T.J. Maxx Is Defying The Retail Slump -- WSJ -2-

TJX Cos. bets big on in-store shoppers, puts faith in merchandise buyers

Traditional retailers are in crisis, damaged by rapidly shifting consumer tastes, technological change and cut-throat price competition. And then there's TJX Cos., which is defying gravity with the simple idea that under the right circumstances people still like to shop in stores.

The owner of T.J. Maxx and Marshalls has seen sales at stores open at least a year rise for 33 straight quarters. Its annual sales exceed those of Nordstrom Inc. and J.C. Penney Co. combined. The company's market value is almost seven times that of Macy's Inc., which was once the more valuable company.

TJX gets almost all its sales from its roughly 3,800 physical locations and plans to open 250 stores this year. Its revenue and profits are climbing and it envisions expanding to 5,600 stores worldwide over time.

The Framingham, Mass., company isn't shifting business online or using big data to figure out what shoppers want. Instead, it has become one of the country's fastest-growing retailers by sticking with a playbook from a vanishing era. It relies heavily on the instincts of its merchandise buyers, many of whom have been with the company for decades. TJX stores rapidly turn over limited quantities of products that are all sold at bargain prices. The result is a rarity in retail -- a constant treasure hunt.

"Fresh merchandise hitting the floor is key," said Paul Sweetenham, a former senior executive at TJX's European division. "It's a very simple business model, but it's hard to execute."

Little is known publicly about how the retailer executes its strategy, and TJX declined to make current executives available for interviews. The Wall Street Journal pieced together how the company operates from conversations with former executives and people familiar with its business practices. Debra McConnell, a TJX spokeswoman, confirmed some facts about its strategy.

TJX is known as an off-price retailer because it offers brand-name goods at 20% to 60% below regular retail prices. The company takes an average of 25 days to sell its merchandise, a quarter of the time it takes department stores like Macy's and Kohl's Corp. to sell their inventory, according to research from investment bank UBS.

"I like hunting for clothes," said 18-year-old Bailey Mizell, who visits the T.J. Maxx near her home in Windsor, N.C., about once a week. "If you find something, then you feel like you've scored a deal." One of her favorite purchases this year has been a $250 Calvin Klein peacoat that she bought for $80.

Traditional retailers are struggling as shoppers shift spending online and eschew brand loyalty in favor of low prices. Abercrombie & Fitch Co. is up for sale, J. Crew Group Inc. and Neiman Marcus Group Ltd. are struggling with heavy debt loads. Macy's, Penney and Sears Holdings Corp. are closing hundreds of stores. Amazon.com Inc. on Tuesday announced a new service that lets its Prime members try on clothing before paying for what they choose to keep, an attempt to wrest market share from department stores and apparel retailers.

Off-price chains are not immune to these forces. Syms Corp., Filene's Basement LLC and Daffy's Inc. have gone out of business since 2011. Some lacked scale and lost out to larger rivals. Fashion retailer Loehmann's, after going through bankruptcy proceedings, converted its business in 2014 to selling only online.

TJX, which emerged a winner in the sector's earlier shakeout, in May surprised investors when it said sales at stores open at least a year rose 1% in the three months to April 29, versus a 7% increase in the year-ago period. Analysts, who had predicted an increase closer to 2%, attributed the shortfall to weak demand across the retail sector and the tough year-ago comparison.

"We're approaching the end of the runway of easy growth for off-price chains," said Steven Dennis, president of SageBerry Consulting LLC, a retail advisory firm.

Designer brands including Ralph Lauren Corp. and Coach Inc. are reducing shipments to off-price chains in efforts to protect their brand image. Department stores are also expanding their own off-price chains, such as Macy's Backstage, Saks Off 5th and Nordstrom Rack.

TJX Chief Executive Ernie Herrman sees opportunities, not threats. On an earnings call last month he said a "disruption" in retailing is creating a glut of merchandise that TJX is scooping up at bargain prices. Products become available when department stores cancel orders or when companies manufacture too many items. Many big brands also make some merchandise for TJX, typically by recycling past seasons' best-sellers.

"We're actually having to hold ourselves back to ensure that we don't buy too much too soon," said Mr. Herrman. He joined the company in 1989 and rose through the merchandising ranks before becoming CEO in January 2016. Each of the company's four CEOs came up through the buying ranks.

TJX's roots date to the 1970s, when the first two T.J. Maxx stores selling low-price clothing and home furnishings opened in central Massachusetts. A reorganization of the chain's parent in the 1980s resulted in the formation of a new company named TJX that went on to launch the HomeGoods furnishings chain and acquire other off-price retailers including its rival Marshalls and sporting goods company Sierra Trading Post.

In expanding overseas, the company named its European stores T.K. Maxx, differentiating the brand from a British discount chain called T.J. Hughes. TJX is launching another home-furnishings chain in the U.S. this summer called HomeSense.

Central to TJX's success are its merchants. The company employs more than 1,000 buyers who buy apparel and other goods from more than 18,000 suppliers around the world. Each buyer controls millions of dollars and has authority to cut deals on the spot, unlike most department stores, which can take weeks to review and approve orders.

