The 2020 crisis that scrambled storied nameplates from Century 21 and Stein Mart to Stage Stores unleashed a broader off-price inventory dilemma last year when retail product scarcity left relatively little to trickle down to the less-than-full-price channel. All of that changed in the spring when mainline chains including Walmart and Target found themselves stuck with an overflow of late-arriving winter merch people broadly passed on buying. And off-price stores were also caught unawares by the overnight upheaval in what would get shoppers spending.
Wells Fargo retail analyst Ike Boruchow is exchanging his recently downbeat position on off-price’s fortunes to argue a bull-case scenario heading into the year ahead. From where he sees it, brands will get back to closeouts and pull the trigger on pack-and-held inventory reserves while slowdown-wary consumers will steadily trade down to cheaper goods as better freight rates support the bottom line. Taken together, Boruchow believes these factors will buoy the off-price sector in 2023.
Consumers who quickly threw off pandemic staples like sweats and loungewear early this year left retailers saddled with aged product that suddenly wouldn’t sell. “This means desirable branded product wasn’t readily available through any channel for consumers and differentiated branded inventory was difficult for the off-pricers to come by,” Boruchow said.
Drilling deeper, when cheap chains like Walmart and Target compete on price, the only lever they have to drive traffic is assortment, according to Boruchow. Without the usual attractive branded merchandise they have to offer, the off-price sector was “less compelling earlier this year,” and faced a tough time “shift[ing] in and out of key categories, like athletic,” he said.
On top of that, shoppers realized they could get big bargains at mainline stores slashing prices to move product, making off price more of a snooze than it usually is.
Ross Stores CEO Barbara Rentler admitted that sales trends suggested the customer “doesn’t think the value is where it needs to be” at the Ross and DD’s Discounts owner. Though the off price company is working to rebalance stock from casual to more fashion forward, it still has a “longer way to go,” she said in August.
It’s not all bad news, though. New vendors are arriving on the scene, and those who previously “didn’t have anything on hand to offer” now are flush with goods, Rentler said. That suggests that suppliers are expanding their merchandise offerings, giving off price the benefit of choosing from a broader pool of inventory.
That’s a welcome development considering Ross Stores said Monday it debuted 40 stores across both banners in September and October for 99 total openings so far this year. It’s shooting to reach 3,600 stores eventually, up for the roughly 2,000 it operates today. The openings indicate that Ross Stores can tap enough inventory to fill the new locations.
Rival TJX also noted that suppliers had plenty of merchandise to offer. CEO Ernie Herrman said the TJ Maxx, Marshalls and HomeGoods owner saw “unprecedented” market availability among “good, better and best” brands. In fact, the company’s biggest problem was keeping merchants from “buying too much, too soon” so TJX could still have enough open-to-buy to adapt as needed, Herrman said.
The fall/winter order cancelations creeping back in at retail have been a windfall for some off-pricers lucky enough to get their hands on product that merchants couldn’t or didn’t want to seal up in overstuffed warehouses.
Aptos Retail vice president of strategy Nikki Baird said retailers she’s spoken with generally believe their “too much stuff” problem will hit “rock bottom” before January. That would put an end to the widely discussed “warehouse storage issue,” she said.
Off price stands to win if retail gets back to a more typical pricing strategy that doesn’t put the channels in direct conflict. That would give off-price retailers the ability to make price adjustments as needed to counter cost inflation on the supply side, something they hadn’t been able to do in the first half of this year.
Boruchow believes a return to more normal pricing tactics across all retail channels would revive the trade-down consumer. First-half comps suffered in their absence, he pointed out. For those who take advantage of closeouts to pack and hold inventory as is customary in off price, Boruchow expects this will give them branded goods they can sell at higher margins, particularly though holiday and into spring. Falling freight rates will also bring transportation costs closer to historical norms.
Burlington CEO Michael O’Sullivan acknowledged the off-price retailer’s first half misfire as the company didn’t move quickly enough to embrace consumer trends and stumbled on inventory, too. After meeting with O’Sullivan and other Burlington executives last month, Boruchow said the retailer is fixing its merchandising processes and a cutback in upfront buys helps to right-size the branded assortment issues. He expects Burlington’s material comps to improve on a strong reserve inventory position through first half of 2023.