Are Discounters Overly Discounted by Investors?
In our recent investor conversations, the Offprice sector is the most debated subsector in Softlines. Near-term industry data, read-throughs, and channel checks inflected several times through the first quarter, between periods suggesting improving trends, only to be followed by periods looking like low-income spending power constraints and reduced inventory availability, setting low-confidence expectations.
In our recent discussions with industry leaders, we find strikingly similar language describing the ramping availability of in-season closeout inventories. Closeout is the lifeblood of the Offprice industry, typically representing up to 50% of annual sales. Our industry conversations suggest closeout availability collapsed in 2021. The ripple effect from low closeout availability caused the Offpricers to shift to purchasing far higher levels of “Direct Buy” inventory from factories in Asia. This shift in purchasing resulted in an increased mix of direct inventory and associated costs.
Supply chain disruptions left the US Softlines industry frighteningly short of inventory in ‘21—resulting in almost no in-season closeout inventories for the Offprice group. The Offpricers had to pivot to buying directly from vendors and factories in Asia, which had a two-prong negative effect. First, Direct Buy margins are lower than Closeout in a typical year. Second, Offprice has to pay for freight with Direct Buy, and ocean freight rates skyrocketed last year. We estimate that Closeout returning to the market could play out similarly to the ‘08/’09 recession.