MW Off-price retailers could thrive, BofA says, citing this bullish data point

By Ciara Linnane

BofA backs buy ratings on Burlington, Ross Stores and TJX

BofA analysts reiterated buy ratings on Burlington Stores Inc., Ross Stores Inc. and TJX Cos. Thursday, ahead of the discount retailers' coming third-quarter earnings, and said they expect all three to continue to attract core and trade-down consumers.

Clothing retailers have been struggling with cash-strapped consumers after a lengthy period of high inflation. Higher prices for essentials - be it groceries, rent or services - have hurt spending on other items over the past two years.

The discount stores were likely affected by bad weather, including the hurricanes that hit Florida and neighboring states during the quarter, leading the analysts to lower their estimates by 2% on average.

"Still, BofA aggregated credit and debit card spending data shows third-quarter spending in the discount category was consistent with the second quarter," the note said.

Card data shows spending was up 2.5% in the period, despite the weather, which also included an unseasonably warm October, with the second-highest average temperatures across the U.S. in the last 130 years, according to the National Oceanic and Atmospheric Administration.

A slower start to the winter season often leads to delayed shopping trips, as consumers are less motivated to buy warmer clothes when it's not cold outside, the analysts said.

"We expect an influx to stores in the fourth quarter once the weather turns consistently colder," they wrote.

The off-price segment is relatively insulated from tariff risk, as it has low direct import exposure, BofA analysts Lorraine Hutchinson and Melanie Nuñez wrote in a note to clients.

President-elect Donald Trump has pledged to impose tariffs of up to 60% on goods from China, and of 10% to 20% on other imports.

"Off-price [retail] primarily sources product domestically, protecting them from taking on a significant incremental tariff cost directly," the analysts wrote. "Vendors largely source in Asia, so they will try to pass through the incremental cost, but we think off-price has the negotiating power to ensure buys still hold solid margins."

With discounters overall focused on maintaining a value gap over full-price retailers, if full-price retailers raise prices to combat tariffs and consumers accept the increase, it would raise the ceiling for pricing at off-price retailers, said the note.

Looking at each company individually, Ross Stores $(ROST)$ has underperformed its peers in the year to date, gaining 2%, while Burlington $(BURL)$ is up 38% and TJX $(TJX)$ up 30%.

"Concern is centered around merchandise margin pressure from the company's branded strategy," the analysts wrote about Ross. "This will be a headwind for the next few quarters, although we expect efficiencies in distribution and buying will help offset pressure to overall gross margin."

BofA is modeling gross margin for Ross to be up 15 basis points in fiscal 2024, followed by down 5 basis points in fiscal 2025.

There are also concerns about the company's recent change of CEO, with Jim Conroy, former CEO of Western-themed retail chain Boot Barn Holdings Inc. $(BOOT.UK)$ replacing Barbara Rentler effective Feb. 2.

Conroy "does not have the typical merchandising background that prior Ross CEOs held," said the note.

"While the end of the third quarter was challenging for [Ross], we think this was due to transitory factors like weather and expect a snapback in comps for the group to disproportionately benefit the stock," the analysts wrote.

BofA is expecting TJX to post a same-store sales gain of 2%, in line with the company's 2% to 3% guidance and the consensus of 3%. The company's Marmaxx and HomeGoods businesses are also expected to see 2% same-store sales gains.

"We see further merchandise margin opportunities from continued selective price increases and better buying, offset by high freight costs and incentive compensation," said the note.

At Burlington, same-store sales are expected to rise 1%, compared with the consensus of 2% and the company's own guidance of flat to up 2%.

"We expect the company will maintain its full year comp guidance of 2-3%, slightly below its algorithm of mid-single-digits but prudent given macro uncertainty," the analysts wrote.

Ross Stores' stock was up 2.6% Thursday, while TJX was down 0.4% and Burlington was up 3.7%.

The SPDR S&P Retail exchange-traded fund XRT has gained 10% in the year to date, while the S&P 500 SPX has gained 25%.

-Ciara Linnane

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November 14, 2024 11:05 ET (16:05 GMT)

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