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For TJX, home furnishings could be a category as big as fashion

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For TJX, home furnishings could be a category as big as fashion

While many U.S. retailers are shuttering physical stores, TJX Cos. Inc. is bucking that trend with plans to open almost 100 locations in the U.S. this year under its home furnishings banner, HomeGoods, as it launches its retail concept, HomeSense.

Home furnishings could be a category as big as apparel for the retail conglomerate in the U.S., said Andrea Weiss, founder the consulting group The O Alliance, and Howard Davidowitz, chairman of Davidowitz & Associates Inc., an investment bank and consulting firm.

That is potentially a multibillion-dollar opportunity for TJX, whose expansion into home furnishings will likely benefit from a spike in new housing construction and household formation by millennials. To give a sense of the opportunity, the company's off-price fashion chains, T.J. Maxx and Marshalls, generated revenue of $21.2 billion in the U.S. for the fiscal year ended Jan. 28. That compares with HomeGoods' $4.4 billion in sales for the fiscal year ended Jan. 28.

Building a home furnishings empire

TJX has previously acknowledged that there is the potential to have up to 1,000 HomeGoods locations in the U.S., which does not include its plans for HomeSense. That is 61.6% more than the 619 stores HomeGoods operated as of July 29 — a count that includes 40 new locations opened in the first half of the current fiscal year. And the retail conglomerate has proven it is capable of growing banners to more than a thousand stores, as it operates 1,194 T.J. Maxx stores and 1,043 Marshalls locations in the U.S. as of July 29, according to its second-quarter earnings results.

Meanwhile, in mid-August, TJX unveiled its first U.S. HomeSense store in Framingham, Mass. A second location recently opened in East Hanover, N.J., and two more stores are slated for Ocean, N.J., and Westwood, Mass., according to the company's website. The company already operates 112 HomeSense stores in Canada and 51 in Europe, though the stores in those markets have a different look and feel from the U.S. version. Beyond an initial handful of locations, TJX has not divulged how many more HomeSense stores it expects to open.

Though many questions arise regarding how TJX will juggle the two banners without one cannibalizing the other, the company has proven it is effective at differentiating its concepts, even if the two sell similar goods, as is the case with Marshalls and T.J. Maxx, Weiss said.

To differentiate each chain, HomeSense will feature a home improvement section, said Ernie Hermann, TJX's CEO, during the call discussing second-quarter earnings, offering products more akin to what a shopper would find at a Home Depot Inc. or Lowe's Cos. Inc. The banner will also sell a larger assortment of large-scale furniture, lighting and art. HomeGoods, however, will continue to offer products in categories such as children and pets that HomeSense will not offer, he said.

TJX is opening stores at a time when other retailers are closing them, giving the company ample choices when it comes to real estate and hiring employees, Weiss said.

But TJX is not expanding into a market without competition. In addition to home improvement retailers, department store chains such as J.C. Penney Co. Inc. and Target Corp. are expanding their offerings. There are also popular mainstays such as Williams-Sonoma Inc., which operates Pottery Barn and West Elm, plus Bed Bath & Beyond Inc., Ikea Group and Crate & Barrel.

An ideal time

The retail giant's expansion into home goods comes at an opportune moment as new-home construction continues to grow, according to data compiled by S&P Capital IQ, and as construction companies broke ground on 1.16 million new housing units in July, up 60.4% from 723,000 in January 2012.

Davidowitz noted that the U.S. is now in a positive home cycle, with few underwater mortgages, which is enticing the building of new homes. "People think homes are a great investment again," he said.

These trends, in turn, are benefiting home improvement and home furnishing retailers. Lowe's Cos.' comparable sales climbed 4.5% during its fiscal second quarter ended Aug. 4, while competitor Home Depot saw a 6.3% comparable sales increase for its fiscal second quarter ended July 30.

Helping to drive those numbers are millennials, who are beginning to form households and whose purchasing power now exceeds that of baby boomers, The O Alliance's Weiss said.

Winning formula

TJX has managed to steal market share the old-fashioned way from its department store rivals, which were distracted by Amazon.com Inc.'s growing online presence, largely by opening physical stores, Davidowitz said.

TJX, though, has had decades to perfect its strategy. The company celebrated 40 years in business in 2016, a history largely built on off-price apparel, with T.J. Maxx founded in 1976 and Marshalls acquired in 1995. In just the last five years, total sales generated by the two chains in the U.S. has grown to $21.2 billion for its most recent fiscal year, a 37.7% increase over the $15.4 billion in sales it reported in the fiscal year ended Jan. 28, 2012.

To achieve that growth, the retailer has mastered the art of directly sourcing a portion of the goods it sells by dealing directly with the manufacturers and suppliers of well-known brands, according to Weiss and Davidowitz. The company then capitalizes on the excess inventory from store closures and bankruptcies, mixing those products with private labels to provide the treasure hunt that consumers are seeking, Weiss said.

Davidowitz and Weiss believe that TJX can achieve the same results in home furnishings, using its well-established strategy for apparel.

Ernie Herrman, TJX's CEO, has previously said his company will apply a formula similar to that of T.J. Maxx, mixing fashion-driven products with value as well as utilizing its existing distribution centers, supply chain and buying organization of more than 1,000 associates. The company also offers products manufactured exclusively for its stores, plus a team that designs merchandise, according to TJX's website.

To fill its shelves with discounted products, TJX has the ability to reverse-engineer its goods, determining first what customers are willing to pay and then making a product that will profit at that price, Weiss said. The company can also find success, and reduce its risk, in following trends rather than setting them, which is an advantage over other retailers, she noted.

For example, if TJX notices that a style of shirt by a well-known brand is selling well, it might directly approach the producer of that shirt, looking at how the product can be made more affordable, Davidowitz said. TJX might ask that the lining in the shirt be removed or that cheaper buttons be used as the company looks at all the ways to reduce the price of the shirt, he explained.

Suppliers are eager to accommodate TJX because they know they will be paid, Davidowitz said, noting that merchandise that does not sell cannot be returned, unlike with the department stores. "When TJX buys it, it's a deal."

While TJX declined to be interviewed for this article, a company spokesperson replied, ''To be clear, our value proposition is a combination of brand, fashion, price and quality, and I want to emphasize that quality is very important to us." The company did not elaborate further.

Ultimately, the expansion of HomeSense, which TJX hopes will appeal just as T.J. Maxx does to consumers' love of a treasure hunt, is something investors will "be hearing a lot about … over the next five to 10 years," Herrman said during the fiscal first-quarter earnings call.