Off-price retailers, led by The TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST), have steadily gained market share in the U.S. -- and to some extent in international markets -- over the past two decades. Nevertheless, entering 2018, investors seemed to have relatively modest expectations for the sector, particularly for industry leader TJX.

However, the parent of chains including T.J. Maxx, Marshalls, and HomeGoods has proved the doubters wrong with a series of strong earnings reports this year. On Tuesday morning, TJX released its second-quarter earnings report -- its strongest one yet.

Sales and earnings soar past expectations

Three months ago, TJX and Ross Stores both published second-quarter forecasts calling for modest 1% to 2% comp-sales growth and little or no earnings-per-share growth, aside from the benefit of a lower corporate tax rate. However, both companies have a history of providing conservative guidance -- and then beating it. Furthermore, their second-quarter forecasts seemed especially conservative in light of the strong U.S. consumer spending environment.

Sure enough, TJX soared past its guidance, and analysts' slightly more bullish estimates, last quarter. Comparable-store sales rose 6% year over year, driving net sales up 12% to $9.3 billion. Analysts had expected revenue of just $9 billion.

A woman with a shopping cart outside of a Marshalls store

TJX Companies posted stellar results for the second quarter. Image source: Marshalls.

Meanwhile, EPS skyrocketed to $1.17 from $0.85 a year earlier. This beat management's EPS forecast of $1.02 to $1.04 by a country mile. On average, analysts had expected EPS of $1.05. Excluding the benefit of tax reform, EPS would have come in at $0.99, which still would have been up 16% year over year.

Broad-based strength

Encouragingly, TJX reported strong results last quarter across each of its four major divisions. Marmaxx -- its largest division, which consists of T.J. Maxx and Marshalls stores in the U.S. -- led the way with a 7% comp-sales gain and an 11% increase in total sales. While Marmaxx surpassed $22 billion in annual revenue last year, it clearly hasn't saturated the market yet. This strong sales performance drove a slight uptick in Marmaxx's segment margin, despite rising freight costs.

The HomeGoods division (which also includes the nascent HomeSense chain in the U.S.) posted a 3% comp-sales increase. This was quite solid, considering that HomeGoods was facing a tough year-over-year comparison and TJX has been adding stores at a phenomenal pace recently. Total revenue for the segment surged 15%, but segment profit was roughly flat due to store opening expenses and rising freight and supply-chain costs.

Sales continued to shine in Canada last quarter, with comp sales up 6% and total revenue up 13%. Segment profit soared 67%, although much of this increase can be attributed to the impact of currency fluctuations.

Lastly, TJX's international segment (which includes Europe and Australia) posted a 4% comp-sales increase. This is a nice acceleration for a segment that has posted 2% comp-sales growth in each of the past two years. Total sales for the international segment rose 12%. Segment profit jumped 25%, but remained quite low compared to TJX's other divisions.

More good things ahead

Based on its strong second-quarter performance, TJX raised its full-year sales and EPS guidance. It now expects comp sales to rise 3% to 4% year over year in fiscal 2019. EPS is projected to be in a range of $4.83 to $4.88, up from the previous guidance range of $4.75 to $4.83. For the third quarter, TJX expects EPS of $1.18 to $1.20 on a 2% to 3% comp-sales increase.

TJX's guidance still looks quite conservative, although rising freight costs (due to a nationwide shortage of truck drivers) will pressure profit growth. Most notably, TJX faces a very easy year-over-year comparison this quarter, after posting flat comp sales in the prior-year period. The nearly complete liquidation of former competitor Bon-Ton should also boost sales over the next 12 months. As a result, I wouldn't be surprised if comp-sales growth remains at 6% or higher in Q3.

The strong Q2 performance at TJX also bodes well for Ross Stores, which will release its earnings report on Thursday. Analysts currently expect EPS of $1.01, slightly above management's guidance of $0.95 to $0.99. However, if Ross Stores posted high single-digit comp sales growth last quarter (like Marmaxx), its EPS will likely come in much higher.

Following the TJX earnings report, shares of TJX and Ross Stores leaped to new all-time highs. While both stocks trade at lofty valuations, they have earned those price tags with rapid growth -- and that growth is likely to continue for the foreseeable future.

Adam Levine-Weinberg owns shares of The TJX Companies and is long January 2019 $50 calls on Ross Stores and short January 2019 $90 calls on Ross Stores. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.