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As Retailers Cancel Factory Orders, a Potential Windfall for Discounters Grows

By Rich Duprey - Mar 28, 2020 at 12:33PM

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Inventory is building up at vendors as retailers can't afford to take shipments now.

Most retailers across the country have closed their stores because they've either been ordered to do so through state shelter-in-place orders or have voluntarily shut down to help contain the spread of the coronavirus. 

Yet with China's factories back up and running again, they're finding their customers refusing shipment of the merchandise orders they previously placed because, without consumers shopping their stores, there is little need to replenish their inventory.

That creates an opportunity for off-price discount outlets like Burlington Stores (BURL)TJX (TJX), and Ross Stores (ROST), which stock their own clothing racks with close-out merchandise, over-runs, and other other opportunistic buys. Ross has announced that it will cancel all merchandise orders through mid-June.

The timing of purchases needs to be taken with care since their own stores are closed. However, this could present the retailers with a unique chance to acquire quality, on-trend merchandise at a good price.

Garment factory workers

Image source: Getty Images.

Ready to get going

The coronavirus started in China before spreading to the rest of the world, so its economy was hit first by the wave of store and factory closures that followed in its wake. But the extreme measures the country took to combat the virus apparently allowed it to "flatten the curve," or spread out the number of new reported cases of COVID-19, the disease caused by the coronavirus.

That's allowed businesses to restart in China, and though that could help many global customers sidestep disruptions to their supply chain, apparel companies are not ready to resume shipments of goods. According to The Wall Street Journal, retailers are canceling orders in China and elsewhere, a development that could undermine the ability of factories to recover.

The Journal reported retailers, including Hennes & Mauritz (HNNMY), the owner of fast-fashion icon H&M, Primark owner Associated British Foods (ASBF.F), Marks & Spencer Group (MAKSY), and others, have notified suppliers they are suspending purchase orders.

It quoted H&M as saying, "[O]ur long-term commitment to suppliers will remain intact, but in this extreme situation we need to respond fast."

Factory operators, though, find themselves pushed to the brink of ruin as a result and have called for the retailers to abide by their contracts. The Bangladesh Garment Manufacturers and Exporters Association said over 4 million Bangladeshi factory workers may lose their jobs as a result. "This is a social chaos we cannot afford."

An opportunity to make good

The situation may not be as ruinous for the companies as it seems -- if it provides an opportunity for off-price retailers like Burlington and TJX to swoop in and acquire merchandise at a significant discount.

Last year, as the trade war between the U.S. and China was ratcheting up and tariffs were raising costs and disrupting supply chains in a different way for retailers, Burlington CEO Thomas Kingsbury described it as "a positive for off-price retailers," while TJX CEO Ernie Herrman told analysts, "Historically, disruptions in the marketplace have created off-price buying opportunities for us."

The current situation is a different landscape for the discounters because they are subject to the same problems confronting the full-price retailers they go up against. And without revenue of their own coming in, and the coronavirus situation still very much up in the air here with no definitive resolution in sight, the off-price retailers will undoubtedly be very circumspect in spending money at this moment.

Making lemonade from lemons

Still, Burlington's business is built on such opportunistic buys that end up creating the "treasure hunt" atmosphere discount shoppers seek out at off-price retailers. 

And more so than some of its peers, TJX sources a significant portion of its inventory from China, though Ross Stores does as well. It also notes that even when it acquires product from domestic suppliers, they ultimately derive from foreign manufacturers.

While many people look for opportunity amid crisis, this could be a chance for off-price retailers to realize a windfall and create something positive out of a very bad situation.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Burlington Stores, Inc. Stock Quote
Burlington Stores, Inc.
BURL
Ross Stores, Inc. Stock Quote
Ross Stores, Inc.
ROST
H & M Hennes & Mauritz AB (publ) Stock Quote
H & M Hennes & Mauritz AB (publ)
HNNMY
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
TJX
Marks and Spencer Group plc Stock Quote
Marks and Spencer Group plc
MAKSY
Associated British Foods plc Stock Quote
Associated British Foods plc
ASBF.F

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