Heading into 2Q22, the sales strategy for TJX Companies and Ross Stores for 2H22 was: (1) to bring in new surprising, better & best brands and delight shoppers with low prices that reflected great value on those brands; and (2) to increase the flow and merchandise turns at the stores so that there was always newness. Both companies succeeded and took market share in apparel from the department stores in the quarter (Marmaxx apparel comps +9% versus Kohl’s down double-digits) and they largely avoided the late-October Surge Impact. Consumers shifting to off-price from traditional retailers was one of the primary calls in our Holiday 2022 Outlook and we expect that consumer trend to persist through the spring: (1) as the brands newly available to off-price buyers is improving sequentially, (2) as discretionary spending becomes increasingly pressured, and (3) it’s cool to be thrifty again and gifts bought at off-price retailers is again viewed as being prudent and canny, especially of those best brands.
Key T.J. Maxx Metrics
- Marmaxx (T.J. Maxx, Marshalls, and Sierra) produced +3% comp-store-sales. Assuming that its home-related business declined similarly as HomeGoods, that would imply that the other businesses (namely apparel) posted comparable-sales growth of +9.3% (i.e., far ahead of management’s expectations). Comparable-store sales accelerated each month of the quarter, and while transactions were down, they also improved each month of the quarter. We estimate that average ticket increased +5%, comparable transactions decreased -2% (+200 bps QoQ), and the conversion rate improved +300 bps. CFO Scott Goldenberg shared that results were consistent across regions and market type (urban, suburban, and rural).
- Why is Marmaxx able to deliver a +9% comp in apparel, while Macy’s, Kohl’s, and Target are reporting declines? First, we suspect that it’s due to T.J. Maxx’s and Marshall’s value and price positioning in the eyes of the consumer, resulting in better flow of traffic. An important measure of its success in perceptions of the brands’ greater value is that Marmaxx is winning a higher average ticket and product margin, and its markdowns are lower YoY (yes, you read that right: prices higher, promotions and clearance lower). Second, the retailer has been able to source excellent branded merchandise at all price levels: good, better, and best and price all of it at strong "value levels." The consumer agrees given Marmaxx’s ongoing increases in its conversion rate--the consumer likes what they see and buys. Management noted that its offering will be even more compelling in 4Q22 given what they have been able to recently source. Traditional retail merchants don’t plan and source in this fashion. Third, given Marmaxx’s faster inventory turns, it’s able to flow more newness and more "surprise, thrill, and delight" into its stores. It can do so because of its flexible stores and assortment (being a treasure hunt) and higher turns, it can more easily test and re-iterate on what’s connecting with consumers (it’s an "agile business".)
- Management expressed feeling very confident in its holiday marketing campaign and product/value positioning, and as such, they raised guidance for Marmaxx 4Q22 sales, as well as 2H22 earnings. We estimate that Marmaxx’s non-home category comparable sales growth will exceed +10% in 4Q22, which will put the business 20%+ above 2019.
- Marmaxx’s trailing-twelve-month (TTM) sales per square foot were largely unchanged at $427. In the quarter, five new T.J. Maxx locations were added, in addition to 14 new Marshalls locations and 10 new Sierra locations.
- HomeGoods (including Homesense) experienced a -16% decline in comparable-store sales. However, compared to 2019, the increase is +4%. While an increase is welcome, that level of increase is below the two-year compounded rate that was typical pre-pandemic which implies that most of the gains during 2021 were stimulus-fueled.
- TTM sales per square foot were down $24 to $387 QoQ. In the quarter, 18 new HomeGoods locations were added, in addition to three new Homesense locations.
- HomeGoods’ profitability declined due to a large drop in revenue.
- TJX Companies' inventory was higher than plan, as the past year’s supply chain delays are lessening more quickly than expected (Target reported this as well). A systemic resolution to supply-chain delays is a major positive for the retail industry as the delays resulted in substantial excess cost, higher retail prices, excess inventory, and out-of-stocks, and impeded retailers’ ability to be in chase-mode. The removal of "freight waste" is a substantial margin and profit recapture opportunity for retailers. For example, Morgan Stanley estimates that TJX has 300 bps of recapture in front of it which is significant given TJX’s pre-tax margin rate of 9.8% (i.e., it’s a 30%+ profit increase opportunity).
- TTM EBITDA and free cash flow were $5,444M and $741M, respectively, versus $5,130M and $2,239M at 3Q19. We expect these figures to increase to at least $6.0B and $2.6B by this point next year driven by higher sales, margin rates, and inventory turns. Contributing to the margin rate will be higher sales and merchandise margins, substantially lower supply chain costs, and "controlled" labor costs (as a % of sales). Management implied the controlled labor costs and that supports our viewpoint above about retail wage inflation having run its course (and the Fed is winning in its battle to get inflation under control).
Key Ross Stores Metrics
- Ross Stores Inc reported better-than-planned revenue and earnings and increased its guidance for 4Q22 for both. Comparable-store sales declined -3% and it is expected to land in the -1% range for 4Q22. As is reflected in the table above, Ross’ comparable-store sales versus 2019 improved +400 basis points QoQ and it is expected to further improve in the coming quarter. Driving that improvement is Ross’ better inventory flow (as opposed to being over-inventoried in 2H22 and hindered by delays and elongated supply-chain timelines) and an elevation of its brand mix to better & best which it is offering at enhanced value. Ross shoppers are liking what they see (surprise & delight), resulting in better comparable-store sales and a substantial improvement in the conversion rate. Additionally, the rate of traffic decline versus 2019 improved by 300 bps QoQ based on our data. Like Marmaxx, the trend in both sales and traffic improved going through the quarter. Also of note, the decline in Ross’ customer count at -2.6% for the month of October (Placer) was superior to the decline at TJ Maxx at -5.0%, implying that Ross is getting more of the trade-in.
- Ross shared that the comp was driven entirely by average unit retail, which reflects the increased assortment of better & best brands, which is also what drove Marmaxx.
- Trailing-twelve-month (TTM) sales per square foot declined $6 QoQ to $345; however, the figure is likely to climb low-single-digits over the next year. Management implied that the next year’s store opening plan would be similar to this year’s at roughly +70 net Ross stores and +30 DD’s stores.
- TTM EBITDA and free cash flow improved QoQ to $2.4B and $350M as earnings improved and as inventory became less of a drag. Looking forward, the improved inventory flow and turns, more access to better & best product, consumer channel shift into off-price, and less intense inflationary expense pressures should drive sales, profits, and cash generation meaningfully higher over the next year.
