With the 2010 holiday season behind us, we're getting a good sense of how the "new normal" is reshaping our shopping habits. As it turns out, the "new normal" is a lot like the old normal:
- Shoppers still gravitate toward brand names.
- Our hearts soar at the sight of a bargain.
- And rather than settle for subpar off-brand bounty, we'll do without or wait for our favorite four-letter word: s-a-l-e.
In other words, give us goods at either end of the frugal-fancy spectrum. Think Tiffany and Target. Coach and Costco (Nasdaq: COST).
Woe is the retailer that is neither a high-end merchant nor a low-priced retailer. That leaves you languishing in the unexciting middle with department stores like Dillard's and Bon-Ton. And these days, the middle of the road is the surest route to mediocre returns in retail.
But a couple of companies have nailed the "new normal" just right by catering to brand-conscious bargain hunters. Investors, allow us to introduce to you the "off-price retailer."
Why pay full price?
"Off-price" retailers give consumers the best of both worlds, buying excess inventory from high- and low-end stores, then reselling it at discounts somewhere in the neighborhood of 20% to 70% less than the usual retail prices.
Retailers like Big Lots (NYSE: BIG), Stein Mart (Nasdaq: SMRT), Syms (Nasdaq: SYMS), DSW (NYSE: DSW), and Overstock.com (Nasdaq: OSTK) all fit into the general "off-price retail" subsector.
But by far, the two leaders -- both in size and execution -- are TJX (NYSE: TJX) and Ross Stores (Nasdaq: ROST). These stores set the standard for the entire discount merchant category. And at these prices, well, we're willing to load them both into our stock shopping basket. Here's why:
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Ross and TJ Maxx are blessed with big-time name recognition among consumers, and broad geographical reach. TJX, the No. 1 off-price retailer, operates 2,800 stores in the U.S., Canada, and Europe under the names T.J. Maxx, HomeGoods, and Marshalls. Ross operates 1,057 stores in 27 U.S. states and Guam; most are Ross Dress for Less stores, while 67 are dd's DISCOUNTS.
Many investors go wrong by lumping these stores into the same retail basket as general discounters and department stores. Shoppers who frequent Ross and TJX's concepts aren't looking to pick up a party frock, canned goods, toilet paper, and Halloween candy. And even Overstock.com -- selling lingerie and lawnmowers -- isn't a perfect apples-to-apples comparison.
Its laser-sharp focus on clothing (women's, men's, juniors, children), accessories, and housewares (decor, dishes, etc.) makes off-price retail a category unto itself.
How the bargain behemoths stack up
Check out the comparisons of some financial metrics for TJX, Ross, and close competitor Syms -- which unlike some of the other off-price retailers named above, also focuses for the most part on apparel.
Company | Revenue Growth (TTM) | EPS Growth (TTM) | Gross Profit (TTM) | Debt-to-capital ratio | P/E (TTM) |
|---|---|---|---|---|---|
| TJX Cos. | 9.3% | 36.7% | 27.0% | 20.3% | 13 |
| Ross Stores | 11.0% | 40.0% | 26.9% | 10.5% | 14 |
| Syms | 45.5% | N/A | 39.2% | 19.4% | 16 |
Sources: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance. N/A = not applicable.
As you can see, TJX and Ross have strong revenue and earnings growth, comparable gross profit, and low debt-to-capital ratios.
Regarding Syms, investors should bear in mind that even though its revenue growth looks impressive, it's also a much smaller retailer. It operates just 48 stores, mostly concentrated on the East Coast. Its purchase of bankrupt Filene's Basement last year has helped boost its revenue growth in the near term, but it's still a small fry in the off-price retail space, and a far more speculative stock for investors because of its tiny size. Its market cap is a mere $103.3 million.
Even more heartening are the many reasons why one could believe off-price retailers have a lot of growth ahead of them. "Fast fashion" -- cheap, limited-stock fashions from places like H&M and Forever 21 -- have helped increase the acceptance of off-price retailers in general.
Treasure hunting is always in vogue
If you haven't been to a Ross, TJ Maxx or Marshalls lately, grab your keys and go. Now. You might be surprised to find one right in your neighborhood.
Meanwhile, the poor economic climate has allowed off-price retailers to set up shop in high-rent places like Manhattan. Further capitalizing on others' misfortune, Ross and TJX have been snapping up unsold inventory from a wider variety of designers, thus appealing to an even broader clientele who can find more quality goods and more varied offerings than ever before.
The entire runway of fashion can be had at a fraction of the cost, from Calvin Klein to Kenneth Cole to Nike to Nine West. And we haven't even gotten to the juniors section yet.
But sometimes you have to dig for it. Some consumers may complain that they'd prefer a more serene shopping experience, but for others, the thrill of the chase is crucial to off-priced retailers' appeal.
Costco CEO Jim Sinegal has said that the "scavenger hunt" mentality makes shopping at his stores exciting. Consumers respond enthusiastically to the prospect of picking through merchandise in hopes of discovering high-end merchandise at rock-bottom prices.
That same emotional appeal is in play at Ross and T.J. Maxx -- neither "new" or "old" normal, but just plain human-nature normal. As far as value-oriented investing goes, these two stocks are perfect bargains to put in your basket for 2011.
