Off-price is thriving on inventory bonanza

Retailers’ inventory woes are turning out to be a treasure trove for off-price sellers such as T.J. Maxx.

  • By Jinjoo Lee,
  • The Wall Street Journal
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Retailers’ inventory nightmare is turning out to be the stuff of off-price retailers’ dreams.

Off-price retailers TJX Companies Inc. (), owner of T.J. Maxx, and Ross Stores Inc. () are seeing much healthier demand than others selling clothes and home-related products. TJX said that U.S. comparable sales at Marmaxx, a unit that houses T.J. Maxx and Marshalls, rose 3% in its quarter ended Oct. 29 compared with a year earlier. Notably, TJX called out strong apparel sales, proving that consumers will still shell out for discretionary purchases for the right brand and price. Ross Stores said on Thursday that it saw comparable-store sales decline 3% over that period—a much better result than the 7.5% drop that Wall Street analysts polled by Visible Alpha had expected.

Both off-price retailers raised their guidance for the fourth quarter. Ross Stores now expects comparable-store sales to be flat to down 2% in its fiscal fourth quarter compared with a year earlier and TJX expects U.S. comparable-store sales in the holiday quarter to be flat to up 1%. After Ross Stores’ earnings call on Thursday, its stock surged 16% in after-hours trading, narrowing its year-to-date decline to just 0.8%. TJX, which unveiled its results on Wednesday, is up 2.7% year to date.

A glut of available inventory as retailers across the board deal with excess merchandise has made it possible for the discount retailers to haggle with suppliers, many of which are desperately trying to get rid of unsold piles of goods. U.S. clothing stores had 24.1% more inventory in September compared with a year earlier, according to Census Bureau data.

In an earnings call on Thursday, Ross Stores Chief Executive Barbara Rentler said the buying environment has “gotten even better,” noting that even some companies that previously didn’t sell to Ross Stores were knocking on its doors. As a result, off-price retailers have been able to carry coveted brand-name goods at a reasonable price. Ms. Rentler said shoes were the best-performing category last quarter, partly because it was able to sell a good selection of branded products. Ernie Herrman, CEO of TJX, said Wednesday the “branded content is really going to be at a new level here going forward.”

In contrast with department stores and big-box retailers, which are discounting heavily, both TJX and Ross Stores have actually managed to raise prices. Ross Stores said on Thursday that while traffic declined from the year earlier period, its average basket size was larger because of higher average selling prices. That has translated to good profitability: The operating margin at Ross Stores was 9.8%, much better than the 8.6% that analysts were expecting. TJX’s pretax profit margin of 11.2% was actually higher than a year earlier. Profitability might have room to improve even further: TJX, for example, hasn’t seen pushbacks to its price increases so far and sees opportunities to raise them more.

In what is shaping up to be an ugly holiday season, off-price retailers could flash flattering top and bottom lines.

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