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TJX vs. Burlington: Which Off-Price Retailer is a Better Pick Before Earnings?
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TJX vs. Burlington: Which Off-Price Retailer is a Better Pick Before Earnings?

The earnings season for department stores and off-price retailers is set to  move to the forefront this week. However, the overall retail industry has been facing multiple macro headwinds including a tight labor market, higher shipping costs, and constraints on inventory supply.

Amid this scenario, Guggenheim analyst Robert Drbul continues to believe that, “Consumers favor the treasure hunt in stores that off-price offers.” The analyst further pointed out that even if traffic to retail stores slowed down in Q4, more specifically, in the months of December and January, Drbul anticipates that this trend is likely to reverse once fear of the Omicron variant dissipates.

Is the analyst correct in his belief? Let us compare two popular off-price retailers in this space, The TJX Companies and Burlington Stores, using the TipRanks stock comparison tool. We will also look at what Wall Street analysts, besides Drbul, are saying about these stocks.

The TJX Companies (NYSE: TJX)

The TJX Companies is set to announce its Q4 and FY22 results on February 23. TJX is an off-price retailer that offers products in the apparel and home fashion category. It operates through brick-and-mortar stores and four distinctive, branded e-commerce websites. Currently, the company has more than 4,500 stores in nine countries and across three continents.

TJX’s prices on its products and merchandise are generally 20% to 60% below full-price retailers. The company operates through four main segments. These include: The Marmaxx segment and the HomeGoods segment, both operating out of the United States, and the TJX Canada and the TJX International segment.

Guggenheim analyst Robert Drbul views TJX, “As the strongest company and operator (management, financially, and from a buying organization standpoint) among our off-price coverage.” Let us look at some of the analyst’s reasons for this rationale.

The analyst perceives TJX to benefit from the uptick in sales in the Home and Active category. Indeed, the company’s management stated on its Q3 earnings call that its home category was witnessing an extremely bullish home trend, while active-inspired apparel was also seeing an uptick in sales.

Drbul is also positive about the company’s “budding online initiatives” as TJX is focused on capturing customers who are online. To lure such customers, TJX intends to allocate more than 50% of its marketing spend to digital advertising.

Moreover, the analyst believes that TJX has ample opportunities this year to raise its total ticket size on certain goods, and this opportunity, combined with the possibility of lower freight costs, “Provides us with optimism on TJX’s abilities to return to double-digit margins in the coming quarters.”

TJX’s management stated on its Q3 earnings call that in the third quarter, the overall average ticket size was flat, but was improving for Q4.

The company’s management had added on the call that to counter supply chain delays, the company was buying merchandise and products from its vendors with longer lead times.

As a result, Ernie Herrman, CEO and President of The TJX Companies, commented, “The company is extremely well-positioned for the holiday selling season, and overall open-only comp store sales to start the fourth quarter are up mid-teens.”

As a result, Drbul is bullish on TJX with a Buy rating and a price target of $85 (28.5% upside) on the stock.

Other analysts are also upbeat about this stock in the off-price retail space, and have a Strong Buy consensus rating. This rating is based on 10 Buys and 1 Hold. The average TJX stock prediction was $85.73, which implies upside potential of approximately 29.6% to current levels for this stock.

Burlington Stores (NYSE: BURL)

Burlington Stores is another off-price retailer with its headquarters in New Jersey. At the end of Q3, the off-price retailer had 832 stores in forty-five states in the U.S. and Puerto Rico. The company offers an extensive selection of in-season, fashion merchandise that is up to 60% off other retailers’ prices.

This year, the company plans to open 120 new stores, and after 2022, it anticipates opening 100 to 120 net new stores every year.

Burlington is expected to announce its Q4 and FY21 results on March 3. Interestingly, the company’s management stated on its Q3 earnings call that it expected 2022 to be “unpredictable”.

Elaborating further on it, Michael O’Sullivan, Burlington’s CEO, commented that he expects that 2022 will be a year of prolonged inflation and as such, shoppers will most likely be attracted to its off-price merchandise.

Sullivan added that Burlington’s business is 33.3% larger now than in 2019 as its value differentiation versus other retailers has grown. Moreover, he pointed out that leaner inventories at full-price retail stores have resulted in higher realized prices for products.

If this trend continues, Sullivan expects that BURL will, “Have the opportunity to capture additional market share to take up our retail prices.”

This year, at a baseline level, Burlington expects its comparable-store sales to decline by “mid-single-digit” or by 5% based on its current visibility of macroeconomic conditions. With this comparable stores’ sales guidance, it expects “operating margin deleverage of about 150 basis points.”

However, Guggenheim analyst Robert Drbul has projected BURL “To incur 360bps of deleverage (vs 2019) on freight and supply chain expenses for the year.”

For Q4, BURL has projected comparable store sales to grow in the low double-digit percentage range, with freight expenses likely to be high and supply chain constraints likely to continue. As a result, the company anticipates these factors to drag down its operating margin by 250 basis points in Q4.

According to Drbul, he foresees some key tailwinds for BURL over the next year. These include access to consumers to a wide array of quality merchandise, higher store efficiency as the company focuses on the opening of smaller stores, and consumers’ desire for off-price merchandise and a treasure hunt environment.

Furthermore, the analyst believes that the factors that will drive positive growth for BURL this year will be higher sales driven by its larger stores and higher prices that would drive consumers to trade down, resulting in higher top-line growth for BURL. Another key factor could also be the possibility of supply chain constraints likely to ease after the middle of this year.

However, the analyst remained sidelined on the stock with a Hold rating “largely due to the valuation premium of its shares.”

Other analysts on the Street, however, are cautiously optimistic about this stock with a Moderate Buy consensus rating. This rating is based on 14 Buys, 3 Holds, and 1 Sell. At the time of writing, the average BURL stock prediction was $326.59, which implies upside potential of approximately 47.7% to current levels for this stock.

Bottom Line

Analysts are bullish about TJX but are cautiously optimistic about BURL. However, based on the upside potential over the next 12 months, BURL seems to be a better Buy.

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