As we head into peak election season, you’re going to hear the phrase “middle class” more than your own name for a couple months. And we're sorry, but we're about to significantly add to that total.
And for that you can blame Target and TJX, which rode middle-class thriftiness to higher-than-expected earnings and revenue last quarter, according to analysts surveyed by Zacks.
Both Target and TJX—an empire that includes TJ Maxx, Marshall’s, and HomeGoods—have capitalized on the increasing thriftiness of middle and upper-middle-class consumers, said Joe Feldman of Telsey Advisory Group.
“People are very price sensitive today across the income spectrum,” Feldman said, “and you’re seeing wherever they can save some money, they’re trying to do that. I think that’s why you’ve seen the trade down to some of the big box companies.” Relatively high-income shoppers are working for that value as well, he said, pointing to “very strong” sales at Costco.
Their success makes sense to Anindya Ghose, professor of technology and marketing at NYU Stern School of Business. “Target and TJX have successfully tapped into the value-oriented mindset of today’s consumers,” he told CFO Brew in an email.
More and more, consumers are sticking to essentials and hunting for deals, and that has translated “to higher spending at discount retailers and a preference for store brands over national brands.”
Bullseye. Target helped drive more traffic by cutting prices on about 5,000 items that customers buy a lot, like food and consumable goods (think toothpaste), Feldman said. But they also benefit from having a bunch of private brands for clothing and home goods, a differentiator and source of newness, he said.
Not to mention that those Goodfellow & Co. shirts and Threshold sheets tend to be cheaper than name brands carried at department stores like Kohl’s or Macy’s. The latter extended its quarterly streak of falling same-store sales when it reported earnings last week.
Speaking of sheets not selling: “Anything home-related has been challenging from a sales standpoint,” Feldman said. The Home Depot and Lowe’s both expect softer sales in the second half of the year, while Williams Sonoma and Arhaus, the high-end furniture brand, also “gave soft commentary” for the next two quarters, he said.
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Maxxing sales. Feldman said TJX hasn’t so much done anything differently as it has just continued to do the same thing—”offer great value on branded goods”—and more people have sought that out.
“You can clearly see that they seem to be taking market share from department stores,” he said, and “you’re also seeing that more affluent consumer trade down” and shopping at stores like TJ Maxx more often.
The shifting variety of inventory that customers expect from stores like TJ Maxx also helps TJX more flexibly respond to spikes in demand from different groups of shoppers.
“If a certain customer category is driving the comp [sales], we can easily go back and repurchase those goods and get them back into the store quickly,” CFO John Klinger told analysts on its earnings call.
Not everyone. Remember, this is a story about the middle class. Lower-income consumers, whose pullbacks have notably hit retailers and restaurants hard enough to prompt some of the price cuts and value deals around the economy, aren’t spending much at Target or Walmart that isn’t on groceries or maybe some seasonal items, said Feldman.
“They’re trying to just get through the week with and put some food on the table,” he said.
Looking ahead. Recovering sales are great—although Feldman noted that Target “faced an easy comparison from last year”—and there are signs that Target, TJX, and Walmart are headed for a strong back-to-school season.
But that doesn’t necessarily mean smooth sailing for the big-box and discount set. For one, “multi-year inflation is still elevated,” Feldman said. Shelter and services costs, from travel to insurance, are still very high “and continue to be a pressure point for the consumer,” he said.
Feldman isn’t all that worried. Wage growth is still outpacing year over year inflation. “The consumer is definitely feeling pressure,” he said, but “spending levels in pockets are actually pretty decent.”
“I’m not trying to say the consumer’s in awesome shape. They’re not. But being realistic about it, you’re seeing some healthy trends, in some places, in some parts of the economy,” he added.