Over the past two decades, TJX (NYSE:TJX) has upended the U.S. fashion retail business with its off-price T.J. Maxx and Marshalls chains. A couple of years ago, it surpassed No. 1 department store chain Macy's in terms of revenue, and that gap continues to grow. TJX's massive success has inspired a host of competitors to enter the off-price business.
With more than 2,200 T.J. Maxx and Marshalls stores operating in the U.S. today, TJX may be starting to saturate the apparel market. As a result, TJX is now turning to the home furnishings market to drive a greater percentage of its future growth. This puts different rivals like Bed Bath & Beyond (NASDAQ:BBBY) in its crosshairs.
Sales explode at HomeGoods
TJX carries various home decor items at the T.J. Maxx and Marshalls chains. However, seeing a greater opportunity, the company launched the stand-alone HomeGoods store concept 25 years ago. In recent years, HomeGoods has been the fastest-growing part of TJX's business.
Five years ago, HomeGoods had 374 stores and generated an annual segment profit of $234 million on $2.24 billion of revenue. Since then, TJX has expanded the U.S. HomeGoods store count to 579. Meanwhile, comp sales have remained on a strong upward trend, and the segment profit margin has expanded.
As a result, in TJX's recently ended 2017 fiscal year, HomeGoods' sales reached $4.40 billion, up 96% from five years earlier. Over the same period, HomeGoods' segment profit surged 162%, reaching $614 million last year.
HomeGoods has plenty of room to grow. It is still a fraction of the size of Bed Bath & Beyond, perhaps its most direct competitor. (Bed Bath & Beyond currently generates about $12 billion of annual revenue.) Furthermore, total revenue for the broader home furnishings and furniture market in the U.S. is around $100 billion. Lastly, there are no other major off-price home furnishings chains, whereas the off-price apparel market is getting crowded.
In recent years, TJX's management has estimated that HomeGoods could eventually grow to be a 1,000 store chain in the U.S. That would entail an expansion of more than 70% from its current store base.
More growth on the horizon
Last week, management announced that HomeGoods will accelerate its expansion in the coming year. TJX plans to open about 80 new HomeGoods stores in the U.S. during fiscal 2018, compared to a combined 65 openings for the T.J. Maxx and Marshalls chains.
About 20 of these new HomeGoods stores will be built inside some of the larger existing T.J. Maxx and Marshalls stores. In effect, those locations will be getting expanded home departments.
Additionally, CEO Ernie Herrman revealed that TJX will pilot a second home store concept, with the first four stores opening later this year. The new chain will focus on slightly different product categories relative to HomeGoods. In this way, the two chains will complement one another, in the same way that T.J. Maxx and Marshalls coexist successfully. TJX believes that the new home chain can grow without hurting HomeGoods' ability to reach 1,000 stores.
Bed Bath & Beyond needs to watch out
TJX has steadily gained share at department stores' expense for two decades, due to the inherent flexibility of the off-price business model. As a result, its revenue has surged from less than $7 billion to more than $33 billion over that period.
For the same reason, TJX's growth in the home furnishings market could put pressure on retailers like Bed Bath & Beyond.
Bed Bath & Beyond isn't completely blind to the off-price threat; it dipped its toe into the water last year by buying flash sale site One Kings Lane for about $12 million. Nevertheless, the vast majority of its business is vulnerable as TJX expands with additional home furnishings stores and new product categories. Thus, long-suffering Bed Bath & Beyond shareholders could be in for more pain in the coming years.