Value Retail's Moment: Off-Price Retailers Thrive as Shoppers Adjust to Economic Realities

Here's my Thought

Hey Friends,

The other week I wrote my quarterly piece on retailer earnings. The full post can be viewed here, but overall many retailers cited themes of economic pressure weakening consumer demand, and increased focus on cost-cutting and operational efficiencies to protect profitability.

Consumer spending is frankly a bit weird as of late. The ConsumerWise research report from Q3 2024 highlighted increased optimism about the U.S. economy, reaching its highest level in a year. This is reflected in consumers’ willingness to spend, though caution remains. Younger generations (Gen Z, millennials) report higher optimism than older groups (Gen X, baby boomers), with male respondents showing more optimism than females. Inflation remains a concern for over half of consumers, but price stabilization has slightly eased worries. Many are still “trading down” for better prices, and the use of "buy now, pay later" services is growing, particularly among younger and higher-income consumers.

2023 was plagued with retailers going bankrupt:

• Bed Bath & Beyond (April 2023): One of the largest retail bankruptcies of the year, leading to the closure of hundreds of stores. The brand was later bought by Overstock.com.

• David’s Bridal (April 2023): Struggling with debt and changing consumer trends, the bridal retailer filed for Chapter 11 for the second time in recent years.

• Rite Aid (October 2023): The pharmacy giant filed as it grappled with around $4 billion in debt, closing several stores as part of its restructuring plan.

• Tuesday Morning (February 2023): A home goods retailer that shut down all of its stores by May after filing for bankruptcy.

• Other companies like Z Gallerie, Hello Bello, and Mitchell Gold + Bob Williams also filed during the year, reflecting broader industry challenges

In 2024, it’s been more of the same. Notable filings include:

• Express Inc. (April 2024): This apparel retailer filed for Chapter 11 and announced store closures as part of its restructuring.

• 99 Cents Only (April 2024): Filed for Chapter 11 as it struggled with operational inefficiencies and rising costs.

• Family Dollar (March 2024): Announced store closures to adjust to a challenging retail environment.

• The Body Shop (March 2024): The beauty brand filed for Chapter 7 liquidation, indicating a complete business shutdown in the U.S.

• Party City (October 2023): Filed for Chapter 11 due to lower-than-expected sales and high debt load​

• Big Lots (August 2024): Filed for Chapter 11 after months of store closures.

There’s a certain niche that is thriving…Retailers catering to low-income consumers, such as Dollar Tree, Five Below, and Big Lots, have seen stock declines, while those focused on value in a premium space are seeing success. Five Below reported a 5.7% drop in same-store sales, with its lower-income demographic struggling. Dollar Tree, which owns Family Dollar, also lowered its full-year outlook, citing financial stress on its middle- and lower-income customers. Family Dollar shoppers are increasingly relying on government assistance and credit for purchases, highlighting the strain on lower-income consumers.

The Wall Street Journal said it best: “The latest batch of retail earnings had clear sets of winners and losers, the lowest-income consumers are scraping by, while middle- and high-income consumers are still shopping but looking for deals”.

Off-price retailers like TJX (T.J. Maxx, Marshalls), Ross Stores, and Burlington are thriving against traditional retailers due to their appeal to value-conscious consumers. In the latest quarter, Burlington's sales increased by 12% to $2.29 billion, with comparable store sales up 6%. Ross saw total sales grow to $4.9 billion, and TJX posted a 9% rise in net sales to $13.3 billion. Consumers are gravitating toward discounted prices as inflation pressures persist.

Off-price retailers are outperforming traditional retailers due to their ability to meet the current consumer demand for value amidst economic uncertainty. Shoppers, especially middle and upper-income groups, are shifting their focus to essential goods, reducing discretionary spending. This trend has benefited off-price retailers like TJX Companies (owner of T.J. Maxx, Marshalls, and HomeGoods), whose Q2 2024 net sales rose 8% to $12.8 billion, compared to many traditional retailers struggling with softer demand in non-essential categories.

In contrast, traditional retailers like Target and Walmart have experienced more mixed results. Walmart has continued to thrive, with total Q2 2024 sales growing by 5.7%, driven largely by grocery and essentials, and a 24% increase in online sales. However, Target saw a 4.9% drop in overall revenue compared to last year, though it managed a slight 2% rise in comparable sales, signaling struggles in non-essential categories.

This divergence highlights how off-price retailers’ focus on discounted, high-demand items has insulated them from the broader slowdown in discretionary spending, while traditional retailers face more challenges with categories like apparel and home goods.

Nordstrom is a great case study in and of itself…..Q2 2024, Nordstrom and its discount chain, Nordstrom Rack, saw distinct performance patterns. Nordstrom's total company net sales increased by 3.4% year-over-year (YoY), with the Rack performing particularly well. Nordstrom Rack's net sales grew by 8.8% YoY, supported by a 4.1% increase in comparable sales, making it a key growth driver. In contrast, the Nordstrom banner saw more modest growth, with net sales and comparable sales both increasing by 0.9%.