TJ Maxx store in Pasadena, California.
Mario Anzuoni | Reuters
Discount sellers like TJX companies AND Ross they continue to see sales increases and take market share from rivals, but it’s not just because consumers are under pressure and hunting for value.
Persistent inflation and rising prices of necessities such as food and gas are driving shoppers to department stores such as Macy’s AND Kohl for discount stores such as TJ Maxx and Ross. But they’ve also become nicer places to shop, especially among younger consumers, and their assortment has gotten better as brands increasingly see them as a growth channel as department stores continue to shrink and lose share.
“They have trusted brands at a lower price. They are more trendy, they are guided by designers, they focus on categories that the customer is much more interested in,” said Jessica Ramirez, senior research analyst at Jane Hali & Partners. “When it comes to categories that maybe also don’t have a lot of interest, they’re pulling out of those categories and they have that ability because of their… strategy. The department store doesn’t have it.”
Both TJX and Ross reported fiscal first-quarter earnings last week that were better than Wall Street expectations, even though both companies posted significant growth compared to the prior-year period.
TJX, which manages brands including TJ Maxx, Marshalls and Homegoods, saw sales rise 6% to $12.48 billion compared to estimates of $12.46 billion, according to LSEG. That’s more than the 3% sales escalate the retailer saw the previous year.
Ross, who runs Ross Dress for Less and dd’s Discounts, saw an 8% escalate in sales, bringing revenue to $4.86 billion compared to estimates of $4.83 billion, according to LSEG. This is more than the 3.7% escalate recorded in the previous year.
Both companies have grown significantly since 2019 and posted banner results throughout 2023.
Last year’s particularly powerful performance led some Wall Street analysts to wonder whether they could continue to grow sales against tougher peers. They managed to do it – and the party isn’t expected to end anytime soon.
Consumers continue to put value first
Consumers struggling with persistent inflation, rising debt and persistently high interest rates have become more selective about how they spend their precious dollars. The most vital thing was value.
“We think the off-price sector continues to be vigorous and we think that will deliver results this quarter, both for [TJX] and Ross are showing continued revenue growth driven by traffic, which indicates that consumers continue to seek value and continue to view the price-based business model of branded goods at value prices as an attractive purchasing opportunity,” Goldman Sachs analyst Brooke Roach told CNBC She said she expects both companies to continue growing this year, in addition to the sales growth seen last year.
Low- and middle-income consumers feel the burn a little more acutely than their higher-income counterparts, but even customers with deeper pockets are turning to discount stores not only for necessities but also for discretionary items.
On a Wednesday morning call with analysts, TJX Chief Financial Officer John Klinger said the company is seeing comparable sales growth in areas where the median household income is both above and below $100,000 – a phenomenon that the retailer he has been observing consistently over the last year.
Ross Chief Operating Officer Michael Hartshorn said the company continues to attract a broad range of consumers of all income levels.
Even discount stores like it Walmart AND Dollar tree they make profits thanks to high-income consumers. On May 16, Walmart beat expectations for quarterly earnings and revenue, in part because of its work to attract more high-income customers. Earlier this year, Dollar Tree reported that its fastest-growing demographic earns more than $125,000 a year.
“We have become a nicer place to shop”
Consumers’ flight to value has undoubtedly helped TJX and Ross escalate sales over the past year, but both companies have grown steadily over time and tend to perform well in any economic cycle.
“That’s because they provide consistent value to consumers — and that’s consistent brand value for the consumer at a discounted price,” Roach said. “So historically, in good economic times, these companies have continued to gain market share. We see no reason why this should change.”
Simeon Siegel, retail analyst at BMO Capital Markets, said off-price prices continue to rise, partly because consumers are starting to see stores in a different delicate.
“We have to acknowledge that as well [TJX] they convinced shoppers that they were fashionistas and not penny pinchers, and I think that was a very powerful and probably vigorous shift in mindset,” Siegel said. “They took something that was embarrassing and turned it into a badge of honor. They took the transaction and turned it into an experience. There was no longer any question of finding something, hiding it, and wearing it as if you had bought it at full price. Instead, it became acceptable and invigorating.”
Siegel said the escalate in off-price prices says as much about consumers’ psyche and health as it does about changing perceptions.
On TJX’s earnings call, CEO Ernie Herrman said the company “has become a cooler place to shop” and has made significant progress in connecting with the newborn Gen Z customer.
“Right now, I see us as the only retailer that can take brands, fashion and quality and put it all together in a treasure hunt,” Herrman said.
The energetic is slightly different for Ross, which has more exposure to lower- and middle-income consumers than TJX and competes more on price, Siegel said. In its fiscal first quarter, TJX’s growth was “entirely driven by customer transactions,” meaning more people were shopping there. Ross reported higher average sales prices, offset by fewer units per transaction.
The brand’s best kept secret
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 failed quality control tests. Nowadays, chains have become a destination for companies looking to escalate their wholesale revenues, even if they don’t sell them.
“Companies will continue to talk [putting fewer of] their products in the off-price channel while still being able to ship orders directly to them,” Siegel said.
The shelves in discount stores are not filled with private label junk, but with brands that are widely known and liked by consumers Nike, AdidasMichael Kors and Ralph Lauren.
For some time, many of these substantial brands have tried to reduce the number of products sold off-price – and through wholesalers in general – in order to escalate sales on their own websites and stores. However, many brands are starting to move away from this strategy and are increasingly recognizing the value that wholesale partners of all kinds can offer.
“If you’re a substantial brand, you watch department stores drop stock and you realize it [direct-to-consumer] is no longer the Holy Grail you once thought, the number of places where you can sell multiple units is shrinking,” Siegel said. “And if you’re a substantial brand, you have to sell a lot of units.”
As brands see a shift in how consumers view lower-priced stores, they are more willing to sell to chains like TJX and Ross, especially since they can do so “invisibly,” Siegel said.
For example, department stores such as Macy’s have a gigantic online presence and regularly run promotions on branded products, which can have a dilutive effect on brand equity. In comparison, most of TJX and Ross’s business takes place in stores, so the markdowns are not as obvious and evident.
“As off-price becomes a larger part of the U.S. apparel ecosystem, we’ve seen off-price become increasingly vital to brands across the apparel and accessories sector,” Roach said. “[TJX] in particular, he talked about strengthening relationships and the opportunity to be better partners with these brands and how they are an attractive partner because they are growing and brands can grow with them.
TJX and Ross CEOs talked about their powerful supplier relationships and how they gain access to better products at scale.
“At a high level, retailers improved their value proposition, whether that was different ranges, wider ranges, better quality and better products. So I think we’ve taken a first step forward in that regard,” said Ross CEO Barbara Rentler. “We feel like we can improve and if we continue to improve, even for this low-income customer, if we can keep her joyful, everything should be fine.”
TJX’s CEO put it a bit more bluntly.
“More and more sellers have even more reasons to want to sell to us rather than others because their merchandise in our store is now recognized as the best,” Herrman said. “They’re dealing with a buying team that is very hands-on and a company that has cash and will pay.”
