Online and home goods retailers are experiencing a boost from the current health crisis. However, department stores and several other retailers selling apparel and footwear continue to struggle even after the store reopenings following the pandemic-led closures. Store traffic is weak amid a resurgence in Covid-19 cases.
That said, analysts believe that there are certain retailers that will perform well over the long-term despite the current challenges. We will use the TipRanks Stock Comparison tool to stack up Nordstrom against TJX to evaluate the Street’s sentiment and pick the better stock.
Nordstrom (JWN)
Upscale department store chain Nordstrom operates 100 full-line stores in the US and Canada. But, its key growth drivers over the recent years have been its 249 off-price Nordstrom Rack stores and digital channels. Similar to other department store peers, Nordstrom has also been struggling to thrive due to intense competition from online and discount retailers.
Covid-19 has further added to its woes as consumer spending shifted to food and home merchandise from apparel and other non-essentials. Following a 52% revenue slump in 2Q, the company did recover sequentially in 3Q with the reopening of stores. However, 3Q revenue was still down about 16% year-over-year to $3.1 billion. Meanwhile, the company’s 3Q EPS came ahead of expectations although it declined 58% year-over-year to $0.34. (See JWN stock analysis on TipRanks)
In reaction to the better-than-anticipated 3Q earnings, Citi analyst Paul Lejuez bumped up the stock’s price target to $26 from $17 but reiterated a Hold rating as he believes that the retail chain continues to face secular headwinds that will limit its future sales and profit growth.
Like Lejuez, the Street is also sidelined on Nordstrom. The Hold analyst consensus breaks down into 2 Buys, 5 Holds and 2 Sells. The average price target of $22.22 indicates downside potential of about 19% in the 12 months ahead. Shares have already plunged 33.1% so far this year.
Meanwhile, Nordstrom continues to ramp up its omnichannel capabilities given the spike in its e-commerce sales (37% growth in 3Q). Last month, it rolled out a pick-up facility at Nordstrom Rack stores for online orders placed on Nordstrom.com, NordstromRack.com and HauteLook.com. Currently, nearly 350 Nordstrom and Nordstrom Rack stores offer the pickup facility. Also, the Nordstrom Rack stores are now equipped to fulfill online orders.
The company is trying to improve its profitability through efficient cost management. It has generated cost savings of $550 million year-to-date and is tracking ahead of its targeted cost savings of $750 million for the current year.
TJX Companies (TJX)
Leading off-price retailer TJX Companies operates 4,574 stores in the US, Canada, Europe and Australia. In the US alone, the company has 1,272 T.J. Maxx stores, 1,134 Marshalls stores and 821 HomeGoods stores. Leaving the pandemic-led disruption aside, TJX is regarded as of one the consistent performers in the retail space. Its strength lies in its off-price business model, which attracts customers through bargain deals.
The company offers customers 20%-60% discounts on prices at which comparable merchandise is sold by department stores and other specialty retailers. TJX has the ability to offer such substantial discounts as it builds its inventory by taking advantage of order cancellations, manufacturer overruns as well as closeouts from brands, manufacturers and other retailers. (See TJX stock analysis on TipRanks)
Recently, TJX impressed the Street with its 3Q results, which reflected a recovery from the previous quarter. The company’s sales fell 3.2% year-over-year in 3Q, in comparison to a 32% decline in 2Q following the reopening of stores and favorable trends in home, beauty and activewear. A lower tax rate drove a 4.4% rise in 3Q EPS to $0.71.
Following the most recent earnings release, RBC Capital analyst Kate Fitzsimons raised the price target on TJX to $70 from $64 and reiterated a Buy rating. In a research note to investors, the analyst stated that while the rising Covid-19 cases so far in 4Q have added to uncertainty, she is optimistic about the company’s market share opportunities amid accelerating closures and bankruptcies in the industry. Fitzsimons believes that TJX has “significant” top and bottom line tailwinds given the commentary on its “excellent” product availability and improved in-store inventories.
The rest of the Street is in line with Fitzsimons’ bullish outlook on TJX, with a Strong Buy analyst consensus boasting 14 unanimous Buys. The average price target stands at $71.08, implying upside potential of 13.2% from current levels. Shares have advanced 2.9% year-to-date.
Meanwhile, keeping in mind the growing demand for home goods, the company is enhancing its home assortment under all its banners and plans to launch HomeGoods.com next year. In addition, TJX continues to expand its store network while several retailers are permanently shutting down their shops due to weak demand. In 3Q, the company opened 17 stores.
Conclusion
TJX is well-positioned to recover faster than Nordstrom due to customers’ spending shift to look for value deals, especially in a challenging macro environment. What’s more, TJX plans to reinstate its quarterly dividend in 4Q at $0.26 per share (payable March 2021), reflecting a hike of 13% from the previous dividend paid in March.
To conclude, the Street’s firmly bullish sentiment, dividend reinstatement and the stock’s upside potential make TJX a better pick than Nordstrom.
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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
