If you offer good value in retail, you're winning. Everyone else is in trouble

Key Points
  • Value is winning in retail. 
  • Analysts say that theme is here to stay, during the Black Friday bargain-hunting and beyond. 
  • Walmart and Target are outperforming, while Kohl's and Macy's are struggling.
Consumers are abandoning malls for big box retailers, says Pro4ma's Liz Dunn
Consumers are abandoning malls for big box retailers, says Pro4ma's Liz Dunn

A wave of good and bad retail earnings reports in recent days highlights one key theme for the industry: Value is winning.

Target, Walmart, T.J. Maxx owner TJX and Nordstrom's off-price Rack business were bright spots in a tumultuous landscape that's been beaten down with bankruptcies, store closures and management upheaval.

The results from Macy's, Kohl's and J.C Penney were much less merry.

"The off-price and discounters are here to stay," Retail Metrics founder Ken Perkins said. "These are going to be the names that fare well here. I don't see that changing at all."

Big-box chains Target and Walmart hiked their full-year profit outlooks, building on their strong quarterly showings. While Walmart found strength in grocery, Target proved its apparel business is booming. And as more sales shift online, the pair are on solid footing. Both companies logged e-commerce sales growth of more than 30%.

TJX's same-store sales surged past analysts' expectations, as more shoppers flocked to its stores, including Marshall's and HomeGoods, during the quarter to hunt for deals. TJX also raised its full-year outlook, sending its stock to a record intraday high of $61.69.

"The modestly more cautious consumer mindset has been helpful here as it drove more shoppers to TJX's stores to look for bargains," GlobalData Retail Managing Director Neil Saunders said.

There used to be much more of a stigma around shopping at off-price channels or hunting for bargains. That was about a decade ago, when department store chains were faring better. Traffic was healthier at shopping malls. Buying goods at full price was more of a status symbol.

But Perkins says millennials were somewhat "traumatized" by the Great Recession in 2008 and 2009 and pivoted toward wanting to save money.

"I think the financial crisis washed away the stigma," Perkins said.

In turn, Walmart and Target have been investing more money to make their businesses more appealing to younger consumers. Walmart bought for $3.3 billion in 2016, in a bid to boost its online business. Target has launched dozens of clothing, beauty and home brands, some geared to tweens and young adults.

Investors love it.

Walmart shares are up more than 28% this year. Target shares have surged more than 90%, making it one of the most impressive stories in retail in 2019. Its stock hit a record high of $127.97 this past week.

Macy's shares have tumbled nearly 50% this year, and shares of Kohl's have fallen about 30%. While J.C. Penney's stock is up about 5%, it trades close to $1, putting it at risk of being delisted.

Nordstrom, whose shares are down about 19% this year, said this past week that its off-price business was up 1.2% during the latest quarter and full-price sales had dropped 4.1%.

Macy's is still trying to expand its off-price business, Backstage, most of which are inside of Macy's stores. While its traditional stores are struggling, it's trying to get in on the momentum in discount retail.

When Macy's reported earnings this past week, CFO Paula Price said Macy's "exceeded" its expectations for Backstage during the quarter. She said sales at Backstage stores that were open for at least 12 months were up by mid-single digits. Macy's now has more than 200 Backstage locations and said it plans to continue to grow that number.

Behind the scenes of Home Depot's operation to take down professional shoplifters
Behind the scenes of Home Depot's operation to take down professional shoplifters

The same winners and losers are likely going to shake out this holiday season, too.

Mass and discount retailers were the No. 2 favorite holiday shopping destination, according to a survey of 3,485 consumers in September by NPD Group. The top choice was e-commerce.

National chains were third on the list, followed by department stores. While off-price retailers are eighth, NPD said the number of people who plan to do their holiday shopping at off-price chains is up 3% since 2018. It called that "the most significant increase amid relative stability across most other channels." Dollar stores fall ninth on NPD's list of top holiday destinations.

"Bifurcation has been apparent with winners being ... Target and Walmart, and underperformers being apparel-driven retailers such as Kohl's, Macy's and Gap," Cowen & Co. analyst Oliver Chen said. "We expect this trend to continue and could be exacerbated in the mall, as lower productivity malls and stores experience outsized pressure."

"Our sense is that retailers are gearing up for a highly competitive holiday period," he said.

Amazon sends out clothing and toy catalogs ahead of the holiday season
Amazon sends out clothing and toy catalogs ahead of the holiday season