The fight against inflation isn’t over yet, as evidenced by the U.S. Fed’s decision to raise interest rates last week. Inflation in Canada has edged lower, prompting BoC to leave the rate alone in it’s recent decision, though prices of goods have remained elevated, taking a bite out of consumer finances.
This environment has proved a boon for discount stores and low-cost retailers enjoying a larger than usual consumer footfall. These stores provide significantly lower prices compared to their larger traditional competitors. Moreover, discount stores have been able to expand successfully, defying the shift towards e-commerce.
The following no-frills players are well-positioned to benefit from consumers who are seeking ways to stretch their shopping budgets during inflation and find a refuge should fears of recession become a self-fulfilling prophecy.
America’s third-largest off-price apparel and home fashion retailer, Burlington Stores (BURL) offers an assortment of low-price products from over 5,000 brands, at prices 60% lower than those of conventional retailers.
The company’s stores provide a treasure-hunt experience, with a quickly changing selection of merchandise in a relatively low-frills shopping environment. BURL generates 23% of sales from women's ready-to-wear apparel, 23% from accessories and footwear, 20% from home décor, 16% from menswear, 14% from youth apparel and baby, and 4% from outerwear.
While economic uncertainty and inflation create a difficult near-term road for Burlington’ turnaround efforts, it should perform reasonably well as economic uncertainty rises. “The off-price sector has performed well in adverse economic conditions historically, and we expect Burlington to fare better than full-price retailers,” says a Morningstar equity report.
“We believe Burlington benefits from vendor relationships and an efficient cost structure that constitute competitive advantages, with efforts to improve its assortment, merchandising, and store footprint likely to lift long-term returns,” says Morningstar equity analyst Erin Lash, who assigns the company a narrow moat and puts the stocks fair value at US$204.
Ross Stores (ROST) is a leading American off-price apparel and home fashion retailer, selling a variety of name-brand products from over 1,920 stores. The company undercuts conventional retailers' prices by 20%-70%, using an opportunistic, flexible merchandising approach.
A relatively low-frills shopping environment focused on a treasure-hunt experience helps maximize inventory turnover and traffic, enabling its low-price approach. The retailer derives 26% of sales from home accents, 25% from the ladies' department, 14% from each of men’s and accessories, 12% from shoes, and 9% from children's.
“With a fast-turning inventory of high-value branded merchandise, Ross' store experience and value proposition should continue to resonate in a variety of economic conditions,” says a Morningstar equity report.
While pandemic fueled fierce competition from digital rivals in Ross' core categories, “we contend that its low-frills shopping experience and significant discounts (around 20%-70% off full retail) result in competitive prices and superior economics after considering shipping and return costs,” argues Morningstar equity analyst Jaime M. Katz, who recently lifted the stock’s fair value to US$105 from US$97, prompted by a stronger-than-expected third-quarter results.
TJX (TJX) sells a variety of branded goods, from 4,689 stores under well known banners including Marshalls, HomeGoods, Winners, Homesense, and Sierra. By leveraging a flexible merchandising network, low-frills stores, and an exciting treasure-seeking shopping experience, TJX gains up to 60% reduction in the standard prices of traditional retailers, resulting in increased profitability and faster inventory turnover.
The company derives 79% of revenue from the United States, 11% from Europe (mostly the United Kingdom and Germany), 9% from Canada, and the rest from Australia.
The retailer’s value proposition should remain attractive even as competition gets fiercer, the report adds.
While digital retailers are turning up the heat, the off-price channel remains relatively well protected, “as the low-frills buying experience and 20%-60% discounts relative to the full-price channel result in competitive prices and superior economics after considering shipping and return costs,” says a Morningstar equity report.
“TJX and its peers benefit from durable advantages over full-price apparel and home décor sellers, with strong brands, store experiences, and scale working to keep returns on invested capital high," asserts Katz, who recently upped the stock’s fair value to US$68 from US$64, reflecting strong third-quarter sales.
