With the holiday season behind us, March is a perfect time for investors to take a fresh look at the retailing businesses that stood out with unusually strong operating results in the fourth quarter.
Off-price and on target
Demitri Kalogeropoulos (TJX Companies): If you're looking for solid sales growth supplemented by increasing cash returns, consider TJX Companies. The off-price specialist, which operates the TJ Maxx, Marshalls, and HomeGoods brands, just concluded its 22nd straight year of positive comparable-store sales. Its holiday-quarter results edged past management's targets thanks to customer traffic growth across its brand portfolio.
A few positive trends are combining to create a cash-rich environment for TJX Companies and its shareholders. Profit margins are strong and likely to power earnings growth of at least 5% this year, for one. Meanwhile, tax law changes have opened the door for repatriation of $1 billion from its Canadian division while lifting ongoing cash flow rates.
Put it all together, and management has ample funds to invest in the business. The retailer is planning to spend a portion of the excess cash on boosting wages and adding new employee benefits like paid parental leave. There will be plenty left for higher direct returns to shareholders, too. TJX Companies just hiked its dividend by 25% and announced plans to spend between $2.5 billion and $3 billion on stock buybacks this year, compared to $1.6 billion in 2017.
A thriving department store chain
Jeremy Bowman (Kohl's): There may be no retailer executing more effectively than Kohl's. The department store chain is coming off a quarter with comparable-sales growth of 6.3%. Kohl's did so while reducing inventory by 7%, showing effective product management, and putting the company in a strong position for 2018, without the need for sales and markdowns that often follow the holiday season.
Unlike other department store chains, Kohl's locations tend to be stand-alone buildings rather than inside malls -- a positive, as many of those shopping centers are seeing traffic fall. That unique position has helped the company buck the "retail apocalypse," as it has largely resisted closing stores the way its peers have had to do. It has also seen in-store traffic increase, a rare feat for a retailer these days.
Kohl's is also making smart moves like devoting excess space inside its stores to partner businesses. It did a recent pilot with supermarket chain Aldi, which will allow five to 10 of the grocery stores to open up inside existing Kohl's locations. It's also testing a shop-in-store partnership with Amazon that could bear fruit.
In spite of those efforts, investors dumped the stock following its strong fourth-quarter earnings report. Shares fell 5%, an indication that the market remains skeptical, but that seems like a mistake. Kohl's sees earnings per share improving to $4.95-$5.45 this year on comparable-sales growth of flat to 2%. At the top end of that EPS range, the stock is trading at a price-to-earnings ratio of just 12. Throw in a a dividend yield of 3.7%, and Kohl's looks like a steal today.
Hot growth for a cool retailer
Rich Duprey (Five Below): While there will always be a place for the traditional brick-and-mortar retailer, it's is probably at a much smaller footprint than what exists today. That's why chains have been closing stores at a dramatic rate, trying to right-size before ruination comes upon them. Deep discount retailer Five Below isn't one of them, however, and in fact is in the midst of a large expansion campaign.
As its name suggests, Five Below sells all of it merchandise for $5 or less, a price level that has become the sweet spot for the deep-discount segment. Five Below has 625 stores in operation, having opened more than 100 new ones in 2017, and doesn't expect to slow down this year.
It's able to grow as it has because it is able to latch onto "trend-right" products and milk them for what they're worth. From Silly Bandz to fidget spinners, Five Below locks onto the craze of the moment. When there's not a fad around, it has a stable of popular characters to fall back on, such as those from Star Wars or Disney's Frozen lineup.
That has translated into a consistent history of growth. Sales per square foot, for example, have widened from $251 in 2012 to $275 over the last 12 months. The stock does trade at a premium, but being a market leader that's by and large proven to be "Amazon-resistant" means it's earned the position. Analysts forecast it should grow earnings at a 30% clip year annually for the next five years, and there are no signs of Five Below cooling down.