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Off-Price to Benefit Big From Department Stores’ Demise

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Off-price has been doing well while much of the rest of retail suffers, and the downfall of the department store will mean even bigger gains for the off-price sector.

A new report out by financial services firm Wedbush said off-price could get a $1 billion benefit from department store consolidation.

“The shuttering of department stores and other brick-and-mortar retail locations is a well-established trend that has unlocked significant market share gains for off-price retailers over the last 8-10 years,” Wedbush CFA Morry Brown said. “With mall traffic declines intensifying, the trend appears likely to gather steam in the coming years, and we believe the off-price sector will continue to capitalize on this theme.”

Just the current and coming closures of J.C. Penney and Macy’s alone (roughly 240 stores that will all be shuttered by the second quarter this year), is expected to be a considerable “tailwind” for off-price, according to Wedbush.

“Of the roughly $1.6 billion of sales freed up from the J.C. Penney’s and Macy’s store closures, we believe off-price retailers are in a position to capture up to $1 billion of these sales over the next 12 months,” the Wedbush report said.

The off-price retailer likely to benefit the biggest? Burlington Stores.

Burlington has already seen its stock swell 295 percent in three years on its success, and Wedbush said, because it has the biggest location overlap with Macy’s and JCP stores on the chopping block, Burlington could score big from the closures. TJX’s Marmaxx division and Ross Stores are next in line to benefit.

“While a scenario in which off-price siphons off roughly 50 percent of abandoned sales from the JCP/M [JCP/Macy’s] door closings would appear to be a fair scenario, we note historical precedent suggests this analysis could prove conservative, even accounting for online market share gains,” Wedbush wrote.

That means the sector could see off-price success gain even more momentum as the bankruptcies and store closures continue—which they will.

“We believe department store consolidation will continue beyond 2017, as mall traffic challenges appear firmly entrenched. We expect continued top-line pressure across the mall, which should further erode margin rates and profitability across mall-based brick-and-mortar units in the coming years,” Wedbush said. Those pressures will raise even further viability concerns for companies like Sears and even for-now stronger players like Macy’s. “In short, the primary driver of off-price revenue growth—market share gains at the expense of department stores—appears highly likely to continue over the medium-term.”

The question over the longer-term will be: what does full-price competition look like?

As the report reiterated, the off-price business model has long been based on prices at full-price stores. But with so many companies selling their product at promotional prices and becoming increasingly irrelevant to consumers, it isn’t clear what full-price sales will look like down the line.

“Presumably, much of the full price business eventually moves online, through some combination of: (1) Amazon, (2) smaller niche e-commerce retailers or (3) vendor’s own websites,” Wedbush noted.

That’s just one factor that could affect the off-price sector. The other is, if the vendor base consolidates alongside the retailers it supplies, the off-price pricing landscape could be forced to shift with fewer vendors with the pull to negotiate more favorable terms, as opposed to the benefits the fragmented retail space currently affords for off-price.

Either way, off-price won’t be losing its advantageous footing anytime soon.

As Wedbush put it, “Off-price appears to have a defensible competitive moat for many years to come.”

 

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