The U.S. brick-and-mortar retail industry has experienced massive upheaval over the past five years. However, e-commerce companies haven't been the only winners. Off-price retailers like The TJX Companies (NYSE:TJX), Ross Stores (ROST), and Burlington Stores (BURL) have gained a huge amount of market share from struggling rivals in recent years.
TJX's blowout Q4 earnings report (released last week) is just one more piece of evidence that off-price retailers will continue gaining share for the foreseeable future. Ross and Burlington are also likely to report strong results for the fourth quarter this week.
Fiscal 2020 wasn't flawless
Overall, TJX's recently-completed 2020 fiscal year was successful, but the company didn't consistently perform up to its usual standards. In the first three quarters of the year, the TJX Canada and HomeGoods business segments both averaged weak comp sales growth of around 1%.
Management blamed the softer performance in Canada on unfavorable weather and the weaker Canadian dollar. It attributed the problems at HomeGoods to some buying mistakes in certain categories, which also hurt gross margin.
Fortunately, the core Marmaxx division (which consists of T.J. Maxx and Marshalls stores in the U.S.) and the TJX International segment (which covers Europe and Australia) performed well last year. As a result, by the end of Q3, management expected full-year comp sales growth of 3% (up from 2%-3% initially) and EPS of $2.61-$2.63, compared to its initial guidance range of $2.55-$2.60.
A strong end to the year
In the fourth quarter, TJX started to fire on all cylinders again. Comparable store sales surged 6%, trouncing the company's November guidance, which called for 2%-3% growth in that metric. All of TJX's business units posted stellar results, with comp sales up 6% at Marmaxx, 5% for HomeGoods, 4% in Canada, and 10% for TJX International. Total sales rose 9.7% to $12.2 billion, reflecting the additional benefit from 4% square footage growth during fiscal 2020.
(Image source: Marshalls)
For the full year, TJX posted a 4% comp sales gain and total sales rose 7% to $41.7 billion.
Not surprisingly, the strong Q4 sales results led to excellent earnings growth. TJX's gross margin increased by 60 basis points year over year last quarter, reaching 28.4%. That more than made up for a modest increase in SG&A expenses as a percentage of sales. As a result, EPS surged to $0.81, up 19% year over year and well ahead of the company's guidance of $0.74-$0.76. Full-year adjusted EPS rose 9% to $2.67.
Looking ahead to fiscal 2021, TJX said it is planning for a 2%-3% comp sales increase and EPS between $2.77 and $2.83 (up 4%-6% year over year). Management expects modest margin pressure in the year ahead, due to a lower average ticket (which increases freight costs) and the impact of a new HomeGoods distribution center in Lordstown, Ohio that is set to open this summer.
Assuming the current coronavirus panic recedes within a few months, there's a good chance that TJX will beat its guidance. After all, it will face easy comparisons for most of the year and management routinely gives conservative forecasts. Last year, TJX beat the midpoint of its original EPS guidance by nearly $0.10 despite some significant missteps.
Burlington and Ross are also likely to perform well
TJX's top rivals in the off-price space, Ross Stores and Burlington, will report their Q4 results this week. Like TJX (and unlike many other brick-and-mortar retailers), both off-price retailers are likely to report strong sales and earnings growth.
Burlington already gave investors a preview a few weeks ago, raising its Q4 guidance. It now expects to report a 3.9% comp sales gain for Q4 (up from 2%-3% previously) and adjusted EPS between $3.21 and $3.23 (up from $3.12-$3.17 previously).
(Burlington raised its Q4 guidance recently. Image source: Burlington Stores.)
For the full year, Burlington is on track to achieve a 2.7% comp sales increase and adjusted EPS between $7.37 and $7.39: up nearly 15% year over year. Total sales increased about 9.3% year over year. In short, Burlington is posting faster sales and EPS growth than TJX despite somewhat lower comp sales growth. This reflects the fact that it is still expanding its store base rapidly and improving its profitability, which has lagged that of TJX and Ross Stores for many years.
Ross Stores hasn't provided any updates since releasing its Q3 earnings report. Through the first three quarters of its 2019 fiscal year, comp sales rose 3%, including a strong 5% gain in Q3. As of late November, management expected full-year EPS to come in between $4.52 and $4.57, up from $4.26 a year earlier ($4.19 excluding a one-time tax gain). Assuming Ross outperformed its sales and earnings guidance like both of its peers, its full-year comp sales and EPS growth will be broadly similar to what TJX reported.
I'm still betting on TJX
All three top off-price retailers represent good investment opportunities despite carrying higher valuations than other brick-and-mortar retailers. (TJX shares trade at 21 times forward earnings, compared to 22 times earnings for Ross Stores and 26 times earnings for Burlington.) However, while TJX is more than twice the size of Ross Stores, which is in turn more than twice the size of Burlington, it may have the strongest long-term growth prospects of the three.
First, TJX has demonstrated a remarkable ability to create new retail concepts and enter new markets successfully. Ross Stores operates two retail concepts (Ross Dress for Less and dd's DISCOUNTS), while Burlington has just one. Both companies operate only in the U.S. By contrast, TJX has five different retail concepts in the U.S. (T.J. Maxx, Marshalls, HomeGoods, Sierra, and HomeSense) and also has stores in Canada, Australia, and six countries in Europe.
(Image source: The TJX Companies)
Second, TJX's international businesses have faced margin pressure due to the strong U.S. dollar in recent years, but that trend won't continue forever. In Europe in particular, sales growth has accelerated dramatically, which will likely drive significant margin expansion once exchange rates stabilize. The margin and earnings growth opportunity is enormous: the TJX International segment's margin has been less than half of the corporate average in recent years.
Third, TJX's decision to expand the HomeGoods chain at a rapid pace over the past few years positions the company for huge market share gains at the expense of bankrupt Pier 1 Imports and struggling Bed Bath & Beyond (BBBY). (There are now more than 800 HomeGoods stores in the U.S., up from 487 five years ago.)
Of course, Ross Stores and Burlington haven't run out of room to grow yet. But TJX has shown more of an ability to create new growth opportunities as it has gotten larger, and its existing international platform gives it a competitive advantage for entering additional new markets in the years ahead. With TJX stock trading at a slightly lower earnings multiple than shares of Ross Stores or Burlington, it is the best way for investors to bet on the continued growth of off-price retail.
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