A TJ Maxx store in Pasadena, California.
Mario Anzuoni | Reuters
Discount retailers like TJX Companies and Ross They are still posting sales gains and taking market share from their rivals, but it's not just because consumers are under pressure and looking for value.
Persistent inflation and rising prices for staples like food and gasoline have pushed shoppers to switch from department stores like Macy's and Kohl's for discount stores like TJ Maxx and Ross. But they have also become more attractive places to shop, particularly among younger consumers, and their assortment has improved as brands increasingly see them as a channel for growth as department stores continue to shrink and lose share.
“They have trusted brands at a cheaper price. They're more fashionable, they're designer-led, they skew toward categories that the customer is much more interested in,” said Jessica Ramirez, senior research analyst at Jane Hali. and associates. “In terms of categories that maybe don't resonate as well, they move away from them and have that ability because of their…strategy. A department store doesn't have that.”
TJX and Ross last week reported fiscal first-quarter earnings that were better than Wall Street expected, even as both companies surpassed huge growth from the prior-year period.
TJX, which operates brands such as TJ Maxx, Marshalls and Homegoods, posted sales growth of 6% to $12.48 billion, compared with estimates of $12.46 billion, according to LSEG. This is in addition to the 3% sales increase the retailer experienced in the prior-year period.
Ross, which runs Ross Dress for Less and dd's Discounts, posted an 8% increase in sales, bringing revenue to $4.86 billion, compared with estimates of $4.83 billion, according to LSEG. This is on top of the 3.7% gain he posted in the prior-year period.
Both companies have grown substantially since 2019 and posted exceptional results throughout 2023.
Last year's particularly strong performance led some Wall Street analysts to question whether they would be able to continue growing sales in the face of tougher comparisons. They've managed to do just that, and the party isn't expected to end anytime soon.
Consumers continue to prioritize value
As consumers face persistent inflation, growing debt and stubbornly high interest rates, they have been more selective about where they spend their precious discretionary dollars. Value has been a priority.
“We believe that the low-priced sector is still healthy and we believe that this quarter's results, both for [TJX] and Ross, are showing consistent traffic-driven increases in competition, indicating that the consumer is still looking for value and the consumer still finds the business model of brand-name products at value prices an attractive purchasing opportunity. “said Brooke Roach, an analyst at Goldman Sachs. CNBC said it expects both companies to continue growing this year, on top of the sales increases they experienced last year.
The low- to middle-income consumer has been feeling the pinch a little more acutely than their higher-income counterparts, but even shoppers with richer wallets have been turning to discount stores not only for necessities, but also for discretionary items.
During a call with analysts Wednesday morning, TJX CFO John Klinger said the company is seeing comparable sales growth in areas where median household income is above and below $100,000, a theme which the retailer has seen consistently over the past year.
Ross Chief Operating Officer Michael Hartshorn said the company also continues to appeal to a wide range of consumers of various income levels.
Even discount stores like it Walmart and dollar tree They are making gains among high-income consumers. On May 16, Walmart beat expectations for quarterly earnings and revenue in part because of the work it has done 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'
The consumer flight to value has certainly helped TJX and Ross boost sales over the past 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 discount price,” Roach said. “So if you look at history, in times of economic strength, these companies were still gaining market share. We don't see any reason why that should change.”
Simeon Siegel, a retail analyst at BMO Capital Markets, said off-price has managed to grow steadily in part because consumers are starting to see stores in a different light.
“We must also recognize that [TJX] “I convinced buyers that they were fashionistas, not cheapskates, and I think it was a very powerful and probably healthy mindset change,” Siegel said. “They took something that was shameful and turned it into a badge of honor.” They took a transaction and turned it into an experience. It was no longer about finding something, hiding it and using it as if you had bought it at full price. Instead, it became acceptable and exciting.”
Siegel said the growth of low prices says as much about the consumer's psyche and health 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 the young Gen Z customer.
“We are the only retailer right now that I see that is able to take brands, fashion and quality and put all of that together in this treasure hunt format,” Herrman said.
The dynamic is a little different at Ross, which has more exposure to the low- and middle-income consumer than TJX and competes more on price, Siegel said. During the fiscal first quarter, TJX's growth was “entirely driven by customer transactions,” meaning more people were shopping there. Ross cited higher average sales prices, offset by fewer units per transaction.
The best kept secret of brands
In the past, the off-price sector was seen as a place for brands to get rid of last season's inventory or items that didn't pass quality control testing. Today, chains have become a destination for companies looking to increase wholesale revenue, even if they don't pass it on.
“Companies will continue to talk about [putting fewer of] their products in the discount channel at the same time that they may very well ship orders directly to them,” Siegel said.
The aisles of discount retailers aren't filled with private label junk, but rather the kind of household names that consumers know and love. Nike, adidasMichael Kors and ralph lauren.
For a time, many of those big names tried to reduce the number of items they sold in the discount channel (and through wholesalers in general) in order to increase sales on their own websites and stores. But many brands are starting to retreat from that strategy and increasingly see the value that wholesale partners of all types can offer.
“If you are a big brand, you see how department stores lose share and you realize that [direct-to-consumer] “It's no longer the Holy Grail you thought it was, there are shrinking places to sell a lot of units,” Siegel said. “And if you're a big brand, you need to sell a lot of units.”
As brands have seen consumers change the way they view 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 run promotions on brand-name items, which can have a dilutive effect on brand equity. By comparison, most of TJX and Ross's business is done in stores, so the markdowns aren't as obvious or visible.
“As off-price becomes a more important part of the US apparel ecosystem, we've seen off-price become more important to brands across the apparel and accessories sector. “Roach said. “[TJX] Specifically, he has talked about strengthening relationships and the ability to be better partners with those brands, and that they are an attractive partner because they are growing and those brands can grow with them.”
TJX and Ross CEOs discussed their strong relationships with suppliers and how they are gaining access to better products at scale.
“At a high level, merchants improved the value offerings they had, whether it was different assortments, broader assortments, better quality, better products. So I think we've taken our first step forward there,” said Barbara Rentler, CEO of Ross. “We feel like we can improve and if we continue to improve, even this low-income customer, if we can satisfy them, we will do well.”
TJX's CEO put it a little more bluntly.
“More and more suppliers have even more reason to want to sell to us over others because their products in our store are now among the best,” Herrman said. “They're dealing with a purchasing team that's very lean and a company that has cash and will pay.”
