Two of the best “buy-and-forget” stocks of the last decade are The TJX Companies, Inc. (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST). These companies compete in the lucrative off-price retail sector and have been known for generating extremely stable cash flows for years.
TJX is a leading off-price retailer of apparel, home fashions, and other merchandise. It sells a variety of branded goods, opportunistically buying inventory from a network of over 21,000 vendors worldwide.
The company targets undercutting conventional retailers' regular prices by 20%-60%, capitalizing on a flexible merchandising network, relatively low-frills stores, and a treasure-hunt shopping experience to drive margins and inventory turnover. TJX operated 4,572 stores at the end of fiscal 2021 under the T.J. Maxx, T.K. Maxx, Marshalls, HomeGoods, Winners, Homesense, Winners, and Sierra banners.
The company currently has a market cap of about $85 billion. Since 2011, TJX has generated a return of about 370%.
Ross Stores is also a leading American off-price apparel and home fashion retailer. It operates over 1,850 stores (at the end of fiscal 2020) across the Ross Dress for Less and dd's Discounts banners.
Ross offers a variety of name-brand products and targets undercutting conventional retailers' regular prices by 20%-70%. Although the shopping experience is also focused on a treasure-hunt experience, unlike TJX, all sales are made in the United States.
ROST is half TJX’s size and has a market cap of around $40 billion. However, ROST has slightly outpaced its main competitor and returned about 400% since 2011. Both of the stocks have handily beat the S&P 500, which only grew 277% over the last decade.
Simply put, investors that bought either one of these stocks have done very well in the last 10 years.
But the question is, which off-price retailer is the better buy today?
To gain an understanding about which is the better company, we first need to dive into the sector itself.
Everyone wants a great deal. And so, the business model for off-price retailers is simple:
Buy large quantities of overproduced or unsold goods at heavily discounted prices (this generally involves popular brands purchased directly from owners, distributors, and manufacturers). Then pass those savings onto consumers by selling them at discounted prices compared with traditional retail stores.
What makes off-price retailing unique is its “treasure hunt” shopping experience. Customers know that the items they see in the store one day may very likely be gone the next day, and so the “here today, gone tomorrow” aspect is what drives consumer motivation at these stores.
In this sector, anything is fair game.
Off-price retailers sell clothing, accessories, personal hygiene products, cosmetics, food, sports equipment, garden supplies, furniture, electronics, appliances… you name it. Essentially, their role is to give excess inventory a new lease on life—which makes them critical to an efficient and well-functioning retail sector.
Of course, that explains the demand side. But how are they able to get a steady supply of inventory?
Because demand forecasting is an inexact science, there will always be excess inventory produced somewhere along the supply chain. According to legendary value investor Mohnish Pabrai, it’s why this business model produces a beautiful stream of cash flows that can be counted on in most market conditions:
“Everything that is living and breathing today will die, right, and all kinds of manufacturers will always have issues with too much inventory or unwanted inventory. And so there’s this need to recycle and find those goods a new home. So there's a recurring revenue to these services which is beautiful. These things actually make models like TJ Maxx really, really good models.
These are great businesses because these mismatched inventories need a home. Retail is a terrible business, but within retail, recycling is a great business.”
Now let’s compare the quarterly results for both TJX and ROST.
According to TJX’s financials for the 3 months ended October 30, 2021, the company had a really strong quarter, after it generated $12.5 billion in revenue, up nearly 24% from $10.1 billion from the previous year. Net income was $1.02 billion, up 18% from $866.6 million from the previous year, and diluted earnings per share were $.84, a 24% increase compared to earnings per share of $0.68 the previous year.
The company also returned $1.1 billion to shareholders in the third quarter through share repurchases and dividends, and announced an increase in the range for expected full year share repurchases by $500 million to $1.75 billion to $2.0 billion.
However, ROST also had a very strong quarter as well. For the 3 months ended October 30, 2021, sales rose 19% to $4.6 billion, with comparable store sales up a strong 14%.The company reported earnings per share of $1.09 on net income of $385 million. This compares to $0.37 per share on net income of $131.2 million the previous year.
During the third quarter and first nine months of fiscal 2021, ROST repurchased 2.1 million and 3.5 million shares of common stock, respectively, for an aggregate cost of $241 million in the quarter and $417 million year-to-date. The company also remains on track to buy back a total of $650 million in common stock during fiscal 2021.
Based on the incredible results from both companies, it’s tough to pick a winner. However, digging deeper into their financials does reveal a stock that is slightly better than the other. That company is Ross Stores.
When comparing TJX and ROST, both companies are similar in financial strength, profitability, and valuation. However, because the companies are so similar, we need to analyze several more financial metrics to determine which stock is the better buy.
For one, ROST is growing faster. In terms of growth rates per share over the last 10 years, revenues (9.7%), book value (13.4%), and free cash flow (21.6%) for ROST have far outpaced TJX. And in the last 10 years, ROST also averaged better net margins of 8.08% (compared to TJX’s 6.7%), and better free cash flow margins of 8.45% (compared to TJX’s 7.29%).
The stock is also cheaper. ROST has a current P/E ratio of 29.92, a P/B ratio of 10.28, and a PFCF ratio of 13.3. Meanwhile, TJX’s P/E ratio is 34.48, it has a P/B ratio of 13.34, and its PFCF ratio is 18.75.
Simply put, both companies are excellent stocks boasting wide moats and bright futures ahead. In fact, investors are essentially splitting hairs when it comes to comparing two of the very best off-price retailers in the game.
However, based on the figures above, there is a winner when these companies go head-to-head...