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Can the Off-Price Powerhouse Be Stopped?

A strong economy, low unemployment and improved consumer confidence are all aiding in a retail rebound after last year’s onslaught of closures and bankruptcies. For off-price, however, the positive outlook is only serving to boost a business that has remained one of the few apparel-related sectors to not need a lifeline.

Though a plateau in comp sales at TJX  in the third quarter of FY18 prompted questions about whether off-price could sustain its dominate growth position, the major players in this sector seem to be powering ahead with strong sales and ambitious growth plans to match.

In fact, the first quarter performance at Burlington, Ross Stores and TJX prompted each retail group to lift their full-year earnings forecasts in May. Burlington’s improved outlook follows a 12.8% increase in sales for the first quarter, a 12 percent lift at TJX and a 9 percent boost for Ross.

“We’re in hyper growth mode. People who wouldn’t take our call before are now calling us,” said Brett Rose, CEO of United National Consumer Suppliers, which moves overstock goods between brands and retailers. “It’s an exciting time to be a retailer but also a consumer. People realize you can get the same thing at one of these off price guys as you can in the mall.”

Those deals are part of what’s driving an equally strong increase in foot traffic. For Burlington, the first quarter marked the 13th of 15 quarters with strong foot traffic while at TXJ, the company marked its 15th consecutive quarter with increased traffic.

That’s in stark contrast to mall-based stores, which continue to struggle to lure consumers in. In fact, being off-mall is part of the secret sauce for these retailers, according to Rebecca Duval, vice president and equity analyst of apparel softlines at BlueFin Research Partners.

“The fact remains that the location is what’s key to their success,” she said, adding it’s easy to pop in on while on your weekly trip to the grocery store. “It’s not a hassle to go in and out real quick to see what’s new and because they’re bringing out new product daily, people want to see what they can get, and it’s driving that demand.”

Off-price executives say the promise of a great find or amazing deal creates the so-called treasure hunt environment that keeps shoppers coming back—and Amazon at bay.

“While there’s no arguing that Amazon has some really intelligent people who are changing not only how the consumer buys but how brick and mortar does business, the treasure hunt is very hard to replicate,” Rose said, adding just look at the number of flash sale sites that have been forced to change their concepts. “When Amazon boxes arrive at the house, it’s what we needed—socks for my son, a new doll for my daughter. But when I come home from Ross or Marshall’s, I have things I didn’t necessarily go for.”

This opportunity to discover new things is one reason why this sector is bucking the overall retail trend that has almost everyone else scrambling to funnel resources into e-commerce.

“We are convinced that the ability to touch and feel the merchandise and the inspiration that our shopping experience elicits, leads to instant gratification, all important factors for shoppers,” Herrman said.

As a result, TJ Maxx is leading the charge in brick-and-mortar expansion with the goal of growing from 4,000 locations across all its banners to 6,100, and that’s just counting stores where the company currently operates. Burlington is planning 35 to 40 net new stores this year, bringing its two-year growth to 176. And Ross is on pace to open 100 stores this year, putting the approximately 1,600-store retail group closer to its goal of 2,500 locations.

But the question becomes how much is too much when there are already chains like Nordstrom Rack, Saks Off 5th and Neiman Marcus Last Call in the mix, as well as new entrants looking to grow like Macy’s with 100 more Backstage areas within its stores and seven additional Gordmans stores.

The first concern analysts have when they hear of expansion plans is how will these companies fill all of those racks. But retail executives say there’s no need to worry about empty stores.

“There’s tons of products available,” said Thomas Kingsbury, CEO of Burlington, giving voice to a sentiment his peers also hold. “We have a lot of liquidity, meaning we have a lot of open buy. So we can continue to buy product every single day if we need to. Our merchants are still on the market every single week looking for great deals.”

Both Rose and Duval agree that stock availability isn’t an issue. “Your normal big sources are doing a better job at controlling inventory, but there will still be some leftover goods,” Duval said. “And there are a gazillion other places that allow them to have access to goods.”

One of those channels is e-commerce sites, which Ernie Herrman CEO and president of TJX sees as a “growing opportunity.”

He told analysts that vertical online retailers and omnichannel players have an even more difficult challenge when it comes to predicting the quantity they should produce for their businesses. And when they overestimate, that’s a positive for them and TJX. “What we’ve seen is they enjoy the benefit of knowing they can come to us, and those goods, which are visible online, will get very dispersed into a treasure hunt format with other strong brands,” he said.

In addition to new sources of goods, the sector is also growing its breadth of product offerings. Two areas currently in play are home and beauty.

“The beauty category has been a growing category for everyone as the market has shift around a lot,” said Ross CEO Barbara Rentler. “We feel good about beauty category, and you know ourselves as well as many other people in the industry feel that it’s an opportunity as the market itself is shifting from department stores to other sectors.”

At Burlington, beauty was among the company’s top performers for the quarter along with home—two of the company’s growth categories. The chain is looking to boost home from 14 percent of sales to more than 20 percent.

As stores continue to offer a wider assortment, they’re increasing their odds of reaching even more consumers, which Duval said already spans “ teens to grandmas.”

“Off price has a wide customer range,” she said. “They want something new. They want to be enticed. They don’t want to see the same floor set for three weeks.”

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