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Off-Price Channel Looks Set to Win for Retail in Q4

Off-pricers are likely the retail winners for the fourth quarter and holiday season, given the value-proposition provided by the sector, while The TJX Cos. Inc. is expected to expand beauty and runway fashion as it looks to Fiscal 2020.

The top three in the off-price channel are TJX, Ross Stores Inc. and Burlington Stores Inc. TJX reports fourth-quarter earnings results on Wednesday, followed by Ross Stores next Tuesday. Burlington Stores hasn’t yet said when it will post earnings results.

While Telsey Advisory Group analyst Dana Telsey has “Outperform” ratings for each of the three publicly-traded, 0ff-price retailers, she noted that there could be some headwinds ahead.

The off-price channel, as Telsey noted, continues to grow its market share from the full-line retailers, but are facing headwinds from “freight costs and wage increases.” Those two factors will continue to pressure margins going forward, unless the retailers are able to get their comparable-store sales to beat their business plan targets. Telsey said comps of at least 3 percent is probably where all three need to hit in order to buffer some of impact from those headwinds. She also advised that the off-pricers “should continue to look for efficiencies to help offset the headwinds.”

According to Telsey, “TJX continues to win over customers with its exceptional value proposition, process enhancement and industry leading newness.”

The retailer’s assortment is based on a good, better and best model, with a growing focus on the better and best categories. That’s a model that attracts new customers, and also drives existing ones to become repeat shoppers. The company currently operates nearly 4,300 stores across multiple banners, and said last May it has an opportunity for 6,100 stores over the long term. That disclosure was made by president and chief executive officer Ernie Herrman when the company reported first-quarter results in May, noting that the growth could come from just our “current chains and our current countries alone.”

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Market sources also said TJX’s relationships with vendors allows it to bring in the name brands found in department stores that consumers want, with many products made under the national brand name just for TJX shoppers.

Telsey is projecting a 3 percent comps gain for the fourth quarter, on top of the 4 percent gain in the year-ago period. She is forecasting comps growth of 3.7 percent for Fiscal Year 2020, noting that the retailer is revamping its loyalty program and will grow its beauty and runway fashion categories. The retailer’s merchandise mix from 2017 has a 52 percent share in apparel and footwear across women’s, men’s and children’s; 15 percent share for jewelry and accessories and 33 percent in home fashions.

She also expects Ross Stores to post a comps increase of 3 percent, against a tough comparison of a 5 percent gain last year. The off-pricer closes between five to 10 stores annually, but almost every door in its portfolio is cash flow positive, Telsey noted. Its largest category–as of the most recent merchandise mix tally for 2017–is women’s apparel at 27 percent, followed by home at 26 percent. Men’s, accessories and fragrances, and footwear are each at 13 percent, with children’s at an 8 percent share of the merchandise mix. “We expect management will continue to look for efficiencies in the business to offset the pressure,” Telsey said.

The analyst expects Burlington Stores to post a comps gain of 2.9 percent, on top of the 5.9 percent gain a year ago. The company said it saw strong sales trends in home, toys and gifting early in the holiday season, with high expectations for beauty and fragrance. Telsey said the retailer can grow through new retail doors–it wants to reach a target of 1,000 stores–and via an expansion of its women’s apparel offerings. The latter is only about 23 percent of sales, compared with its competitors who are closer to 30 percent.