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Retail Trends Continue: Department Vs. Discount

Daniel Laboe

Two of America’s largest retailers released their Q3 earnings this morning and yielded very different results. Retail has been in crux position in recent years as the “retail apocalypse,” propagated by Amazon AMZN, spells trouble for brick-and-mortar storefronts.

Only a few niche groups of brick-and-mortar retailers have been able to thrive in this digitalizing economy. Others have seen substantial slowdowns. Department stores seem to be getting the butt end of the retail apocalypse stick, while discount stores appear to be immune.

Kohl’s KSS and TJX Companies’ TJX October quarter earnings this morning are a good case in point. Having demonstrated very different results for investors thus far in 2019, these two stocks opposing trends continue.

TJX has driven over 35% returns this year on the tailwind of the discount retailers’ drive to progressively new highs. A big beat on both top and bottom-line metrics drove TJX up over 2% in morning trading.

KSS, on the other hand, has been pulled down along with the rest of department store stocks, yielding investors negative returns. The company missed both top and bottom-line estimates, and KSS plummeted 16% out of the trading gates this morning.

The Retail Trend

Millennials are changing the landscape in which businesses operate, with Silicon Valley leading the charge. Our world is becoming centered on the interconnected digital network we call the internet. The internet was built to hold and share data, making the transfer of data timely and seamless. Today the internet is allowing for a timely and seamless transfer of goods.

We, as millennials have grown up to recognize the importance of both convenience and value as standards of living. Why go to the store when you can make a few taps on your phone and get almost anything delivered to you? Why spend an hour looking for one thing you want at Macy’s M when you could just type that item into and find what you’re looking for within minutes? Why spend more at a traditional retailer when you can find the same thing at a discounted price at TJ Maxx or Marshalls?

Department stores like Macy’s, Nordstrom JWN, and Kohl’s are cumbersome places with an excessive amount of square footage that instills anxiety into the average shopper. Why deal with these time-consuming department stores when you can just search for your item on the internet, find in a fraction of the time and never have to leave your house. Department stores’ lack of convenience is what’s killing this breed of retailers.

Discount retailers provide a unique product offering that Millennials seem to enjoy. They provide consumers with the opportunity to hunt for value. This generation loves the satisfaction that comes when you find something you love in a room of discounted goods. The value proposition that these retailers provide is making them immune to the retail apocalypse. Below are the year-to-date returns of TJX, Target TGT, and Ross Stores ROST, some of America’s largest discount retailers.

Take Away

Kohl’s and TJX’s earnings exemplifies how the brick-and-mortar retail markets have been playing out in recent years. Millennials’ emphasis on convenience and value is underlying this trend, and I don’t see this tendency materially changing any time soon.

Discount retailer stocks remain a solid investment in my eyes and provide a slight market hedge with their low betas. I would stay away from department store stocks as they appear to be toxic in nature.

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Nordstrom, Inc. (JWN) : Free Stock Analysis Report
Ross Stores, Inc. (ROST) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
The TJX Companies, Inc. (TJX) : Free Stock Analysis Report
Kohl's Corporation (KSS) : Free Stock Analysis Report
Macy's, Inc. (M) : Free Stock Analysis Report
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