Ross Stores, Inc. (ROST), The TJX Companies, Inc. (TJX): Why This Retailer Is Well Placed for Growth

While reviewing Ross Stores, Inc. (NASDAQ:ROST)’s recent results I had an eerie sense of déjà vu. It’s not just that it operates in the same sector as its chief rival The TJX Companies, Inc. (NYSE:TJX), but it seems to have the same approach to understating company guidance. Ross has underperformed its rival, but I think this is potentially a good buying opportunity in a sector set to do well in 2013.

Ross Stores Gives Good Results

Rather like its rival, Ross reported a good Christmas and gave its usual conservative guidance In addition it is (like TJX) doing away with giving monthly sales results. Both companies are investing for growth, but TJX is making more of a play on expanding in Europe; in fact I’ve discussed this issue at more length in this article.

Meanwhile Ross is focused on expanding stores in existing markets and building out two new distribution centers in the next two years while relocating its corporate headquarters. In addition, there are 60 new Ross Stores, Inc. (NASDAQ:ROST) stores planned for 2013. As such, its capital expenditures are forecast to rise $670 million in 2013 from $424 last year. A busy year!

The chartists among you will note that Ross has underperformed The TJX Companies, Inc. (NYSE:TJX) over the last six months, and this is partly a consequence of worse than expected performance in its home goods lines. TJX has been performing well in this category, and other home goods stores have been strong so I think this is probably an issue of Ross’ execution.

Elsewhere Ross Stores, Inc. (NASDAQ:ROST) was not burdened with the need to aggressively discount or promote during the Christmas season. This is a sure sign that the sector has pricing power because overall consumer spending has been tepid.

Why the Off-Price Retailers Can Continue to Win Out

The retail market is competitive at the best of times, and with an ongoing anemic recovery the sector has seen some vicious changes in market share. The bifurcation in retail, with the high end and bottom end doing relatively well while the mid-market suffers, is now firmly established in the marketplace.

The victims have been the likes of the department store J.C. Penney Company, Inc. (NYSE:JCP), whose habit of missing estimates and downgrading guidance seems to perfectly represent the difficulties in the mid-market. Moreover, its restructuring plan involves focusing on areas like footwear. In other words it can’t offer a ‘trading down’ option without eroding its values.