News & Insights
Off-Price, On Point
by James Dworkin — Managing Director, Threadstone Advisors
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The “Off-Price” channel is hot and just about everyone knows it. Index stock price growth has far exceeded that of its broader retail brethren; planned new stores remain a bright spot in an otherwise spotty retail landscape. Chains that have historically eschewed off-price retail — Macy’s, Saks Fifth Avenue and Nordstrom — are now bees to honey. Perhaps most interesting, a great deal of this anticipated growth is occurring outside of e-commerce as most brands try to dissuade consistent, online display of their goods at the 20 – 60% discounts offered in-store. As a result, many of these Off-Price chains are becoming the darling of needy landlords outside of traditional “Off-Price Centers” occupying otherwise tertiary properties and, as a destination, driving much needed traffic. Not surprisingly, private equity has noticed and, we expect, will accelerate a consolidation of an otherwise largely regionally organized market.

The Off-Price channel is loosely referred to as retailers selling high profile, branded soft and hard goods at deep discounts to opening prices sold through specialty, retail and online channels. The sector includes large public companies such as TJ Maxx, Ross Stores and Burlington and smaller niche players including Forman Mills, Gabriel Brothers and Roses Discount. Threadstone’s analysis of the channel evidences anticipated average sales growth of 5 – 10%, gross margins averaging 30% and EBITDA margins of over 8%. New store paybacks are less than three years in large measure due to their low capital cost. On average, the sector trades publicly at 8.5 times trailing EBITDA (over 7 times 2015). By comparison, Department Stores are trading at slightly lower multiples albeit with significantly higher EBITDA margins. The larger companies far exceed these metrics presumably through greater operating leverage, buying heft and realizable growth opportunities. Box sizes and locations vary widely with locations sited in the most challenging urban settings and the wealthiest suburban landscapes. Though not largely penetrated yet, we expect Off-Price to enter the increasingly desperate mall space as well. This broad demographic spectrum points to the Off-Price channel’s greatest strength: it appeals to everyone!

At some point, all this focus and activity must start to pressure the smaller, weaker players. Companies evidencing weaker management, smaller balance sheets, reduced purchasing power and older stores will ultimately be rolled up or forced out. Brands will generally prefer to sell to the most professional groups offering the ability to quickly move the largest quantities of excess product and/or be in a position to commit for consistent specially made-up product with the confidence of knowing their merchandise will be displayed in a clean, well-lit, well-organized retail setting. Landlords will favor the better credits as well. And, perhaps most importantly, customers will travel to those promising the most fruitful bounties. The good news for these smaller players is, however, that executed well and timed properly, their sale can command premium EBITDA multiples as strategic buyers eyeball the tremendous synergies they will garner post-closing. Thus, whereas such owners might reasonably expect a valuation of 6 – 7 times trailing EBITDA, it is not unlikely they can ask 7 – 9 times, assuming they are well-located with white space within which to grow.

The Holy Grail, however, will be presented to the Company that can somehow find the formula to display and sell their best brands, reliably, online. Until that time — which may never come — it will be a battle for turf, product, and customers amongst the bricks and mortar.

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