TMFDeej (99.47)

An interesting pairs trade: Short discount retailers / Long high-end department stores

January 29, 2009 – Comments (3) | RELATED TICKERS: TJX , SKS , JWN

I came across a great article in the paper copy of Fortune last night.  Here's a link to the on-line version: Discounters lose their edge.  The premise of the piece is interesting.  It basically states that the advantage that discount retailers like TJ Maxx (TJX) has over high-end department stores is narrowing as the big boys are forced to provide deep discounts on their goods.

This theory makes a lot of sense and jibes with what I have been seeing.  I normally don't frequent high-end department stores, I prefer the clearance section of Banana Republic or Old Navy myself, but my wife and I had some time to kill when we went out on a date to a movie a few weeks ago.  So we wandered into a Macys. 

The prices there were incredible.  I didn't buy anything for myself, but I picked up a ton of stuff for my sons, including zipper-up hooded sweatshirts for $3!  Three freaking bucks.  I don't think that high-end department stores are going to set the world on fire because I don't see how they can make money selling things like this so cheaply, but I do think that the outperformance of discount retailers may be coming to an end.

I have a similar story about Banana Republic, the Gap's high-end brand.  I went in there before Christmas to pick up a gift certificate for my wife.  While looking around I noticed that they had some dress shirts that were normally $100 marked down by 60% or something like that.  On top of that, they were knocking $50 off of every $125 that customers spent at checkout.  I ended up getting a bunch of $100 shirts for something like $15 each.

There is a ton of antecdotal evidence out there that great deals can be had at nice stores.  If so, why would anyone submit themselves to shopping at a messy discount store when they can get the same prices at clean, fancy stores?  I don't think that they would.

Take a look at this chart that I put together. 

It shows how much the stock of TJ Maxx (in blue) has outperformed that of Saks (SKS - in red) and Nordstrom (JWN - in green) over the past year.  Shorting TJX and going long SKS or JWN might be an interesting pairs trade.  One could even make a case for just a straight short of TJX.  I won't put any real money behind this trade, but it would make an interesting CAPS play.

Deej