These 2 Discount Retailers Are Running Away From the Pack

by Alyssa Oursler | August 23, 2013 2:50 pm

These 2 Discount Retailers Are Running Away From the Pack

While retailers like Walmart (WMT[1]), Macy’s (M[2]) and American Eagle (AEO[3]) have been busy bemoaning the second quarter’s “weak consumers” and too-deep discounts, TJX Companies (TJX[4]) and Ross Stores (ROST[5]) have been taking their complaints right to the bank.

The bread and butter of both discount retailers, of course, is discounts … meaning uncertain, penny-pinching shoppers are good news for the companies. At least that’s what two similar second-quarter earnings reports from TJX and ROST seem to suggest.

For Q2, TJX Companies earned 66 cents per share — three pennies better than analyst estimates and 18% better than a year ago. Meanwhile, Ross Stores improved its earnings by 21% year-over-year for EPS of 98 cents that were a nickel better than expectations.

At TJX, sales grew 8%, while same-store sales logged a 4% gain on top of last year’s 7% improvement. Revenues grew by a percentage point more at ROST, while the same-store sales figures were 4%, too. Management at Ross Stores thanked higher consumer traffic, improved margins and solid same-store sales growth for the impressive results.

The only difference: While TJX raised the lower end of its outlook, Ross issued weaker-than-expected guidance, pointing to “ongoing uncertainty in the macro-economic environment and the potential for a more promotional and competitive retail climate.”

Of course, it seems likely that such uncertainty could play right into the discount retailer’s hands, considering traffic trends suggest customers traded in their normal shopping destinations to hit up the discounter. Plus, since a heavily promotional environment weighed heavily on the rest of the sector during Q2, other retailers might be forced to pare back on their discounts to boost margins and earnings.

That will make Ross Stores’ cheap offerings even more appealing.

The bigger question is just how long the discount retailers’ not-so-cheap stocks can keep up their runs. Both stocks were heading downward along with the broader market early in the month, but strong earnings helped TJX and Ross Stores recover from those losses and then some — thanks to nearly 8% gains in TJX and ROST, the pair are up a respective 28% and 29% on the year.

However, that brings ROST’s trailing P/E to 19 and TJX’s to 20 — both roughly 20% higher than their respective five-year averages. Plus, each trades at a much higher forward P/E than projected earnings seem to justify. So it could be just a matter of time before investors take some profits.

But for now, it appears TJX and Ross Stores have distanced themselves from the pack.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities. Follow her on Twitter at @alyssaoursler[6].

Endnotes:
  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. M: http://studio-5.financialcontent.com/investplace/quote?Symbol=M
  3. AEO: http://studio-5.financialcontent.com/investplace/quote?Symbol=AEO
  4. TJX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TJX
  5. ROST: http://studio-5.financialcontent.com/investplace/quote?Symbol=ROST
  6. @alyssaoursler: http://twitter.com/alyssaoursler

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