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Discount retailers brace for uncertainty ahead despite solid second quarter results

Generally speaking, the performance of the 3 leading US discount retailers, Burlington, Ross and TJX, is less likely to be significantly affected by macroeconomic fluctuations and even when external forces exert pressure on other retailers, these discount shops tend to thrive because they are attractive to consumers.

However, the outbreak of the new crown pneumonia epidemic caught these retailers what a surprise.

The three major discount retailers - Burlington, Ross and TJX - had little to no e-commerce, so the enforced commercial lockdown imposed to combat the outbreak last year was particularly costly.

While home furnishings have been a bright spot for any retailer selling home furnishings over the past 18 months, clothing sales - most of the discount ready-to-wear business - have only recently stopped plummeting as people socialised less and barely needed to dress up during the epidemic.

The situation has now changed, and although the pressure to fight the epidemic remains, people are starting to update their wardrobes as they return to work and social activities.

And thanks to the re-opening of physical shops, retail sales are rebounding. But new challenges have re-emerged, including rising freight costs, tight supplies and fluctuating demand, and the new coronavirus delta variant has added to the uncertainty of the fight against the epidemic.

Here we look at how these discount retailers fared in the second quarter.

Despite strong sales and margin growth in the second quarter, Burlington's CEO Michael O'Sullivan told analysts that the retailer was still holding back in the near term due to uncertainty over the resurgence of the epidemic and "increasingly poor supply chain conditions". "The retailer remains conservative in the near term.

O'Sullivan said, "All sectors of the retail industry have experienced unprecedented volatility and disruption in merchandise deliveries, which has led to significant increases in international and domestic US freight rates."

In a press release, Burlington said, "Given the uncertainty regarding the pace of consumer demand recovery and the ongoing New Crown Pneumonia outbreak, the company is not providing sales or earnings guidance for fiscal year 2021."

The company said comparable shop inventories fell 7%, but were offset by the 101 shops Burlington has added since the end of the second quarter of fiscal 2019.

Total sales for the second quarter were up 34% over 2019 to $2.2 billion, while comparable shop sales increased 19% over the same period. Gross margin increased 80 basis points over 2019 to 42.2%, according to the company's press release. Net profit increased 21 per cent to $103 million from 2019.

Analysts were surprised by the gloomy outlook, even as sales and profit margins fell short of expectations.

But analysts at Wells Fargo believe that despite recent concerns about supply costs and retail uncertainty, Burlington "should prosper in the long term".

In fact, the Wells Fargo team, led by Ike Borucho, believes that Burlington will eventually benefit from the woes of other retailers, as it has in the past.

In an emailed commentary, Wells Fargo said: "The unexpected events of 2020 have led to many retailers going out of business, resulting in significant inventory mismatches.

The last time a similar dynamic occurred was in 2008, followed by a decade of off-market share price gains and steady earnings growth for Burlington.

If history repeats itself, Burlington should be well prepared to take advantage of the quality new supply of brands entering the market in 2020, as its low-price business model could drive further market share growth and push the company's margins to all-time highs.

As with other retailers in the second quarter, Ross Stores' lean inventory prevented multiple price cuts and boosted margins.

At the end of the second quarter, Ross Stores' inventory was down 5%, while the average inventory per shop was up 3% over 2019.

According to a company press release, sales increased 21 per cent to $4.8 billion during the period, with comparable shop sales up 15 per cent. ross said net profit rose nearly 20 per cent to $494 million.

The new crown pneumonia outbreak did not stop Ross from expanding its shops.

Ross chief executive Barbara Rentler reiterated that the retailer had returned to its pre-epidemic plan of opening about 100 new shops a year to reach 3,000.

Chief Operating Officer Michael Hartshorn said by phone that 28 shops were planned to open this quarter, including 18 Ross and 10 DD's Discount discount shops.

Hartshorn said, "Looking ahead, the positive external factors favoring our improved first-half results remain intact, but the spread of the delta variant of New Crown Pneumonia and worsening supply chain congestion across the industry could present potential close calls and there remains significant uncertainty going forward."

In an emailed commentary, the analysts said, "Overall, we are seeing adequate inventory availability at Ross shops, but merchandise deliveries at Ross are declining given pent-up demand, consumers holding large cash grants, and supply chains becoming congested.

In the second quarter, TJX Corporation reported a 23 per cent year-over-year increase in net sales to $12.1 billion and a 20 per cent increase in operating locations.

Total profit increased 29 per cent, or $336 million, to $1.5 billion compared to the same period in 2019, according to a company press release.

Chief Financial Officer Scott Goldenberg told analysts that operating store sales in the Marmaxx division, which includes T.J. Maxx and Marshalls shops, were up 18 per cent year-over-year and profits were up 19 per cent.

But Goldberg also warned that the continuation of the new crown epidemic could disrupt its trajectory.

He said, "While we do not plan to close shops completely in the third quarter, the company's sales could also be negatively impacted if new anti-epidemic lockdown regulations are implemented."

On the other hand, TJX is poised to make a big push in e-commerce, with CEO Ernie Herrman saying in a phone call that TJX will launch e-commerce in HomeGoods shops in the third quarter, an area the company believes is ripe for gaining market share.

Hrman noted that while TJX is also facing challenges in the supply chain, the supply chain issues that most retailers are currently dealing with could still provide benefits to TJX.

Again, the best thing for our business over the next few years is to continue to take advantage of the high market share growth we currently enjoy," he said. As ironic as it sounds, I believe that supply chain disruptions will create future buying opportunities for us."

In an emailed commentary, Wells Fargo analyst Ike Boruchow noted that TJX is standing out in the market not only in terms of price, but in terms of retail.

"TJX appears well positioned to continue to benefit from the turbulent inventory dynamics across the retail sector. with 13 sourcing offices, over 18,000 suppliers and over 100 sourcing countries worldwide, we believe they have one of the most efficient, resilient and effective models in specialty retail. "

For more information about European and American home furnishings, please continue to pay attention to Grammy Home.


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