Discount Retail at a Deep Discount

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

The biggest benefactors of the recent struggles of J.C. Penney should be the off-price retailers, as these retailers have snatched up the majority of Penney's lost market share. Let's take a look at them. 

Kohl's (NYSE: KSS) is one of the major discount department stores, operating some 1,127 stores in 49 states. Kohl's and its peers, Ross Stores (NASDAQ: ROST) and The TJX Companies (NYSE: TJX), have the competitive advantage of offering a wide array of brand name and fashion merchandise at prices that are generally 20% to 60% below other major retailers. 

Industry tailwinds

The "Baby Boomer" population drove economic growth via increased home buying and increased discretionary spending, yet, driving future growth will be the Millennials and Generation X.

This shift will be a big positive for retailers, as the shopping trends of these generations are likely to benefit off-price retailers the most. These two generations have shopping habits that tend to favor off-price shopping opportunities. What's more is that the two generations combined are nearly twice the size of the Baby Boomer generation.

Source: U.S. Census Bureau 

With 72.5 million members of Generation Y and 49 million members of Generation X, the current and future retail shoppers will certainly have an impact on sales of certain stores. Generation X has been shown to buy more clothing than previous generations. Generation Y shoppers strongly support discount department stores, as indicated by a report from Urban Land Institute. 

Best bet 

Kohl's is trading at 12.6 times earnings, a steep discount to the industry average and near the bottom of its five year range. The retailer's five year range has been between 9.9 times and 20.2 times earnings.

Last quarter, comp sales were up year over year, but way behind the company's guidance of 3% to 4%. This was due to a weak holiday season and unfavorable weather conditions. However, January sales were impressive as the company was able to clear out seasonal merchandise. 

At the end of last quarter, Kohl's had 1,146 stores across 49 states, up from 1,127 a year ago. Concurrently, Kohl's declared a 9% hike in dividend to $0.35 per share over its previous dividend. 

The comps

Ross Stores is another major off-price retailer, with 1,125 stores, of which 1,037 were Ross Dress for Less in 29 states, and 88 were dd’s DISCOUNTS stores in seven states. 

Ross' big initiatives of late include operating stores with lean inventories and catering local stores to market demands. Both should help with lower future markdowns. Ross managed to enter fiscal 2013 with average inventories down 3% from 2012, and plans to target another low-single digit decline in 2014.

Ross posted 1Q EPS of $1.07, versus $0.93 for the same period last year, on the back of 3% higher same store sales and 8% higher total sales. As far as store count is concerned, Ross plans to open 60 Ross Dress for Less stores and 20 dd's DISCOUNTS stores this year. 

TJX operates the T.J. Maxx, Marshalls, and HomeGoods stores. Analysts expect revenue to be up 4% in fiscal 2014 on the back of 150 new store openings. TJX prides itself on opportunistically purchasing inventory, allowing it to react quickly to the market, and limit markdown risk. 

TJX should also be able to leverage its recent purchase of off-price retailer Sierra Trading Post. TJX is also seeing solid performance in Europe and North America, thanks to the popularity of TJX's Homegoods brand in those regions. 

Sales have grown in the European region over the last two years from 11% in fiscal 2011 to 13% in fiscal 2012. The retailer is also planning to increase its store count to 3,200 by fiscal 2014, with plans to expand its Homegoods stores to 825 from 750 stores. 

Bottom line

Kohl's has the best dividend yield…

…And is the cheapest discount retailer. 

All in all, while Ross and TJX will both be big benefactors of the change in consumer shopping preferences, Kohl's is currently offering investors the best value for their buck, trading at a discount to the industry and offering investors a solid dividend.

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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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