When investing in retailers, especially those competing in the low end of the pricing spectrum, investors need to go with the companies that can truly succeed in one of the fiercest markets there is. This essentialy means offering a lower price than your competitors and whichever companies can do this will thrive for years to come. A few such names are Amazon (AMZN +1.25%), TJX (TJX +0.05%) and Ross Stores (ROST +0.46%) which are benefiting their customers with aggressively low prices and rewarding their shareholders with growing sales over time.
Amazon for disruptive growth
Amazon is clearly the most disruptive force in the retail business over the last few years, founder and CEO Jeff Bezos has imprinted a culture of relentless competitiveness, innovation and growth in the company. Amazon does not care about short term profit margins, the company is too busy building competitive strengths to capitalize on its growth opportunities for years to come.
In the words of Jeff Bezos:
"Your margin is my opportunity"
The company has increased revenues at an amazing 32.7% annually over the last five years, and there is no slowdown at sight: Net sales increased 24% to $17.09 billion in the third quarter, compared with $13.81 billion in third quarter 2012. Excluding the $332 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, revenues grew 26% compared with third quarter 2012.
Amazon reported a big increase of 48% in operating cash flows for the previous 12 months, but the company is spending its money aggressively, so free cash flows decreased 63% to $388 million for the year. The company also lost money on a GAAP accounting basis during the quarter.
Amazon can be a tough pill to swallow for many investors,specifically this with qualms with buying a company that does not seem to be much interested in making money in the medium term requires a lot of faith in management´s long term vision. On the other hand, for investors looking for a disruptive growth company in the retail space, Amazon is a fairly unique opportunity.
TJX: Great clothes and reasonable prices
TJX is an off-price retailer of apparel and home fashions operating approximately 2,400 stores in the U.S. under its T.J.Maxx, Marshalls, HomeGoods, and Sierra Trading Post brands and more than 700 stores in Canada and Europe under different names.
The company has a leadership position in off-price retail, and it relies on a buying force of 800 people sourcing for products from more than 16,000 vendors in more than 60 countries. Its scale advantages, global presence and effective inventory management system mean that the TJX is uniquely positioned to manage large volume and disperse merchandise across different geographies to target specific markets.
The company leverages its bargaining power with suppliers by negotiating conveniently low prices for its products which it sells at discounts of between 20% and 60% versus traditional retail prices. This resonates remarkably well among consumers through good and bad economic times: TJX has experienced only one year of negative comparable-store sales in its 36-year history, and comparable-store sales have increased in 40 out of the last 41 quarters.
TJX will report earnings on Nov. 21, but on Oct. 21 management raised guidance for the current year's third quarter and full year results due to strong sales and profit margins in the preceding months. The Company now expects third quarter diluted earnings per share to be in the range of $0.84 to $0.85, compared with last year's $0.62 per share on the back of an expected increase of between 4% and 7% in comparable store sales for the quarter.
Ross Stores dresses for less
Ross Stores competes directly against TJX in the off-price apparel and home fashion business. Ross Dress for Less is a leading brand in the segment with 1,131 stores, and the company also operates 122 dd's Discounts stores targeting a typically younger customer with more moderate income levels than Ross.
Both TJX and Ross Stores are doing well over the last few years, but Ross Store´s smaller size means that it's easier for the company to generate higher growth rates for shareholders. Ross Stores has expanded sales at 10.2% annually over the last five years, while TJX has delivered an annual increase of 7.1% over that period.
When it comes to earnings per share, Ross Stores has increased earnings at a remarkable 30% per year while TJX delivered a still very strong 24.9% annual growth rate in earnings per share over the last five years. Again, both companies are performing strongly, while TJX offers more soundless due to its size and scale advantages, Ross Stores is the one with the higher growth rates.
Ross Stores reported better than expected earnings in August with net sales rising 9% during the quarter and earnings per share surging 21% to $0.98 versus an average estimate of $0.93 per share by Wall Street analysts. Comparable store sales remained strong in the quarter with an increase of 4% versus the previous year, so this discount retailer continues delivering attractive growth rates for investors.
Bottom line
The retail business is changing and price competitiveness is becoming a crucial competitive strength in the industry. Smart and efficient retailers like Amazon, TJX and Ross Stores are well positioned to continue benefiting from the rise of the price-conscious consumer for years to come. All three names are worth a closer look by Foolish investors looking to get a leg up by investing in the retail industry.
