Off-price retailers seem to be taking a page out of the department store playbook after riding high on the rest of retail’s supply chain troubles.
Wall Street might not be pleased when companies such as TJX report earnings this week that might fall short of estimates, though any missteps right now might just be a temporary bump in the road.
With high supply chain costs eating away at margins, off-price retailers stuck with misaligned merchandise have had to further drop prices to make a sale. But markdowns also come at a cost to their margins.
Now, some names in the sector are looking for a handout.
“As container costs have declined recently, off-price buyers have taken the unusual step of asking their vendor partners for margin support,” UBS retail and softlines analyst Jay Sole said in a research note.
Sole didn’t say who was asking or how many companies stepped out with hat in hand.
One factor who deals with the industry described the “ask” as “rare” in the off-price world, and had yet to hear of any company making such a request. But he pointed out that that off-price sellers have been putting off incoming product shipments because they’re overloaded with inventory that they’re struggling to clear out.
Sole cited the “lack of fiscal stimulus and inflation” as reasons why second quarter sales could disappoint. He hosted a call with a senior buyer at a large, privately held off price retailer who said that some in the sector were caught flat-footed when customers suddenly wanted dressier options after reliably purchasing casual clothes for the past two years.
“At the same time, there’s a lack of high-quality brands available in the market,” this buyer said.
So far, off-price companies have had a “much harder time passing on cost increases to consumers on full-price items than expected,” Sole pointed out.
TJX president and CEO Ernie Herrman last fall said the company was able to “surgically” raise prices on certain items. While customers didn’t balk at the changes, the company hoped it could get away with charging more for the coveted department store brands.
That’s a problem in any selling period when off-pricers are competing with their department store counterparts for market share, especially when full-price retailers are also dangling promotions to convert customers. But even some full-price stores are having a hard time getting the sale, meaning there’s less chance for off-price retailers when goods normally sold at off-price are still selling in the full-price distribution channel.
What’s more, inflation right now is taking dollars out of the consumer pocket.
Sole said August sales trends seem to be improving, and off-price margins will get some breathing room as supply chain costs come down. What could help too is for off-price sellers to get their inventory under control, which Sole said could happen by February when fiscal 2023 begins.
Retail analyst Lorraine Hutchinson at Bank of America Securities cut her estimates for TJX, Ross Stores and Burlington.
Despite a “sharp pullback in consumer spending” dominating the inflation-plagued second quarter, the trio is “well-positioned to benefit from trade down in the second half,” she said. Hutchinson maintained a “Buy” rating on TJX, Ross and Burlington shares.
Hutchinson cited data from Revolve and Allbirds suggesting that “demand is softening at the high end, and could foreshadow early signs of trade-down.”
She expects good product to become available for off-price chains as “retailers are looking to clear out high volumes of excess inventory that they cannot hold nor push through stores.”