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Why Off-Price Retailers Are Pushing Out Payment Terms—Again

Off-price retail’s well-documented inventory challenges aren’t expected to disappear anytime soon, and now many in the sector are reverting to tactics last seen in the early days of the pandemic: asking vendors for more time to pay their bills.

When reporting second-quarter earnings in August, TJX, Ross and Burlington all sang a similar tune. There’s plenty of product for the taking, they said, just not necessarily in hot-selling categories.

In a research note, UBS retail analyst Jay Sole keyed into a trio of issues plaguing the once-hot sector. Not only are off-price retailers “increasingly asking for longer-than-normal payment terms from vendors,” but remote working has also thrown a wrench into the buying process. What’s more, he wrote after speaking with a former off-price buyer, if off-pricers want to get back to business as usual, they’ll have to put in some work mending “vendor relationships after taking the unusual step of canceling many orders this past spring.”

Sole also noted ongoing foot traffic challenges that are likely off by “double-digits” versus the prior-year period. His source also believe social-distancing protocols could “hamper store productivity this holiday.” Products in the home category continue to perform well as consumers spruce up their surroundings, but shoppers are finding less of a need to purchase new clothing as “apparel remains very weak,” Sole added.

“Plus, we think gross margins will be under pressure. The inventory buying environment remains challenged,” he wrote. “In addition, managing distribution center operations in a social distancing world and rising freight costs have been additional pressure points.”

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Sole’s source reiterated what the off-price trinity said about “not enough goods available in the hot categories at the right prices.”

Meanwhile, AlixPartners also sees headwinds for off-price retail. “Brands are looking to preserve their margins and many are keeping inventory for themselves,” said Sonia Lapinsky, managing director in the retail practice at the management consulting firm. Retailers including department stores also have pulled back on their orders.

In the aftermath of the coronavirus pandemic’s effects on bottom lines across the industry, brands will now take a much closer look at what they need for their own operations, what’s a reasonable amount to ship to others, and who they ship to as well—all with an eye on boosting margins, Lapinsky said.

It’s a self-preservation mentality retail can’t ignore. For now, retailers would rather chase sales, even if it means leaving some money on the table, than grapple with a glut of goods destined for markdowns. The former ensures better margins, while the latter hurts profitability.