Winners – it’s not just the name of a Canadian clothing chain. It’s an apt description of Winners’ parent, TJX Cos. Inc., and its biggest rival, Ross Stores Inc.
The two are North America’s leading “off-price” clothing retailers. The business model: snap up overstocks and clearance items from the makers and department stores at a deep discount, then sell them to value-oriented middle-class customers at discounts of 20 per cent to 60 per cent off regular prices.
The model is proving to work in both bad times and good. Both companies posted stellar second-quarter reports, prompting analysts to raise estimates and target prices – and investors to bid up the shares. TJX is up nearly 11 per cent from its Aug. 18 announcement, and Ross Stores is up more than 8 per cent since Aug. 21.
That means the shares aren’t as “off-price” as they used to be. Yet investors interested in companies with consistently solid returns and the prospect for sustained, steady growth will likely find there’s still value in these stocks.
Both companies rely on aggressive and timely buying systems, sophisticated inventory management and distribution and, importantly, scale. Massachusetts-based TJX Cos. has 3,100 stores in the U.S., Canada and Europe, primarily under the T.J. Maxx and Marshalls brands. (There were 345 Canadian locations at year-end 2013, primarily under the Winners and HomeSense brands.) California-based Ross Stores has roughly 1,300 locations, with more than half in California, Florida and Texas.
Analyst Richard Jaffe of Stifel, Nicolaus & Co. Inc. describes the model: “Off-price retailers operate their business quite differently from a typical retailer, and have succeeded in creating a competitive moat around the business. Merchandise is bought close to need, versus six to nine months in advance at a typical retailer.” Stores are set up so that departments don’t have a fixed amount of space for specific products, allowing flexibility based on customer demand, he said.
The winning math for both chains is same-store sales growth – gains in revenue at stores open at least a year – coupled with a healthy number of new-store openings.
Analyst Tuna Amobi of Standard & Poor’s Capital IQ says in the near term, TJX, whose shares closed Friday at $59.61 (U.S.), is targeting annual increases in square footage of 4 per cent to 5 per cent. That would be coupled with 2-per-cent growth in same-store sales, TJX projects. (The gains for the 2014 fiscal year, which ended Feb. 1, were 4.7 per cent for square footage and 3 per cent in same-store sales.)
Mr. Amobi, who has a “buy” rating and $65 target price, says TJX believes the U.S. can ultimately support 3,825 locations. In Canada, 450 stores are the goal. Europe, where TJX has 400 stores, can sustain 875 in its existing markets and perhaps 1,800 if it expands into new countries.
Oliver Chen of Citigroup Global Markets Inc. has a “buy” rating and $72 target price. He says he expects the off-price retailers’ customers “to stay even as the economy improves, given positive customer experiences and the ability to purchase branded goods at discounted prices.”
Mr. Chen and Mr. Jaffe of Stifel, who has a $70 target price, believe TJX will trade at roughly 20 times its 2015 calendar-year earnings – once, as Mr. Jaffe puts it, investors come to see the company’s “continued, consistent earnings growth.”
Ross Stores, whose shares closed Friday at $75.42 (U.S.), has similar expansion potential. Morningstar analyst Bridget Weishaar says the company believes it can nearly double its number of locations, most of which use the “Ross” name. (The company also operates a 130-store chain, “dd’s DISCOUNTS,” which targets more lower-income consumers than the Ross nameplate does.)
“Our channel checks support this [store growth] thesis,” says Ms. Weishaar, who has a “fair value” estimate of $80 on the shares. “Long lines and quick inventory turnover indicate that even current markets offer the opportunity for additional growth.”
S&P’s Mr. Amobi, who has a “buy” rating and $80 target price, notes that Ross operates in just 33 states, giving it “ample opportunity for geographic expansion and market share gains.” The company plans 75 new Ross stores and 20 new dd’s in the current fiscal year.
John Kernan of Cowen & Co., who has an “outperform” rating and $80 target price, says “the company's improving access to branded apparel, sourcing capabilities, and potential to nearly double the domestic store base are under-appreciated.”
Mr. Kernan sees Ross Stores’ ample cash flow enabling it to grow its dividend (currently yielding 1.1 per cent) by 20 per cent or more, and repurchase roughly $500-million of stock each year. (The company is on track to buy back $550-million worth this fiscal year, it says.)
TJX, too, is a story of cash flow, returned to investors: Its dividend yield is 1.2 per cent, and Ms. Weishaar of Morningstar notes TJX has repurchased about 15 per cent of its shares over the last five years. Her financial models assume another 15-per-cent decline in the share count over the next five.
Traditionally, e-commerce has been a problem for off-price retailers of apparel and other goods. The downside of quick, opportunistic buying of other companies’ remainders is that it’s awfully hard to keep a website consistently stocked with merchandise.
But TJX is trying, launching tjmaxx.com a year ago and learning from Sierra Trading Post, a primarily online retailer it purchased two years ago. Analyst Mark Montagna of Avondale Partners says tjmaxx.com is “performing above plan, continuing to add more categories and expand to more vendors.” E-commerce is just 1 per cent of sales right now, but “should be an increasingly meaningful contributor to profit dollars for the foreseeable future,” he says.
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