While the demise of apparel retailers like Macy’s Inc (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) over the past couple of years has been well documented, there’s been one bright spot — off-price retailers such as TJX Companies Inc (NYSE:TJX) and Burlington Stores Inc (NYSE:BURL).
Though consumers have been shunning shopping malls and full-priced clothing stores, the so-called “treasure hunt” experience delivered by bargain houses has translated into enviable revenue growth. The recent trajectory of the off-price retailing industry’s top lines has prompted plenty of bullish outlooks too.
What if, however, the rapid-fire growth of this sliver of the shopping world was about to hit a wall due to sheer saturation?
That’s a polite way of saying that the recent good times will surely come to an end, mainly as a result of all the copycat businesses — not just names like Ross Stores, Inc. (NASDAQ:ROST) or the aforementioned TJX Companies (which operates T.J. Maxx and Marshalls), but also thanks to traditional retailers like Nordstrom and Macy’s getting into the same game.
It’s not quite a red-alert situation yet, but current and would-be owners of TJX stock or its peers would be wise to consider this: We may be at the peak of off-price retailing right now.
Subtle Red Flags
To be fair, the red flags are subtle and anything but decisive — but they’re there.
Case in point: In September, privately-owned retailer Neiman Marcus announced it would be closing a fourth of its off-priced Last Call locales, reportedly to better focus on its full-priced stores. It’s an indirect abdication from a market that had been working, though.
Underscoring that decision from Neiman Marcus is last quarter’s revenue figures from Nordstrom, which included a 5% decline in its off-price arm called Rack.
It’s not just full-priced retailers running into a headwind with their discount store efforts, though. The TJX news headlines have been equally lackluster, with same-store sales only up 0.3% through the first three quarters of this year. They were up 5% over the course of the first three quarters of the prior year.
The Pros Sound Off
Jan Rogers Kniffen, CEO of retail investor consultancy J. Rogers Kniffen WWE, offered up some unbiased insight in June of this year, observing:
“We are reaching the point where off-price will just mean ‘low price.’ There isn’t enough overruns and excess goods on the face of the Earth to supply all of these off-price players. And outlets have the same issue. We have heard Coach, Kors and Ralph Lauren talk about pulling back from outlets. Neither off-price nor outlet is immune from the internet or from the trend to experiential spending.”
It’s a minority opinion to be sure, but Kniffen is hardly alone. A recent analyst note from bond-rating agency Kroll said of off-price retailing: “A contributing factor to the sales declines could be the growth within the segment. Off-price stores appear to be ‘over-retailed,’ prompting more competitive pricing and discounting within the sector.”
Forbes contributor and omnichannel expert Steve Dennis cautioned in May: “Yet there is growing evidence that the segment is beginning to mature and that future results may be quite different from the boom of recent years.”
Bottom Line on TJX Stock
No, it’s not a prediction of outright doom for TJX and its peers. It is a reminder, though, that nothing breeds competition like opportunity. Companies like Ross and Burlington have proven there’s a market for discount-oriented retailing and though outfits like Nordstrom and Neiman Marcus may have stumbled a bit with it thus far, they’re not outright abdicating the idea. In the meantime, more players continue to wade into the arena.
The big takeaway is if you’re expecting the next five years for TJX to look like the last five years have, it would be wise to adjust your expectations. Things don’t look terribly grim right now, but all big trends start at as small ones that most people don’t even notice until it’s too late.
Just something to think about.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
