Retail stocks crashed last week, after several department stores -- led by Macy's -- reported poor Q3 sales trends and/or weak fourth quarter outlooks. Shares of off-price giant TJX (NYSE:TJX) got caught up in the rout, falling more than 13% from the morning of Nov. 6 to the close of trading on Nov. 13.
However, there's a good chance that TJX will escape the malaise currently spreading through the department-store sector. Additionally, even if it does face a bit of a slowdown, the company has a stellar track record of bouncing back from short-term disruptions.
Outperformance is the norm
One reason I'm skeptical about seeing retail sales weakness spread to TJX is that the company entered the third quarter on a very strong trajectory.
At the beginning of the current 2016 fiscal year, it projected that comparable-store sales would rise 1%-2% for the full year. However, strong sales trends encouraged TJX to lift its full-year comp sales growth guidance to 2%-3% in May and then to 3%-4% in August. Comp sales increased 5% in Q1 and 6% in Q2, so this guidance could still be conservative.
Additionally, TJX entered Q3 with very lean inventory. CEO Carol Meyrowitz has said that the management team is constantly holding back its buyers to ensure that TJX is ready to pounce on whatever new opportunities show up. With department stores apparently having over-ordered this year, TJX has probably found lots of great deals on fresh merchandise to drive sales in Q3 and Q4.
Hopeful signs from two department stores
Another reason to expect a solid earnings report from TJX is that not every department store ran into trouble last quarter. Department stores at the lower end of the price spectrum, such as Kohl's (NYSE:KSS) and J.C Penney (NYSE:JCP), actually performed fairly well.
At Kohl's, comparable-store sales rose 1% year over year, marking the fourth straight quarter of growth after a long period of weak results for the mid-priced department store. (Comp sales had declined 1.6% at Kohl's in the year-earlier quarter.)
Obviously, 1% comp-store sales growth is still nothing to write home about. But Kohl's is in the early stages of a major turnaround effort. J.C. Penney is further ahead in its own turnaround and posted 6.4% comp growth last quarter, with sales growth in all regions and merchandise categories.
J.C. Penney reported that transaction count, conversion, and units per transaction all rose year over year, while the average price paid per item declined slightly. In other words, more people came to J.C. Penney stores and they bought more items, but they were looking for relatively low-priced merchandise.
If that mentality was widespread, it could be good news for TJX as well. The company has been focusing on selling higher volumes of lower-priced goods recently. It was extremely successful with this strategy in Q2, and J.C. Penney's Q3 results could bode well for TJX's upcoming earnings report.
TJX benefits from retail turmoil
At a high level, the sharp drop in TJX stock last week seems irrational because turmoil in the retail industry is usually good for the company. Whereas a port slowdown on the West Coast earlier this year hurt department stores by disrupting their merchandise flows, TJX was able to swoop in and buy up goods that department stores no longer wanted at bargain prices.
Furthermore, because TJX buys its merchandise at the last minute, it has more flexibility than traditional department stores to react to changing demand trends. As a result, there's a good chance TJX will report another quarter of strong earnings this week.
But even if TJX took some lumps during the third quarter -- it does occasionally have a bad quarter -- it will probably bounce back quickly. That's the beauty of its flexible business model: TJX can get whatever consumers are interested in with very short notice and sell it for less than traditional retailers.
Adam Levine-Weinberg is long January 2016 $55 calls on The TJX Companies, The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.