Source: TJX.

The retail industry is remarkably challenging and competitive, especially when it comes to companies operating in the low end of the pricing spectrum. However, TJX (NYSE:TJX) is a particularly solid player in the sector, and the stock could offer substantial upside potential for investors if management continues leading the business in the right direction. Let's take a look at TJX and three important reasons the stock could deliver material gains in the years ahead.

A smart business model
TJX is an off-price retailer of apparel and home fashions. As of the second quarter of 2014, the company operated 3,279 stores in the U.S., Canada, and Europe via its T.J. Maxx, Marshalls, HomeGoods, TJX Europe, and TJX Canada divisions.

TJX relies on a global network of 900 employees sourcing for products from more than 16,000 vendors in over 75 countries. The company provides department stores the opportunity to clear excess inventory under favorable conditions; TJX is willing to purchase less-than-full assortments of items, styles, and sizes, and it usually pays promptly. This gives TJX significant bargaining power with suppliers, which the company translates into big pricing discounts of between 20% and 60% versus traditional retail prices.

Scale, global presence, and the know-how to make the right merchandising decisions are key competitive advantages for TJX. The company's most direct competitor is arguably Ross Stores (NASDAQ:ROST), which reported $2.7 billion in sales during the quarter ended Aug. 2. In comparison, TJX generated sales for $6.9 billion during the same quarter, so the company has a considerable size advantage in the industry. 

Rock-solid financial performance
This convenient business model resonates well among customers through good and bad economic times. TJX has delivered growing comparable-store sales in each of the past 22 quarters, quite an impressive performance for a company operating in the always cyclical retail industry.

The last quarter was no exception to the rule, as TJX reported a 7% sales increase during the second quarter of 2014 to $6.9 billion. Comparable-store sales increased 3%, and gross square footage expanded 4% as the company opened 23 new stores during the period.

Both sales and earnings came in ahead of Wall Street analysts' expectations, and management raised guidance for the rest of the year, so the business is clearly firing on all cylinders from a commercial and financial point of view. 

Competitor Ross Stores reported a similar 7% revenue increase, while comparable-store sales grew 2% during the quarter. Being materially smaller than TJX, Ross Stores should have an easier time expanding more rapidly; however, the two companies are performing similarly.

Abundant growth prospects
Management believes TJX has considerable room for expansion, and recent financial performance confirms the belief, as demand remains strong. The company believes it could ultimately reach 5,150 stores in its existing chains and countries alone, versus a current store base of fewer than 3,300 units.

Europe should be a considerable growth driver for TJX in the middle term. The company is on track to open 40 stores in the Old Continent this year, up 25% versus fiscal 2013. On a longer-term basis, management estimates that it can add over 450 stores in Europe, more than double its current store base of 408 units.

CEO Carol Meyrowitz sounded quite optimistic in the latest earnings press conference regarding demand and opportunities for growth in Europe:

Our 2014 plans include more than doubling the number of stores in Germany versus the prior year. Our new store performance across Europe continues to be excellent. We are looking forward to expanding into our next European countries, with our first few stores opening slated for Austria in the first half of 2015.

Key takeaway
Discount retail is a cyclical and aggresively competitive business, and that means TJX operates in a challenging and dynamic environment. However, considering the company's smart business model, outstanding financial performance, and abundant room for growth, there are valid reasons to believe TJX could deliver substantial gains for investors in the years ahead.

Andrés Cardenal and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.