Doubling Down on Digital Infrastructure Thematic Leader

Doubling Down on Digital Infrastructure Thematic Leader

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Adding two Middle-class Squeeze call option positions ahead of earnings this week

Adding two Middle-class Squeeze call option positions ahead of earnings this week

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Off-price retailers – another thorn in the side of department stores

Off-price retailers – another thorn in the side of department stores

A new report from Moody’s reinforces the negativity surrounding department stores like Macy’s (M), JC Penny (JCP) and Nordstrom (JWN). Unlike most that focus on the shift to digital commerce that is part of our Connected Society theme, Moody’s adds a perspective that meshes extremely well with our Cash-Strapped Consumer and Rise & Fall of the Middle Class investing themes — consumers embracing off-price retailers such as TJ Maxx, Marshalls, and HomeGoods all of which are part of TJX Companies (TJX) as well as Ross Stores (ROST).

One interesting observation is the expanding footprint of these off-price retailers beyond apparel and into home products, which offers additional challenges to Macy’s and other department stores that have home products and furnishings. This move also means additional challenges for Pottery Barn (owned by William-Sonoma (WSM)), privately held Crate and Barrell and Bed Bath & Beyond (BBBY).

Off-price retailers will remain among the top performers in the U.S. retail industry during the next 12 to 18 months.

That’s according to a new report from Moody’s Investors Service. The outlook is not as positive for department stores, which will continue to struggle as they seek to level the playing field with both off-price and online vendors.

Moody’s expects operating income in the off-price sector to grow 6.9% in 2017 and 5.4% in 2018. Department stores will see operating income decline 9.3% this year and 2.7% in 2018.

“Off-price retailers continue to outperform other sectors of the U.S. retail industry largely because they offer the kind of lower-cost, higher-value products and shopping experience many consumers are looking for,” said Moody’s analyst, Christina Boni. “Off-price stores are far outstripping department stores, which in contrast are still struggling with outmoded formats and supply chains that can’t keep pace with customer demand.”

Despite their lack of e-commerce penetration, off-price retailers have succeeded where department stores have foundered due to their focus on delivering major label brands at significant discounts to value-hungry consumers, Moody’s said. Off-price vendors also outperform the broader universe of U.S. apparel-focused retailers.

While apparel sales make up the bulk of their sales, off-price retailers have been increasing their product mix in the higher-growth and less competitive home products category. Moody’s estimates that home product sales at off-price stores grew 9.9% in 2016, compared with 7.8% for the off-price sectors overall growth.

Source: Moody’s: No letup in sight to off-price growth |Chain Store Age