Ross Stores Inc. and TJX Cos. are producing the best risk-adjusted returns among their peers by flipping extra goods to deal-hungry customers instead of tying their fortunes to fashion trends.
Ross, which sells discounted designer wear at more than 1,100 U.S. stores, outperformed 53 North American specialty and department stores in the past five years, according to the BLOOMBERG RISKLESS RETURN RANKING. The Pleasanton, California-based retailer had the highest total return and second-lowest volatility for a risk-adjusted gain of 11 percent. TJX, which owns the Marshalls and T.J. Maxx chains, came in second with a gain of 7.3 percent, helped by the smallest price swings.
Ross and TJX stand apart from most department stores and mall-based retailers by taking advantage of overproduction from manufacturers to carry in-season goods instead of betting on what will be fashionable as long as a year in advance. The model helped reduce revenue swings and cut the time goods are kept in inventory. The chains are also benefiting from more value-oriented shopping after the U.S. financial crisis.
“It’s the perfect business model for a good economy and a bad economy,” said Mark Montagna, a senior analyst at Avondale Partners LLC in Nashville, Tennessee, who has a market outperform rating, the equivalent of a buy, on both stocks. “The beauty of their buying is if you buy it now for immediate delivery, that removes so much of the risk.”
When department stores and specialty retailers cancel orders for products from towels to tank tops, or manufacturers make too much of an item, buyers for TJX and Ross swoop in and cut a deal for the goods during or at the end of a season.
The retailers are able to snag better discounts and sell items at lower markups than competitors because they are flexible on the styles and sizes they will accept. Deliveries are made to distribution centers versus individual stores, and they don’t request benefits such as return privileges, delayed deliveries, or advertising and markdown allowances.
The strategy has kept sales more stable than at rivals. Framingham, Massachusetts-based TJX hasn’t posted an annual decline in same-store sales in the past decade, while Ross had one in that period, according to data compiled by Bloomberg. Macy’s Inc. had five such declines, Kohl’s Corp. three and Sears Holdings Corp. posted drops in all 10 years. Same-store sales at Gap Inc. dropped eight times in the past decade.
Total sales growth also surpassed rivals. Ross’s annual revenue increased by 9.1 percent on average in the past five years, while TJX’s rose by 5.9 percent, according to data compiled by Bloomberg. That compares with the average 5.7 percent gain at 44 North American specialty retailers tracked by Bloomberg Industries.
Goods stayed in inventory for an average of 65 days for Ross in its latest fiscal year and 62 days for TJX, highlighting the retailers’ agility in turning over merchandise. The measure exceeded 95 days at Macy’s, Sears, J.C. Penney Co. and Kohl’s in the same time period.
“That means it’s a lot fresher, the margins are a lot more stable,” said Brandon Geisler, who oversees the $375 million Marsico 21st Century Fund, which includes shares of Ross, in Denver. “You tend to be trend-right and are in-season at the right time in the right place.”
Carol Meyrowitz, chief executive officer of TJX since 2007, and Michael Balmuth, who has run Ross since 1996, declined to comment for this story.
Ross has returned 386 percent in the past five years and 40 percent this year, and had the second-lowest volatility in both periods. TJX returned 241 percent and 38 percent respectively, and was the least volatile stock. The Standard & Poor’s 500 Consumer Discretionary Sector Index returned 29 percent in the five-year period, including 13 percent this year.
Coldwater Creek Inc. and American Apparel Inc., which have lost more than 90 percent of their market value in the past five years, are examples of apparel retailers that have fallen victim to fashion missteps and commodity fluctuations. Sandpoint, Indiana-based Coldwater Creek, which targets 45- to 65-year-old women, has had sales suffer after merchandising decisions such as reducing the selection of outerwear, dresses and non-apparel.
American Apparel, based in Los Angeles, saw productivity and sales decline after the retailer was forced to fire workers due to immigration violations and amid increasing costs for yarn and fabric that were difficult to pass on to young customers in the face of the recession.
While they have benefited from the same trends recently, TJX and Ross offer investors different bets in the years ahead. For one, TJX is larger, with revenue of $23.2 billion in the year ended Jan. 28. At 2,938 stores in the U.S., Canada and Europe as of April 28, it now ranks closer to department stores, exceeding sales at Kohl’s and J.C. Penney.
Ross is smaller at 1,146 locations, generating $8.61 billion in sales last year. That’s more comparable to Gap, which had $14.5 billion in revenue in the period and Victoria’s Secret-owner Limited Brands Inc., which had $10.4 billion.
TJX and Ross also have differing expansion plans. TJX Chief Executive Officer Carol Meyrowitz has said the company has “vast growth potential” at its European unit, which posted its highest first-quarter profit this year.
Ross CEO Michael Balmuth is focusing on growth in the U.S. and in May raised the company’s long-term store target to 2,500 locations from 2,000, with plans to enter new markets and fully saturate existing areas with its Ross Dress for Less and dd’s Discounts chains.
TJX also can appeal to higher-income shoppers with some more expensive merchandise, such as $150 denim, while prices at Ross would be half of that, Dave Weiner, an analyst at Deutsche Bank AG in New York, said in a telephone interview.
Shares of Ross, which have more than tripled since the end of 2009, are trading at 22 times the company’s profit in the past 12 months, higher than 87 percent of its U.S. competitors. TJX has doubled in the same time period and trades at 21 times the past 12 months’ earnings.
Ross’s anticipated success of its new stores and improvements at its dd’s Discounts chain “are nearly fully reflected in the share price,” Richard Jaffe, an analyst at Stifel Nicolaus & Co. in New York, wrote in a May 17 note.
Jaffe, who has a buy rating on TJX and a hold on Ross, said he doesn’t share Ross’s optimism that it can expand even to its original 2,000-location target. TJX’s growth in Canada and Europe and plans for an e-commerce business provide more opportunity for growth.
While Ross’s annual return may slow from a pace of more than 40 percent gains the past three years, the shares still may climb “somewhere in the teens” annually in the coming years, Tom Saberhagen, an analyst at Akre Capital Management LLC in Middleburg, Virginia, said in a telephone interview. Ross was the third-biggest holding in the firm’s top-performing $1.09 billion Akre Focus Fund as of Jan. 31.
“We believe that we operate one of the most flexible business models in the world and that this flexibility has enabled us to succeed through many types of economic and retail cycles,” Debra McConnell, a spokeswoman for TJX, said in an e-mailed response to questions. “We buy close to need, which gives us greater visibility into current fashion and pricing trends and helps create continuous freshness in our stores and higher merchandise margins.”
Ross shoppers are attracted to value in both good and bad economies, Bobbi Chaville, a spokeswoman for the company, said in an e-mail.
“We believe our performance has been driven by offering ‘great value’ to our customers,” she wrote. “By focusing on value, we have been able to drive sales, and ultimately, to achieve strong shareholder returns.”
Ross and TJX should be able to hold on to customers they gained during the recession, said Akre’s Saberhagen. The Akre Focus Fund, which bought Ross and TJX in late 2009 and early 2010 as its sole apparel-retail holdings, has gained 22 percent in the past year, beating 99 percent of its competitors, according to data compiled by Bloomberg.
“Once people learn about the bargains that are available in this channel, then they’ll continue to come back,” Saberhagen said. If the economy improves, “same-store sales might not be as fast as they are right when a recession hits, but they very rarely go negative with Ross or with TJ.”