Can off-pricers overcome second-quarter turbulence?

Photos: Getty Images/Andrei Stanescu, helen89
Aug 27, 2020
Tom Ryan

TJX Cos. and Ross Stores are expected to gain market share amid the downturn, but their second-quarter performances reveal they still have to fight through inventory and store traffic challenges tied to COVID-19.

For both, sales significantly outperformed conservative forecasts as stores reopened, but started trending down in the mid-teens in July due to inventory shortages and slower in-store traffic, leading to cautious second-half outlooks.

The weakening sales trend was blamed on:

  • Supply chain bottlenecks: Both retailers reopened their distribution centers at the same time or after they reopened their stores and failed to ramp up fast enough to fill understocked store inventories. Vendors and transportation providers likewise initially encountered logistics hurdles. Ross faced a DC staffing shortfall due to heightened competition for warehouse workers.
  • Category gaps: Categories such as comfy casual and active apparel as well as home are in high demand amid the stay-at-home economy and currently tough to replenish. The sudden cancellation of orders from retailers and vendors combined with quickly shifting trends led to an imbalance. Product availability is expected to improve in the coming quarters and reach equilibrium by year-end. 
  • July and August moderation: Initial store opening sales were boosted by pent-up demand and aggressive markdowns, but traffic slowed in July and August due to the depleted inventory levels and a return to more normal demand. A resurgence of COVID-19 cases in California, Florida, Texas and Arizona impacted Ross. TJX also blamed reduced demand for career apparel and some nervousness about in-store shopping. Ernie Herrman, TJX’s CEO, on an analyst call estimated that at least one out of every seven or eight customers “just aren’t comfortable right now going into the brick & mortar.”

Both TJX and Ross expect to benefit from the stocks they packed away to support first-quarter sales, trading down by consumers amid the downturn, and buying and real estate opportunities created by consolidation.

Barbara Rentler, Ross’ CEO, said on an analyst call, “Over the longer term, we remain well positioned as an off-price retailer to continue to gain market share given the large number of retail store closures and consumers’ continued focus on value and convenience.”

DISCUSSION QUESTIONS: Were the challenges faced by TJX Cos. and Ross Stores in the second quarter temporary or long-term issues? What are the biggest risks facing off-pricers as a result of the COVID-19 disruptions?

Please practice The RetailWire Golden Rule when submitting your comments.
"If off-pricers continue to bet big on physical stores, low traffic could last for years. "
"It hard to see the off-pricers – particularly those in the soft goods categories — fully recovering any time soon, perhaps ever, as the Retail Darwinism continues."
"I think beyond 2020, once the vaccine is available, things will largely revert to mean — to the advantage of off-price retailers."

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19 Comments on "Can off-pricers overcome second-quarter turbulence?"

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David Naumann
David Naumann
CEO and President, Cogent Creative Consulting
4 months 26 days ago

Off-price and apparel retailers are going to have challenging times until the pandemic is gone. With a focus on physical store shopping and very limited or no online revenues, off-price retailers will need to shift their assortments to adapt to new demand patterns and continue to assure their customers that their store environment is safe. Adopting agile supply chain practices to accelerate procurement of merchandise, especially for high demand products, will be imperative for success.

Ryan Grogman

Discount retailers were faring quite well before the pandemic, and I have no reason to think they will not continue to thrive even more moving forward as personal finances are stretched thin due to job impacts and economic slowdowns. However, it’s clear that even off-price retailers need to respond to the changing needs of their consumers. It’s safe to assume that the revenue of TJX Cos. in Q2 was helped by their online sales, whereas Ross Stores’ lack of an e-commerce site was a missed opportunity. Both brands would also further benefit from BOPAC capabilities.

Suresh Chaganti

I think beyond 2020, once the vaccine is available, things will largely revert to mean — to the advantage of off-price retailers. They will take advantage of a recessionary economy and a gap in the competitive space created by retailers that permanently closed.

They do have two critical gaps 1.) category gaps and aligning their supply chain to fix those 2.) They don’t have meaningful e-commerce capabilities.

The lack of e-commerce is by choice, but I’d wager they will evaluate this again with changing consumer behavior and expectations.

