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Off-Price Retail: Entering 2023 in “Chase-Mode”

Thomas Paulson
Mar 17, 2023
Off-Price Retail:  Entering 2023 in “Chase-Mode”

Following up on our report of department stores Q4 2022 updates last week, we see many of the same themes that we reported on and in our Holiday 2022 & Beyond Outlook in the Q4 2022 updates for the off-price retailers. Those themes include: (1) the rising appeal of “value” for consumers and the reappearance of the hourglass consumption pattern resulting from the disengagement of middle–income consumers; (2) the importance of “surprise and delight” in merchandise (which is where off-price can especially win given the plentiful buying environment); (3) the importance of convenience and physical stores to an off-price brand’s ability to win consumer consideration; (4) heavy discounts to get “clean” of excess inventory brought consumers into the stores; and (5) for management teams and investors, obtaining a clean inventory position going into 2023 was the goal for Q4 2022. Lastly, from all of these reports, one can say that "inflation" for apparel, shoes, accessories, and soft-home is comfortably in the rearview mirror.

TJX Inc.

  • Marmaxx (Marshalls and T.J. Maxx) produced a +7% comparable-store sales increase, with comparable transactions up at least +4%, slightly ahead of a +2.5% traffic increase, which demonstrates an improvement in conversion rate (something that Marmaxx has been driving during 2022). Apparel and accessories were the winning categories (up high-single-digits), with home categories down. As shown in the chart above, sector-wide traffic momentum picked up in December and was especially robust in January, except for Nordstrom Rack. Similar to Kohl’s, sharp price declines (markdowns) were part of what drove those traffic gains. The merchandise margin for TJX Inc. (including HomeGoods and International) declined an estimated -150 basis points. TJX Inc’s inventory turns were excellent at 6.1X.
  • CEO Ernie Hernman stated, “We are excited about our plans to drive sales and customer traffic… we are convinced that the appeal of our touch-and-feel treasure hunt shopping experience will continue to resonate with consumers…This allows us to offer our shoppers an assortment of merchandise to surprise and excite them every time they visit. We are also focused on being a gift-giving destination all year long…Our marketing has been very effective in targeting consumers with broad reaching and compelling brand campaigns across different channels and platforms where consumers are currently spending their time (i.e., social). Our messaging is continuing to reinforce our value leadership and demonstrate that we are one of the best choices for consumers during the current economic environment.” (This description matches what we expected to see in 2023, which is that “it’s cool to be thrifty again” and a gift bought at off-price retailers is “OK.”)
  • In terms of store plans for 2023 in the U.S., management expects 45 net new stores for Marmaxx, 32 stores for HomeGoods, 18 for HomeSense, and 18 stores for Sierra. Additionally, the company plans to remodel 400 locations and relocate approximately 55 stores. Management expects to drive a +2 comp-store sales increase and an improvement in profitability.
  • As shown in the table below, Marmaxx outperformed in the off-price sector. We suspect that contributors to that outperformance include having: (1) better merchandise throughout the year which stems from having a more liquid inventory position; (2) improving conversion rates throughout the year – their merchandise hit with their shoppers, and shoppers returned and promoted the brand to friends & family; (3) a more affluent customer mix; and (4) the financial flexibility to spend more on advertising to drive traffic.

