Retail Stocks, Sales Still Solid
The economic recovery remains muted, but apparently nobody told the retail sector.
The S&P 1500 Retail Sector Index has risen 18% over the last three months and 15% year-to-date, handily outperforming the broader S&P 1500 Index.
While retail sales aren’t jumping, neither are they slumping. Year-over-year growth of 4.0% to 5.5% over the last seven months is roughly in line with the average of 4.5% since 1993 — and a marked improvement from the ugly numbers seen in 2009.
As the table below illustrates, most industry groups within the retail sector have outperformed the S&P 1500 Index’s 6% gain so far in 2010. However, while discounters such as Ross Stores ($56; ROST) and TJX ($45; TJX) have outperformed the market by a wide margin so far this year, they have lagged in recent months.
This underperformance could stem from fears that discounters have less exposure to the economic recovery. However, both Ross and TJX have delivered impressive growth over the last year (sales up at least 11%, per-share profits at least 48%) and are expected to manage profit growth of about 20% in fiscal 2011 ending January. Consensus estimates for the companies project profit growth of 9% or 10% in fiscal 2012, numbers that sound unduly conservative assuming the economic recovery does not falter.
The two discounters reported modest growth in September. TJX posted a 1% gain in same-store sales for the month, matching the consensus. Ross said same-store sales grew 2%, versus the consensus estimate of 2.1%. The company also raised its October-quarter per-share-profit guidance. But Ross’s new earnings projection reflects favorable trends in profit margin rather than a rosier sales outlook. And Ross declined to increase its targets for the January quarter, suggesting concerns about a holiday environment likely to see a heavy dose of promotional activity to lure skittish shoppers.
Both Ross and TJX trade at a discount to their five-year average P/E ratios and offer excellent total-return potential in the year ahead. Ross is a Focus List Buy and a Long-Term Buy. TJX is a Buy and a Long-Term Buy.