Off-Price Retailers Making Inroads Against Department Stores

 
   By Karen Talley 
 

Off-price retailers including TJX Cos. (TJX) and Ross Stores Inc. (ROST) are making inroads into the traditional turf of department stores, a point driven home by strong sales during the holidays.
The off-price retailers, which also include Stein Mart Inc. (SMRT), are taking market share by offering virtually the same merchandise as department stores, but at lower prices. The off-price retailers generally do this by striking closeout or clearance deals with vendors. They aim to offer prices 20% to 60% below those of department and specialty stores.
The strategy appears effective, with the off-price stores demonstrating their latest standout performance during the holidays, lifting earnings guidance while many other retailers struggled.
The increases for TJX, which operates T.J. Maxx and Marshalls stores, and Ross came after both posted 6% growth in comparable-store sales for the holiday month of December, each more than twice the amount analysts expected. "These gains were on top of our most challenging sales comparison of the year and demonstrate the ongoing resilience of our off-price model," said Ross Stores Chief Executive Michael Balmuth. Comparable sales grew 9% in the year-ago period.
Stein Mart, an off-price retailer that seems to be overcoming difficulties experienced over the last several years, reported 5.9% growth, almost three times expectations.
Off-price operators' same-store sales started outperforming rivals like department stores and mass merchants around the time of the recession. The momentum increased at the end of 2011, as the presidential election approached and the uncertainty caused a drop in consumer confidence.
Two of the department-store industry's weakest links are especially vulnerable, said Paul Lejuez, retail analyst at Nomura Equity Research. "We believe off-pricers have taken share from both J.C. Penney Co. (JCP) and Kohl's Corp. (KSS) and continue to pose a market share threat, given their better brands" at attractive prices, Mr. Lejuez said.
Spokeswomen for J.C. Penney and Kohl's didn't respond to requests for comment.
Macy's Inc. (M), the largest U.S. department store by sales and one that is performing well, still looks over its shoulder at what the off-price retailers are doing. "While not as directly as other forms of retail, everyone who sells anything in a category sold at Macy's is a competitor," said Macy's spokesman Jim Sluzewski.
In the case of Kohl's and Penney, both retailers are going through tough times to begin with. Off-price retailers' taking business only exacerbates the problems.
For their part, off-price retailers set themselves up in an appealing way to vendors. They are typically willing to purchase less-than-full assortments of items, styles and sizes in quantities ranging from small to very large; they pay promptly; and they generally don't ask for typical retail concessions such as advertising; delivery concessions like drop shipments to stores; or return privileges.
TJX sees value "as the combination of fashion, quality, brand and price," spokeswoman Sherry Lang said. Add to that measure effective marketing strategies and other factors and the result is increased customer traffic, Ms. Lang said.
Stein Mart didn't respond to requests for comment.
The momentum should endure, said Mark Montagna, retail analyst at Avondale Partners. "Right now, customers are looking for name brands at a value price and these retailers have what the customer wants."
Mr. Montagna also said the retailers benefit by always having low prices "so you don't have to wait for a sale" and they have better inventory turnover because they keep it low and frequently replenish it.
Eric Freiberg, chief executive of SweepStreet, an online, off-price jewelry retailer, sees stores like TJX and Ross, also taking from the upper end, like Neiman Marcus and Saks Inc. (SKS).
The reason, he says, is it became fashionable to be frugal during the recession and that habit has stuck. Also, the off-price retailers are getting in better lines of merchandise.
Mr. Freiberg also runs a brokerage, Quattro M Securities, and has seen "a tremendous shift" of money coming from luxury retailers to the off-price retailers. "It's an off-price world now," Mr. Freiberg said. "The shopper that would only go to a department store, today goes into TJX or Ross because of the brands they now carry."
Off-price "once meant 'less-than,' say, a department store," said Sara Rotman, chief executive of fashion branding agency MODCo Creative. "Now, they've become a completely socially acceptable thing."
Write to Karen Talley at karen.talley@dowjones.com