Buyers undergo intensive schooling. Trainers travel with new buyers for their first three years on the job. Buying techniques are codified at TJX University, an in-house training program that teaches employees how to identify value. Staff learn to evaluate products based on a formal formula that rates brand, fashion, quality and price on a scale of one to four. A total score of 16 is considered the perfect buy.

An oft-repeated anecdote in training sessions involves two dress buyers in the early 1990s. All the hot dress styles were on the West Coast, so the buyer on the East Coast assigned her purchasing budget to the West Coast buyer.

"The best decision my dress buyer ever made was not to buy," former TJX CEO Ted English has told staffers. Mr. English was the divisional merchandise manager for dresses when the incident occurred. Because employee bonuses are awarded on the basis of divisional and company performance, the East Coast buyer's compensation wasn't hurt.

TJX is obsessed with getting merchandise to stores quickly. On a recent afternoon in early May, a large New York manufacturer was looking to unload several hundred thousand swimsuits. A TJX buyer cut a deal.

The supplier shipped the suits to TJX's warehouses within a week, and they were in its U.S. stores before Memorial Day weekend. Merchandise often arrives at stores on racks that employees wheel off trucks and move straight onto the sales floor. Products arriving at stores in the morning must be displayed by the evening, giving rise to an internal mantra, "Door to Floor in 24."

Stores typically get deliveries several times a week. The schedule ensures a continuous stream of products to lure shoppers. And because TJX doesn't purchase the full range of colors and styles, stores have one or two items in a particular color or size, giving customers an urgency to buy.

Consumers on average visit an off-price retailer about seven times a year and a majority of them will purchase something, according to Craig Johnson, president of consulting firm Customer Growth Partners. Shoppers visit a department store four times a year and a third buy something during those trips. TJX shoppers have an average household income of roughly $72,000, the same as those who shop at Macy's, according to Cowen & Co. research.

Carole Cusa, 65, used to shop at Saks Fifth Avenue and Bergdorf Goodman when she worked as a real estate broker in Manhattan. She began shopping at T.J. Maxx after retiring. "At this point in my life I'm not going to spend as much as I used to on clothes," she said. Ms. Cusa recently bought a Lilly Pulitzer dress for $39.99 and a pair of Ralph Lauren jeans for $34.99.

TJX doesn't offer discounts or promotions. Items that don't sell within a month are marked down and moved to clearance racks. Most are sold after one or two markdowns.

Nor is it wedded to specific product categories. "It can be the biggest retailer of Italian soaps one year and be out of that business next year, " said Mr. Sweetenham, who held various roles at the company from 1993 to 2012.

If the off-price model is underpinned by speed and agility, traditional retailers are at the other end of the spectrum. They tend to be locked into a group of suppliers and order goods months in advance, which makes it harder to adjust to changing trends.

Macy's will carry Ralph Lauren, Tommy Hilfiger, Michael Kors and other big brands -- whether or not they sell well. Large suppliers guarantee Macy's a gross margin of around 40% even if retail prices are marked down. Brands also pay to staff their own boutiques inside Macy's stores and kick in money for advertising and special events. That makes it harder for traditional department stores to change their layout, because space is devoted to specific brands.

TJX, on the other hand, can choose not to buy products from any one brand if it doesn't like the styles. Its stores have no walls between departments, so it can quickly reconfigure floor plans. Similar clothes from different labels can be found on the same rack.

Sales at U.S. T.J. Maxx and Marshalls stores average roughly $332 a square foot, higher than that of Macy's and Kohl's, whose store sales approximate $188 and $186 per square foot respectively, according to investment research firm Evercore ISI.

A Macy's spokeswoman said the chain's newer stores have a more flexible format, which enables them to better allocate space. She declined to comment on margin arrangements with suppliers, but said Macy's introduces dozens of new brands a year, many of which it sells exclusively. The company is also working to reduce the amount of time it takes merchandise to reach its sales floor after being ordered. That lead time currently ranges from nine weeks to six months for branded goods.

One area where TJX trails other retailers is on the Internet. Nearly 18% of Macy's revenue comes from e-commerce, estimates research firm eMarketer. That compares with just over 1% at TJX, according to Ms. McConnell. It is hard to make money selling inexpensive apparel online, where return rates can approach 40%, according to Mr. Dennis, the retail consultant.

TJX rolled out an e-commerce site for T.J. Maxx in 2004, but shut it down a year later. It didn't relaunch the site until 2013. The online operation now has its own buyers to minimize overlap with what is sold in stores.

Some brands won't let TJX sell their products online because they don't want the items to be easily searchable at lower prices. For certain brands that allow online sales, shoppers have to click on items before they can see brand names. The restraints are similar to those in the physical world, where some companies do not allow TJX to advertise their brands. Advertising individual labels is not part of TJX's marketing strategy, Ms. McConnell said.

Another complication: TJX's systems are designed to move merchandise in and out of its distribution centers quickly, and not to hold products until they can be packed for home delivery. Many stores don't have stock rooms, making it hard to ship online orders from those locations.

The company is "a bit tech phobic," said Mr. Sweetenham, the former TJX executive. "But they do have a great business model."

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

June 21, 2017 02:47 ET (06:47 GMT)