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Burlington or Ross: Which Retail Discounter Has More Upside Potential?

support@smarteranalyst.com (Ben Mahaney)
·6 min read

Retailers are gearing up for the peak holiday season, which contributes a significant portion of their overall sales. A challenging macro environment and a rise in unemployment triggered by the coronavirus pandemic are curtailing consumer spending. However, an unprecedented surge in e-commerce sales and the gradual reopening of stores are fueling retailers’ hopes of a slow but steady recovery.

Consulting firm Deloitte estimates holiday sales will generate between $1.147 trillion to $1.152 trillion during the November-January period, reflecting a tepid 1% to 1.5% Y/Y growth. The firm expects e-commerce sales of $182 billion to $196 billion, indicating a 25% to 30% rise.

Amid this challenging retail landscape, we will use the TipRanks’ Stock Comparison tool to compare off-price retailers Burlington Stores and Ross Stores to assess which stock is in a better position for recovery.

This image has an empty alt attribute; its file name is BURL-vs-Ross.png
This image has an empty alt attribute; its file name is BURL-vs-Ross.png

Burlington Stores (BURL)

Burlington Stores’ business model has helped the off-price retailer boost its sales at a CAGR (compounded annual growth rate) of 7.9% between fiscal 2010 to fiscal 2019. The retailer attracts customers by offering discounts of up to 60% compared to the prices at which department stores and other retailers sell similar merchandise. It closed its e-commerce business earlier this year as it said that it accounted for a very insignificant proportion of overall sales.

Like other retailers, Burlington experienced significant sales declines since the COVID-19 outbreak. Aside from pandemic-led store closures, inventory issues also hurt the company’s performance in the second quarter of fiscal 2020 (ended Aug. 1). Fiscal 2Q sales dropped 39% to $1 billion.

Sales of its reopened stores plunged 14% through the end of the quarter. Strong clearance sales drove higher sales in the first half of 2Q but weakened in late June and July due to low inventory levels and delayed store replenishment. Overall, weak sales resulted in an adjusted loss per share of $0.56 compared to adjusted EPS of $1.36 in fiscal 2019's 2Q.

Given uncertain market conditions, Burlington intends to operate with leaner store inventories and believes that this would driver faster turnovers and lower markdowns. The company is also taking several other initiatives to ensure tighter expense control and to improve its operating margin amid a highly competitive retail market.

Burlington continues to “de-weather” its business by focusing on high-growth categories like women’s apparel, children’s products, bath and cosmetic products, housewares, décor for the home and beauty and reducing exposure to seasonal merchandise.

In the first half of fiscal 2020, Burlington opened 25 new stores, including 10 relocations, and shut down 3 stores, ending the period with 739 stores. It is targeting 62 new store openings in fiscal 2020. Over the long-term, the company plans to expand to at least 1,000 stores.

On Thursday, Loop Capital analyst Laura Champine boosted the stock's price target to $240 from $225 and reiterated a Buy rating. The analyst notes that while she is raising her SG&A expense forecasts for the next two quarters due to COVID-related pressure, the company's inventory management issues are "slowly being resolved".

Champine adds that Burlington's quick shift toward a more casual assortment will "accelerate" inventory turns and raise the company's merchandise margin. (See BURL stock analysis on TipRanks)

The rest of the Street shares Champine’s optimism with a Strong Buy analyst consensus based on 10 Buys, 1 Hold and no Sells. With shares down 8.5% so far this year, the $233.67 average analyst price target indicates 12% upside potential over the coming year.

This image has an empty alt attribute; its file name is Burlington.png
This image has an empty alt attribute; its file name is Burlington.png

Ross Stores (ROST)

Even without an online presence, Ross Stores has emerged as one of the leading names in the retail business thanks to its off-price stores which give customers a treasure hunt like experience. Through its 1,566 Ross Dress for Less stores and its 266 deep discount (dd’s) stores, the company offers merchandise at considerable discounts compared to other retailers.

Impacted by the pandemic, Ross Stores' fiscal 2Q sales plunged 32.5% to $2.68 billion. Following the gradual reopening of stores, the company’s sales benefited from pent-up demand and aggressive markdowns to clear inventory.

However, as the weeks progressed in the second quarter sales trends were adversely affected by depleted inventory levels as the retailer struggled to replenish merchandise.

At its 2Q conference call, Ross Stores indicated that the pandemic continues to have a negative impact on demand. The company said that the trends in 3Q have not materially changed from the second quarter, with comparable-store sales for the first two and a half weeks declining mid-teens Y/Y. Ross Stores posted an adjusted loss per share of $0.13 in the fiscal 2Q of 2020 compared to EPS of $1.14 in the year-ago period.

However, the company continues to be optimistic about its long-term prospects especially as several retailers are closing multiple stores. Ross Stores did not open any new stores in 2Q due to the uncertain business environment. It has resumed new store openings and plans 66 new stores for fiscal 2020.

Following the 2Q results, MKM Partners analyst Roxanne Meyer lowered Ross Stores’ price target to $105 from $110 but maintained a Buy rating. The analyst noted that 2Q comparable sales and overall performance were "negatively impacted" by slower than anticipated re-ramp at distribution centers and "inconsistent" availability of inventory.

Meyer sees multiple headwinds for Ross Stores persisting "at least through Q3" which will likely put pressure on sales and margins. However, in the long term, the analyst expects the company to benefit from "strong demand" once its customers "more fully return to stores". (See ROST stock analysis on TipRanks)

The rest of the Street is cautiously optimistic on the stock. The Moderate Buy analyst consensus is based on 11 Buys, 4 Holds and no Sells. Shares have declined 18.5% year-to-date, with the average analyst price target of $101.27 implying upside potential of 6.8% from current levels.

This image has an empty alt attribute; its file name is Ross.png
This image has an empty alt attribute; its file name is Ross.png

Conclusion

It might take a while for retailers to bounce back to pre-pandemic sales levels as Covid-19 cases are again on the rise. Off-price retailers TJX Companies, Burlington and Ross Stores are better positioned than department stores and several other retailers for a faster recovery because of their value offerings. However, Burlington's and Ross Stores' lack of online presence in the current scenario appears to be a disadvantage. Pre-pandemic, these retailers had delivered sound growth at their physical stores.

Currently, BURL looks better than ROST backed by the Street’s more bullish outlook and a higher upside potential.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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