Analysis: TJX needs to work harder to fend off rivals and inspire consumers

TJX has produced a good set of second-quarter numbers with solid growth across most divisions. However, there is a clear trend of deterioration in comparable sales, which grew by a relatively meagre 2% this quarter. Admittedly, TJX is up against some tough prior year comparatives, but there are also some factors at play which are dragging down performance.

Foremost among these is that in the U.S., TJX’s consumers have not benefitted from the tax and bonus windfalls of last year. This means their attitude to buying product has been a little more cautious and conservative, with visit frequency and volumes down marginally. When stacked up against some tough prior year numbers, this has flattened the growth curve. Unfortunately, this is a trend that will likely extend into the third quarter as TJX continues to lap the robust performance of 2018.

Against a modestly weaker demand backdrop, TJX has also faced a lot more competition. This has come from the rise of other players, like Macy’s, making more serious forays into off-price and, to a certain extent, the greater visibility of cheaper resale players. However, we still maintain our view that while these players are unhelpful to TJX, their impact on growth is only slight. A more serious threat this quarter came from the above-average levels of discounting across many apparel retailers. This gave those shoppers looking for bargains more choice and more reason to shop around, something that had a tangible impact on both TJMaxx and Marshalls.

We are also keeping an eye on the assortment across TJX’s various banners as we have some concerns that the quality of the selection is beginning to deteriorate. This is also evidenced in some of our consumer data which shows ratings for finding relevant and exciting products has dropped over the past six months. To be fair, this is an early trend and it may be the result of an off-season or a subtle shift in consumer mood. However, it could also be a consequence of a tighter buying environment where there are fewer big-name branded products available.

The deterioration has occurred across both TJMaxx and HomeGoods but is particularly acute in the latter. One of the criticisms we have of HomeGoods is that the offer rarely seems to change, and a lot of the themes, products and styles are static over time. While the home furnishings market is not as driven by fashion as apparel, and while staple basics like colored pillows and home textiles should have a degree of consistency, there is much more room for excitement and newness both between seasons and over the years. In our view, the ‘samey’ nature of the experience is at odds with the off-price promise of providing new and exciting products, thereby giving consumers reasons to visit regularly. This unfavorable dynamic is perhaps why HomeGoods comparable sales were flat during the quarter.

Overall, we remain favorable about TJX. The group has some good gains which can be made from international expansion, as has been evidenced by the 6% comparable uplift from the European and Australian businesses this quarter. It may also be a beneficiary if a turndown in the economy occurs which will push more shoppers into bargain hunting mode. However, we also believe that in the core U.S. market, TJX needs to work much hard to fend off rivals and inspire consumers. The tighter control from big brands over where their product is distributed may hinder these efforts over the medium-term.