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Here’s the Biggest Challenge Off-Price Faces This Year

Off-price retailers might have a tough time keeping their margins intact this year, thanks to inflation rates pushing up costs across the board.

While leaders like Marshalls owner TJX have raised some products prices, Wells Fargo retail analyst Ike Boruchow observed “little material benefit” in the higher tickets charged at the off-price company’s HomeGoods nameplate, where comps dropped about 10 to 15 percent sequentially in the fourth quarter. This suggests that strategies such packing and hold the inventory acquired when major chains offload goods during a consumer spending downturn might not be enough to shore up off-price retail margins.

Boruchow cited a raft of challenges facing off-price, from steep labor and supply chain costs, which Burlington expects to continue to battle, according to the New Jersey retailer’s fourth-quarter earnings call. Participants at the analyst’s recent bull versus bear meeting don’t expect next year’s off-price margins to match 2019, suggesting a protracted recovery ahead.

What’s more, off-price chains typically have “structurally lower gross margins versus full-price retailers,” Boruchow said, meaning they “stand to benefit the most if freight pressures subsides in the near future.”

Boruchow isn’t convinced that TJX and friends can save their margins this year, even if data suggests a modest improvement in certain areas of the freight market.

“Some investors also note that near-term spot rate dynamics are being influenced by unique one-time factors,” he said, pointing to companies pulling back on their use of standard cargo containers to temporarily warehouse inventory as they sold through goods in the first quarter. But any freight-rate relief is likely to be short-lived, in Boruchow’s opinion, as China’s lockdowns and a potential West Coast dockworker strike could keep trucking capacity tight.

Boruchow indicated that investors will be scrutinizing upcoming first-quarter reports to see if gross margins support off-price retailers looking to raise prices.

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The analyst’s insights come as The Conference Board last week said April’s Consumer Confidence Index fell slightly to 107.3 from 107.6 the month before. Purchasing intentions inched down as “inflation and the war in Ukraine continue to post downside risks to confidence and may further curb consumer spending this year,” said Lynn Franco, senior director of economic indicators for the New York City research nonprofit.

Economists at Wells Fargo Securities said the index suggests that “consumers do not know what to make of the crosscurrents in the economy.” They noted that consumers are worried businesses might hire fewer people in the coming months, a potentially troubling development for retail spending.