Last Tuesday, off-price giant TJX Companies (TJX +0.57%) reported a rare sales miss for the third quarter. Management blamed unfavorable weather and the impact of several hurricanes -- as well as some fashion missteps -- for the uncharacteristically poor performance.
However, these problems didn't extend to TJX's smaller rival, Ross Stores (ROST +1.06%). On Thursday afternoon, Ross Stores blew past all forecasts (its own and those of Wall Street analysts), posting stellar sales and earnings results for the third quarter.
Another top-notch performance
Ross Stores faced the same headwinds as other retailers last quarter: hurricane-related disruption and unseasonable weather. Nevertheless, the underlying strength of its business continued to shine through.
Sales jumped 8% year over year on a 4% comparable-store-sales increase. This was particularly impressive because Ross Stores was facing a tough year-over-year comparison, having posted a stellar 7% comp sales gain in the year-ago period.
Ross Stores continued its run of strong sales and earnings growth in Q3. Image source: Ross Stores.
Meanwhile, Ross Stores' pre-tax margin continued to expand, reaching 13.2%, up from 12.5% a year earlier. As a result, EPS surged 16% to $0.72, beating the company's forecast of $0.64-$0.67 by a country mile.
Conservative guidance again
Ross Stores is maintaining a relatively cautious outlook for the fourth quarter. The company expects EPS of $0.88-$0.92 on a comp sales increase of 2%-3%. On the Ross Stores earnings call, CEO Barbara Rentler indicated that the holiday season will probably be highly promotional. She also pointed to tough year-over-year comparisons and an "uncertain external environment" as potential headwinds.
Rentler is probably just being conservative, though. A host of retailers have stated recently that sales trends are improving because of more favorable weather. Furthermore, Ross Stores will face an easier year-over-year comparison in the upcoming quarter than it did last quarter.
Indeed, Rentler pointed to the same factors as potential headwinds at the beginning of the current fiscal year. Ross Stores' outlook reflected that attitude. Its original guidance called for 1%-2% full-year comp sales growth and EPS of $3.02-$3.15, up by a modest 7%-11% year over year, despite the benefit of having an extra week in fiscal 2018.
Yet Ross Stores hasn't missed a beat, posting strong sales and earnings growth throughout the current fiscal year. As a result, its full-year EPS forecast has now reached $3.24-$3.28 -- and that's still probably too low.
TJX still might be a better bet now
Following its stellar third-quarter earnings report, Ross Stores surged to a new all-time high, surpassing the $70 mark for the first time. These gains are well deserved. However, Ross Stores stock now trades for more than 22 times earnings, compared with around 17 times earnings when I recommended it back in July.
Ross Stores investors shouldn't necessarily bail out. The stock's valuation still seems reasonable given the company's long track record of double-digit EPS growth. Nevertheless, TJX stock, which has barely budged since July, now looks like the more attractive off-price retail stock.
TJX's comp sales growth is likely to bounce back in the fourth quarter, as the external factors that hurt it last quarter have already faded. Furthermore, quick inventory turnover is key to the off-price business model. As a result, the fashion missteps that undermined TJX's Q3 performance should have a much smaller impact in Q4 and no lingering impact beyond this year.
TJX stock currently trades for less than 18 times earnings, and the company probably has more margin upside than Ross Stores. Indeed, TJX posted surprisingly strong EPS results last quarter in spite of its weaker-than-expected sales. Thus, while Ross Stores and TJX shares are both attractive, TJX stock appears to be the better choice.