Stephen Rector

While I think the challenges are temporary for both, there seem to have been a few big missteps in terms of management direction on how to be nimble and agile on both the supply chain side and merchant side. Without an e-commerce strategy in place, both companies have to execute well to remain successful in the future.

Neil Saunders

Yes I am sure that in time off-price will get back to growth. However the vast majority of off-price is linked to clothing and fashion and, unfortunately, spending in those areas is down sharply. This is especially so for occasion and event wear, which is an area where a lot of consumers use off-price retailers to get brands they love at low prices. How long the rebuild takes is linked directly to the course of the pandemic. Until our social and out of home activities resume, apparel sales will remain muted.

All that said, certain areas of off-price continue to grow. Off-price home furnishings sales are growing strongly thanks to increased spending on the home. In this sense, it is clear that the fortunes of the segment are linked to wider trends and are not the primary result of any failings or missteps by the off-price players.

Jeff Sward

I’d bet on the off-price guys bouncing back before the mall based department stores. The problems described are solvable. If they want to shift out of work apparel they can devote that space to home products. Leverage that demand and traffic to help apparel. Create more of a one-stop shopping opportunity. They are going to have to tear up parts of the old rule book.

Cathy Hotka

I’ll take a different tack — TJX and other off-price retailers are enjoying plenty of in-store traffic these days. That said, they would do well to invest in e-commerce capabilities ASAP; there’s no end in sight for this virus.

Brett Busconi

Go to the websites for Ross and for TJX.
TJX offers free shipping on orders over $89 and returns are free in store, but not if mailed back.
Ross doesn’t have an e-commerce option.

Both are strong brands and I expect in-store traffic will pick up, but both are missing the boat. TJX has an offer, although it is weak vs. others, and Ross doesn’t even have a seat on the boat.

Off-pricers can do well by adapting to the times. The need for these services is unlikely to decrease.

Lisa Goller

If off-pricers continue to bet big on physical stores, low traffic could last for years.

Their business models rely on consumers lingering in stores to discover unique items; yet now shoppers want to get in and out fast. Concerns about germs from crowds and merchandise have caused some shoppers to forego new purchases altogether.

Despite their affordability and variety, these retailers lack the digital infrastructure they need to compete in 2020.

In the fall, consumer reluctance to shop in stores will only increase if COVID-19 cases rise. To stay relevant and solvent, off-pricers need to invest in robust e-commerce capability, and supply chain integration and visibility to give consumers more choice and reliable service.

Gary Sankary

Given the impact on the economy during the pandemic I think this sector of retail is positioned well for a rebound in the second half of the year. Investing in an e-commerce strategy is important, but so is supporting their in-store businesses. There’s a “treasure hunt” aspect of their business that’s difficult to create digitally.

Ryan Mathews

The right answer is, it’s complicated. It all depends on variables we can’t calculate now — infection/death rates, whether or not we get a vaccine, whether or not the novel coronavirus mutates, whether it is a mild or severe flu season, whether and for whom some CARES Act payments continue, unemployment, etc. I’d say the biggest long-term risk is that people aren’t dressing the way they used to even a year ago, so demand is artificially depressed. Combine that with supply chain issues and you are looking at a perfect storm.

Gene Detroyer

Nothing about Q2 is projectable in any way, neither the good, the bad nor the ugly. No matter sales or operations. Situations like COVID-19 highlight weaknesses. That said, there will be a return to a higher mean for good operators or a disappearance for poor operators. The same goes for Ross and TJX and other off-price stores.

Phil Rubin
4 months 26 days ago
It hard to see the off-pricers – particularly those in the soft goods categories — fully recovering any time soon, perhaps ever, as the Retail Darwinism continues. Five reasons: Inventories are low and unless the big boxes offer up what they couldn’t sell during the spring, things might get worse next year. As manufacturers reduce and “right-size” production, and focus on higher margin business, the challenges will continue. The challenge extends with being largely physical in an environment that prioritizes e-commerce. The off-price chains, especially those focused on soft goods, have always lagged in the e-commerce world, hence the rise of brands like Gilt, Haute Look and Net-a-Porter. The latter have had their own struggles. There is contraction for all kinds of reason in many soft good categories beyond casual wear. And there are plenty of alternative, better-branded outlets for those goods, including manufacturers’ own factory stores. If you support the thesis that strong brands will reduce their indirect business, then you have to also conclude that that applies to off-price as well. Competition from… Read more »
4 months 26 days ago

They need inventory….

