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Report: Off-Price to Outperform Overall Apparel Sector for the Next 5 Years

Off-price apparel has continued its upward trend as value-conscious consumers keep scouting deals, and the sector’s swift growth is expected to carry on for the next five years.

And it will carry on to the tune of 6 to 8 percent growth in that time, compared to the 4 percent growth Moody’s Investors Service expects for the wider apparel and home industries.

“The off-price segment will continue to do better than the overall apparel and home sector into the foreseeable future,” Moody’s vice president – senior credit officer Scott Tuhy said in a report released Tuesday. “Major incumbents TJX, Ross Stores and Burlington are leading the way at a time when the broader and highly fragmented apparel sector is growing at a tepid pace.”

Off-price stores generally sell a broad range of goods including clothing, accessories, linen and home décor by major-label brands at 20 to 80 percent than regular retail prices.

More stores are tapping into the off-price trend and opening up their own versions of the lower price locales.

Macy’s is the latest to capitalize on the concept, announcing in May that it would open four off-price stores this fall, branded Macy’s Backstage, and adding two more to that count last month. The new stores will average 30,000 square feet and carry a mix of Macy’s clearance goods from its department stores, plus exclusive styles from top brands. On Wednesday, Macy’s announced plans to shutter one of its traditional stores in West Orange, California to reopen it instead as a Backstage store this fall.

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Kohl’s also said in May that it would foray into the off-price format with an Off Aisle by Kohl’s test store in Marlton, New Jersey that opened just days ago.

While there may be room still for competitors, newcomers should expect to face stiff competition from the established players.

“Consumer appetite for discount luxury is such that newcomers will hardly make a dent in the incumbents’ already significant market share,” Tuhy said. “While high-end department stores will continue to open off-price stores at an above-average pace, we expect incumbents such as TJX, Ross Stores and Burlington to remain the leaders in the off-price segment.”

And it’s the significant scale, flexible purchasing ability, strong vendor relations and adaptable real estate strategies that will keep those leaders in the segment’s top spots.

“High demand for bargains and a lack of supply constraints will continue to boost their growth,” according to Moody’s. “Collectively, these retailers plan to open 185 new stores this year, following up on the 180 that opened their doors in 2014.”

In an interview on multimedia financial services firm The Motley Fool’s website about just why off-price retail is so good at making money, contributor Adam Levine-Weinberg said some stores are making the segments work and others are losing.

Nordstrom, according to Levine-Weinberg, has been very successful with the off-price format and has “a lot of runway to keep growing that concept.”

He added, “As for the other chains that are trying to get in, I think there’s a good chance that Macy’s will be successful. I’m a little less certain about Kohl’s.”

J.C. Penney had a chain of outlet stores that was sold off a few years for less than what the inventory was worth and the chain went out of business a couple years later, Levine-Weinberg explained, and other bankruptcies in the off-price space in recent years include Filene’s Basement and Loehmann’s.

“It’s definitely a very valuable business model if you get it right, he said, cautioning however, that “You can’t just open a bunch of off-price stores and voila, you have these 40 percent returns in equity and giant profits.”