2018 was a good year for most retailers in the U.S., but business conditions have been far more challenging in 2019, separating the winners from the losers.
TJX Companies (NYSE:TJX) and, to a lesser extent, Ross Stores (NASDAQ:ROST) were among the winners in the first quarter. TJX posted a stellar 5% comparable-store sales gain, and Ross Stores achieved a solid 2% comp sales increase during that period. As a result, TJX stock has held up quite well compared to those of many other retailers, while Ross Stores stock sits near its all-time high of $108.20.
While neither stock is a bargain, shares of these two off-price retail giants could continue rising if TJX and Ross Stores deliver strong earnings reports this week. Let's take a look at what investors should expect.
TJX has been firing on all cylinders
Comp sales surged 6% at TJX last year, and the company continued its strong sales momentum in the first quarter. Furthermore, as of late May, management was bullish about the second quarter, calling for 2% to 3% comp sales growth and an acceleration in earnings growth. Given that TJX usually issues very conservative guidance, comp sales and earnings per share are likely to outpace the company's solid forecast.
The one potentially worrisome data point from TJX's Q1 earnings report was that the company ended the period with inventory per store up 7% in constant currency. Management attributed most of the increase to timing effects. However, if sales trends slowed unexpectedly last quarter, high inventory levels could have forced TJX to take deep markdowns, hurting gross margin.
Ross Stores looks to get back on track
While Ross Stores achieved respectable results in the first quarter -- a 2% comp sales gain, total sales growth of 6%, and a slight year-over-year increase in EPS -- the retailer fell short of its own lofty standards.
Management blamed the underperformance on a continuation of subpar sales trends in the ladies apparel category, which accounts for about a quarter of Ross Stores' revenue. Ross made some uncharacteristic merchandise planning mistakes, according to CEO Barbara Rentler, and didn't have the right assortments in its stores to drive sales.
On Ross Stores' Q1 earnings call, Rentler noted that the company's buyers were working hard to fix the merchandise assortments in ladies apparel. However, she warned that it could take a few quarters to fully resolve the recent issues. Consequently, Ross Stores' Q2 guidance assumes that business trends will be similar to the first quarter. Investors will be looking for tangible signs of improvement in the upcoming earnings report.
The retail slowdown may not hurt TJX and Ross Stores
While many retailers are struggling, and a growing number of economists have warned that the risk of a U.S. recession is rising, off-price retailers are uniquely suited to keep growing sales and earnings under adverse conditions. When the economy is struggling, it's easier than ever for off-price retailers to acquire inventory at huge discounts, and consumers are even more motivated to hunt for deals. That's why TJX and Ross Stores were both able to post annual comp sales gains during the Great Recession.
Ross Stores and TJX are already benefiting from market share gains at the expense of retailers that have gone out of business or downsized significantly in the past few years. A recession could create even more opportunities in that regard.
Additionally, rising freight costs have weighed on earnings growth for both retailers over the past year or so. However, last year's tight freight market has given way to a supply glut as economic growth has slowed this year. This should enable TJX and Ross Stores to negotiate big savings as their freight contracts come up for renewal.
In short, investors have every reason to believe that the top off-price retailers met or exceeded expectations last quarter -- and that they will continue to do so in the future. That makes shares of TJX and Ross Stores look like solid choices for long-term investors.