Specialty Retail's Best Kept Secret

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The apparel industry should be just one of the benefactors of a rebounding economy. I believe that "value priced" retailers could be the best-in-industry performers given their advantages, including their attractive discount pricing and ability to quickly move in and out of product categories based on customer demand. 
There has also been a reduction in take home pay as a result of the payroll tax holiday expiration, which should play a role in how consumers shop, thereby, leading consumers to continue looking for value price apparel. Two of the top companies operating in this specialty retail segment are Ross Stores (NASDAQ: ROST) and The TJX Companies (NYSE: TJX)
Ross operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less and dd's DISCOUNTS. Ross posted 2% higher March same-store sales and 6% higher total sales on a year over year basis, while also reiterating its forecast of a 5% to 6% increase in April same-store sales. Meanwhile, Ross plans to open 60 Ross Dress for Less and 20 dd's DISCOUNTS stores in 2012. 
Ross has also been seeing solid performance in its West Coast operations given favorable weather. This includes California, the Southwest and Pacific Northwest areas where over 60% of its stores are located.
At the end of 2012, there were 30 hedge funds owning Ross, which was an increase of 7% from the number of hedge fund owners at the end of the third quarter. Most notably, Ross' top hedge fund owner by market value was billionaire Jim Simons' of Renaissance Technologies (check out Simons' cheap picks).
TJX is one of Ross' top off-price retail competitors. TJX operates T.J. Maxx, Marshalls and HomeGoods, and various other branded stores in Canada and Europe. Speaking to the continued tailwinds of the industry, TJX posted 5% higher total sales in March on a year over year basis.
What's more is that TJX Companies has been seeing impressive increases in its comparable store sales every month for a year. The retailer also plans to continue expansion efforts, planning to open some 150 net new stores this year, which is an increase in selling square footage of around 5%.
Unlike the positive hedge fund sentiment seen over at Ross, hedge funds turned negative on TJX. Going into 2013 there were a total of 37 hedge funds long the stock, which was a 10% decrease from the third quarter (check out which hedge funds were dumping TJX).
Other comps

Macy's (NYSE: M) is the higher-end retailer operating two brands, Macy's and Bloomingdale's. Macy's has held up nicely despite a struggling economy given the fact that high-end customers have been less impacted. The retailer managed to post 4Q EPS of $1.83, compared to $1.74 for the same period last year, on the back of 3.9% higher same-store sales. As well, Macy's is expecting this year (fiscal 2014) same store sales growth of 3.5%. 
At the end of 2012, Macy's had some $1.5 billion of share repurchase authorization remaining, where Macy's could use its growing cash flow to buy back more shares. Net cash flow from operations came in at $2.26 billion in 2012, compared to $2.09 billion for 2011. 
J.C. Penney (NYSE: JCP) is the struggling turnaround story in the retail sector. This includes its poor fourth quarter performance, failing to meet expectations and reporting a fifth consecutive quarter of sluggish results. Last quarter, the retailer posted a quarterly loss of $1.95 per share compared with earnings of $0.21 in the year-ago quarter. Meanwhile, quarterly sales of $3.88 billion were down over 28% from the prior-year quarter and comp-store sales were down 31%.
The story really has been dismal for Penney, with traffic declining 11% in the first quarter, 12% in both second and third quarters and 17% in the fourth quarter of fiscal 2012. Analysts are also not encouraged by its future prospects, with expectations for long-term (5-year) EPS to decline by an annualized 27%.
Billionaire Bill Ackman of Pershing Square Capital continued to be the hedge fund with the largest position going into 2013, owning some 39 million shares, which made up 8.4% of his 13F portfolio (check out Ackman's top stock picks). 

By the numbers

Although the outlook for J.C. Penney is bleak, there are industry players that could be solid long-term investments. Ross is reasonably priced in the context of other retailers and competitor TJX:
  Ross Stores
TJX Companies
J.C. Penney Macy's
Forward P/E 14
n/a 10
What's more is that the "off-price" retailers (Ross and TJX) offer investors a very impressive ROI:
  Ross Stores
TJX Companies
J.C. Penney Macy's
Return on investment 41% 41% n/a 9.50%
So what sets Ross above TJX? Well Ross has a better balance sheet (lower LT-debt to equity) and is also collecting its cash quicker (higher receivables turnover):
  Ross Stores
TJX Companies
J.C. Penney Macy's
Long-term debt to equity 8.5% 21% 94% 115%
  Ross Stores
TJX Companies
Receivables turnover 185 times 139 times

Don't be fooled

Ross is positioned in one of the fastest growing areas in the industry, off-price retail. This industry should continue to perform well despite a rebounding economy, and I believe Ross is best positioned with its growth plans and better balance sheet. 

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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