On Performance: Off-Price Retailers in 3Q15
Margins in 3Q15
In the third quarter of fiscal 2015 ended October 31, 2015, The TJX Companies’ (TJX) operating margin came in at 12.3%, ahead of rivals Ross Stores (ROST) and Burlington Stores (BURL), which had operating margins of 12.1% and 3.2%, respectively. However, TJX’s operating margin in the third quarter declined from 13.2% in the comparable quarter of the previous year, due to currency headwinds, higher wages and supply chain costs.
Unlike Ross Stores and Burlington Stores, which have a presence in the United States only, TJX’s presence in Canada and Europe exposes it to currency headwinds.
Ross Stores’ and Burlington Stores’ margins
In 3Q15, Ross Stores’ gross margin increased by 40 basis points to 28% and its operating margin increased by 30 basis points to 12.1%. This margin expansion was mainly driven by higher merchandise margins.
Burlington Stores’ gross margin, including other income, remained essentially flat at 40.1% in 3Q15 and its operating margin increased to 3.2% in 3Q15 from 2.5% in 3Q14. This improvement was driven by lower incentive compensation and expense leverage associated with advertising and store occupancy costs.
The 3Q15 operating margin of Nordstrom (JWN), which operates the off-price Nordstrom Rack stores, declined to 4.7% from 8.3% in 3Q14, due to growth initiatives.
Margin expectations from 4Q15
TJX expects its fourth quarter gross margin to be in the 27.7% to 27.8% range, down from 28.2% on a year-over-year basis. This decline is expected due to currency headwinds and additional supply chain costs. The company’s operating margin in the fourth quarter is expected to be adversely impacted by a rise in selling, general, and administrative expenses as a percent of sales due to higher wages, integration costs associated with the Trade Secrets acquisition, and higher supply chain costs.
Off-price retailer Ross Stores expects its 4Q15 margin to be in the 12.6% to 12.8% range, down from 13.1% in 4Q14. The company’s chief financial officer Michael Hartshorn explained that this anticipated decline was due to an expected rise in distribution expenses and the timing of packaway inventory costs.
Thomas Kingsbury, president and chief executive officer of Burlington Stores, stated in the 3Q15 conference call that the company aims to improve its operating margin by optimizing its markdowns, customizing its assortments by store, and efficiently managing its receipts. Burlington Stores accounts for 0.4% of the iShares Russell 2000 Growth ETF (IWO).