Global investors eye US retailers Ross and TJX

By Roger Montgomery

Published on March 30, 2016

This week Money asks Roger Montgomery for a hot stock pick - TJX Companies (NYSE:TJX) and Ross Stores (NASDAQ:ROST)

TJX Key statistics:

29/03/16 closing share price: $78.62USD 52 week high: $78.67USD

Ross Key statistics:

29/03/16 closing share price: $58.09USD 52 week high: $59.68USD

The life of an American bricks-and-mortar retailer has been tough going for some time now. But in a niche corner of the market, off-price retailers TJX Companies and Ross Stores are performing strongly as their unique business model benefits from changes in consumer habits. The shares of both companies look very appealing for savvy global investors.

TJX operates a network of more than 3600 stores and generated over $US30 billion ($40 billion) in sales in the past year. Ross has almost 1500 stores and turns over about US$12 billion annually. The companies make money from buying out-of-season and over-run stocks from fashion labels and traditional retailers, such as the (struggling) department and chain specialty stores, at deeply discounted prices and offering consumers the chance to score great bargains on branded merchandise.

For the past three years TJX has grown sales at an average rate of 6% each year and Ross has similarly grown at 7%pa. For both companies the growth has been driven by a strong balance of opening new stores and turning over more merchandise at existing stores.

TJX and Ross will continue to roll out new stores in the coming years. While thousands of stores would signal saturation in a small market such as Australia - think that David Jones and Myer have about 100 stores combined, and nationwide retail chains like Harvey Norman and JB Hi-Fi can run 200 to 300 stores - it's just the tip of the iceberg in the US. Taken together the off-price giants still represent less than 1% of almost $5 trillion in annual US retail sales.

Importantly, TJX and Ross have demonstrated that they can translate this top-line growth into strong profitability for shareholders. Operating margins are currently low-teen percentages at both companies. But with limited capital employed, returns on business assets have typically been 60%-plus.