Off-Priced Retail Is Poised for Another Run in 2014

The off-priced retail stores have done well thanks to a poor economy, but there could still be upside to this sector.

Jan 10, 2014 at 11:35AM

Kohl's (NYSE:KSS), as one of the nation's top discount-department retailers, has been going head to head with the likes of TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) for over half a decade. However, it looks at if Kohl's might get a leg up in 2014.

Firstly, the demographics are a major tailwind. Given the large number of millennials, even with an improvement in the economy and employment, shoppers will continue visiting Kohl's and other major discount-department stores. Generation Y has some 70 million members, while Generation X comes in with 50 million. Yet, there's a big catalyst for pushing the discount-department stores higher, and that's the fact that Gen-Y currently only accounts for around 6% of all household spending. The younger generation has grown up shopping at Kohl's and its peers, and they should continue visiting these stores even as they have more discretionary income.

Why Kohl's is the best in the business
Kohl's still has some work to do, however. Last quarter marked the eighth straight quarter that inventory growth outpaced sales growth quarter over quarter. Kohl's ended up posting earnings per share of $0.81 for the quarter, about 6% below consensus estimates , and over the last 12 months it has underperformed its major peers. The EPS miss was due to a slight decline in sales.

However, in thinking about the turnaround, Kohl's has a very solid brand portfolio. This includes a variety of home products, accessories, and apparel. Some of its key partners include Columbia, Dockers, and Reebok. Kohl's is also getting deeper into national brands, which should drive more traffic. The biggest news of late is that Kohl's will sell women's branded apparel from Juicy Couture and IZOD beginning in the fall of 2014. During the third quarter, national brand penetration jumped 4% quarter over quarter to 47% of sales.

Kohl's is also resonating with customers
Kohl's is looking to get more customers in the store with the introduction if its loyalty program, which it has rolled out in 100 stores. The company believes that its loyalty program, which is in 30% of stores, has already boosted its sales by 1% to 2%.

On the other hand, it's also leveraging its e-commerce platform to boost sales. E-commerce sales jumped 40% during fiscal 2012 after a 37% rise in 2011. Helping meet this demand, Kohl's now has three distribution centers. What's more is that that during the third quarter, e-commerce sales jumped another 15% year over year.

Meanwhile, TJX Companies is the leader in the market, with its TJ Maxx, Marshalls, and HomeGoods brands. Other top competitor Ross Stores owns retail brands Ross Dress for Less and dd's Discounts. Kohl's has the lowest store count of the three. Kohl's has tended to focus on apparel, which is similar to TJX's focus, while Ross has focused on a broader inventory selection. TJX recently decided to jump back into the e-commerce space, building up its platform. This comes after it tried to enter the e-commerce space in 2005, but failed.

As far as rewarding shareholders, Kohl's pays a 2.5% dividend yield, while Ross and TJX's are both below 1%. One of the beauties of the off-price retail space is that they have proved resilient against market ups and downs,as  all three major off-price retailers have a beta below 0.7.

Bottom line
Kohl's trades at the cheapest among the major discount-department retailers, trading at a 13 times forward price-to-earnings ratio, while Ross is at 19 times and TJX 22 times. Given that millennials are becoming an even larger part of the retail industry, that's a big positive for Kohl's. And the reason that Kohl's is a best-of- breed discount retailer is its strong brand portfolio and growing e-commerce platform.

As Wal-Mart falls, which retailer will take over?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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