As the economic recovery stumbles and job worries rise, conventional wisdom says consumers will stop spending and go to ground. But this time, the opposite seems to be true – June retail sales blew away analysts’ expectations. And that bodes well for the right retail stocks.
Two prime examples are Ross Stores (NASDAQ: ROST) and TJX Companies (NYSE: TJX). Ross operates two brands of retail apparel and home accessories stores — Ross Dress for Less and dd’s Discounts. The retailer advertises brand name and designer apparel, accessories, and home products apparel at discounts of 20% to 70% below department store prices. TJX Companies operates the U.S. brands TJ-Maxx, Marshalls, and HomeGoods.
Both retail groups reported stronger than expected sales in June. Ross announced last week that revenue from stores that have been open a year or more rose 5% or more during the month of June. Industry analysts had expected only a 3.4% increase. The company agreed that the results were better than they expected and they forecast July revenue to rise as well – by 2% to 3%. The company also raised its earnings projections for the second quarter from the previous range of $1.15-to-$1.20 a share to $1.20-to-$1.22 a share.
TJX, which operates under the same business model as Ross, performed well enough to predict that its second quarter profits will be at the high end of projections. Sales for the five-week period ended July 2, were $2.1 billion, up 8% over the $2.0 billion achieved during the same period last year. Citigroup analysts earlier this week upgraded the stock from “sell” to “hold.”
While it’s not unusual for retail to outperform other sectors as the economy begins to grow, retail stocks are on a tear – last week, the S&P Retail Index (RLX) hit its highest level since it was created back in 2007.
That bodes well for retailers’ all-important back-to-school shopping. Designer discount stores like Ross can do particularly well as style-conscious consumers focus on getting more bling for their retail buck.
So what places these two stocks at the head of the pack? Fundamentals. At $79.10, Ross is trading more than 62% above its 52-week low of $48.71 last August. With a market cap of $9.26 billion, the company pays a dividend yield of 1.10% and has a price-to-earnings growth (PEG) ratio of 1.25, an indication that the stock is fairly valued. The retailer carries very little debt: $15 million compared to $674.28 million in cash.
At $55.46, TJX is trading more than 40% above its 52-week low of $39.56 last August. With a market cap of $21.37 billion, the company pays a dividend yield of 1.40% and has a PEG ratio of 1.03, also indicating a fair stock valuation. The company has total cash of $1.46 billion compared to total debt of $789.61 million.
Bottom Line: Both ROST and TJX are solid bets in a sector well built to weather economic jitters. They boast strong brands in well-performing retail niches, are in a better debt position than Nordstrom (NYSE: JWN) and stronger sales growth than JC Penney (NYSE: JCP).
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.