Off-price stores such as TJX (NYSE:TJX) and Ross (NASDAQ:ROST) are thriving these days as consumers are looking for more discounted items. As a result, TJX had a great third quarter. Let's have a look at TJX in detail and analyze its future growth prospects.

Third-quarter report
TJX's business model of offering huge discounts seems to be working as it topped expectations and posted earnings per share of $0.86, which was 21% more than the year-ago quarter. Sales grew 9% to $7 billion, while same-store sales increased by 5%. The company was able to generate high in-store traffic due to selective merchandise available at its stores

Comparable-sales growth at HomeGoods remained strong at 10%. Other brands, including Marmaxx and TJX Europe, had comps growth of 4% and 5%, respectively. Selling, general, and administrative expenses saw an uptick of 4 percentage points. However, this was offset by an increase of 0.5 percentage points in the gross margin thanks to a higher merchandise margin during the quarter.

What is TJX up to?
TJX believes in rewarding shareholders from time to time through stock buybacks and growing dividends. In the third quarter, TJX repurchased $375 million worth of its shares. During the first three quarters of fiscal 2014, TJX spent about $1 billion on stock buybacks. It has further plans of spending $300 million to $400 million on share repurchases during the last quarter of fiscal 2014.

TJX is continuously expanding its distribution networks for Marmaxx and HomeGoods in an effort to cater to increasing demand for its brands; this will ensure that the company's sales keep rising. In addition, TJX is investing in new data centers, store remodels, and supply chain improvement programs, which will perk up its store efficiency to a great deal.

Almost all retailers these days are looking to capture more market share through e-commerce and omni-channels. For this reason, TJX's e-commerce business has been identified as a major growth driver by the company and many analysts. The company's shopping site, which was launched a few months ago, will certainly prove fruitful as the number of online shoppers is increasing rapidly.

According to Businessweek, US retailers are increasing their promotions to attract more traffic. Still, customers have become more frugal and aren't showing that much interest in stores. When people become thrifty, most of the retailers lose but TJX gains thanks to huge discounts offered at its stores. TJX has 16,000 different vendors, which means that it can buy stuff at far cheaper rates than its competitors, hence it is able to offer low prices at its stores. Ross Stores and Burlington Stores have the same business model, but their operations aren't as big as TJX.


Source: Zacks

If we consider the above table, it's quite easy to see that TJX has outperformed its peers in almost every growth metric. TJX's year-over-year return is 30%, which is more than most US retailers. The company has a high price-to-earnings ratio of 23.9 because it's beating its competitors and therefore has a higher price tag. Gap and Ross Stores are not doing bad either, but they are still behind TJX.

In the latest quarter, Gap's EPS grew 14%, while sales increased 3% in comparison to the year-ago quarter. Gap is constantly expanding its business through franchisees in international markets. During the third quarter, it opened 18 new stores in China, 14 Old Navy stores in Japan, and 15 Athleta stores at various locations. The company is looking to expand in countries including Costa Rica, Brazil, the Philippines, Peru, China, and Japan. Just like TJX, Gap is also investing in its e-commerce business, which grew 20% in the third quarter.

Ross' latest quarter results were in-line with expectations. Earnings per share grew 12%, whereas sales increased 6% from the prior year's quarter. The company improved its inventory management by placing selective merchandise on the shelves, which increased its store efficiency and led to lower operating costs.

Ross is consistently rewarding its shareholders through stock buybacks and healthy dividends. The company lowered its full-year earnings guidance, as it expects persistent challenges for the economy ahead.

Final thoughts
TJX had an admirable third quarter where its earnings once again beat expectations. Sales coupled with comps were also healthy, portraying a brighter picture for the company in the future. TJX's business model of offering discounted prices to customers is certainly paying off in the current economic conditions. The company's e-commerce business along with a focus on expanding its distribution network will continually enhance sales. Investments in the supply chain will make its business more cost effective, which will curb operating expenses. Considering all of this, I believe TJX presents a great investment opportunity at this point in time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.