Throughout the last year, off-price retail was the one area in which the apparel crowd could pin its hopes. While most other retailers were in contraction mode, off-price players were ramping up store openings and new formats, with little to no regard for e-commerce. Seeing the success, department stores like Macy’s committed to more off-price doors. Now, new questions are emerging about whether this sector will fare as well as everyone had hoped going forward.
In a note to investors, Wells Fargo analyst Ike Boruchow said the industry should prepare to see lower sales in off-price through 2018. In particular, he set his sights on TJX, downgrading the 1,000-pound gorilla in the channel.
“The issue for TJX, relative to ROST and BURL, is size (they are multiples larger and carry many more brands),” Boruchow reportedly wrote. Currently TJX, which operates TJ Maxx, Marshall’s, Home Goods and the new Home Sense banners, has more than 2,000 stores and aspirations that top out at 3,000.
Third quarter comp store sales for the retail group were flat compared to a 5 percent increase the prior year, fueling questions about the sector.
Beyond the channel leader, Moody’s predicted the channel in general would slow, with operating income dropping off from 9.5% in 2016 to 5.4% in 2018.
[Read more about the size of the off-price channel: Infographic: Off-Price Store Growth]
One concern, according Boruchow is that the beloved treasure hunt format for these retailers relies a steady pipeline of new product, and these days, he says there’s less to go around.
“The big difference between our view then vs. now is the current inventory situation in the U.S. wholesale channel. To put it simply, one of the primary bullish points on retail right now is how clean inventory in the channel is,” he wrote.
Store chains have been touting their improved inventory positions, which they attribute to a range of factors, including leaning into analytics, creating more of the right product, trimming out the excess and improving visibility in the supply chain.
Pair that with the concerted effort that some brands like Coach and Michael Kors are making to pull back on distribution and wean themselves from off-price dependence, and it looks like Boruchow could be onto something.
But TJX refutes the idea that inventory is scarce.
“Availability has never been an issue for us, and with a vendor universe of more than 18,000 vendors, we have tremendous flexibility in the brands that we offer consumers,” a spokesperson for TJ Maxx told Business Insider.
Tom Kingsbury, CEO and chairman of Burlington, which has seen 19 consecutive quarters of positive comps, made the same case during the company’s Q3 earnings call. “In terms of product availability, supply has never been better,” he said, adding that Burlington is seeing “significant buying opportunities.”