Better Buy: Target vs. TJX Companies

Target (TGT 0.18%) and TJX Companies (TJX -0.06%) (owner of TJ Maxx, Marshalls, HomeGoods, and other smaller brands), both had a strong 2019. Both companies run discount stores, but they have significantly different operating models. Let's take a look at both of them and see which one is the better buy right now.

Target: leading discount chain

Target has emerged as a top general merchandise retailer, providing real competition to leaders Walmart and Amazon. It sells almost everything a customer could want to buy, and it makes you feel good in the process. It operates on a discount model, offering better prices than similar department stores, supermarkets, and apparel chains.

Image source: Target.

Target has been successful with its private-label brands, which give it a lot of flexibility and opportunity in merchandising since it maintains full control over the process. It has launched brands such as Cat & Jack with competitive prices and exclusive designs that it can tailor to customer demand. Target's private label apparel brands contributed to a more than 10% increase in third-quarter apparel sales. CEO Brian Cornell also attributed Target's gross margin expansion in the third quarter to private label brands, which the company can produce itself at a lower cost than name-brand goods. Additionally, Target was able to introduce "unique items for more than 40 owned and exclusive brands" for the recent holiday season.

The company is also developing grocery delivery services to better compete with new initiatives from Walmart, Amazon, and the broader supermarket industry. Groceries account for a substantial proportion of consumer spending. Target posted low-single-digit comp sales growth for its food and beverage category in the third quarter.

Finally, Target has developed strong omnichannel capabilities -- such as drive-up and buy online, pickup in store -- and has been very willing to try new concepts like small-format stores. Its strengths in that area, specifically its free next-day shipping and fast pickup options, have contributed to Target's strong sales results recently. About 80% of digital comp sales growth came from same-day fulfillment services in the company's third quarter.

TJX: thriving on off-price items

TJX's business model requires overstock from other companies to stock inventory. This puts a sense of uncertainty into the concept, but it also gives shoppers a reason to return frequently to check out what's new. 

Today's retail environment is flooded with too much merchandise, and TJX has been eating it up. CEO Ernie Herrman often mentions "fantastic product availability," which is the foundation of the company's success. 

TJX has over 1,100 buyers and strong partnerships with more than 21,000 vendors, so it always has access to merchandise. The company calls itself "one of the most flexible retailers in the world." Its business model works in any economy and has provided incredible growth opportunities recently, as other retailers have struggled to sell merchandise at full price. 

TJX relies far less on digital sales than traditional retailers. Digital is a small part of the TJX business, at least for the time being, as the company's business model relies on customers coming to its stores often to see what deals they can snag.

TJX's loyalty program also contributes to the company's efforts to maintain strong traffic at its stores. TJX offers a credit card through Synchrony Bank that gives customers 10% off their first order, 5 points for every dollar spent at the company's stores, and 1 point for each dollar spent elsewhere. Cardholders receive a $10 rewards certificate for every 1,000 points they accumulate.

Herrman noted during the company's third-quarter conference call that a lot of TJX's inventory comes from e-commerce channels. Many retailers are still figuring out how to manage their e-commerce inventory and have excess goods after the close of a season.

Comparing the discount kings

Target's sales are almost double TJX's, with $18.4 billion compared to TJX's $10.5 billion in the third quarter. Let's see how fast they've each been growing over the past few quarters.

Data source: Target's and TJX Companies' quarterly reports. Chart by author.

These numbers are quite competitive, and both companies are seeing fantastic growth. However, Target announced slower comp growth of 1.4% for November and December of 2019, falling short of expectations. The company expects to report a similar level of comp sales growth for the full fourth quarter.

Now let's take a look at how many stores they have. TJX and all of its sub-brands have 4,519 stores worldwide, and management sees long-term growth potential to at least 6,100 stores. By contrast, Target has 1,844 stores, all in the U.S. TJX is growing its retail square footage by about 4% annually, while Target has been growing its space by less than 1% in recent years.  

Which is the better buy?

Let's look at valuation. Target shares trade at 19 times trailing earnings, while TJX trades at 25 times trailing earnings. TJX stock gained 35% in 2019, and its shares currently trade around $64. Target soared 92% during 2019, and its shares currently trade around $117. 

These are both winners. The case for TJX would be that it has a lot of opportunity ahead and will continue to grow at a steady pace, as it has over the course of its history. 

However, Target is a better value. The company has almost double TJX's revenue and has been growing comp sales at a similar rate recently, although total sales growth has been somewhat slower at Target compared to TJX. And while TJX's flexible store configurations and wide-ranging vendor partnerships allow it to continually change its merchandise, Target still has a more diversified product mix. Overall, Target is the better buy here, and it is likely to keep delivering value to its investors in the form of share price appreciation and dividends.