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Analysts Say Off-Price Retail Growth to Ramp Up

Off-price retail has been outperforming the overall apparel industry for some time, but that growth gap is set to widen further.

The sector that brings major labels to deal-hungry consumers at more palpable prices has been outperforming department stores struggling from stale offerings and dwindling foot traffic.

An NPD study out last month said off-price buys account for 75 percent of apparel purchases across all retail channels.

“Weak mall traffic has increased the need for department stores to differentiate their product offering and customer experience, and to accelerate their off-price focus,” Moody’s Investors Service said in a research note Tuesday. “We expect off-price sector revenue to grow by 6 percent to 8 percent for the next five years, outperforming the broader apparel sector by a collective 4 percent.”

The usual suspects—TJX, Ross, Burlington and Nordstrom Rack—will continue to dominate the space, though Macy’s and Hudson’s Bay will increase square footage for their off-price formats.

“The big incumbents already have a well-established, strong advantage in their significant scale, flexible purchasing, solid and expanding vendor relations and adaptable real estate strategies,” Moody’s said.

And that scale is only increasing. According to Moody’s, TJX has plans to grow its Marmaxx store count to 2,223 from last year’s 2,163, and Ross will open 90 more stores this year, bringing its count to 1,530.

For the first quarter, TJX reported net sales up 10 percent to $7.5 billion, Ross sales were up 5 percent to $3.08 billion, Burlington reported net sales up 8.4% to $1.28 billion and Nordstrom said off-price net sales (which include its Rack stores and jumped 11.8%.

By comparison, Macy’s reported sales in the first quarter down 7.4% to $5.77 billion, J.C. Penney said net sales dipped 1.6% to $2.8 billion, and full-price sales at Nordstrom fell 2.2%.

“TJX Companies, Ross Stores and Burlington continue to outpace overall apparel, which are growing at a much slower pace,” Moody’s vice president and senior analyst Christina Boni said in a statement. “In contrast, the department store industry is losing share to off-price and other areas of apparel spending, as online competition increases and mall traffic continues to decelerate.”

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The off-price sector’s share of sales is expected to grow to roughly 10 percent of apparel sales by 2018, up from last year’s 8.8%, and Moody’s estimates that the segment will grow between 6 percent and 8 percent for the next five years, doubling its outperformance of the broader apparel sector to 4 percent, compared to outperforming it by 2 percent last year.