Most apparel-focused retailers have had a rough time over the past few years, bearing the brunt of declining U.S. mall traffic. However, No. 2 department store chain Kohl's (NYSE: KSS) and off-price leader TJX Companies (NYSE: TJX) have been able to outperform most of their rivals, partially due to their focus on non-mall store locations.
On Tuesday morning, Kohl's and TJX demonstrated that their success is continuing this year. Both companies reported strong first-quarter results, with sales and earnings coming in ahead of analysts' estimates and the companies' own forecasts.
Kohl's continues its resurgence
In the fourth quarter of fiscal 2017, Kohl's posted a stunning 6.3% increase in comparable-store sales. This represented a remarkable turnaround after several years of flattish comp sales results. However, investors have been skeptical that Kohl's could maintain its momentum in 2018.
Kohl's confounded the skeptics by achieving a 3.6% comp sales increase last quarter. This was particularly impressive because the company -- like many of its competitors -- was negatively impacted by unseasonably cold weather at the beginning of the spring selling season.
Gross margin rose by 0.5 percentage points in the first quarter, reaching 36.9%, helped by Kohl's strong sales performance and superb inventory management. Meanwhile, operating expenses rose 3.7%, driven by investments the company is making to drive future growth. Kohl's outperformed its own forecasts for both gross margin and operating expenses.
Kohl's first-quarter results exceeded management's expectations on all fronts. Image source: Kohl's.
The net result was that adjusted earnings per share soared 65% year over year to $0.64. This was far ahead of the company's EPS forecast of $0.45 to $0.50 and the average analyst estimate of $0.50. Additionally, Kohl's boosted its full-year EPS guidance range from $4.95-$5.45 to $5.05-$5.50 on the back of this Q1 earnings beat.
A return to form for TJX
TJX also posted strong sales and earnings results last quarter, following an uncharacteristically sloppy performance last year (TJX's fiscal 2018).
Comp sales rose 3% in the first quarter of fiscal 2019, ahead of the company's forecast of 1% to 2% growth. In the key Marmaxx segment -- which includes T.J. Maxx and Marshalls stores in the U.S. -- comp sales growth was even stronger at 4%. Total sales surged 11.6% to $8.69 billion. Sales growth probably would have been even better if weather trends had been more favorable.
TJX's margin performance came in well ahead of expectations, too. Solid cost control enabled the company to expand its pre-tax margin to 11% from 10.7% a year earlier. Including the benefit of a lower tax rate, EPS skyrocketed to $1.13 from $0.82 in the first quarter of fiscal 2018. This easily surpassed the company's guidance for EPS of $1 to $1.02 and the average analyst estimate of $1.02.
TJX did warn investors that it expects some earnings headwinds during the remainder of fiscal 2019 from rising freight costs and the impact of currency fluctuations. Nevertheless, it bumped up the low end of its full-year EPS guidance range by $0.02. Moreover, TJX routinely provides conservative sales and earnings forecasts, so there's a good chance that it will beat its guidance.
Expect more good things ahead
TJX stock posted modest gains in midday trading on Tuesday, while Kohl's stock plunged as much as 7.7%. In both cases, investors seemed to be worried about future headwinds highlighted by management. For example, Kohl's noted that a shift in the retail calendar boosted its sales last quarter, at the expense of the second half of the year.
That said, Kohl's and TJX are set to benefit from new sales and earnings growth drivers starting later this year. Among apparel-focused retailers, Kohl's and TJX have the most store overlap with regional department store operator Bon-Ton Stores , which is liquidating its business. That will put roughly $2.5 billion in annual sales up for grabs. Kohl's and TJX could also benefit to a lesser extent from the liquidation of Toys R Us.
The sales growth opportunities from competitors' bankruptcies should more than offset the headwinds that Kohl's and TJX executives have highlighted. As a result, both companies are primed to continue posting strong sales and earnings growth, paving the way for further share-price gains.
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Adam Levine-Weinberg owns shares of Kohl's and The TJX Companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .