The economic environment in the U.S. does not look favorable for discretionary spending, and as a result, the retail sector has experienced decline in consumer spending for most of the previous year. Still, the total aggregate sales of the five largest off-price retailers in the U.S. increased by 11% during 2012 as compared to only 4% increase in total national apparel sales during the same period, according to the NPD Group. Similarly, a report from the NPD Group also signifies that warehouse club channels are also rapidly gaining market share.
It’s easier to understand the success of TJX (TJX, Financial), Ross Stores (ROST), and Costco Wholesale (COST) based on these numbers and research data. But let’s find out if they can sustain the growth momentum in the future?
Solid growth
There’s an impressive track record of comparable-store sales growth of TJX. It has consistently recorded positive comps each year for the past three decades, except the negative 2% in 1996. The third quarter of fiscal 2013 was very similar with consolidated comps increasing 5% since the last year's figure of 7 %. Precisely, TJX has delivered positive comps growth for the past 17 years without missing on any of them and seems to continue the same going forward.
The combined increase in ticket and traffic led to the comps growth in the third quarter. The fourth quarter has also started robustly and management feels confident to sustain the comps growth momentum. The reason behind this confidence is that TJX is able to attract and retain buyers with trendy, up-to-date designer names at attractive discount as compared to the big department stores and other retailers.
The adjusted earnings per share increased 21% on account of solid comps growth and the better-than-expected performance of new stores. This has resulted in five consecutive years of double-digit EPS growth. This illustrates that the company is able to connect well with its target customers and also depicts its initiatives of store remodels and new store openings which are performing well keeping aside the economic environment.
Better times ahead
Moving Ahead, TJX feels confident regarding its huge growth potential across all segments and geographies. For instance, the store count for TJX Canada increased to 450, representing 30% more stores than the present base. The goal is long-term and there’s no timeframe specified by management for the same. Additionally, it also plans to add new stores in Europe.
TJX is also focusing on the e-commerce channel apart from the conventional brick-and-mortar business to provide consumers with the ability and convenience to shop 24/7. It has launched an ecommerce website after a long gap of eight years for which the customer response is amazing.
Peer comparison
The record comps growth for TJX is truly amazing; Ross Stores have also not declined either as represented by its impressive revenue growth trajectory. This growth is also driven by strong track record of comps growth. Ross has delivered positive comps growth for almost 10 years without missing on a single beat. Only in 2004 it recorded negative comps in 10 years. The comps grew by 2% during the third quarter.
The revenue increased 6% to $2.4 billion due to positive comps as against the year-ago quarter. The earnings per share increased 11% from $0.72 in the year-ago quarter to $0.80 currently. Juniors and Missy sportswear proved to be the strongest businesses during quarter, and Florida proved to be the top-performing region.
There’s wide demographic for bargain hunters ranging from those who require a bargain' to those who 'want a bargain, and thus belongs to a wide range of household-income categories. These were the primary reasons for the success of TJX, Ross and Costco Wholesale as well.
There was 3% consolidated comps growth for Costco in the first quarter of fiscal 2014. The total sales increased by 5% to $24.5 billion due to the positive comps growth and 13 new locations opened during the first quarter. Earnings per share were recorded at $0.96.
The membership renewals for Costco have been constant at 90% in the U.S. and just below 87% worldwide, which appears to be a good number. Additionally, the companywide new membership signups increased 17% during the first quarter. These two metrics are believed to be crucial as a major portion of the profit comes from memberships. Costco, similar to TJX and Ross has plans to increase comps by providing rightly priced trend-worthy merchandise.
Conclusion
TJX is the best pick of the three in terms of stock price performance over the last one year. Its share price gains of 30% oversee the strengths of both Ross and Costco. Going forward, the trend seems to continue with TJX growing on the store count and is expected to profit from the e-commerce initiative. At a P/E ratio of 20, the stock looks cheaper as compared to Costco and appears worthy of the investment.
