Last Tuesday, off-price giant TJX Companies (TJX +0.11%) posted somewhat disappointing results for the second quarter. Comparable-store sales growth slowed to 2% (compared to 5% a quarter earlier), which was at the low end of the company's guidance range. Additionally, TJX's pre-tax margin declined modestly, despite an easy year-over-year comparison.
By contrast, on Thursday afternoon, Ross Stores (ROST +0.46%) reported better-than-expected results for the second quarter. However, the No. 2 off-price retailer issued a cautious outlook for the remainder of the fiscal year.
A strong quarter for Ross Stores
In the first quarter of fiscal 2019, comp sales rose 2% year over year at Ross Stores, driving a 5.8% increase in total revenue. While that was a respectable result, management said that some merchandise planning missteps in the women's apparel business -- which accounts for more than a quarter of the company's revenue -- weighed on growth.
Back in May, Ross Stores projected that comp sales would rise 1% to 2% year over year in the second quarter. Ultimately, the retailer outperformed that forecast, as comp sales rose 3%. Total sales increased 6.5% to $3.98 billion.
Ross Stores' sales growth accelerated modestly last quarter. Image source: Ross Stores.
Ross Stores also beat its forecast for earnings per share last quarter. EPS reached $1.14, up about 10% year over year and solidly ahead of management's guidance range of $1.06 to $1.11. On average, analysts had been expecting EPS of $1.12. CEO Barbara Rentler attributed much of the earnings beat to some expenses shifting to the second half of fiscal 2019.
Some signs of hope -- but also some reasons for caution
For now, Ross Stores is projecting comparable-store sales increases between 1% and 2% for the third and fourth quarters. However, that's probably a conservative estimate, in line with the company's typical pattern. Indeed, sales trends in women's apparel started to bounce back last quarter following a couple of weaker quarters. Furthermore, Ross will face easier year-over-year comparisons in the second half of fiscal 2019 than it did last quarter.
On the other hand, Ross Stores' earnings growth could slow in the second half of the year. The company is currently calling for EPS between $0.92 and $0.96 this quarter -- up from $0.91 last year -- and EPS between $1.20 and $1.25 in the fourth quarter (compared to adjusted EPS of $1.13 in the prior-year period).
The main earnings headwinds facing the off-price retailer in the quarters ahead include the shift of some expenses from the first half of fiscal 2019 to the second half of the year and new tariffs on goods from China. Investors have to hope for an acceleration in sales growth, which could enable Ross Stores to beat its current earnings guidance.
TJX stock seems more attractive right now
Ross Stores stock has been trading for about 23 times the high end of management's full-year EPS guidance recently. That's rather pricey, although it may be justified by the company's steady growth, high profit margin, and ample room for long-term expansion.
That said, TJX seems like a better stock to buy now. Shares of the top off-price retailer currently trade for a little more than 20 times forward earnings, making them a bit cheaper than Ross Stores stock. And while TJX reported slightly slower sales growth than its smaller rival last quarter, the two companies have been growing at similar rates on average in recent years.
Additionally, TJX has more room for long-term margin expansion than Ross Stores. Currency headwinds have weighed on profitability in many of TJX's international markets over the past few years, but that trend is likely to reverse sooner or later. It will also benefit from economies of scale as it expands its two smaller U.S. chains: Sierra and HomeSense.
Thus, while Ross Stores looks like a solid stock for long-term investors, I continue to own shares of TJX instead as my bet on the off-price retail sector.
