Please ensure Javascript is enabled for purposes of website accessibility

T.J. Maxx and Marshalls Are Destroying Department Stores

By Adam Levine-Weinberg - May 21, 2016 at 10:25AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Department stores' inventory woes are fueling the continued rise of off-price retailers.

Earlier this month, just about every department store you could imagine reported a Q1 sales decline. At the two biggest department store chains -- Macy's (M -2.27%) and Kohl's (KSS -19.25%) -- comparable-store sales fell 5.6% and 3.9%, respectively.

Sales fell at department stores like Macy's last quarter.

This sales slump didn't extend to off-price giant TJX Companies (TJX -0.22%), though. The parent of T.J. Maxx and Marshalls reported a stellar 7% year-over-year increase in global comparable-store sales.

To make matters worse, efforts by department stores like Macy's and Kohl's to protect their own margins could ultimately help TJX grow at their expense during the next few quarters.

Market share gains accelerate

TJX's Marmaxx business segment -- made up of Marshalls and T.J. Maxx stores in the U.S. -- accounts for about 65% of the company's revenue. However, in recent years, its growth appeared to be slowing. For the year ending in Jan. 2015, comparable-store sales rose just 1% at Marmaxx.

Given that Marshalls and T.J. Maxx are relatively mature businesses, it wasn't that surprising that their growth was slowing.

However, the opposite now seems to be occurring. In Q1, Marmaxx segment comp sales rose 6% year over year for a second consecutive quarter. Ironically, growth is accelerating at Marshalls and T.J. Maxx just as department stores like Macy's and Kohl's are recording their biggest sales declines since the Great Recession. This indicates that TJX is rapidly gaining market share.

TJX profits from chaos

Marshalls' and T.J. Maxx's strong growth in the face of plummeting department store sales shows just how much TJX benefits from chaos in the retail world.

In effect, TJX serves as a buyer of last resort for its more than 17,000 vendors. When supply chain disruptions (like last year's West Coast port slowdown), unexpected changes in demand, or other inventory miscues leave department stores and specialty stores with more product than they want, TJX steps in to buy the excess at bargain prices.

TJX can then offer great deals to its customers. This helps it drive more traffic to Marshalls and T.J. Maxx stores -- and away from department stores like Macy's and Kohl's.

Expect more share gains this year

Unfortunately for the department stores, the threat from TJX is likely to become more potent as the year progresses. In light of the recent slowdown in sales trends, many retailers are reducing their orders for later this year.

That will help them avoid margin-killing inventory pileups. However, vendors facing order cuts will probably be looking to unload excess merchandise at a big discount. TJX is likely to buy a lot of this inventory. It will then be able to undercut department stores' prices even further in its T.J. Maxx and Marshalls stores.

The retail inventory glut will continue to benefit T.J. Maxx for the next year.

Furthermore, due to weak sales of winter seasonal merchandise across the retail industry, TJX has gotten great deals on so-called "packaway" inventory in the past few months. These goods will show up in its stores during the upcoming winter season, allowing TJX to continue undercutting department stores on price.

Maybe next year?

The dynamics highlighted here show how difficult it is for department stores to compete with Marshalls and T.J. Maxx. Even chains that have been pretty careful about managing inventory (like Kohl's) will be hurt by the fact that their rivals are cutting orders and thereby giving TJX opportunities to pick up high-quality goods at cut-rate prices.

If department stores and specialty stores can keep orders and inventory in line with demand over the next year, the current merchandise glut will subside. In that scenario, conditions could turn more favorable by next spring.

TJX is a formidable competitor under any circumstances. But if other retailers' inventory miscues allow it to keep finding great deals, department stores will continue to suffer mightily.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
TJX
$55.73 (-0.22%) $0.12
Macy's, Inc. Stock Quote
Macy's, Inc.
M
$17.91 (-2.27%) $0.41
Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$28.82 (-19.25%) $-6.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.