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Off-price could become bright spot for retail industry as stores reopen

An economic downturn and a glut of apparel and accessories are setting the stage for off-price retailers to recover faster from coronavirus-led closures than other retail sectors.

Like many retailers, The TJX Cos. Inc., Ross Stores Inc. and Burlington Stores Inc. have seen their sales suffer this spring as their stores have remained closed. But the companies, which bill themselves as offering better value than department stores and stock their racks using inventory off-loaded by full-price retailers and brands, stand to bounce back more quickly as states ease restrictions on movement and businesses.

Millions of consumers are looking to spend less on clothing and other home goods in the current climate. Meanwhile, off-price retailers have their pick of apparel inventory as stores reopen; many department stores and brands missed weeks of sales key for selling spring and summer collections that are close to being out-of-season, if they are not already, and are now turning to off-price outlets as one avenue for liquidating the inventory quickly.

Bankruptcies and store closures at retailers including J. C. Penney Co. Inc. also stand to benefit off-price players by ceding them market share, Ross CEO Barbara Rentler said during a call with analysts May 21.

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Stephen Rector, founder and president of Bakertown Consulting and a former Macy's Inc. executive, noted the opportunity for the discount segment.

"The off-price channel is the one part of retail that will come out of this in a good way," Rector said.

A faster recovery

Analysts at Jefferies said following TJX's first-quarter earnings report May 21 that they expect the company to "significantly outperform in a post-COVID world" thanks to an abundance of inventory and the company's budget-focused price point. Consumer surveys and online search data conducted ahead of off-price store reopenings showed that customers were eager to return to shopping at the outlets, Jefferies said.

Early results from the openings validate that. Sales at TJX stores that have been opened at least one week showed sales gains over the year-ago quarter, CEO Ernie Herrman told analysts during a May 21 call to discuss first-quarter earnings.

Off-price names are more reliant on physical stores than most retailers. At TJX, e-commerce transactions make up just 2% of sales, and while Herrman said the retailer expects more digital sales as the pandemic persists, the company "will not look to e-commerce as our major leveraging point to get us through COVID."

Reliance on a constantly changing pipeline of inventory and a low per-item cost make expanding e-commerce sales a tough proposition for off-price retailers, Rector said. "No one has figured it out yet."

While analyst estimates compiled by S&P Global Market Intelligence expect coronavirus closures to take a bigger bite out of same-store sales at off-price retailers than department stores Macy's and Kohl's Corp. in the first half of 2020, they also expect off-price to return to growth by year-end.

That may not be enough to offset sales declines in the first half of the year; both TJX and Ross reported first-quarter dollar sales that were less than half of their year-ago results, and analysts expect full-year declines in the double digits for both off-price chains and department stores. But the estimates represent a bounce back compared to the national department stores, which are expected to post same-store sales in negative territory through the end of 2020.

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'Loaded with inventory'

There are signs that full-price retailers and the manufacturers that supply them have inventory to off-load. Children's apparel-maker Carter's Inc. said it would hold some seasonal inventory until 2021, with Executive Vice President and CFO Richard Westenberger telling analysts May 5 that he foresees as "an enormous quantity of spring product in the marketplace." But other items will be headed for alternative sellers, including off-price stores.

"Certainly, we've made use of the off-price channel in past years where we've had excess inventory," Westenberger said. "That will be a component."

Marcus Shen, COO at B-Stock Solutions, which runs auction sites for inventory that retailers want to off-load, said transactions on its platform declined in March and April as retailers closed their doors. But sales are bouncing back in May with retailers trying to move seasonal apparel as well as a glut of returned items that customers could not take back during the month-and-a-half stores were shut, Shen said.

"That's a pretty material amount of time," Shen said in an interview. "There's certainly going to be a lot of stuff that people were hoping to sell during the spring season" moving into the market now."

Bakertown's Rector noted that retailers are facing a shorter-than-normal selling season thanks to store closures. "There's going to be a huge amount of summer merchandise."

While some seasonal inventory will be packed away for 2021, TJX expects to have plenty of inventory going into the summer, Herrman said May 21. The company has already reopened hundreds of stores in North America and Europe.

While TJX's suppliers are "loaded with inventory," tapping that hoard will take time, Herrman said. TJX plans to have about half of its stores open again at the end of May, and its purchases will depend on how much full-price retailers mark down similar apparel items in their own stores as a result of the oversupply. "We won't buy anything if we can't show significant enough savings against ... the other retailers," Herrman said.