"It takes a lot of money to look this cheap" was one of Dolly Parton's most famous quips. It also takes a lot of investment to offer cheap prices. That's why not all discounters are succeeding, even as inflation has sent most consumers scrambling to find the best value.
Seeing which retailers are luring shoppers from competitors is one way to identify the winners. And the data show that two of this season's big earnings standouts-Ross Stores and Target-also score high marks on this metric.
Gordon Haskett analyst Chuck Grom and his team identified retailers' stores that were very close-either in the same shopping plaza or within a one-mile radius-to those of a direct competitor. Then they measured the traffic growth at each of those stores and compared the results to see which brand was attracting more visitors.
The data, much like the recently completed second-quarter earnings season, show that Ross looks like the best bet in off-price retail.
Grom notes that Ross has maintained a mid-teens lead over Burlington Stores in the past six months and a similar gap over TJX Cos.' Marmaxx brand.
"Indeed, we think it's clear that Ross is gaining material market share," he writes, citing three catalysts: the company's improved merchandise, better social media outreach, and cleaner, more pleasant stores that are easier to shop, "all of which are working in lock-step to drive higher sales productivity."
Like other analysts, he also thinks that Ross is still in the "early-innings" of this cycle. While Guggenheim compared it to prepandemic-era TJX, Grom says it's like "Costco Wholesale 20 years ago when its brand image flipped."
Target may also be turning a corner. Grom thinks shoppers who had increasingly defected to TJX during the big-box retailer's postpandemic struggles are starting to come back.
"Said differently, traffic decelerations at Marmaxx have been more pronounced for stores near Target than for those far from a Target . . . suggesting some mindshare may be shifting back to the Bullseye when two directly competing locations (a TJ Maxx/Marshalls vs. a Target) square off," he writes.
Ross is down about 3% over the past month, but that's much better than the roughly 15% and 30% declines seen by TJX and Burlington, respectively. The State Street SPDR S&P Retail exchange-traded fund is down a little over 5%, while the State Street Consumer Disc Select Sector SPDR ETF is down about 4.5%. Target is up more than 3% over the same period.
As for dollar stores, Grom thinks that Dollar Tree has a marginal edge, but not enough for investors to rush out and buy the stock.
While its traffic improved relative to Dollar General, that comes after lapping a weak period last year, when it moved away from its strict $1 and $1.25 pricing strategy. He still has concerns about that shift, as well as the competitive pricing landscape and the increased complexity in Dollar Tree's merchandising and operations.
Dollar Tree fell after it reported results in late August and is down about 12% over the past month, while Dollar General gained ground after reporting and is up about 2% over the same period.
Robust retail sales in August, supported by a strong job market, did little to help consumer stocks recently, especially those in the discretionary category. This week's interest rate hike, along with average gas prices hovering just below $4.50 and estimates that inflation won't be tamed until 2029, have investors worried about the sector.
It looks like value will stay in vogue, but not all discounters are equally well positioned to capitalize on the trend.
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