Ross Stores

  • Ross Stores Inc--the combined Ross Dress for Less and dd’s DISCOUNTS--produced a +1% comparable-store increase, which was ahead of plan. Management’s outlook for 2023 is a “flat” comparable-store sales and slightly higher profitability (stemming from anniversarying last year’s high shipping costs). The company's Q4 2022 update press release quotes CEO Barbara Rentler, “During a very competitive holiday season, Q4 sales and earnings exceeded our guidance due to customers’ positive response to our improved assortments and stronger value offerings.” This compares to earlier in the year when there were gaps and not enough.
  • President and Chief Operating Officer Michael Hartshorn shared, “Our focus is on value and off-price value will lead to better traffic; it will lead to a higher basket if you offer great deals to the customer, and that's how we're thinking about the business going forward.”
  • Ross’ inventory turns improved to 6.2X and the Ross Dress for Less stores produced a +2.8% increase in visits per location; consolidated traffic was “flat” due to a decline at dd’s. Unlike, TJX and across retail, Ross’ merchandise margin was up. Given Ross’ disclosures and banner mix, it’s hard to know if Ross Dress for Less' conversion rate materially increased or decreased; the best that we call tell is that it was relatively stable to a touch down.
  • For 2023, Ross Stores Inc. will open 75 new Ross Dress for Less locations and 25 dd's DISCOUNTS, which is their historic cadence. This suggests they’ve moved on from the delays of the past two years. Separately, capex is to increase from $650M-$810M  as the company “makes further investments in our stores, supply chain, and merchant processes to support our long-term growth and to increase efficiencies throughout the business,” said Hartshorn. “One of the biggest increases...[is the] technology investments that we're making. Some examples of that would be automation in our distribution centers. It would be looking at store-level activities and providing technology to make those more efficient in all of our stores, for instance, how our associates mark down goods, how they receive in the back room and making sure we can continue to have associates focusing on customer-facing activities.”
  • Rentler also noted that, “Over the past 3 years, we have faced a wide range of unprecedented challenges from the COVID pandemic, supply chain disruptions as well as ongoing inflationary headwinds. These factors have not only negatively impacted our own business, but also our customers' household budgets, their discretionary income, and their shopping behaviors. As a result, our shoppers today are seeking even stronger values when visiting our stores. In response, our merchants are fine-tuning our assortments with an increased focus on delivering the most competitive bargains available while continuing to adjust our product mix based on our customers' evolving preferences.”


  • Burlington produced a better-than-planned -2% decrease in comparable-store sales and its inventory turnover improved to 5.8X. On the quarter and year, CEO Michael O’Sullivan stated, “On a 1-year basis and a 3-year basis, our comp growth in both December and January was positive, with January stronger than December. We believe that there were two drivers of this improvement in our trend. Firstly, we took a number of actions in the back half of last year to sharpen our values. We describe these in some detail on our November call. So this morning, I'm just going to summarize a couple of points. Number one, we backed off our original plan to raise prices. The consumer and promotional environment changed rapidly last year, and it became clear that this was not the right time to be raising prices. Instead, in the fourth quarter, we sharpened our values on fresh receipts, and we aggressively used markdowns to drive faster terms on existing inventory. We focused especially heavily on expanding opening price points in our assortment. Number two, we significantly raised receipt plans and inventory levels in our strongest businesses and focused this open to buy on great opportunistic deals. The off-price supply environment was very strong in Q4, and we were able to take advantage of some incredible buys, especially on branded merchandise. We flowed many of these receipts to stores to fuel the stronger trend, and we also tucked away some of these goods in reserve for later release. These actions worked. Shoppers responded to our sharper values, expanded opening price points and great branded buys. This led to a significant improvement in customer conversion and in average transaction size. In other words, shoppers like the values that they found when they walk into our stores. In Q4 2022, we also saw an improvement in traffic. ( shows a 10 point improvement, as shown above.) This points to the second driver of our stronger trend. We interpret this improvement in traffic as a sign that the macro headwinds may have started to abate. In particular, although inflation is still elevated, we are beginning to lap the significant spike that occurred in late 2021 into early 2022.”

  • O'Sullivan continued: “Let me move on now and talk about the outlook for the year ahead. As we said in November, we anticipate that in 2023, the economy will slow down, and then inflation will continue to fall. We expect the inventory overhang across retail to diminish, and this should lead to less promotional activity. If the external environment unfolds, as I have just described, we believe that this could have three major implications to Burlington. First, the economic slowdown should create a greater consumer focus on value, potentially driving some trade-down activity from middle- and higher-income groups. Second, our value differentiation versus other retailers could grow as promotions moderate, and this should be a tailwind for traffic, conversion and transaction size. And third, we expect that the external expense environment will improve compared to last year. We are already seeing this start to happen with freight rates. There is one other factor that is important to call out, and this one is specific to Burlington. We executed poorly in 2022, and this hurt our trend. Once we corrected these mistakes late in the year, we saw an improvement. Obviously, in 2023, we will be lapping these issues, and we expect to drive stronger results. These are the major reasons why we feel optimistic about 2023. But with all that being said, we recognize that there are some uncertainties and potential headwinds ahead. In particular, we remain concerned about the lower-income customer, our core customer. In 2022, this customer group bore the brunt of the impact of inflation on real household incomes…Putting all these factors together, we are guiding full year comp sales growth in the range of positive 3% to positive 5%. (Well above its competitors.) We believe that there may be upside to this range, and we are managing our business to chase potential upside. Given this comp range, we expect to be able to drive 80 to 120 basis points of margin expansion in 2023.”

