Can Off-Price Retailers Sustain Their Strong Sales Growths?

Off-price retailers TJX Companies (TJX), Ross Stores (ROST), and Burlington Stores (BURL) delivered strong sales growths in 1Q16. These off-price retailers performed better than major department stores such as Macy’s (M) and Kohl’s (KSS).

Besides the intense competition from off-price retailers, department stores are also being adversely impacted by strong online retailers such as Amazon (AMZN).

Off-price retailers sell their merchandise at deep discounts compared to similar merchandise sold by department stores.

In 1Q16, TJX Companies reported sales growth of 9.9% and same-store sales growth of 7%, driven by strong consumer traffic. TJX Companies is the largest off-price retailer in the United States based on sales. For a business overview of TJX Companies, read TJX Companies: A Tour of the Retail Powerhouse.

Ross Stores reported sales growth of 5.1% in 1Q16 and a same-store sales growth of 2%. However, the company missed the consensus sales’ estimate. Ross Stores’ 1Q16 sales were adversely impacted by merchandising execution issues in the ladies apparel category.

Burlington Stores delivered revenue growth of 8.2% in 1Q16, driven by same-store sales growth of 4.3% and a $52.6 million in contributions from its new and non-comparable stores.

TJX Companies and Ross Stores together account for 3.2% of the Consumer Discretionary Select Sector SPDR ETF (XLY).

High-end department store Nordstrom (JWN), which also operates off-price Nordstrom Rack stores, delivered lower-than-expected sales growth (including credit card revenues) of 1.1% in 1Q16. The 1Q16 sales of its off-price Nordstrom Rack stores rose by 7.6%.

Consumers are still resorting to bargain-hunting at off-price stores. This is adversely impacting department store sales. Macy’s and Kohl’s reported sales falls of 7.4% and 3.7%, respectively, in 1Q16.

For 2Q16, TJX Companies expects its sales to be in the $7.7 billion–$7.8 billion range, compared to sales of $7.4 billion in 2Q15. This sales guidance assumes a -1% impact due to currency headwinds. The company expects its comparable same-store sales to rise in the 2%–3% range.

Ross Stores has issued conservative guidance for its 2Q16 sales, given the uncertain retail environment. The company expects its overall sales to rise in the 4%–5% range. Ross Stores expects its same-store sales for 2Q16 to rise in the 1%–2% range, compared to 4% growth in 2Q15.

Burlington Stores expects its 2Q16 same-store sales to rise in the 2.5%–3.5% range compared to their rise of 5.6% in 2Q15.

We’ll discuss the inventory management of off-price retailers in the next part of this series.