Off-Price Retail Is Fully Priced -- Heard on the Street
By Jinjoo Lee
Despite their gravity-defying sales track record, the holidays
were a reminder of just how much off-price retailers' fates are
tied to physical stores.
Both TJX Cos. and Ross Stores' sales during the holiday season
were lower than analyst expectations, down 10% and 4%,
respectively, in the quarter ended Jan. 30 compared with a year
earlier. For TJX in particular, its international footprint was a
burden: At certain times in the quarter, the retailer had to
temporarily close all stores in Europe and the majority of Canadian
stores, leading to substantial sales declines. Ross Stores, which
only operates in the U.S., said on a Tuesday earnings call that
California, its largest market, underperformed because of
The good news is that restrictions are becoming less likely as
vaccination efforts get under way. For the full year, both
retailers saw their total revenue decline more than 20%, which
isn't terrible considering that neither have significant online
sales. Net income declined more dramatically, by at least 95% for
both. Still, both managed to stay profitable overall for the year.
That is a testament to the cost efficiency of their business
models. Pre-pandemic, both TJX and Ross Stores boasted operating
margins that were roughly double that of department stores.
The popularity of home goods has been both a gift and a burden
to these retailers. While such goods have helped lift sales, TJX
Cos. noted in its earnings call last week that the shift to
non-apparel categories has added pressure to margins. For the full
year, the home category accounted for almost 40% of overall sales
at TJX, up from 33% the prior year. Of course that also means that
when the pandemic lifts and consumers return to clothes shopping,
TJX could get a margin boost.
The long-term picture for off-price retailers undoubtedly looks
good; they have a track record of performing well during and after
economic downturns. While the S&P 500 lost more than 14% of its
value from December 2007 to December 2010, TJX and Ross Stores
gained 55% and 147%, respectively. Both have been steadily gaining
market share from department stores and intend to do more of that
this year by continuing to open new stores.
There are some wild cards that the pandemic has introduced,
however. Several apparel brands -- including Under Armour -- have
shifted away from selling to off-price retail to preserve margins
going forward. TJX argued in its earnings call that this isn't an
issue because it can buy from other, newer brands. Still, it is a
risk that needs to be monitored; the value proposition of
discounters goes away if they stop carrying brands that customers
want. The other risk is that customers are much more comfortable
shopping online and directly from brands now than they were before
the pandemic. Both Macy's and Best Buy noted in their respective
earnings calls last week that digital sales could account for 40%
of total sales going forward.
Despite these uncertainties, TJX and Ross Stores' shares are
trading at 28 times and 26 times forward earnings respectively.
Both were valued at roughly 20 times forward earnings before the
pandemic. No discounts to see here.
Write to Jinjoo Lee at firstname.lastname@example.org
(END) Dow Jones Newswires
March 03, 2021 06:44 ET (11:44 GMT)
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