Supply side: low-cost retailers thrive without e-commerce
The low-cost retail sector quickly recovered from the pandemic, which temporarily closed stores for much of last year. Three large low-cost retailers, Burlington, Ross Stores and TJ Maxx, which have little to no e-commerce, saw their sales return in 2021.
These chains also sell household items, and that part of their business took off amid the pandemic. They also continue to be popular with consumers who want to refresh their wardrobe with new clothes and fashion accessories.
Burlington, the smallest of the three major low-cost retailers with 792 stores, recently announced an aggressive growth strategy with the potential to expand to 2,000 stores in the next few years following the closure of the e-commerce operations of the ‘business. The plan also calls for smaller stores, more in line with competitors Ross and TJ Maxx.
Laurie Hummel, senior vice president and general merchandise manager for Burlington, said at the Texas A&M Retailing Summit in Dallas last month that the retailer’s decision to shut down the online business made sense given the model deals currently underway. close and operates with lower margins. She said the cost of execution and last mile delivery was too dilutive for margins, let alone the cost of returns. With the money saved by shutting down the e-commerce business, Burlington plans to open another 100 over the next year.
Burlington had strong sales in the first half of this year, up 34% from the pre-pandemic period of 2019. Net income increased 69% to $ 274 million. Comparable sales increased 19% compared to the pre-pandemic period of 2019.
Despite strong sales and margin gains in the second quarter, Burlington CEO Michael O’Sullivan told analysts the retailer was cautious in the near term due to uncertainty surrounding the resurgence of the pandemic and a supply chain situation that he said was “getting worse”. Burlington and its competitors will release their third quarter results in late November.
Wells Fargo analysts believe Burlington “should thrive” in the long term, despite short-term concerns over supply costs and uncertainties in retail. Wells Fargo analyst Ike Boruchow said Burlington would ultimately benefit from the woes of other retailers, as in the past.
“The unexpected events of 2020 have resulted in numerous retailer bankruptcies and therefore serious inventory dislocations,” noted Boruchow. “The last time a similar dynamic occurred was in 2008, which was followed by a decade of non-price equity gains and stability. [Burlington] performance. If history repeats itself, Burlington should be well positioned to take advantage of the new premium offering from brands entering the market given its low-cost business model, which could lead to further market share gains and push sales. margins at record levels for the company. “
Hummel said Burlington’s new look will be a well-stocked, smaller store with a balance of home goods, clothing, shoes, other fashion accessories and beauty products. She said less than 10% of the inventory would be coats and outerwear, which previously constituted a larger share for the retailer formerly known as Burlington Coat Factory.
She said stores like Rogers’ have already been downsized, with about a third of the old space now blocked. She said the retailer would renegotiate tenant rents and use smaller sizes between 25,000 and 32,000 square feet.
Winning the supply chain
When asked how the discount could ensure adequate inventory amid the supply chain disruption, Hummel said the best thing about the discounted prices is that she always buys for the holidays until October. She said not everything is from China and there are plenty of ways for the retailer to source from the United States.
Ross said having reduced inventory by 2021 meant he didn’t have to take a lot of markdowns, which bolstered his margins. Ross reported that inventories were down 5% in the middle of the year, while average retail store inventories were up 3% from the same period in 2019, before the pandemic. Ross CEO Barbara Rentler said sales rose 21% in the second quarter of this year to $ 4.8 billion. Comparable store sales increased 15% and net income increased to $ 494 million, up nearly 20% from the comparable period.
Rentler reiterated that Ross is back to his pre-pandemic plans to open about 100 new stores each year on track to 3,000. Like Burlington, Ross executives have said there is some uncertainty about sustainability. positive external factors benefited the results for the first half of the year. The company did not provide any forward-looking guidance given the uncertainties, but equity analysts called Ross’s results “strong.”
Jen Redding, analyst at Wedbush Financial, said there was a lot of inventory, but shipments were declining given consumer demand that was teeming with stimulus cash. She said lower inventory had been a boon for Ross and Burlington, who could continue merchandise and sales trends for higher margins amid the recovery.
TJX Cos. Inc., the parent company of TJ Maxx, Marshalls, HomeGoods, Sierra and HomeSense stores, also had a strong first half of 2021. Second quarter sales increased 23% to $ 12.1 billion, and mixes were on average 20% compared to the same period. in 2019. Like his competitors, TJ Maxx CFO Scott Goldenberg told analysts in August that supply chain disruptions could work in his favor.
“We think this will probably create a future buying opportunity for us,” he said.
Boruchow agreed, saying the low-cost retail industry continues to benefit from volatile inventory dynamics in the retail landscape.
Deutsche Bank analysts last month said the top three non-price players would fare better than most retailers next year. In addition to an expected moderation in supply and freight issues, analysts said retailers have specific advantages.
“We recognize that trends can be volatile in the short term, particularly on the margin front,” the note said. “But low-cost retailers are poised to continue to gain market share through the continued shift of consumers towards valuable scavenger hunting experiences and shopping. The low cost sector will have more opportunities to source goods as stocks and promotions normalize. “
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