WWD Viewpoint: Off-Price’s Long History and Shopping Appeal
Last week, off-price giant TJX Cos. delivered higher profits on robust sales for its most recent quarter — leading the company to up its earnings guidance for the year.
Second-quarter sales jumped 12 percent to $9.3 billion while diluted earnings per share rose to $1.17 a share from 85 cents a share in the same period last year. The company now expects earnings per share to range between $4.83 and $4.88 — which is well above last year’s $4.04.
What’s driving these results? Shoppers. And not just any shoppers, but customers — including Millennials — who like to buy goods in a physical store. Shoppers who like to hunt for bargains and who love the discovery and the act of shopping itself.
In a retail landscape dominated by Amazon, which garnered a whopping 50 percent online market share during last year’s holiday shopping season, according to analysts, and where retailers from Wal-Mart Stores and Target Corp. to Macy’s and Nordstrom have made e-commerce a top priority as a way to enhance the customer’s overall shopping experience, off-price retailers such as TJX Cos., Ross Stores and Burlington Stores are crushing it. According to S&P Capital IQ, these three retailers have delivered top-line growth for the trailing 12 months of more than 10 percent.
And in the case of TJX and Ross Stores, they’ve delivered strong sales without selling a thing online. But how have these companies fared on Wall Street?
Looking at the recent milestone of the longest-running bull market in U.S. history (10 years, according to analysts), retail stocks, in general, have outperformed other sectors. In the 10-year period, the S&P Retail Select Industry Index, which is composed of a variety of consumer discretionary companies, clocked a 235 percent gain, which compares to the S&P 500’s 120 percent gain in the same period.
Digging deeper into the traditional retail sector that includes department stores, mass merchants, off-price, chain stores and specialty apparel brands (and excluding companies such as Amazon), the off-price segment has outperformed the pack. While shares of Walmart, Gap Inc. and Kohl’s have shown 10-year gains of around 60 percent (currently trading at $95, $32 and $80, respectively), Ross Stores’ stock increased 95 percent (to about $95) in the 10-year period — which is the same as the gains made by Nordstrom (a market leader trading at $62) and Macy’s (which has essentially reinvented itself, and trades at around $38).
For TJX Cos., the stock increased 490 percent to $107 in the 10-year period. And while not as large as TJX, Burlington Stores Inc.’s stock gained a whopping 545 percent to $168 from its IPO in 2013.
Despite these massive gains, it’s not been an easy ride. Although TJX, Ross Stores and Burlington have delivered strong sales and profits, there have been hiccups in the 10-year period — which will likely continue. Last week, investors pulled back on shares of Ross Stores after the company delivered better-than-expected results, but said it sees same-store sales gains in the second half to be between 1 and 2 percent.
Results for the second quarter showed earnings per share jumping from 82 cents last year to $1.04 in the most recent quarter on sales that rose 9 percent to $3.74 billion. Chief executive officer Barbara Rentler promised investors the company will do better moving forward. Still, a 9 percent quarterly sales gain is impressive — but investors are a hard crowd to please.
Ross Stores’ official brand moniker is “Ross Dress For Less” and it was not always an off-pricer. The retailer traces its roots to a single store in San Bruno, Calif., which was founded in 1950 by Morris “Morrie” Ross who had a compulsive drive to work more than 80 hours a week on every aspect of the business. For eight years it remained a single unit until Ross sold the store to William Isaacson who expanded it into a chain of eight.
Then, off-price mania hit the market.
In the June 9, 1980, issue of WWD the headline for the page one news story read, “Off-price retailing: Vigorous contender.” In the story by Ron Cohen, WWD declared off-price retailing as the fastest-growing segment in the industry. And, at the time, it also included factory outlet stores where manufacturers sold directly to consumers. Sacrilege!
As shoppers embraced the model of buying direct from manufacturers or purchasing branded apparel “on closeout” from a retailer such as Filene’s Basement (the first off-price retailer), the momentum continued. In 1982, Mervin Morris, who was the founder of Mervyns department stores, saw the writing on the wall and led a team of investors to buy the six Ross Department Stores. He changed the format to off-price, and grew the chain from there.
In 1983, Walter Loeb, who was working as an analyst at Morgan Stanley, told WWD that manufacturers were adjusting quickly to the expansion of off-price retailing, which included developing products specifically for the channel. Over time, the off-price segment began to have a clear divergence between brand-operated outlet stores and retail businesses that sold branded goods at steep markdowns.
For the consumer, what resonated most was the thrill of finding bargains. That’s it. No special, secret sauce or formula. Just branded products sold at 40 to 70 percent off.
During the early Nineties, as the U.S. navigated a recession, the company known today as TJX Cos. expanded via acquisitions and by entering new markets as well as home furnishings with the HomeGoods moniker. The growth included international expansion. For Burlington Stores, which was founded by Monroe Milstein in 1972 as the Burlington Coat Factory Warehouse Corp., the early 1980s offered opportunities for growth as well. By 2006, Bain Capital Partners bought the company for $2.06 billion.
The year before the deal, Milstein participated in a WWD financial forum and shared insights into consumer behavior. He said shoppers want branded products, and can’t resist a deal. He also predicted the acceleration of the “direct-to-consumer” model, which has been robustly deployed over the past five years — and amplified by e-commerce.
Today, off-price retailing has evolved into: chains such as Ross Stores, Burlington Stores and TJ Maxx (and TJX’s Marshalls, HomeGoods, Sierra Trading Post and HomeSense) offering significant savings on branded goods; outlet stores and malls where brands offer closeouts; and department store chains selling brands’ products at a discount through separate chains such as Nordstrom Rack.
Social media is also playing a key role. At Ross Stores, a frugal and smart shopper is also fashionable, and its a lifestyle supported by the #yesforless campaign. There are also numerous bloggers and Web sites that connect shoppers to deals on branded goods across the market.
From here, the off-price segment is poised for continued growth. Dana Telsey, chief research officer at Telsey Advisory Group, said TJX is well on its way to becoming a $40 billion “retail leader” by next year — “based on the strength of [the first half] performance.” Still, there are some challenges, at least on the P&L statement.
“We appreciate the longer-term growth story as the company is targeting 6,100 stores (versus a current base of 4,194) in only current countries and concepts, but the pre-tax margin continues to compress,” Telsey said in a research note. She’s got the stock pegged with a “market perform” rating and a $110 price target.
Burlington, meanwhile, is set to release earnings later this week. And Telsey and her team of analysts are bullish on this retailer. In a preview report, analysts at the firm said they “continue to view Burlington as having a solid runway for growth and expect that management will maintain their relentless focus on executing their strategic priorities including: 1) driving comparable store sales growth; 2) expanding, modernizing and optimizing the store fleet; and, 3) increasing operating margins.”
The analysts have Burlington rated “outperform” and have placed a $190 price target on the stock. Telsey said, “What has been encouraging to the comp performance is that traffic has been a key driver for a string of 13 consecutive quarters (in the last 15 quarters), a trend that we would not expect to abate.”
That’s traffic, in a physical store. Which is remarkable to consider as retailers close stores and focus and invest on e-commerce.
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