3 off-price retailers that look like bargains in the stock market wreckage

TJ Maxx’s parent company, TJX, reported earnings that beat Wall Street expectations.

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Two of the top three off-price retailers released quarterly results this week, with starkly different results. This leaves

Burlington Stores
,

which reports May 26. Three key factors could determine Burlington’s stock reaction.

In an otherwise brutal week for retail, TJ Maxx’s parent company, TJX (ticker: TJX), posted a beating in profits, despite light selling. It was a welcome turnaround from other big players, whose higher revenues haven’t trickled down to the bottom line due to margin-squeezing supply chain and transportation costs.

Ross Stores

stock (ROST) shed more than 20% on Friday — its worst day since 1993 — as earnings, revenue, same-store sales and guidance all came in well below expectations.

“TJX was the exception in that it is currently protecting its margins, even at the expense of sales,” said Simeon Siegel, analyst at BMO Capital Markets.

On the other hand,

walmart

(WMT) and

Target

(TGT) reported higher-than-expected sales, but lower profits and margins. The pair noted that consumers, especially at the lower end of the income scale, are pulling out of discretionary categories as the cost of essentials rises.

Still, that’s not the whole story, and TJX wasn’t the only bright spot, as the upbeat results of

Foot locker

(FL) and

Outdoor bridge workers

(DECK) proved on Friday. While some less affluent shoppers are undeniably feeling pinched, others have shifted their consumption to pandemic-delayed experiences, or are simply taking a break from stocking up on goods.

“I don’t know if the slowdown is a decline in the ability to spend; it feels more like a break considering how people have already spent,” says Siegel.

This is where the opportunity for off-price retailing lies. If these companies can capitalize on their reputation for value at a time when consumers are selectively spending on non-essentials – think dressy clothes rather than the basics that everyone has already bought – and offer attractive products, they can take market share despite a difficult context for the retail trade.

That means several metrics beyond the top and bottom results will be the focus when Burlington (BURL), which closed Friday at $150.71, reports.

The first concerns margins, whether Burlington was able to protect them like TJX or were hurt by high costs that soared in the quarter. Burlington has been somewhat optimistic about it, and Joe Van Cavage, vice president and portfolio manager at Intrepid Capital Funds, said he wouldn’t be surprised if the company offered “a little better on gross margins.” , although the situation has evolved rapidly since retailers provided guidance during the previous earnings season.

The second thing investors will look at is inventory. In their rush to make sure they had enough product to sell, companies like Target over-ordered merchandise at a time when transportation costs were high and consumer spending was changing. By contrast, TJX has proven adept in its ability to “change what’s in its stores based on what consumers are buying,” says Sarah Kanwal, equity analyst at Crestwood Advisors. “No one can do it quite like he can.”

Burlington has seen inventory swings in the past, but if it can show it has successfully threaded the needle this time around, that would go a long way to restoring investor confidence. Indeed, trust will likely be the third deciding factor. If management can strike a less austere tone than its peers or provide a better-than-expected updated outlook, that could allay some investor concerns about the second half of the year.

Ultimately, investors had a meteoric response to retail selling this earnings season amid broader market carnage. This year, Burlington’s stock is down 48%, Ross’s is down 37% and TJX’s is down 24% “When almost any company has to recalibrate their expectations, every earnings becomes a catalyst,” says Siegel. “But that doesn’t mean they won’t be in a good position later on.”

It can be difficult for investors to take a long view with so much red clouding their view. They would be wise to do so.

Write to Teresa Rivas at [email protected]

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