How come TJ Maxx and Ross discount their clothes so much

New York
CNN business

It’s a great time to own a closing store like TJ Maxx.

Traditional brands and retailers are overflowing with clothing, home goods, electronics and other merchandise. As of July, they were sitting on $713 billion in inventory, according to the latest Census Bureau data.

It’s a great opportunity for “off-price” retailers like TJX ( TJX ) — parent of TJ Maxx, Marshalls and HomeGoods — as well as Ross ( ROST ), Burlington ( BURL ) and Ollie’s Bargain Outlet ( OLLI ).

These chains have flexible purchasing models and are able to collect unwanted goods from suppliers at deep discounts to their initial wholesale price.

Unlike brands and stores that lock in inventory six months to a year in advance, TJX and other off-price chains buy excess merchandise to sell immediately. They also capitalize on canceled orders or when companies manufacture too many items.

And if a designer changes the style or color of a dress, for example, off-price stores are happy to take it and sell it cheap.

If the price is right, these companies will also buy some merchandise and store it for future seasons, a practice known as packaway.

By buying merchandise cheaply and controlling costs with limited advertising budgets, off-price stores can sell designer names and mid-range brands at 20% to 60% below traditional retailers’ prices.

Companies and analysts say today’s inventory buildup in retail is the perfect environment for off-price chains.

Inventories at Nike ( NKE ), Gap ( GPS ), Kohl’s ( KSS ), Target ( TGT ) and others are up from a year ago. “We effectively have a few seasons landing in the market at once,” Nike ( NKE ) CEO John Donahoe said on a call with analysts last month.

Factory shutdowns delayed shipments last year and into 2020, as did container ship shortages and supply chain delays. Inflation has also squeezed the pockets of shoppers and passed on discretionary items.

Companies are now reducing excess stock to stimulate customer demand. They are also packing some merchandise to try to sell in future seasons, channeling more merchandise to their own retail stores and canceling orders from suppliers.

But these strategies will not be enough to eliminate abuse. And the beneficiaries of this deluge will be off-price chains.

“This is going to throw all the water on them,” said Brett Rose, CEO of wholesale distributor United National Consumer Suppliers, which works with stores and brands. Rose’s company is shipping 40% more volume to off-price chains than the same time a year ago.

“We’re seeing some incredible off-price buying opportunities in the market,” TJX CEO Ernie Herrman said in August.

Ollie’s Bargain Outlet, a closing chain of more than 400 stores that offers appliances, flooring and outdoor goods, is finding “opportunities like we haven’t seen in a long time,” CEO John Swygert said last month.

“Cancelled orders, excess inventory and supply chain disruptions have resulted in a wide range of products being unavailable,” he said.