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Why “Off Price” is Right On the Mark

Big ticket retailers like JC Penney’s and Sears share two patches of common ground this fiscal year: both have made a historically unusual push into more high-end luxury items and both have reported the kinds of massive quarterly losses that have rattled their already jittery investors. However, the off price market, intransigently devoted to discount retail, continues to outperform its swankier rivals.

Consider the case of Ross Stores. Ross operates a chain of stores that sells deeply discounted products including apparel, jewelry and a wide range of home accessories. Bucking the prevailing retail trend towards underachieving malaise, Ross recently reported a markedly sunny second quarter, registering a 17% leap in profits. Sales rose 9% to $2.55 billion from $2.341 billion and comparable store sales creeped up 4%.

Michael Balmuth, CEO and vice chairman of Ross Stores, beamed enthusiastically. He said, “We are pleased with our better-than-expected results for the second quarter and first six months of 2013, which were mainly driven by above-plan sales and merchandise gross margin. Our performance for both the quarter and year-to-date periods continues to benefit from the solid execution of our core off-price strategy of delivering compelling name brand bargains to today’s value-focused consumers.”

And their projections for the third quarter remain rosy, especially in relative comparison to their languishing competitors. Ross expects its full year earnings per share to hit $3.80-3.87, a significant jump from last year’s $3.53. Also, the company expects third quarter earnings per share to be in the $0.75-0.78 range, up from $0.72 at the same time last year.

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Analysts attribute Ross’ stellar performance to a variety of factors. First, rather than splinter its focus in too many directions it has maintained a laser-like focus on top line growth. Unlike JC Penney’s now widely discredited strategy, it has sparked profitability by targeting its most productive markets for incremental expansion, rather than inventing new, untested markets for rapid expansion. Ross has also become a model for other retailers in the area of inventory management and and merchandise organization, two crucial logistical departments both JCP and Sears have failed at miserably.

For three consecutive quarters, Ross has experienced positive growth. The 15.1% revenue increase brought the figure up to $2.76 billion in the most recent quarter. Looking back further, revenue increased 10.6% in the third quarter of the last fiscal year from the year earlier and 12% in the second quarter of the last fiscal year.

TJX companies, another giant off-price retailer, is also flourishing in a challenging economic environment. The company’s net income topped an impressive $479.6 million, up from $421.1 million. Additionally, sales increased a hefty 8% to $6.4 billion. Comparable store sales leapt 4% and gross margin, unlike JCP, rose 0.7% to 28.8%. The overall increase in second quarter earnings registered at a brisk 13.9%.

Analysts expect TJX’s adjusted earnings per share to hit $2.74-2.80, better than the earlier estimate of $2.70-2.78. The increasingly dominate chain raked in $932.4 million in net income for the first half of the year, up 11% from $840.3 from last year.

Carol Meyrowitz, TJX CEO, was predictably elated. “We are very pleased with our above-plan second quarter results which were achieved over high year-over-year comparisons for quarterly comp sales and earnings per share growth,’ she said.

Meyrowitz  expressed enthusiasm regarding the company’s inventory as well as its growth potential for physical stores. “We are in an excellent inventory position, which gives us the flexibility to capitalize on the great brands and fashions available to us in the marketplace.We remain confident that our strong top- and bottom-line growth will continue and we will grow TJX to be a $40bn-plus company,” she said.

Compare the success of these off price retailers to historical market leaders like JCP and Sears. Sears, as lively as an emphysemic lung, reported a net loss of $194 million, compared to $132 million at the same time last year. Revenues plunged 6.3% to $8.87 billion from $9.47 billion.

The formerly dominant retailer posted a loss $1.70 per share versus the prevailing Wall Street expectation of a more modest $1.10 loss, a 7.8% overall depreciation. Same store sales dropped 1.5%, with Kmart dipping 2.1%.

Or consider JCP. Once a sterling American icon now stained with chronic failure, JCP reported a dizzying $586 million loss for the second quarter ending August 3rd.

This brings JCP’s total reported losses to $934 million, a considerable leap from the tally at this point last year of $310 million. Sales have plunged in the second quarter 11.9% and 14.2% for the year in total so far.

Many have pointed to the rising significance of fast fashion as a seismic shift in the apparel industry, especially given the strong second quarter showings of retailers like H&M, the Gap, and Zara.

Competition for so-called “millennials”, or shoppers aged thirteen to thirty, has become both central and fierce.  The millennial consumer group is increasingly targeted by retailers worldwide since the demographic spends more than $65 billion a year. More than other age groups, they are keenly interested in new trends but also sensitive to value as well.

Apparel retailers have struggled with this consumer group for a variety of reasons. First, they are increasingly directing their discretionary income to electronics instead of clothing. Also, they simply have less money to part with since their parents are besieged by higher payroll taxes, an anemic job recovery that has disproportionately impacted millennials and the increasing price of transportation.

The retailers who have adjusted their strategies accordingly are the ones who have prospered. Besides H&M, the Gap and Zara, Forever 21 and Uniqlo have managed to remain profitable by relying upon an ever shifting fast fashion landscape with an eye to low discounted prices and high margins.

This is in stark contrast to Sears’ new strategy which is to deemphasize its longstanding reliance upon discounts and promotions in favor of high end couture and luxury goods. In 2010, Sears CEO Eddie Lambert first conjured the idea that the retail giant could profitably straddle the fence that separates low cost and couture. Since then, he’s been aggressively pushing to add more and more luxury items to Sears’ Marketplace site. Sears will contract with high end suppliers of expensive brand name goods and then essentially function as a third party in the transaction with consumers. Paradoxically, Sears seems to be intentionally focusing less on the business model that is currently producing the most.

Suffice to say most analysts predict more good fortune for retailers like Ross and TJX, and more frustration for JCP and Sears. The rocky terrain of the apparel industry continues to fluidly shift and evolve and those players who most nimbly accommodate new realities will likely enjoy the spoils of victory. Those who dither will find a resting spot in the dustbin of retail history.This time next year, JCP and Sears could be chapters in business textbooks, related as cautionary tales, rather than places to shop.