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



January 29, 2009 – Comments (3) | RELATED TICKERS: TJX , SKS.DL2 , 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.


3 Comments – Post Your Own

#1) On January 29, 2009 at 2:01 PM, Tastylunch (28.52) wrote:

I think this is a very dangerous play Deej

there are two big differences between discounters and department stores.

Wal-Mart can run with these prices for a long long time. Macy's et al can't. Dillard's and Saks look to me to be in real trouble, if they have keep prices this low for too long they will go under. They don't make money selling at this low of discounts and their vendors are pushing back putting more of the burden on the stores. Wal-mart & co can just wait em out till the smoke clears.

Alos the department stores are carrying consumer credit debt and the default rates are spiking. That's why Target is doing poorly but Wal-Mart is doing well.

That's my two cents.

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#2) On February 02, 2009 at 7:32 PM, kstarich (28.75) wrote:


I'm with tasty here.  From a girl who loves to shop Macy's and can't stand Wal-Mart I just don't see the former outer performing the latter.  Inventory is shrinking at Macy's (I was there this weekend) and walmart is fully stocked.

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#3) On April 17, 2009 at 6:12 AM, symonds88 (< 20) wrote:

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Virtual Currency

One thing that a lot of people have missed in this recent economic down turn is the fact that in-game money for all of the massive mutliplayer online role playing games has not been effected. I guess it just shows how strong and stable the computer game industry really is.

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