  • On the new store plan for 2023, O’Sullivan said, “ We continue to be very pleased by the relative performance of our new stores, especially our new store format. In 2023, we are planning to open 90-100 gross new stores. After relocations and closures, this should yield 70-80 net new stores. This is lower than we would like [by 20-30 locations] and reflects the current lack of high-quality real estate locations as well as supply issues within the construction industry. Over the next couple of years, we think that there could be a wave of consolidation in brick-and-mortar retail, and we anticipate that this could drive a significant increase in the number of high-quality new store locations. Once we get through 2023, we believe that we can grow our new store program, such that we will open 500-600 net new stores over the following five years.”

Nordstrom Rack

  • We estimate that Nordstrom Rack’s comparable-store sales were down roughly -8% during Q4 2022, with roughly half the decline due to the elimination of Rack store-based online order fulfillment. Additionally, management blew-out older unproductive inventory (like Target, Kohl’s, and others). shows traffic per location down about -10% – but still at high levels on a per location. (Our full analysis on Nordstrom Inc’s Q4 2022 update can be found here.)
  • Nordstrom CEO Erik Nordstrom stated, “We are committed to improving both our top and bottom line performance at Nordstrom Rack in three ways. First and most importantly, we are prioritizing 100 nationally recognized strategic brands to help us drive sales and grow market share. Simply put, we know we win with customers at the Rack when we deliver great brands at great prices. We believe strong brand recognition drives outsized customer engagement, and these brands are proven performers many of which are not widely available in the off-price space. By increasing inventory turns at the Rack, we can increase the flow of these great brands and give customers newness each time they visit us.

Second, we are expanding our reach and convenience for customers by opening 20 new Rack stores this year. Rack stores continue to be our largest source of new customer acquisition, accounting for more than 40% of newly acquired customers in 2022. Our Rack store fleet is under-penetrated, and we have an opportunity to attract more customers and drive profitable growth through a proven model as we expand our reach with more new stores.

Third, we will drive greater engagement and higher profitability at Our digital capabilities are unique in the off-price space, and we see opportunities to leverage our digital assets to increase engagement with our Rack customers. We will also continue to optimize the operational model for improved profitability as we did by discontinuing store-based fulfillment of orders.

Off-price in particular, has a real requirement around convenience. And the discovery process in off-price for a lot of customers lends to sell to stores. So having more stores provides a lot more convenience. And it sure seems clear to us that our fleet is under-penetrated. You look at our store count compared to others out there, we see a lot of room for growth there. The other piece I just would call out is what Rack stores do to our ecosystem. Rack stores remain the largest source of new customer acquisition for us. It's more than 40% of our new customer acquisition occurred in Rack stores. So there's just a lot of goodness all around for us to open Rack stores.” (We read this to imply that Nordstrom views Rack as still too subscale for competing against TJX, etc.)

  • President and Chief Brand Officer Pete Nordstrom noted, “We took an aggressive position to get the markdowns there to clean ourselves out, to get ourselves in a really good spot for 2023 with the balance of seasonality, age and categories. Now we have open-to-buy. We're chasing into it. There's a good product to be bought out there, and it starts with these top strategic brands."
  • CFO Michael Maher stated, “We're building our assortment of strategic brands in the Rack, we expect to get to a place where we're targeting somewhere around the middle of the year, but we expect sequential improvement as we go through the next couple of quarters. And then we're also opening new Rack stores. Those will begin here in the spring, so we'll see some benefits in the first half of the year. But it will be most pronounced as we get into the second half.” (And so watch Q2 2023 for a turn, if one doesn’t happen, that’d be a problem.)

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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