TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) are two of my top favorite retail stocks because they are rare examples of retailers with defensive characteristics. That’s the main reason why I hold a bullish stance on both.
As off-price retailers, TJX and Ross’s business models are based on offering branded merchandise at discounted prices. This tends to attract thrifty shoppers even during economic downturns, which has historically positioned these companies well. They showcase resilience and often outperform other traditional retailers.
In this article, I will dive into these two stocks within the U.S. retail market and its current momentum.
Off-Price Retail: A Resilient Model
Brick-and-mortar stores are alive and well—at least in the off-price retail sector. These stores have demonstrated remarkable resilience, even as consumer trends shift dramatically with the rise of e-commerce.
While online shopping offers convenience and often lower costs, traditional off-price retailers like TJX Companies and Ross Stores continue to attract consumers with their ability to offer designer clothes at significantly reduced prices compared to traditional retail outlets.
As the retail landscape has been marked by volatility over the past decade, these off-price giants have stood out. It seems like consumers can’t resist the “treasure hunt” of finding branded clothes at rock-bottom prices in these stores, which are much cheaper than those found at traditional retailers.
While overall U.S. retail sales grew at a modest 3.2% CAGR (compound annual growth rate) over the last five years until January 2024, TJX and Ross Stores have doubled that growth, achieving revenue CAGRs of 6.8% and 6.4%, respectively. This growth trajectory has persisted through various economic cycles, including the challenges posed by the COVID-19 pandemic, periods of high inflation, and high interest rates.
The resilience of TJX and Ross Stores becomes even more evident during economic downturns, as they continue to attract consumers seeking lower prices. Both companies share a strategy of offering branded merchandise at compelling prices, yet they differ in their market positioning. Ross Stores focuses predominantly on the U.S. market, particularly in apparel, while TJX reaches a broader demographic through multiple brands across global markets.
Despite experiencing correlated stock movements over the past five years, Ross Stores faced greater volatility from mid-2021 to mid-2022 compared to TJX. Nonetheless, both companies have demonstrated their abilities to adapt to changing consumer behaviors and economic conditions.
Where Is TJX Currently Positioned?
TJX has enjoyed bullish momentum throughout this year, rising by 18%, beating Q1 estimates, and increasing its guidance for the full fiscal year.
The Framingham, Massachusetts-based company currently boasts about 4,900 stores worldwide. TJX has been aggressively expanding its brands and store footprint, planning to open another 140 stores in 2024 alone. This growth strategy is the engine driving TJX’s top and bottom-line growth over the next few years.
TJX’s Q2 guidance projects a 2% to 3% boost in comparable store sales, with a healthy pretax margin ranging from 10.4% to 10.5%. Projections suggest a revenue uptick of 3.3% in 2024 and 5.6% in 2025. Given its recent performance (posting a 6% revenue CAGR and a 10% EBITDA bump from FY22 to FY24), it’s likely that TJX will exceed these targets and justify its bullish valuation.
At present, TJX trades at a forward P/E ratio of 26.6x compared to a sector average of 15x. I find this premium valuation justified for a couple of reasons. First, TJX has demonstrated resilient performance, consistently outperforming market expectations. Secondly, its business model isn’t as susceptible to economic cycles as traditional retailers.
Where Is ROST Currently Positioned?
When it comes to Ross Stores, the Dublin, California-based company operates 1,775 stores across the U.S. and plans to open approximately 90 new stores this year.
In terms of its stock, ROST has consistently beat EPS consensus estimates for eight consecutive quarters. However, its stock performance picked up only after the fiscal Q1 earnings this year, amid concerns about more conservative guidance revealed in Q4 due to inflation fear.
In its Fiscal Q1 earnings report, Ross revealed EPS that exceeded the consensus by 8.4%, driven by a 3% year-over-year increase in comparable store sales and an improved operating margin, which rose from 10.1% in 2023 to 12.2%. These operating margins could be higher if the company wasn’t pursuing a strategy to reduce merchandise margins and expand its range of competitively priced brands to gain market share.
With this strategy, Ross maintains a conservative outlook, guiding same-store sales growth of 2% to 3% in Fiscal 2024 (coincidentally matching TJX’s guidance). In terms of the bottom line, analysts project EPS growth of 8% and 10% for this year and the next. Currently trading at a forward P/E ratio of 24x, similar to TJX, Ross’s valuation stands significantly above the industry average.
I believe Ross justifies this premium valuation for reasons similar to those of TJX. Both companies have become defensive picks in the retail space.
Are TJX and ROST Stocks Buys, According to Analysts?
The positive momentum experienced by these retailers is reflected in the bullish sentiment of Wall Street analysts, who currently rate both TJX and ROSS as Strong Buys. For TJX, 17 out of 19 analysts recommend the stock as a Buy, while the remaining two have a Neutral stance. The average TJX stock price target is $116.18, indicating an upside potential of 3.6%.
Regarding ROST, 15 out of 19 analysts rate the stock as a Buy, with the rest giving it a Neutral recommendation. The average price target is $162.88, suggesting a more significant upside potential of 10.9%.
The Takeaway
Despite targeting different demographics, TJX Companies and Ross Stores share many similarities in their business models. Both have consistently performed well amid volatile macroeconomic conditions, showcasing the resilience of the off-price retail sector against the threat of e-commerce and traditional retail.
Moreover, both companies trade at remarkably similar valuation multiples, which are justified by their unusually defensive positions within the retail space. For these reasons, I see TJX and ROST as likely to remain long-term winners in this cyclical and vulnerable industry.
