Off-price retailers may prove to be “recession-proof” yet again.
Consumers trading down amid economic concerns have given a boost to off-price retailers. The stocks have been performing well against the index for the past three months, and the outlook for continued gains is positive.
TJX Companies (TJX) and Burlington stock have outpaced the S&P 500 and other department store stocks in the consumer discretionary sector for the past three months. Ross Stores (ROST), meanwhile, has outpaced the index in the past month.
TJX has risen about 7 percent in three months, closing at $117.93 on Friday. Burlington rose around 16 percent, closing at $271.39. Ross Stores rose around 4 percent in the same period but has still surpassed the S&P 500 and the consumer discretionary index within the last month to close at $154.31.
Stock performances for these off-price retailers demonstrate that while consumers are continuing to spend, they are becoming choosier when shopping for non-essential items due to economic worries like inflation. According to the US Census Bureau, retail sales rose by 0.1 percent in August, higher than economists’ expectations. But consumers are focusing their funds on staple items, not items like apparel or accessories, which saw a decline of 0.7 percent last month. And when they are, they’re looking for deals.
“It’s creating an increase in consumers who want to hunt for bargains, particularly brands that are well-recognized,” said Patrick Diedrickson, a senior analyst at Ameriprise Advisor Services.
This has proven to be a boon for TJX, Burlington and Ross Stores, all of whom have surpassed sales expectations in the second quarter.
TJX, which includes TJ Maxx and Marshalls, saw its comparable store sales rise 4 percent in its second quarter due to higher sales. The company also continues to grow. It celebrated the opening of its 5,000th store worldwide during the second quarter and is set to invest $360 million in a 35 percent stake of the United Arab Emirates-based retailer Brands For Less.
TJX, which makes up half of the off-price retail market with TJ Maxx and Marshalls, tends to attract a more affluent market base than Ross and Burlington. These consumers want deals on apparel and accessories but still prefer branded items. The company’s unique procurement strategy of purchasing excess brand items at a discount from vendors continues to appeal to them.
“You often hear that retail is dead, but the best retailers survive and often thrive,” said Michael Schiemer, 39, a retail investor who owns stock in TJX.
Schiemer purchased TJX stock in 2020 because of the corporation’s affordable offerings and versatility, particularly its ability to shift focus to another brand or its e-commerce section amid constantly changing retail trends.
Burlington, meanwhile, saw its compared sales increase by 5 percent in the second quarter and total sales rise 13 percent. It expects to open around 100 new stores by the end of the fiscal year. Ross Stores also saw its comparable stock sales increase by 4 percent due to higher sales.
Higher tier department stores like Macy’s, Dillard’s and Kohl’s have not fared so well. Macy’s stock has decreased around 16 percent over the past 3 months, with comparable sales for the second quarter down 3.3 percent. Dillard’s stock is down almost 13 percent, and Kohl’s dropped 12 percent. Both department stores also saw decreases in comparable sales.
“It’s a very flawed business, because it was built for a completely different retail market than what we have now,” said David Swartz, a senior equity analyst at Morningstar, of the traditional department store model.
Department stores, Swartz said, were primarily built to service middle-class customers in malls. As malls began to disappear and the middle class started to shrink, consumers looked elsewhere to shop, such as online retailers like Amazon and SheIn, as well as strip malls, where off-price retailers tend to operate.
“People don’t see department stores as having much of a future anymore,” Swartz said.
TJX, Burlington and Ross Stores have each updated their earnings guidance for the second half of the fiscal year based on their surprising Q2 results. TJX now expects comparable store sales to be up around 3 percent for the year, with earnings per share between $4.09 and $4.15. Burlington expects its earnings per share to reach between $7.66 and $7.96; it also plans to open 100 new stores countrywide.
Most analysts have a buy recommendation for TJX, with an average target price of $127.38, nearly $10 higher than the current prices. Burlington and Ross Stores also have buy recommendations.
But for some analysts like Diedrickson, Burlington and Ross are risky stocks due to the market segment they cater to––lower-income consumers who often feel the effects of economic changes the most. Ross CEO Barbara Rentler acknowledged this in the company’s updated 2024 guidance, saying that the company would remain cautious in forecasting for the second half of the year.
Whether things get better for this consumer segment in the wake of the Federal Reserve’s rate cuts remains to be seen. But affluent consumers, at least, will continue to power TJX, barring major decline in traffic caused by dire economic circumstances.
“I don’t think that’s on the radar yet,” said Diedrickson.