Across most of the fashion industry, the reaction to the Trump administration’s tariffs has ranged from nervous handwringing to full-on panic. But for off-price retailers, the tariffs are proving very good for business.
TJX, the parent company of TJ Maxx, Marshalls and TK Maxx in Europe, said its net sales jumped 7 percent in the second-quarter compared with a year earlier, beating Wall Street expectations. And while dozens of retailers have lowered or withdrawn their sales and profit outlooks citing uncertainty around the tariffs, TJX raised its forecast for both. It now sees comparable sales rising 3 percent, and profit margins close to last year’s level. Shares rose 8 percent following the report to an all-time high.
By design, off-price retailers typically thrive when times get tough for their mainstream competitors. They operate by buying up unsold inventory and selling it at a deep discount. Stores stuffed with merchandise, ranging from factory outlet basics to fine jewellery at 90 percent off retail, appeal to consumers who still want the full shopping experience even when their budgets are stretched thin.
After taking off during the 2008 recession, the biggest off-price chains now dwarf most of their competitors. TJX’s net sales topped $56 billion last year, edging out luxury behemoth LVMH, Zara-owner Inditex and Nike as the world’s largest apparel retailer. Other big players in the category include Ross Stores, Burlington, Nordstrom Rack and Saks Off Fifth.
Now, the Trump administration’s tariffs appear set to touch off another golden era for off-price. TJX and its peers are for the most part not direct importers of goods, which means they rely on their partners to absorb the additional costs and duties to their partners, insulating their own bottom line. TJX also boasts a prolific roster of vendors, which means it has plenty of options from which to choose the best deals. Still, they’re not entirely immune from the industry-wide disruption.
On Wednesday, TJX effectively squelched any questions about whether the tariffs, and the global trade disruptions they’ve caused, will be a positive or negative for off-price.
“We’re taking advantage of a marketplace out there where you’ve had store closures and less exciting execution across the board in retail brick-and-mortar,” TJX chief executive Ernie Herrman said in the earnings call. “My guess is that we’re gaining market share here.”
The TJX Cheat Code
As fashion’s tariff crisis unfurls, a key advantage in TJX’ supply chain is that the retailer is not responsible for importing the vast majority of its merchandise. Rather, it purchases 90 percent of total inventory from third-party vendors who will address customs and duties instead.
TJX sources from more than 21,000 vendors with a team of 1,300 buyers worldwide, including some in remote corners of the world, who are able to take advantage of volatilities in the supply chain. At the same time, it has flexibility on product volume by category, which means its planners can dictate fewer units of products that are particularly vulnerable to tariffs. For instance, if footwear prices soar in the coming months, off-price retailers can quickly pivot to buying fewer shoes or products in a more-stable category.
“Say there is a category that is highly tariff-driven,” said Herrman. “We can just downplay that category. We are so diverse in our families of business that we can do that.”
“Nobody else has these satellite buying offices in remote locations [in Europe] that source easier and faster in different countries, which also helps the tariffs situation,” he added.
As a result, TJX has not seen any impact to its merchandise margin in the second quarter, a rare feat at a time when virtually every retailer is grappling with higher costs of goods. Coach-owner Tapestry, for instance — another fast-growing retailer in recent years — missed profit projections in its earnings report last week, blaming tariffs for cost increases.
Then, TJX prices its items based on the aggregate cost of that merchandise and competitor pricing — ensuring that there is what TJX refers to as a “value gap” between its prices and that of competitors’ for similar products.
“We’re feeling bullish in being able to deal with tariffs,” Herrman added. “Our flexibility allows us the ability to diversify our sourcing.”
Price Isn’t Everything
Lower prices are not a guarantee of success during uncertain times.
In the case of Target, which also reported Wednesday, apparel sales fell 4 percent in its second quarter. The superstore chain was once known for buzzy collaborations and an upmarket-feeling shopping environment that attracted customers across the income spectrum. In recent years, however, many of those shoppers perceived its assortment had fallen behind big-box competitor Walmart and off-price retailers. This year, sales have also been dented by backlash to Target’s decision to end most of its diversity, equity and inclusion initiatives, prompting calls for boycotts.
The risk with many value retailers is a pull-back from discretionary spending overall, rather than shoppers merely trading down, said William Blair analyst Dylan Carden.
“If the consumer is stressed in nondiscretionary, they wouldn’t have the bandwidth to invest in apparel, period,” he said.
That’s why TJX’s relative immunity from tariffs and the current economic climate only goes so far.
But the off-price giant has one more trick up its sleeve: the experience of finding something new at every store visit.
Because it doesn’t have any consistent priority in category or brand offering, TJX has the license from shoppers to always surprise them. It’s why the retailer has become a go-to for shopping for gifts, Herrman said. While the company has e-commerce, the vast majority of sales are still through its 5,000-some stores across the world. The retail plans to open 130 new stores this year as it expands its base of new customers, including younger shoppers.
“We aim to attract shoppers in a very wide demographic with our treasure hunt shopping experience,” said Herrman. “Our new customer base skews younger than the current customer base.”
For mall brands, department stores and other full-price retailers, that’s a troubling sign. Every dollar spent at an off-price chain is one less dollar going to a full-price retailer, and the performance gap is widening. As TJX gains share, the pressure grows on chains like Macy’s and Nordstrom, which are already contending with weaker foot traffic and higher markdowns.
“The diversity of their offering, the value of their offering, the extensive assortment of brands and their very convenient locations has made TJX into a market share gainer, in both traffic and wallet share,” said analyst Dana Telsey. The loss, she added, comes at the expense of department stores and other big retailers, including Target.