By Jinjoo Lee
Off-price retailers such as T.J. Maxx and Ross Stores are like indestructible organisms: They can flourish under all economic conditions, whether too hot or too cold.
The latest quarter was further proof of this resilience. Both T.J. Maxx-owner TJX Cos. and Ross reported this week that comparable-store sales rose 3% in their quarters ended May 4 compared with a year earlier as inflation-pinched consumers sought out deals. This marks the seventh consecutive quarter of comparable sales growth for TJX and the sixth for Ross.
Ross, whose consumers skew low-to-middle income, has been lowering prices to drive sales. TJX, with a higher-income clientele, has been able to raise prices selectively without much pushback. Despite diverging pricing strategies, lower freight costs helped both companies expand operating margins.
Bad times aren't required for good times at these retailers -- they were growing in 2021 when consumers were feeling flush. TJX, Ross and Burlington Stores' collective share of the apparel and footwear specialist market ballooned from 25% in 2019 to 31% last year, according to a Jefferies report citing Euromonitor data.
Off-price is likely stealing market share from home retailers, too. TJX's HomeGoods business saw comparable-store sales rise 4% last quarter, while Ross Stores said the home category outpaced overall company growth. That contrasts with anemic home-related sales at retailers like Target and Beyond, the company formerly named Overstock that took on Bed Bath & Beyond's website and domain name.
Can off-price retailers keep growing? Weakness at other apparel brands suggests that they can. Recognizable brands such as Nike, Lululemon and Coach owner Tapestry have hit speed bumps on sales growth.
Where there is unsold inventory, there are buying opportunities for off-price retailers. There could be a big wave of inventory from recent bankruptcies at Express and teen-focused Rue 21, too, as they close down hundreds of stores. TJX Chief Executive Ernie Herrman said on Wednesday that there has been a "spill-off" of extra inventory from other retailers.
The wave of store closures also should help boost foot traffic at off-price retailers. Off-price historically has been the biggest beneficiary of apparel store closures, according to a report from Evercore equity analyst Michael Binetti. In addition to bankrupt retailers, Macy's has announced plans to close 150 stores. UBS analysts estimate that more than 16,000 apparel stores could close over the next five years.
This hasn't gone unnoticed. TJX Companies and Ross shares have appreciated 92% and 40%, respectively, over the past five years. They are now among the most expensive U.S.-listed apparel-industry stocks. They trade at forward-12-month earnings multiples that rival Nike's and recently outpaced Lululemon's.
They have also done much to please investors: TJX's return on invested capital hit 25.4% last fiscal year, while Ross's hit 19.7%, exceeding even mighty Costco's returns. Both companies also have a record of generous cash returns to shareholders.
Off-price retail stocks aren't cheap, but premium products never are.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
May 24, 2024 07:00 ET (11:00 GMT)
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