Are These 3 Department Stores Good Investments?

Kohl’s, TJX, and Ross look like good investments because of their good performance in tough times.

Feb 12, 2014 at 10:00AM

The economy is out of the depths of the recession, but it is still limping and consumers are still watching their budgets closely. As bargain hunters look for the best deals that their dollar can buy, off-price retailers are one of their favorite shopping destinations. So, let's take a look at Kohl's (NYSE:KSS), one of the nation's top discount-department retailers, and see how it fares when stacked against TJX (NYSE:TJX) and Ross Stores (NASDAQ:ROST) in the off-price retail market..

Kohl's going strong
Kohl's third-quarter results failed to showcase any gains, as it reported a comparable-store sales decline of 1.6% versus the year-ago quarter. Even during the nine-month period of fiscal 2013, comps were down 90 basis points. On the bright side, e-commerce sales were up 15% versus the comparable quarter in the previous year, increasing comps by 120 basis points. As a result, net sales declined 1% to $4.4 billion for the quarter.

According to management, going into the fourth quarter inventory levels have been managed well, so fewer markdowns are expected as compared to the previous year. However, much needs to be done, as this was the eighth consecutive quarter of inventory growth outpacing sales growth, and this hurts margins. As a result of lower sales, diluted earnings per share came in at $0.81 and missed consensus estimates by about 6%.

However, Kohl's solid brand portfolio should be a growth driver going forward, as the national brand penetration rose 4% quarter over quarter to 47% of sales, and Kohl's is also getting deeper into national brands. With Kohl's planning to sell women's branded apparel from Juicy Couture and IZOD beginning in the fall, one can expect an increase in traffic both in-store and online.

Kohl's is also confident of increasing traffic to stores by way of expanding its loyalty program, which is currently operational at 30% of its stores and has shown a low single-digit sales increase in loyalty markets versus the control market. As more and more markets are covered by this program, this should fuel sales growth.

Moreover, e-commerce sales growth of 15% year over year is a bright spot, and this was on top of a 40% jump during fiscal 2012 and a 37% rise in 2011. E-commerce sales will be a good growth driver going forward, and Kohl's already has three distribution centers catering to the e-commerce channel.

TJX and Ross are also in the party
TJX probably doesn't want to miss the e-commerce opportunity either given the fact that the U.S. has the second-largest number of digital buyers, at 155.7 million, and the retail landscape is witnessing a paradigm shift toward e-commerce. As a result, TJX relaunched its website after eight years to reestablish the company's e-commerce channel. This should be a growth driver going forward and help it improve on its third-quarter revenue growth of 9% and comps growth of 5%.

As per management, TJX has been gaining market share of young buyers, as it is positioned to offer the best of both worlds -- trendy, up-to-date designer names at a deeper discount than elsewhere. To continue attracting and retaining more new customers, TJX plans to continue leveraging its global marketing and upgrading the shopping experience in its stores. TJX management is very confident of growing into a $40 billion business in the long term.

Like TJX, Ross Stores reported growth in its third quarter. The top line grew by an impressive 6% year over year to almost $2.4 billion on the back of 2% comps growth over and above 6% last year in the same quarter. Earnings increased 11.1% to $0.80 per share from $0.72 per share in the year-ago quarter.

As far as rewarding shareholders is concerned, Kohl's pays a 2.5% dividend yield, while Ross and TJX's are both below 1%. All three are pretty defensive stocks with a beta of less than 0.7.

Millennials are becoming a larger part of the retail industry with a total spending power of $200 billion, and they are the ones who hold the key for off-price retailers. Those who have grown shopping at off-price retailers aren't going to switch anytime soon. This is because no one wants to buy things from elsewhere when they can get them cheaply at off-price retailers, even when the economy improves. So, these three companies look good irrespective of the economic environment.

The bottom line
The three discounters have been performing quite well, and they should continue to do well due to the reasons stated above. All three are looking to expand and are targeting the e-commerce market for growth. So, even in a slowly recovering economy, these three companies look good.

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Amal Singh 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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