After rallying for most of 2018, retail stocks have pulled back in a hurry this month. Off-price leader TJX Companies (NYSE:TJX) hasn't been immune, despite posting strong results in the first half of its 2019 fiscal year. TJX stock ended last week 9% below the all-time high it reached in early October.
However, TJX is well positioned to post blowout sales and earnings results when it releases its third-quarter earnings report on Tuesday morning. That could potentially send the stock rocketing to new highs.
Momentum has been growing
During the first half of fiscal 2019, TJX achieved strong sales and earnings growth. In the first quarter, comp sales increased 3% and total sales jumped 12%. This helped drive a 38% surge in earnings per share, including a roughly 21% lift from a lower federal corporate tax rate.
The second quarter was even better. Comp sales rose 6%, driving another 12% uptick in total sales, despite a smaller benefit from exchange rate fluctuations. EPS skyrocketed 38% year over year once again, beating management's guidance by more than 12%.
Last quarter may have been spectacular
There's a good chance that TJX's comp sales momentum accelerated further in the third quarter. For one thing, it faced a very easy top-line comparison, as unfavorable weather and some fashion misses caused comp sales to be flat year over year in the prior-year period.
Additionally, the U.S. retail landscape has been upended in recent months by the liquidation of regional department store chain Bon-Ton and toy giant Toys R Us, as well as a massive wave of store closures by Sears Holdings. This type of turmoil is generally good for off-price stores, as it increases the availability of marked-down merchandise and forces consumers to change their shopping habits.
Nordstrom's (NYSE:JWN) recently released earnings report offers a glimpse into the favorable environment for off-price retailers. Nordstrom's off-price segment logged a stellar 5.8% comp sales increase last quarter. This marked a dramatic acceleration from its 4% comp sales gain in the second quarter and its meager 0.4% first-quarter comp sales increase.
To some extent, Nordstrom's improving off-price results are being driven by better execution on a company-specific level. Still, given that TJX has fairly consistently outperformed Nordstrom Rack in terms of comp sales growth in recent years, the uptick in off-price sales growth at Nordstrom bodes well for TJX's upcoming earnings report.
Management's initial outlook was promising
In most of its earnings reports, TJX's management projects that comp sales will increase by 1% to 2% in the following quarter. It did so back in May, yet the company ended up posting a 6% comp sales increase in the second quarter.
However, on TJX's August earnings call, management forecast that comp sales would rise 2% to 3% in the third quarter, including a 3% to 4% increase at its Marmaxx division, which includes its domestic T.J. Maxx and Marshalls stores. Given that the retailer's guidance is usually so conservative, TJX must have gotten off to a blistering start to the quarter to give management the confidence to provide a stronger outlook.
In short, all signs point toward another big increase in TJX's sales and profit in the third quarter. Investors have high expectations for the company, but if TJX delivered another quarter of high single-digit comp sales growth -- which seems quite likely -- it just might be enough to snap the stock out of its recent funk.
Adam Levine-Weinberg owns shares of Nordstrom and The TJX Companies and is short April 2019 $115 calls on The TJX Companies. The Motley Fool recommends Nordstrom and The TJX Companies. The Motley Fool has a disclosure policy.