For a discount retailer like TJ Maxx, which regularly supplies unsold inventory, 2021 is going to be a hungry year. A party might be coming.
In normal times, such stores source their inventory through two large groups. About three-quarters are sourced from merchandise that local stores sell at bargain prices (think of stores running out of business or piles of unsold clothes at the end of the season), while a quarter are ordered directly from suppliers and factories (mainly in Asia), estimates Michael Binetti, equity analyst at Credit Suisse. Last year’s unusually tight inventory situation upset that ratio. In a research report, Credit Suisse estimated that so-called direct purchases from factories or suppliers accounted for 75% of the inventory declines last year.
According to the report, that number hit the profit margins of companies that cut prices last year. For starters, merchandise purchased directly has been a less profitable form of sales than closed-off inventory. Also, last year, sea freight was especially expensive, making sourcing dresses and shoes from Asia much more expensive. Low-cost retail is one of the rare spots in the apparel retail sector as profit margins actually decline in 2021 compared to 2019.
Now, the misfortunes of other retailers could overturn that scenario.
Cos. CEO Ernie Herrman said during the company’s earnings press conference last Wednesday that the inventory buying environment is “extremely loaded across the board”. Barbara Rentler, CEO of
“There’s a lot of supply there,” said on an earnings call Thursday.
Discount retailers are getting so many calls with inventory offers that they’re starting to wait for offers, Mr. Binetti said. “They know they’ll get callbacks for a better price.” Mr. Binetti’s team estimates that the return of closed inventory could add 2.5 percentage points to merchandise margins for discount sellers over the next two years.
For now, however, the sales environment doesn’t look rosy, especially for discount chains that have more exposure to cash-strapped consumers. TJX, which targets a relatively broad base, recorded steady-state store sales in the quarter ended April 30 from a year earlier. Ross Stores, which has the average customer with a household income of $60,000 to $65,000, said Similar store sales decrease 7% over the same period. dd’s DISCOUNTS owned by Ross Stores, which serves a lower-income demographic ($40,000 to $45,000 in household income), is even worse.
Michael Hartshorn, managing director at Ross Stores, said: “I’d say the health of our customers… they’re in a tight squeeze – food and fuel prices with inflation there means they have spend less on discretionary items,” Michael Hartshorn, managing director at Ross Stores, said Thursday to investors.
How well discount retailers perform in the future depends in part on the severity of the economic downturn. For both discount and dollar store, sales growth was weak during the early stages of the 2008 recession as their patrons made fewer purchases. But they eventually thrived as higher-income consumers also began to feel the squeeze.
While predicting the size of an economic downturn is difficult, it’s easy to see how dire today’s sales environment is for brick-and-mortar stores that are dealing with rapid change. quicken consumer preferences at a time when they need to order early to get ahead of the supply-line bottlenecks. That makes for an ideal environment for discount chains, which are nimble operators. Having at least one part of the profit equation in the pocket — cheap, plentiful goods — is a big plus.
Even after recently bloodbath in retail warehousemany still show higher stock prices than at the end of 2019, including
A broad basket of retailers — the S&P Retail Options Industry Index — has gained more than a third since then. In contrast, TJX, Ross and
prices are still lower than pre-pandemic levels.
Investors don’t have to look at the prices at TJ Maxx to look for a deal here.
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