As the current retail environment winnows out the weakest players, it's also rewarding muscular organizations which are happily thriving, despite disruption wrought by Amazon.com, not to mention rapidly shifting consumer shopping habits and preferences.
Recently I was reminded of what a resilient enterprise TJX Companies (NYSE:TJX) has proven to be, when writing about, of all things, Dollar General Corp.'s (NYSE:DG) current-year ambitions to improve profitability. You wouldn't immediately think that the strategies of a dollar-store retailer dovetail with those of an off-price destination for savvy fashionistas, but I'll illuminate their confluence below. By way of introduction, let's first review TJX Companies' not-so-secret retail weapon.
The element of surprise
In TJX Companies' earnings conference calls, management rarely fails to emphasize the organization's extremely varied mix of merchandise. A philosophy of avoiding predictable product inventory runs across TJX's multiple brands: T.J. Maxx ("T.K. Maxx" abroad), Marshalls, HomeGoods, Sierra Trading Post, and the recently launched Homesense. CEO Ernie Herrman summed up the organization's bent neatly during TJX's most recent earnings call at the end of February: "We offer an eclectic, ever-changing mix of compelling branded assortments at excellent values every day."
I'd place key emphasis on the word "day." Those who shop regularly at T.J. Maxx or HomeGoods understand that an item on the shelves this afternoon might not be found tomorrow, let alone next week. Eclecticism, combined with unpredictability and cut-rate prices, provides an ambience of surprise on each shopping visit; it also a provides a sense of urgency to commit and purchase, rather than simply browse.
To me, the introduction of delightful uncertainty is reminiscent of Kohl's (NYSE:KSS) gamification of shopping. Kohl's features a more stable, predictable, department-store-genre selection of goods. Yet it dangles layers of discounts and promotions, which can then be combined with "Kohl's Cash" (customer rewards generated by prior purchases) to serially reduce the list price of an item at checkout. Both TJX and Kohl's attempt to bolster value with fun, in order to maintain steady traffic into their respective stores.
The element of surprise may be TJX's obvious retail weapon, but its impact is only possible due to the company's inventory strategy. TJX can offer compelling price points because it's a destination for the unsold inventory of well-regarded brands, from mass-market to prestige labels. TJX Companies currently purchases from 20,000 vendors in over 100 countries to supply its global base of 4,000 stores. Vendors include manufacturers, third-party distributors, and fellow retailers. Here's CEO Herrman commenting on the company's status as a clearinghouse for previously unloved merchandise:
Further, we can offer brands one of the most efficient and discreet avenues for clearing inventory. We do not advertise brand names in our marketing, our in-store inventory turns rapidly, and individual brands can blend into our racks with tens of thousands of items in each store.
It turns out that customers avidly snap up designer labels when they're offered at bargain prices -- who knew? The rapid inventory movement Herrman refers to should pique shareholders' interest. Compare TJX Companies' inventory turnover (a measure of how many times per year a corporation's inventory is sold and replaced) to that of close competitors:
Along with fellow discounter Ross Stores, TJX boasts a truly swift inventory turnover, replacing its entire inventory roughly nine times a year. Numerous advantages result when a company can move inventory so fast. Primarily, organizations avoid the carrying costs (financing, warehousing, insuring, etc.) associated with holding goods for long periods. And selling inventory quickly trims the potential for product obsolescence.
But perhaps not so obviously, companies with high inventory turnover rates simply need less infrastructure to grow sales. For example, TJX was able to able to sell approximately $36 billion worth of merchandise in 2017 across just 4,000 stores globally (e-commerce accounts for just 2% of total revenue). By my rough math, the average TJX Companies location is selling nearly one million dollars' worth of inventory every six weeks.
Additionally, decades spent as an off-price conduit between merchandise off-loaders and value-conscious consumers have resulted in pretty stable margins for the company: TJX's annual net profit has consistently landed between 6% and 8% of total revenue since 2010 (the tail end of the Great Recession). This mid- to high-single-digit band represents enviable net profit for a corporation in the discount retail business.
As for the similarity in strategy between Dollar General and TJX: This year, Dollar General is experimenting with a "treasure hunt" concept to boost sales and by extension, gross margin. The ubiquitous dollar store will roll out hundreds of new and unique SKUs (stock-keeping units) at 700 of its 14,000 locations. These mystery products will show up in stores at irregular intervals, to keep customers enticed by the prospect of a serendipitous purchase.
Dollar General's CEO Todd Vasos recently described the ethos of the experiment to analysts as follows:
She [Dollar General's customer] is looking for more of a treasure hunt. She's looking for something new and unique in her shopping experience, especially as it relates to non-consumables. We believe that this will deliver exactly what she's looking for.
Does this sound vaguely familiar?