The TJX Companies, Inc. (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST) are two stocks that Jim Cramer regularly discusses together. The former’s shares are on a downward spiral since early August and have bled 14%. For the latter, the stock is up by more than 20% year-to-date. In his morning appearance on October 2nd, Cramer revealed that he had been buying TJX and continued to praise Ross Stores:
“Well. . .okay I just bought TJX for the trust and I didn’t want to hype my position. I just bought it. Literally, I have some but I just bought more. You know, I’m not trying to talk my book, but if you look at the stock I mean it’s been hideous. Last quarter was just, I’m going to use a word for that last quarter, bad. It was bad. . .But the problem with TJX was just that it was, it was actual, the TJMax, it was a disaster. Home goods was very good. And they said on the conference call, Mr. Herrman said, that look things have picked up already. And no one believes. But I’m believing in Herrman I think he’s money good. So yes, we’ve been buying TJX.
“I mean it’s just funny how, fickle the market is. Here they put good number, good number, good number, they put bad number and suddenly they’re a pariah. Now Ross Stores is the one to buy. Now Ross Stores did get a terrific CEO that we know from Boot Barn. Jim Conroy. . .take a look at the Ross Stores chart, now that’s Conroy just crushing TJ. I believe TJ’s going to have a comeback. And it’s not a Nike situation, they had the wrong merchandise particularly at the counter. And they have the ability to pivot.”
Yet, while Cramer’s buying TJX for the trust, the stock didn’t make it on our list of 10 Blue Chip Stocks Jim Cramer is Crazy About.
Starting from The TJX Companies, Inc., the firm’s comparable same store sales were 4% in the second quarter, but broader weakness persisted as its Marmaxx business’ same store sales lagged broader growth and grew by 1%. Marmaxx is TJX’s off price division that combines the T.J. Maxx and Marshalls businesses and it contributes more than 60% to TJX’s revenue. As a result, a slowdown in the business drags the business and potentially explains why TJX’s forward P/E multiple of 24.94 marks a slowdown from the 30.30 earlier in the fiscal year.
However and as Cramer remarked, management outlined that the slowdown in Marmaxx was due to a wrong inventory mix compared to broader structural issues that could take longer to address. To excite the bulls, management raised diluted EPS guidance to $5.31 to $5.36 (previously $5.08 to $5.15) and pretax profit margin to 12.3% to 12.4% (adjusted 12.0% to 12.1%). Yet, at the same time, inventories grew by 7% in the quarter to $7.9 billion and a Morgan Stanley survey covered by The Street suggests that a perception of higher prices was the second biggest reason behind Marmaxx’s sales drop. Consequently, a correct inventory mix and shifting consumer perceptions might be required for a turnaround, with the latter potentially taking longer than a quarter.
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As for Ross Stores, Inc., the firm is operating in a different league when it comes to same store sales growth. During the second quarter, the firm’s comparable same store sales grew by 10% and revenue grew by 13%. The growth was due to higher volume at the firm’s stores stemming from inflation-weary consumers. Ross Stores benefits from being a discount and off price retailer, and the firm has leveraged the current environment by buying inventory. In the second quarter, inventory grew by 18% to create headwind risks if inflation were to drop and competitors were to step up the heat. The growth coupled with the share price performance means that Ross’s forward P/E multiple of 27.40, which is higher than the historical average, lends weight to the valuation ceiling bearish hypothesis based on execution vulnerabilities.
Looking at hedge funds, they trimmed their positions in both in Q2. According to Insider Monkey’s data, while 83 out of 1,022 funds had disclosed a stake in Ross in Q1, this figure dropped to 71 out of 1,006 funds in Q2. For TJX, the figure dropped to 80 from 83. The bearish concerns appear to be reflected in Ross’s short interest as a percentage of float as well. 3.46% of the shares are short compared to TJX’s 1.68%.
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