RECENT NEWS
SeekingAlpha  Mar 18  Comment 
By David Trainer: Check out this week's Danger Zone Interview with Chuck Jaffe of Money Life and MarketWatch.com. Discount retailer Tuesday Morning (TUES) is in the Danger Zone this week. Brick and mortar stores continue to struggle against the...
Forbes  Mar 17  Comment 
Brick and mortar stores continue to struggle against the onslaught of online retailers, and discount retailer Tuesday Morning (TUES) is not positioned well to meet this challenge. With no online store, inferior operational metrics to its peers,...
The Straits Times  Mar 12  Comment 
March 13, 2014 12:35 AM LONDON (AFP) - Discount retailer Poundland's remarkable rise in Britain was capped on Wednesday as it debuted on the London stock market - largely unnoticed by customers browsing the piles of chocolate and bottles of...
Financial Times  Mar 12  Comment 
Poundland underlines investor enthusiasm for London retail flotations after shares in the discount store chain jump, but Pets at Home falters
Reuters  Mar 10  Comment 
Target Corp has been sued by Swatch Group SA, which accused the second-largest U.S. discount retailer of illegally selling watches that copy its own.
Financial Times  Mar 5  Comment 
US discount retailer is overhauling its information security and compliance practices in the aftermath of a massive holiday season breach
Forbes  Mar 4  Comment 
Shares in Chinese online discount retailer Vipshop Holdings gained more than a third in trading at the New York Stock Exchange today, paving the way for a second billionaire to emerge from the company in just the past few days.
Reuters  Feb 28  Comment 
British discount retailer Poundland has set its share offer price range at 250-300 pence, giving an implied market value of 625-750 million pounds ($1.04-$1.25 billion)...
Financial Times  Feb 26  Comment 
Net income almost halves to $520m, or 81 cents a share, as the US discount retailer deals with the continuing fallout of a cyber breach




 
TOP CONTRIBUTORS

Off-price retailers sell clothing and accessories from major-label brands at a significant discount. These companies take advantage of overruns, canceled orders, and forecasting mistakes made by their counter-parts in the full-price retail sector. When a major designer produces more clothing than it can sell through specialty retailers or department stores, or a store can't move all of the items in a particular line, the excess inventory is sold at a 20%-60% discount to an off-price retailer. The company passes these savings onto consumers, marking up goods by a lower percentage than full-price stores and instead building their operating margins by moving a high volume of inventory quickly, at rock-bottom prices.

Companies that Sell Off-price Retail Products

The Big Three

  • TJX Companies (TJX) is the largest North American off-price retailer, in terms of revenues and market cap, and it dominates the East Coast market in the United States. TJX had $17B in revenues in 2007.
  • Ross Stores (ROST) is TJX's closest competitor, focusing on West Coast markets. Ross had just under $5B in revenues in 2007.
  • Big Lots (BIG) has a similar market share to Ross Stores, and operates 1400 stores in 47 states.

Other Off-price Retail Stores

  • Syms Corp (SYM) operates 34 off-price stores in the Eastern and Midwestern United States.
  • Stein Mart (SMRT) and Chico's FAS (CHS) target fashion-conscious, value-seeking 35-60 year old women with above average annual household incomes as their core customers.
  • Filene's Basement (BSMTQ) sells discounted branded and private label merchandise at prices significantly below traditional department store prices.
  • DSW (DSW) sells dress, casual, and athletic footwear at discounted prices.

Online Off-price Retailers

  • Overstock.com (OSTK) offers a huge range of discounted goods at its online e-commerce site, from bathroom and kitchen products to sports apparel and jewelry.
  • Bluefly (BFLY) offers a selection of over 350 discounted designer brands on its website.


Overview

Off-price companies serve a special niche in the retail industry, capitalizing on volatility in consumer demand and mistakes made by designers and full-price retail outlets to keep their stores stocked with new low-price products. It is the unpredictability of the market, and the inability of designers and retail stores to perfectly predict consumer demand, that create excess inventories for off-price consumption. While a specialty retail or department store must rely on fashion trends and innovative product designs to drive profits, an off-price retailer depends instead on its ability to move high volumes of goods quickly, and on its relationships with designers and distributors who provide the low-cost inventory on which its stores depend. Off-price companies rely on extremely lean cost structures, using their scale along with sophisticated systems and distribution infrastructure to maximize productivity while maintaining the lowest possible prices for consumers.

