Off-Price Still Offers Value for Investors

Most people think of TJ Maxx and Ross Stores when investing in the off-price space, but there's an overlooked gem.

Apr 28, 2014 at 2:33PM

Many of the off-price retailers held up nicely throughout the economic downturn. Shares of TJX (NYSE:TJX), Ross Stores (NASDAQ:ROST), and Dillard's (NYSE:DDS) are all up over 90% over the last three years, while the S&P 500 index is up only 40%. The reason for this is that these retailers offer a wide array of products, from apparel to home goods, at attractive prices. Thus, many shoppers have been trading down from higher-end department stores in an effort to save money. But will that be enough to keep shoppers coming back as the economy rebounds?

The best way to play off-price retail
What looks to be one of the best-in-show department-store retailers is Dillard's. This retailer doesn't rely as heavily on the lower-income market as TJX and Ross. Thus, Dillard's products should continue selling nicely during a rebounding economy.

Dillard's was a turnaround story back in 2006. One of the key lessons it learned was to keep a "fresh" merchandise mix. If a brand is underperforming, Dillard's eliminates this brand and quickly replaces it. Dillard's has also added exclusive brands, including Antonio Melani, Gianni Bini, and Roundtree & Yorke.

Dillard's is already preparing for the rebounding economy. It's been looking to distinguish itself from the lower-tier department stores by branding itself as a mid-tier department-store retailer, hence its introduction of exclusive brands. This helps it avoid having to heavily discount its merchandise. This should also help Dillard's keep its margins higher than its peers. Dillard's already has one of the top net profit margins in the industry at 13.6% (over the trailing-12 months), compared to TJX's net margin of 7.9% and Kohl's 4.8%.

Dillard's remains underrated
With fewer than 300 stores, Dillard's also has the potential to expand its footprint, namely in the Western part of the U.S. TJX rules the off-price sector, generating more revenue than any of its peers. Its store base is also fairly vast, with more than 1,000 TJ Maxx stores, 900 Marshalls stores, and 450 HomeGoods stores. Ross Stores operates some 1,200 stores in 33 states.

Even with more than 1,000 stores, Ross Stores remains at a big disadvantage given it's the only key off-price retailer without an e-commerce platform. And TJX has another advantage given it operates various brands across the U.S. and Europe.

Dillard's also remains an underfollowed investment. There are only six analysts following Dillard's, compared to the 25 following TJX, 25 following Ross, 17 following Macy's, and 22 following Nordstrom.

How shares stack up
Despite the strong fourth quarters for both Ross Stores and TJX, shares of both are down more than 5% year to date. Meanwhile, Dillard's shares are flat. Dillard's trades at a 10.7 P/E based on next year's estimates. That's much lower than either Ross Stores or TJX, which trade at 14.8 and 16.5, respectively.

And when you factor in expected earnings growth, Dillard's is an even more enticing investment. From a P/E-to-growth (PEG) ratio standpoint, Dillard's ratio is 0.7 compared to Ross Stores' 1.4 and TJX's 1.7. The story for Dillard's is pretty exciting, where its return on investment is near decade highs as well as its net profit margin. Dillard's inventory turnover ratio is also at the highest rate ever.

Dillard's also recently initiated a dividend payment. At year-end 2013, Dillard's announced a cash dividend of $0.06 per share. This should be a great way for Dillard's to put its cash flow-generating capabilities to work. Its dividend yield is only 0.2%, but Dillard's has managed to reduce shares outstanding by 33% over the last three years ending fiscal 2013.

Bottom line
Dillard's is the smallest of the off-price operators, but it looks to be the best investment in the space. It has the opportunity to expand within the U.S. while also enjoying industry-leading margins. For investors looking to play the off-price retail market, Dillard's is worth a look.

The biggest thing to come out of Silicon Valley in years is fashion
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers