Results from off-price leaders TJX Companies and Ross Stores demonstrated the downshift in consumer spending on apparel and soft home goods, which appears worse than it is given that we are lapping last year’s stimulus-fueled champagne moment and the gleeful return to off-price treasure shopping (which is a form of entertainment and relaxation for many) where customers treated themselves. Moreover, we are also in a difficult period of high inflation that decreases the ability of less affluent households (Ross and dd's Discounts) to purchase discretionary items. TJX has done better with flowing the right goods, at the right value, and at the right time to improve sales and conversion rate. Ross has been behind on these but is making progress. TJX is increasing marketing to improve traffic. Ross is lowering prices to improve conversion. It's going to be a dynamic 2H22 of choppiness. 2023 should be a more normal year and sales densities and profitability should improve for the off-price industry.
Key T.J. Maxx Metrics
- TJX’s U.S. apparel sales were slightly positive and home-related goods were down mid-teens. On a 3-year CAGR basis, HomeGoods comparable store sales increased a respectable +6%. The upside surprise was better-than-planned merchandise margins despite the industry glut of excess inventory and high clearance activity. That better merchandise margin reflects Marmaxx’s ability to get the right goods and deliver them at the right value to drive consumer excitement, loyalty, and conversion. We estimate that conversion improved over 300 bps YoY.
- On the availability of goods, CEO Ernie Herrman shared, "Many of you were aware of the amount of goods in the market. I hesitate to use the word unprecedented, but it is at a different level, I would say, than we've seen. And it's across our good, better and best zones. I would tell you [that] gives us a level of optimism, as you would say, to getting to that optimal mix and an excitement level for the back half."
- TJX’s 2H22 guidance implies flattish comparable-store sales for Marmaxx and double-digit declines for HomeGoods. Implicit in that guidance are relatively consistent 3-year comp CAGRs. Herrman shared, "We are laser-focused on driving traffic and sales with our marketing initiatives. This year, we have sharpened our messaging to reinforce our value leadership position. Each of our banners are communicating that we offer shoppers more for their money, and at the same time, deliver great brands and quality. In an environment where consumer wallets are stretched, we believe it is as important as ever to amplify our value messaging across television, digital and social media platforms."
- In 2Q22, three new HomeGoods locations and one Homesense location were added.
- Trailing twelve-month (TTM) sales per square foot for Marmaxx declined $3 QoQ to $427 and for HomeGoods they declined $12 QoQ to $411. It is likely that both will increase at a low-single-digit rate over the next year.
- Profitability was lower due to higher wage costs and substantially higher freight pressure; however, higher retail prices and strong buying delivered over 250 bps of margin benefit, which is a lot relative to a 29% gross margin business. Marmaxx’s profitability was also preserved by tight expense controls as SG&A per square foot only increased about 4%, which is roughly in-line with industry wage inflation ($23.01 per hour). As such, there is no sign that service levels have been reduced to drive profitability higher.
- TTM EBITDA and free cash flow (FCF) was $5.5B and $0.8B, respectively, with FCF substantially down from last year’s $4.7B. Over the next year, it is highly likely that TJX grows its EBITDA by $0.5B and that FCF returns to its longer-term average of 55% of EBITDA, or around $3.3B.
Key Ross Stores Metrics
- Like TJX, Ross Stores missed its plan (-7% comparable-store sales) and lowered its 2H22 top-line outlook. Ross noted inflationary pressures impacting its middle-income customers and an increasingly promotional retail environment (Kohl’s said similar things – see below). Florida and Texas were cited as top-performing regions “mainly due to the outperformance of border and tourist locations.” Both home and apparel were down roughly -7%. In contrast, TJX’s home was down mid-teens, whereas apparel was up slightly. The two brands lapped similar performance in apparel, but TJX lapped a +36% compare in home compared to Ross’ mid-teens increase. We suspect that the difference stems from TJX’s more affluent customer and better inventory flow.
- Another difference between the two companies’ quarters is that TJX finished the quarter on an improved pace, whereas the pace of business for Ross deteriorated. This also speaks to the more-affluent versus less-affluent customer mix between the two chains and the impact of inflation. Given the difference in the customers’ willingness to spend, TJX has been able to drive conversion rate higher YoY.
- That said, we estimate that Ross’ conversion rate – the difference between traffic and transactions – appreciably improved from last quarter’s deterioration. That stabilization supports CEO Barbara Rentler’s claim that the company made progress in getting the right goods at the right moment in front of its shoppers (i.e., a better assortment and better product flow). In addition, as shown below, Ross is outperforming TJX in visits on a YoY basis. As noted above, TJX plans to increase its marketing spend in 2H22 – its visitation trends demonstrate why management sees opportunity there.
- To meet the demands of its low to moderate-income consumers, Ross is mixing down and lowering prices, which will pressure its average ticket and merchandise margin in 2H22. Ross is also too heavy in inventory and taking clearance actions.
- Ross trailing-twelve-month (TTM) sales per square foot declined $4 QoQ to $386 and it is likely to be at the same level next year.
- 21 new Ross locations and 8 new dd’s Discounts locations were added in the quarter and the plan for 100 new locations for the year remain on track.
- Profitability declined vs. last year to an 11.3% operating margin due to deleverage on fixed expense, higher markdowns (which TJX avoided based upon good sell-through), and higher freight costs.
- TTM EBITDA and free cash flow were $2.5B and $1.6B, respectively. These metrics are likely to be at similar levels next year.
