T.J. Maxx parentTJX Companies(NYSE: TJX) has earned rave reviews from investors and retail analysts in recent years.
The stock has nearly doubled over the last five years, while much of the apparel retail has been stuck in seemingly permanent decline. Department store chains like Macy'sandJ.C. Penneyhave been forced to close hundred of stores and are now trading at five-year lows. Other mall-based staples likeGap Inchave struggled. Few traditional retailers seem to have the right formula to fend off e-commerce threats likeAmazon.comandfast fashion upstarts like H&M and Uniqlo.
Off-price brands like T.J. Maxx and its sister brand Marshall's appear to be in a sweet spot, however. The discounted name-brand clothing they offer promises shoppers something new and surprising every time they come in the store, the so-called "treasure hunt" effect, and the model has been difficult to replicate online. TJX has been able to consistently deliver comparable sales growth, though that figure was flat in its most recent quarter.
As a result, TJX is now nearly twice as big by market cap as Macy's, Gap,Nordstrom(NYSE: JWN), J.C. Penney, and Sears. However, while TJX has come to define the off-price space, it may not be the best operator in the sector.Though a number of peers in the space likeRoss StoresandBurlington Storeshave also seen their stocks surge, Nordstrom Rack, whose performance is hidden within the larger department-store chain, might be a hidden gem.
More than a department store
Though Nordstrom is best known for its high-end department stores, its off-price Rack brand has become an increasingly important part of the business. Nordstrom now has 220 Rack stores, nearly double the number of full-line department stores, and by one key metric they are more successful than TJX's brands.
Image source: Nordstrom.
According to sales per square foot, which shows how efficiently a retailer is using its space, Nordstrom Rack does better than T.J. Maxx and Marshall's. In 2016, Nordstrom Rack stores delivered $474 of revenue per square foot of space, better than the return of its full-line stores at $330 per square foot. Nordstrom Rack contributed 31% of the parent company's revenue last year, and that number continues to grow each year.
At T.J. Maxx and Marshall's, by comparison, sales per square foot was $404 per square foot last year.
The race is on
While many retailers have been forced to shutter stores or even declare bankruptcy, both Nordstrom Rack and TJX have promised aggressive expansions. Nordstrom has already added six new off-price locations this year, with plans to open at least twelve, a move that would increase the base by more than 5%. TJX, meanwhile, is the much bigger chain, with more than 2,000 T.J. Maxx and Marshall's stores across the U.S. and 3,800 total locations globally, including Home Goods. The company sees that rising to 5,600 in the future.
Macy's recently blamed its woes not on e-commerce, but on off-price brands like T.J. Maxx, as it said would expand its own off-price brand, Backstage, inside its department stores.
But comparable sales have slowed lately at T.J. Maxx and Nordstrom Rack, indicating that off-price retail may be plateauing. While T.J. Maxx and Marshall's had flat comparable sales last quarter, Nordstrom Rack's fell 0.9%.
As more retailers shutter stores that trend could improve, but the future of off-price retail may not be as rosy as the last few years. Amazon is now the country's biggest online apparel retailer, and evenWal-Mart is making strides in the space with acquisitions of ShoeBuy, ModCloth, Moosejaw, and potentially Bonobos.
Despite Nordstrom's better sales per square foot metric, TJX is the much bigger of the two and has unbeatable profits with an operating margin of 14%. That spells opportunity for Nordstrom, though, as its off-price brand could lead the stock's comeback.
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