Which Off-Price Retailer Has Higher Profitability in 2016?

Can Off-Price Retailers Keep Running Strong in 2016?

(Continued from Prior Part)

Strong margins

The lean business models and low-cost structures of off-price retailers TJX Companies (TJX) and Ross Stores (ROST) have helped them sustain higher operating margins than other department stores. Also, off-price retailers turn over their inventory faster, which also helps them enhance their margins.

Gross margins

In the fiscal year ended January 30, 2016, TJX Companies reported a gross margin of 28.8%, which marked a 20-basis-point improvement from the previous fiscal year. This increase was a result of higher merchandise margins. The fiscal 2015 gross margin of Ross Stores, for example, improved by ten basis points to 28.2%, due to higher merchandise margins.

The gross margin based on total revenue of Burlington Stores (BURL) increased by 20 basis points to 40.4% in fiscal 2015. The increased gross margin was a result of a reduction in markdown rate, partially offset by a rise in product sourcing costs. The overall gross margin of Nordstrom (JWN), the operator of off-price Nordstrom Rack stores, declined to 36.5% in fiscal 2015 from 37.8%, due to increased markdowns amid a highly promotional environment in the second half of fiscal 2015. On a comparative basis, Burlington Stores had a higher gross margin compared to its peers in fiscal 2015. However, Burlington Stores’ operating margin was lower than these two off-price retailers.

Ross Stores’ higher operating margin

In fiscal 2015 (ending January 30, 2016), the operating margin of TJX Companies declined by 40 basis points to 12%, primarily due to higher employee payroll costs and increased supply chain costs. Ross Stores’ fiscal 2015 operating margin improved by ten basis points to 13.6% in fiscal 2015. The company has been implementing expense control measures to offset the impact of the increased wages. These initiatives include re-engineering processes in stores to best utilize labor hours. The operating margin of Burlington Stores improved by 40 basis points to 5.8% in fiscal 2015, driven by lower store-related costs and corporate costs as a percentage of sales.

Margin expectations

TJX Companies expects its gross profit margin to come in the 28.3%–28.5% range in fiscal 2016 as compared to 28.8% in fiscal 2015. This lower estimate reflects the potential impact of currency headwinds. The operating margins of off-price retailers in the current fiscal year are likely to be impacted by higher wages. Ross Stores will raise the minimum wage for eligible hourly associates to $10 per hour in the second quarter of 2016, up from the current $9 minimum. TJX Companies and Ross Stores together account for 2.2% of the SPDR S&P Retail ETF (XRT).

We’ll discuss the inventory management of off-price retailers in the next part.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Can Off-Price Retailers Sustain Same-Store Sales Growth in 2016?

• Part 3 - Why Off-Price Retailers Are Managing Inventory Better than Department Stores

• Part 4 - Inside the Store Expansion Plans of Off-Price Retailers in 2016