2 Discount Retailers To Buy This Holiday Season

With the holiday season in full swing, it’s a good time for investors to take a closer look at companies that benefit from the end-of-year surge in consumer purchases. After all, holiday sales — transactions taking place between November and December — represent about 20% of annual retail sales.

But just because retail sales are picking up — recently demonstrated by record-setting Black Friday weekend purchases — doesn’t mean that all retailers are a good bet for investors this season. In fact, industry heavyweights Macy’s (NYSE: M) and Kohl’s (NYSE: KSS) both missed earnings estimates in the third quarter and lowered full-year guidance. On the trading day following each retailer’s weak report, Macy’s stock fell 10% and Kohl’s stock fell 19%.

Clearly, some traditional retailers are having trouble delivering on earnings, but that doesn’t mean all retail stocks are dead money.

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Two stocks that make good buys during the holiday season are The TJX Companies (NYSE: TJX) and Ross Stores (NASDAQ: ROST). These two discount retailers have continued to grow earnings and comparables and are well-positioned to keep growing in the future. Let’s take a closer look.

It’s all about bargains and discounts

Unlike the retail competitors mentioned above, both TJX Companies (parent company of the TJ Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post brands) and Ross Stores focus heavily on discounted, brand name items to fill store shelves.

These retailers offer steep discounts on apparel and accessories — ranging anywhere from 20% to 60% off — and are constantly replenishing stores with new offerings. Not only does this allow the companies to capture new and emerging trends while they’re happening, but it also encourages customers to frequently check back for new items. This has translated into increased revenue for both companies.

In the third quarter, TJX Companies’ reported revenue increased by 6.3% year over year. In that same quarter, Ross Stores reported a year-over-year increase of 8.4% in revenue. According to these figures, consumer appetite for deeply discounted name-brand apparel and accessories is growing.

I would expect to see revenue increases for both retailers to continue as U.S. consumers have long demonstrated their desire for deals.

Both fill a unique niche and are expanding operations

In an age where Amazon is a threat to seemingly any business, a differentiated strategy is a key to survival.

When you arrive at one of TJX Companies’ stores or a Ross store, you never really know what you’re going to find — and that’s by design. The goal is to offer a unique shopping experience, in which the process feels more like a treasure hunt than a chore. It’s a strategy that even Amazon has a hard time replicating, and is part of the reason both companies aren’t nearly as vulnerable to Amazon’s disruptive forces as more traditional retailers are. It’s an approach based on excitement and urgency. What’s in stores today, maybe gone tomorrow — and this prompts consumers to buy sooner rather than later.

Across the country, TJX Companies and Ross Stores are expanding. Currently, TJX Companies has 4,519 locations across its brands, and it added 100 new stores in the third quarter. Ross Stores currently operates 1,550 locations with plans to have 2,400 physical stores over time. In September and October, Ross stores added 42 new locations.

Continued strong performance

Both TJX Companies and Ross Stores are growing earnings-per-share, gross profits, and comparables, and are coming off several quarters of strong performance.

TJX Companies increased EPS to $0.68 in the third quarter, which is a strong 11.5% year-over-year bump. Ross Stores increased EPS to $1.03, a jump of 13.2% over that same time period. On a full-year basis, TJX Companies grew EPS at a 20.3% pace, while Ross Stores increased EPS by 20%. What’s more, the future of both companies’ EPS growth looks bright.

In the third quarter, TJX Companies increased gross profit by 5.9% year over year. During that same time frame, Ross Stores’ gross profit increased by 8%. On an annual basis, TJX Companies’ gross profits grew by 7.52% while Ross Store’s gross profits expanded 4.04%.

In addition to increasing earnings and swelling gross profits, comparables for TJX Companies grew 4% in the third quarter and increased 5% at Ross Stores. In the fourth quarter of 2018 — a time period that encompasses last year’s holiday season — Ross Store’s comparables increased 5%. In TJX Companies’ history — dating back to 1987 — comparable store sales have only declined once.

With all of that under consideration, the future for TJX Companies and Ross Stores looks promising. Both are expanding operations, growing sales, and boosting earnings-per-share. As such, these discount retailers look like buys, both in this holiday season and beyond.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Christopher Competiello has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.

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