Off-price retailers TJX Companies and Ross Stores emerged as strong players in the retail space, stealing market share from department stores over recent years. These retailers sell their merchandise at steep discounts compared to department stores and other retailers. Prior to the pandemic, they were delivering consistent results despite the growing strength of online retailers.
Retailers like Walmart and Target were allowed to operate their stores amid the pandemic as they sell essentials in addition to discretionary goods. However, other retailers selling discretionary items had to temporarily shut down their stores to control the spread of COVID-19. The temporary closure of stores and the decline in discretionary spending on apparel and accessories had a major impact on TJX and Ross Stores.
Using the TipRanks’ Stock Comparison tool, we will compare these two off-price retailers to see which stock is better positioned to recover faster.
TJX Companies (TJX)
The pandemic shook even a strong player like TJX Companies, which had delivered 24 straight years of comparable sales growth heading into the crisis.
The leading off-price retailer operates over 4,500 stores in the US, Canada, Europe, and Australia under the T.J. Maxx, Marshalls, HomeGoods, Sierra, and Homesense brands. It reported net sales of $6.67 billion for the second quarter of fiscal 2021 (ended on August 1).
Sales were down about 32% Y/Y as stores remained closed for one-third of the fiscal quarter. The company’s sales had declined over 52% in the fiscal first quarter with stores closed for almost half of the quarter.
TJX posted a loss of $0.18 per share in fiscal 2021’s second quarter compared to an EPS of $0.62 in fiscal 2020’s second quarter.
One favorable update regarding the second quarter was the strength in the HomeGoods and HomeSense chains and in other home goods within the TJX retail chains. According to analysts, people are increasingly shopping for home goods as they spend more time at home due to work-from-home and social distancing rules.
Several retailers gained from a spike in their online sales amid the pandemic. But, TJX Companies’ online shopping sites account for only a small proportion of its overall sales. Moreover, the company had shut down its online businesses when it temporarily closed its stores.
Despite the performance in the first half of fiscal 2021, Wall Street has a Strong Buy consensus for TJX stock based on 14 Buys and 1 Hold. TJX stock has fallen 15% year-to-date. But, there could be a possible upside of 23.6% over the next 12 months based on an average price target of $63.87.
Following the second-quarter results, Guggenheim analyst Robert Drbul reaffirmed a Buy rating with a price target of $65 for TJX stock. Drbul lowered his revenue and earnings estimates for the second half of the fiscal year as TJX management revealed softer sales trends exiting the second quarter, traffic challenges and sub-optimal inventory position.
However, the analyst continues to see TJX as the strongest operator within the off-price space and believes that “TJX will emerge in a stronger competitive position following the COVID-19 disruption.” (See TJX stock analysis on TipRanks)
Ross Stores (ROST)
Ross Stores, which operates 1,566 Ross Dress for Less stores and 266 dd’s Discounts stores, experienced a 32.5% drop in its sales to $2.68 billion in the second quarter of fiscal 2020, which ended on August 1. COVID-19 related store closures hurt the company’s second-quarter top line after causing more than 51% fall in the fiscal first-quarter sales.
Ross Stores’ management disclosed that sales in the second quarter initially rose due to pent-up demand and markdowns to clear aged inventory. However, a depleted inventory position had an adverse impact on sales in the weeks thereafter. Stores were open for two-thirds of the quarter but were operating at reduced hours.
It is notable that Ross Stores does not have an e-commerce site. Stay-at-home mandates caused a rise in online shopping and Ross Stores missed out on business from this lucrative channel.
However, the company surprised investors by delivering positive second-quarter earnings of $0.06 per share due to a benefit of $0.19 from the partial reversal of the inventory valuation reserve from the first quarter. Excluding this benefit, Ross Stores’ adjusted loss per share of $0.13 was still better than analysts’ estimate of a $0.28 loss per share. The company had reported an EPS of $0.14 in the fiscal 2019 second quarter.
The company cautioned that sales trends have not significantly changed from the second quarter with comparable sales down mid-teens Y/Y in the first two and a half weeks in the fiscal third quarter. Challenges like uncertainty related to the pandemic and potential lockdowns due to rising COVID cases continue to be a matter of concern for investors. (See ROST stock analysis on TipRanks)
Barclays analyst Adrienne Tennant recently lowered the price target for Ross Stores to $105 from $115 but reiterated a Buy rating. The analyst expects a mid-teens decline in Ross Stores’ fiscal third-quarter comparable sales. However, she continues to believe that the company is well-positioned to gain market share and expand margins post COVID-19.
Overall, 10 Buys and 4 Holds add up to a Moderate Buy consensus for Ross Stores. An average price target of $100.86 reflects an upside potential of 15.6% in the stock. Ross Stores stock has fallen 25% year-to-date.
The better stock
Off-price retailers like TJX Companies and Ross Stores could likely fare better than department stores and other retailers as customers would look for bargain deals amid challenging macro conditions. Moreover, the market share of off-price retailers might increase further as several retailers are reducing their store presence while some are going bankrupt.
The Street consensus and higher upside potential indicate that TJX Companies stock might rebound faster than Ross Stores.
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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