Off-price retailers maintain edge over department stores: UBS

Investing.com -- Off-price retailers continue to outpace department stores in sales and profitability, according to UBS, which rates TJX Companies (NYSE:TJX) and Burlington Stores (NYSE:BURL) as Buys. 

“Off-Price retailers have been major share gainers over Department Stores, in terms of both sales and EBIT dollars, over the past 10+ years,” UBS wrote, adding that this trend remained strong in the fourth quarter of 2024.

As of the most recent quarter, off-price retailers held 59.5% of total sales among the group UBS analyzed, which includes TJX, Burlington, and Ross Stores (NASDAQ:ROST), versus department store peers such as Nordstrom (NYSE:JWN), Macy’s, Dillard’s, and Kohl’s. 

That figure is said to be up 1,000 basis points over the past five years and increased 190 basis points year-over-year. 

Meanwhile, the bank says off-price retailers captured 76.6% of the total profit pool, up 560 basis points year-over-year, reflecting accelerating earnings share gains.

By contrast, UBS remains bearish on department stores, maintaining Sell ratings on Macy’s, Dillard’s, and Kohl’s due to “weaker growth prospects.” 

UBS expects continued earnings per share misses and price-to-earnings (P/E) contraction for these companies. Nordstrom, which is in the process of being taken private, is rated Neutral.

Inventory trends are also said to favor off-price retailers. Off-price inventory rose 9% year-over-year in Q4 2024, compared to 5% for department stores, which UBS says suggests greater resilience in gross margins.

While the firm acknowledges that off-price stocks already trade at a significant valuation premium over department stores—24x forward earnings versus 12x—UBS expects that strong fundamentals and continued share gains will sustain their outperformance. 

“We therefore think Off-Price’s outperformance vs. Dept. Stores will likely continue, keeping their valuation premium high and potentially widening further,” UBS concluded.