The Off-Price Edge
Our recent analysis on inflation’s impact on consumer behavior showcased how macro dynamics are driving value-seeking consumption. While major players like Costco, Walmart have benefited from this shift, TJ Maxx stands apart. TJ Maxx isn’t the only premium off-price retailer we are seeing yield success - we’re seeing this entire category outperform the broader retail market. While our last post established some of the catalysts supporting the category (the “why”), we wanted to dive further in the business model levers (the “how”) that are yielding this success. What makes premium off-price retailers structurally superior—and uniquely positioned—in today’s retail landscape?
The operating margins of major retailers tell a compelling story. TJ Maxx and peers like Ross consistently deliver operating margins of 10%+, outperforming heavyweights like Costco and Walmart (~5%). Even when adjusted for merchandising mix (e.g., apparel vs. grocery), premium off-price players outperform category-specific peers like Macy’s, Kohl’s, and Nordstrom. Meanwhile, dollar stores, often grouped among “discount players,” trail behind in margins, underscoring that not all value models are created equal.
The Pillars of Retail Value Creation
At its core, premium off-price retailers enjoy a fundamentally unique cost structure than other retailers, due to their ability to access high quality inventory at low prices, achieve higher sales per square foot, and maintain lower operating expenses.
Low cost of inventory
We have written extensively about the current inventory apocalypse. Brands, distributors, and other retailers are increasingly eager to offload unwanted inventory at low prices aiming to avoid cannibalization or brand degradation. This is evident in the premium off-price players’ gross margins which are comparable to full-price peers. Assuming conservatively that TJX’s consumer prices are on average 60% of full price (in reality it ranges from 20-60% off) and gross margin is ~30%, this implies that TJX is acquiring inventory for AT MOST 40% of the retail selling price (vs. 60%+ for traditional retailers). Our market discussions consistently highlight that TJX’s ability to “eat inventory” through its extensive network of brick-and-mortar stores across the U.S. makes suppliers more willing to offload high-quality inventory at low prices.
Higher sales per square foot
Premium off-price retailers outperform both full-price and dollar stores on sales per sq. ft. due to an optimized retail footprint efficiency. Not only does TJX ($427 / sq. ft.) handily beat Macy’s ($210 / sq. ft.) and Kohl’s ($202 / sq. ft.) , it’s on par with Nordstrom ($439 / sq. ft.), a significantly higher end retailer with an affordable-luxury positioning. Unlike dollar stores which rely on lower-margin goods, premium off-price stores balance efficient layouts with higher average price points driven by discounted name-brand merchandise. This strategic combination optimizes both volume and price per transaction.
Lower operating expenses
Premium off-price retailers can benefit from both lower SG&A costs and / or capex costs compared to full-price retailers. By focusing on no-frills store designs and optimizing labor costs, these retailers drive profitability while leaning into a well-marketed “treasure hunt” to avoid compromising on the customer experience. Unlike traditional retailers that invest heavily in high-end store buildouts, off-price players prioritize functional, low-cost store formats. This approach not only reduces upfront costs but also accelerates payback periods on new store openings, allowing for faster expansion with less financial risk.
A Wide Open Premium Opportunity
Shoppers are increasingly prioritizing high-quality goods at accessible prices, and premium off-price retailers are uniquely positioned to meet this demand. Major category-specific full price retailers such as Nordstrom and Bloomingdales (owned by Macy’s) are seeing TJ Maxx’s sustained success and are doubling down on the premium off-price model by expanding Nordstrom Rack and Bloomingdale’s Outlet. These segments offer a strategic solution for addressing excess inventory challenges while appealing to value-conscious consumers. This momentum underscores the growing relevance of premium off-price, not just as a thriving segment but as a strategic solution for retailers, brands, and consumers alike.
At Equal, we see an immense opportunity for innovation in this space. If you are building the next generation of premium off-price retail or exploring ways to rethink the model, we’d love to connect. Please don’t hesitate to reach out to sophia@equal.vc & chelsea@equal.vc!