Under the cloud that inflation has cast over the financial stability of lower-income households, off-price retailers in recent days posted Q2 reports riddled with uncertainty over the second half of the year, and Burlington was especially hard hit.
The off-pricer’s Q2 total sales fell 10% year over year to $1.98 billion as store comps plummeted 17%. Gross margin contracted by 320 basis points to 38.9%. Freight and product sourcing expenses were both up in the period, and merchandise margins were down, according to a company press release. Net income plunged 88% to $12 million.
The trouble derives from the tough macro environment, but some of the blame lies with Burlington itself, according to William Blair analysts Dylan Carden and Jordan Voss.
“[B]urlington’s comps were much weaker than off-price peers,” they said in emailed comments, noting that, in a similar period, TJX’s Marshall’s and TJ Maxx businesses together saw comps fall 2%, and Ross Stores’ comps fell 7%. “While much of the underperformance can be attributed to Burlington’s lower-income customer, the company has also been slower to adjust its merchandise assortment to better-performing product categories.”
Burlington seemed to struggle with merchandising as far back as January, according to store checks this year by Jane Hali & Associates analysts. “It seems like they had difficulty from Q1 because of a lack of assortment, and I didn’t see any improvements until later into Q2,” Hali analyst Jessica Ramírez said by phone, noting that the retailer was especially low on handbags and footwear. “Entering Q1 they did say they weren’t able to get product. That makes me wonder — because Ross did such a good job, they’ve been pulling really good brands. And TJ Maxx and Marshalls are also really strong, I think the strongest I've seen in a very long time.”
That strength showed up in TJX’s Q2 numbers. Net sales in fell just 2% to $11.8 billion, and overall company store comps (including its other banners like Home Goods as well as Marshall’s and TJ Maxx) fell 5%. Net income actually edged up 3% to $809.3 million, per a company press release.
“Overall, TJX is in a good place,” GlobalData Managing Director Neil Saunders said in emailed comments. “The business has costs under control, which is why net income rose 3% this quarter. It also has a good buying environment to secure new product. The main pressure is coming from a downswing in demand and despite its positioning in the market, TJX is not immune from this trend.”
While TJX did relatively well as Burlington stumbled, Ross hit something of a middle ground, though, like Burlington, the retailer caters to a lower-income consumer. Sales there fell 4.6% year over year to $4.6 billion as store comps fell 7%; comps in Q2 in 2021 had risen 15%, the strongest of the year last year, according to a company press release. Net income tumbled 22.1% to $385 million.
“While Ross is suffering, it is important to note that the business remains well-run, has an extremely relevant proposition, and retains the loyalty of its shoppers who are not defecting elsewhere but are simply spending less,” GlobalData’s Saunders said in emailed comments. “Along with the steady pace of physical expansion, this means the company will start to recover as it moves into the new fiscal. So as much as 2022 will be a year of treading water, Ross will remain afloat and will be in a good position to start swimming more strongly once the current economic stress has dissipated.”
Ross opened 29 new locations in June and July, on track to open 100 stores this year, with the goal of growing to at least 2,900 Ross Dress for Less stores and 700 DD’s Discounts locations over time.
Burlington is also expanding, and that contributed to recent increases in footfall despite the challenging sales numbers. Of the three major off-price players, the chain had the most consistent traffic growth compared to 2019, according to research from Placer.ai, which noted that Burlington has expanded from 675 locations in 2019 to 873 in 2022. In 2020 the company said it would exit e-commerce to focus on more lucrative brick-and-mortar sales.
The trouble of high costs and lower sales weren’t limited to the dominant three off-pricers, as Nordstrom’s Rack business saw sales decline as Q2 progressed, though they rose 6.3% overall in the period. But Burlington’s struggle in particular reflects the cutbacks in discretionary spending in response to inflation, and UBS analysts expect to see more markdowns from apparel retailers in general in coming months.
“[Burlington’s] report is further indication economic pressure on lower-to-moderate income shoppers continues, inventory levels are still too high, and major promotional activity will continue for [the second half of the year],” UBS analysts led by Jay Sole said in emailed comments. “[Its] report is also further confirmation the macro environment slowed in 2Q and has probably not improved. We think the broad-based nature of the challenges facing Softline retailers will amplify the pressure on the industry to increase gross margin eroding discounts in 2H22.”