How T.J. Maxx and Ross will (eventually) come out of the coronavirus crisis even stronger

April 20, 2020, 3:45 PM UTC

Many major U.S. retailers are entering their sixth week of mass store closures with no relief in sight.

For the likes of T.J. Maxx and Marshalls’ parent TJX, Ross Stores, or Burlington Stores, the fast-growing off-price retailers, the pain is compounded by not having e-commerce to fall back on.

Yet despite this brutal time, with sales essentially down 100% until stores reopen, industry experts expect the off-price giants, beloved by shoppers for the treasure hunt component and frequent merchandise turnaround with brand-name products at discount prices, to bounce back even stronger.

As hard as this crisis is for T.J. Maxx and its peers, it’s downright life-threatening to department stores like Macy’s and J.C. Penney and specialty clothing chains, the very rivals from whom discount retailers have poached billions of dollars in market share in the past decade.

That will make TJX, Ross, and Burlington, with their strong finances, even more attractive to brands at a time department stores are canceling orders en masse to stay solvent. Add to that economic turmoil—some 22 million Americans have filed for unemployment benefits in the past month—and shoppers will be even hungrier for the bargains.

“Their business models have been built for these very times,” PwC consumer markets leader Steve Barr tells Fortune.

That business model has long been centered on being nimbler when buying inventory from popular brands such as Ralph Lauren, Under Armour, Michael Kors, Calvin Klein, Adidas, Speedo, and countless others (including, if you’re lucky, Prada) and selling it for 20% to 70% cheaper.

TJX, Ross, and Burlington, which for now have reportedly stopped placing orders, get much of their merchandise from other retailers’ order cancellations, manufacturer overruns, and closeouts. But unlike department stores, which order products six to nine months ahead of time and tend to buy an item in its full assortment of sizes and colors, the off-price giants make purchases much closer to when the items will hit shelves and don’t need to have every size of something to buy it. And they are constantly bringing in new items: Ross, for instance, gets fresh merchandise delivered three to six times a week. That explains why you can’t find that perfect dress shirt you saw on a Marshalls’ rack in your size, but that you’ll still find something you weren’t looking for.

The unpredictability of store inventory is the very key to the treasure hunt that is their secret sauce: Take a pass on that dress today, and it probably won’t be there next week. That also makes e-commerce very difficult for them: TJX gets 2% of sales online, while Ross and Burlington do no e-commerce. But it keeps shoppers coming in droves.

American consumers have voted with their feet: TJX, which also owns Home Goods as well as businesses in Canada and Europe, eclipsed Macy’s by sales in 2014. By 2019, TJX’s revenue of $41.7 billion made it 70% larger than its department store rival.

The business model of moving inventory quickly will be crucial when business regains some semblance of normalcy. However much many brands piously pledge to become less reliant on off-price chains, and lament the harm to their brand “halo” of being sold in a discount store (hello, Michael Kors and Under Armour!), being paid by retailers that can move product fast will be even more paramount.

“They can recover their costs quickly if they put it in the off-price channel,” says Barr.

TJX declined to comment, and Ross and Burlington did not respond to a request for comment.

After the storm

To protect their cash reserves while stores are closed, the department stores and clothing chains like Gap Inc., which compete albeit indirectly with the off-price players, have canceled orders on an unprecedented scale.

But they already have a lot of inventory built up for spring and summer that they will have to clear out for fall merchandise and eventually the holiday season. A lot of that will have to be done via deep discounting. That will create a temporary surfeit of merchandise on the market that depresses prices and increases competition for the off-price crowd.

After that headwind, this storm will ultimately reinforce the trends that have made T.J. Maxx, Ross, Marshalls, and company the big winners in apparel retail.

“They’ll absolutely be in the driver’s seat in terms of the available merchandise and pick the best of the best to put in their stores,” says Instinet retail analyst Michael Baker. That, in turn, will keep shoppers interested and perpetuate their long defection away from department stores.

But taking advantage of the turmoil requires strong finances. And the off-price players have a massive edge.

RapidRatings, a firm that analyses corporations’ financial health, recently conducted a stress test assuming 15% revenue declines this year, assessing risk of default on a scale of 0 to 100. TJX and Ross’s quotients barely budged, while Macy’s, Kohl’s, and Nordstrom plunged. Meanwhile, Cowen & Co said last week Burlington has enough liquidity to get through a yearlong sales drought.

“If you’re not in a strong place as this crisis hits, you’re screwed,” says Barbara Kahn, a marketing professor at the Wharton School.

One way this matters is that the off-price chains can better afford making opportunistic buys whenever they find merchandise for cheap, even if they have to store it many months, perhaps even a year, ahead of when it hits stores, a retail industry practice called “packaway.” About 46% of Ross Stores’ inventory at fiscal year end was “packaway” merchandise.

The department stores, meanwhile, will struggle to ensure basic upkeep, let alone wanting to incur the extra storage costs.

Still, even off-price retail could get badly dinged by this crisis. No one knows when stores will reopen, how quickly and how widely. What will shopper mood and purchasing power be? Will they be comfortable shopping in off-price stores that often look like bazaars? Will they want to rifle through a rack that countless other shoppers have gone through before them?

Certainly the downturn works in these retailers’ favor. The 2008–09 recession turned millions of Americans on to shopping at T.J. Maxx, Ross Dress for Less, Burlington, and Marshalls, and they never looked back.

So if anyone can outlast rivals in the storm and emerge as bigger winners, the off-price retailers have some of the best odds.

“People will be price sensitive, and they’re trained to go to T.J. Maxx anyway,” quips Kahn.

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