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Discount retailers are poised to outperform, with Ross Stores leading the way, according to Credit Suisse. The firm has just raised its stock to number one in this retail sector. While many retailers are grappling with overstocking, high inflation and potential recession, earnings reports from both Ross Stores and TJX Companies show the resilience of the companies. Non-price space benefits from excess stock in the system. Retailers buy extra items cheaply to sell. At the same time, cash-strapped consumers tend to turn to these brands to find great deals and increase their budget during times of a weak economy. Other discount retailers include Nordstrom Rack and Macy’s Backstage. On Thursday, Ross Stores reported fiscal third-quarter earnings per share of $1.00 compared to a StreetAccount estimate of 81 cents. Revenue was $4.57 billion versus $4.37 billion expected. TJX’s third-quarter earnings per share were 86 cents after tax, compared to StreetAccount’s estimate of 80 cents, but revenue was lower than expected. Credit Suisse expects Ross Stores to have the most upside potential, including the fact that its three-year acceleration in same-store sales growth in the third quarter was better than Marmaxx’s TJX division. Ross Store’s 2022 EBIT margin (or operating income over operating sales) was nearly 300 basis points below 2019 levels compared to TJX’s 70 basis points, analyst Michael Binetti wrote in a note Thursday. “In our opinion, the ROST now offers more torque/leverage for above-the-table performance and is moving into our top pick at a reduced price,” Binetti said. He raised his share price target to $123 from $99, implying 25 percent upside from Thursday’s close, and reaffirmed his overweight rating. The increase was based on calendar year 2024 EPS compared to 2023 EPS. “With a ~20x ROST target (compared to our TJX target of ~22x our CY24 EPS) and more margin room to return to pre-COVID levels versus TJX, ROST could offer more upside potential today, in our species,” wrote Binetti. Ross Stores shares are down less than 4% year-to-date, while shares of TJX, the parent company of TJ Maxx, Marshalls and HomeGoods, are up almost 4% over the same period. TJX reached a 52-week high of $79.99 in Friday trading. — Michael Bloom of CNBC provided the coverage.
Credit: www.cnbc.com /