Changing consumer tastes, introducing new fashion trends, and expanding market reach through online platforms have helped apparel retailers rebound last year. Despite the ongoing labor shortages, supply chain constraints, and high inflation, apparel sales rose 31% year-over-year in February 2022.
Given the high inflation, off-price retailers have been witnessing increasing store traffic lately as they offer products at significantly lower prices than full-price stores. This growing demand should allow these retailers to overcome the rising input costs. The global off-price retail market is expected to grow at an 8.7% CAGR to reach $450.54 billion by 2027.
TJX Companies, Inc. (TJX) and Ross Stores, Inc. (ROST) are two prominent apparel retailers in the United States. TJX operates as an off-price apparel and home fashions retailer that sells family apparel, home fashions, fine jewelry and accessories, and other merchandise worldwide. It operates through Marmaxx; HomeGoods; TJX Canada; and TJX International. ROST operates off-price retail apparel, and home fashion stores under the ROST Dress for Less and dd's DISCOUNTS brand names. Its stores primarily offer apparel, accessories, footwear, and home fashions and sell its products at department and specialty stores.
ROST is a winner with 4.2% gains over the past month versus TJX’s 0.8% loss. Which of these stocks is a better pick now? Let’s find out.
Recent Financial Results
TJX’s net sales for its fiscal 2022 fourth quarter ended January 29, 2022, increased 26.6% year-over-year to $13.85 billion. The company’s pre-tax income came in at $1.24 billion, indicating a 144.6% year-over-year improvement. While its net income increased 188.8% year-over-year to $940.20 million, its EPS grew 188.9% to $0.78. As of January 29, 2022, the company had $6.23 billion in cash and cash equivalents.
For its fiscal 2021 fourth quarter ended January 29, 2022, ROST’s net sales increased 18.1% year-over-year to $5.02 billion. The company’s pre-tax income came in at $473.32 million, representing a 23.8% year-over-year improvement. Its net earnings came in at $366.82 million, up 54.1% from the prior-year period. ROST’s EPS grew 55.2% year-over-year to $1.04. The company had $4.92 billion in cash and equivalents as of January 29, 2022.
Past and Expected Financial Performance
Over the past three years, TJX’s revenue, net income, and total assets have increased at CAGRs of 7.6%, 2.4%, and 26%, respectively.
TJX’s EPS is expected to grow 10.9% year-over-year in fiscal 2023, ending January 31, 2023, and 13.9% in fiscal 2023. Its revenue is expected to grow 8.8% year-over-year in fiscal 2023 and 6% in fiscal 2024. Analysts expect the company’s EPS to grow at a 12% rate per annum over the next five years.
ROST’s revenue, net income, and total assets have increased at CAGRs of 8.1%, 2.8%, and 31%, respectively, over the past three years.
Analysts expect ROST’s EPS to improve 3.5% year-over-year in fiscal 2022, ending January 31, 2023, and 13.3% in fiscal 2023. Its revenue is expected to grow 5.1% year-over-year in fiscal 2022 and 6.5% in fiscal 2023. Analysts expect the company’s EPS to grow at a 35.8% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, ROST is currently trading at 0.38x, 171.4% higher than TJX’s 0.14x. In terms of forward EV/Sales, ROST’s 1.63x compares with TJX’s 1.48x.
Profitability
TJX’s trailing-12-month revenue is almost 2.6 times ROST’s. However, ROST is more profitable, with a 14.2% EBITDA margin versus TJX’s 10.3%.
Furthermore, ROST’s net income margin, levered free cash flow margin, and ROE of 9.1%, 5%, and 46.9% compare with TJX’s 6.8%, 2.4%, and 44.4%, respectively.
POWR Ratings
While TJX has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, ROST has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both TJX and ROST have a B grade for Quality, consistent with their higher-than-industry profitability ratios. TJX’s trailing-12-month ROE of 44.4% is 158.4% higher than the industry average of 17.2%. ROST has a 46.9% ROE, 172.6% higher than the 17.2% industry average.
In terms of Momentum, both TJX and ROST are rated C, owing to their mixed price performance over the past year.
Of the 66 stocks in the A-rated Fashion & Luxury industry, TJX is ranked #16, while ROST is ranked #33.
Beyond what we have stated above, our POWR Ratings system has also rated TJX and ROST for Stability, Value, Sentiment, and Growth. Get all TJX ratings here. Also, click here to see the additional POWR Ratings for ROST.
The Winner
Although high inflationary pressure and labor shortages could mar the growth of apparel retail sales, the increasing foot traffic at off-price retail stores and an improving job market should benefit both TJX and ROST. However, a relatively lower valuation makes TJX a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Fashion & Luxury industry.
TJX shares were trading at $61.73 per share on Tuesday afternoon, down $0.34 (-0.55%). Year-to-date, TJX has declined -18.39%, versus a -4.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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