A TJ Maxx store in Pasadena, California.
Mario Anzuoni | Reuters
Discount retailers like TJX Company And Horse are still growing sales and taking market share from their competitors, but it’s not just because consumers are under pressure and looking for value.
Persistent inflation and rising prices for essential goods like food and gasoline have prompted shoppers to head to department stores like Macy’s And Kohl’s for discounters like TJ Maxx and Ross. But they have also become cooler ways to shop, particularly among younger consumers, and their assortments have improved as brands increasingly look to them as a growth channel as department stores continue to shrink and lose market share.
“They have trusted brands at a cheaper price. They’re more on-trend, designer-driven and leaning toward categories that the customer is much more interested in,” said Jessica Ramirez, senior research analyst at Jane Hali & Associated. “In terms of categories that maybe aren’t doing as well, they’re pulling back from them and they have that ability because of their…strategy. A department store doesn’t have that.”
TJX and Ross both reported fiscal first-quarter earnings last week that were better than Wall Street expected, although both companies posted above-average growth from the same period last year.
TJX, which operates brands such as TJ Maxx, Marshalls and Homegoods, saw sales rise 6% to $12.48 billion, compared with estimates of $12.46 billion, according to LSEG. This is in addition to the 3% increase in sales the retailer reported in the same period last year.
Ross, which operates Ross Dress for Less and dd’s Discounts, saw sales jump 8%, increasing sales to $4.86 billion, compared with estimates of $4.83 billion, according to LSEG. This is in addition to the 3.7% increase in the same period last year.
Both companies have grown significantly since 2019 and achieved excellent results in 2023.
Last year’s particularly strong performance led some Wall Street analysts to question whether they could continue to grow sales despite tougher comparisons. That’s exactly what they managed to do – and the party isn’t expected to end any time soon.
Consumers still value value
As consumers grapple with persistent inflation, rising debt and stubbornly high interest rates, they are becoming more selective about how they spend their precious money. Value was paramount.
“We believe the off-price sector is still healthy and we believe this quarter’s results for both… [TJX] and Ross are seeing consistent increases in traffic-driven competition, indicating that the consumer is still looking for value and that the consumer still sees Price’s business model of branded goods at great prices as an attractive purchasing opportunity,” said Brooke Roach, analyst at Goldman Sachs told CNBC it expects both companies to continue to grow this year on top of the sales increases they posted last year.
Low- to middle-income consumers are feeling the burn a little more than their higher-income counterparts, but even deep-pocketed shoppers are turning to discount stores not just for necessities but for essentials as well.
During a call with analysts Wednesday morning, TJX chief financial officer John Klinger said the company is seeing comparable sales increases in areas where the average household income is both above and below $100,000 – a theme the retailer has discussed over the past year continuously observed.
Michael Hartshorn, Ross’s chief operating officer, said the company continues to attract a wide range of consumers with different income levels.
Even discounters like it Walmart And Money tree win with high-income consumers. On May 16, Walmart beat profit and sales expectations for the quarter, thanks in part to the work the company did to attract more high-income shoppers. Earlier this year, Dollar Tree said its fastest-growing demographic earns more than $125,000 a year.
“We have become a cooler place to shop”
Consumers’ flight to value undoubtedly helped TJX and Ross increase their sales last year, but both companies have grown steadily over time and tend to do well in any economic cycle.
“That’s because they provide consistent value to the consumer – and that’s consistent brand value to the consumer at a reduced price,” Roach said. “So if you look at history, these companies have still been market share winners during times of economic strength. We see no reason why that should change.”
Simeon Siegel, retail analyst at BMO Capital Markets, said off-price offerings have managed to grow steadily, in part because consumers are increasingly viewing stores in a different light.
“We have to recognize that too [TJX] “We convinced shoppers that they were fashionistas and not cheapskates, and I think that was a very powerful and probably healthy shift in mindset,” Siegel said. “They took something embarrassing and turned it into a badge of honor.” They turned a transaction into an experience. It was no longer about finding something, hiding it and wearing it as if you had bought it at full price. Instead, it became acceptable and exciting.
Siegel said the growth in off-price prices says as much about the psyche and health of consumers as it does about this shift in perception.
During TJX’s earnings call, CEO Ernie Herrman said the company has “become a cooler place to shop” and has made great strides with young Gen Z customers.
“I currently see the only retailer able to bring together brands, fashion and quality in this treasure hunt format,” Herrman said.
At Ross, the dynamic is slightly different because the company appeals to more low- and middle-income consumers than TJX and competes more on price, Siegel said. In the first fiscal quarter, TJX’s growth was “entirely driven by customer transactions,” meaning more people shopped there. Ross cited higher average sales prices offset by fewer units per transaction.
The Marche’s best kept secret
In the past, the off-price sector was seen as a place where brands dumped their last season’s inventory or items that had failed quality control tests. Today, the chains have become a go-to place for companies looking to increase their wholesale sales, even if they don’t broadcast it through the media.
“Companies will continue to talk about it [putting fewer of] your products in the off-price channel, while at the same time potentially sending orders directly to them,” Siegel said.
The shelves of off-price retailers are not full of private label junk, but of household names that consumers know and love Nike, AdidasMichael Kors and Ralph Lauren.
For a while, many of these big names tried to reduce the number of items they sold in the off-price channel – and through wholesalers overall – in order to increase sales on their own websites and stores. However, many brands are starting to move away from this strategy and increasingly recognize the value that wholesale partners of all types can provide.
“If you’re a big brand, you watch department stores give up market share and you realize it [direct-to-consumer] “is no longer the Holy Grail you once thought it was, there are fewer and fewer places to sell a lot of units,” Siegel said. “And if you’re a big brand, you have to sell a lot of units.”
As brands have observed consumers changing their attitudes toward off-price stores, they are more willing to sell to chains like TJX and Ross, especially because they can do so “invisibly,” Siegel said.
Department stores like Macy’s, for example, have a massive online presence and regularly offer specials on branded items, which can dilute brand equity. In comparison, the majority of TJX and Ross’ business is conducted in stores, so the markdowns are not as obvious or visible.
“As off-price becomes a larger part of the U.S. apparel ecosystem, we have seen off-price become increasingly important to brands across the apparel and accessories sector,” Roach said. “[TJX] specifically talked about strengthening relationships and being able to be better partners with these brands and being an attractive partner because they can grow and these brands can grow with them.”
The CEOs of TJX and Ross talked about their strong supplier relationships and how they gain access to better products at scale.
“At a high level, retailers have improved their offerings, be it through different ranges, broader ranges, better quality, better products. I think we have taken the first step forward here,” said Barbara Rentler, CEO of Ross. “We feel like there is room for improvement, and if we continue to improve, if we can satisfy even this low-income customer, we should be able to do well.”
The CEO of TJX put it a little more clearly.
“More and more vendors are having even more reasons to want to outsell us over others because their merchandise is now among the best in our store,” Herrman said. “You’re dealing with a purchasing team that is very hands-off and a company that has cash on hand and will pay.”
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2024-05-26 12:00:01
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