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Will Off-Price Retail Chains be Poised for Long-Term Success?

A glut of excess inventory and a value-focused price point have set up deep discounters to outperform other retail sectors.

Pre-COVID-19, off-price retail chains were some of the hottest picks in the sector, reporting increasing same-store sales and boasting plans to grow brick-and-mortar footprints. Those companies were also greatly outperforming department stores and apparel retailers.

Off-price chains were “riding the wave of the strength in the economy,” says Chris Weilminster, executive vice president and COO of Urban Edge, a REIT focused on urban retail properties with a portfolio primarily focused in New York. “Their value proposition with the assortment of goods is very, very competitive with many of the department stores that you now see having challenges.”

The good news for the sector is the COVID-19 pandemic—while halting that momentum in the short-term—may have only strengthened their position for the long-term. Economic uncertainty and high levels of unemployment have reconfigured consumer spending, putting an ever greater focus on discounts than before. After all, the idea behind the off-price retail model is to provide over-produced items at discount prices. In the current recessionary climate, consumers are more focused on value than ever, and off-price chains’ strategy is to scoop up excess inventory from full-line competitors and sell it at attractive margins.

Like many retailers, off-price giant  TJX Cos. Inc. (parent company of Marshalls, T.J. Maxx, HomeGoods and other brands), Burlington Stores Inc. and Ross Stores Inc. saw expected decreases in sales this spring as stores remained shuttered. But as states ease restrictions (with some notable hiccups in recent hot spots like Arizona, Texas and Florida), stores are reopening and many retail experts predict that off-price players will emerge as the big winners.

A surplus of apparel and accessories is paving the way for off-price retailers to bounce back, reported S&P Global Market Intelligence. Due to the COVID-19 closures, many department stores and brands missed weeks of sales that were vital for selling spring and summer merchandise that now are close to being out-of-season, S&P reported.  They’re desperately looking to off-price chains as a way to liquidate inventory quickly. As a result, off-price companies will have a field day picking through merchandise from department stores and specialty apparel stores.

“In terms of just core retail, off-price retailers have definitely benefited the most simply because there’s so much excess inventory between the department stores and apparel stores, which basically lost an entire season,” says retail consultant/broker Corey Bialow, CEO of Bialow Real Estate Inc.

And it wasn’t just that stores temporarily closed, Bialow continues. “On top of that, you have all of the [permanent] department stores closings. J.C. Penney. Neiman Marcus. Macy’s is closing some stores. Even Nordstrom is closing some stores. You have so much inventory out there that has to go somewhere. T.J. Maxx, Ross, Marshalls and Burlington—all of these players are benefitting from the downturn.”

Additionally, store closures are pushing market share to these deep discounters. As many as 25,000 U.S. stores could permanently shutter this year as the pandemic accelerates the retail turmoil, according to global marketing research firm Coresight Research. So far in 2020, more than 4,000 stores have permanently closed.

Foot traffic/sales are up at off-price retailers

In places where they have reopened, off-price chains’ foot traffic has been booming, as it appears that shoppers are eager to get out and seek bargains again.

“The consumer likes the hunt. We’re a social group of people and want to be in that environment,” Weilminster says, noting that he recently saw at least 50 shoppers waiting in line to get into a HomeGoods store in their portfolio.

According to a June report from foot-traffic tracker Placer.ai, off-price stores like Burlington, Ross and T.J. Maxx have seen rebounds in foot traffic since May. Additionally, the 1,100-plus TJX stores that have been open at least one week reported sales increases over the year-ago quarter, TJX Cos. CEO Ernie Herrman told analysts during the company’s first-quarter earnings report call on May 21.

“We believe these strong early trends speak to our values on a wide selection of merchandise serving a wide customer demographic, also the loyalty of our valued customers and pent-up demand,” Herrman said.

Something else giving off-price chains an advantage is their off-mall locations, especially amid COVID-19 concerns and social-distancing measures. Many shoppers are likely more comfortable in open-air strip center locations than enclosed malls.

“You can just run into your one store with a mask on and find what you want and run out. I think it’s just more conducive to how people are shopping today,” Bialow says.

Do off-price chains need e-commerce?

Most off-price companies don’t have much of an online presence, because their ever-changing inventory and low prices can make e-commerce platforms less economically feasible and difficult to update and manage.

In March, TJX Cos. and Burlington shuttered stores as well as distribution centers and e-commerce operations. Since e-commerce only brought in 0.5 percent of Burlington’s total sales, that company said it would close its e-commerce site and refocus resources on boosting in-store sales. TJX reopened its online operations in May, but limited how many orders could be placed daily. (E-commerce sales make up only roughly 2 percent of TJX’s sales.) Ross Stores never offered an e-commerce option. That’s in stark contrast with many other U.S. retailers that kept their online operations open, which was bringing in at least some revenue while physical locations were shuttered.

We will not look to e-commerce as our major leveraging point to get us through COVID and out the other side,” Herrman recently told investors.

Off-price chains never built out those platforms because when it comes to off-price goods, it’s nearly impossible to make a profit through e-commerce, says Bruce Schanzer, president and CEO of Cedar Realty Trust, which specializes in grocery-anchored centers on the East Coast.

With their inability to generate revenue during the pandemic, many off-price retailers saved their businesses from collapse by cutting every possible expense, Schanzer adds.

“It might sound counterintuitive, but by not selling goods via e-commerce—which would be highly capital-intensive, but just marginally profitable—they managed to ride out the pandemic without burning through precious cash,” he says.

For these retailers to reverse course and build out e-commerce platforms after very consciously choosing to focus on the brick-and-mortar channel would likely only happen if there was a fundamental change in consumer behavior as we come out of this period, Schanzer adds.

Some experts disagree with strategy

In April, S&P Global downgraded TJX while Fitch revised its outlook for Burlington to “negative” due to concerns about the “total lack of online sales and questions about whether these retailers can still attract shoppers willing to rummage after social distancing,” Bloomberg reported.

Bialow says long term, he doesn’t believe it’s viable for off-price chains to not also focus on e-commerce sales.

“Today it works simply because we’re in a unique environment,” he notes. “Eventually to be successful, any retailer in this ‘new normal’ going forward has to have e-commerce. You have to be an omnichannel retailer.”

While there are challenges in selling designer merchandise at discounted prices online, off-price players will have to figure it out, Bialow explains.

“Yes. They have had difficulty with the tracking of inventory,” Bialow notes. “But with today’s advanced technology, I’m sure there’s got to be ways to do it. I think down the road it’s inevitable. That’s where retail is moving. I don’t see how you could compete in the retail world without having an online presence.”

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