4 Off-Price Retailers that are Worth the Price

Key Points

• The retail environment has shifted dramatically, creating winners and losers in the group. 
• Off-price retailers are hitting their stride and outperforming the broader retail sector. 
• These stocks are on track to move higher this year and next as price-conscious shoppers lean into bargains. 

The signals are mixed in retail land, but some clear winners exist. While Foot Locker NYSE: FL and Target NYSE: TGT suffer from poor positioning, inventory woes, and competition, names like Walmart NYSE: WMT have emerged as clear winners. Walmart is winning because of its size, scale, and scope, which allow it to command the best pricing from purveyors and offer the widest selection of what consumers are shopping for. But there are other winners in the retail space.

The off-price retailers are also gaining ground and taking share. The stocks are trading at higher valuations than their full-price competitors, but there’s a reason: they are delivering results and growing in a challenging environment. 

The TJX Companies Grows When Target Can’t 

TJX Companies NYSE: TJX is the crown jewel of off-price retailers with business across North America and internationally. The company’s Q2 results attest to its position within the market and the benefit of shopping-down and price-conscious shoppers. The company reported a solid beat on the top and bottom lines and raised guidance, citing strength in apparel and home goods, 2 categories that are in decline for Target and Walmart.

The company also raised guidance above the Marketbeat.com consensus, leading the group to raise targets for the Q3 and FY results and the stock price. 

TJX stock yields about 1.5%, with shares trading near $89. That is compounded by a low payout ratio, a healthy balance sheet, a bias toward distribution growth, and share repurchases. Repurcaheses effectively double the yield in the year's first half and should continue for the foreseeable future.

Analysts also see the stock moving higher and have been raising targets since the Q2 release. The consensus target implies about 7.5% upside for the market, while the freshest targets add another 15% to 20%. 

Kohl’s is the High-Yielding Value in this Group

Kohl’s NYSE: KSS shares imploded in 2022 due to poor performance and CEO Michelle Gass's exit. Now, the stock is trading at the deep value of 10X its earnings compared to 25X or better for most of its peers. The stock yields about 7.75%, which may be a red flag, but it is a payment the company continues to stand behind. 

The latest results show outperformance on the top and bottom lines and came with cautious guidance. The company reaffirmed its prior guidance despite the Q2 strengths and the CEO's belief that “efforts are just underway” to help boost profitability in the back half of the year and next. Regarding the payment, the company pays about 85% of its F24 earnings outlook. That sounds high, but it is offset by rapidly improving cash flow, a 14% YOY reduction in inventory, and debt reduction. 

Ross  Stores, Another Solid Dividend Paying Stock 

Ross Stores NASDAQ: ROST also beat the top and bottom line estimates, raising guidance to a level above the consensus. The company is also growing relative to last year, as are all the off-price retailers, and it pays a solid dividend. The payout is only about 1.15% in yield but is healthy and reliable at only 27% of earnings.

The payout was suspended during the pandemic to preserve capital but has since been reinstated at a higher level. Other than that, the company has only ever increased its payout. Analysts also like ROST. They rate the stock a Moderate Buy with a price target trending strongly higher and leading the market. 

Burlington Stores Is Set To Shine

Burlington Stores NYSE: BURL has yet to report for Q2 but is set to shine. The Q1 results were tepid and came with weak guidance, leading the analysts to lower their expectations. Given the strength of TJX, KSS, and ROST, BURL will likely outperform when it reports.

Until then, analysts rated this non-dividend-paying stock a Moderate Buy with a price target about 30% above the current action. The price target shows volatility but has been relatively flat over the past year and may begin to trend higher following the Q2 release.