Why This Off-Price Retailer Stands Out From Its Peers

Competing on price alone is a race to the bottom, since only the retailer with the lowest prices will be left standing at the end. Burlington is an example of a retailer with a differentiated business model that gives it an edge over its peers.

Feb 27, 2014 at 9:52AM

Source: Burlington

Although all off-price retailers focus on selling brand-name merchandise at reduced prices, their business models aren't exactly identical. Business models help distinguish Burlington Stores (NYSE:BURL) from its off-price peers The TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST).

Larger store size
Burlington has a larger average store size than other off-price retailers at between 50,000 and 80,000 square feet.  In comparison, TJX and Ross Stores' average store sizes are 29,000 (TJX's U.S. T.J. Maxx stores) and 29,300 square feet, respectively. In fact, at 80,000 square feet, some of Burlington's stores are comparable in size to those of smaller department stores. As a result, Burlington offers a wider product assortment than its off-price peers, further enhancing the "treasure hunt" shopping experience associated with off-price stores.

Moreover, a larger average store size also works in Burlington's favor with respect to store expansion. While landlords of shopping centers like off-price retailers as anchor tenants to draw in foot traffic, the average off-price retailer's inability to take on larger facilities is sometimes a drawback. Similar to how retailers prefer to consolidate purchases by ordering from a single supplier, landlords prefer to deal with a smaller number of tenants that lease bigger retail spaces. As a result, Burlington has an advantage in finding suitable real estate for store expansion. It has set a target of adding 25 new stores every year to its current national footprint of 500+ stores.

Source: Burlington

Shallow merchandising
Burlington intentionally keeps its product assortment shallow by stocking only a limited number of units for each style. Besides increasing the scarcity factor of its products, Burlington's shallow merchandising strategy allows it to sell on-trend, in-season items to its customers. In addition, the company does little pre-season purchasing and focuses on keeping excess cash and shelf space for opportunistic purchases during the season.

The results speak for themselves. Burlington's gross margin is much higher than those of its peers at 39%, while TJX and Ross Stores sport margins in the 27%-28% range. Burlington also improved its inventory turnover by 52% from 2.4 times in 2008 to 3.6 times in 2012.

In contrast, Ross Stores focuses on packaway merchandise -- closeouts, order cancellations, and manufacturer overruns both during and at the end of a season, which are 'packed away' in its warehouses and resold to customers at a later date. The risk associated with Ross Stores' packaway merchandising strategy is that it assumes fashion trends don't change significantly. In the event of a major shift in fashion trends, Ross Stores could be potentially left with lots of unpopular and unwanted goods.

While TJX also purchases some packaway merchandise, it primarily focuses on buying pre-season cuttings in anticipation of the upcoming selling season. There is an element of uncertainty in forecasting whether the merchandise that TJX bought will be popular in the new season.

TJX got its feet wet in e-commerce with the aim of attracting its younger customers. It acquired off-price Internet retailer Sierra Trading Post in December 2012 and launched its Internet store in September 2013. However, technology isn't restricted to e-commerce.

Burlington uses technology to drive its off-price retail business in the following ways. Firstly, its business intelligence system enables its purchasing team to read market trends and act on opportunities. Secondly, Burlington tests new products in selected stores and monitors their sales data before rolling them out chain-wide. Thirdly, its markdown optimization system allows it to price its products appropriately for maximum profitability, following results from data-driven market research and testing.

Foolish final thoughts
Price is the key attraction for consumers switching from departments to off-price retailers. However, attractive pricing alone is insufficient as a competitive advantage for retailers. Burlington leverages its strengths in larger store sizes, shallow merchandising and technology to compete more effectively against its peers.

Is Burlington the Fool's favorite stock?
Burlington is my top pick among off-price retailers. What about Motley Fool? The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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