Supply chain disruptions have caused problems for many retailers, but for the off-price sector, they may provide an opportunity.
Bank of America analysts led by Lorraine Hutchinson say the category is poised for stock growth in 2022 after a period of underperformance during the pandemic. Shares of TJ Maxx and HomeGoods parent TJX Cos. TJX, +0.65% have gained 13% over the past year. But Ross Stores Inc. ROST, +0.47% stock and shares of Burlington Stores Inc. BURL, +0.25% have both fallen, down 11.7% and 4.3% respectively.
The S&P 500 index SPX, +0.06% has gained 21.6% over the last 12 months.
“Supply chain disruption creates a unique sourcing opportunity for off-price retailers, primarily for packaway inventory,” wrote BofA in a report.
“Many retailers will cancel or not accept late deliveries given the seasonality/changing trends of products. Off-pricers can then procure these items at steep discounts and either pack them away for later seasons or use them to supplement current store inventory.”
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To be sure, the off-price category is not immune to pandemic pressures. Analysts note that these companies are feeling the squeeze of higher costs, and expect moderation as the year passes and pressures ease.
However, these three big players are gaining market share, mostly from department stores, even though off-price retailers don’t have robust e-commerce businesses.
“[M]eaning the off-price value proposition and store experience are compelling enough for customers to continue making visits,” the report said.
And these retailers have room to raise prices.
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“Given the overall scarcity of product, retailers have limited their promotional activity, leading to higher realized prices. This dynamic has created a price-taking opportunity for off-price retailers, which could help offset heightened freight and supply chain costs while still providing value to customers by offering goods at a deep discount to traditional retailers,” BofA said.
The home category also continues to do well for off-pricers.
BofA rates TJX, Ross and Burlington stocks buy. TJX has a $95 price objective. Ross, which BofA says has the most upside, has a $150 price objective. And Burlington’s price objective is $350.