Strong gross margins
Despite tough macro conditions and a highly promotional environment, major off-price retailers TJX Companies (TJX), Ross Stores (ROST), and Burlington Stores (BURL) were able to deliver improved gross margins in their respective fiscal years. Fiscal 2016 for Ross Stores and Burlington Stores ended on January 28, 2017, and fiscal 2017 for TJX Companies ended on the same date.
In fiscal 2016, Ross Stores’s gross margin increased 50 basis points to 28.7%. TJX Companies’s gross margin increased 20 basis points to ~29.0% in fiscal 2017, driven by higher merchandise margins, leverage on buying, and occupancy costs on strong same-store sales.
Burlington Stores’s (BURL) gross margin increased 80 basis points to 40.8% in fiscal 2016, driven by higher merchandise margins. The company’s gross margin was higher than its off-price peers in fiscal 2016. However, Burlington Stores doesn’t include occupancy costs in its costs of goods sold.
Operating margin comparison
In fiscal 2016, Ross Stores’s operating margin increased 40 basis points to 14.0%, mostly due to its higher gross margin, which was partially offset by the impact of increased wages. TJX Companies’s operating margin decreased ~60 basis points to 11.4% due to higher wages and investments to support growth.
Burlington Stores’s operating margin increased to 6.8% in fiscal 2016 from 5.7% in fiscal 2015. The retailer’s operating margin in fiscal 2016 benefited from an improvement in store-related costs, as well as marketing and strategy costs as a percentage of sales. Overall, Ross Stores delivered a higher operating margin in fiscal 2016 than TJX Companies and Burlington Stores during the comparable timeframe.
Initiatives to improve
Retailers are trying to optimize their operations and control costs in an effort to enhance their margins and mitigate the impact of a highly competitive market. Burlington Stores (BURL) is seeking to improve its operating margin by optimizing markdowns, enhancing its purchasing power, and driving operating leverage by improving its operational efficiency.
Burlington Stores believes that its increasing size and West Coast buying office could help leverage buying opportunities and realize economies of scale in its purchasing activities. However, higher wages and growth-related investments are expected to put pressure on the margins of Burlington Stores and other off-price retailers.
We’ll discuss the stock price movement of off-price retailers in the next part of this series.