The TJX Companies, Inc. (TJX), Ross Stores, Inc. (ROST): Buy This Discount Retailer

I do not think Amazon will feel that pressure to turn around earnings yet – management is strengthening the Amazon universe with offerings like Amazon Prime and Amazon Mom – but, long term, margins will have to increase. As retailers become increasingly savvy to Amazon’s practices, they will also make Amazon’s continued expansion more difficult.

E-commerce

TJX doesn’t have an e-commerce website, although there are plans to unveil one by the end of FY 2014. TJX recently acquired Sierra Trading Post, a small off-price retailer with an e-commerce store, for $200 million in an all-cash deal. Management will leverage Sierra Trading Post’s knowledge base to instruct TJX’s expansion online. While this will bring TJX into the same arena as Amazon (online shopping), I still believe that there will not be significant competition due to the different product lines offered.

The major competition

By many metrics, Ross would seem better than TJX. For the trailing-12 months, Ross reported a better operating margin (13.2% compared to TJX’s 12.0%) and a lower P/E ratio (18.2 versus 20.0 for TJX). Ross sports slightly faster EPS growth (15% growth for the most recent quarter compared to 13% at TJX) and a lower debt-to-equity ratio (0.1 compared to 0.3). They pay roughly equivalent dividends (yielding about 1% each).

However, it’s the disruptive innovation that will make a difference here. Neither Ross Stores, Inc. (NASDAQ:ROST) nor TJX has an e-commerce website, but TJX has plans to implement one (unlike Ross, which is examining the idea but has made no commitments). TJX is increasing market share internationally, while Ross Stores, Inc. (NASDAQ:ROST) remains US-centric. TJX’s increasing geographic dispersion will enable the chain to better weather an economic downturn in one country by bolstering sales in others – Ross Stores, Inc. (NASDAQ:ROST) is wholly dependent on the United States.

Foolish conclusion

TJX, like Ross Stores, Inc. (NASDAQ:ROST), has a great business model, which works well in good and bad economic times. Unlike Ross Stores, Inc. (NASDAQ:ROST), management is not resting on its laurels but is rather expanding and changing the model to make it more accessible at home and abroad. With Amazon only a distant threat at most, TJX is a great long-term investment for your portfolio.

Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Michael is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Buy This Discount Retailer originally appeared on Fool.com is written by Michael Douglass.

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