Cracks are appearing in the facade of the off-price sector, long the growth darling in a tumultuous retail market.
Increased competition within the off-price channel, competitors offering lower-price goods and Amazon taking market share are just some of the factors dinging growth prospects at retailers, including The TJX Cos. Inc. and Burlington Stores Inc.
UBS equity analyst Jay Sole on Monday reiterated his “Sell” ratings on TJX and Burlington, while Ross Stores Inc.’s shares garnered a “Neutral” rating. That’s even though the off-price channel is traditionally viewed as recession-proof when economic growth grinds to a halt, as consumers trade down when they begin to scour the market for deals that offer a more wallet-friendly price-value proposition.
What’s troubling is that the three factors determined by UBS to hurt off-price channel growth are “deflationary,” and deflation “is a major threat to off-price profits.” Sole’s report noted that deflationary trends could partially explain why the second-quarter Consumer Price Index for apparel was down 2.5%, with the women’s and girl’s apparel CPI down 4.5%.
In the analyst’s opinion, what’s troublesome for off-price is that “[W]e expect deflation to persist.”
While Amazon grabs share gains from the online shopping channel, what’s hurting off-price, too, is consumers’ eagerness to compare prices and hunt down the best deal, which damages off-price’s overarching “value for money” proposition.
“It gets increasingly hard for off-price to drive meaningful value for money [versus] the rest of retail as deflation continues,” the analyst said.
According to Sole in a report on Monday, the accelerating rate of store closures in softlines should have aided the off-price channel, but that isn’t happening. Plus, Wall Street’s consensus estimate for off-price earnings before interest and taxes — for example, the collective of TJX, Ross Stores Inc. and Burlington — is an increase of only 3.5% this year. That’s below the five-year average increase of 7%.
UBS data analytics, which reviews “environmental factors facing a business, including competition, cannibalization and addressable market quality,” determined that new store openings by the off-pricers has each nameplate “increasingly competing with itself.”
Off-price players have increased their store counts by 3% this year, said Sole.
Another factor impacting the off-price channel: department stores such as Macy’s Inc. and Stage Stores Inc. are converting existing stores into off-price clearance formats, UBS noted. For example, Stage is converting 158 doors to its off-price nameplate Gordmans this year, which is expected to help the latter deliver sales projected to double the volume it achieved during its department-store days.
Following a well-established trend in retail, Amazon is seen as the “likely share taker,” UBS noted of market expectations for the off-price sector.
For one, Amazon’s North America business has been expanding its fashion offerings and taking softlines market share from legacy retailers. The UBS report said it found that off-price shoppers also purchase soft goods — women’s, men’s and children’s apparel and shoes — from Amazon, according to a survey of more than 7,500 U.S. consumers over the age of 18. That puts Amazon and off-price in direct competition with each other.
Editor’s Note: This story was reported by FN sister magazine Sourcing Journal. For more, visit Sourcingjournal.com.