Did you know that off-price retail has been one of the better-performing sectors over the past five years? Well, it's true. Off-price retailers help larger department stores clear unsold inventory, then sell these department-store brands to customers, often at a 20% to 60% discount.

Riding the wave of post-recession penny-pinching on apparel, off-price retailers TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST) have each outperformed the S&P 500 over the past one, three, and five years:

TJX 1 Year Price Returns (Daily) Chart

TJX 1-Year Price Returns (Daily) data by YCharts.

But of course, this impressive outperformance is in the rearview mirror. Is one of these a better buy now? Let's find out.

A 25%-off sign on a rack of jeans.

Image source: Getty Images.

Growth and potential

Off-price retail is still a growth sector of the economy, and both TJX and Ross have managed to grow  quarterly revenue in the mid-single-digit to low-double-digit range over the past five years:

TJX Revenue (Quarterly YoY Growth) Chart

TJX Revenue (Quarterly YoY Growth) data by YCharts.

While it looks as though TJX is currently outperforming Ross, with top-line growth of 11.6% last quarter versus Ross' 8.5%, one quarter offers only a snapshot. If you take a compounded three-year growth rate, Ross has outgrown TJX consistently, and the three-year blended growth spread has been rather consistent.

TJX Revenue (3 Year Growth) Chart

TJX Revenue (3-Year Growth) data by YCharts.

TJX, which owns both TJ Maxx and Marshall's brands, had a total of 2,285 U.S. discount stores as of February. The company also has 671 HomeGoods stores, 454 TJX Canada stores, and 564 TJX International stores (Europe and Australia), for a grand total of 4,070 stores. Ross, on the other hand, had only 1,409 Ross stores along with 213 dd's DISCOUNTS, for a total of 1,622 stores.

Both companies grew their same-store sales at 3% last quarter. Should that continue, future growth will largely be determined by new store openings. With less than half of TJX's store count, Ross theoretically has more room to grow and thus may sustain the higher growth rate it's had over the past three years.

Winner: Ross Stores

How efficient are they?

While growth is good, efficiency really separates decent retailers from great retailers. To get a sense of how efficient each company is, it's important to look at gross margin, return on equity, and days of inventory outstanding. Gross margin may reveal an inherent cost advantage, since both companies sell the same type of goods, and return on equity will reveal how efficiently each company is earning profits from capital investments.

TJX Gross Profit Margin (TTM) Chart

TJX Gross Profit Margin (TTM) data by YCharts.

As you can see in the charts above, Ross Stores has recently overtaken TJX in terms of gross margin, but just barely. TJX traditionally has had much better gross margin, so it's difficult to know if Ross' recent surge is part of a trend or merely a one-off development.

On the other hand, TJX has had superior returns on equity for a long time -- though both companies have had excellent results in that regard. That may be due to TJX's superior inventory management, as it has long had lower days of inventory (a lower number here implies quicker inventory turnover). However, like gross margin, Ross has been closing the gap on that front recently.

Winner: TJX Companies (though it's close)

Valuation

The final showdown comes down to valuation. Because Ross Stores has superior growth prospects, I'd expect it to have a slightly higher valuation, and that's indeed the case. On the basis of both a forward price-to-earnings ratio, as well as the EV-to-EBITDA ratio, Ross carries a slightly higher valuation.

TJX PE Ratio (Forward) Chart

TJX P/E Ratio (Forward) data by YCharts.

TJX has a higher dividend yield (around 1.6% at current prices), which may lead some to think that TJX may be the choice for value investors. Ross stock yields closer to 1%.

Investors should note, however, that TJX pays out more of its earnings as a dividend, with a payout ratio nearly twice that of Ross. In addition, Ross has bought back more of its market capitalization over the past 12 months than TJX. That means that Ross still is returning a lot of money to shareholders and has the potential to increase its dividend more in the future. 

TJX Dividend Yield (TTM) Chart

TJX Dividend Yield (TTM) data by YCharts.

While TJX may seem like it's the "cheapest" of the two on a multiple and dividend basis, Ross' conservative payout and higher share repurchases keep it in the game.

Winner: Tie

Which to buy?

It's difficult to say which off-price giant is the better buy. More likely, your preference will depend on what sort of investor you are. For those geared toward safety and dividends, TJX may be the pick for you. For those looking for growth, Ross seems to be the choice. Or taking a position in each may be the way to go, as both companies offer stability and growth.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of some of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.