Competition is tough in the retail business, so you need to invest in top industry players if you are going to achieve superior returns by investing in the sectors. With this in mind, names like TJX (NYSE:TJX), CarMax (NYSE:KMX), and Tiffany (NYSE:TIF) are three leading specialty retailers with rock-solid competitive strengths and delivering above-average financial performance for investors.
TJX owns brands such as T.J. Maxx, Marshalls, and HomeGoods. The company operates 3,441 stores in the U.S., Canada, and Europe as of the end of the last quarter, and this makes TJX the biggest retailer of off-price home and apparel fashions in the world.
Scale is a major advantage for TJX, the company has a buying organization with more than 1,000 employees sourcing from a universe of over 17,000 vendors in more than 100 countries. This provides a lot of leverage for the company when negotiating product prices with suppliers.
Also, management has nearly four decades of off-price retail experience in the U.S., and the company has been operating in Canada for 25 years and in Europe for 20 years. Experience and know-how can be key strengths for TJX when making merchandising decisions and allocating the right products to the right markets at the right time.
These strengths have allowed TJX to deliver outstanding financial performance over the years, as comparable-store sales have increased at more than 5% annually for 25 consecutive quarters. This level of consistency is quite unusual in the retail business, and it speaks wonders about TJX's competitive strengths and management quality. Also, the company has raised dividends over the last 19 consecutive years, including a big dividend hike of 18% announced in March.
TJX still offers substantial room for growth; management calculates that it can take the store base to nearly 5,475 stores in the long term. This would imply 2,000 additional stores, or almost 60% growth from the current base.
CarMax operates 147 used car stores in 75 markets across the U.S. The company is the largest retailer of used cars in the country. According to management, CarMax sells more than two times as many used cars as its closest competitor.
CarMax has an innovative approach to the business, which resonates remarkably well among consumers. CarMax has a no-haggle pricing policy, making the negotiation process much simpler and more comfortable, since customers don´t need to engage in a long and daunting bargaining process like in most other competitors.
Sales employees work on fixed commissions, so they make the same amount of money regardless of which car the customer buys. This means they don't need to push the cars that generate higher margins for the company, and they can focus on finding the best vehicle for each customer.
The business has produced rock-solid numbers over the long term. Sales have grown at an average rate of 10.5% annually over the last decade, while earnings per share increased at an even stronger 19.5% per year over this period.
Management is planning to open between 13-16 new store per year over the next three years, this would bring the total store base to a range of 184-190 units by 2019. Also, the company is leveraging its online presence to generate growth and customer loyalty: CarMax had 14.4 million visits to its online platform during the last quarter, while a big 32% of those visits came from mobile.
Tiffany doesn't need much of a presentation, the company is arguably the most recognized brand in the jewelry and accessories business. Brand differentiation, exclusive designs, and high-quality retail locations allow Tiffany to demand a considerable pricing premium for the products inside the famous blue box, and this means superior profitability for investors over time.
Small and undifferentiated players in the business need to operate with relatively thin profit margins, since they don´t get to charge much of a premium over wholesale jewelry prices. Tiffany on the other hand, produces succulent gross profit margins in the neighborhood of 60% of sales.
Tiffany has expanded its store base by nearly 6% per year through the last 20 years, and management is planning to open approximately 12-15 stores this year. This represents an increase of between 4%-5% versus 298 stores as of the end of the last quarter. More than half of these new openings will be in the Asia Pacific market, a region offering attractive opportunities for growth on the back of avid customer demand and low market penetration levels.
Operating in the high-end of the pricing spectrum, Tiffany is particularly exposed to changing discretionary spending, besides, foreign currency fluctuations are weighting on performance lately. On the other hand, the company still has a lot to offer to investors over the long term thanks to its unique brand power, superior profitability and abundant growth prospects in Asia.