We’re going short the off price apparel retailers – most notably TJX and ROST (we’re buyers of BURL on weakness) after having the group on our long bias list for much of this year. The main factor is that we think that inventories are too lean out there for the off price retailers to find quality enough buys to drive their top line in 2021. We saw a slight sequential improvement in the rate of apparel import declines for the month of August – the latest month reported by OTEXA. Apparel imports were down 12% to $6.6bn vs -22% in July. Props to the apparel retail space in aggregate for adjusting inventory purchases to the anemic level of demand. But when I see such a big decline in imports, it makes me more cautious on the off-price retailers on the margin – TJX/ROST/BURL. I want to like these names, as they tend to benefit during times of supply/demand shocks. But the consensus is already there -- these names are flat-out loved right now. Consensus buy ratings are as bullish as we’ve seen in 20-years. In the latest quarter, the lack of excess inventory in key categories left an imbalance for the off price retailers. The decline in imports is keeping a lid on the amount of inventory that off-price retailers can buy to either pack away for next year or drive incremental clearance demand in the current environment. That’s likely to continue well into 2021. TJX is a secular winner and definitely a name to bet on over the long term, but at 32x earnings and 20x cash flow it’s a little overdone long side. ROST has a spot-on valuation for a lesser quality asset, and is the place I’d go to be short the space. BURL faces similar risk, but there’s unit growth and margin optionality that I’d be careful about shorting. Keep this group on a tight leash.