Error creating thumbnail

Trends and Forces that Affect the Off-price Market

Fashion is not the key variable in Off-price Retail

Fashion trends are a key driver of profits in the full-price retail industry; a designer often compensates for several poorly selling products with one hot, fast-selling line. The off-price sector does not have this luxury - firms in this industry must make the right decisions about what products to buy and sell, because they operate at such small margins on each individual product. Three key factors in off-price retail profits are:

  • Scale - the company purchases a huge amount of inventory and distributes it throughout its network of stores, selling in large volumes (as opposed to the full-price fashion industry, in which exclusivity and low supply, high demand products are the norm).
  • Operational expertise - off-price companies can't afford to take major losses on a product, because of their lean costs structures; this makes decision-making and the ability to predict what products will sell quickly an essential part of off-price retail success.
  • Vendor relationships - designers and department stores must sell their excess inventory at prices low enough to fit the off-price model, so companies in this sector must have strong business relationships with wholesalers and designers in order to guarantee continual flow of low-price inventory.

Off-price Companies Depend on Manufacturing Mistakes for their Product Supply

Imperfection in the retail industry is what makes the off-price model possible. When a major label like Polo Ralph Lauren (RL) miscalculates consumer preferences and over-produces a product, it will send the excess inventory to T.J. Maxx at a huge discount. The margin that RL earns on this excess inventory is dramatically less than what it earns in specialty retail and department stores, so the company looks to avoid this situation whenever possible. If companies like Ralph Lauren could predict consumer preference perfectly, off-price retailers would no longer have an economic niche - but as long as buyers remain fickle and selective in their spending habits, off-price companies will continue to fill a need in the marketplace.

Off-price Retail is Growing Faster than its Full-price Counterparts

The two largest firms in the off-price sector, TJX and Ross, have combined to grow sales at a Compounded annual growth rate - CAGR of greater than 10% over the past five years, well above the average annual growth rate in the apparel industry of ~4%.[1] The numbers indicate that more consumers are looking for value-shopping options, and off-price firms are predicting similar growth in the next five years and looking to expand into new markets.

Cost Pressure on the Industry is Building

The rise in Commodities Prices, and especially the price of oil, puts pressure on the off-price industry's already lean margins. Passing these costs onto the consumer is a major risk for an off-price company that depends on its steep discounts to attract business. High commodities prices also lead to inflation, and higher worker wages, which could further constrict off-price margins. On the flip side, when consumers have to spend more on basic commodities they will look for cheaper alternatives when they buy non-essential goods like clothing and footwear, which could benefit the off-price sector.

How U.S. Economic Cycles Impact Off-Price Retail

Many analysts and investors are predicting a recession in 2008, with some arguing that it has already begun. This is due to the effects of the subprime lending crisis, which has thrown the financial services industry into a tailspin and restricted the amount of money lent and borrowed by large institutions. This has created a lack of liquidity and a Credit crunch that has slowed consumer spending and affected retail sales. Most retailers are reporting lower sales numbers in the first quarter 2008.

But the off-price sector is affected by a recession somewhat differently than its counterparts in the full-price business. Consumers are likely to become more cost-conscious in a recession, motivating them to turn to off-price stores, while large department stores and designers will have a difficult time moving products, resulting in greater excess inventories for the off-price firms.

Nonetheless, the products that off-price retailers sell depend on discretionary income. Clothing, footwear, home products, and the other items that off-price retailers offer are not necessities, for the most part. So consumers must have some disposable income to spend on retail, even at an off-price store. The advantages that an off-price retailer holds in a recession are unlikely to create higher sales numbers; but they could help off-price firms fare better than their specialty counterparts who will struggle to sell high-end products in a depressed spending environment.

  1. Data from Bear Sterns, September 2007
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki