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Why Off-Price Retailers Could Struggle in Early 2022

By Maurie Backman - Nov 24, 2021 at 9:02AM

Key Points

  • Off-price retailers rely on leftover inventory from name brands to stock their shelves.
  • This year, many big names are facing inventory shortages due to supply chain holdups.
  • If off-price retailers can't buy inventory, they may need to shift gears and scale back store expansion plans.

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After a solid run, off-price chains could face challenges during the first part of the new year.

While the pandemic may have dealt a blow to the retail industry as a whole, off-price chains clearly emerged as winners. At a time when shoppers had to conserve funds due to economic concerns and financial constraints, chains like Burlington Stores ( BURL -0.56% ) saw an uptick in foot traffic. And now, a number of off-price retailers are making plans to open even more stores.

That's a very good thing for real estate investors. Store closures have hammered shopping centers and malls, creating a vacancy crisis that commercial landlords across the country are struggling to address. But while the pandemic may have been kind to off-price retailers, these chains could face one serious challenge going into the new year.

Masked person looking at clothing in store.

Image source: Getty Images.

A lack of inventory could be an issue

Off-price chains appeal to consumers in both the best and worst of times due to their competitive price points. And a big reason they're able to offer name brands at such a discount is that they commonly scoop up leftover inventory from those well-known brands on the cheap.

But right now, that strategy doesn't work for one big reason: There's not a lot of leftover inventory to go around. For months, retailers have been grappling with supply chain issues and shipping bottlenecks that have caused a massive inventory shortage. And if retailers don't have extra inventory on hand, off-price retailers can't snag it at a discount and resell it to customers.

In addition, in recent weeks, a number of big names in the retail businesses have said that they're moving away from off-price stores. These include Under Armour ( UAA -0.94% ), Ralph Lauren ( RL -1.73% ), and Steve Madden (NASDAQ: SHOO).

To be fair, this may be part of a general strategy on the part of these companies. When products are sold at discount stores, it can erode original retailers' pricing power and also, create brand images that may not align with what those retailers are aiming for. Plus, some well-known brands have their own outlet stores and would rather their extra inventory get sold there than at a discount chain.

But while unloading extra inventory to off-price chains may be something that retailers often do as a last resort, this year, that option just may not be on the table. And that could leave off-price retailers in a pretty bad spot.

If things get bad enough, some of those retailers may need to rethink expansion plans. And if that comes to be, real estate investors could get hurt. Talk about trickle-down misery.

How worried should investors be?

Thankfully, the supply chain woes many retailers are grappling with now should resolve themselves at some point in 2022. And once that happens, off-price retailers could enjoy an uptick in product -- and revenue.

Furthermore, a big reason off-price retailers are able to thrive is that they're great at amassing a diverse mix of inventory. That could mean tapping different sources if their go-to retailers have limited inventory left over in the wake of the holiday shopping boom.

Still, real estate investors should gear up for a little turbulence as off-price retailers navigate the current season. And they shouldn't be surprised if some off-price chains scale back reopening plans temporarily to focus on new strategies for sourcing products.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Burlington Stores, Inc. Stock Quote
Burlington Stores, Inc.
$291.35 (-0.56%) $-1.65
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$23.28 (-0.94%) $0.22
Ralph Lauren Corporation Stock Quote
Ralph Lauren Corporation
$117.08 (-1.73%) $-2.06
Steven Madden, Ltd. Stock Quote
Steven Madden, Ltd.
$46.19 (-1.60%) $0.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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