new stores each year on the path to 3,000. Like Burlington, Ross execs said some uncertainty about the sustainability of the positive external factors benefited the first-half results. The company did not provide forward guidance given the uncertainties, but equity analysts called the Ross results “solid.”

Jen Redding, an analyst at Wedbush Financial, said there is plenty of inventory, but deliveries are sliding given demand among consumers flush with stimulus cash. She said the leaner inventories had been a plus for Ross and Burlington, who could chase merchandise and sales trends for higher margins amid the recovery.

TJX Cos. Inc., the parent company of TJ Maxx, Marshalls, HomeGoods, Sierra and HomeSense stores, also had a stellar first half of 2021. Second-quarter sales rose 23% to $12.1 billion, and comps averaged 20% over the comparable period in 2019. Like its competitors, TJ Maxx chief financial officer Scott Goldenberg told analysts in August that supply chain disruptions could work in its favor.

“We think it is going to create a future buying opportunity for us likely,” he said.

Boruchow agreed, saying the off-price retail sector continues to benefit from volatile inventory dynamics across the retail landscape.

Last month, analysts at Deutsche Bank said that the three major off-price players would be better positioned than most retailers next year. In addition to an expected moderation of the supply and freight issues, the analysts said the retailers have specific advantages.

“We recognize trends may be volatile in the near term, particularly on the margin front,” the note stated. “But off-price retailers are poised to continue to gain market share driven by consumers’ continued move toward treasure hunt experiences and value shopping. The off-price sector will have more opportunity to source merchandise as inventory and promotions normalize.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.