Investing in TJX: Discounted value for the Millennial consumer

TJX is the world leader in off-price retailing. ‘Off price’ is a discount pricing format, whereby a retailer purchases excess stock from known brands, for example Ralph Lauren, and sells it on to the end consumer at a lower price. In Europe and the UK, TJX’s well-known local brand, TK Maxx, typically retails branded goods at a 60-65% discount, but can go as low as 90%, encouraging consumers to embrace the ‘treasure hunt’ format, exploring the store for bargains.   

The model benefits all parties: for brands, by relieving them of excess stock; for TJX, as its long-established direct relationships protect it from fraud and counterfeit risk; while the end consumer benefits from access to premium goods at a more attainable price point. From an ESG perspective, the model helps to reduce waste and supports the consumer with choice, quality and value.

We like off-price retailing as we believe the sector has a considerable runway for growth. It currently only makes up 2% of the overall retail mix, and TJX has a clear advantage over its competitors, such as Ross Stores, thanks to its expansive international presence. While c.80% of Ross Stores outlets are in the US, TJX has over double the amount stores, more than 4900, with 644 in Europe stocking fashion and homeware¹. It can therefore turn inventory very quickly, allowing its partner brands to rapidly shift (costly) excess stock from their supply chains and meaning customers always have a fresh product offering. For fiscal 2023, TJX’s net sales were USD49.9 billion, an increase of 3% year-over-year. It’s latest results, Q1 2024, were above plan with a 22% increase in earning per share compared to the prior year¹.

As thematic investors, TJX sits within our ‘Millennial & Gen Z Consumer’ portfolio. Contrary to what you might expect, changing shopping habits and the digitalisation of retailing are working to TJX’s advantage. As brands scale back their physical presence, they need different ways of distributing products, and TJX is benefitting disproportionally from that, as a trusted, consistent buyer. Its stores have a steady presence on high streets that increasingly feature just a few speciality retailers.

In terms of its growth trajectory, the business is evolving in step with changes in the wider industry. While we expect physical stores to always make up the majority of the revenue stream, it has invested in an e-commerce strategy to ensure it has exposure to those customers who will only ever shop online.

Additionally, it has expanded into stocking premium beauty products, including social media cult favourites Glossier, Tom Ford, Charlotte Tilbury and Olaplex. This new category has been well-received by customers. When Glossier products hit US shelves in 2022, a 34,000-member strong Reddit group was awash with customer photos showing off their bargains, and a single TikTok post showing a photo of Glossier products on a TK Maxx store shelf racked up some 135,000 views and a myriad of ecstatic comments².

Given its interesting position in the retail space, we view TJX as a ‘defensive growth’ company. It delivers consistently solid mid-single-digit same-store sales growth, double-digit earnings and strong returns on investor capital, with a little operating margin leverage.

The challenges the name has faced in recent years, including elevated freight costs and a spike in wage inflation, have largely dissipated. We believe the operating environment has almost fully normalised post-Covid, and TJX should benefit from macro tailwinds, such as interest rate cuts and normalised inflation, as well as its organic expansion and diversification efforts.

This story was first told in Portfolio Adviser’s ‘Beneath the bonnet’ segment, by Christian Mayes.

¹ Glossy, February 2024

² Glossy, July 2022