In the third quarter, the three major off-price chains in the U.S. reported a feat accomplished by few other retailers this year: the vanquishing of new tariffs imposed by the Trump administration.
Through judicious inventory management and hyper-vigilant pricing, TJX Cos., Ross and Burlington in recent weeks successfully protected margins in Q3, and all three expect that to continue in Q4.
“In other words, we've rolled right over tariffs,” Burlington CEO Michael O'Sullivan told analysts last month.
That looked slightly different at each company. TJX had the greatest success, blunting the impact of new levies entirely. Gross margin there inched up one percentage point to 32.6%, and net income rose 11% to $1.4 billion. Overall, Q3 net sales there rose 7% year over year to over $15 billion. Comps at Marmaxx, which includes U.S. retailers T.J. Maxx, Marshalls and Sierra, rose 6% year on year; at U.S. HomeGoods, which includes the company’s Homesense stores, comps rose 5%.
“Importantly, we are very pleased with our mitigation strategies, which allowed us to offset all the tariff pressure we saw in the third quarter,” TJX Chief Financial Officer John Klinger said during a call with analysts last month.
Ross didn’t achieve that, but CEO James Conroy said the retailer was able to “partially offset tariff impacts, resulting in better-than-expected merchandise margins for the third quarter.” Thanks to opportunistic buys, the company expects “tariff-related costs in the fourth quarter to be negligible.”
That includes the addition of more name brands into its assortment, which Conroy said “not only drove higher sales, but also helped us partially offset tariff impacts, resulting in better-than-expected merchandise margins for the third quarter.”
Sales at Ross grew 10% year over year in Q3 to $5.6 billion, with comparable store sales up 7%. But U.S. trade policy did hurt margins somewhat: Mainly due to tariffs, operating margin shrank by 35 basis points, reaching 11.6%, according to Chief Financial Officer William Sheehan.
Of the three retailers, Burlington had the most trouble in the period, with mixed Q3 results that missed expectations. Total sales rose 7% from last year to $2.7 billion, as comps rose 1%. Still, margins and earnings were stronger than expected. Gross margin expanded by 30 basis points to 44.2% and merchandise margin expanded by 10 basis points.
The sales miss and margin expansion are related, and go back to mitigating tariffs, O'Sullivan told analysts. When tariffs were announced, Burlington reduced its sales and inventory acquisition plans for the most impacted goods, especially in home, he said.
“We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression,” he said, adding, “The sales were lower. Now that wasn't an error — it was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3.”
As tariffs in some areas have come down, Burlington has resumed acquiring inventory, he also said.
A few months ago, executives from all three retailers described in depth how they keep a watchful eye on pricing at mainstream retailers in order to protect their value proposition and their margins in the tariff era. Speaking to analysts a couple of weeks ago, O'Sullivan reiterated that but warned it can be tricky.
“I would sum up our pricing strategy in three words: ‘Be very careful,’” he said.
“We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases,” he said. “So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward.”
