Discount & Outlet Trouble Ahead?

Recent Nordstrom earnings have led many in the industry to believe good times for outlet and off-price are coming to an end. In looking at the Nordstrom Rack sales, the comp was up 3.6% with .com and Hautelook driving all of the growth and making up for a decline of 3.0% in Nordstrom Rack brick & mortar stores. So is this the end of prosperity for discount and outlets? Cowen believes outlet weakness is isolated to Nordstrom Rack and is quite bullish on upcoming earnings from Ross and TJX:

Comps at Nordstrom Rack ( & Hautelook) declined -3.0%, which represents a deceleration from 3Q’s -2.2% decline and the 2-year stack only marginally improved to +0.2% vs. 3Q’s run rate of -0.5%. Traffic & momentum took a negative turn in August & have yet to fully recovery for Rack. Despite the slowdown for Rack, both TJX (reporting 2/24, Outperform, $71.61) and ROST (reporting 3/1, Outperform, $54.82) did not see a similar business disruption in 3Q and we expect both likely outperformed again in 4Q given a different customer demographic than JWN’s “aspirational” customer. We continue to like the setup for ROST into 4Q and ’16 given exposure to a healthier lower-income consumer, overexposure to more normal winter weather trends on the West Coast, and positioning to benefit from maximum wage increases in California as 25% of stores located in the state.

While Q4 may meet expectations, one can't argue that in a country already over-retailed, the rate at which TJX, Ross, Nordstrom Rack and Saks Off Fifth are adding stores can't go on forever. Ironically, some of these retailers are "shifting share" from their own department stores. Next week's earnings from Ross and TJX will hopefully provide clarity as to how much longer this rate of expansion can continue.