Luxury brands are cleaning up their image - and it could be bad news for TJ Maxx

Business Insider/Mary Hanbury

Some brands are scaling back from off-price stores.

• TJ Maxx has reported 21 consecutive years of growth and is considered a bright spot in the retail industry.
• Some high-end brands are sending less inventory to off-price stores in an effort to make over their images.
• This could potentially hurt TJ Maxx in the future.

TJ Maxx has defied the retail apocalypse: it reported same-store sales growth for 21 consecutive years, and early in 2017, it announced plans to open 1,800 stores globally.

But the tide may be turning as the brands TJ Maxx stocks start to sharpen up their image and send less inventory to off-price stores.

During the third quarter last year, for the first time in two decades, TJX Companies, the parent company for TJ Maxx and Marshalls, reported flat same-store sales growth for these stores, sparking debate as to whether this could be a sign of things to come.

Brands scale back to sharpen their image

Shopping at TJ Maxx involves rummaging through somewhat chaotic racks of discounted designer clothing and handbags. It can be a bargain hunter's paradise and a way for brands to shift their old stock, but executives at high-end brands worry that it doesn't necessarily bode well for their image in the eye of the consumer.

Ralph Lauren, Michael Kors, and VF Corp - the parent company of brands such as North Face and Timberland - have all said that they want to scale back from off-price and department stores to improve their brand image, from one that seems cheap to one that is more high-end.

Ralph Lauren CEO Patrice Louvert said in August that discounting was damaging to the brand and its profit margins. He said shoppers would only spend money on "exciting" apparel, and "exciting isn't selling a generic product with more and more discounting."

Business Insider/Mary Hanbury

Michael Kors handbags at a TJ Maxx store in Manhattan.

Michael Kors is trying to reposition itself as a more high-end retailer, and that includes making the brand less available to the mass market by reducing the number of promotions.

According to a Morgan Stanley note to investors, this strategy is proving effective. In the third quarter of 2017, Michael Kors reduced the number of promotional days in stores and in the wholesale channel. As a result, average prices in women's wholesale accessories, footwear, and ready-to-wear rose, which suggests that customers were prepared to pay full price.

Similarly, after being faced with a glut of excess inventory caused by a series of sports retailer bankruptcies in 2016, the parent company of outdoorwear brand North Face changed tactics and sent the inventory to its own outlet stores instead of off-price retailers such as TJ Maxx. This way, it would be able to take control of pricing, Fortune reported.

Controlling inventory

Excess inventory fuels off-price retail. According to Wells Fargo analysis, inventory levels are cleaner than they have been for five years - and that could be bad news for TJ Maxx.

Maintaining a lean inventory is a top priority for brands at the moment. In its most recent quarterly results, Ralph Lauren reported a 26% decrease in inventory levels compared to the year before. The CEO of PVH, the parent company of Calvin Klein and Tommy Hilfiger, told Jim Cramer of Mad Money that "inventories, in particular, are under much tighter control," claiming that this was the strongest holiday season the company had seen in the past four years.

This week, Wells Fargo downgraded its rating of TJ Maxx's parent company, TJX.

"The big difference between our view then vs. now is the current inventory situation in the US wholesale channel. To put it simply, one of the primary bullish points on retail right now is how clean inventory in the channel is," Wells Fargo analyst Ike Boruchow wrote in a note to investors.

He added: "At a high level, we simply see a less favorable setup right now."

TJ Maxx does not believe this is a concern for the business. "Availability has never been an issue for us, and with a vendor universe of more than 18,000 vendors, we have tremendous flexibility in the brands that we offer consumers," a spokesperson for TJ Maxx told Business Insider.

Morningstar equity analyst Bridget Weishaar agrees that the concerns are overblown.

"Even though you hear a couple of brands in the news saying that they are trying to limit the amount of inventory in the discount channel, given the diversity of the brands that they can get, I am not worried," she told Business Insider.

Increased competition

Off-price stores are facing increased competition from department stores such as Macy's and Nordstrom, who are aggressively rolling out their own outlet stores. Macy's Backstage and Nordstrom Rack mimic the off-price model by offering steep discounts on designer clothes.

Business Insider reported earlier this year that the off-price concept is unlikely to work as effectively at department stores. It's more appealing for vendors to sell to off-price stores because they don't charge vendors to sell products, advertise with them, or ask for returns. There's also no cost for the vendor when items are marked down.

Nevertheless, increased competition combined with limited inventory could begin to cause issues for TJ Maxx.

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