Costco and TJX must be able to manage the emerging shift to deflation by leveraging their deep value propositions to get customers to buy more. As inflation headwinds continue to decline, and may at some point turn into tailwinds, their competitors will be able to compete better on price. So, TJ Maxx, Marshalls, Costco-owned HomeGoods and TJX should stay on their games. The economy has gone from coronavirus-fueled inflation at its highest levels in decades to a period of low inflation. The CPI closed out 2023 as inflation continues to slow. Excluding food and energy, the core CPI rose 3.9% year-over-year, the lowest reading since May 2021. The Fed's preferred measure of inflation, the core personal consumption expenditures price index, showed a 2.6% year-over-year increase in December. The Fed targets 2% as a healthy annual inflation rate. The question currently facing investors is whether the Federal Reserve will start cutting interest rates soon to pave the way for an economic soft landing, which could boost the stock market. However, signs of a resilient economy cloud this picture due to concerns that the cuts could heat things up too much and stoke inflation. The latest example of an economy that won't pull away was Friday when the government's monthly outlook for job growth crushed estimates in January. In its epic battle to crush inflation, the Fed began raising interest rates in March 2022. It has done so 11 times since then. Declining inflation – which means that inflation is still there, but prices are rising at a slower rate – was the reward for stepping on the brakes. Deflation would be a step further because it occurs when price levels actually fall. Wall Street is seeing a mix of deflation and slowing inflation across most categories within retail. “Inflation has been consistently moderate over the past few months, especially on the food side but also in other categories such as general merchandise, clothing and household items,” said Joe Feldman, an analyst at Telsey Advisory Group. At warehouse retailer Costco, Jim Cramer noted that the company was “starting to see contraction” since it had “no price growth” in the last quarter. In the first quarter of fiscal 2024, reported in mid-December, Costco said it saw shrinkage on some items, which led to higher sales of those units. For example, management saw contraction on larger items such as furniture sets due to lower shipping costs year over year. Average selling prices on other items such as televisions were lower while unit sales rose. In its own brand, Kirkland Signature prices were “flat to low by a few percent, while units were up in the mid-20s” on a percentage basis, CFO Rich Galanti said on the company's post-earnings call. Galanti also addressed the solution, saying that the way to compensate for this is to “push people and hesitate.” He added: “As long as we see renewal rates continue to do what they're doing, and as long as we see new subscriptions continue to do what they're doing, hopefully it will continue to get people to convert to executives as well, and continued leadership is the best value there.” Costco is known for its volume-driven sales strategy, which maximizes razor-thin margins. Membership fee revenue is the glue that allows Costco to keep prices so low. Deflation can be a double-edged sword. In the near term, this is positive for consumers who are getting relief from higher prices for goods and services. It also reduces additional costs for retailers such as merchandise and shipping expenses. But if deflation persists over time, it is usually a signal of a weak economy, which could lead to weak consumer demand and a buildup of inventory that forces retailers to lower prices. While shrinkage is a valid concern for the broader retail sector, Costco and off-price retailer TJX can offset this risk because their business models allow them to be consistent market share winners in their specific niches in the retail industry even during volatile economic periods. Shares of both Costco and TJX hit all-time highs on Friday. Cost 1 Year Mount Costco 1 Year Over the past two years, Costco has seen strong sales across the food and miscellaneous, fresh food, and non-food categories with rising prices. While it tries to keep prices low, and does so better than any other retailer, inflation has forced Costco to raise prices somewhat, which has increased revenue. Feldman explained that Costco is a leveraged company, so, to mitigate downturn risks, the company will need to increase revenue either by selling more units and/or through pricing. The last option narrows down. While sales are still strong, in its first fiscal quarter, Costco noted that inflation slowed to 1%, which means Costco may not be able to raise its prices as much as it used to. What we like as long-time investors about Costco is that it doesn't rely solely on price to make money. In fact, the membership-only retailer prides itself on its ability to keep prices lower than competitors in times of inflation and deflation. Costco always says it will be the last to raise prices in an inflationary environment and the first to lower them once pressures ease. Costco can boost sales in either scenario by “encouraging its members to purchase more items to get more savings,” Feldman said. He added that Costco's available methods to stimulate more spending are “providing more value through package size or putting more effort into marketing the merchandise.” Remember, value is not just about price. It's also about what it offers consumers great value for their money. As prices continue to fall, Costco's operational costs should decline as well, making it easier for retailers to price their goods at a greater discount to members versus traditional retailers, all while maintaining profitability. “They will be able to maintain a price gap with the competition to show that there is still tremendous value,” Feldman said. He explained that Costco's plan would likely make consumers spend more on merchandise from the same total basket size. With merchandise and shipping costs also lower, management can also pressure vendors to give them better prices, which are then also passed on to Costco members. Another benefit for Costco is that “traffic is up fairly strongly and the average number of items per basket has been relatively stable,” Jefferies said in a recent research note. Analysts added that if pricing becomes a headwind, Costco may raise its membership fees. This is the catalyst we've been waiting for and long overdue considering the company has historic highs every five years or so. The last raise was in 2017. The second catalyst that Costco shareholders had been waiting for happened in the first quarter of the fiscal year: a special dividend. Costco is scheduled to report its second quarter of fiscal 2024 on March 7. Next week, it will announce January sales. Unlike most companies, Costco releases monthly sales, giving investors a more realistic look at the business. TJX 1Y Mountain TJX Companies 1 year Another hope among the retail sector is that with lower prices, consumers may have more money to spend on discretionary goods while still looking for value, Feldman said. This could help stimulate demand for discretionary purchases at TJX. TJX tends to be well positioned in any type of economic environment but will not be immune to a downturn. Like Costco, Feldman said the off-price retailer will need to increase revenue through either price or number of units. The good thing is that TJX's business model keeps prices at a discounted rate and helps them execute better, the analyst explained. “TJX can be more aggressive with its pricing because of the strength of the customer base. It can achieve more volume than most,” Feldman said. Back in November, TJX reported strong results for the third quarter of fiscal 2024, which by calendar year represents the three-month period ending October 28, 2023. At that time, management was forced to shave the company's fiscal fourth-quarter guidance range to reflect a cost of 3 cents per share. It has been postponed from the third quarter. The stock took a 3% hit that day. But we thought they were wrong, and judging by the 9% increase since then, Wall Street has come around to our view of things. TJX is scheduled to report its fiscal 2024 fourth quarter on February 28, which includes the holiday shopping season. We'll consider the release and post-earnings conference call for a first look at TJX's financial guidance for 2025, or by calendar year 2024. (Jim Cramer's Charitable Trust Long Cost, TJX. See here for a full list of stocks.) As a CNBC Investing Club subscriber With Jim Cramer, you will receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. 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A person runs through a notebook while shopping for items at a Costco wholesale store on September 6, 2023 in Colchester, Vermont.
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Costco And TGX Enterprises It should be able to manage the emerging shift to deflation by leveraging its deep value proposition to push customers to buy more. As inflation headwinds continue to decline, and may at some point turn into tailwinds, their competitors will be able to compete better on price. So, TJ Maxx, Marshalls, Costco-owned HomeGoods and TJX should stay on their games.
