uploads/2015/04/Net-Sales-vs-peers21.png

What’s Attracting Major Department Stores to the Off-Price Space?

By

Updated

Share price performance

As of April 20, 2015, off-price retailers TJX Companies (TJX) and Ross Stores (ROST) had appreciated by 266% and 379%, respectively, since the beginning of 2010. Department stores like Nordstrom (JWN) and Macy’s (M) had appreciated by 102% and 292%, respectively, over the same period, while JCPenney had declined by 68.2%. Nordstrom’s aggressive expansion into the off-price category through its Rack stores has propelled the company’s growth in recent years.

Article continues below advertisement

Off-price retailers

TJX Companies, a leading off-price retailer, saw 6% sales growth to $29.1 billion in the fiscal year ended January 31, 2015. This surpassed the sales of Macy’s, the largest department store.

Consumer spending has improved compared to recession levels, yet people continue to be cautious when it comes to discretionary items. Shoppers are looking for better deals at off-price retailers like TJX Companies, which sells merchandise at a discount of roughly 20.0%–60.0% compared to department stores.

Why department stores are expanding into off-price

The upscale department store Nordstrom has been expanding its off-price Rack stores at a faster pace compared to its full-line stores due to the advantages associated with the off-price model. Off-price stores are attracting more consumers. Also, these stores require lower capital investment compared to a typical department store like Macy’s or the full-line stores of Nordstrom.

The off-price business models of TJX Companies and Ross Stores help them turn their inventories at a faster rate. In the fiscal year ended January 31, 2015, the inventory turnover ratios for TJX Companies and Ross Stores were 6.7x and 6.0x, respectively. Compare those numbers to the inventory turnover ratios of 3.0x, 3.1x, and 5.2x for Macy’s, Kohl’s (KSS), and Nordstrom, respectively.

Off-price retailers also enjoy higher margins. This is because they purchase merchandise from suppliers at lower prices. In fiscal 2015, TJX Companies and Ross Stores reported operating margins of 12.4% and 13.5%, respectively. Macy’s and Nordstrom ended the comparable fiscal year with operating margins of 9.9% and 9.8%, respectively.

TJX Companies and Macy’s make up about 1.9% and 1.0% of the Consumer Discretionary Select Sector SPDR Fund (XLY), respectively.

Advertisement

More From Market Realist