TJX and Ross, off-price retailers, will not slow down anytime soon.

• Discount retailers TJ Maxx and Ross Dress for Less are experiencing increasing sales as inflation-conscious consumers seek out bargains and become more accustomed to shopping at discount stores.
• Despite tough comparisons, the two retailers are expected to continue growing and have surpassed quarterly revenue and earnings expectations.
• The sector is advantageous in any economic climate as it provides well-known brands at a lower cost to households.

Despite the pressure on consumers to find value, off-price retailers like and are still experiencing sales gains and capturing market share from their competitors.

Department stores like Macy's and Bloomingdale's have lost popularity among shoppers due to persistent inflation and rising prices for essentials. However, these stores have become cooler places to shop, particularly among younger consumers, and their assortments have improved as brands view them as a growth channel.

"Jessica Ramirez, a senior research analyst with Jane Hali & Associates, stated that they have trusted brands at a cheaper price. These brands are more on-trend and designer-led, and they focus on categories that customers are more interested in. In contrast, department stores may not have the same strategy to pull back from unpopular categories."

Last week, both TJX and Ross reported better-than-expected fiscal first quarter earnings, despite experiencing growth that was significantly lower than the prior year.

LSEG reports that TJX, which operates under brands such as TJ Maxx, Marshalls, and Homegoods, experienced a 6% increase in sales to $12.48 billion in the latest fiscal year, exceeding estimates of $12.46 billion. This growth follows a 3% increase in sales seen in the previous year.

Ross, which operates Ross Dress for Less and dd's Discounts, experienced an 8% increase in sales, resulting in revenue of $4.86 billion, exceeding estimates of $4.83 billion, and following a 3.7% increase in the previous year, according to LSEG.

Both companies have grown substantially since 2019 and posted banner results throughout 2023.

Despite tougher comparisons, the company has continued to grow sales thanks to its particularly strong performance last year.

Consumers are still prioritizing value

With ongoing inflation, mounting debt, and persistently high interest rates, consumers have become more discerning in how they allocate their discretionary funds, prioritizing value.

Goldman Sachs analyst Brooke Roach stated that the off-price sector is still healthy and the consistent traffic-driven comp increases in the results this quarter for TJX and Ross indicate that consumers are still looking for value. She expects both companies to continue growing this year, in addition to the sales increases they saw last year.

Even high-income consumers are turning to discounters for both necessities and discretionary items, while low-to-middle income consumers are feeling the financial strain more acutely.

John Klinger, TJX's finance chief, stated during a Wednesday morning call with analysts that the company has observed comparable sales growth in regions with average household incomes both above and below $100,000, a trend that has been consistent over the past year.

Michael Hartshorn, Ross's Chief Operating Officer, stated that the company is still drawing in a diverse range of customers from different income brackets.

High-income consumers are gaining popularity among even discounters like Walmart and Dollar Tree.

'We've become a cooler place to shop'

TJX and Ross have experienced sales growth over the past year, which can be attributed to the consumer's shift towards value. However, both companies have a history of success and are able to thrive in any economic climate.

"Roach stated that these businesses have consistently provided value to consumers at a discount price, which is branded as consistent value. Historically, during times of economic strength, these businesses have gained market share. Therefore, there is no reason to believe that this trend will change."

BMO Capital Markets' retail analyst Simeon Siegel stated that off-price stores have experienced consistent growth due to consumers shifting their perception of these stores.

"Siegel stated that TJX successfully convinced shoppers to view themselves as fashionable individuals rather than frugal spenders, which was a positive shift in mindset. TJX transformed a transaction into an enjoyable experience, making it acceptable and exciting for customers to wear their purchases as if they had paid full price."

As much as the growth in off-price retail says about the change in consumer perception, it also reveals a lot about their psychology and well-being.

During TJX's earnings call, CEO Ernie Herrman stated that the company has transformed into a more appealing shopping destination for the young Gen Z customer base.

Herrman stated that we are the only retailer currently able to combine brands, fashion, quality, and a treasure hunt format.

Ross has more exposure to lower- and middle-income consumers and competes more on price, while TJX's growth is driven by customer transactions, according to Siegel. In the first fiscal quarter, TJX's growth was entirely driven by customer transactions, meaning more people were shopping there. Ross, on the other hand, had higher average selling prices but fewer units per transaction.

Brands' best kept secret

Historically, the off-price sector was viewed as a location for brands to dispose of their unsold inventory or products that failed quality control checks. Nowadays, these chains have evolved into a destination for companies seeking to increase their wholesale revenue, despite not openly advertising it.

Siegel stated that companies will continue to discuss reducing the number of their products in the off-price channel while simultaneously sending orders directly to them.

The aisles of off-price retailers are not filled with private label junk, but instead, with well-known household brands such as , , Michael Kors, and others.

Many brands are shifting away from the strategy of reducing the number of items sold through off-price channels and wholesalers to focus on growing sales through their own websites and stores. However, they are now recognizing the value that various types of wholesale partners can bring.

"According to Siegel, if you're a large brand and you observe department stores losing market share, you may realize that direct-to-consumer sales are no longer the ultimate goal. Instead, you may need to focus on selling a significant number of units in shrinking markets."

TJX and Ross are increasingly popular destinations for brands to sell their products, as consumers' perceptions of off-price stores have shifted, allowing brands to do so discreetly, according to Siegel.

Macy's, for instance, has a significant online presence and frequently advertises discounts on branded products, which can harm brand value. In contrast, TJX and Ross primarily conduct business in physical stores, so their markdowns are less noticeable.

"Roach stated that as off-price gains significance in the U.S. apparel market, it has become increasingly important to brands in the apparel and accessories sector. TJX, in particular, has emphasized the importance of strengthening relationships with these brands and being a better partner for their growth. This makes TJX an attractive partner for brands looking to expand their reach."

TJX and Ross CEOs discussed their robust vendor relationships and how they obtain high-quality products at a larger scale.

"Barbara Rentler, CEO of Ross, stated that the merchants enhanced the value offerings they provided, including different, broader, better quality, and better products. She believes that this marks their first step forward. Ross aims to continue improving to meet the needs of low-income customers, as they believe there is still room for improvement. If they can satisfy this customer, they believe they will do well."

TJX's CEO put it a bit more bluntly.

"Herrman stated that more vendors are becoming interested in selling to us because they have even more reasons to do so, as their products are now displayed alongside the best in our store. He added that the vendors are dealing with a straightforward buying team and a company that has cash and will be paying."