US retail and food service sales increased 1.9% in September from August and grew 5.4% year-on-year, according to the US Department of Commerce data. The temporary store closures during the coronavirus pandemic-induced lockdowns caused unprecedented damage to retailers, which were partially offset by a surge in e-commerce sales.
With the reopening of stores, several retailers are experiencing gradual improvement though business continues to be mostly below pre-pandemic levels. According to the US Department of Commerce, sales from clothing and clothing accessories stores increased 11% in September month-on-month but were down 12.5% year-on-year. Department store sales, which rose 9.7% in September month-on-month, were down 7.3% year-on-year.
Amid a challenging business environment, we will use the TipRanks Stock Comparison tool to place TJX Companies and Macy’s alongside each other and see which stock offers a better investment opportunity.
TJX Companies (TJX)
After 24 consecutive years of comparable sales growth, leading off-price retailer TJX might report lower comps in the current fiscal year due to the impact of pandemic-led store closures. Prior to the pandemic, TJX grew consistently due to its off-price business model, which helped the retailer offer merchandise at 20% to 60% discount compared to regular prices at which comparable items are sold by other department stores and retailers.
During the lockdown period earlier this year, TJX not only closed its stores but also its four e-commerce sites. The move came even as several retailers experienced a huge spike in their e-commerce sales. However, in general, e-commerce has not been a major focus area for off-price retailers. Rival Ross Stores does not have an e-commerce channel and for TJX, e-commerce accounted for about 2% of its FY20 (ended Feb. 1, 2020) sales.
TJX has now reopened its four e-commerce sites and almost all of its retail stores by the end of June. The company’s 2Q FY21 (ended Aug. 1) sales fell 32% Y/Y to $6.7 billion as stores were closed for about one-third of the quarter. However, this was an improvement compared to the 52% sales decline in 1Q FY21. TJX slipped to a loss of $0.18 per share in 2Q FY21 compared to an EPS of $0.62 in 2Q FY20.
In the second quarter, TJX experienced strong sales at its HomeGoods and HomeSense chains, as well as at its home categories and at other chains. Demand for home merchandise has been strong since the pandemic as people have been spending more time at their homes to curb the spread of the virus.
TJX operates over 4,500 stores in the US, Europe, Canada and Australia under the T.J. Maxx, Marshalls, HomeGoods, Sierra, HomeSense, Winners and T.K. Maxx brands. While several retailers have been closing stores, TJX opened 12 stores in fiscal 2Q. Prior to COVID-19, the company had stated that it sees the opportunity to operate 6,100 stores over the long-term. (See TJX stock analysis on TipRanks)
Last month, J.P. Morgan analyst Matthew Boss raised his price target for TJX stock to $66 from $63 and reiterated a Buy rating following his interaction with management. The analyst’s recent fieldwork indicates improvement in September sales at the retailer’s Marmaxx and HomeGoods chains. Boss now expects better numbers than his 3Q comparable sales estimate of a 10% decline.
The rest of the Street has a bullish outlook on TJX. The Strong Buy analyst consensus is based on 11 Buys versus 1 Hold and no Sells. Shares have declined 7.2% year-to-date, with the average analyst price target of $64.08 indicating upside potential of 13.1% over the coming months.
Department store chain Macy’s has been struggling to thrive in recent years due to weak traffic at its malls and intense competition from online players and off-price retailers. But the pandemic added to its woes and has been a major drag on the company’s efforts to improve its sales.
Macy’s 2Q FY20 (ended Aug. 1) sales sank 35.8% to $3.56 billion and comparable sales fell 35.1%, reflecting the impact of store closures. By the end of fiscal 2Q, the company reopened almost all its stores. Adjusted loss per share was $0.81 in 2Q FY20 compared to adjusted EPS of $0.28 in 2Q FY19. Macy’s was able to deliver better-than-feared results as digital sales grew 53% and represented 54% of overall comparable sales backed by strong traffic on both macys.com and bloomingdales.com.
Looking ahead though, the retail chain expects digital sales growth to moderate as stores have reopened. To boost its online sales, the company has recently partnered with DoorDash to offer same-day delivery services from 500 Macy’s malls nationwide on orders placed through its website and via its mobile app.
Overall, Macy’s expects 3Q and 4Q FY20 comparable sales to decline in the low-to-mid 20s range. To withstand the current crisis, the company is drastically cutting down costs and has reduced its headcount by 3,900. The company also announced a plan to close 125 stores.
Meanwhile, Macy’s sees an opportunity to open new freestanding off-price Backstage stores, test the Backstage concept online and continue the expansion of the Bloomingdale’s The Outlet brand. It also intends to open several off-mall smaller format Macy’s brand stores and test the off-mall smaller format for Bloomingdale’s.
Following the 2Q results, Goldman Sachs analyst Alexandra Walvis reiterated a Sell rating on the stock with a price target of $4. While the analyst acknowledged the company’s gross margin improvement, cost management and its digital sales potential, she cautioned “Sales trends in stores remain under significant pressure and the company’s shift to digital is set to weigh on gross margins and drive deleverage in stores.”
The analyst added, “We anticipate a challenging holiday season given traffic constraints and elevated cost of shipping, and believe margins and returns are likely to remain under pressure for several years as these secular pressures outweigh strategic initiatives.” (See M stock analysis on TipRanks)
Overall, the Street has a bearish outlook on the stock. The Strong Sell analyst consensus is based on 4 Sells and 1 Hold. With shares already down about 64% so far this year, the average analyst price target of $5.50 implies another 10.7% downside potential is lying ahead.
In consideration of rising unemployment figures and a challenging macroeconomic environment, consumers are likely to be on the hunt for bargains, thus benefitting off-price retailers like TJX. The discount retailer is better positioned to be back on the growth track than Macy’s when the pandemic abates. Based on the Street’s consensus and upside potential in the stock, TJX appears to be a more favorable stock pick compared to Macy’s.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment