In the wake of inflation, rising living costs, and increased debt among consumers, the off-price retail model has continued to flourish.
The sector, dominated by players like TJX Companies, Ross Stores, and Burlington, has exhibited a unique resilience during fluctuating economic conditions.
These retailers, characterized by their "treasure hunt" shopping experiences and value-driven products, appeal to a broad demographic, encompassing middle- to low-income shoppers.
While the sector's reliance on brick-and-mortar stores may have been a challenge for other retail categories in recent years, it is proving to be a significant advantage for off-price retailers. As the e-commerce growth in apparel and footwear has plateaued, shoppers are returning to physical stores, preferring the excitement of finding name-brand items at discounted prices. Meanwhile, the struggles of department stores like Macy's, which is in the process of closing more than 100 locations, have provided off-price retailers with further opportunities to gain market share.
TJX Companies, the parent company of T.J. Maxx, Marshalls, HomeGoods, and several international brands, continues to lead the off-price retail sector.
In the second quarter of 2024, the company posted net sales of $13.5 billion, up 5.6% year-over-year, with comparable sales rising 4%. The Marmaxx division, which includes T.J. Maxx and Marshalls, contributed significantly to this growth, driven by a 5% increase in comps. This performance is indicative of the broader trend of consumers seeking value, especially in categories like apparel and home goods.
A key factor in TJX's success is its real estate strategy. The company’s stores are typically located in suburban strip malls and smaller shopping centers, which have proven to be more resilient than enclosed malls. This advantage, combined with the company's strong inventory management and ability to quickly adapt to consumer preferences, has allowed TJX to outperform traditional department stores, which are grappling with declining foot traffic and high operating costs. Analysts, such as those at UBS, have pointed out that TJX is well-positioned to take market share from its department store competitors over the next several years.
The company's focus on customer experience, combined with its ability to offer name-brand products at deeply discounted prices, has driven increased customer transactions. This focus on value, especially during times of economic uncertainty, resonates with consumers who are cutting back on discretionary spending but still seek quality items. TJX’s international expansion, with businesses like HomeSense and Sierra Trading Post, further positions the company to continue its upward trajectory, despite economic challenges.
Ross Stores, with its focus on lower-income consumers, has also reported strong results in 2024. The company’s second-quarter net sales grew 7.1% year-over-year to $5.3 billion, and comparable sales increased by 4%. Like TJX, Ross has benefited from its suburban store locations and value-driven merchandising strategy. The company’s ability to offer a wide range of products, from apparel to home goods, at low prices has made it a go-to destination for budget-conscious shoppers.
One of Ross’s key strategies has been aggressive store expansion. The company opened 24 new locations in just two months, bringing its total to nearly 2,000 stores across the U.S. This rapid expansion has allowed Ross to capture market share in regions where department stores and other retailers are retreating. The company’s ability to open new stores while maintaining profitability speaks to its strong operational efficiency.
However, Ross faces some near-term challenges. CEO Barbara Rentler has warned that the company’s year-over-year comparisons will become more difficult in the second half of the year, particularly as consumers continue to feel the pressure of inflation. While Ross’s value proposition remains attractive to shoppers, the company may face margin pressure as it balances its low-price strategy with rising costs for merchandise and distribution.
Burlington, the smallest of the three major off-price retailers, has also posted solid growth in 2024. The company’s second-quarter net sales rose 13.4% to $2.5 billion, with comparable sales up 5%. Burlington’s gross margin expanded by 110 basis points to 42.8%, reflecting the company’s ability to manage markdowns and freight costs effectively.
One of Burlington’s key growth drivers has been its store expansion strategy. In the second quarter, the company added 36 new stores, with a goal of opening 50 net new stores by the end of the year. Burlington’s CEO Michael O’Sullivan has emphasized the importance of new stores in driving sales growth, noting that new locations are performing better than expected in their first year of operation.
Burlington has also benefited from the shift in consumer behavior brought on by inflation. As more middle-income shoppers become value-conscious, Burlington’s product assortment, which includes more branded merchandise, has become increasingly appealing. The company’s ability to offer recognizable brands at discounted prices has helped it attract a broader customer base, despite concerns about the health of the lower-income consumer.
While off-price retailers like TJX, Ross, and Burlington are thriving, dollar stores are facing significant challenges. In previous economic downturns, dollar stores like Dollar General, Dollar Tree, and Family Dollar saw strong sales growth as low-income consumers flocked to their stores for affordable essentials. However, the current economic environment is proving more difficult for these retailers.
Dollar General, which caters primarily to households earning less than $35,000 annually, has struggled to capture consumer spending in 2024. In the second quarter, the company’s sales growth was below expectations, with CEO Todd Vasos attributing the weak performance to increased competition from big-box retailers like Walmart. As inflation continues to squeeze household budgets, many low-income shoppers are turning to larger retailers, where they can find a broader selection of products at competitive prices.
One of the key challenges for Dollar General is the financial pressure facing its core customer base. More than 60% of the company’s customers have reported that they are cutting back on basic necessities due to rising costs for rent, utilities, and healthcare. Additionally, many of these customers are relying more heavily on credit cards, with some reaching their credit limits. This has led to reduced spending on discretionary items, which has hurt Dollar General’s sales.
In response, Dollar General has ramped up its promotions and markdowns in an effort to attract more customers. However, these efforts have not been enough to offset the impact of increased competition and rising costs. Analysts have pointed out that Walmart and other value retailers are doing a better job of capturing the available traffic, leaving Dollar General with less market share than expected.
Dollar Tree, which serves a slightly more affluent customer base than Dollar General, has also faced challenges in 2024. The company’s second-quarter sales were below expectations, as more middle- and upper-income shoppers pulled back on discretionary spending. According to Dollar Tree executives, customers with annual incomes over $125,000 have become more price-sensitive, focusing on essentials rather than non-essential purchases.
In an effort to win back shoppers, Dollar Tree has been expanding its product assortment to include higher-priced items. The company raised its base price from $1 to $1.25 in 2021 and has since introduced a “multi-price” model, with items priced up to $5. This strategy has helped Dollar Tree diversify its offerings and attract a broader range of customers. However, the company faces the challenge of balancing its low-price image with the need to offer higher-priced items to maintain profitability.
The divergent paths of off-price retailers and dollar stores in 2024 highlight the complex dynamics of the retail sector in a time of economic uncertainty. While off-price retailers are thriving by offering value and a unique shopping experience, dollar stores are struggling to adapt to changing consumer behavior and increased competition.
Looking ahead, off-price retailers are well-positioned to continue their growth. As department stores continue to close and more consumers prioritize value, companies like TJX, Ross, and Burlington are likely to capture even more market share. Their ability to offer branded merchandise at discounted prices, combined with their strategic real estate locations, gives them a competitive edge in the evolving retail landscape.
For dollar stores, the future is less certain. As low-income consumers continue to face financial pressure, dollar stores will need to find new ways to attract and retain customers. Whether through promotions, product diversification, or operational improvements, dollar store retailers will need to adapt quickly to remain competitive in an increasingly crowded value retail market.
