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Target and T.J. Maxx Are Killing Macy's

By Jeremy Bowman – Nov 30, 2019 at 5:08AM

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And the two winners have more room to run.

With retail earnings season winding down, a few lessons are clear from the latest round of reports. 

The biggest trend, continuing a pattern from recent years, is that brick-and-mortar sales are shifting away from department stores and toward more nimble competitors, including big-box chains like Target (TGT 3.34%) and Walmart, as well as off-price retailers like TJX Companies (TJX 1.88%). In fact, though Amazon may be the 800-pound gorilla stampeding through the retail industry, what's killing struggling retailers isn't necessarily e-commerce, but rather other brick-and-mortar retailers. The recent success of retailers like Target and TJX, for example, is coming at the expense of stalwarts like Macy's (M 3.00%).

A man shopping for clothes in a store.

Image source: Getty Images.

The vast majority of shopping still takes place in stores, after all. However, shoppers are moving away from brick-and-mortar chains that don't suit their needs and towards competitors that do. As the chart below shows, shares of Target and TJX have crushed Macy's stock this year. In fact, Macy's is one of the worst performers in the S&P 500 for 2019.

TJX Chart

Target, TJX Companies, and Macy's Year-to-Date Stock Performance, data by YCharts.

The disparity between Target, TJX, and Macy's was thrown into sharp relief last quarter. At Target and TJX, comparable sales rose 4.5% and 4%, respectively. At Macy's, comp sales fell 3.9% on an owned basis. Both Target and TJX saw strong increases in earnings and raised their full-year forecasts. At Macy's, adjusted earnings per share fell by 74% in the quarter, and the company slashed its earnings guidance.

Clearly, Target and TJX are doing something right that Macy's isn't. Let's take a look at the difference between retail's winners and losers here.

Winning the apparel wars

Apparel is key to all three of these companies, but Target and TJX are steadily gaining share in the category these days, unlike Macy's. Target has unleashed a number of popular private-label brands in recent years, adding over 20 since 2016, including Cat & Jack (a line of kids clothes) and A New Day for modern women's apparel. In the third quarter, Target said comparable sales in apparel jumped more than 10%, easily outpacing the broader industry.

Commenting on TJX's third quarter, CEO Ernie Herrman said, "Once again, we saw strength in both Marmaxx's [T.J. Maxx and Marshalls'] apparel and home businesses," as the company's off-price formula has delivered consistent growth. The business model, which takes advantage of manufacturer errors, closeouts, cancellations, and similar events to sell name-brand clothes at a discount, has proven to be a winner. Helpfully for off-price retailers, the model does not easily translate to e-commerce.

Both Target and TJX have seen increasing traffic in their stores of late, showing that their brands continue to resonate with customers. Macy's, on the other hand, blamed its poor results in apparel on warm weather, which pushed out sales of cold-weather clothes. However, that excuse seemed particularly weak considering that few other retailers blamed poor weather -- and Target and TJX, which both also have national footprints, saw strong apparel sales growth.

A clear strategy

Well-defined strategies have also helped propel growth at Target and TJX in recent years. Target has revamped its business by rolling out same-day fulfillment options like Shipt, Drive Up, and in-store Order Pickup, while also adding more private brands to differentiate itself from other brick-and-mortar retailers and Amazon. At the same time, Target is opening small-format stores in under-served neighborhoods in big cities and college towns to meet a need in the market that it is uniquely suited for, as the company offers a wide range of everyday products including food, apparel, and home goods. 

TJX, meanwhile, continues to blanket the country with stores, favoring high-traffic locations in strip malls while mostly avoiding conventional shopping malls. (Stores in lower-quality Class C and D malls have become an albatross for companies like Macy's due to plunging shopper traffic.) TJX's ability to beat department store prices at its chains -- which include T.J. Maxx, Marshalls, and HomeGoods -- continues to drive traffic and comparable sales growth.

Macy's strategy, on the other hand, seems to be muddled. The company has made smart acquisitions like Bluemercury and Story, but hasn't invested enough in expanding them. It's launched its own off-price chain, Backstage, which has delivered growth, but since most Backstage stores are located inside Macy's stores, they may be siphoning sales from the core department stores. Macy's has also been reluctant to close stores in lower-tier malls that may be hurting its brand image, and it's been slow to unlock the full value of its real estate. As a result, its profitability is rapidly deteriorating. 

What it means

The struggles at department stores and mall-based chains like Macy's show that Target and TJX have plenty of room to run as they grab market share from struggling peers like Macy's, Kohl's, and Gap, among others. 

Though e-commerce may be regarded as the biggest threat in the industry, there is still plenty of competition at the brick-and-mortar level. U.S. department stores alone generated $143 billion in sales last year, according to the Census Bureau. Without a change in strategy, chains like Macy's will continue to give up market share. That's great news for Target, TJX, and their investors.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon and Target. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.

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