Moody’s: Off-Price Growth Slowing But Still Outpacing Apparel Overall

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TJX

The gulf between off-price and department store performance continues to be vast, but the divide could narrow some.

In a report released on Tuesday, Moody’s Investors Service said that while off-price will continue to outperform the overall apparel sector over the next 12 to 18 months, the growth rate has decelerated. Operating income for off-price, which hit 9.6% in 2016, is anticipated to cap at 6.9% this year and only reach 5.4% in 2018. Meanwhile, apparel retail in general is expected to perform at 4 percent.

Compare that to department stores, which will see operating income decline by 9.3% this year and 2.7% next year. While the department store sector is trying a variety of strategies to pull out of its nose dive, Moody’s said the “outmoded formats and supply chains that cannot keep pace with customer demand” simply aren’t a match for the “lower-cost, higher value products and shopping experience” off-price can provide.

“The purchasing model for off-price requires flexibility and speed in meeting consumer demand much closer to the time of sale,” the report said. “Departments stores and specialty retail operators still struggle with long lead times because their product flow is not only impeded by its internal processes but also the ability of its vendors to shorten its lead times.”

Off-price is not without its challenges, however. The sector’s slower growth is attributed to the rapid pace of new store development along with higher minimum wages across several states.

Although some department stores are trying to chase the off-price success with their own concepts, Moody’s pretty much dismisses them. “We see little chance of anyone–let alone department stores–overtaking off-price incumbents,” the report noted. “We expect that TJX, Ross Stores, Burlington and Nordstrom Rack will remain the dominant leaders in this sector.”

Bricks vs. clicks

While other apparel chains are shuttering doors at a rapid pace, off-price has growth in mind—and little to no online aspirations. The sector is sticking to the formula that’s made it a fan favorite: an assortment that changes rapidly and offers lower prices, yielding a treasure hunt style adventure for shoppers. To capitalize on its popularity, the major players plan to increase domestic square footage by 4.2% this year.

Meanwhile, department stores are continuously brainstorming new ways to make what remains of their physical fleets work for them. “What was once an asset (having an abundance of choice in one place) has become a liability because customers are now doing their product browsing and research online, before the store visit,” Moody’s said.

In some cases, making lemonade out of lemons means reconfiguring the space to offer less inventory, while in others, the focus is on tying stores to the online shopping experience with services like buy online, pickup in store.

The sector is pulling more and more tricks out of the bag in an attempt to retain revenue lost due to having fewer locations. Moody’s said department stores can expect to retain an average of 15 percent to 40 percent of sales in these instances.

Partly to recoup some of these losses, department stores are investing heavily in their online businesses. They’re also being pushed toward online sales because consumers are turning to the Internet for apparel in greater numbers than other product categories. “This necessitates duplicative costs, which include supplying two different channels, and is contributing to the subsector’s big margin squeeze,” Moody’s said. “We expect these operators to continue focusing on supply chain management, which is critical to improving operating efficiency.”

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