Discounts, Clearance Sales Are In As Retail Stores Reopen

It is no secret the post retail lockdown world will be floating in discounts just in time for the back-to-school shopping season.  We only need to look to Harrod’s, the London iconic luxury department store, opening its first ever outlet location this Summer.  In addition, Alibaba BABA ’s Tmall recently announced the launch of Luxury Soho, an outlet style platform where luxury labels can get shed excess product. These type of luxury outlets would have been unimaginable six months ago however as physical stores unlock the doors, dust the shelves off and unpack boxes of merchandise that have been stuck in a warehouse (or on a boat) a significant portion will be yesterday’s news.  

While brands that are heavy on basics (LEVI, LULU) will be able to pack away product for another day, fashion focused brands will have to take a margin hit through heavy markdowns while others may return to the often brand degrading off-price channel. While so many brands have spent years withdrawing from the likes of TJ Maxx distribution channels in search of full price selling integrity, we are likely to see the pace of backing away slow. For example, Under Armour recently commented it will take a little bit longer to step off the off-price channel.  For brands heavily reliant on department store distribution and who have turned their back on off-price they are likely to come knocking again (note I was already seeing this pre Covid).

While TJX was clearly gaining share before Covid-19 (one of the few retailers with positive traffic gains driving 5% comps in Feb) the short-term excess capacity dump will enable this retailer to name their price for merchandise, driving margins higher over the next 18 months.  In addition, the wave of store closings about to hit the US and Europe over the next 12+ months will create a renewed market share opportunity in the value category (and now one with more premium brands).

The recent earnings season was very much about rocket speed digital mix shift, curbside pick-up and fulfilment from store offsetting the store closing pain.  It was also about basket size driving comp store sales (WMT basket +16.5%, Target TGT +12.5%). TJX is a completely different type of winner. As a reminder only 2% of business is online and all stores and ecommerce were closed for ~50% of the quarter. As 1100 stores re-opened initial sales overall have been above last year across all states and countries. Traffic, basket and conversion have all shown signs of life. Now that is a retail trifecta.