I don’t think it is terribly important for Ross to sell online. Ross targets a very specific demographic, and I do not think that demographic does much shopping online. They buy a product when they need it, the day of. They don’t have time to wait for it to show up. Ross also frequently operates in more “neighborhood” type locations in former grocery store buildings so they tend to be more convenient for customers to visit quickly as part of their daily routine.

TJX on the other hand who seems to be targeting a lot of the middle class/upper middle class “treasure hunt” type customers who buy heavily on impulse who do shop at other stores is in a riskier They definitely need to beef up online. TJX is often located in power centers and not as convenient for customers to visit quickly as part of their daily routine.

Cynthia Holcomb

Too bad neither retailer truly invested in eCommerce capabilities. With transient inventory, online inventory is indeed an understood challenge. Yet, in the face of the decade long, dramatic and rampant reinvention of brick and mortar retail, it seems TJX Cos and Ross missed the easily calculable 21st Century opportunity of eCommerce.

An all hands-on-deck approach to building even a limited eCommerce offering ready for Q1, 2021 of home basics and comfort apparel would be a wise approach to offset the continued loss of in-store traffic due to COVID in Q1. It is imperative in my opinion that off-pricers invest in eCommerce as an alternative to in-store shopping.

Shopping patterns have changed and likely will continue to be hit and miss at least for the next few years if ever even returning to the past “normal.” Meanwhile, there are plenty of treasure hunts available on Amazon, eBay, Shopify, and a multitude of other digital shopping platforms being discovered daily due to the COVID effect. Off-price Treasure is a calculable commodity.

4 months 25 days ago

Again these chains have a different customer who is still used to the concept of going to a physical store. The margins on these items are very thin and often in limited supply making an e-commerce strategy very challenging.

They could perhaps procure a set of stand alone “basic” products for e-commerce only that is different from their usual store merchandise.

When Ross and TJX reopened stores, many locations had lines out front waiting to get inside. Nobody was in line for Macy’s, JCP, Nordstrom, etc. The target customer for this format wants to shop in a store.

Ananda Chakravarty

Long term, there’s no reason to believe that off-pricers won’t be able to regain their mojo. The current scenarios from the pandemic are primarily from supply chain challenges and lack of online presence. Combine that with “essential” status and you have a difficult quarter. The long-term issues that remain may include a shift away from work-focused clothing and though home furnishings are solid during the pandemic, these are not always recurring purchases and may eat away at future earnings. I expect clothing to shift towards more home-work focused clothing in the future. Online presence for many off-pricers, though not critical, can be an advantage during this timeframe.

Craig Sundstrom

One might think that reduced demand and reduced supply (inventory) are a good match for each other; of course we have to consider possibility the latter drives the former…and to the extent that “traffic” is a proxy for “demand” that conclusion will be offered.

The biggest risk off-price retailers face long term is the same one (almost) all retailers face: as the health crisis goes on, the economic one grows … and the Recession threatens to become a Depression.

William Passodelis

This is all temporary. They will have opportunity for plenty of inventory and offering.

And there are many, many people out of work and hurting — this emphasizes the need for and ongoing success of both of these competitors.

Hopefully we will be able to put COVID-19 in the past in 6 to 9 months — however, the economic ramifications from all of this are going to take longer to smooth out and hopefully resolve — IMHO.

And I agree, I also noticed lines outside of these retailers when they reopened! I was really surprised — and the other stores except for Walmart and Target were EMPTY!

"If off-pricers continue to bet big on physical stores, low traffic could last for years. "
"It hard to see the off-pricers – particularly those in the soft goods categories — fully recovering any time soon, perhaps ever, as the Retail Darwinism continues."
"I think beyond 2020, once the vaccine is available, things will largely revert to mean — to the advantage of off-price retailers."

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