Ross Stores (ROST) shareholders could be in for a wild midweek ride. The company is slated to report fourth-quarter financial results on Tuesday after the market's close. Back in November, following Ross' third-quarter report, shares jumped 10% in a day. The quarter before that, shares surged 11% on earnings.
Retailers in general have been the subject of heightened earnings drama of late. Just over the past week, quarterly reports sent shares of Gap (GPS) up 8%; Nordstrom (JWN) up 5%; L Brands (LB) down 14%; and Foot Locker (FL) down 13%.
Some of these companies face challenges unique to them and their immediate rivals. Foot Locker is dealing with weak demand for basketball shoes. L Brands' Victoria's Secret chain could be facing "changing tastes against an anti-harassment backdrop," as Wolfe Research analyst Adrienne Yih wrote in a recent note. But all of these stores must contend with a push by Amazon.com (AMZN) to take share in apparel, which is contributing to what had already been years of declining clothing prices.
Retailers that report better-than-expected outlooks get relief rallies. Those that look at all like Amazon victims get crushed.
For Ross, the closest competitor might be TJX (TJX), which beat earnings estimates last Wednesday and saw its shares jump 7% in response.
"We believe TJX's comp gains bode well for ROST (Buy, $92 PT) and BURL (Buy, $135 PT)," wrote MKM Partners analyst Roxanne Meyer in a note. Those price targets work out to 10% upside from recent levels for TJX and 13% for Burlington Stores (BURL). "Comp" is short for comparable-store sales. Those rose 4% for TJX last quarter; analysts predict a 4% gain for Ross and 3.1% for Burlington.
All three of these companies are off-price retailers, meaning they opportunistically buy overstocked garments from other retailers and sell them at significant discounts to shoppers who are willing to hunt for bargains. As such, these chains are safe for now from competition from Amazon. In fact, they have been benefiting from the struggles of traditional retailers.
The outlook for Ross remains bright, but long-term investors should watch two developments closely. First, the shares have gained 167% over the past five years, which is nearly twice as much as TJX stock has gained. As a result, Ross recently traded at 19.4 times forward earnings estimates, which is a 13% premium to TJX. Five years ago, Ross traded at a 9% discount.
Second, Macy's (M) recently announced it will expand its thriving off-price in-store chain called Backstage to 145 stores by the end of 2018, from a recent 45. If more department stores begin running their own closeout retailers, standalone closeout players like Ross and TJX will face more competition for bargain hunters.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.