Off-Price: the Overstock Barometer of the Industry

Ross's inventory is up 18% from a year ago. TJX told investors there is "more availability in the marketplace than we could ever buy."

Both companies are off-price retailers, which means they buy other brands' goods at a discount and resell them. That makes them a barometer for overstock. The more they can buy, the more unsold product the industry is holding. If you run an apparel brand, this is the market your unsold goods often end up in.

Total sales were $6.26 billion, up 13%. Inventory ended the quarter at $3.09 billion, up 18% from $2.61 billion.

That inventory sits on only 4% more stores (2,328 versus 2,233).

And the goods are moving. Ross management said in-store inventory turns (how quickly goods sell) stayed strong and clearance levels stayed low. Ross CEO Jim Conroy said customer traffic "once again served as a primary driver" of the same-store sales increase.

TJX, echoed this even more strongly on its call: “more availability in the marketplace than we could ever buy.”

Ross says the build is deliberate. Goods are selling and very little needs clearing.

So where is the supply buildup coming from?

The industry today continues to suffer from an ongoing inventory glut. Too many brands making too much stuff.

On the call, Conroy said "There's a lot of goods being canceled… we expect that to continue.” He tied it to "softness in mainstream retail" and called the supply opportunity from closeouts "outstanding.”

He did not say who is canceling. On Ross's May call, management said it had seen "some cancellations in the market, some from mainstream retail.” That matches how a cancellation usually works. A department store or specialty chain commits to a season of goods months ahead. When its sales soften, it cancels or trims the orders it has not received. The brand has often made the goods already, so now the cancellation puts them in a difficult situation: the goods were made for demand that no longer exists.

This is where the off-price retailer steps in, picking up the unwanted goods from a now distressed brand, at a discount.

TJX described the same market as Ross did. CEO Ernie Herrman said product availability "continues to be off the charts across all categories and from a wide range of brands."

TJX tells shoppers its merchandise sells “at prices generally 20% to 60% below full-price retailers’ regular prices on comparable merchandise.” That is the price on the rack. TJX does not say what it pays the brand, but its financials let you back into it.

Start with a jacket that sells for $100 at a full-price retailer. That retailer usually pays the brand about half, so $50 wholesale. At the middle of TJX’s range, the same jacket sells for $60.

Now work backward. TJX’s cost of sales, which covers the goods plus buying, freight, distribution and store occupancy, ran about 69% of sales last quarter before one-time tariff refunds. We estimate buying, freight, distribution and occupancy take 13 to 14 of those points. That leaves the goods themselves at about 55 cents of every shelf dollar. On a $60 jacket, TJX paid about $33. Ross’s numbers land in the same place, at about $34.

So the brand got about $33 for a jacket a full-price retailer would have paid $50 for. That is roughly a third less - enough to nearly eliminate average gross margins.

The shopper then sees the jacket at a price the brand did not set, and some of those shoppers might have paid full price at the brand’s own site or in a store had the brand or its retailing partner been more careful with production runs.

Our point: The discount taken to move the units to an off-price buyer is a costly distress signal. So TJX and Ross’s ongoing recent success + inventory buildups point to elevated distress among apparel companies generally.

Unfortunately, growth in apparel is often bought through inventory commitments, but the same commitments erode margin when the goods go unsold. Overproduction, ultimately, is the villain of this story. Overproduction compels markdowns, and each point of markdown is pure margin loss. In today’s industry, brands can scarcely afford the margin pressure.

Both retailers grew inventory faster than sales. Ross's inventory rose 18% against 13% sales growth. TJX's rose 7% against 5%, and 2% per store.

That is a choice. Ross's inventory per store is up about 14% on only 4% more stores, and management says turns stayed strong and clearance stayed low. When demand is soft, you see slow turns and heavy markdowns. Ross has neither. So the extra goods were bought with a plan, and the plan was to have room when the supply showed up.

Both management teams tell you what the room is for. Conroy says Ross has "plenty of flexibility to capitalize on closeout opportunities." Klinger says TJX is "well positioned to take advantage of the plentiful buying opportunities in the marketplace." Buyers talk like that when they have prepared for a firesale and are waiting for the goods to come to them.

That is opportunism, and brands are the supply. Every overbuilt season and every canceled order has a buyer waiting, and that buyer wants a discount.

We present 3 lessons for operators from what off-price retailers taking advantage of the inventory glut:

#1 Unsold Inventory Changes Hands, and the Margin Goes With It

Inventory is the one asset that loses value on its own. Goods made months ahead of demand have to go somewhere, and when they do not sell at full price, off-price is the buyer of last resort. The brand pays for that in margin.

#2 A Canceled Order Is the Brand's Problem

When a retailer cancels, the risk sits with whoever made the goods. Smaller orders cap that exposure. At Patchwork, brands place small test and replenishment orders closer to the sale, with a 5-week lead time from purchase order to fulfillment, so there is less left to cancel and less to mark down.

#3 Off-Price Earnings Are an Early Read on Excess

Ross and TJX see excess supply first-hand because they are the ones buying it. Both report again in November. Watch whether TJX still calls availability "outstanding," and whether Ross says a lot of goods are still being canceled. If they do, the excess is still in the system.

Ross and TJX gain when brands over-produce. A brand stops being an off-price supplier supplier by committing less, and later. Small first orders + the agility to react to what’s working caps the cost of being wrong. Short lead times let you reorder what sells and stop making what doesn’t, so there is less left over to cancel and less to mark down. That is agility is what we promote and help brands built at Patchwork. The industry has scarcely been more in need of an off-ramp from conventional supply chains.

Patchwork is an agile supply chain platform for apparel brands. We help brands move from large speculative production bets to demand-responsive production — reducing inventory risk and deadstock.

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