Why Off-Price Retailers Are the Bright Spot in a Slowing Economy

As the U.S. economy slows—GDP dipped to -0.3% in Q1 2025 amid rising inflation and import-driven headwinds—investors are hunting for sectors that can thrive in turbulent times. Look no further than off-price retailers like TJX Companies (TJX) and Ross Stores (ROST). These discount powerhouses are uniquely positioned to capitalize on a slowing economy, rising unemployment, and the unraveling of traditional retail's inventory overhang. Here's why they're set to outperform.

The Macro Backdrop: A Perfect Storm for Off-Price Retailers

The latest data paints a clear picture: the U.S. economy is cooling. GDP growth fell to -0.3% in Q1 2025, with imports surging 41.3% and government spending contracting 5.1%. Meanwhile, the unemployment rate has held steady at 4.2% through April 2025 but is projected to rise to 4.5% by early 2026. Inflation remains stubborn, with core PCE hitting 3.5%—a 10-year high.

In this environment, off-price retailers benefit from three tailwinds:
1. Consumer Caution: As unemployment creeps higher and wages stagnate, shoppers are prioritizing discounts. Off-price retailers cater directly to this demand, offering 30-50% discounts on name-brand goods.
2. Inventory Gluts in Traditional Retail: Overstocked competitors (think department stores and apparel chains) are desperate to clear excess inventory, creating a steady supply of discounted goods for off-price buyers.
3. Structural Resilience: Off-price models thrive in volatility, with flexible sourcing, low fixed costs, and minimal markdown risk.

Consumer Behavior Shifts: The Rise of “Smart Spenders”

The shift to off-price retail isn't just cyclical—it's secular. A 2025 McKinsey survey found that 68% of U.S. consumers now prioritize discounts over brand loyalty, up from 52% in 2020. This trend is especially pronounced among younger demographics and middle-income households, which are disproportionately impacted by inflation.

Off-price retailers are also winning by solving a key problem for cautious buyers: risk mitigation. Shoppers can test designer brands at a fraction of the cost, while retailers like Ross Stores and TJX leverage data analytics to ensure consistent inventory turnover.

Note: TJX's stock has outperformed the S&P 500 by 30% since 2021, while Macy's stock has declined by 15%.

Sector-Specific Tailwinds: The Inventory Gold Rush

The biggest opportunity for off-price retailers is the $150B inventory overhang plaguing traditional retailers. Brands from Gap to Lululemon are slashing prices to clear excess stock, and off-price buyers are the primary beneficiaries.

Take TJX Companies: in Q1 2025, its inventory turnover ratio hit 4.2x—double that of Macy's—while gross margins stayed robust at 32.5%. Meanwhile, Ross Stores' same-store sales rose 5% in Q1, driven by clearance demand.

This dynamic isn't temporary. As tariffs and supply chain bottlenecks persist, brands will continue to offload excess inventory to off-price channels, creating a virtuous cycle of growth.

Valuation: A Bargain in a Costly Market

Off-price stocks are trading at a 25% discount to broader retail valuations, despite stronger fundamentals.

Even at current prices, TJX's P/E is 30% below its 5-year average, suggesting undervaluation.

Margins are also holding up. Off-price retailers' operating margins (10-12%) are twice as stable as traditional peers' (5-7%), thanks to lower occupancy costs and minimal markdown risk.

The Investment Case: Act Now Before the Crowd

The playbook is clear: buy off-price retailers before the slowdown becomes a recession. Key catalysts include:
- Rising unemployment pushing more shoppers to discount channels.
- Traditional retailers' inventory liquidations accelerating through 2025.
- Off-price players' ability to grow stores and online sales in underserved markets.

Top picks:
1. TJX Companies (TJX): Dominates global off-price retail with 5,000+ stores and a 98% store retention rate.
2. Ross Stores (ROST): Strong in California and the Southwest, with 20% of sales now from online channels.

Conclusion: A Trade That Works in Any Weather

In a slowing economy, off-price retailers are the ultimate defensive play. They thrive on consumer frugality, inventory clearance, and operational agility—traits that will only grow in value as macro headwinds persist. With valuations still low and tailwinds accelerating, this is a rare opportunity to invest in a sector that's poised to outperform no matter how the economy evolves.

While bonds pay more, TJX's dividend is growing at 8% annually—proof of its durable cash flow.

The time to act is now. Don't miss the discount retailers' ascent.

Data as of May 2025. Past performance does not guarantee future results.