TJX Companies Or Ross Stores: Which Off-Price Retailer Posted Stronger Q3 Results?

| About: TJX Companies (TJX)
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Summary

TJX released Q3 2015 earnings on November 18.

Ross released Q3 2014 earnings on November 20.

Which company had the better quarter?

The TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST) are two of the largest off-price retailers of apparel and home fashions in the world and both have recently released third quarter earnings. Let's do a direct comparison of the companies' results and their outlooks going forward to determine which had the stronger quarter and then decide which stock represents the better long-term investment opportunity today.

TJX Chart

TJX data by YCharts

Breaking Down The Quarterly Reports

The TJX Companies

On November 18, before the market opened, TJX release third quarter earnings and the results came in mixed compared to the consensus estimates; here's a breakdown and year-over-year comparison of the key statistics:

Metric Reported Expected Year Ago
Earnings Per Share $0.85 $0.85 $0.75
Revenue $7,366 million $7,451 million $6,982 million
  • Earnings per share increased 13.3%.
  • Revenue increased 5.5%.
  • Global comparable-store sales increased 2%, including 1% growth at T.J. Maxx and Marshalls in the U.S., 7% growth at HomeGoods in the U.S., 3% growth in Canada across all of its brands, and a 1% decline in Europe across all of its brands.
  • Gross profit increased 5.6% to $2,162 million.
  • The gross margin expanded 10 basis points to 29.4%.
  • Operating profit increased 9.0% to $969 million.
  • The operating margin expanded 50 basis points to 13.2%.
  • Generated $736.3 million in net cash provided by operations and invested $280.8 million in capital expenditures, resulting in free cash flow of $455.5 million.
  • Repurchased 7.5 million shares of its common stock for approximately $448 million.
  • Paid out $121.4 million in dividends.
  • Opened 106 net new stores during the quarter, bringing its total store count to 3,385 worldwide.

Ross Stores

After the market closed on November 20, Ross reported third quarter earnings and the results surpassed the consensus estimates; here's a breakdown and year-over-year comparison of the key statistics:

Metric Reported Expected Year Ago
Earnings Per Share $0.93 $0.87 $0.80
Revenue $2,599 million $2,554 million $2,398 million
  • Earnings per share increased 16.3%.
  • Revenue increased 8.4%.
  • Comparable-store sales increased 4%.
  • Gross profit increased 9.9% to $717 million.
  • The gross margin expanded 40 basis points to 27.6%.
  • Operating profit increased 13.6% to $307 million.
  • The operating margin expanded 50 basis points to 11.8%.
  • Generated $240.19 million in net cash provided by operations and invested $298.20 million in capital expenditures, resulting in negative free cash flow for the quarter.
  • Repurchased $141.09 million worth of its common stock.
  • Paid out $41.93 million in dividends.
  • Opened 28 net new stores during the quarter, bringing its total store count to 1,366 worldwide.

What Do The Companies Expect Going Forward?

The TJX Companies

Following its mixed third quarter report, TJX lowered its full year earnings per share outlook and reiterated its other growth expectations for fiscal 2015; here's a summary of what it now expects to accomplish:

  • Earnings per share in the range of $3.09-$3.13, an increase of 9.2%-10.6% from the $2.83 earned in fiscal 2014.
  • Global comparable-store sales growth in the range of 1%-2%.
  • Approximately $1.6 billion-$1.7 billion in share repurchases.

Lastly, TJX provided its outlook on the fourth quarter, calling for the following results:

  • Earnings per share in the range of $0.86-$0.90, an increase of 6.2%-11.1% from the $0.81 earned in the fourth quarter of fiscal 2014.
  • Global comparable-store sales growth in the range of 1%-2%.
  • Expansion of its merchandise margins.

Ross Stores

As a result of its performance in the first nine months of the year, Ross raised its full year earnings per share outlook on fiscal 2014; its new outlook calls for earnings per share in the range of $4.28-$4.32, which would result in growth of 10.3%-11.3% from the $3.88 earned in fiscal 2013.

Lastly, Ross reiterated its outlook on the fourth quarter, calling for earnings per share in the range of $1.05-$1.09, which would result in growth of 2.9%-6.9% from the $1.02 earned in the fourth quarter of fiscal 2013; in addition, the company expects to achieve comparable-store sales growth in the range of 1%-2%.

Whose Quarter Was Stronger?

After comparing the companies' quarterly results and their outlooks going forward, I think it is clear that Ross Stores posted stronger results; it reported higher growth in earnings per share, revenue, comparable-store sales, gross profit, and operating profit, while expanding its margins and returning more than $180 million to shareholders via share repurchases and dividends, and its outlook calls for continued growth in the fourth quarter.

Which Stock Should Be Bought Today?

Although Ross Stores posted stronger quarterly results, I think TJX represents the better long-term investment opportunity today, because of its inexpensive forward valuations; take a look at this chart of the company's earnings per share outlook on fiscal 2015 and analysts' expectations for fiscal 2016 through 2017, and its price-to-earnings multiple based on its current share price:

Fiscal Year 2015 2016 2017
Estimated Earnings Per Share $3.11 $3.52 $3.99
P/E Ratio At Current Levels 21.3 18.8 16.6

As the chart above shows, TJX's stock trades at 21.3 times its earnings estimates for the current fiscal year, which seems fair, but it trades at just 18.8 times next year's estimates and a mere 16.6 times 2017's estimates. I think TJX's stock could continue to trade at a fair multiple of about 21, which would place shares around $84 by the conclusion of fiscal 2017, representing an increase of more than 25% from current levels. With all of this information in mind, I think long-term investors should strongly consider initiating positions in TJX today and adding to them on any weakness provided by the market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.