uploads///Net Sales vs peers

Are Department Stores Threatened by TJX’s Off-Price Model?

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Apr. 9 2015, Updated 12:38 p.m. ET

Off-price retailers

Off-price retailers like TJX Companies (TJX), Ross Stores (ROST), and Burlington Stores (BURL) have been gaining strength compared to traditional department stores like J.C. Penney (JCP) and Macy’s (M). These off-price retailers sell designer brands at deep discounts compared to the prices in department stores.

The SPDR S&P Retail ETF (XRT) invests about 6.3% of its holdings in department stores.

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Consistent performance

In a previous part of this series, we saw how TJX Companies has performed well even in adverse market conditions. The last time a decline in same-store sales was reported was 1996. In fiscal 2015 ending January 31, 2015, off-price retailers TJX Companies and Ross Stores reported a 6.0% and 7.9% increase in their net sales, respectively, compared to the prior year.

Department stores Macy’s (M) and Nordstrom (JWN) registered a sales growth of 0.6% and 7.7%, respectively. Nordstrom’s sales growth primarily came from its off-price Rack stores and online business, not from its upscale full-line stores. Sales for Kohl’s Corporation (KSS) remained essentially flat at $19.0 billion.

Although macro conditions have improved, consumers are still not spending on discretionary items at the desired levels. In this scenario, consumers across various income levels resort to treasure-hunting at off-price stores.

Off-price competition intensifies

Many stores, from Saks Fifth Avenue to Nordstrom, want to grab a share of the off-price market. Currently, Nordstrom’s off-price stores outnumber its high-end full-line stores. Even Macy’s is contemplating the idea of off-price retailing and has set up a team to come up with a pilot off-price store.

The competition is increasing, but TJX Companies’ off-price model still leads the category because of its size and expertise. The next article explores the company’s high operating margins.

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