Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

Discount-seekers might want to dig a little deeper for a good deal. 

Amid a slew of dismal retail earnings,  T.J. Maxx parent TJX Cos. on Wednesday said sales at established locations rose by 6 percent from a year earlier, blowing well past analyst estimates. What's more, the discount retailer said its sales jump was entirely driven by higher customer traffic -- a rare feat these days, when it's increasingly hard to get shoppers off their couches and into retail shops. 

Bargain Bin
Ross Stores shares are up 13 percent in the past year
Source: Bloomberg

With $30 billion in revenue a year, it's no surprise TJX tends to get more attention than other off-price retailers, which promise customers discounted prices on designer labels. But investors should give competitor Ross Stores a closer look. 

Both companies are benefiting from a long-term shift in shopper behavior toward deal-seeking, a practice that revved up during the 2008 global recession, reinforced by online retailers' use of discounts to lure consumers.

Neither chain tends to locate stores in traffic-bleeding malls. And both are reaping the benefits of a warmer-than expected winter, which led to tepid sales and bloated inventory at apparel retailers and department stores such as Macy's and Nordstrom. That's a boon to off-price retailers, which can swoop in and grab that extra inventory to sell at a profit.

Overstocked
Year-over-year change in the number of days it takes department stores to sell their inventory
Source: Bloomberg Intelligence
Note: Average year-over-year change in number of inventory days at JC Penney, Kohl's, Macy's, Nordstrom, Sears, Stage, Hudson's Bay, Dillard's, Bon-Ton

And for investors who think the U.S. economy is going to get worse, off-price retailers tend to do better in a down economy than their full-priced rivals. Both TJX and Ross have only suffered one year of falling sales at established stores since 1995 (TJX's down year was 1995, and Ross's was 2004 -- neither were recession years). And among retail stocks analyzed by research firm Cowen, Ross's stock price had the least correlation to the S&P 500 during the past two recessions. 

Playing Defense
Stock Correlation vs. S&P 500
Source: Cowen

Ross, which is scheduled to report earnings in March, could benefit from characteristics that were once seen as disadvantages.

For one, Ross's 1,400 stores are exclusively located in the U.S., whereas nearly a third of TJX's 3,500 stores are outside the U.S. TJX, which has plans to continue its international expansion, offered guidance for the year that was lower than analysts were expecting because of negative impacts from foreign exchange. 

Because most of Ross's stores are located in southern U.S. states, with little exposure in the Midwest and Northeast, it still has room to grow. Cowen estimates Ross could open another 1,000 stores in the coming years, not to mention growth opportunities from M&A and e-commerce (Ross is one of the few retailers that doesn't have an e-commerce website).

The off-price retailer also has more lower-end customers than TJX, where the average price on an item is $14 to $15, compared with $10 at Ross, according to Cowen. That means Ross stands to benefit more than TJX from lower gas prices, which tend to affect lower-end consumers more than higher-end consumers. It also makes Ross less susceptible to competition from Amazon, which tends to target wealthier customers with its Prime membership. 

And while TJX generates a smidgen more in sales per square foot, Ross is actually slightly more profitable than TJX. 

Measuring Up
TJX brings in more sales per average square foot but Ross is slightly more profitable
Source: Bloomberg Intelligence
As of 3Q 2015

Over the past six months, Ross has delivered investors a total return of roughly 16 percent, compared to TJX's 7 percent and the S&P 500's total return of 4 percent. Both companies trade at around 20 times forward earnings. It just might be time for investors to take a walk down the discount aisle. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net