Earlier this year, I argued that off-price giant TJX Companies (NYSE:TJX) is a better pick for long-term investors than its smaller rival Ross Stores (NASDAQ:ROST). At the time, I noted that TJX's international business was likely to be a major driver of growth and margin expansion in the coming years.
Last quarter, TJX showed that there's another thing setting it apart from Ross Stores: superior execution. This allowed TJX to post stronger profit growth than its rival despite facing big headwinds from its wage increase initiative and foreign currency exposure.
TJX sales and earnings take off
Steady growth has helped TJX nearly double its annual revenue over the past decade, surpassing $30 billion. This makes it one of the largest fashion retailers in the world.
Given TJX's massive size and scale, one would generally expect its growth to be slowing. Instead, the company has reported accelerating growth lately. In the fiscal year that ended in early 2015, comp sales rose a modest 2% year over year at TJX. By contrast, in TJX's most recent fiscal year, comp sales rose 5% year over year.
Last quarter, TJX recorded another increase in growth, with comp sales rising 7%. Most of this sales growth was driven by higher customer traffic. Meanwhile, the company increased its retail square footage by 5% year over year. As a result, total sales rose 10% year over year despite a 1 percentage point negative impact from the strong dollar.
The net result was that earnings per share increased 10% last quarter, from $0.69 to $0.76. Had the dollar remained flat against other currencies, EPS would have reached $0.81, up 17% year over year.
Ross Stores hits a bump
EPS rose a respectable 6% year over year at Ross Stores last quarter. However, Ross clearly underperformed its larger rival in most respects.
Most notably, Ross Stores' comparable store sales rose just 2% year over year, while total sales increased 5%. Furthermore, customer traffic was roughly flat, indicating that shoppers didn't feel motivated to visit Ross' locations.
On the company's earnings call, management mentioned "merchandise execution issues" in the ladies apparel market. While Ross executives didn't provide much detail on the nature of these issues, it appears that the company didn't have the right colors and styles that customers wanted.
These merchandise problems will continue to disrupt Ross Stores' growth in Q2, and could even have some lingering effects in the second half of the year.
The value of consistency
Ross Stores hopes to fix its merchandise selection problems in the next few months and reinvigorate customer traffic by presenting a more compelling product assortment.
However, a big selling point of off-price retailers like TJX and Ross Stores is the "treasure hunt" experience: if you look hard enough, you can always find great deals on desirable products. If customers don't find anything they like, they won't return.
To put it a different way, it's easier for an off-price retailer to keep a regular customer than to win back a lapsed customer. Thus, there is a risk that a short-term slowdown in sales growth due to merchandise miscues could eventually morph into a longer-term decline in customer traffic.
TJX has been firing on all cylinders lately in terms of finding items that will excite shoppers. This consistency ensures that customers will keep coming back. As a result, TJX is well-positioned to continue gaining market share over the next decade.
Adam Levine-Weinberg is long January 2018 $60 calls on The TJX Companies, Inc. and short January 2018 $90 calls on The TJX Companies, Inc. 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.